WASHINGTON — Management of Gottschalks Inc. told WWD it has developed a plan to increase its available capital by $37 million, trim operating expenses and close six under-performing stores in the Pacific Northwest, as part of a program to improve its financial position and fend off new competition on the West Coast.
This story first appeared in the February 3, 2003 issue of WWD. Subscribe Today.
Details of the plan are expected to be released publicly today.
“We feel the economy is going to be more of a challenge in the near term and this will put Gottschalks in the best financial position I’ve seen since I arrived here in 1997,” Jim Famalette, president and chief executive officer, told WWD Friday. The 71-unit department store in August retained New York investment firm Financo Inc. to help shore up its balance sheet.
Sources said the plan motivated factors to extend through March 31 letters of credit that had been due to expire Friday.
The slow economy and new competition from retailers including Kohl’s Corp. have pinched Gottschalks financial results in recent months. For the nine-month period ended Nov. 2, the Fresno, Calif.-based department store chain recorded a net loss of $8 million on sales of $466.8 million, which were down 2.3 percent from the prior-year period. A year earlier, the firm had taken a $9.6 million loss.
The biggest step in the plan is Gottschalks sale of its private label credit card business, which handles about $300 million in annual sales. Household Retail Services, of Prospect Heights, Ill., agreed Friday to buy the Gottschalks’ credit card portfolio of 1 million customers. Gottschalks executives did not disclose details of the deal Friday, but said it freed up $30 million in the capital for operating use.
Famalette also said Gottschalks’ lenders have agreed to change its loan covenants to allow it an extra $7 million.
Gottschalks also said it is closing six under-performing former Lamonts stores primarily located in the Pacific Northwest to improve annual operating income by approximately $2 million. Two Seattle stores have already been closed, and another two stores in that city are slated to close within three weeks. By the end of March, Gottschalks also plans to close a unit in Wenatchee, Wash., and one in Corvallis, Ore.
Gottschalks acquired the then-bankrupt Lamonts chain in July 2000 in a $20.1 million deal. Since the acquisition, it has closed 14 of the 34 former Lamonts units it bought.
Famalette acknowledged that acquisition has proved problematic.
“The economy turned sour and, post-Sept. 11, the stores really put a great deal of strain on the company,” he said, admitting that low recognition of the Gottschalks nameplate in the Pacific Northwest contributed to lackluster sales. The company expects to report a one-time charge of $3 million in the fourth quarter of 2002 as a result of the upcoming closures.
Other pieces of Gottschalks financial plan include:
Cutting its annual spending on selling, general & administrative items by $15 million.
Reducing its annual technology spending by 56.3 percent to $7 million. That money will be “directed primarily toward maintenance and improvement of the company’s existing store base,” said Famalette.
Postponing all store openings until spring 2004, then beginning to open two or three stores a year.
In a merchandising shift, Gottschalks plans to increase its assortment of private label brands Shaver Lake and Sarah Bentley by about 15 percent, with the goal of those brands representing $80 million in annual sales. The company also intends to launch a new children’s private label merchandise program in stores this spring.
Analysts suggested that Gottschalks’ is restructuring itself to go head-to-head with the fast-growing Kohl’s, which expected to open some 28 stores in Southern California this spring. The key question is whether Kohl’s will expand north into Central and Northern California where the majority of the Gottschalks chain is located.
Jennifer Black, senior research analyst at Wells Fargo, said Gottschalks needs to project a clear identity to compete.
“I’m negative on the whole department store category,” she said. “We’re seeing continued consolidation in the department store business. Consumers are busy and they’re getting busier.”
Famalette conceded Kohl’s California entry is a major consideration.
“We may not see Kohl’s until 2004 or 2005,” he said. “But we’re making sure we’re capable of upgrading our stores, making sure customer service is at a peak and taking this action to remain competitive no matter who our competitor is.”