Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
x ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2002
OR
o TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
Commission file number 1-09100
Gottschalks Inc.
(Exact name of Registrant as Specified in its Charter)
|
Delaware
|
77-0159791
|
|
(State or Other Jurisdiction of Incorporation or Organization)
|
(I.R.S. Employer Identification Number)
|
7 River Park Place East
Fresno, California 93720
(Address of Principal Executive Offices including Zip Code)
(559) 434-4800
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 Par Value
|
Name of each exchange on which registered
New York Stock Exchange
Pacific Stock Exchange
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K.
x
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 31, 2002:
Common Stock, $.01 par value: $33,081,000
On March 31, 2002 the Registrant had outstanding 12,726,364 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's
definitive proxy statement with respect to its Annual Stockholders'
Meeting scheduled to be held on June 20, 2002, which will be filed
pursuant to Regulation 14A, are incorporated by reference into Part
III of this Form 10-K.
Gottschalks Inc.
2001 ANNUAL REPORT ON FORM 10-K
INDEX
|
Part I.
|
|
Page |
|
Item 1.
|
Business
|
4
|
|
Item 2.
|
Properties
|
18
|
|
Item 3.
|
Legal Proceedings
|
20
|
|
Item 4.
|
Submission of Matters to a Vote of Security Holders
|
21
|
|
Part II.
|
|
|
|
Item 5.
|
Market for the Registrant's Common Stock and Related Stockholder Matters
|
22
|
|
Item 6.
|
Selected Financial Data
|
22
|
|
Item 7.
|
Management's Discussion and Analysis of Results of Operations and Financial Condition
|
26
|
|
Item 7a.
|
Quantitative and Qualitative Disclosures About Market Risks
|
50
|
|
Item 8.
|
Financial Statements and Supplementary Data
|
50
|
|
Item 9.
|
Changes in and Disagreements with Accountants on Auditing and Financial Disclosures
|
50
|
|
Part III.
|
|
|
|
Item 10.
|
Directors and Executive Officers of the Registrant
|
50
|
|
Item 11.
|
Executive Compensation
|
52
|
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management
|
52
|
|
Item 13.
|
Certain Relationships and Related Transactions
|
52
|
|
Part IV.
|
|
|
|
Item 14.
|
Exhibits, Financial Statement Schedules and Reports on Form 8-K
|
52
|
|
Signatures
|
|
87
|
|
Exhibits Index
|
|
53
|
PART I
Item 1. BUSINESS
GENERAL
Gottschalks Inc. (the "Company") is a regional department and
specialty store chain based in Fresno, California. The Company currently operates 73 full-line
"Gottschalks" department stores located in six Western states, with 39 stores located in
California, 20 in Washington, six in Alaska, three in both Idaho and Oregon and two in Nevada. The
Company also operates 13 "Gottschalks" and "Village East" specialty apparel
stores which carry a limited selection of merchandise.
The Company's department stores typically offer a wide range of better to
moderate brand-name and private-label merchandise, including men's, women's, junior's and children's
apparel; cosmetics, shoes, fine jewelry and accessories; and home furnishings including china,
housewares, domestics, small electric appliances and, in selected locations, furniture and
mattresses. The majority of the Company's department stores range from 40,000 to 150,000 in gross
square feet, and are generally anchor tenants of regional shopping malls or strategically located
strip centers.
The Company has operated continuously for 98 years since it was founded by Emil
Gottschalk in 1904. At the time the Company initially offered its stock to the public in 1986, the
Company operated 10 department stores. Since then, a total of 69 department stores have been added,
with 42 of those stores being added through acquisitions in fiscal 1998 and 2000. Six of the stores
acquired in fiscal 2000 were subsequently closed in fiscal 2001. The Company is incorporated in the
state of Delaware.
Gottschalks Inc. has one wholly-owned subsidiary, Gottschalks Credit Receivables
Corporation ("GCRC"), which was formed in 1994 in connection with a receivables
securitization program. (See Note 3 to the Consolidated Financial Statements.)
ACQUISITIONS
The Company has completed two significant acquisitions in its operating history,
including the acquisition of eight stores from The Harris Company ("Harris") in fiscal
1998, and an additional 34 stores from Lamont's Apparel, Inc. ("Lamonts") in fiscal
2000.
The Lamonts Acquisition
The Company completed the largest acquisition in its operating history on July
24, 2000, significantly expanding its presence throughout the Pacific Northwest and Alaska. Under
the transaction (hereinafter the "Lamonts acquisition"), the Company acquired 37
department store leases, related store fixtures and equipment and one store building from Lamonts, a
bankrupt specialty apparel store chain, for a cash purchase price of $20.1 million. Concurrent with
the closing of the transaction, the Company sold one of the store leases for $2.5 million, and
subsequently terminated two other store leases, resulting in a net cash purchase price of $17.6
million for 34 store leases, related store fixtures and equipment and one store building. The
Company did not acquire any of Lamonts' merchandise inventory, customer credit card receivables or
other corporate assets in the transaction, nor did the Company assume any material liabilities,
other than the 34 store leases. The 34 stores acquired were located in five Western states, with 19
stores in Washington, seven in Alaska, five in Idaho, two in Oregon and one in Utah. The Company
converted the acquired stores to the Gottschalks banner and re-opened the stores in early September
2000. In fiscal 2001, the Company closed six of the acquired stores that were determined to be
either underperforming or inconsistent with the long-term operating strategy of the Company. (See
"Risk Factors - The Company Continues To Face Integration Challenges With The Lamonts
Acquisition.")
The Harris Acquisition
On August 20, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Harris, a wholly-owned subsidiary of El Corte Ingles
("ECI") of Spain. Harris operated nine full-line department stores located in the Southern
California area. As planned, the Company closed one of the acquired stores on January 31, 1999. The
purchase price for the assets consisted of 2,095,900 shares of common stock of the Company and a
$22.2 million 8% Extendable Subordinated Note, due March 2003 (subsequently extended to March 2006)
(the "Subordinated Note"). As a result of the acquisition, Harris became a significant
stockholder of the Company, and both Harris and ECI became affiliates of the Company. The Company
also leases three of its store locations from ECI. (See Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations - "Liquidity and
Capital Resources - Transactions with Affiliate.")
OPERATING STRATEGY
Merchandising Strategy
The Company's merchandising strategy is directed at offering and promoting
moderate to upper-moderately priced brand-name merchandise recognized by its customers for style and
value. Brand-name merchandise is complemented with offerings of private-label and other higher and
budget-priced merchandise. Brand-name apparel, shoe, cosmetic and accessory lines carried by the
Company include Estee Lauder, Lancome, Clinique, Chanel, Dooney & Bourke, Nine West, Liz
Claiborne, Calvin Klein, Ralph Lauren (Polo and Chaps), Guess, Nautica, Karen Kane, Tommy Hilfiger,
Esprit, Evan Picone, Haggar, Koret and Levi Strauss. Brand-name merchandise carried for the home
includes Lenox, Krups, Calphalon, Royal Velvet, Waterford, Mikasa, KitchenAid and Samsonite.
The Company has also directed considerable effort towards improving the quality
and increasing the penetration of private-label merchandise in its overall merchandise mix. The
Company's most well recognized private-label is "Shaver Lake," currently carried in the
women's, men's and children's departments, as well as in certain departments in the home division.
The "Shaver Lake" brand is exclusively offered in Gottschalks stores, and provides an
opportunity to increase Gottschalks' brand acceptance and promote competitive differentiation.
The Company purchases merchandise from numerous suppliers. In no instance did
purchases from any single vendor amount to more than 5% of the Company's net purchases in fiscal
2001. The Company's merchandising activities are conducted centrally from its corporate offices in
Fresno, California.
The Company's merchandise mix as a percentage of total sales (including leased
department sales) is reflected in the following table:
Fiscal Years
-------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Women's Apparel...... 29.3 % 28.0 % 26.6 % 27.0 % 27.2 %
Cosmetics, Shoes
& Accessories(1)... 22.5 22.5 22.2 19.0 17.8
Home................. 20.1 20.8 22.1 22.2 22.7
Men's Apparel........ 13.8 14.0 13.7 14.0 14.0
Junior's and
Children's Apparel.. 10.5 10.7 10.3 10.1 10.5
Leased Departments(1 3.8 4.0 5.1 7.7 7.8
------- ------- ------- ------- -------
Total Sales........ 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
======= ======= ======= ======= =======
(1) The increase in Cosmetics, Shoes and Accessories department
sales as a percentage of total sales, and the corresponding decrease in Leased Department sales as a
percentage of total sales since fiscal 1997 relates to the planned conversion of the shoe
departments in the Company's stores from leased departments to owned departments. Prior to mid-
fiscal 1998, all of the Company's shoe departments were operated by an independent lessor. Since
that time, the Company has converted the shoe departments in groups of stores from leased
departments to owned departments, with the conversion fully complete in August 2001. (See Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
Store Locations
The Company's stores are located primarily in diverse, growing, non-major
metropolitan or suburban areas in the western United States where management believes there is
strong demand and fewer competitors offering similar better to moderate brand-name merchandise and a
high level of customer service. The Company has historically avoided expansion into the center of
major metropolitan areas that are well served by the Company's larger competitors, and has instead
sought to open new stores in nearby suburban or secondary market areas.
The Company's department stores are generally anchor tenants of regional shopping
malls or strategically located strip centers. Other anchor tenants in the malls or strip centers
generally complement the Company's goods with a mixture of competing and non-competing merchandise,
and serve to increase customer foot traffic. With new regional shopping mall construction on the
decline, one of the Company's strategies is to open stores in smaller and more diverse locations
that may not be desired by its larger competitors that adopt a more standardized approach to
expansion.
While the Company currently has no new store openings planned for fiscal 2002,
future new store openings will focus on sites that will serve to "fill in" geographical
areas between existing stores. Management believes this strategy will improve the Company's ability
to leverage advertising, transportation and other operating costs more effectively. In addition to
opening individual store locations, the Company may also pursue additional selective strategic
acquisitions. (See Part I, Item I, "Business -- Acquisitions".)
The Company has continued to invest in the renovation and refixturing of its
existing store locations in an attempt to maintain and improve market share in those market areas.
Store renovation projects can range from updating décor and improving in-store lighting,
fixturing, wall merchandising and signage, to more extensive remodeling and expansion projects. The
Company sometimes receives reimbursement from mall owners and vendors for certain of its new store
construction costs and costs associated with the renovation and refixturing of existing store
locations. Such contributions have enhanced the Company's ability to enter into attractive market
areas that are consistent with the Company's long-term expansion plans.
The following tables present selected data related to the Company's stores for
the fiscal years indicated:
Fiscal Years
--------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Stores open at year-end:
- --------------------------
Department stores......... 73 (1) 79 (2) 42 40 (3) 34
Specialty stores (4)...... 13 17 20 22 25
------- ------- ------- ------- -------
Total 86 96 62 62 59
======= ======= ======= ======= =======
Gross store square
footage (in thousands):
- --------------------------
Department stores......... 5,876 6,139 4,377 4,301 3,391
Specialty stores.......... 54 63 77 83 94
------- ------- ------- ------- -------
Total 5,930 6,202 4,454 4,384 3,485
======= ======= ======= ======= =======
(1) The Company closed 6 stores in fiscal 2001, all of which were
acquired in the Lamonts acquisition in July 2000.
(2) The Company opened 37 new department stores in fiscal 2000, including the 34
store locations acquired from Lamonts on July 24, 2000, and three additional new stores opened
during the third and fourth quarter of the year.
(3) The Company acquired nine stores from Harris in August 1998, closing one
of the stores acquired on January 31, 1999, as planned. Two of the stores acquired are located in
malls with pre-existing Gottschalks locations. The Company combines separate locations within the
same mall for the purpose of determining the total number of stores being operated, resulting in a
net addition of six department stores in fiscal 1998.
(4) The Company has continued to close certain free-standing Village East stores
as their leases expire and incorporate those stores as separate departments into nearby Gottschalks
department stores.
Following is a summary of the Company's department store locations, by store size:
# of
stores
open
-------
Larger than 200,000 gross square feet..... 3
150,000 - 199,999 gross square feet....... 7
100,000 - 149,999 gross square feet....... 9
40,000 - 99,999 gross square feet....... 42
20,000 - 39,999 gross square feet....... 12
-------
Total............................... 73
=======
Marketing Strategy
The Company's marketing strategy is based on a multi-media approach, using
newspapers, television, radio, direct mail and catalogs to highlight seasonal promotions, selected
brand-name merchandise and frequent storewide sales events. Advertising efforts are focused on
communicating branded merchandise offered by the Company, and the high levels of quality, value and
customer service available in the Company's stores. In its efforts to improve the effectiveness of
its advertising expenditures, the Company uses data captured through its proprietary credit card to
develop segmented advertising and promotional events targeted at specific customers who have
established purchasing patterns for certain brands, departments or store locations.
The Company's sales promotion strategy also focuses on special events such as
fashion shows, bridal shows and wardrobing seminars in its stores and in the communities in which
they are located to convey fashion trends to its customers. The Company receives reimbursement for
certain of its promotional activities from some of its vendors.
The Company offers selected merchandise, a Bridal Registry service, and other
general corporate information on the World Wide Web at
>http://www.gottschalks.com, and sells merchandise through its
mail order department. The information on the Company's website is not part of this annual
report.
Customer Service
Management believes one way the Company can differentiate itself from its
competitors is to provide a consistently high level of customer service. The Company has a
"Four Star" customer service program, designed to continually emphasize and reward high
standards of customer service in the Company's stores. Sales associates are encouraged to keep
notebooks of customers' names, clothing sizes, birthdays, and major purchases, to telephone
customers about promotional sales and to send thank-you notes and other greetings to their customers
during their normal working hours. Product seminars and other training programs are frequently
conducted in the Company's stores and its corporate headquarters to ensure that sales associates
will be able to provide useful product information to customers. The Company also offers
opportunities for management training and leadership classes for those associates identified for
promotion within the Company. Various financial incentives are offered to the Company's sales
associates for reaching sales performance goals.
In addition to providing a high level of personal sales assistance, management
believes that well-stocked stores, a liberal return and exchange policy, frequent sales promotions
and a conveniently located and attractive shopping environment enhance its customers' shopping
experience and increase customer loyalty. Management also believes that maintaining appropriate
staffing levels in its stores, particularly at peak selling periods, is essential for providing a
high level of customer service.
Distribution of Merchandise
The Company's primary distribution center is a 420,000 square foot facility
located in Madera, California. The facility, constructed in 1989, is located in close proximity to
the Company's corporate headquarters in Fresno, California. The facility currently serves all of the
Company's store locations, with daily distributions of merchandise to all stores, including its
stores located in states outside California. During the period of July 2000 through June 2001, the
Company distributed merchandise to its locations in Washington, Alaska, Idaho and two of the stores
located in Oregon through an outsourced facility located in Kent, Washington. The Company ceased
using the outsourced facility in June 2001, consolidating all of its distribution functions to its
primary facility in Madera.
The Company has continued to improve its logistical systems, focusing on the
adoption of new technology and operational best practices, with the goals of receiving, processing
and distributing merchandise to stores at a faster rate and at a lower cost per unit. The Company's
logistical system enables the Company to "cross dock" the majority of its merchandise,
thereby processing merchandise through the distribution center and to the stores in minutes and
hours as compared to several days in the past. The Company has formal guidelines for vendors with
respect to shipping, receiving and invoicing for merchandise. Vendors that do not comply with the
guidelines are charged specified fees depending upon the degree of non-compliance. Such fees are
intended to offset higher costs associated with the processing of and payment for such
merchandise.
Private-Label Credit Card
The Company issues its own credit card, which management believes enhances the
Company's ability to generate and retain market acceptance and increase its sales and credit-related
revenues. As described more fully in Note 3 to the Consolidated Financial Statements, the Company
conveys its customer credit card receivables to its wholly-owned subsidiary, GCRC, on an ongoing
basis in connection with a receivables securitization program. The Company has continued to service
and administer the receivables under the program.
The following table represents a summary of information related to the Company's
credit card receivable portfolio for the fiscal years indicated:
Fiscal Years
----------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands of dollars)
Average credit card
receivables serviced (1).. $ 88,617 $ 80,992 $ 79,125 $ 69,143 $ 64,612
Service charge income (2).. $ 17,817 $ 16,832 $ 15,618 $ 13,522 $ 11,711
Credit sales as a
% of total sales......... 40.9%(3) 41.4%(3) 44.2% 43.1% 43.7%
- Includes receivables sold, the retained interest in receivables
sold, and receivables that are ineligible for transfer to GCC Trust and are retained by the Company,
all of which are serviced by the Company.
- The dollar increases in service charge income are primarily due to additional
service charge revenues generated by newly originated customer credit card accounts and by new
credit programs. (See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations.")
- Excluding credit sales generated in the 37 stores opened in fiscal
2000, which have continued to generate a lower credit sales percentage than the Company's more
mature stores, credit sales as a percentage of total sales was 45.0% in fiscal 2001 and 43.9% for
fiscal 2000.
The Company has a variety of credit-related programs which management believes
have improved customer service and increased credit-related revenues. Such programs include:
- An "Instant Credit" program, through
which successful credit applicants receive a discount ranging from 10% to 50% (depending on the
results of the Instant Credit scratch-off card) on the first day's purchases made with the Company's
credit card;
- A "55-Plus" charge account program, which
offers additional merchandise and service discounts to customers 55 years of age and older;
- "Gold Card" and "55-Plus Gold Card"
programs, which offer special services at a discount for customers who have a minimum net spending
history on their charge accounts of $1,000 per year; and
- The "Gottschalks Rewards"
program, which offers an annual rebate certificate for up to 5% of annual credit purchases on the
Company's credit card (up to a maximum of $10,000 of annual purchases) which can be applied towards
future purchases of merchandise.
As of March 31, 2002, the Company had approximately 754,000 active credit card
holders, as compared to 747,000 active credit card holders as of March 31, 2001. Management believes
holders of the Company's credit card typically buy more merchandise from the Company than other
customers.
Competition and Seasonality
See Part I, Item I, "Risk Factors - We Face Significant Competition from
Other Retailers" and "Risk Factors - Our Business is Susceptible to Economic Conditions
and Other Factors that Affect our Markets, Some of Which are Beyond our Control".
Employees
As of February 2, 2002, the Company had approximately 7,200 employees, including
2,000 employees working part-time (less than 20 hours per week on a regular basis). As of February
3, 2001, the Company had 8,300 employees (including 2,200 working part-time). The Company hires
additional temporary employees and increases the hours of part-time employees during seasonal peak
selling periods. Approximately 130 employees in seven former Lamonts locations in King County,
Washington are covered by a collective bargaining agreement with the United Food and Commercial
Worker's Union (UFCW). After the acquisition of Lamonts' assets, which included the leases of those
seven stores, the Company engaged in good faith bargaining and as a result, ratified an agreement
with the union with a 2-½ year term on April 7, 2001. The agreement expires on September 30, 2003.
Management does not believe that the agreement will have a material affect on the Company's
business, its financial condition or results of operations. Management considers its employee
relations to be good.
Executive Officers of the Registrant
Information relating to the Company's executive officers is included in Part III,
Item 10 of this report and is incorporated herein by reference.
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain "forward-looking statements" regarding
activities, developments and conditions that the Company anticipates may occur or exist in the
future relating to things such as:
- the Company's ability to meet debt obligations and adhere to the restrictions
and covenants imposed under its various debt agreements;
- the timely receipt of merchandise and the Company's ability to obtain
adequate trade credit from its key factors and vendors;
- the Company's ability to either improve the operating results and cash flows
of certain of the stores acquired in the Lamonts acquisition, or to sell, sublease or close those
stores that continue to be underperforming;
- the Company's ability to obtain an extension of the Harris letter of credit
(See "Risk Factors - An Affiliate Is Providing Credit Enhancement To The Senior Revolving
Credit Facility");
- the Company's ability to finalize the Proposed Transaction (as defined below;
see "Risk Factors"), or to finalize alternative transactions in the event the Proposed
Transaction is not finalized;
- the Company's ability to either renew or extend the maturity of the 2000-1
Series Certificates prior to the expiration of their current commitment period on October 31,
2002;
- the impact of higher interest rates;
- the impact of higher operating costs, including workers' compensation, health
care and energy costs;
-
future capital expenditures;
- the Company's competitive strategy, competitive pricing and other competitive
pressures;
- the ability of the Company to sell or sublease the three stores closed in
fiscal 2001;
- the effect of the adoption of new accounting standards by the
Company;
- the realization of the Company's deferred tax assets;
- the Company's assumptions and expectations underlying its critical accounting
policies (see "Management's Discussion and Analysis of Financial Condition and Results of
Operations");
- the unlikelihood of potential draws under the Company's outstanding standby
letters of credit;
- the overall level of consumer spending and demand for the products
offered;
- general economic conditions;
-
the impact of sales promotions and customer service programs on consumer spending;
- lease extensions and suitable alternative store locations; and
-
the utilization of consumer credit programs.
Such forward-looking statements can be identified by words such as:
"believes," "anticipates," "expects," "intends,"
"seeks," "may," "will," "projects," "forecasts,"
"plans" and "estimates". The Company bases its forward-looking statements on
its current views and assumptions. As a result, those statements are subject to risks and
uncertainties that could cause actual results to differ materially from those predicted. Some of the
factors that could cause the Company's results to differ from those predicted include the following
risk factors, as well as other risks and uncertainties discussed in other documents filed by the
Company with the Securities and Exchange Commission. In addition, the Company typically earns a
disproportionate share of its operating income in the fourth quarter due to seasonal buying
patterns, which are difficult to forecast with certainty. While the Company believes that its
assumptions are reasonable, it cautions that it is impossible to predict the impact of such factors
which could cause actual results to differ materially from predicted results.
The following list of important factors is not exclusive and the Company does not
undertake to revise or update any forward-looking statement to reflect events or circumstances that
occur after the statement is made.
RISK FACTORS
The Company's business is subject to certain risks, and those risks
should be considered while evaluating its business and financial results. Any of the risks discussed
below could materially and adversely affect the Company's operating results and financial condition,
as well as the projections and beliefs about its future performance. Accordingly, the Company's
results could differ materially from those projected in its forward-looking statements. In addition,
the preparation of financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions. These estimates and assumptions affect the
reported amounts and timing of revenue and expenses, the reported amounts and classification of
assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could
differ materially from the Company's estimates and assumptions. (See Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies.")
The Company's Current Sources of Liquidity May Not Be Adequate
The Company's working capital requirements are currently met through a
combination of cash generated by operations, borrowings under its senior revolving credit facility,
sales of proprietary credit card accounts under its receivables securitization program, short-term
trade and factor credit, and by proceeds from external financings and sale transactions. The
Company's liquidity position is also currently partially dependent upon credit enhancement provided
by an affiliate. In the event these sources of liquidity are not adequate, the Company may be
required to pursue one or more alternative strategies to improve its liquidity position, which could
include the sale of additional stores. If the estimates or assumptions relative to any one of these
sources of liquidity are not realized, the Company's business, financial condition and results of
operations may be materially adversely affected.
Because the Company is already highly leveraged, the ability to obtain additional
or alternative sources of financing in the future for working capital, capital expenditures, new
store openings, acquisitions and other general corporate purposes is limited. This limited financial
flexibility may result in increased vulnerability to general adverse economic and industry
conditions, a more limited ability to react to changes in the business environment and the industry
in which the Company competes, and the Company may be at a competitive disadvantage with competitors
that have less debt and greater access to capital resources. In addition, a significant portion of
the Company's cash flow from operations must be dedicated to the payment of principal, interest and
other fees relative to its debt, which reduces the funds available to operations. Risks and
uncertainties associated with the previously described sources of liquidity are described more fully
below.
The Company Is Highly Dependent On Its Senior Revolving Credit Facility For
Working Capital Purposes
The Company is highly dependent on its ability to borrow against its senior
revolving credit facility for working capital purposes. The Company's senior revolving credit
facility (the "GE facility"), for which General Electric Capital Corporation ("GE
Capital") acts as administrative agent, currently provides for borrowings of up to $165.0
million through January 31, 2005. Such borrowings are subject to a restrictive borrowing base equal
to a specified percentage of eligible merchandise inventory, less other reserves that are
established by GE Capital. Several factors can influence the maximum amount the Company is able to
borrow under this facility, including without limitation, the level of eligible inventory, the
appraised value of eligible inventory and the level of reserves established against eligible
inventory. Any significant reduction to the Company's borrowing capacity under the GE facility would
have a material adverse affect on the Company's liquidity position.
The GE facility contains restrictive financial and operating covenants, including
without limitation, the requirement to maintain a minimum twelve-month trailing EBITDA (as defined
in the agreement) and the requirement to maintain a minimum accounts payable to inventory ratio.
Certain of the Company's other debt agreements also contain financial and other restrictive
covenants, as well as cross default provisions. Accordingly, the failure to comply with these
restrictions and covenants would cause a cross-default under the majority of the Company's other
debt agreements. Any of these defaults, if not waived, could result in a majority of the Company's
debt becoming immediately due and payable. If this were to occur, the Company may not be able to
repay the debt or borrow sufficient funds to refinance it. Even if new financing were available, the
Company may not be able to complete such refinancing quickly enough or at financially acceptable
terms. In addition, as described more fully below, a default under the GE facility would also result
in a cross-default under the securitization program. (See Part II, Item 7, "Management's
Discussion and Analysis of Results of Operations and Financial Condition.")
The Company Is Highly Dependent On Key Relationships With Factors And Vendors
The success of the Company's business is highly dependant upon the adequacy of
trade credit offered by key factors and vendors, the vendors' ability and willingness to sell it
products at favorable prices and terms, and the willingness of vendors to ship merchandise on a
timely basis. Restrictions to the amount of trade credit granted by key factors and vendors can
adversely impact the volume of merchandise the Company is able to purchase. Any significant
reduction in the volume of merchandise the Company is able to purchase, or a prolonged disruption in
the timing of when merchandise is received, would have a material adverse affect on the Company's
business, liquidity position, and results of operations.
In the months prior to the finalization of the GE facility on February 1, 2002,
the Company experienced a significant reduction in the level of unsecured credit offered by many of
its factors and vendors. Because the Company's fiscal 2001 holiday merchandise had already been
received, the reduction in trade and factor credit did not materially affect the Company's level of
inventory receipts for fiscal 2001. Management believes the reduction of trade and factor credit was
not only precipitated by the pending expiration of the Company's previous revolving credit facility,
but was also caused by factors outside the Company's control, including the events of September
11th and the fiscal 2001 bankruptcy filing by a major retailer. Following the
finalization of the GE facility, the level of unsecured credit offered by vendors increased, but
unsecured credit granted by key factors, which can represent over 50% of total trade credit granted
to the Company, remained restricted.
Management subsequently negotiated the restoration of credit lines with its key
factors by issuing $10.7 million of standby letters of credit to provide partial guarantees. The
standby letters of credit issued to key factors currently expire in June and July 2002. A total of
$7.0 million of those letters of credit are supported by the Harris letter of credit, described
below. The Company expects to extend the expiration dates of those letters of credit in order to
ensure the Company continues to receive factor credit. If Harris does not agree to extend its letter
of credit, the letters of credit issued to factors would no longer be supported by the Harris letter
of credit, and their extension beyond June 30, 2002 would result in a $7.0 million reduction to the
borrowing availability under the GE facility.
There can be no assurance the Company will continue to receive an adequate level
of key factor and vendor trade credit to support its operations. Any further reductions of trade and
factor support or a lack of further improvements in the level of unsecured factor and trade support
granted to the Company may impair the Company's ability to purchase an adequate level of merchandise
to support its operations. The inability to purchase an adequate level of merchandise would have a
material adverse affect on the Company's business, liquidity position and results of operations.
An Affiliate Is Providing Credit Enhancement To The Senior Revolving Credit
Facility
The standby letters of credit issued by the Company to key factors reduced
borrowing availability under the GE facility. In order to offset most of this availability
reduction, Harris, an affiliate of the Company, agreed to provide short-term credit enhancement to
the GE facility under the terms of a Credit Facilitation Agreement entered into with the Company on
February 22, 2002.
Under the Credit Facilitation Agreement, Harris agreed to guarantee an
irrevocable standby letter of credit (the "Harris letter of credit") issued by a bank to
GE Capital in the amount of $7.0 million for the purpose of collateralizing certain of the standby
letters of credit that were subsequently issued under the GE facility to key factors. The Harris
letter of credit currently expires on June 30, 2002 and is collateralized by proceeds that may be
received from a proposed sale of the Company's ownership interest in the partnership that owns the
Company's corporate headquarters (the "Proposed Transaction"), but is otherwise a general
and unsecured obligation of the Company. Repayment of drawings under the Harris letter of credit is
also guaranteed by the Company's Chairman of the Board and certain of his family members. (See Note
15 to the accompanying Consolidated Financial Statements.) Under the current terms of the Credit
Facilitation Agreement, the Harris letter of credit will be reduced dollar-for-dollar by the amount
of net proceeds received from the Proposed Transaction. The Company has requested that Harris extend
the expiration date of the letter of credit through September 30, 2002, and remove the provision
that the letter of credit be reduced dollar-for-dollar by proceeds from the Proposed Transaction.
While management currently expects that Harris will agree to such revisions, no assurance can be
given that such revisions will be approved. In the event Harris does not agree to such revisions,
the credit enhancement to the GE facility will be substantially reduced in the event proceeds from
the Proposed Transaction are received prior to June 30, 2002, and will be eliminated entirely on
June 30, 2002. As described previously, because the Harris letter of credit supports $7.0 million of
letters of credit issued to factors which are expected to extend beyond June 30, 2002, the
elimination of the credit enhancement provided by the Harris letter of credit would significantly
reduce the Company's borrowing capacity under the GE facility.
The Company Continues To Face Integration Challenges With The Lamonts
Acquisition
The Lamonts acquisition presented the Company with many challenges. As described
more fully in the Company's Annual Report on Form 10-K for the year ended February 3, 2001, the
Company incurred a significant outflow of cash in fiscal 2000 in connection with the Lamonts
acquisition, using its then existing line of credit to fund a portion of the cash purchase price, as
well as costs associated with opening and initial stocking of the stores with inventory and supplies
and capital expenditures to refurbish the stores and integrate information systems. In addition, the
acquired stores' results for the first five months of their operation fell short of expected levels.
All of these factors contributed to the $31.3 million operating cash flow deficit in fiscal 2000.
In fiscal 2001, the acquired stores generally continued to perform below expectations. This lower
than expected performance, which was primarily due to slow customer acceptance and a soft retail
economic environment that was intensified by the events of September 11th, contributed to
the Company's reduced earnings and liquidity position. Based on a review of the long-term prospects
of each of the acquired stores, management decided to close six of the 34 acquired stores in fiscal
2001.
The Company is continuing to operate 28 of the original 34 acquired stores.
However, 10 of those stores continue to perform below expectations. In the event the Company is
unable to improve the operating performance of those locations, management may consider the sale,
sublease or closure of those locations in the future. In the past, the Company has successfully
improved the operating results and cash flows of under performing locations through a variety of
strategies, including revising the merchandise mix, changing store management, revising marketing
strategies, renegotiating lease agreements and reducing operating costs. There can be no assurance,
however, that these strategies will improve the operating results and cash flows of those under
performing stores, or that the Company will be able to sell, sublease or close those stores in the
event their performance does not improve. In addition, the Company may incur certain costs and
expenses in connection with the sale or closure of those locations that may not be fully offset by
sale proceeds, sublease income or favorable lease terminations. As a result, significant store
closure costs may be incurred in the future.
The Company has approximately $27.6 million of long-lived assets (including
leasehold improvements, fixtures and equipment, a building, favorable lease rights and goodwill)
recorded as of February 2, 2002 with respect to the 28 locations acquired from Lamonts that the
Company is continuing to operate. At February 2, 2002, the Company determined that no impairment
existed in those locations based on anticipated cash flows over the expected lease terms, or in some
cases, based on third party appraisals. If actual market conditions are less favorable than those
projected, future charges for the impairment of long-lived assets may be incurred. In addition, as
of February 2, 2002, the Company has a total of $7.6 million of goodwill (net of accumulated
amortization) recorded in connection with previous acquisitions. Effective the beginning of fiscal
2002, the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets" will be implemented. As a result, the Company will
no longer amortize previously recorded goodwill and will instead evaluate goodwill for impairment at
least annually, or at any time certain indicators of impairment arise. The Company will continue
to amortize its other long-lived assets over their respective estimated useful lives. The Company is
in the process of evaluating the impact of adopting SFAS No. 142 and there can be no assurance that
at the time the review is completed that a material impairment charge will not be recorded.
The Company's Securitization Program Provides An Important Source Of Working
Capital Financing
The Company securitizes the receivables generated under its private-label credit
card. Under the securitization program, the Company conveys all of its customer credit card
receivables to a wholly-owned subsidiary, GCRC, on a daily basis and certain of those receivables
are simultaneously conveyed to GCC Trust, a qualified special purpose entity, which issues
securities representing interests in the receivables to investors.
The receivables securitization program contains restrictions and requirements,
including the requirement to maintain certain receivable portfolio performance standards. Management
believes that actual portfolio performance has substantially exceeded all minimum standards since
the inception of the program in fiscal 1994. The program also contains credit rating downgrade
default provisions, which requires securities issued under the program to be rated BBB or higher.
Securities issued under the program are currently rated single A+ by the rating agency. The
inability to maintain compliance with such restrictions and standards or a downgrade in its credit
rating, if not waived, could result in the acceleration of principal for the securities currently
issued under the program. Any such acceleration, if not refinanced on a timely basis, would
significantly reduce excess cash flows generated under the program that ultimately serve as an
important source of working capital for the Company. Any significant decrease in the level of excess
funds generated under the program would have a material adverse affect on the Company's liquidity
position. In addition, any default under the securitization program would result in the cross-
default under a majority of the Company's other debt obligations, including the GE facility.
The current commitment period for the $20.0 million Series 2000-1 Certificates
expires on October 31, 2002. If the commitment period for the 2000-1 Series Certificates is not
extended by October 31, 2002, the then-outstanding balances of the certificates will be repaid with
excess cash flows generated under the program in six equal monthly installments commencing in
December 2002 (the "amortization period"). The repayment of the outstanding balances of
the certificates, which is currently expected to be approximately $12.0 million as of October 31,
2002, would reduce excess cash flows available to the Company for working capital purposes at a rate
of approximately $2.0 million per month over the six month amortization period. The Company expects
that the commitment period for the Series 2000-1 Certificates will be extended, or that new
certificates with an equal or larger principal amount will be issued in their place, prior to the
end of the commitment period. However, there can be no guarantee that the certificates will be
extended on a timely basis, or at terms and conditions that are not materially different from the
current certificates. The failure to extend the certificates, or any significant delay in the
extension of the certificates, could have a material adverse affect on the Company's liquidity
position. In addition, the failure to extend the commitment period of the 2000-1 Series Certificates
on a timely basis would result in a cross-default under the GE facility, which if not waived, would
subsequently result in a cross-default under a majority of the Company's other debt agreements.
The Company cannot guarantee that it will continue to generate receivables by
credit card holders at the same rate, that it will not experience a material change in default rates
or finance charges earned, or that it will continue to establish new credit card accounts at the
same rate as in the past. Any material decline in the generation of receivables or in the rate of
cardholder payments on accounts could have a material adverse effect on the Company's liquidity
position.
The Company Faces Significant Competition From Other Retailers
The retail business is highly competitive, and if the Company fails to compete
effectively, it could lose market share. The Company's primary competitors include national,
regional and local chain department and specialty stores, general merchandise stores, discount and
off-price retailers and outlet malls. Increased use and acceptance of the internet and other home
shopping formats also creates increased competition. Some of these competitors offer similar or
better-branded merchandise and have greater financial resources to purchase larger quantities of
merchandise at lower prices. The Company's ability to counteract these competitive pressures
depends on its ability to:
·
offer merchandise which reflects the different regional and local needs of its
customers;
·
differentiate and market the Company as a home-town, locally-oriented store (as opposed to its
more nationally focused competitors); and
·
continue to offer adequate quantities of better to moderately priced branded and private label
merchandise.
The Company's Business Is Susceptible To Economic Conditions And Other
Factors That Affect Its Markets, Some Of Which Are Beyond Its Control
General Economic and Market Conditions. The Company's stores are
located primarily in non-major metropolitan, suburban and agricultural areas in the western United
States. A substantial portion of the stores are located in California and Washington. The Company's
success depends upon consumer spending, which may be materially and adversely affected by any of the
following events or conditions:
-
a downturn in the national, California or Pacific Northwest economies;
-
a downturn in the local economies where the stores are located;
-
a decline in consumer confidence;
-
an increase in interest rates;
-
inflation or deflation;
-
consumer credit availability;
-
consumer debt levels;
- higher energy costs in California and the Pacific Northwest;
- higher healthcare and workers' compensation insurance costs;
- >
tax rates and policy; and
-
unemployment trends.
Seasonality and Weather. Seasonal influences affect the Company's
sales and profits. The Company experiences its highest levels of sales and profits during the
Christmas selling months of November and December, and, to a lesser extent, during the Easter
holiday and Back-to-School seasons. The Company has increased working capital needs prior to the
Christmas season to carry significantly higher inventory levels and generally increases its selling
staff levels to meet anticipated demands. Any substantial decrease in sales during its traditional
peak selling periods could materially adversely impact the Company's business, financial condition
and results of operations.
The Company also depends on normal weather patterns across its markets.
Historically, unusual weather patterns have significantly impacted its business.
Consumer Trends. The Company's success partially depends on its ability
to anticipate and respond to changing consumer preferences and fashion trends in a timely manner.
However, it is difficult to predict what merchandise consumers will demand, particularly merchandise
that is trend driven. Failure to accurately predict constantly changing consumer tastes, preferences
and spending patterns could adversely affect short and long-term results.
Terrorist Activities. The occurrence or threat of terrorist activities,
and the responses to and results of such activities, could materially adversely affect the Company's
business, its customers and suppliers, the retail and financial markets and general economic
conditions.
The Company May Face Higher Operating Costs
Approximately 59.6% of the Company's debt at February 2, 2002 has
underlying variable interest rates, which may result in higher interest expense in the event
interest rates are raised. (See Item 7A "Qualitative and Quantitative Disclosures about Market
Risk.")
A substantial portion of the Company's stores are located in California and
Washington. As a result, the Company is particularly sensitive to negative occurrences in those
states. In mid-fiscal 2001, problems associated with the deregulation of the electric industry in
California resulted in intermittent service interruptions and higher utility rates. The Company may
face similar situations in fiscal 2002. The Company's inability to adequately address these problems
could have a material adverse affect on its financial position and results of operations. In
addition, the Company is facing higher workers' compensation and health insurance costs in the
market areas in which it operates. There can be no assurance that the Company will be able to fully
offset the negative impact of such higher costs.
The Company Depends On Key Personnel
The Company's success depends to a large extent on its executive management team.
The loss of the services of certain of its executives could have a material adverse effect on the
Company. The Company cannot guarantee that it will be able to retain such key personnel or attract
additional qualified members to its management team in the future.
The Company also depends on attracting and retaining a large number of qualified
employees to maintain and increase sales and to execute its customer service programs. Many of its
employees are in entry level or part-time positions with historically high levels of turnover. The
Company's ability to meet its employment needs is dependent on a number of factors, including the
following factors which affect our ability to hire or retain qualified employees:
·
unemployment levels;
·
minimum wage legislation; and
·
changing demographics in the local economies where stores are located.
Item 2. PROPERTIES
Corporate Office and Distribution Center
The Company's corporate headquarters is located in an office building in
northeast Fresno, California. The building was constructed in 1991 and is owned by a limited
partnership in which the Company is the sole limited partner holding a 36% interest. The Company
leases 89,000 square feet of the 176,000 square foot building under a twenty-year lease expiring in
the year 2011. The lease contains two consecutive ten-year renewal options and the Company receives
favorable rental terms under the lease. The Company is currently evaluating the sale or financing of
its partnership interest. In the event the Company sells its partnership interest, the Company may
not continue to receive favorable rental terms under the lease. (See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital
Resources.") The Company believes that its current office space is adequate to meet its office
space requirements for the foreseeable future.
The Company's distribution center, completed in 1989, is a 420,000 square foot
distribution facility located in Madera, California, which is in close proximity to the Company's
corporate headquarters. The facility was originally designed to provide for the future growth of the
Company and its processing capacity and physical size is readily expandable. The Company leases the
distribution facility from an unrelated party under a 20-year lease expiring in the year 2009, with
six consecutive five-year renewal options.
Store Leases and Locations
The Company owns seven of its 73 department stores, all of which are
subject to mortgage loans, and leases the remaining 66 department stores and all of its 13 specialty
stores. Most of the Company's department store leases expire in various years through 2021, and have
renewal options for one or more periods ranging from five to 20 years. Leases for specialty store
locations generally do not contain renewal options. While there is no assurance that the Company
will be able to negotiate further extensions of any particular lease, management believes that
satisfactory extensions or suitable alternative store locations will be available.
Certain of the department and specialty apparel store leases provide for the
payment of additional contingent rentals based on a percentage of sales, require the payment of
property taxes, insurance and maintenance costs, and in certain cases, also provide for rent
abatements and scheduled rent increases during the lease terms. The Company leases three of its
department stores from ECI, an affiliate of the Company. Additional information pertaining to the
Company's store leases is included in Note 9 to the Consolidated Financial Statements.
The following table contains additional information about the Company's stores
open as of the end of fiscal 2001:
# Gross
of Square
State Stores Footage(1)
- ------------------------- --------- -----------
Department Stores:
California............. 39 4,104,250
Washington............. 20 991,800
Alaska................. 6 291,650
Idaho.................. 3 124,500
Oregon................. 3 157,400
Nevada................. 2 206,000
--------- -----------
Total 73 5,875,600
========= ===========
Specialty Stores:
California............. 12 50,240
Nevada................. 1 3,400
--------- -----------
Total 13 53,640
========= ===========
(1) Reflects total store square footage, including office
space, storage, service and other support space that is not dedicated to direct merchandise
sales
.
Item 3. LEGAL PROCEEDINGS
The Company is party to legal proceedings and claims which have arisen
during the ordinary course of business. In the opinion of management, the ultimate outcome of such
litigation and claims is not expected to have a material adverse effect on the Company's financial
position or results of its operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered in this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed for trading on both the New York
Stock Exchange ("NYSE") and the Pacific Stock Exchange. The following table sets forth the high and
low sales prices per share of common stock as reported on the NYSE Composite Tape under the symbol
"GOT" during the periods indicated:
2001 2000
--------------- ---------------
Fiscal Quarters High Low High Low
- --------------------- ------- ------- ------- -------
1st Quarter....... 6.20 4.62 7.00 4.44
2nd Quarter....... 5.38 2.85 6.69 4.25
3rd Quarter....... 3.38 2.25 6.04 4.69
4th Quarter....... 3.12 2.26 5.00 3.94
On March 31, 2002, the Company had 808 stockholders of record, some of which were
brokerage firms or other nominees holding shares for multiple stockholders. The closing price of the
Company's common stock as reported by the NYSE on March 31, 2002 was $3.59 per share.
The Company has not paid a cash dividend since its initial public offering in
1986. The Board of Directors has no present intention to pay cash dividends in the foreseeable
future, and will determine whether to declare cash dividends in the future depending on the
Company's earnings, financial condition and capital requirements. In addition, the Company's senior
revolving credit agreement and certain of its other debt agreements prohibit the Company from paying
dividends without prior written consent from those lenders. (See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations.")
Item 6. SELECTED FINANCIAL DATA
The Company reports on a 52/53 week fiscal year ending on the Saturday nearest to
January 31. The fiscal years ended February 2, 2002, February 3, 2001, January 29, 2000, January 30,
1999 and January 31, 1998, are referred to herein as fiscal 2001, 2000, 1999, 1998 and 1997,
respectively. All fiscal years noted include 52 weeks, except for fiscal 2000, which includes 53
weeks. Management believes the Company's results of operations for fiscal 2000 were not materially
affected by results applicable to the 53rd week.
The selected financial data below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of Operations," and the
Consolidated Financial Statements of the Company and related notes included elsewhere herein. As
described more fully below, the Company's results for the first three quarters of fiscal 2001 were
adversely affected by several factors, including ongoing integration challenges in the 34 stores
acquired in the Lamonts acquisition and the subsequent closure of six of those stores, and the
general slowdown in the retail economic environment beginning in early fiscal 2001, which was
intensified by the events of September 11th. The Company's results improved in the
fourth quarter of fiscal 2001, offsetting the operating losses incurred in the first three quarters
of the fiscal year. Nevertheless, the Company experienced a significant reduction in its operating
results for the full year in fiscal 2001.
Fiscal Years
------------ ---------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(In thousands of dollars, except share data)
RESULTS OF OPERATIONS:
Net sales......................... $ 710,702 $ 663,868 $ 541,275 $ 478,538 $ 414,361
Net credit revenues............... 8,420 9,150 8,709 6,988 6,478
Net leased department
revenues(1)..................... 4,093 3,948 4,209 5,944 5,135
--------- --------- --------- --------- ---------
Total revenues................. 723,215 676,966 554,193 491,470 425,974
--------- --------- --------- --------- ---------
Costs and expenses:
Cost of sales................... 470,281 433,724 354,010 313,431 274,843
Selling, general and
administrative expenses........ 223,926 201,765 167,561 152,231 132,034
Depreciation and
amortization(2)................ 14,123 11,505 9,465 8,040 6,078
New store pre-opening
costs(3)....................... -- 6,183 495 421 589
Store closing costs (4)......... 729
Asset impairment charge (5)..... -- -- 1,933 -- --
Acquisition related
expenses....................... -- -- -- 859 673
--------- --------- --------- --------- ---------
Total costs and expenses....... 709,059 653,177 533,464 474,982 414,217
--------- --------- --------- --------- ---------
Operating income.................. 14,156 23,789 20,729 16,488 11,757
--------- --------- --------- --------- ---------
Other (income) expense:
Interest expense................. 14,364 13,750 11,408 9,470 7,325
Miscellaneous income............. (1,595) (1,414) (1,555) (2,011) (1,955)
--------- --------- --------- --------- ---------
12,769 12,336 9,853 7,459 5,370
--------- --------- --------- --------- ---------
Income before income tax
expense and extraordinary item... 1,387 11,453 10,876 9,029 6,387
Income tax expense................ 533 4,374 4,240 3,747 2,657
--------- --------- --------- --------- ---------
Income before extraordinary item.. 854 7,079 6,636 5,282 3,730
Extraordinary item - loss on
early extinguishment of debt
(net of income tax benefit
of $267,000) (6)............... (429) -- -- -- --
--------- --------- --------- --------- ---------
Net income........................ $ 425 $ 7,079 $ 6,636 $ 5,282 $ 3,730
========== ========== ========== ========== ==========
Per share amounts (basic and dilut
Income before extraordinary
item............................ $ 0.06 $ 0.56 $ 0.53 $ 0.46 $ 0.36
Extraordinary item (6)............ (0.03) -- -- -- --
--------- --------- --------- --------- ---------
Net income........................ $ 0.03 $ 0.56 $ 0.53 $ 0.46 $ 0.36
========= ========= ========= ========= =========
Weighted-average number of
common shares outstanding:
Basic........................ 12,681 12,614 12,577 11,418 10,474
Diluted...................... 12,691 12,632 12,616 11,449 10,491
Fiscal Years
------------ ---------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(In thousands of dollars)
SELECTED BALANCE SHEET DATA:
Retained interest in
receivables sold................ $ 19,222 $ 19,853 $ 29,138 $ 37,399 $ 15,813
Receivables, net.................. 11,331 9,248 7,597 18,985 6,650
Merchandise inventories (7)....... 160,212 185,226 130,028 123,118 99,294
Property and equipment, net....... 152,607 147,711 120,393 113,645 99,057
Total assets...................... 391,174 410,059 316,164 326,596 244,080
Working capital................... 104,378 111,011 104,719 96,231 67,579
Long-term obligations,
less current portion............ 110,216 113,012 80,674 74,114 62,420
Subordinated note
payable to affiliate............ 21,646 21,303 20,961 20,618 --
Stockholders' equity.............. 118,172 117,573 110,238 103,468 83,905
Fiscal Years
------------ ---------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(In thousands of dollars, except per square foot data)
OTHER SELECTED DATA:
Sales growth:
Total store sales............... 8.5%(8) 22.6% (9) 9.9% 15.4%(10) 6.2%
Comparable store sales.......... 0.4%(8) 5.6%(11) 7.7%(12) 2.1% 3.3%
Comparable stores data(13):
Sales per selling square foot... $ 173 $ 176 $ 168 $ 170 $ 160
Selling square footage.......... 3,478 3,384 2,758 2,621 2,642
Capital expenditures.............. $ 18,683 $ 29,635 $ 16,059 $ 16,801 $ 14,976
Current ratio..................... 1.98:1 1.93:1 2.38:1 1.98:1 2.01:1
(1) Net leased department revenues consist of sales totaling
$28.9 million, $27.7 million, $29.0 million, $40.2 million and $35.2 million in fiscal 2001,
2000, 1999, 1998 and 1997, respectively, less cost of sales.
(2) Depreciation and amortization includes the amortization of goodwill
totaling $570,000, $553,000, $536,000, $291,000 and $116,000 in fiscal 2001, 2000, 1999, 1998
and 1997, respectively, and the amortization of favorable lease rights totaling $424,000 and
$113,000 in fiscal 2001 and 2000, respectively. Effective the beginning of fiscal 2002, the
Company will implement the provisions of SFAS No. 142. As a result, the Company will no
longer amortize previously recorded goodwill and will instead test it for impairment. The
Company will continue to amortize favorable lease rights. (See Note 1 to the Consolidated
Financial Statements).
(3) Fiscal 2000 includes $5.6 million pre-tax ($3.5 million, or
$0.28 per share, after-tax) of non-recurring costs associated with the re-opening of the stores
acquired in the Lamonts acquisition. Excluding this amount, pro-forma net income for fiscal 2000
was $10.6 million, or $0.84 per share.
(4) Represents costs incurred in connection with (i) the closure of
seven stores in fiscal 2001, net of proceeds from the sale or favorable termination of the related
store leases and (ii) the discontinuation of the use of an outsourced distribution center facility
located in Kent, Washington. The Company subsequently re-opened one of the closed stores, resulting
in a total of six stores closed in fiscal 2001. Costs associated with the reopening of the store
are included in selling, general and administrative costs for financial reporting purposes.
(5) Represents a non-recurring charge related to the write-off of an
investment in a co-operative buying group. Excluding this amount, pro-forma net income for fiscal
1999 was $7.8 million, or $0.62 per share.
(6) The extraordinary loss on the early extinguishment of debt in fiscal 2001
totaling $696,000 pre-tax, consists of the prepayment penalty and the write-off of unamortized loan
fees related to the early retirement of the Company's previous revolving credit facility, less the
related tax benefit of $267,000.
(7) The significant increase in merchandise inventories in fiscal 1998 and fiscal
2000 as compared to the prior year relates primarily to additional inventories purchased for stores
acquired in connection with the Harris and Lamonts acquisitions in those years, respectively. (See
Part I, Item I, "Business - Acquisitions"). The decrease in inventory from fiscal 2000 to
fiscal 2001 is primarily due to the reduction of inventory levels in the Pacific Northwest and
Alaska locations to more closely reflect current selling trends, as well as to the closure of six
stores in fiscal 2001.
(8) Represents total sales and comparable store sales growth
percentages for fiscal 2001 as compared to the comparable 52 week period in fiscal 2000. Total sales
and comparable store sales for the 52 week period in fiscal 2001 increased by 7.1% and decreased by
0.9%, respectively, as compared to the 53 week period in fiscal 2000.
(9) The increase in total store sales in fiscal 2000 is primarily due to the
addition of 37 stores in the second half of fiscal 2000, including the 34 stores acquired in the
Lamonts acquisition. (See Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Net Sales.")
(10) The increase in total store sales in fiscal 1998 is primarily due to the
addition of 8 stores in connection with the Harris acquisition. (See Part I, Item I, "Business
- - Acquisitions".)
(11) Represents comparable store sales growth for the first 52 weeks of
fiscal 2000 as compared to the same period of fiscal 1999. Comparable store sales for the 53 week
period in fiscal 2000 increased by 6.9% as compared to the 52 week period in fiscal 1999.
(12) Comparable store sales in fiscal 1999 were materially affected by the
termination of the shoe department leases in 28 department stores effective August 1, 1999, and by
the implementation of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition
in Financial Statements", which requires the Company to report sales in leased departments
separately from sales in owned departments.
(13) Includes leased department sales in order to facilitate an understanding
of the Company's sales relative to its selling square footage.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is management's discussion and analysis of significant factors that
have affected the Company's financial position and its results of operations for the periods
presented in the accompanying consolidated financial statements. As described more fully below, the
Company's results for the first three quarters of fiscal 2001 were adversely affected by several
factors, including ongoing integration challenges in the 34 stores acquired in the Lamonts
acquisition and the subsequent closure of six of those stores, and the general slowdown in the
retail economic environment beginning in early fiscal 2001, which was intensified by the events of
September 11th. The Company's results improved in the fourth quarter of fiscal 2001,
offsetting operating losses incurred in the first three quarters of the fiscal year. Nevertheless,
the Company experienced a significant reduction in its operating results for the full year in fiscal
2001.
Fiscal 2001 and 1999 results both include 52 weeks as compared to fiscal 2000
results, which includes 53 weeks. Management believes the Company's results of operations for fiscal
2000 were not materially affected by results attributable to the 53rd week.
Critical Accounting Policies
The Company's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements included in Item 14 of this Form 10-K. The Company's discussion
and analysis of its financial condition and results of operations are based upon the Company's
consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities.
On an on-going basis, the Company evaluates its estimates, including those related to its revenue
recognition policy, the realizability of its customer credit card receivables, the accounting for
the securitization and sale of customer credit card receivables under its receivable securitization
program, the carrying value of its merchandise inventories, the adequacy of its store closure
reserves, and the valuation of its long-lived assets and deferred tax assets. The Company bases its
estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. In the past, actual results have not been materially different
from the Company's estimates.
Some of the Company's significant accounting policies involve a higher degree of
judgment or complexity than its other accounting policies. The policies described below have been
identified as critical to the Company's business operations and the understanding of its results of
operations. The impact and associated risks related to these policies on the Company's business
operations are discussed throughout Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Revenue Recognition Policy
Net retail sales are recognized at the point-of-sale, net of estimated sales
returns and allowances and exclusive of sales tax. Net retail sales also include all amounts billed
to a customer in a sale transaction for shipping and handling, including customer delivery charges.
Revenues on special order sales are recognized when the merchandise is delivered to the customer and
the merchandise has been paid for in its entirety.
The Company records an allowance for estimated sales returns in the period in
which the related sale occurs. These estimates are based primarily on historical sales returns. If
the historical data used to calculate these estimates does not properly reflect future returns,
revenue could be overstated and adjustments to the allowance for estimated sales returns may be
necessary.
Customer Credit Card Receivables
Customer credit card receivables consist primarily of customer credit card
receivables that do not meet certain eligibility requirements of the Company's receivables
securitization program. These receivables are retained by GCRC, which is consolidated in the
Company's financial statements. The Company maintains an allowance for doubtful accounts on such
ineligible receivables to reflect expected credit losses resulting from the inability of customers
to make required payments on such accounts. A considerable amount of judgment is required to assess
the ultimate realization of the customer credit card receivables and the credit-worthiness of each
customer. Furthermore, these judgments must be continually updated and evaluated. Estimates of
potential losses are based on historical as well as current data, including the aging of the
receivables, recent bankruptcy trends, delinquency rates, historical charge-off patterns, recovery
rates and other portfolio data. Other factors, including the general and retail economic environment
in the markets in which the Company operates, are also considered. Historically, the Company's
credit losses on such ineligible receivables have been consistent and within expectations. However,
if the financial condition of the Company's customers were to deteriorate, resulting in an
impairment of their ability to make payments, adjustment to those estimates may be required.
Accounting for the Securitization and Sale of Receivables
The Company conveys all of the customer credit card receivables generated under
its private label customer credit cards to a wholly-owned subsidiary, GCRC, on a daily basis and
those receivables that meet certain eligibility requirements of the program are simultaneously
conveyed to GCC Trust to be used as collateral for securities issued to investors. GCC Trust is a
qualified special purpose entity and is not consolidated in the Company's financial statements. The
transfers of such receivables are accounted for as sales for financial reporting purposes pursuant
to SFAS No. 140, "Accounting for the Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," and as such, the transferred receivables are removed from the
Company's balance sheet at the time of the transfer. The Company retains a beneficial ownership
interest in certain of the receivables transferred under the program and also retains an
uncertificated ownership interest in the retained interest to future interest income (interest-only
strip) and other receivables that do not meet certain eligibility requirements of the program. The
retained interests and the interest-only strips are carried at their estimated fair values, which
are estimated based upon the present value of the expected future cash flows, calculated using
management's best estimates of key assumptions about anticipated credit losses, account prepayment
speeds, discount rates and other factors necessary to derive an estimate of fair values. The gain or
loss on the sale of the receivables is calculated by comparing the carrying amount of the financial
assets involved in the transfer to their relative fair values at the date of transfer. The
certificated portion of the retained interests are considered readily marketable and are classified
as available for sale and carried at their estimated fair values in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Inventory Valuation
Merchandise inventory, which consists of merchandise held for resale, is valued
at the lower of LIFO (last-in, first-out) cost or market using the retail inventory method
("RIM") of accounting. Inherent in the RIM calculation are various judgements and
estimates including, among others, merchandise markon, markups, markdowns and shrinkage, which
significantly impact the ending inventory valuation at cost, as well as resulting gross margins. The
Company applies various methodologies to ensure that the application of the RIM is consistent for
all periods presented. Such methodologies include the development of consistent cost-to-retail
ratios and the grouping of homogenous classes of merchandise. Estimated inventory shrinkage between
physical inventory dates is based on historical experience. Should actual inventory shrinkage
results differ from the Company's estimate, year-end revisions to inventory shrinkage expense
recognized on an interim basis may be required.
Estimating the market value of the Company's merchandise inventory requires
assumptions about future demand and market conditions. Such estimates are based on actual and
forecasted sales trends, current inventory levels and aging information by merchandise categories.
The Company records markdowns to value merchandise inventories at net realizable value. If
forecasted sales are not achieved, or if other indicators of impairment are present, additional
markdowns may be needed in future periods to clear excess or slow-moving merchandise, which may
result in lower gross margins.
Reserve for Store Closure Costs
The Company records an estimated reserve for store closure costs in the period in
which a decision is made to close a store. Costs that may be included in the reserve include
estimated lease termination costs (net of estimated sublease revenue or favorable lease
settlements), asset impairment charges (including the write-off of allocated goodwill and favorable
lease rights), estimated severance and other incremental costs expected to be incurred in connection
with the closure of the store. Such estimates may be subject to change should actual amounts differ
from the amounts originally estimated.
As of the end of fiscal 2001, the Company had a reserve for store closure costs
totaling $529,000, which consisted primarily of estimated future lease obligations for three store
locations that were closed in fiscal 2001. In the event the Company is not successful in selling or
subleasing these three locations as soon as management expects, additional reserves for store
closure costs with respect to those three stores may be recorded. In addition, in the event the
Company decides to close additional store locations in fiscal 2002, additional reserves for store
closure costs, which may be material, may be recorded.
Impairment of Long-Lived Assets
The Company's long-lived assets consist primarily of property and equipment,
goodwill, favorable lease rights and other long-term assets. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. With respect to store locations, the Company performs an evaluation of
whether an impairment charge should be recorded whenever a store experiences unfavorable operating
performance. A store's assets are evaluated for impairment by comparing its estimated undiscounted
cash flows over its estimated lease term to its carrying value. If the cash flows are not sufficient
to recover the carrying value, a loss equal to the difference between the carrying value and the
discounted future cash flows of the asset is recognized. Estimates of future cash flows are based on
a variety of factors, including historical experience in similar locations, changes in
merchandising, promotional or operating strategy that may affect the profitability of a particular
location, knowledge of the market area and in some cases, expected sale proceeds or sublease income,
and independent appraisals. In addition, the analysis assumes that new store locations typically
take three years to achieve their full profit potential. Various uncertainties, including but not
limited to changes in consumer preferences, increased competition or a general deterioration in
economic conditions could adversely impact the expected cash flows to be generated by an asset or
group of assets. In fiscal 2001, the Company recorded asset impairment charges in connection with
store closures, and such charges are included in store closure costs in the accompanying
consolidated income statement. No asset impairment charges were recorded for store locations
continuing to be operated. However, if actual performance for those stores or fair value estimates
are less favorable than management's projections, future asset impairment charges may be necessary.
Similar procedures are used when analyzing other corporate assets for impairment.
Effective the beginning of fiscal 2002, the provisions of SFAS No. 142 will be
implemented and as a result, the Company will no longer amortize previously recorded goodwill. The
Company will instead perform an initial impairment review of goodwill during the first six months of
fiscal 2002, as required by the statement, with an annual impairment review thereafter, unless more
frequent reviews are warranted by specific events or circumstances. There can be no assurance that
at the time these reviews are completed that material impairment charges will not be recorded.
Income Taxes
The carrying value of the Company's net deferred tax assets assumes that the
Company will be able to generate sufficient future taxable income to realize the value of these
assets. In determining the appropriate valuation allowance, management considers all available
evidence for certain tax credit, net operating loss and capital loss carryforwards that would likely
expire prior to their utilization. Management believes it is more likely than not that the Company
will generate sufficient future taxable income in the appropriate carryforward periods to realize
the benefit of its remaining net deferred tax assets. However, if the available evidence were to
change in the future, an adjustment to the valuation allowance may be required, resulting in
additional income tax expense.
Results of Operations
The following table sets forth for the periods indicated certain items from the Company's
Consolidated Income Statements, expressed as a percent of net sales:
Fiscal 2001 Compared to Fiscal 2000
Net Sales
Fiscal Years
-------------------------------
2001 2000 1999
--------- --------- ---------
Net sales......................... 100.0 % 100.0 % 100.0 %
Net credit revenues............... 1.2 1.4 1.6
Net leased department revenues.... 0.6 0.6 0.8
--------- --------- ---------
Total revenues............... 101.8 102.0 102.4
Costs and expenses:
Cost of sales.................. 66.2 65.3 65.4
Selling, general and
administrative expenses...... 31.5 30.4 31.0
Depreciation and amortization.. 2.0 1.7 1.7
New store pre-opening costs.... -- 1.0 0.1
Store closure costs............ 0.1
Asset impairment charge........ -- -- 0.4
--------- --------- ---------
Total costs and expenses..... 99.8 98.4 98.6
--------- --------- ---------
Operating income.................. 2.0 3.6 3.8
Other (income) expense:
Interest expense............... 2.0 2.1 2.1
Miscellaneous income........... (0.2) (0.2) (0.3)
--------- --------- ---------
1.8 1.9 1.8
--------- --------- ---------
Income before income tax expense
and extraordinary item.......... 0.2 1.7 2.0
Income tax expense................ 0.1 0.6 0.8
--------- --------- ---------
Income before extraordinary item.. 0.1 1.1 1.2
Extraordinary item - loss on early
extinguishment of debt (net of
tax benefit)................... (0.1)
--------- --------- ---------
Net income........................ 0.0 % 1.1 % 1.2 %
========= ========= =========
Fiscal 2001 Compared to Fiscal 2000
Net sales increased by approximately $46.8 million, or 7.1%, to $710.7 million in
fiscal 2001 as compared to $663.9 million in fiscal 2000. Fiscal 2001 included 52 weeks as compared
to fiscal 2000, which included 53 weeks. On a comparable 52 week versus 52 week basis, net sales for
fiscal 2001 increased by $55.7 million, or 8.5%, as compared to fiscal 2000. Fiscal 2001 sales
reflect a full year of sales generated by the 34 stores acquired in the Lamonts acquisition (net of
lower sales volume resulting from the closure of six of those stores in fiscal 2001), as compared to
fiscal 2000, which reflect net sales generated for five months after the opening of the stores in
September 2000. Comparable store sales for fiscal 2001, which includes sales for stores open for the
full period in both years, increased by 0.4% as compared to the same 52 week period of the prior
year.
The Company operated 73 department stores and 13 specialty apparel stores as of
the end of fiscal 2001 as compared to 79 department stores and 17 specialty apparel stores as of the
end of fiscal 2000. Thirty-seven of those stores were opened in the second half of fiscal 2000,
however, and were not open for the full period of the prior year. As described more fully in Note 2
to the accompanying financial statements, six of the acquired stores were closed in June and July
2001, with one of those stores subsequently reopened in September 2001. The Company closed one
additional store at the end of January 2002, resulting in a total of six stores closed in fiscal
2001.
Net Credit Revenues
Net credit revenues related to the Company's credit card receivables portfolio decreased by
approximately $700,000, or 8.0%, to $8.4 million in fiscal 2001 as compared to $9.1 million in
fiscal 2000. As a percent of net sales, net credit revenues were 1.2% of net sales in fiscal 2001 as
compared to 1.4% in fiscal 2000. Net credit revenues consist of the following:
(In thousands of dollars) 2001 2000
- -------------------------------------------------------- --------- ---------
Service charge revenues................................. $ 17,817 $ 16,832
Interest expense on securitized receivables............. (4,902) (4,425)
Charge-offs on receivables sold and provision for
credit losses on receivables ineligible for sale...... (4,550) (3,642)
Gain on sale of receivables............................. 55 385
--------- ---------
$ 8,420 $ 9,150
========= =========
Service charge revenues increased by $985,000, or 5.9%, in fiscal 2001 as
compared to fiscal 2000. This increase is primarily due to additional service charge revenues
generated by newly originated customer credit card accounts in new stores opened since the same
period of the prior year. The increase is also due to an increase in the volume of late charge fees
collected on delinquent credit card balances as compared to the same period of the prior year. The
decrease as a percentage of net sales is primarily due to lower average outstanding balances on
newly originated customer accounts in the 37 new stores opened in fiscal 2000. Such accounts
continue to generate lower service charge revenues as compared to those produced by more established
accounts. The Company's credit sales as a percent of total sales were 40.9% in fiscal 2001 as
compared to 41.4% in fiscal 2000. Excluding credit sales generated in the 37 new stores, credit
sales as a percentage of total sales were 45.0% in fiscal 2001 as compared to 43.9% in fiscal
2000.
Interest expense on securitized receivables increased by $477,000, or 10.8%, in
fiscal 2001 as compared to fiscal 2000. This increase is due to a higher level of average
outstanding securitized borrowings resulting from the issuance of the 2000-1 Series certificate in
November 2000 (renewed in November 2001), partially offset by a lower weighted-average interest rate
applicable to all securitized borrowings during the period (6.59% in fiscal 2001 as compared to
7.62% in fiscal 2000). Charge-offs on receivables sold and the provision for credit losses on
receivables ineligible for sale increased by $908,000, or 24.9%, in fiscal 2001 as compared to
fiscal 2000. As a percentage of net sales, such losses increased to 0.6% in fiscal 2001 as compared
to 0.5% in fiscal 2000. These increases reflect higher bankruptcies and higher unemployment rates
caused by the economic downturn in certain of the Company's market areas. As a result of a decrease
in the volume of receivables sold as compared to the prior year, the gain on the sale of receivables
decreased by $330,000 to $55,000 in fiscal 2001 as compared to $385,000 in fiscal 2000.
Net Leased Department Revenues
Net rental income generated by the Company's various leased departments increased
by approximately $200,000, or 3.7%, to $4.1 million in fiscal 2001 as compared to $3.9 million in
fiscal 2000. This increase is primarily due to additional revenues generated by the leased shoe
departments in 36 of the Company's Pacific Northwest and Alaska locations, which were operated by an
independent lessee since their opening in the second half of fiscal 2000. The Company terminated
that lease in August 2001 and re-opened Company operated shoe departments in 15 of those stores.
Pursuant to SAB No. 101, sales generated in those departments after the termination of the lease are
included in total sales as opposed to net leased department revenues for financial reporting
purposes.
Leased department sales are presented net of the related costs for financial
reporting purposes. Sales generated in the Company's leased departments, consisting primarily of the
shoe departments in 36 Pacific Northwest and Alaska locations (prior to the termination of the lease
in August 2001), fine jewelry departments and beauty salons, totaled $28.9 million in fiscal 2001 as
compared to $27.7 million in fiscal 2000.
Cost of Sales
Cost of sales, which includes costs associated with the buying, handling and
distribution of merchandise, increased by approximately $36.6 million to $470.3 million in fiscal
2001 as compared to $433.7 million in fiscal 2000, an increase of 8.4%. The dollar increase is
consistent with the increase in sales volume. The Company's gross margin percentage decreased to
33.8% in fiscal 2001 as compared to 34.7% in fiscal 2000. The decrease in the gross margin
percentage was primarily due to higher markdowns as a percentage of sales as compared to the prior
year. The increased level of markdowns was primarily attributable to the clearance of excess
seasonal inventory levels in the first half of fiscal 2001 resulting from lower than expected sales
in certain of the Pacific Northwest and Alaska store locations and to inventory liquidations at the
six stores which were closed.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by approximately $22.2
million, or 11.0%, to $223.9 million in fiscal 2001 as compared to $201.7 million in fiscal 2000. As
a percentage of net sales, selling, general and administrative expenses increased to 31.5% in fiscal
2001 as compared to 30.4% in fiscal 2000. The dollar increase is primarily attributable to operating
costs associated with a full year of operating the 37 stores opened in the second half of fiscal
2000, as compared to five months of such costs incurred in the prior year. In addition, the Company
has continued to experience higher health care and workers' compensation costs, as well as higher
utilities costs in California. These factors, combined with lower than expected sales volume
generated by the new stores opened in fiscal 2000, contributed to the increase in selling, general
and administrative costs as a percentage of net sales. The Company is continuing to implement
programs aimed at reducing operating costs in the new stores, as well as throughout all areas of the
Company. However no assurance can be given that the Company will be able to fully offset the impact
of such higher costs.
Depreciation and Amortization
Depreciation and amortization expense, which includes the amortization of
intangibles (goodwill and favorable lease rights), increased by approximately $2.6 million, or
22.8%, to $14.1 million in fiscal 2001 as compared to $11.5 million in fiscal 2000. As a percent of
net sales, depreciation and amortization expense increased to 2.0% in fiscal 2001 as compared to
1.7% in fiscal 2000. The dollar increase is primarily due to additional depreciation related to
assets acquired from Lamonts, capital expenditures for new stores and for the renovation of existing
stores, and for information systems enhancements, both to integrate the newly acquired stores into
the Company's existing systems and for other system enhancements. The increase is also due to an
increase in the amortization of assets acquired under capital leases and to the amortization of
goodwill and favorable lease rights recorded as a result of the Lamonts acquisition.
Effective the beginning of fiscal 2002, the Company will adopt the provisions of
SFAS No. 142. As a result, goodwill will no longer be amortized and will instead be evaluated for
impairment at least annually, or at any time certain indicators of impairment arise. The
amortization of goodwill totaled $569,000 in fiscal 2001 and $553,000 in fiscal 2000. The Company
will continue to amortize favorable lease rights over their estimated lease terms.
New Store Pre-Opening Costs
New store pre-opening costs, which are expensed as incurred, typically include
costs such as payroll and fringe benefits for store associates, store rents, temporary storage,
utilities, travel, grand opening advertising, credit solicitation and other costs incurred prior to
the opening of a store. No new store pre-opening costs were incurred in fiscal 2001. The Company
recognized a total of $6.2 million of new store pre-opening costs in fiscal 2000, including $5.6
million incurred in connection with the opening of the 34 stores acquired from Lamonts. The Company
also recognized new store opening costs totaling $551,000 in connection with the opening of three
new stores in Grants Pass, Oregon, Walla Walla, Washington and Redding, California on August 23,
November 8 and November 10, 2000, respectively.
Store Closure Costs
The Company estimates a reserve for store closure costs in the period in which
management decides to close a store. During the second quarter of fiscal 2001, the Company closed
six stores and discontinued the use of an outsourced distribution center facility located in Kent,
Washington. The Company closed one additional store in January 2002. The Company recognized a net
amount of $729,000 in connection with the closure of those stores in fiscal 2001. Such costs
represent approximately $2.0 million of estimated lease termination costs, asset impairment charges
(including the write-off of allocated goodwill and favorable lease rights), estimated severance and
other incremental costs expected to be incurred in connection with the closure of the store, less
$1.3 million of cash proceeds received from the sale of lease rights and favorable lease
terminations.
The Company re-opened one of the closed stores in the third quarter of
fiscal 2001. Costs associated with the re-opening of the store were classified as selling, general
and administrative costs and are not included in store closure costs for financial reporting
purposes.
Interest Expense
Interest expense, which includes the amortization of deferred financing costs,
increased by approximately $600,000 to $14.4 million in fiscal 2001 as compared to $13.8 million in
fiscal 2000, an increase of 4.5%. As a percent of net sales, interest expense decreased to 2.0% in
fiscal 2001 as compared to 2.1% in fiscal 2000. These decreases are primarily due to lower average
outstanding borrowings on the Company's working capital facility, as well as a decrease in the
weighted-average interest rate applicable to the facility (5.48% in fiscal 2001 as compared to 8.76%
in fiscal 2000). These decreases were partially offset by higher interest resulting from the
completion of a $4.0 million mortgage loan and approximately $8.1 million of additional fixtures
and equipment lease financings in the first half of fiscal 2001. As a result of the finalization of
the new revolving credit facility on February 1, 2002 and other new financings in the first quarter
of fiscal 2002, management expects interest expense and the amortization of deferred financing costs
will increase in fiscal 2002. (See "Liquidity and Capital Resources.")
Interest expense related to securitized receivables is reflected as a reduction
of net credit revenues and is not included in interest expense for financial reporting purposes.
Miscellaneous Income
Miscellaneous income, which includes the amortization of deferred income and
other miscellaneous income and expense amounts, increased by approximately $200,000 to $1.6 million
in fiscal 2001 as compared to $1.4 million in fiscal 2000. As a percent of net sales, miscellaneous
income remained unchanged at 0.2% in fiscal 2001 and 2000. The dollar increase relates to an
increase in the amortization of the deferred gain on fixtures and equipment sale/leaseback
transactions. (See "Liquidity and Capital Resources - External Financings.")
Income Taxes
The Company's effective tax rate is 38.5% in fiscal 2001 as compared to 38.2% in
fiscal 2000. (See Note 11 to the Consolidated Financial Statements).
Extraordinary Item
The Company recorded an extraordinary loss on the early extinguishment of debt
totaling $429,000 in fiscal 2001, consisting of $696,000 for the prepayment penalty and the write-
off of unamortized loan fees related to the early retirement of the Company's previous revolving
credit facility, net of the related income tax benefit of $267,000.
Net Income
As a result of the foregoing, the Company reported net income of $425,000 in
fiscal 2001 as compared to $7.1 million in fiscal 2000. On a per share basis (basic and diluted),
net income was $0.03 per share in fiscal 2001 as compared to $0.56 per share in fiscal 2000.
Excluding the extraordinary item in fiscal 2001 and the non-recurring costs incurred in connection
with the re-opening of the 34 stores acquired from Lamonts in fiscal 2000, pro-forma net income
totaled $854,000, or $0.06 per share in fiscal 2001 as compared to $10.6 million, or $0.84 per share
in fiscal 2000.
Fiscal 2000 Compared to Fiscal 1999
Net Sales
Net sales increased by approximately $122.6 million, or 22.6%, to $663.9 million
in fiscal 2000 as compared to $541.3 million in fiscal 1999. This increase is primarily due to
additional sales volume generated by the 37 stores opened during the second half of fiscal 2000, and
by two new stores opened in Danville and Davis, California in October and November 1999,
respectively. The increase is also due to a 6.9% increase in comparable store sales. Fiscal 2000
included 53 weeks of sales as compared to 52 weeks in fiscal 1999. Excluding the 53rd
week in fiscal 2000, net sales increased by 21.1%, with a 5.6% increase in comparable store sales.
The increase in comparable store sales in fiscal 2000 resulted partially from the conversion of the
shoe departments in 28 Gottschalks locations from leased to owned departments, effective August 1,
1999. Sales generated in those departments prior to the termination of the lease on August 1, 1999
are included in Net Leased Department Revenues, as described below.
The Company operated 79 department stores and 17 specialty apparel stores as of
the end of fiscal 2000, as compared to 42 department stores and 20 specialty apparel stores as of
the end of fiscal 1999. Thirty-seven of these department stores were opened in the second half of
fiscal 2000, including the 34 stores which were acquired from Lamonts on July 24, 2000 and opened
during the period beginning August 24 and continuing through September 7, 2000, and the three new
stores opened in Grants Pass, Oregon, Walla Walla, Washington and Redding, California on August 23,
November 8 and November 10, 2000, respectively. The new department store in Redding is a replacement
for a pre-existing specialty store in that location, which was closed.
Net Credit Revenues
Net credit revenues associated with the Company's private label credit card
increased by $441,000, or 5.1%, in fiscal 2000 as compared to fiscal 1999. As a percent of net
sales, net credit revenues decreased to 1.4% of net sales in fiscal 2000 as compared to 1.6% in
fiscal 1999. Net credit revenues consist of the following:
(In thousands of dollars) 2000 1999
- -------------------------------------------------------- --------- ---------
Service charge revenues................................. $ 16,832 $ 15,618
Interest expense on securitized receivables............. (4,425) (4,069)
Charge-offs on receivables sold and provision for
credit losses on receivables ineligible for sale...... (3,642) (3,013)
Gain on sale of receivables............................. 385 173
--------- ---------
$ 9,150 $ 8,709
========= =========
Service charge revenues increased by approximately $1.2 million, or 7.8%, in
fiscal 2000 as compared to fiscal 1999, but as a percent of net sales, decreased to 2.5% in fiscal
2000 as compared to 2.9% in fiscal 1999. The dollar increase is primarily due to a change in the
method of assessing service charges to an average-daily balance method effective April 1999
(previously assessed based on the balance as of the end of a billing period), an increase in the
volume of late charge fees collected on delinquent credit card balances and additional service
charge revenues generated by newly originated customer credit card accounts in the Company's 37 new
store