UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT
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 (I.R.S. Employer
incorporation or organization) Identification No.)
7 River Park Place East, Fresno, California 93720
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code
(209) 434-8000
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
The number of shares of the Registrant's common stock
outstanding as of August 31, 1997 was 10,472,915.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARIES
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
August 2, 1997 and February 1, 1997 2
Consolidated statements of operations -
thirteen and twenty-six weeks ended
August 2, 1997 and August 3, 1996 3
Condensed consolidated statements of cash
flows - twenty-six weeks ended August 2,
1997 and August 3, 1996 4
Notes to condensed consolidated financial
statements - thirteen and twenty-six weeks
ended August 2, 1997 and
August 3, 1996 5 -9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10-19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Related
Stockholder Matters 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item I. GOTTSCHALKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
August 2, 1997 February 1, 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 4,317 $ 4,764
Cash held by GCC Trust 279 1,895
Receivables - net 14,229 25,507
Merchandise inventories 98,930 89,472
Other 9,101 12,593
Total current assets 126,856 134,231
PROPERTY AND EQUIPMENT 131,413 127,258
Less accumulated depreciation
and amortization 42,717 39,888
88,696 87,370
OTHER LONG-TERM ASSETS 9,235 11,592
$224,787 $233,193
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $ 6,408 $ 13,904
Cash management liability 6,400 1,504
Trade accounts payable 22,361 19,906
Accrued expenses and other
liabilities 13,417 18,076
Taxes, other than income taxes 4,099 8,202
Current portion of long-term
obligations 2,805 2,408
Total current liabilities 55,490 64,000
LONG-TERM OBLIGATIONS
(less current portion):
Line of credit 25,000 25,000
Notes and mortgage loans payable 31,446 29,861
Capitalized lease obligations 5,284 5,380
61,730 60,241
DEFERRED INCOME 19,194 19,580
DEFERRED LEASE PAYMENTS AND OTHER 9,470 9,233
STOCKHOLDERS' EQUITY 78,903 80,139
$224,787 $233,193
See notes to condensed consolidated financial statements.
</TABLE>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
<TABLE>
<CAPTION>
(In thousands of dollars, except share data)
Thirteen Weeks Twenty-Six Weeks
Ended Ended
August 2, August 3, August 2, August 3,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $ 99,997 $ 95,675 $190,503 $181,235
Service charges & other
income 3,133 3,277 6,625 7,106
103,130 98,952 197,128 188,341
COSTS & EXPENSES:
Cost of sales 67,718 65,283 129,715 124,013
Selling, general &
administrative expenses 31,811 30,370 61,316 58,373
Depreciation & amortization 1,430 1,786 2,985 3,691
Interest expense 2,593 2,758 5,207 5,608
103,552 100,197 199,223 191,685
LOSS BEFORE INCOME TAX
BENEFIT (422) (1,245) (2,095) (3,344)
Income tax benefit (174) (460) (860) (1,237)
NET LOSS $ (248) $ (785) $ (1,235) $ (2,107)
Net loss per common share $ (0.02) $ (0.07) $ (0.12) $ (0.20)
Weighted average number of
common shares outstanding 10,473 10,473 10,473 10,450
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - NOTE 1)
(In thousands of dollars)
Twenty-Six Weeks
Ended
August 2, August 3,
1997 1996
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,235) $ (2,107)
Adjustments:
Depreciation and amortization 2,985 3,691
Provision for credit losses 1,095 1,175
Net gain from termination of
capital leases (1,344)
Income tax refunds received 3,311
Other adjustments, net (1,010) (1,413)
Changes in operating assets and
liabilities:
Receivables, net 10,183 12,405
Merchandise inventories (9,165) (12,065)
Trade accounts payable 2,433 2,270
Other current and long-term assets
and liabilities (2,541) (3,948)
Net cash provided by operating
activities 2,745 1,975
INVESTING ACTIVITIES:
Purchases of property and equipment,
net of reimbursements received (4,577) (3,870)
Proceeds from sale of assets and
sale/leaseback arrangement 352 1,938
Distribution from limited partnership 110 43
Net cash used in investing
activities (4,115) (1,889)
FINANCING ACTIVITIES:
Net payments under lines of credit (7,496) (543)
Proceeds from long-term obligations 3,214
Principal payments on long-term
obligations (1,328) (1,076)
Changes in cash management liability
and other 6,533 1,033
Net cash provided by (used in)
financing activitie 923 (586)
DECREASE IN CASH (447) (500)
CASH AT BEGINNING OF YEAR 4,764 5,113
CASH AT END OF PERIOD $ 4,317 $ 4,613
See notes to condensed consolidated financial statements.
</TABLE>
GOTTSCHALKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Thirteen and Twenty-Six Weeks Ended August 2, 1997 and
August 3, 1996
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Gottschalks Inc. is a regional department and specialty
store chain based in Fresno, California, currently
consisting of thirty-six "Gottschalks" department
stores and twenty-four "Village East" specialty stores
located primarily in non-major metropolitan cities
throughout California and in Oregon, Washington and
Nevada. Gottschalks department stores are generally
located as anchor tenants in regional shopping malls
and typically offer a wide range of brand-name and
private-label merchandise, including men's, women's,
junior's and children's apparel, cosmetics and
accessories, home furnishings and other consumer goods.
Village East specialty stores offer apparel for larger
women.
The accompanying unaudited condensed consolidated
financial statements include the accounts of
Gottschalks Inc., its wholly-owned subsidiary,
Gottschalks Credit Receivables Corporation ("GCRC") and
Gottschalks Credit Card Master Trust ("GCC Trust").
(See Note 3). Such financial statements have been
prepared in accordance with generally accepted
accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally
accepted accounting principles for complete financial
statements. In the opinion of management, all
adjustments (consisting primarily of normal recurring
accruals) considered necessary for a fair presentation
have been included. Operating results for the thirteen
and twenty-six week periods ended August 2, 1997 are
not necessarily indicative of the results that may be
expected for the year ending January 31, 1998 (fiscal
1997), due to the seasonal nature of the Company's
business and its LIFO inventory valuation adjustment
("LIFO adjustment"), currently recorded only at the end
of each fiscal year (Note 4). These financial
statements should be read in conjunction with the
financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year
ended February 1, 1997 (the "1996 Annual Report on Form
10-K").
The condensed consolidated balance sheet at February 1,
1997 has been derived from the audited consolidated
financial statements at that date. Certain amounts in
the accompanying financial statements for the fiscal
1996 interim period have been reclassified to conform
with fiscal 1997 presentation.
2. PROPOSED ACQUISITION OF THE HARRIS COMPANY
On July 3, 1997, the Company entered into a non-binding
letter of intent with El Corte Ingles ("ECI"), of
Spain, and The Harris Company ("Harris") which
contemplates the purchase of all of the common stock of
Harris. Harris, a wholly-owned subsidiary of ECI,
currently operates nine department stores located
throughout Southern California. The letter of intent
contemplates that the purchase price would consist of
common stock of the Company and junior subordinated
debt to be issued to ECI. The acquisition is subject to
due diligence by the parties, the execution of
definitive agreements and a variety of other
conditions precedent, including the approval by the
stockholders of the Company. The acquisition, if
consummated, would not occur until the fourth quarter
of fiscal 1997, at the earliest.
3. RECEIVABLES SECURITIZATION PROGRAM
The Company's receivables securitization program
provides the Company with a source of working capital
financing that is generally more cost effective than
traditional debt financing. Under the program, the
Company automatically sells all of its accounts
receivable arising under its private-label customer
credit cards to its wholly-owned subsidiary,
Gottschalks Credit Receivables Corporation ("GCRC"),
and certain of those receivables are subsequently
conveyed to a trust, Gottschalks Credit Card Master
Trust ("GCC Trust"), to be used as collateral for
securities issued to investors. The Company services
and administers the receivables in return for a monthly
servicing fee. The following securities have been
issued under the securitization program:
Fixed Base Certificates. In 1994, certain of the
receivables were sold through the issuance of $40.0
million principal amount 7.35% Fixed Base Class A-1
Credit Card Certificates (the "1994 Fixed Base
Certificates"). An additional $6.0 million principal
amount 6.79% Fixed Base Class A-1 Credit Card
Certificate (the "1996 Fixed Base Certificate") was
issued in late fiscal 1996 under the program. Proceeds
from the issuances of the 1994 and 1996 Fixed Base
Certificates (collectively the "Fixed Base
Certificates") were used primarily to reduce or repay
previously outstanding higher interest bearing debt
obligations of the Company and pay certain costs
associated with the transactions. Interest on the
Fixed Base Certificates is earned by the
certificateholders on a monthly basis and the
outstanding principal balances of such certificates are
to be repaid in equal monthly installments commencing
September 1998 through September 1999, through the
application of the principal portion of credit card
collections during the period. Management currently
intends to refinance the Fixed Base Certificates as
they mature with newly issued certificates under the
program. The issuances of the Fixed Base Certificates
were accounted for as sales for financial reporting
purposes. Accordingly, the $46.0 million of receivables
underlying the Fixed Base Certificates as of August 2,
1997 and February 1, 1997 and the corresponding debt
obligations have been excluded from the accompanying
financial statements.
Variable Base Certificate. A Variable Base Class
A-2 Credit Card Certificate ("Variable Base
Certificate") was also issued in 1994 in the principal
amount of up to $15.0 million to Bank Hapoalim, as
collateral for a revolving line of credit financing
arrangement with that bank (Note 5). The issuance of
the Variable Base Certificate was accounted for as a
financing for financial reporting purposes and the
receivables underlying the Variable Base Certificate,
totaling $714,000 at August 2, 1997 and $9.0 million at
February 1, 1997, are included in receivables reported
in the accompanying financial statements.
The Company retained an ownership interest in certain
of the receivables sold or financed under the program,
represented by Subordinated and Exchangeable
Certificates. The outstanding principal balances of
receivables underlying those certificates totaled $9.7
million at August 2, 1997 and $11.8 million at February
1, 1997, and such amounts are included in receivables
reported in the accompanying financial statements.
Receivables also include receivables that did not meet
certain eligibility requirements of the program, an
allowance for doubtful accounts on all receivables,
including receivables sold, and accrued finance charges
and vendor claims, totaling $3.8 million as of August
2, 1997 and $4.7 million as of February 1, 1997.
4. MERCHANDISE INVENTORIES
Inventories, which consist of merchandise held for
resale, are valued by the retail method and are stated
at last-in, first-out (LIFO) cost, which is not in
excess of market value. The Company includes in
inventory the capitalization of certain indirect costs
related to the purchasing, handling and storage of
merchandise to better match sales with those related
costs. Current cost, which approximates replacement
cost, under the first-in, first-out (FIFO) method was
equal to the LIFO value of inventories at February 1,
1997. A valuation of inventory under the LIFO method is
presently made only at the end of each year based on
actual inventory levels and costs at that time. Since
these factors are subject to variability beyond the
control of management, interim results of operations
are subject to the final year-end LIFO inventory
valuation adjustment.
5. DEBT OBLIGATIONS
Revolving Lines of Credit. The Company has a
revolving line of credit arrangement with Congress
Financial Corporation ("Congress") which provides the
Company with an $80.0 million working capital facility
through March 30, 2000. 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 to fund
increased seasonal inventory requirements. Interest on
outstanding borrowings under the facility is charged at
a rate of approximately LIBOR plus 2.5% (8.4% at August
2, 1997), with no interest charged on the unused
portion of the line of credit. Under the agreement, the
Company also has the potential of reducing the interest
rate by 1/4% each year, up to a maximum possible
reduction of 1/2% beginning in fiscal 1998, if
specified pre-tax income levels are attained by the
Company. The maximum amount available for borrowings
under the line of credit was $55.0 million as of August
2, 1997, of which $30.8 million was outstanding as of
that date. Of that amount, $25.0 million has been
classified as long-term in the accompanying financial
statements as the Company does not anticipate repaying
that amount prior to one year from the balance sheet
date. The agreement contains one financial covenant,
pertaining to the maintenance of a minimum tangible net
worth, with which the Company was in compliance as of
August 2, 1997.
The Company also has a revolving line of credit
arrangement with Bank Hapoalim (Note 2) which provides
for additional borrowings of up to $15.0 million
through March 30, 1999. Borrowings are limited to a
percentage of the outstanding principal balance of
receivables underlying the Variable Base Certificate
and therefore, the Company's borrowing capacity under
the line of credit with Bank Hapoalim is subject to
seasonal variations that may affect the outstanding
principal balance of such receivables. Interest on
outstanding borrowings under the facility is charged at
a rate of approximately LIBOR plus 1.0% (6.6% at August
2, 1997). At August 2, 1997, $600,000, which was the
maximum amount available for borrowings as of that
date, was outstanding under the line of credit with
Bank Hapoalim.
Long-Term Borrowings. The Company has four fifteen-year mortgage
loans with Midland Commercial Funding
("Midland") with outstanding balances totaling $19.6
million at August 2, 1997. The Midland loans, due
October and November 2010, bear interest at rates
ranging from 9.23% to 9.39%. The Company also has the
following other long-term loan facilities as of August
2, 1997: (i) a 10.45% mortgage loan payable with
Heller Financial, Inc. ("Heller"), due January 2002,
with an outstanding loan balance of $4.3 million; (ii)
an additional 9.97% mortgage loan payable with Heller,
due April 2004, with an outstanding loan balance of
$5.7 million; (iii) two 10.0% notes payable to
Federated Department Stores, Inc. ("Federated"), due
March and July 2001, with outstanding balances totaling
$2.1 million; and (iv) other long-term obligations with
outstanding balances totaling $2.3 million.
Certain of the Company's long-term debt and lease
agreements contain various restrictive covenants. The
Company was in compliance with all such restrictive
covenants as of August 2, 1997.
6. LEASE ARRANGEMENT
During 1996, the Company finalized agreements with
Broadway Stores, Inc. ("Broadway"), a wholly-owned
subsidiary of Federated, and the landlords, whereby the
Company vacated its present location in the Vintage
Faire Mall in Modesto, California and sub-leased the
Broadway's former store in that mall for the remaining
twelve years of the Broadway lease. The Company also
vacated its original location in the Fresno, California
Fashion Fair Mall and reopened a store in that mall
under a new 20-year lease in the former Broadway store
location. The Company recognized a pre-tax gain of
$1.3 million in the first half of 1996 upon the
termination of the original leases, which were
accounted for as capital leases by the Company,
representing the difference between the capital lease
obligations and the net book value of the related
assets recorded under the capital leases, and such gain
is included in service charges and other income in the
accompanying financial statements. The new leases have
been accounted for as operating leases for financial
reporting purposes.
7. COMMITMENTS AND CONTINGENCIES
The Company received $3.3 million in the first quarter
of fiscal 1996 in connection with the filing of certain
amended income tax returns. The Internal Revenue
Service is currently examining the amended income tax
returns and, on a preliminary basis, has proposed
certain adjustments to those returns. While it is
currently impossible to determine the final disposition
of this matter, management does not believe that its
ultimate resolution will have a material adverse effect
on the financial position or results of operations of
the Company.
In addition to the matter described above, the Company
is party to legal proceedings and claims which arise
during the ordinary course of business. In the opinion
of management, the ultimate outcome of such litigation
and claims will not have a material adverse effect on
the Company's financial position or results of
operations.
The Company opened one new department store in Sonora,
California in August 1997 and plans to open one
additional new store in Santa Rosa, California in late
September 1997. The Company is also in the process of
remodeling one existing store location. The estimated
cost to complete these projects is $6.3 million. While
management expects to complete these projects during
the second half of 1997, there can be no assurance that
the completion of such projects will not be delayed
subject to a variety of conditions precedent and other
factors.
8. NEW ACCOUNTING STANDARD
Effective for periods ending after December 31, 1997,
the Company will be required to adopt the provisions of
Statement of Financial Accounting Standards No. 128
"Earnings Per Share". At that time, the Company will be
required to change the method currently used to
calculate earnings per share and restate all prior
interim and annual periods presented. The new
requirements will include a calculation of basic
earnings per share, from which the dilutive effect of
stock options will be excluded. A calculation of
diluted earnings per share will also be required,
however it is not expected to differ materially from
basic earnings per share. The adoption of the new
standard is not expected to have a material impact on
previously reported earnings per share.
GOTTSCHALKS INC. AND SUBSIDIARIES
Item 2. 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 condensed
consolidated financial statements. As described more
fully in "Seasonality", the Company's results of
operations, like most retailers, are subject to
seasonal influences, with the major portion of sales,
gross margin and operating results realized during the
second half of each year.
Thirteen Weeks Ended August 2, 1997 Compared To
Thirteen Weeks Ended August 3, 1996
Results of Operations
The following table sets forth for the periods
indicated certain items from the Company's Consolidated
Statements of Operations as a percent of net sales:
<TABLE>
<CAPTION>
Second Quarter
1997 1996
<S> <C> <C>
Net sales 100.0% 100.0%
Service charges & other income 3.1 3.4
103.1 103.4
Costs and Expenses:
Cost of sales 67.7 68.2
Selling, general & administrative expenses 31.8 31.7
Depreciation & amortization 1.4 1.9
Interest expense 2.6 2.9
103.5 104.7
LOSS BEFORE INCOME TAX BENEFIT (0.4) (1.3)
Income tax benefit (0.2) (0.5)
NET LOSS (0.2)% (0.8)%
</TABLE>
Net Sales
Net sales and comparable store sales increased by
approximately $4.3 million to $100.0 million in the
second quarter of 1997 as compared to $95.7 million in
the second quarter of 1996, an increase of 4.5%. Sales
increases were primarily in the areas of women's and
children's apparel and cosmetic accessories.
No new stores were opened in the first two quarters of
fiscal 1997. The Company opened one new store in
Sonora, California in August 1997 and one additional
store is planned to be opened in Santa Rosa, California
in late September 1997.
Service Charges and Other Income
Service charges and other income decreased by
approximately $200,000 to $3.1 million in the second
quarter of 1997 as compared to $3.3 million in the
second quarter of 1996, a decrease of 4.4%. As a
percent of net sales, service charges and other income
decreased to 3.1% in the second quarter of 1997 as
compared to 3.4% in the second quarter of 1996.
Service charges associated with the Company's customer
credit cards increased by approximately $100,000 to
$2.7 million in the second quarter of 1997 as compared
to $2.6 million in the second quarter of 1996, an
increase of 3.9%. This increase is due to an increase
in credit sales as a percent of total sales (44.6% in
the second quarter of 1997 as compared to 44.5% in the
second quarter of 1996), combined with additional
income generated by increases to the interest rate
charged on outstanding customer credit card balances
and to the late charge fee assessed on delinquent
credit card balances, both effective in late fiscal
1996. The increase in credit sales is primarily due to
the Company's new "Gottschalks Rewards" program,
introduced during the first quarter of 1997, which
offers a rebate of up to 5% of annual credit purchases
on the Company's credit card which can be applied
towards future purchases of merchandise.
Other income, which includes the amortization of
deferred income and other miscellaneous income and
expense items, decreased by approximately $300,000 to
$400,000 in the second quarter of 1997 as compared to
$700,000 in the second quarter of 1996. Other income
in the second quarter of 1996 included a pre-tax gain
of $311,000 resulting from the termination of a lease
previously accounted for as a capital lease by the
Company. (See Note 6 to the accompanying financial
statements).
Cost of Sales
Cost of sales increased by approximately $2.4 million
to $67.7 million in the second quarter of 1997 as
compared to $65.3 million in the second quarter of
1996, an increase of 3.7%. Due to a reduction in
markdowns, cost of sales decreased as a percentage of
sales in the second quarter of 1997 as compared to the
second quarter of 1996, resulting in an increase in the
Company's gross margin percent to 32.3% in the second
quarter of 1997 as compared to 31.8% in the second
quarter of 1996. Excluding the effect of certain
indirect costs related to inventory which are
reclassified to cost of sales by the Company for
financial reporting purposes, the gross margin percent
increased to 37.2% in the second quarter of 1997 as
compared to 36.8% in the second quarter of 1996.
The Company's interim gross margin percent may not be
indicative of its gross margin percent for a full year,
due to the seasonal nature of the Company's business
and its LIFO inventory valuation adjustment ("LIFO
adjustment"), currently recorded only at the end of
each fiscal year. Management believes the Company's
fiscal 1997 LIFO adjustment will not materially effect
its fiscal 1997 results of operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
by approximately $1.4 million to $31.8 million in the
second quarter of 1997 as compared to $30.4 million in
the second quarter of 1996, an increase of 4.7%. As a
percent of net sales, selling, general and
administrative expenses increased to 31.8% in the
second quarter of 1997 as compared to 31.7% in the
second quarter of 1996. Including the effects of
certain indirect costs related to inventory which are
reclassified to cost of sales for financial reporting
purposes, selling, general and administrative costs as
a percent of sales decreased to 36.6% in the second
quarter of 1997 as compared to 36.7% in the second
quarter of 1996.
Depreciation and Amortization
Depreciation and amortization expense, which includes
the amortization of new store pre-opening costs,
decreased by approximately $400,000 to $1.4 million in
the second quarter of 1997 as compared to $1.8 million
in the second quarter of 1996, a decrease of 19.9%. As
a percent of net sales, depreciation and amortization
decreased to 1.4% in the second quarter of 1997 as
compared to 1.9% in the second quarter of 1996. The
decrease (in dollars) is primarily due to the
amortization of new store pre-opening costs, which
decreased by approximately $400,000 as compared to the
same period of the prior year because of the reduction
in the level of new store openings. Excluding the
amortization of new store pre-opening costs,
depreciation and amortization expense as a percent of
net sales remained unchanged at 1.4% in the second
quarters of 1997 and 1996.
Store pre-opening costs represent certain costs
associated with the opening of new stores. Such costs
are deferred and amortized generally on a straight-line
basis not to exceed a twelve month period. Management
expects the amortization of new store pre-opening costs
to increase in the second half of 1997 as a result of
completing and opening the two new stores in Sonora and
Santa Rosa, California.
Interest Expense
Interest expense, which includes the amortization of
deferred financing costs, decreased by approximately
$200,000 to $2.6 million in the second quarter of 1997
as compared to $2.8 million in the second quarter of
1996, a decrease of 6.0%. Due to the increase in sales
volume, interest expense as a percent of net sales
decreased to 2.6% in the second quarter of 1997 as
compared to 2.9% in the second quarter of 1996. The
decrease (in dollars) is due to a decrease in the
weighted-average interest rate charged on outstanding
borrowings under the Company's various lines of credit
(8.3% in the second quarter of 1997 as compared to 8.7%
in the second quarter of 1996), combined with lower
average outstanding borrowings under the Company's
lines of credit due to improved operating results as
compared to the same period of the prior year. These
decreases were partially offset by higher interest
costs associated with additional long-term financing
arrangements entered into during fiscal 1996, including
the $6.0 million mortgage loan with Heller Financial,
Inc. ("Heller"). (See "Liquidity and Capital
Resources").
Income Taxes
The Company's interim effective tax credits of (41.0%)
in the second quarter of 1997 and (37.0%) in the second
quarter of 1996 relate to net losses incurred during
those periods and represent the Company's best estimate
of the annual effective tax rate for those fiscal
years.
Net Loss
As a result of the foregoing, the Company reduced its
net loss by $537,000 to a net loss of $248,000 in the
second quarter of 1997 as compared to a net loss of
$785,000 in the second quarter of 1996. On a per share
basis, the net loss was reduced by $.05 per share to a
net loss of ($.02) per share in the second quarter of
1997 as compared to a net loss of ($.07) per share in
the second quarter of 1996.
Twenty-Six Weeks Ended August 2, 1997 Compared To
Twenty-Six Weeks Ended August 3, 1996
<TABLE>
<CAPTION>
First Half
1997 1996
<S> <C> <C>
Net sales 100.0% 100.0%
Service charges & other income 3.5 3.9
103.5 103.9
Costs and Expenses:
Cost of sales 68.1 68.4
Selling, general & administrative expenses 32.2 32.2
Depreciation & amortization 1.6 2.0
Interest expense 2.7 3.1
104.6 105.7
LOSS BEFORE INCOME TAX BENEFIT (1.1) (1.8)
Income tax benefit (0.5) (0.6)
NET LOSS (0.6)% (1.2)%
</TABLE>
Net Sales
Net sales increased by approximately $9.3 million to
$190.5 million in the first half of 1997 as compared to
$181.2 million in the first half of 1996, an increase
of 5.1%. This increase resulted from a 5.0% increase in
comparable store sales, combined with additional sales
volume generated by one new store which was opened in
Reno, Nevada in March 1996 that was not open for the
entire first half in the prior year. Sales increases
were primarily in the areas of women's and children's
apparel and cosmetic accessories.
Service Charges and Other Income
Service charges and other income decreased by
approximately $500,000 to $6.6 million in the first
half of 1997 as compared to $7.1 million in the first
half of 1996, a decrease of 6.8%. As a percent of net
sales, service charges and other income decreased to
3.5% in the first half of 1997 as compared to 3.9% in
the first half of 1996.
Service charges associated with the Company's customer
credit cards increased by approximately $500,000 to
$5.7 million in the first half of 1997 as compared to
$5.2 million in the first half of 1996, an increase of
10.2%. This increase is due to an increase in credit
sales as a percent of total sales (45.3% in the first
half of 1997 as compared to 44.6% in the first half of
1996), combined with additional income generated by
increases to the interest rate charged on outstanding
customer credit card balances and to the late charge
fee assessed on delinquent credit card balances, both
effective in late fiscal 1996. The increase in credit
sales is primarily due to the Company's new
"Gottschalks Rewards" program, introduced during the
first quarter of 1997, which offers a rebate of up to
5% of annual credit purchases on the Company's credit
card which can be applied towards future purchases of
merchandise.
Other income, which includes the amortization of
deferred income and other miscellaneous income and
expense items, decreased by approximately $1.0 million
to $900,000 in the first half of 1997 as compared to
$1.9 million in the first half of 1996. Other income
in the first half of 1997 included a gain on the sale
of certain assets of $142,000. Other income in the
first half of 1996 included 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 the accompanying financial
statements).
Cost of Sales
Cost of sales increased by approximately $5.7 million
to $129.7 million in the first half of 1997 as compared
to $124.0 million in the first half of 1996, an
increase of 4.6%. Due to a reduction in markdowns, cost
of sales decreased as a percentage of sales in the
second quarter of 1997 as compared to the second
quarter of 1996, resulting in an increase in the
Company's gross margin percent to 31.9% in the second
quarter of 1997 as compared to 31.6% in the second
quarter of 1996. Excluding the effect of certain
indirect costs related to inventory which are
reclassified to cost of sales by the Company for
financial reporting purposes, the gross margin percent
increased to 37.1% in the first half of 1997 as
compared to 36.9% in the first half of 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
by approximately $2.9 million to $61.3 million in the
first half of 1997 as compared to $58.4 million in the
first half of 1996, an increase of 5.0%. As a percent
of net sales, selling, general and administrative
expenses remained unchanged at 32.2% in the first half
of 1997 and 1996. Including the effects of certain
indirect costs related to inventory which are
reclassified to cost of sales for financial reporting
purposes, selling, general and administrative costs as
a percent of sales decreased to 37.2% in the first half
of 1997 as compared to 37.3% in the first half of 1996.
<PAGE>
Depreciation and Amortization
Depreciation and amortization expense, which includes
the amortization of new store pre-opening costs,
decreased by approximately $700,000 to $3.0 million in
the first half of 1997 as compared to $3.7 million in
the first half of 1996, a decrease of 19.1%. As a
percent of net sales, depreciation and amortization
decreased to 1.6% in the first half of 1997 as compared
to 2.0% in the first half of 1996. The decrease (in
dollars) is primarily due to the amortization of new
store pre-opening costs, which decreased by
approximately $700,000 as compared to the same period
of the prior year because of the reduction in the level
of new store opening. Excluding the amortization of new
store pre-opening costs, depreciation and amortization
expense as a percent of net sales remained unchanged at
1.5% in the first half of 1997 and 1996.
Interest Expense
Interest expense, which includes the amortization of
deferred financing costs, decreased by approximately
$400,000 to $5.2 million in the first half of 1997 as
compared to $5.6 million in the first half of 1996, a
decrease of 7.2%. Due to the increase in sales volume,
interest expense as a percent of net sales decreased to
2.7% in the first half of 1997 as compared to 3.1% in
the first half of 1996. The decrease (in dollars) is
due to a decrease in the weighted-average interest rate
charged on outstanding borrowings under the Company's
various lines of credit (8.1% in the first half of 1997
as compared to 8.6% in the first half of 1996),
combined with lower average outstanding borrowings
under the Company's lines of credit due to improved
operating results as compared to the same period of the
prior year. These decreases were partially offset by
higher interest costs associated with additional long-term
financing arrangements entered into during fiscal
1996, including the $6.0 million mortgage loan with
Heller Financial, Inc. ("Heller"). (See "Liquidity and
Capital Resources").
Income Taxes
The Company's interim effective tax credits of (41.0%)
in the first half of 1997 and (37.0%) in the first half
of 1996 relate to net losses incurred during those
periods and represent the Company's best estimate of
the annual effective tax rate for those fiscal years.
Net Loss
As a result of the foregoing, the Company reduced its
net loss by approximately $900,000 to a net loss of
$1.2 in the first half of 1997 as compared to a net
loss of $2.1 million in the first half of 1996. On a
per share basis, the net loss was reduced by $.08 per
share to a net loss of ($.12) per share in the first
half of 1997 as compared to a net loss of ($.20) per
share in the first half of 1996.
Liquidity and Capital Resources
Sources of Liquidity.
As described more fully in the Company's 1996 Annual
Report on Form 10-K and Notes 3 and 5 to the
accompanying financial statements, the Company's
working capital requirements are currently met through
a combination of cash generated by operations,
borrowings under its revolving lines of credit and its
receivables securitization program.
Revolving Lines of Credit.
The Company has a revolving line of credit arrangement
with Congress Financial Corporation ("Congress") which
provides the Company with an $80.0 million working
capital facility through March 2000. 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 to fund
increased seasonal inventory requirements. Interest on
outstanding borrowings under the facility is charged at
a rate of approximately LIBOR plus 2.5% (8.4% at August
2, 1997), with no interest charged on the unused
portion of the line of credit. The Company also has the
potential to reduce the interest rate by 1/4% each
year, up to a maximum possible reduction of 1/2%
beginning in fiscal 1998, if specified pre-tax income
levels are attained by the Company. The maximum amount
available for borrowings under the line of credit with
Congress was $55.0 million as of August 2, 1997, of
which $30.8 million was outstanding as of that date.
Of that amount, $25.0 million has been classified as
long-term in the accompanying financial statements as
the Company does not anticipate repaying that amount
prior to one year from the balance sheet date. The
agreement contains one financial covenant, pertaining
to the maintenance of a minimum tangible net worth,
with which the Company was in compliance as of August
2, 1997.
The Company also has a revolving line of credit with
Bank Hapoalim which provides for additional borrowings
of up to $15.0 million through March 1999. The
Company's borrowing capacity under the line of credit
with Bank Hapoalim is limited to a percentage of the
outstanding balance of receivables collateralizing the
line, and is therefore subject to seasonal variations
that may affect the outstanding balance of such
receivables. Interest on outstanding borrowings under
the line of credit is charged at a rate equal to
approximately LIBOR plus 1.0%, (6.6% at August 2,
1997). At August 2, 1997, $600,000, which was the
maximum amount available for borrowings as of that
date, was outstanding under the line of credit with
Bank Hapoalim. The issuance of an additional Fixed
Base Certificate under the Company's receivables
securitization program in 1996 reduced the level of
receivables available to collateralize the Variable
Base Certificate, thus reducing the Company's current
borrowing capacity under the facility.
Receivables Securitization Program.
The Company's receivables securitization program
provides the Company with an additional source of
working capital financing that is generally more cost
effective than traditional debt financing. Since 1994,
the Company has issued $40.0 million 7.35% Fixed Base
Certificates (the "1994 Fixed Base Certificates") and a
$6.0 million 6.79% Fixed Base Certificate (the "1996
Fixed Base Certificate") under the program. Proceeds
from the issuances of the 1994 and 1996 Fixed Base
Certificates (collectively the "Fixed Base
Certificates") were primarily used to reduce or repay
previously outstanding higher interest bearing debt
obligations of the Company and pay certain costs
associated with the transactions. Interest is earned
by the certificateholders on a monthly basis and the
outstanding principal balances of such certificates are
to be repaid in equal monthly installments commencing
September 1998 through September 1999, through the
application of credit card principal collections during
that period. Management currently intends to refinance
the Fixed Base Certificates as they mature with newly
issued certificates under the program. The issuances of
the Fixed Base Certificates were accounted for as sales
for financial reporting purposes. Accordingly, the
$46.0 million of receivables underlying those
certificates as of August 2, 1997 and February 1, 1997
and the corresponding debt obligations have been
excluded from the accompanying financial statements.
A Variable Base Certificate was also issued under the
program in 1994 in the principal amount of up to $15.0
million to Bank Hapoalim as collateral for the
previously described revolving line of credit agreement
with that bank.
Other Financings.
The Company's long-term financing arrangements are
described more fully in Note 5 to the accompanying
financial statements. During the first quarter of
1997, the Company received the final $3.0 million of
its total $6.0 million mortgage loan with Heller
Financial, Inc. ("Heller").
Management believes the previously described sources of
liquidity are sufficient for its working capital,
capital expenditure and debt service requirements, in
addition to its long-term growth plans at moderate
levels. The Company may engage in other financing
activities if it is deemed to be advantageous.
Additional Cash Flow Analysis.
Cash flows from operating activities consists primarily
of the net loss adjusted for certain non-cash income
and expense items, including depreciation and
amortization and the provision for credit losses, and
changes in operating assets and liabilities, including
receivables, merchandise inventory and other current
and long-term assets and liabilities. Net cash
provided by operating activities was $2.7 million in
the first half of 1997 as compared to $2.0 million in
the first half of 1996. The variances in merchandise
inventory and credit card receivable balances from
amounts reported at year end are primarily seasonal in
nature, in that inventory levels are typically at their
lowest level after the Christmas selling season and
steadily increase in the months thereafter and
receivables are typically at their highest level after
the Christmas selling season and decline in the months
thereafter as customers repay their account balances.
Net cash used in investing activities was $4.1 million
in the first half of 1997 as compared to $1.9 million
in the first half of 1996, an increase of $2.2 million.
Net cash used in investing activities in the first half
of 1997 and 1996 consisted primarily of capital
expenditures for tenant improvements, fixtures and
equipment for new and certain existing store locations,
net of amounts received as reimbursement for certain of
those expenditures. Such expenditures were also
partially offset by proceeds from the sale of certain
assets during those periods. Consistent with their
scheduled completion dates, capital expenditures for
new stores and store remodel projects will continue to
increase throughout the second half of fiscal 1997.
Net cash provided by financing activities was $923,000
in the first half of 1997 as compared net cash used in
financing activities of $586,000 in the first half of
1996, an increase of approximately $1.5 million. Net
cash provided by financing activities in the first half
of 1997 includes the $3.0 million proceeds received
from the previously described mortgage loan with
Heller.
The Company's 1997 expansion program included the
opening of one new department store in Sonora,
California in August 1997 and the scheduled opening of
an additional new store in Santa Rosa, California, in
late September 1997. The Company has also commenced
the remodel and 23,000 square foot expansion of its
existing store located in the Valley Plaza Mall in
Bakersfield, California and certain other store remodel
projects. The remaining estimated cost to complete
these projects as of August 2, 1997, net of amounts to
be contributed by a mall owner, is $6.3 million.
Management expects to complete these projects during
the second half of fiscal 1997, 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.
Proposed Acquisition of The Harris Company.
On July 3, 1997, the Company entered into a non-binding
letter of intent with El Corte Ingles ("ECI"), of
Spain, and The Harris Company ("Harris") which
contemplates the purchase of all of the common stock of
Harris. Harris, a wholly-owned subsidiary of ECI,
currently operates nine department stores located
throughout Southern California. The letter of intent
contemplates that the purchase price would consist of
common stock of the Company and junior subordinated
debt to be issued to ECI. The acquisition is subject to
due diligence by the parties, the execution of
definitive agreements and a variety of other
conditions precedent, including the approval by the
stockholders of the Company. The acquisition, if
consummated, would not occur until the fourth quarter
of fiscal 1997, at the earliest.
Safe Harbor Statement
Certain statements contained in this Quarterly Report
on Form 10-Q are forward-looking statements within the
meaning of Section 27A of the Securities Exchange Act
of 1933 and Section 21E of the Securities Exchange Act
of 1934 and the Company intends that such forward-looking
statements be subject to the safe harbors
created thereby. These forward-looking statements
include the plans and objectives of management for
future operations and the future economic performance
of the Company, and such forward-looking statements can
be identified by words including, but not limited to:
will, believes, anticipates, intends and expects.
As described more fully in the Company's 1996 Annual
Report on Form 10-K, these forward-looking statements
are qualified by important factors that could cause
actual results to differ materially from those
identified in such forward-looking statements. Results
actually achieved thus may differ materially from
expected results in these statements as a result of
those factors or other factors affecting the Company.
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.<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND RELATED
STOCKHOLDER MATTERS
There were no sales of unregistered securities by the
Company during the thirteen week period ended August 2,
1997.
The Company's credit agreement with Congress Financial
Corporation prohibits the Company from paying dividends
without prior written consent from that lender.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On June 26, 1997, the Company held its 1997 Annual
Meeting of Stockholders at which the Company submitted
to a vote to its stockholders the election of the
following nine nominees for director. Each of the nine
nominees were elected. The following represents a
tabulation of the votes cast for each of the nine
nominees.
<TABLE>
<CAPTION>
NOMINEE FOR DIRECTOR VOTES FOR VOTES WITHHELD
<S> <C> <C>
Joe Levy 9,334,350 117,361
Gerald H. Blum 9,333,470 118,241
Bret W. Levy 9,323,445 128,266
Sharon Levy 9,324,900 126,811
Joseph J. Penbera 9,342,500 109,211
Frederick R. Ruiz 9,339,300 112,411
O. James Woodward III 9,343,100 108,611
Max Gutmann 9,337,900 113,811
James R. Famalette 9,340,600 111,111
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant to the
requirements of Item 601 of Regulation S-K:
Exhibit No. Description
27 Financial Data Schudule
(b) The Company did not file Current Reports
on Form 8-K during the thirteen week
period ended August 2, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
Gottschalks Inc.
(Registrant)
September 15, 1997
\s\ Joseph W. Levy
(Joseph W. Levy,
Chairman and Chief Executive
Officer)
September 15, 1997
\s\ Alan A. Weinstein
(Alan A. Weinstein,
Senior Vice President and
Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE IS BEING FILED IN ACCORDANCE WITH
REGULATION S-T AND INCLUDES UNAUDITED SELECTED FINANCIAL DATA FROM THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE SECOND QUARTER ENDED AUGUST 2, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> AUG-02-1997
<CASH> 4,317
<SECURITIES> 0
<RECEIVABLES> 15,396
<ALLOWANCES> 1,168
<INVENTORY> 98,930
<CURRENT-ASSETS> 126,856
<PP&E> 131,413
<DEPRECIATION> 42,717
<TOTAL-ASSETS> 224,787
<CURRENT-LIABILITIES> 55,490
<BONDS> 61,730
0
0
<COMMON> 105
<OTHER-SE> 78,903
<TOTAL-LIABILITY-AND-EQUITY> 224,787
<SALES> 190,503
<TOTAL-REVENUES> 197,129
<CGS> 129,715
<TOTAL-COSTS> 129,715
<OTHER-EXPENSES> 2,986
<LOSS-PROVISION> 1,294
<INTEREST-EXPENSE> 5,207
<INCOME-PRETAX> (2,095)
<INCOME-TAX> (860)
<INCOME-CONTINUING> (1,235)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,235)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
