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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
For The Fiscal Year Ended January 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
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 (IRS Employer
incorporation or organization) Identification No.)
7 River Park Place East, Fresno, CA 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone no., including area code: (209) 434-4800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
Common Stock, $.01 par value 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 No
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 the 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, 1999:
Common Stock, $.01 par value: $51,061,000
On March 31, 1999 the Registrant had outstanding 12,575,565 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 24, 1999, which will be filed
pursuant to Regulation 14A, are incorporated by reference into
Part III of this Form 10-K.
INDEX
PART I
Page No.
Item 1. Business........................ 1
Item 2. Properties...................... 24
Item 3. Legal Proceedings............... 28
Item 4. Submission of Matters to a Vote of
Security Holders................ 28
PART II
Item 5. Market for Registrant's Common
Stock and Related Stockholder
Matters......................... 28
Item 6. Selected Financial Data......... 29
Item 7. Management's Discussion and Analysis
of Results of Operations and Financial
Condition....................... 33
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk... 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............... 51
Item 11. Executive Compensation.......... 53
Item 12. Security Ownership of Certain
Beneficial Owners and Management. 53
Item 13. Certain Relationships and
Related Transactions............ 53
PART IV
Item 14. Exhibits, Financial Statement
Schedule and Reports on Form 8-K. 53
Signatures................................. 90
PART I
Item 1. BUSINESS
GENERAL
Gottschalks Inc. is a regional department and specialty store
chain based in Fresno, California. The Company currently operates forty full-
line department stores, including thirty Gottschalks' stores located
throughout California, and in Oregon, Washington and Nevada, and ten
"Harris/Gottschalks" stores located in the Southern California area. The
Company also operates twenty-two "Gottschalks" and "Village East" specialty
stores which carry a limited selection of merchandise. On August 20, 1998,
the Company acquired nine of the stores now operated under the
"Harris/Gottschalks" nameplate (closing one of the acquired stores on
January 31, 1999, as planned) from The Harris Company ("Harris") of San
Bernardino, California. In fiscal 1998, the Company's sales, which include
sales applicable to the Harris/Gottschalks locations after August 20, 1998,
exceeded a half-a-billion dollars for the first time in the Company's
history. Fiscal 1998 sales totaled $517.1 million, a 15.4% increase from
fiscal 1997 sales of $448.2 million. Total department store sales comprised
96.5%, and specialty store sales comprised 3.5%, of fiscal 1998 sales.
Gottschalks and Harris/Gottschalks department stores typically
offer a wide range of moderate to better brand-name and private-label
merchandise, including men's, women's, junior's and children's apparel;
cosmetics, shoes, fine jewelry and accessories; home furnishings including
china, housewares, domestics, electronics (in ten locations) and small
electric appliances; and other consumer goods. The Company's stores also
carry private-label merchandise and a mix of higher and budget priced
merchandise. The Company's department stores are generally anchor tenants of
regional shopping malls. Village East specialty stores, which offer apparel
for larger women, are located in the same mall in which a Company department
store is located, or as a separate department within some of the Company's
larger stores. The Company services all of its stores, including its store
locations outside California, from a 420,000 square foot distribution
facility centrally located in Madera, California.
The Company has operated continuously for over 94 years since it
was founded by Emil Gottschalk in 1904. The Company did its initial public
offering of stock in 1986, and most of its growth has occurred since then.
Gottschalks Inc. includes the accounts of its wholly-owned
subsidiary, Gottschalks Credit Receivables Corporation ("GCRC"). GCRC is a
qualified special purpose entity which was formed in 1994 in connection with
a receivables securitization program. (See Note 3 to the Consolidated
Financial Statements and Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".)
BUSINESS ACQUISITION
On August 20, 1998, the Company acquired substantially all the
assets and business 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. The assets acquired consisted primarily of
merchandise inventories, customer credit card receivables, fixtures and
equipment and certain intangibles. The Company also assumed certain
liabilities relating to the business, including vendor payables, store
leases and certain other contracts. The purchase price for the assets was
2,095,900 shares of common stock of the Company and a $22.2 million 8%
Subordinated Note due August 20, 2003. As planned, the Company closed one of
the acquired stores on January 31, 1999.
Management believes the primary benefits of the acquisition are:
(1) the addition of approximately $90.0 million of annual sales volume to
further leverage Gottschalks' overhead; (2) the elimination of certain
duplicative corporate and distribution functions of Harris; (3) increased
purchasing power in areas such as merchandising, advertising, supplies and
insurance; (4) the acquisition of a profitable shoe division operated by
Harris; (5) the potential to more fully develop Harris' home divisions,
which management believes are under-penetrated in the Company's market
areas; and (6) the addition of more than 100,000 active proprietary credit
card customers.
OPERATING STRATEGY
Merchandising Strategy. The Company's merchandising strategy is
directed at offering and promoting nationally advertised, brand-name
merchandise recognized by its customers for style and value, and to
complement the branded merchandise with a mixture 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, Dooney & Bourke, Nine West, Liz Claiborne, Carole Little, Calvin
Klein, Ralph Lauren, Guess, Nautica, Karen Kane, Tommy Hilfiger, Esprit,
Evan Picone, Haggar, Koret and Levi Strauss. Brand-name merchandise carried
for the home includes Sony, Mitsubuishi, Lenox, Krups, Calphalon, Royal
Velvet, KitchenAid and Samsonite. Certain of the Company's stores also carry
apparel lines desired by the Company's more affluent customers, including
St. John Knits, Dana Buchman, Ellen Tracy and Ralph Lauren (Polo). In the
Company's stores, brand-name merchandise is prominently displayed, in many
cases with vendor supplied fixtures and signage. The Company's merchandising
activities are conducted centrally from its corporate offices in Fresno,
California.
The Company's merchandising strategy also continues to focus on
reallocating selling floor space to higher profit margin items, such as
shoes, and shifting its merchandise mix to a higher proportion of better
brands. For example, during fiscal 1998, the Company reduced the number of
stores that carry electronics, traditionally a lower gross margin line of
business, and intends to discontinue carrying electronics in its stores by
the end of fiscal 1999. In fiscal 1999, the Company will assume the
operation of its shoe division, which is currently operated by an outside
company as a leased department (in Gottschalks locations). In fiscal 1999,
the Company also plans to expand and remodel the shoe departments in certain
of its stores. The Company's merchandising strategy also continues to focus
on serving particular market segments experiencing increasing growth in its
market areas, including the "55 Plus" age group and the Hispanic population.
The following table sets forth for the periods indicated
a summary of the Company's total sales by division,
expressed as a percent of net sales:
1998 1997 1996 1995 1994
Softlines:
Cosmetics & Accessories... 18.2% 17.8% 17.5% 17.2% 16.6%
Women's Clothing.......... 16.8 16.8 15.9 15.5 16.1
Men's Clothing............ 14.0 14.0 14.4 14.3 13.9
Women's Dresses, Coats
& Lingerie.............. 7.7 7.9 7.9 7.8 7.9
Shoes, Fine Jewelry & Other
Leased Departments (1).. 7.7 7.8 7.8 7.4 7.1
Junior's Clothing......... 4.6 5.2 5.5 6.0 6.3
Children's Clothing....... 5.5 5.3 5.3 4.9 4.9
Village East.............. 2.5 2.5 2.5 2.6 2.6
Shoes (2)................. 0.8
---- ---- ---- ---- ----
Total Softlines........ 77.8 77.3 76.8 75.7 75.4
Hardlines:
Housewares................ 10.7 10.6 10.4 11.0 10.9
Domestics & Luggage....... 7.8 8.1 7.9 8.1 8.1
Electronics & Furniture... 3.7 4.0 4.9 5.2 5.6
---- ---- ---- ---- ----
Total Hardlines........ 22.2 22.7 23.2 24.3 24.6
---- ---- ---- ---- ----
Total Sales (3)........... 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
- ---------------------
(1) The Company currently leases the fine jewelry, shoe (in
thirty-one of its stores as of January 30, 1999) and maternity
wear departments, custom drapery, restaurants and the beauty
salons in its department stores. The shoe department lease has
been terminated effective mid-fiscal 1999.
(2) The Company currently operates the shoe departments in
the Harris/Gottschalks locations. Upon terminating the shoe
department lease in mid-fiscal 1999, the Company will operate the
shoe department in all of its locations.
(3) Fiscal 1998 amounts include sales applicable to the
Harris/Gottschalks stores starting August 20, 1998. Fiscal 1997
and prior amounts presented reflect Gottschalks sales only and do
not reflect amounts applicable to Harris.
The Company is a member of Frederick Atkins, Inc. ("Frederick
Atkins"), a national association of major retailers which provides its
members with group purchasing opportunities. The Company's membership in
Frederick Atkins provides it with the ability to obtain better prices by
purchasing a larger volume of merchandise along with other members of the
organization. Substantially all of the Company's private-label merchandise
is currently purchased through Frederick Atkins. The Company also purchases
merchandise from numerous other suppliers, none of which accounted for more
than 5% of the Company's net purchases in fiscal 1998.
Store Location and Expansion Strategy. The Company's stores are
located primarily in diverse, growing, non-major metropolitan areas in the
western United States. Management believes the Company has a competitive
advantage in offering moderate to better brand-name merchandise and a high
level of service to customers in secondary markets where there is a strong
demand and fewer competitors offering such merchandise. The Company has
historically avoided expansion into major metropolitan areas which are well
served by the Company's larger competitors. Some of the Company's stores are
located in agricultural areas and cater to mature customers with above
average levels of disposable income. The Company's department stores are
generally anchor tenants of regional shopping malls, with the majority of
its stores ranging in size from 50,000 to 150,000 gross square feet. Other
anchor tenants in the malls generally complement the Company's goods with a
mixture of competing and non-competing merchandise, and serve to increase
customer foot traffic within the mall.
The Company generally seeks to open two new stores per year,
although more stores may be opened in any given year if it is believed to be
financially attractive to the Company. As part of its expansion strategy,
the Company may also pursue selective strategic 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 decor and
improving in-store lighting, fixturing, wall merchandising and signage, to
more extensive remodeling and expansion projects. The Company sometimes
receives reimbursement for certain of its new store construction costs and
costs associated with the renovation and refixturing of existing store
locations from mall owners and vendors. 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 table presents selected data related to the
Company's stores for the fiscal years indicated:
Stores open at
year-end: 1998 1997 1996 1995 1994
Department stores 40 (1) 34 32 31 26
Specialty stores 22 (2) 25 27 29 27
-- -- -- -- --
TOTAL 62 59 59 60 53
== == == == ==
Gross store square
footage (in thousands):
Department
stores 4,301 3,391 3,175 2,878 2,327
Specialty stores 83 94 101 106 98
== == === === ==
TOTAL 4,384 3,485 3,276 2,984 2,425
===== ===== ===== ===== =====
- ---------------------------
(1) The Company acquired nine stores from Harris in August 1998,
closing one of the stores acquired on January 31, 1999. 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.
(2) The Company has continued to close certain free-
standing Village East stores as their leases expire and
incorporate those stores into nearby larger Company department
stores as separate departments. Sales generated by these
departments are combined with total specialty store sales for
reporting purposes.
As of the end of fiscal 1999, the Company operated thirty-six
department stores in California, two in Nevada and one each in Oregon and
Washington. The Company's stores range in size from 25,000 to over 200,000
gross square feet. Management believes the Company has a competitive
advantage in being able to accommodate diverse locations into its operation
that may not be desired by its larger competitors that adopt a more
standardized approach to expansion. 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 - 199,000 gross square feet 7
100,000 - 149,999 gross square feet 8
50,000 - 99,000 gross square feet 19
25,000 - 49,000 gross square feet 3
--
TOTAL 40
==
See Part I, Item 2, "Properties--Store Leases and Locations" for additional
information related to the Company's store locations.
Sales Promotion Strategy. The Company commits considerable
resources to advertising, using a combination of media types which it
believes to be most efficient and effective by market area, including
newspapers, television, radio, direct mail and catalogs. The Company's sales
promotion strategy includes seasonal promotions, promotions directed at
selected items and frequent storewide sales events to highlight brand-name
merchandise and promotional prices. The Company also conducts a variety of
special events including 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 certain of its vendors.
Management has continued to focus on enhancing its information
systems as a means to improve the effectiveness of its sales promotion
strategy. The Company uses direct marketing techniques to access niche
markets by generating specific lists of customers who may be most responsive
to specific promotional mailings and sending mailings only to those specific
customers. The Company has also implemented a telemarketing program, which,
through the use of an advanced call management system and the Company's
existing credit department personnel, the Company is able to auto-dial
potential customers within a selected market area and deliver a personalized
message regarding current promotions and events. In fiscal 1998, the Company
completed the installation of a new targeted marketing system through which
the Company is now able to analyze the purchasing patterns of third party
bank card users and, for the first time, direct targeted marketing
activities at those customers. (See Part I, Item I, "Business--Private-Label
Credit Card")
In addition to targeted advertising efforts, the Company also uses
a variety of other marketing formats in its sales promotion strategy. One of
the Company's most significant recent marketing efforts is the inception of
"Emil's Market", named after the Company's founder, Emil Gottschalk. Emil's
Market, introduced in the Company's stores in fiscal 1998, is a complete
marketing strategy for the Company's housewares division, intended to
present houseware products in a specialty store format within the main
department store using a consistent theme with visual presentation,
advertising and packaging. A portion of the initial funding for the project
and certain annual recurring costs are paid by participating vendors. In
fiscal 1998, the Company also launched its new "KidZone" program for the
children's division and the new "Get It" program for the junior's and young
men's divisions, through which members receive additional discounts and
special services. The primary objectives of these programs are to improve
customer loyalty and increase sales in these divisions.
The Company offers selected merchandise, a complete Bridal
Registry service, and other general corporate information on the World Wide
Web at http://www.gottschalks.com. The Company also sells merchandise
through its mail order department. In addition to the previously described
marketing efforts, the Company also has a wide variety of credit-related
programs aimed at improving sales, including the "Gottschalks Rewards"
program. (See Part I, Item I, "Business--Private-Label Credit Card.")
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 send thank-you
notes and other greetings to their customers during their normal working
hours. The "Four Star" customer service program also emphasizes sales
associate and store management training. 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 to reward 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 the customer's 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. In fiscal 1999, the Company expects to implement a new labor
scheduling system, through which management believes it will be able to more
efficiently match staffing levels to projected sales, thereby improving
customer service and maximizing the return on its store payroll
expenditures.
Distribution of Merchandise. The Company's 420,000 square foot
distribution center is centrally located in Madera, California and serves
all of the Company's store locations, including its store locations outside
California. Completed in 1989, the distribution center presently has the
capacity to process merchandise for up to seventy-five department store
locations, and the capacity may be expanded beyond that amount. The Company
receives substantially all of its merchandise at the distribution center and
makes daily distributions to the stores.
The Company has continued to focus on the adoption of new
technology and operational best practices at its distribution center with
the goals of receiving, processing and distributing merchandise to stores at
a faster rate and at a lower cost per unit. In fiscal 1998, the Company
completed the implementation of a new logistical system at its distribution
center, which is the same system that many of the Company's larger
competitors have also put into place. The new system enables the Company to
minimize the manual handling of a large percentage of incoming merchandise
and provides for the processing of such merchandise through the distribution
center and to the stores in minutes and hours as compared to several days in
the past. Currently, approximately 50% of merchandise is purchased from
vendors which provide the Company with an advanced shipping notice ("ASN"),
which is an electronic document transmitted by a vendor that details the
contents of each carton en route to the distribution center. These vendors
also ship only "floor-ready" merchandise which arrives on approved hangers
pre-tagged with universal product code ("UPC") tickets, a bar coded price
label containing retail prices that can be electronically translated into
the Company's inventory systems.
The Company also has formal guidelines for vendors with respect to
shipping, receiving and invoicing for merchandise under its "Partners in
Technology" program. Vendors that do not comply with the guidelines for
shipping merchandise using ASN's and in floor-ready status are charged
specified fees depending upon the instance of non-compliance. Such fees are
intended to offset higher costs associated with the processing of such
merchandise. Vendors can obtain the Company's shipping guidelines through
the Company's Web site.
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 sales and other revenues for the
Company. As described more fully in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," the Company sells its customer credit card
receivables 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 represents a summary of information related to the
Company's credit card receivable portfolio for the fiscal years indicated:
1998 1997 1996 1995 1994
(In thousands of dollars, except selected data)
Average credit
card receivables
serviced (1) $69,143 $64,612 $64,162 $62,492 $57,613
Service charge
income 13,431 11,618 10,493 10,937 8,904
Credit sales as a
% of total
sales (2) 43.1% 43.7% 43.1% 43.6% 42.2%
# of days credit
sales in
receivables (3) 115.6 119.3 123.7 127.5 146.2
_______________________
(1) Includes receivables sold, the retained
interest in receivables sold, and other
receivables, which are all serviced
by the Company.
(2) The decrease in credit sales as a percentage of total sales
in fiscal 1998 is primarily due to the new Harris/Gottschalks
locations, which generally have a lower credit sales
volume than that of the rest of the Company.
(3) Excludes receivables acquired from Harris on August 20, 1998.
The Company has a variety of credit-related programs which
management believes have improved customer service and have increased
service charge 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 days' 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 net
minimum spending history on their charge accounts of $1,000
per year;
- 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; and
- Ongoing credit card reactivation programs designed to
recapture credit cardholders who have not utilized their
credit card for a specified period of time.
The Company had approximately 589,000 active credit card holders
as of February 28, 1999 as compared to 460,000 as of February 28, 1998. This
increase is primarily due to the acquisition of approximately 100,000 credit
card accounts from Harris in August 1998. Management believes holders of the
Company's credit card typically buy more merchandise from the Company than
other customers.
The Company's credit management software system has automated
substantially all aspects of the Company's credit authorization, collection
and billing processes, and enhances the Company's ability to provide
customer service. This system, combined with a credit scoring system,
enables the Company to process thousands of credit applications daily at a
rate of less than three minutes per application. The Company also has an
automated advanced call management system through which the Company manages
the process of collecting delinquent customer accounts. As described more
fully in Part I, Item I, "Business--Sales Promotion Strategy", the Company
is also able to utilize the credit management and advanced call management
systems for direct marketing and telemarketing activities.
The credit authorization process is centralized at the Company's
corporate headquarters in Fresno, California. Credit is extended to
applicants based on a scoring model. Applicants who meet pre-determined
criteria based on prior credit history, occupation, number of months at
current address, income level and geographic location are automatically
assigned an account number and awarded a credit limit ranging from $300 to
$2,000. Credit limits may be periodically revised. The Company's credit
system also provides full on-line positive authorization lookup capabilities
at the point-of-sale. Within seconds, each charge, credit and payment
transaction is approved or referred to the Company's credit department for
further review. Sales associates speed-dial the credit department for an
approval when a transaction has been referred by the system.
The Company offers credit to customers under several payment
plans: the "Option Plan", under which the Company bills customers monthly
for charges without a minimum purchase requirement; the "Time-Pay Plan",
under which customers may make monthly payments for purchases of home
furnishings, major appliances and other qualified items of more than $100;
and the "Club Plan", under which customers may make monthly payments for
purchases of fine china, silver, crystal and collectibles of more than $100.
The Company also periodically offers special promotions to its credit card
holders through which customers are given the opportunity to obtain
discounts on merchandise purchases or purchase merchandise under special
deferred billing and deferred interest plans. Finance charges may be
assessed on unpaid balances at an annual percentage rate of up to 21.6%, and
a late charge fee on delinquent charge accounts may be assessed at a rate of
up to $15 per late payment occurrence. Such charges may vary depending on
applicable state law.
Information Systems and Technology. The Company has continued to
invest in technology and systems improvements in its efforts to improve
customer service and increase the profitability of the Company. The
Company's information systems include IBM mainframe technology, supplemented
by applications on client servers, mid-range and personal computers
connected through a local area network. All of the Company's transaction
processing and reporting activities are computerized, including its sales,
inventory, credit, accounts payable, payroll and financial reporting
systems. Every store processes each sales transaction through point-of-sale
("POS") terminals that connect on-line with the Company's mainframe computer
located at its corporate offices in Fresno, California. This system provides
detailed reports on a real-time basis of sales, gross margin and inventory
levels by store, department, vendor, class, style, color, and size.
Management believes the continued enhancement of its merchandise-
related systems is essential for gross margin improvement and shrinkage
control. The Company has an automatic markdown system which has assisted in
the more timely and accurate processing of markdowns and reduced inventory
shortage resulting from paperwork errors. The Company's price management
system has improved the Company's POS price verification capabilities,
resulting in fewer POS errors and enhanced customer service. Combined with
enhanced physical inventory procedures and improved security systems in the
Company's stores, these systems have resulted in the Company's inventory
shrinkage decreasing from approximately 1.4% in fiscal 1994 and 1.3% in
fiscal 1995 to approximately 1.1% of net sales in fiscal 1996, 1997 and
1998.
Management also believes improved technology is critical for
future reductions in costs related to the purchase, handling and
distribution of merchandise, traditionally labor-intensive tasks. The
Company's merchandise management and allocation system, upgraded in fiscal
1998, has enhanced the Company's ability to allocate merchandise to stores
more efficiently and make prompt reordering and pricing decisions. The
system also provides merchandise-related information used by the Company's
buying division in its analysis of market trends and specific item
performance in stores. The Company has also implemented a variety of
programs with its vendors, including an automatic replenishment inventory
system for certain basic merchandise and an electronic data interchange
("EDI") system providing for on-line purchase order entry and electronic
invoicing. Such systems have automated certain processes associated with the
purchasing and payment for merchandise.
Management is also focused on improving systems as a means to
reduce operating costs and improve efficiencies throughout the Company.
Recent system implementations include the previously described logistical
system installed at the Company's distribution center, which has resulted in
lower distribution center payroll and other overhead costs. A workflow and
imaging system was also recently installed, which has created a "paperless"
environment in the Company's accounts payables department and has automated
certain tasks that were previously manual. Efficiencies gained through this
system have enabled the department to process a significantly higher volume
of invoices and payments without increasing staffing levels. The Company
also intends to utilize the imaging technology to reduce operating costs and
improve efficiencies in other areas of the Company, including the credit and
human resources departments. In fiscal 1999, the Company expects to complete
a strategic review of its information systems and formulate a long-term
strategy for further system improvements.
The Company's Year 2000 readiness is described more fully in Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
Competition. The Company operates in a highly competitive
environment, competing with national, regional, and local chain department
and specialty stores, some of which are considerably larger and have
substantially greater financial and other resources than the Company.
Competition has intensified in recent years as new competitors, including
specialty stores, general merchandise stores, discount and off-price
retailers and outlet malls, have entered the Company's primary market areas.
Increased use and acceptance of the internet and other home shopping
formats, and the trend towards consolidation of competitors within the
retail industry, have also created additional competition for the Company.
The Company competes primarily on the basis of current merchandise
availability, customer service, price and store location and the
availability of services, including credit and product delivery.
The Company's larger national and regional competitors have the
ability to purchase larger quantities of merchandise at lower prices.
Management believes its buying practices partially counteract this
competitive pressure. Such practices include: (i) the ability to accept
smaller or odd-sized orders of merchandise from vendors than its larger
competitors may be able to accept; (ii) the ability to structure its
merchandise mix to more closely reflect the different regional, local and
ethnic needs of its customers; and (iii) the ability to react quickly and
make opportunistic purchases of individual items. The Company's membership
in Frederick Atkins also provides it with increased buying power in the
marketplace. Management also believes that its knowledge of its primary
market areas, developed over more than 94 years of continuous operations,
and its focus on those markets as its primary areas of operations, give the
Company an advantage that its competitors cannot readily duplicate. Many of
the Company's competitors are national chains whose operations are not
focused specifically on non-major metropolitan cities in the western United
States. One aspect of the Company's strategy is to differentiate itself as a
home-town, locally-oriented store versus its more nationally focused
competitors. The Company encourages its store management and associates to
actively participate in local charitable activities.
Seasonality. The Company's stores experience seasonal sales and
earnings patterns typical of the retail industry. Peak sales occur during
the Christmas selling months of November and December, and to a lesser
extent, during the Easter and Back-to-School selling seasons. The Company
generally increases its inventory levels and sales staff for these seasons.
(See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality").
Employees. As of January 30, 1999, the Company had 6,600
employees, including 1,780 employees working part-time (less than 20 hours
per week on a regular basis). The Company hires additional temporary
employees and increases the hours of part-time employees during seasonal
peak selling periods. None of the Company's employees are covered by a
collective bargaining agreement. Management considers its employee
relations to be good.
To attract and retain qualified employees, the Company offers a
25% discount on most merchandise purchases; participation in a 401(k)
Retirement Savings Plan to which the Company makes quarterly and annual
contributions depending upon the profitability of the Company; and vacation,
sick and holiday pay benefits as well as health care, accident, death,
disability, dental and vision insurance at a competitive cost to the
employee and eligible beneficiaries and dependents. The Company has
performance-based incentive pay programs for its officers and certain of its
key employees and has stock option plans that provide for the grant of stock
options to officers and key employees of the Company. The Company's
stockholders have also approved a stock purchase plan, which is expected to
be implemented in fiscal 1999. The Company also offers management training
and leadership classes for those associates identified for promotion within
the Company.
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:
revenues and earnings;
savings or synergies from acquisitions;
future capital expenditures;
its expansion strategy (including store and department
openings);
the impact of sales promotions and customer service programs
on consumer spending;
the utilization of consumer credit programs;
its Year 2000 readiness.
Such forward-looking statements can be identified by words such as:
"believes", "anticipates", "expects", "intends", "seeks", "may", "will" 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
General Economic and Market Conditions. The Company's stores are
located primarily in non-major metropolitan and agricultural areas in the
western United States. A substantial portion of the stores are located in
California. 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 economy or in the California
economy;
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;
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 also has increased working capital needs prior to the Christmas
season to carry significantly higher inventory 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. Factors that could cause
results to vary include:
the timing and level of sales promotions;
the weather;
fashion trends;
local unemployment levels; and
the overall health of the national and local economies.
The Company 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.
Expansion Strategy - Future Growth and Recent Acquisitions. The
Company's expansion strategy involves remodeling and expanding existing
stores and acquiring or opening new stores. Achieving such expansion plans
(including any potential acquisitions) depends upon many factors, including
the ability of the Company to:
- identify, negotiate, finance, obtain, construct, lease or
refurbish suitable store sites;
- hire, train and retain qualified personnel; and
- integrate new stores into existing information systems and
operations.
The Company also expects to achieve synergies from its recent
acquisition of the Harris stores. Achieving such synergies depends upon
many factors, including the ability of the Company to:
- leverage the additional sales volume of the Harris stores
over existing overhead;
- increase the Company's purchasing power;
- increase usage of the Company's credit card by the new
Harris customers; and
- successfully assume the operation of its shoe business.
The Company cannot guarantee that it will achieve its targets for
remodeling or expanding existing stores or for opening new stores, or that
such stores will operate profitably when opened or acquired, or that it will
achieve the expected synergies from the Harris acquisition. If the Company
fails to effectively implement its expansion strategy, it could materially
and adversely affect the Company's business, financial condition and results
of operations.
Competition. The retail business is highly competitive. 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
are larger and have greater financial resources to purchase larger
quantities of merchandise at lower prices. The Company's success in
counteracting these competitive pressures depends on its ability to:
- offer merchandise which reflects the different regional
and local needs of its customers;
- differentiate and market itself as a home-town, locally-
oriented store (as opposed to its more nationally focused
competitors);
- continue to shift its merchandise mix to a higher
proportion of better branded merchandise.
- increase its buying power as a member of Fredrick Atkins; and
- accept smaller or odd-sized orders of merchandise.
Existing or new competitors, however, may begin to carry such
brand-name merchandise or increase their offering of better quality
merchandise which may negatively impact the Company's business, financial
condition and results of operations.
Vendor Relations. The Company believes its close relationship
with its key vendors enhances its ability to purchase brand-name merchandise
at competitive prices. If the Company loses key vendor support, is unable
to participate in group purchasing activities or its vendors withdraw brand-
name merchandise, it could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company cannot
guarantee that it will be able to acquire brand-name merchandise at
competitive prices or on competitive terms in the future.
Leverage and Restrictive Covenants. Due to the level of the
Company's indebtedness, any material adverse development affecting the
Company could significantly limit its ability to withstand competitive
pressures and adverse economic conditions, take advantage of expansion
opportunities or to meet its obligations as they become due. The Company's
existing debt imposes operating and financial restrictions that limit
the Company's ability to make dividend payments and grant liens.
Interest Rate Risk. The Company's borrowings under its revolving
line of credit facility bear a variable interest rate. If interest rates
increase, the Company's financial results could be materially adversely
affected. See Item 7A, "Quantitative and Qualitative Disclosures About
Market Risk."
Consumer Credit Risks. The Company's private-label credit card
facilitates sales and generates additional revenue from credit card fees.
Changes in credit card use, default rates or in the laws regulating the
granting or servicing of credit (including late fees and finance charges
applied to outstanding balances) could materially adversely affect the
Company's business, financial condition and results of operations. In
addition, the Company cannot guarantee that the credit card programs it has
implemented will increase or maintain customer spending.
Securitization of Accounts Receivable. The Company securitizes
the receivables generated under its private-label credit card. Under the
securitization program, the Company transfers such receivables to a special
purpose entity which issues interests in the receivables to investors. The
Company cannot guarantee that it will continue to generate receivables by
credit card holders at the same rate, or that it will establish new credit
card accounts at the rate it has 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 financial condition
and results of operations.
Year 2000 Readiness. If computer hardware, software or technology
improperly function using dates after December 31, 1999, then the Company
may be adversely affected. The Company estimated its costs and completion
dates for its Year 2000 readiness based on assumptions of future events
including:
- the continued availability of internal and external
resources, such as human resources and capital;
- the ability of third parties doing business with the
Company to timely modify their computer systems; and
- the Company's contingency plans.
The Company cannot guarantee that it or the third parties it does
do business with will successfully complete the Year 2000 conversion on a
timely basis. If either the Company or any third party with whom it does
substantial business fails to complete its Year 2000 conversion on a timely
basis, it may adversely affect the Company's business, financial condition
and results of operations.
Dependence on Key Personnel. The Company's success depends to a
large extent on its executive management team. The loss of the services of
any such executive 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.
Labor Conditions. The Company 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 the 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 the Company's
ability to hire or retain qualified employees:
- unemployment levels;
- minimum wage legislation; and
- changing demographics in the local economies where stores are
located.
The foregoing list of important factors is not exclusive and the
Company does not undertake to revise any forward-looking statement to
reflect events or circumstances that occur after the statement is made.
Item 2. PROPERTIES
Corporate Offices and Distribution Center. The Company's
corporate headquarters are located in an office building in northeast
Fresno, California, constructed in 1991 by a limited partnership of 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. (See Note 1 to the Consolidated Financial Statements.) The
Company believes that its current office space is adequate to meet its long-
term office space requirements.
The Company's distribution center, completed in 1989, was
constructed and equipped to meet the Company's long-term merchandise
distribution needs. The 420,000 square foot distribution facility is
strategically located in Madera, California to service economically the
Company's existing store locations in the western United States and its
projected future market areas. 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 six of its forty
department stores, and leases the remaining thirty-four department stores
and all of its twenty-two specialty stores. 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. Additional information
pertaining to the Company's store leases is included in Note 6 to the
Consolidated Financial Statements.
The following table contains specific information about each of
the Company's stores open as of the end of fiscal 1998:
Expiration
Gross(1) Date of
Square Date Current
Feet Opened Lease Owned or Leased(2)
DEPARTMENT STORES:
Northern Region (17 Gottschalks locations):
Antioch............. 80,000 1989 N/A (3) Own
Auburn.............. 40,000 1995 2005 Lease
Carson City, Nevada. 68,000 1995 2005 Lease
Chico............... 85,000 1988 2017 Lease
Eureka.............. 96,900 1989 N/A (3) Own
Klamath Falls,
Oregon............ 65,400 1992 2007 Lease
Modesto:
Vintage Faire.....161,500 1977 2007 Lease
Century Center.... 65,000 1984 2013 Lease
Reno, Nevada........138,000 1996 2016 Lease
Sacramento..........194,400 1994 2014 Lease
Santa Rosa..........131,300 1997 2017 Lease
Sonora.............. 59,800 1997 2017 Lease
Stockton............ 90,800 1987 2009 Lease
Tacoma, Washington..119,300 1992 2012 Lease
Tracy...............113,000 1995 2015 Lease
Woodland............ 57,300 1987 2017 Lease
Yuba City........... 80,000 1989 N/A(3) Own
Central Region (13 Gottschalks locations):
Bakersfield,
Valley Plaza...... 90,000 1987 2017 Lease
Capitola............105,000 1990 2015 Lease
Clovis..............101,400 1988 2018 Lease
Fresno:
Fashion Fair......163,000 1970 2016 Lease
Fig Garden........ 36,000 1983 2005 Lease
Manchester........175,600 1979 2009 Lease
Hanford............. 98,800 1993 N/A(3) Own
Merced.............. 60,000 1983 2013 Lease
Oakhurst............ 25,600 1994 2005 Lease
San Luis Obispo..... 99,300 1986 N/A(3) Own
Santa Maria.........114,000 1976 2006 Lease
Visalia.............150,000 1995 2014 Lease
Watsonville......... 75,000 1995 2006 Lease
Southern Region (10 Harris/Gottschalks locations) (4):
Bakersfield, East
Hills:
Women's, Shoes and
Accessories.....105,000 1998 2008(5) Lease
Men's, Children's
and Home........ 92,900 1988 2009 Lease
Hemet............... 51,000 1998 2005 Lease
Indio............... 60,000 1998 2005 Lease
Moreno Valley.......153,000 1998 2008(5) Lease
Palmdale:
Women's, Shoes and
Accessories.....114,000 1998 2008(5) Lease
Men's, Children's
and Home.........114,900 1990 N/A(3) Own
Palm Springs........ 82,000 1991 2015 Lease
Redlands............106,000 1998 2007 Lease
Riverside...........208,000 1998 2002 Lease
San Bernardino......204,000 1995 2017 Lease
Victorville......... 71,000 1998 2006 Lease
Total Department
Store Square
Footage........ 4,301,200
SPECIALTY STORES:
Gottschalks:
Aptos............... 11,200 1988 2004 Lease
Redding............. 7,800 1993 Automatically Lease
renews every
60 days
Scotts Valley....... 11,200 1988 2001 Lease
Village East:
Antioch............. 2,100 1989 1999(6) Lease
Capitola............ 2,360 1991 2009 Lease
Carson City, Nevada. 3,400 1995 2005 Lease
Chico............... 2,300 1988 2000 Lease
Clovis.............. 2,300 1988 2009 Lease
Eureka.............. 2,820 1989 2004 Lease
Fresno, Fig Garden.. 2,800 1986 30 days(7) Lease
Hanford............. 2,800 1993 2008 Lease
Modesto,
Century Center.... 2,730 1986 2005 Lease
Palmdale............ 2,716 1990 2000 Lease
Sacramento.......... 2,700 1994 2004 Lease
San Luis Obispo..... 2,500 1987 2011 Lease
Santa Maria......... 3,000 1976 2001 Lease
Stockton............ 1,799 1989 30 days(7) Lease
Tacoma.............. 4,000 1992 2012 Lease
Tracy............... 3,428 1995 2006 Lease
Visalia............. 3,400 1975 1999(6) Lease
Woodland............ 2,022 1987 1999(8) Lease
Yuba City........... 3,200 1990 2000 Lease
Total Specialty Store
Square Footage.... 82,575
Total Square
Footage.........4,383,775
__________________________
(1) Reflects total store square footage, including office space,
storage, service and other support space that is not dedicated to
direct merchandise sales.
(2) Most of the Company's department store leases contain renewal
options. Leases for specialty store locations generally do not
contain renewal options.
(3) These stores are Company owned and have been pledged as security
for various debt obligations of the Company. (See Note 5 to the
Consolidated Financial Statements.)
(4) Locations opened in fiscal 1998 were acquired from
Harris. Locations open prior to that date were original
Gottschalks locations that are now operated under
Harris/Gottschalks nameplates.
(5) These leases are with ECI, an affiliate of the Company.
(6) The Company expects to renegotiate these leases prior to
their expiration.
(7) These leases are renewable on a month-to-month basis.
(8) The Company expects to close this location upon the expiration of
its lease and incorporate it into the nearby department store
location as a separate department.
Item 3. LEGAL PROCEEDINGS
Not Applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matter was 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 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:
1998 1997
Fiscal Quarters High Low High Low
1st Quarter....... 9 1/4 6 13/16 6 1/2 5 1/8
2nd Quarter....... 8 7/8 7 3/4 9 5 1/2
3rd Quarter....... 8 3/4 6 9/16 9 7/8 7 11/16
4th Quarter....... 7 15/16 6 7/8 9 1/8 6 3/4
On March 31, 1999, the Company had 894 stockholders of record,
some of which were brokerage firms or other nominees holding shares for
multiple stockholders. The sales price of the Company's common stock as
reported by the NYSE on March 31, 1999 was $7 1/16 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
credit agreement with Congress Financial Corporation prohibits the Company
from paying dividends without prior written consent from that lender.
On August 20, 1998, in connection with completing the acquisition
of substantially all of the assets and business of Harris, the Company
issued 2,095,900 shares of its common stock and the Subordinated Note to
Harris (see Note 2 to the Consolidated Financial Statements). The
transaction was a private placement involving one offeree and one purchaser
exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
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 January 30, 1999,
January 31, 1998, February 1, 1997, February 3, 1996 and January 28, 1995
are referred to herein as fiscal 1998, 1997, 1996, 1995 and 1994,
respectively. All fiscal years noted include 52 weeks, except for fiscal
1995 which includes 53 weeks.
The selected financial data below should be read in conjunction
with Part II, 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. The
Company completed the acquisition of nine stores from Harris on August 20,
1998, closing one of the acquired stores on January 31, 1999, as planned.
The acquisition has affected the comparability of the Company's financial
results.
RESULTS OF OPERATIONS:
1998 1997 1996 1995 1994
(In thousands, except share data)
Net sales........... $517,140 $448,192 $422,159 $401,041 $363,603
Net credit revenues.. 6,897 6,385 4,198 4,896 4,210
------- ------- ------- ------- -------
524,037 454,577 426,357 405,937 367,813
Costs and expenses:
Cost of sales...... 347,531 304,558 287,164 278,827 247,423
Selling, general and
administrative
expenses......... 150,719 130,922 123,860 120,637 101,516
Depreciation and
amortization(1)... 8,461 6,667 6,922 8,092 5,860
Acquisition related
expenses........... 859 673
Unusual items(2)..... 3,833
------- ------- ------- ------- -------
507,570 442,820 417,946 407,556 358,632
======= ======= ======= ======= =======
Operating income (loss) 16,467 11,757 8,411 (1,619) 9,181
Other (income) expense:
Interest expense...... 9,470 7,325 8,111 7,718 7,599
Miscellaneous income.. (2,032) (1,955) (2,792) (726) (755)
------- ------- ------- ------- -------
7,438 5,370 5,319 6,992 6,844
======= ======= ======= ======= =======
Income (loss) before
income tax expense
(benefit)........... 9,029 6,387 3,092 (8,611) 2,337
Income tax expense
(benefit)........... 3,747 2,657 1,258 (2,972) 821
------- ------- ------ ------ ------
Net income (loss)..... $ 5,282 $ 3,730 $ 1,834 $(5,639) $ 1,516
======= ======= ====== ====== ======
Net income (loss)
per common share -
basic and diluted.. $ 0.46 $ 0.36 $ 0.18 $ (0.54) $ 0.15
======= ======= ====== ====== ======
Weighted-average
number of common
shares outstanding
basic and diluted 11,418 10,474 10,461 10,416 10,413
SELECTED BALANCE SHEET DATA:
1998 1997 1996 1995 1994
(In thousands of dollars)
Retained interest in
receivables sold...$ 37,399 $ 15,813 $ 20,871 $ 25,892 $ 25,745
Receivables, net.... 16,136 3,085 1,818 1,575 1,566
Merchandise
inventories........ 123,118 99,294 89,472 87,507 80,678
Property and
equipment, net..... 113,645 99,057 87,370 89,250 93,809
Total assets........ 324,364 242,311 232,400 239,041 233,353
Working capital..... 96,231 67,579 70,231 42,904 37,900
Long-term obligations,
less current portion.74,114 62,420 60,241 34,872 33,672
Subordinated note
payable to affiliate.20,618 --- --- --- ---
Stockholders' equity.103,468 83,905 80,139 77,917 83,577
OTHER SELECTED DATA:
1998 1997 1996 1995 1994
(In thousands of dollars, except other selected data)
Sales growth:
Total store sales.... 15.4% 6.2% 5.3% 10.3% 6.2%
Comparable store
sales. 2.1% 3.3% 1.4% (3.1%) 3.3%
Comparable stores data:
Sales per selling
square foot $170 $160 $170 $181 $195
Selling square
footage 2,621 2,642 2,161 1,892 1,747
Gross margin percent:
Owned............. 34.3% 33.5% 33.4% 31.8% 33.3%
Leased............. 14.8% 14.6% 14.6% 14.4% 14.1%
EBITDA(3)...........$31,133 $24,631 $21,689 $10,777 $22,268
Capital
expenditures... $16,801 $14,976 $ 6,845 $12,773 $ 4,539
Current ratio..... 1.98:1 2.01:1 2.10:1 1.45:1 1.43:1
Inventory turnover
ratio............. 2.6 2.6 2.6 2.7 2.9
- -----------------------------------
(1) Includes the amortization of new store pre-opening costs of
$421,000, $589,000, $1.3 million, $2.5 million and $438,000
in fiscal 1998, 1997, 1996, 1995 and 1994, respectively.
This amount also includes the amortization of goodwill of
$291,000 in fiscal 1998 and $116,000 in each of fiscal
years 1997 through 1994.
(2) Represents legal fees and other
costs incurred to settle litigation against the Company.
(See the Company's 1997 Annual Report on Form 10-K for
additional information.)
(3) "EBITDA" is defined as earnings before
interest, income taxes, depreciation and amortization, and
other unusual items. EBITDA also excludes interest expense
on securitized receivables which is included in net credit
revenues. EBITDA is not intended to represent cash
flows from operations, to be an indicator of the Company's
operating performance or to be a measure of its liquidity.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Following is management's discussion and analysis of significant
factors which 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 in "Liquidity and Capital
Resources", the Company completed the acquisition of nine stores from Harris
on August 20, 1998, closing one of the acquired stores on January 31, 1999,
as planned. The acquisition has affected the comparability of the Company's
financial results.
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:
1998 1997 1996
Net sales........................ 100.0% 100.0% 100.0%
Net credit revenues.............. 1.3 1.4 1.0
----- ----- -----
101.3 101.4 101.0
Costs and expenses:
Cost of sales................. 67.2 68.0 68.0
Selling, general and
administrative expenses..... 29.1 29.2 29.3
Depreciation and amortization. 1.6 1.5 1.7
Acquisition related expenses.. 0.2 0.1
----- ----- -----
98.1 98.8 99.0
----- ----- -----
Operating income ................ 3.2 2.6 2.0
Other (income) expense:
Interest expense.............. 1.8 1.6 1.9
Miscellaneous income.......... (0.3) (0.4) (0.6)
----- ----- -----
1.5 1.2 1.3
----- ----- -----
Income before income tax expense. 1.7 1.4 0.7
Income tax expense...... 0.7 0.6 0.3
----- ----- -----
Net income ................. 1.0% 0.8% 0.4%
===== ===== =====
Fiscal 1998 Compared to Fiscal 1997
Net Sales
In fiscal 1998, net sales exceeded a half-a-billion dollars for
the first time in the Company's history. Net sales in fiscal 1998 increased
by $68.9 million to $517.1 million as compared to $448.2 million in fiscal
1997, a 15.4% increase. This increase is primarily due to additional sales
volume generated by the nine new Harris/Gottschalks locations, beginning
August 20, 1998, and by two new stores not open for the entire year in
fiscal 1997. As planned, the Company closed one of the stores acquired from
Harris on January 31, 1999. Comparable store sales, which increased by 2.1%
in fiscal 1998 as compared to the prior year, were negatively impacted by
unseasonably cold and wet weather conditions caused by the El Nino weather
system.
Net Credit Revenues
Net credit revenues related to the Company's credit card
receivables portfolio consist of the following:
(In thousands of dollars) 1998 1997
Service charge revenues $13,431 $11,618
Gain (loss) on sale of
receivables (45) 1,050
Interest expense on
securitized receivables (3,314) (3,579)
Charge-offs on receivables
sold and provision for
credit losses on
receivables ineligible
for sale (3,175) (2,704)
------ ------
$ 6,897 $ 6,385
====== ======
Net credit revenues associated with the Company's private label
credit card increased by $512,000, or 8.0%, in fiscal 1998 as compared to
fiscal 1997. As a percent of net sales, net credit revenues was 1.3% of net
sales in fiscal 1998 as compared to 1.4% in fiscal 1997. As described more
fully in Note 3 to the Consolidated Financial Statements, the gain on sale
of receivables in fiscal 1997 relates to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", and
includes a non-recurring credit of $898,000 related to a change in the
estimate for the allowance for doubtful accounts for receivables which were
ineligible for sale. SFAS No. 125 has not materially affected the Company's
operating results since its initial implementation in fiscal 1997.
Service charge revenues increased by approximately $1.8 million,
or 15.6%, in fiscal 1998 as compared to fiscal 1997. This increase is
primarily due to additional service charge revenues generated by customer
credit card receivables acquired from Harris, combined with an increase in
the volume of late charge fees collected on delinquent credit card balances.
This increase was partially offset by lower revenues resulting from a
decrease in credit sales as a percent of total sales (43.1% in fiscal 1998
as compared to 43.7% in fiscal 1997), partially due to lower credit sales
volume in the Harris/Gottschalks locations than in the Gottschalks
locations.
Interest expense on securitized receivables decreased by $265,000,
or 7.4%, in fiscal 1998 as compared to fiscal 1997. This decrease relates to
lower outstanding borrowings against securitized receivables during the
period. (See Note 3 to the Consolidated Financial Statements and "Liquidity
and Capital Resources".) Charge-offs on receivables sold and the provision
for credit losses on receivables ineligible for sale increased by $471,000,
or 17.4%, in fiscal 1998 as compared to 1997. As a percent of sales,
however, such amounts remained unchanged at 0.6% in fiscal 1998 and 1997.
Cost of Sales
Cost of sales, which includes costs associated with the buying,
handling and distribution of merchandise, increased by approximately $43.0
million to $347.5 million in fiscal 1998 as compared to $304.6 million in
fiscal 1997, an increase of 14.1%. The Company's gross margin percentage
increased to 32.8% in fiscal 1998 as compared to 32.0% in fiscal 1997,
primarily due to increased sales of higher gross margin merchandise
categories in certain of the Company's stores, combined with lower costs
associated with the processing of merchandise at the Company's distribution
center. Inventory shrinkage remained unchanged at 1.1% of net sales in
fiscal 1998 and 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
approximately $19.8 million to $150.7 million in fiscal 1998 as compared to
$130.9 million in fiscal 1997, an increase of 15.1%. As a percent of net
sales, selling, general and administrative expenses decreased to 29.1% in
fiscal 1998 as compared to 29.2% in fiscal 1997, primarily due to higher
sales volume gained through the acquisition of the Harris stores. This
decrease also reflects lower rental expense resulting from the modification
of certain store lease agreements and from the refinancing and conversion of
certain operating equipment leases into capital leases. This decrease was
partially offset by increased payroll and payroll related costs in the
Company's stores as a result of the mandatory minimum wage increase in
California (from $5.15 to $5.75 per hour, an 11.7% increase) effective March
1, 1998, and other competitive wage adjustments. The Company also increased
advertising and credit solicitation expenditures during the year in an
attempt to improve sluggish apparel sales during the first half of the year
and in connection with the integration of the Harris stores.
Depreciation and Amortization
Depreciation and amortization expense increased by approximately
$1.8 million to $8.5 million in fiscal 1998 as compared to $6.7 million in
fiscal 1997, an increase of 26.9%. As a percent of net sales, depreciation
and amortization increased to 1.6% in fiscal 1998 as compared to 1.5% in
fiscal 1997. These increases are primarily due to additional depreciation
related to capital expenditures for new stores and for the renovation of
existing stores, new capital lease obligations, and assets acquired from
Harris. These increases are also due to the amortization of goodwill
associated with the recent acquisition of the Harris stores.
Acquisition Related Expenses
Acquisition related expenses of $859,000 were incurred in fiscal
1998, consisting primarily of costs incurred prior to the elimination of
certain duplicative operations of Harris, including certain merchandising,
advertising, credit and distribution functions. As of the end of fiscal
1998, all duplicative operations of Harris have been eliminated.
The Company had previously entered into negotiations for the
acquisition of Harris in fiscal 1997. The parties were unable to agree on
the terms of the transaction, however, and negotiations were discontinued.
Fiscal 1997 results include $673,000 of costs related to the proposed
transaction, consisting primarily of legal, accounting and investment
banking fees.
Interest Expense
Interest expense, which includes the amortization of deferred
financing costs, increased by approximately $2.1 million to $9.5 million in
fiscal 1998 as compared to $7.3 million in fiscal 1997, an increase of
29.3%. As a percent of net sales, interest expense increased to 1.8% in
fiscal 1998 as compared to 1.6% in fiscal 1997. These increases are
primarily due to higher average outstanding borrowings under the Company's
working capital facilities, and additional interest associated with the
Subordinated Note issued to Harris (see Note 2 to the Consolidated Financial
Statements). These increases were partially offset by a decrease in the
weighted-average interest rate applicable to outstanding borrowings under
the Company's working capital facilities (7.88% in fiscal 1998 as compared
to 8.16% in fiscal 1997) resulting from interest rate reductions during the
year.
Interest expense related to securitized receivables is reflected
as a reduction to 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, remained
unchanged at approximately $2.0 million in fiscal 1998 and 1997.
Income Taxes
The Company's effective tax rate was 41.5% in fiscal 1998 as
compared to 41.6% in fiscal 1997. (See Note 7 to the Consolidated Financial
Statements.)
Net Income
As a result of the foregoing, the Company's net income increased
by $1.6 million to $5.3 million in fiscal 1998 as compared to $3.7 million
in fiscal 1997. On a per share basis (basic and diluted), net income per
share increased to $0.46 per share in fiscal 1998 as compared to $0.36 per
share in fiscal 1997.
Fiscal 1997 Compared to Fiscal 1996
Net Sales
Net sales increased by approximately $26.0 million to $448.2
million in fiscal 1997 as compared to $422.2 million in fiscal 1996, an
increase of 6.2%. This increase resulted from a 3.3% increase in comparable
store sales, combined with additional sales volume generated by new store
openings in fiscal 1997 and 1996. The Company operated thirty-four
department stores as of the end of fiscal 1997 as compared to thirty-two as
of the end of fiscal 1996.
Net Credit Revenues
Net credit revenues consist of the following:
(In thousands of dollars) 1997 1996
Service charge revenues $11,618 $10,493
Gain on sale of receivables 1,050
Interest expense on
securitized receivables (3,579) (3,564)
Charge-offs on receivables
sold and provision for
credit losses on receivables
ineligible for sale (2,704) (2,731)
------ ------
$ 6,385 $ 4,198
====== ======
Net credit revenues increased by approximately $2.2 million, or
52.1%, in fiscal 1997 as compared to fiscal 1996. As a percent of net sales,
net credit revenues increased to 1.4% in fiscal 1997 as compared to 1.0% in
fiscal 1996. The gain on sale of receivables in fiscal 1997 includes a non-
recurring credit of $898,000 related to a change in the estimate for the
allowance for doubtful accounts for receivables which were ineligible for
sale. Because the provisions of SFAS No. 125 were not permitted to be
applied retroactively to prior periods presented, there was no gain or loss
on receivables sold in fiscal 1996. (See Note 3 to the Consolidated
Financial Statements.)
Service charge revenues increased by approximately $1.1 million,
or 10.7%, in fiscal 1997 as compared to fiscal 1996. This increase is
primarily due to an increase in credit sales as a percent of total sales
(43.7% in fiscal 1997 as compared to 43.1% in fiscal 1996), driven by the
success of the Company's "Gottschalks Rewards" customer loyalty program,
introduced in early fiscal 1997. This increase is also due to additional
income generated by modifications made to credit terms in selected states,
initiated in late fiscal 1996.
Interest expense on securitized receivables remained unchanged at $3.6
million in fiscal 1997 and 1996, and charge-offs on receivables sold and the
provision for credit losses on receivables ineligible for sale remained
unchanged at $2.7 million in fiscal 1997 and 1996.
Cost of Sales
Cost of sales increased by approximately $17.4 million to $304.6
million in fiscal 1997 as compared to $287.2 million in fiscal 1996, an
increase of 6.1%. As a percentage of sales, cost of sales and the Company's
gross margin percentage remained unchanged at 68.0% and 32.0% in fiscal 1997
and 1996, respectively. Due to additional promotional activity, markdowns as
a percentage of net sales increased in fiscal 1997 as compared to 1996. This
increase was offset by lower costs related to the buying and distribution of
merchandise in fiscal 1997, primarily driven by improved technology
implemented at the Company's distribution center during the year. Inventory
shrinkage remained unchanged at 1.1% of net sales in fiscal 1997 and 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by
approximately $7.0 million to $130.9 million in fiscal 1997 as compared to
$123.9 million in fiscal 1996, an increase of 5.7%. Due to the increase in
sales volume and ongoing Company-wide expense control measures, selling,
general and administrative expenses as a percent of net sales decreased to
29.2% in fiscal 1997 as compared to 29.3% in fiscal 1996.
Depreciation and Amortization
Depreciation and amortization expense, which includes the
amortization of new store pre-opening costs, decreased by approximately
$200,000 to $6.7 million in fiscal 1997 as compared to $6.9 million in
fiscal 1996, a decrease of 3.7%. As a percent of net sales, depreciation and
amortization expense decreased to 1.5% in fiscal 1997 as compared to 1.7% in
fiscal 1996. The decrease in dollars is primarily due to a $748,000 decrease
in the amortization of new store pre-opening costs as compared to the prior
year, partially offset by additional depreciation related to capital
expenditures for new stores opened and capital lease obligations entered
into during the year. Excluding the amortization of new store pre-opening
costs, depreciation and amortization expense as a percent of net sales
increased to 1.4% in fiscal 1997 as compared to 1.3% in fiscal 1996.
Interest Expense
Interest expense, which includes the amortization of deferred
financing costs, decreased by approximately $800,000 to $7.3 million in
fiscal 1997 as compared to $8.1 million in fiscal 1996, a decrease of 9.7%.
Due to the increase in sales volume, interest expense as a percent of net
sales decreased to 1.6% in fiscal 1997 as compared to 1.9% in fiscal 1996.
The decrease in dollars is primarily due to a decrease in the weighted-
average interest rate charged on outstanding borrowings under the Company's
working capital facilities (8.16% in fiscal 1997 as compared to 8.62% in
fiscal 1996), resulting from interest rate reductions during the period, and
lower average outstanding borrowings under those facilities in fiscal 1997
as compared to fiscal 1996. This decrease was partially offset by higher
interest expense associated with additional long-term financing arrangements
entered into during late fiscal 1996, including the issuance of the $6.0
million 1996-1 Series certificate and a $6.0 million mortgage loan. (See
"Liquidity and Capital Resources".)
Miscellaneous Income
Miscellaneous income, which includes the amortization of deferred
income and other miscellaneous income and expense items, decreased by
approximately $800,000 to $2.0 million in fiscal 1997 as compared to $2.8
million in fiscal 1996. Other income in fiscal 1997 includes a credit of
$400,000 from a deferred lease incentive resulting from the revision of
certain terms of the related lease. Other income in fiscal 1996 includes a
pre-tax gain of $1.3 million resulting from the termination of two leases
previously accounted for as capital leases by the Company. (See Note 6 to
Consolidated Financial Statements.)
Acquisition Related Expenses
Acquisition related expenses of $673,000 were incurred in fiscal
1997 in connection with a proposed acquisition of Harris. Such costs,
consisting primarily of legal, accounting and investment banking fees, were
recognized by the Company after the parties were unable to agree on the
terms of the transaction and discontinued negotiations. The companies
resumed negotiations and successfully completed the acquisition in fiscal
1998.
Income Taxes
The Company's effective tax rate was 41.6% in fiscal 1997 as
compared to 40.7% in fiscal 1996. (See Note 7 to the Consolidated Financial
Statements.)
Net Income
As a result of the foregoing, the Company's net income increased
by approximately $1.9 million to $3.7 million in fiscal 1997 as compared to
$1.8 million in fiscal 1996. On a per share basis (basic and diluted), net
income increased by $0.18 per share to $0.36 per share in fiscal 1997 as
compared to $0.18 per share in fiscal 1996.
Liquidity and Capital Resources
The Company's working capital requirements are currently met
through a combination of cash provided by operations, short-term trade
credit, and by borrowings under its revolving line of credit and its
receivables securitization program. Working capital increased by $28.6
million to $96.2 million in fiscal 1998 as compared to $67.6 million in
fiscal 1997. The Company's liquidity position and capital structure was
enhanced in fiscal 1998 by a business acquisition through which the Company
acquired net current assets that were readily convertible into cash,
including merchandise inventories and customer credit card receivables and
funded the acquisition of those assets through the issuance of long-term
unsecured subordinated debt and equity. The increase is also due to a $15.0
million increase ($40.0 million as of the end of fiscal 1998 as compared to
$25.0 million as of the end of fiscal 1997) in the amount of line of credit
borrowings that are classified as long-term for financial reporting
purposes. The Company's ratio of current assets to current liabilities
decreased slightly to 1.98:1 as of the end of fiscal 1998 as compared to
2.01:1 as of the end of fiscal 1997.
Business Acquisition. As described more fully in Note 2 to the
Consolidated Financial Statements, the Company completed the acquisition of
substantially all of the assets and business of Harris on August 20, 1998.
The assets acquired consisted primarily of merchandise inventories, customer
credit card receivables, fixtures and equipment and certain intangibles. The
Company also assumed certain liabilities relating to the business, including
vendor payables, store leases and certain other contracts. The purchase
price for the assets was the issuance to Harris of 2,095,900 shares of
common stock of the Company and the issuance of a $22.2 million 8%
Subordinated Note due August 20, 2003. Interest on the Subordinated Note is
payable semi-annually beginning in February 1999, with the principal portion
due and payable upon its maturity date, unless such payment would result in
the default on any of the Company's other credit facilities, in which case
the maturity of the note would be extended by three years to August 2006.
The Company also incurred additional costs related to the transaction,
including professional fees and transaction costs, severance pay, costs
related to the consolidation of duplicative distribution and administrative
functions, and costs associated with the closure of the former Harris store
located in San Bernardino on January 31, 1999.
Revolving Line of Credit. The Company has a $110.0 million
revolving line of credit facility with Congress through March 30, 2001.
Borrowings under the arrangement are limited to a restrictive borrowing base
equal to 65% of eligible merchandise inventories, increasing to 70% of such
inventories during the period of September 1 through December 20 of each
year (except for fiscal 1998, which was extended to February 28, 1999) to
fund increased seasonal inventory requirements. Interest under the facility
is charged at a rate of approximately LIBOR plus 2.25% (reduced to LIBOR
plus 2.00% on March 1, 1999), with no interest charged on the unused portion
of the line of credit. The maximum amount available for borrowings under the
line of credit with Congress was $79.9 million as of January 30, 1999, of
which $60.3 million was outstanding as of that date. As described below,
such outstanding borrowings were reduced by $25.3 million on March 1, 1999
by proceeds from the issuance of a new certificate under the Company's
receivables securitization program.
Receivables Securitization Program. The Company's receivables
securitization program provides the Company with an additional source of
working capital and long-term financing that is generally more cost-
effective than traditional debt financing.
As of January 30, 1999, the Company had three outstanding series
of certificates issued through private placements under the program,
including $40.0 million principal amount 7.35% Fixed Base Class A-1 Credit
Card Certificates (the 1994-1 Series), a $6.0 million principal amount
6.79% Fixed Base Certificate (the "1996-1 Series") and a Variable Base
Certificate in the principal amount of up to $15.0 million (the "Variable
Series"). As described more fully in Note 3 to the Consolidated Financial
Statements, the Company commenced the repayment of the outstanding principal
balances of the 1994-1 and 1996-1 Series certificates on October 15, 1998,
making total principal reductions of $15.8 million through January 30, 1999.
The Company also reduced amounts outstanding against the Variable Series
certificate to $700,000 from $7.7 million as of January 31, 1998. The
outstanding principal balances of the certificates, totaling $30.9 million
and $53.7 million as of January 30, 1999 and January 31, 1998, respectively,
are off-balance sheet for financial reporting purposes.
On March 1, 1999, the Company issued a $53.0 million principal
amount 7.66% Fixed Base Class A-1 Credit Card Certificate (the "1999-1
Series") to a single investor through a private placement. Proceeds from the
issuance of the 1999-1 Series were used to repay the outstanding balances of
the 1994-1, 1996-1 and Variable Series certificates, totaling $26.9 million
as of that date, reduce outstanding borrowings under the Company's revolving
line of credit by $25.3 million and pay certain costs associated with the
transaction. Interest on the 1999-1 Series will be earned by the certificate
holder on a monthly basis at a fixed interest rate of 7.66%, and the
outstanding principal balance of the certificate will be repaid in twelve
equal monthly installments commencing September 2003 and continuing through
August 2004. Monthly cash flows generated by the Company's credit card
portfolio, consisting of principal and interest collections, are first used
to pay certain costs of the program, which include interest payable to the
investor, and are then available to fund the working capital requirements of
the Company. Subject to certain conditions, the Company may expand the
securitization program to meet future receivables growth.
Other Financings. As described more fully in Note 5 to the
Consolidated Financial Statements, the Company has other long-term
obligations with total outstanding balances of $30.2 million at January 30,
1999 ($32.7 million as of January 31, 1998). The loans mature at dates
ranging from 2001 to 2010, bear interest at fixed rates ranging from 9.23%
to 10.45%, and are collateralized by various properties and equipment of the
Company. The scheduled annual principal maturities on the Company's various
long-term obligations are $2.7 million, $2.8 million, $2.5 million, $1.4
million and $1.4 million for fiscal 1999 through fiscal 2003, with $19.4
million due thereafter.
The Company's revolving line of credit agreement, and certain of
its long-term debt and lease arrangements contain various restrictive
covenants. The Company was in compliance with all such restrictive covenants
as of January 30, 1999.
The Company has entered into an agreement to open one new
department store in the second half of fiscal 1999 and is in the process of
remodeling certain existing store locations. The estimated cost of such
projects, totaling $6.4 million, is expected to be provided for from
existing financial resources. Such projects are expected to be fully
complete in fiscal 1999. However, there can be no assurance that the
completion of such projects will not be delayed subject to a variety of
conditions precedent or other factors.
Management believes the previously described sources of liquidity
are adequate to meet the Company's working capital, capital expenditure and
debt service requirements for fiscal 1999. Management also believes it has
sufficient sources of liquidity for its long-term growth plans at moderate
levels. The Company may engage in other financing activities if they are
deemed to be advantageous.
Year 2000 Readiness
The year 2000 problem is pervasive, with almost every business,
large and small, affected. The year 2000 problem impacts both information
technology ("IT"), including hardware (mainframes, client/server systems and
personal computers) and software (packaged software and custom designed),
and impacts non-information technology ("non-IT"), including building
security, climate control and telephone systems. The Company also exchanges
data with certain trade suppliers and other third parties. Like many other
companies, the year 2000 computer issue creates risks and uncertainties for
the Company. If internal systems do not correctly recognize and process date
information beyond the year 1999, there could be a material adverse impact
on the Company's operations. To address year 2000 issues, the Company
established a task force in fiscal 1997 to coordinate the identification,
evaluation and implementation of changes to computer systems and
applications necessary to achieve a year 2000 date conversion with no
disruption to business operations. Plans and progress against plans are
reviewed by the year 2000 task force and are reported to the Company's
senior executive officers and the Board of Directors on a regular basis. It
is expected that activities related to the year 2000 issues will be continue
through mid-fiscal 1999 with the goal of appropriately resolving all
material internal systems and third party issues.
The Company's State of Readiness.
As of January 30, 1999, the Company's efforts towards becoming
year 2000 compliant with respect to its IT systems are progressing on
schedule with a projected completion date of mid-fiscal 1999. Based on
testing to date, management believes its mainframe operating system
environment and point-of-sale systems are already year 2000 compliant.
Modifications to the Company's proprietary, or custom designed software,
have been substantially completed and tested. Upgrades have been scheduled
for certain purchased software packages and are expected to be complete by
mid-fiscal 1999. The Company's operating system contains a testing
environment specifically designed to test year 2000 compliance. IT systems
acquired from Harris are limited to point-of-sale equipment, which has
already been converted to Gottschalks technology and is year 2000 compliant.
The Company has also completed the identification and evaluation
of all of its non-IT systems, which include, among other things, store alarm
and security systems, air conditioners and lighting, fire control, elevators
and escalators. The Company has already communicated with its suppliers,
dealers, financial institutions and other third parties with which it does
business to determine that the supplier's operations and the products or
services they provide are year 2000 compliant or to monitor their progress
toward year 2000 compliance. Some providers are not yet year 2000 compliant
and the Company is monitoring their progress on a continual basis.
Costs Associated with Year 2000 Issues.
The costs incurred to date related to the IT year 2000 conversion
are approximately $316,000. The Company currently expects that the total
remaining cost of these efforts, including both incremental spending and re-
deployed resources, will be approximately $330,000. Such costs, which
represent approximately 10.9% of the Company's fiscal 1999 IT budget,
consist primarily of internal personnel costs, external consulting fees and
costs in excess of normal hardware and software upgrades and replacements
and do not include potential costs related to the cost of internal software
and hardware replaced in the normal course of business. Management expects
such costs will be funded with working capital. Purchased hardware and
software are being capitalized in accordance with normal policy. Personnel
and all other costs related to the year 2000 project are being expensed as
incurred. In some instances, the installation schedule of new software and
hardware in the normal course of business has been accelerated, or deferred,
in order to resolve year 2000 compatibility issues. The acceleration, or
delay of such projects, however, will not have a materiel adverse effect on
the Company's financial position or results of operations.
The cost of the project and the estimated completion dates for the year
2000 conversion are based on the Company's best estimates, which have been
derived based on a number of assumptions of future events including the
continued availability of internal and external resources, the timely
completion of third party modifications and other factors. The ultimate cost
of the project is subject to change as the project progresses. Actual
results may differ from original estimates. The Company has not yet
completed its assessment of costs that may be associated with non-IT year
2000 issues, as such determination will be dependant upon the results of
communications with the related suppliers.
Contingency Plans.
Management believes its efforts towards year 2000 compliance will
be completed on schedule in mid-fiscal 1999. In the event the Company is not
able to progress according to schedule, however, the Company has developed
contingency plans. The Company's year 2000 conversion schedule contains
"trigger" dates to implement the contingency plan specifically designed for
each system in the event the conversion has not progressed accordingly to
schedule. If necessary, the Company has the ability to divert additional
internal IT staff onto the year 2000 project. The Company also has
additional sources of contract programming specialists who are familiar with
the Company's operating environment. The Company also believes that it has
alternate sources of suppliers for substantially all of its non-IT systems
to replace suppliers that are unable to become year 2000 compliant within an
appropriate time frame.
Based on currently available information, management does not
believe that the year 2000 matters discussed above related to internal
systems will have a material adverse impact on the Company's financial
condition or its results of operations; however, it is uncertain to what
extent the Company may be affected by such matters and no assurance can be
given. In addition, there can be no assurance that the failure to ensure
year 2000 capability by a supplier or another third party would not have a
material adverse effect on the Company.
Inflation
Although inflation has not been a material factor to the Company's
operations during the past several years, the Company does experience
increases in the cost of certain of its merchandise, salaries, employee
benefits and other general and administrative costs. The Company is
generally able to offset these increases by adjusting its selling prices or
by modifying its operations. The Company's ability to adjust selling prices
is limited by competitive pressures in its market areas.
The Company accounts for its merchandise inventories on the retail
method using last-in, first-out (LIFO) cost using the department store price
indexes published by the Bureau of Labor Statistics. Under this method, the
cost of products sold reported in the financial statements approximates
current costs and thus reduces the impact of inflation on reported income
due to increasing costs.
Seasonality
The Company's business, like that of most retailers, is subject to
seasonal influences, with the major portion of net sales, gross profit and
operating results realized during the Christmas selling months of November
and December of each year, and to a lesser extent, during the Easter and
Back-to-School selling seasons. The Company's results may also vary from
quarter to quarter as a result of, among other things, the timing and level
of the Company's sales promotions, weather, fashion trends and the overall
health of the economy, both nationally and in the Company's market areas.
Working capital requirements also fluctuate during the year, increasing
substantially prior to the Christmas selling season when the Company must
carry significantly higher inventory levels.
The following table sets forth unaudited quarterly results of
operations for fiscal 1998 and 1997 (in thousands, except per share data).
(See Note 11 to the Consolidated Financial Statements.)
1998
Quarter Ended May 2 August 1 October 31 January 30
Net sales $95,468 $104,131 $123,118 $194,423
Gross profit 29,941 32,601 43,188 63,879
Income (loss) before
income tax expense
(benefit) (3,408) (2,310) 604 14,143
Net income (loss) (1,994) (1,352) 345 8,283
Net income (loss)
per common share
-basic and
diluted $ (0.19) $ (0.13) $ 0.03 $ 0.66
Weighted-average
number of common
shares outstanding(1) 10,479 10,479 12,138 12,575
1997
Quarter Ended May 3 August 2 November 1 January 31
Net sales $90,506 $99,997 $101,466 $156,223
Gross profit 28,510 32,279 32,871 49,974
Income (loss) before
income tax expense
(benefit) (1,673) ( 422) (2,516) 10,998
Net income (loss) ( 987) ( 248) (1,485) 6,450
Net income (loss)
per common share
-basic and diluted $ (0.09) $ (0.02) $ (0.14) $ 0.62
Weighted-average
number of common
shares outstanding 10,473 10,473 10,473 10,477
- ------------------------------
(1) The increase in the weighted-average number of
common shares outstanding during fiscal 1998 is due to the
issuance of 2,095,900 shares of common stock to Harris on August
20, 1998 in connection with a business acquisition (see Note 2 to
the Consolidated Financial Statements.)
Recently Issued Accounting Standards
AICPA Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities" was recently issued and is effective for fiscal 1999.
This statement requires start-up costs, such as new store pre-opening costs,
to be expensed as incurred. SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" was also issued and is
effective for fiscal 1999. SOP 98-1 requires certain internal and external
software development costs to be capitalized upon meeting certain criteria.
The Company does not expect the adoption of these new accounting standards
will have a material effect on its financial position or the results of its
operations.
_________________________________
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks in the normal course of
business, due to changes in interest rates on short-term
borrowings under its revolving line of credit. As of January 30, 1999, line
of credit borrowings subject to a variable interest rate represented 46.5%
of the Company's total outstanding borrowings (both on and off-balance
sheet). The Company does not engage in financial transactions for
speculative or trading purposes, nor does the Company purchase or hold any
derivative financial instruments.
The interest payable on the Company's revolving line of credit is
based on a variable interest rate and is therefore affected by changes in
market interest rates. An increase of 51 basis points on existing line of
credit borrowings (a 10% change from the Company's weighted-average interest
rate as of January 30, 1999, less a scheduled interest rate reduction of 25
basis points on March 1, 1999) would reduce the Company's pre-tax net income
and cash flow by approximately $375,000. This 51 basis point increase in
interest rates would not materially affect the fair value of the Company's
fixed rate financial instruments. (See Note 1 to the Consolidated Financial
Statements.)
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is set forth under Part IV, Item 14,
included elsewhere herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by Item 10 of Form 10-K, other than the
following information required by Paragraph (b) of Item 401 of Regulation S-
K, is incorporated by reference from those portions of the Company's
definitive proxy statement with respect to the Annual Stockholders' Meeting
scheduled to be held on June 24, 1999, to be filed pursuant to Regulation
14A (the "1999 Proxy") under the headings "Nominees for Election as
Director" and "Section 16(a) Beneficial Ownership Reporting Compliance."
The following table lists the executive officers of the Company:
Name Age(1) Position
Joe W. Levy 67 Chairman and Chief
Executive Officer
James R. Famalette 46 President and Chief
Operating Officer
Gary L. Gladding 59 Executive Vice
President/
General Merchandise
Manager
Michael S. Geele 48 Senior Vice President
and Chief Financial Officer
Michael J. Schmidt 57 Senior Vice
President/
Director of Stores
- ---------------------------------
(1) As of March 31, 1999
Joe W. Levy became Chairman and Chief Executive Officer of the
Company's predecessor and former subsidiary, E. Gottschalk & Co., Inc. ("E.
Gottschalk") in 1982 and of the Company in 1986. Mr. Levy was Executive Vice
President from 1972 to 1982 and first joined E. Gottschalk in 1956. He
serves on the Board of Directors of the National Retail Federation and the
Executive Committee of Frederick Atkins. He was formerly Chairman of the
California Transportation Commission and served on the Board of Directors of
Community Hospitals of Central California. Mr. Levy has also served on
numerous other state and local commissions and public service agencies.
James R. Famalette became President and Chief Operating Officer of
the Company on April 14, 1997. Prior to joining the Company, Mr. Famalette
was President and Chief Executive Officer of Liberty House, a department and
specialty store chain based in Honolulu, Hawaii, from 1993 through 1997, and
served in a variety of other positions with Liberty House from 1987 through
1993, including Vice President, Stores and Vice President, General
Merchandise Manager. From 1982 through 1987, he served as Vice President,
General Merchandise Manager and later as President of Village Fashions/Cameo
Stores in Philadelphia, Pennsylvania, and from 1975 to 1982 served as a
Divisional Merchandise Manager for Colonies, a specialty store chain, based
in Allentown, Pennsylvania. Mr. Famalette serves on the Board of Directors
of the National Retail Federation and Frederick Atkins.
Gary L. Gladding has been Executive Vice President of the Company
since 1987, and joined E. Gottschalk as Vice President/General Merchandise
Manager in 1983. From 1980 to 1983, he was Vice President and General
Merchandise Manager for Lazarus Department Stores, a division of Federated
Department Stores, Inc., and he previously held merchandising manager
positions with the May Department Stores Co.
Michael S. Geele became Senior Vice President and Chief Financial
Officer of the Company on January 21, 1999. Prior to joining the Company,
Mr. Geele was Chief Financial Officer of Southwest Supermarkets in Phoenix,
Arizona from 1995 to 1998. From 1991 to 1995, Mr. Geele served as Vice
President of Finance for Smitty's Super Valu in Phoenix, Arizona, and from
1981 to 1991 served in various financial positions with Smitty's, including
Senior Director and Corporate Controller. Mr. Geele is a Certified Public
Accountant.
Michael J. Schmidt became Senior Vice President/Director of Stores
of E. Gottschalk in 1985 and of the Company in 1986. From 1983 through 1985,
he was Manager of the Gottschalks Fashion Fair store. Prior to joining the
Company, he was General Manager of the Liberty House store in Fresno from
1981 to 1983, and before 1981, held management positions with Allied
Corporation and R.H. Macy & Co., Inc.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from those portions of the Company's 1999 Proxy under the headings
"Executive Compensation" and "Director Compensation For Fiscal Year 1998."
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
from the portion of the Company's 1999 Proxy under the heading "Security
Ownership of Certain Beneficial O