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 May 3, 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 May 3, 1997 was 10,472,915.
<PAGE>
INDEX
GOTTSCHALKS INC. AND SUBSIDIARIES
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
May 3, 1997 and February 1, 1997 2
Consolidated statements of operations -
thirteen weeks ended May 3, 1997 and
May 4,1996 3
Condensed consolidated statements of cash
flows - thirteen weeks ended May 3, 1997
and May 4, 1996 4
Notes to condensed consolidated financial
statements - thirteen weeks ended May 3,
1997 and May 4, 1996 5-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-16
PART II. OTHER INFORMATION
Item 5. Other Information
17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
May 3, 1997 February 1, 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 5,061 $ 4,764
Cash held by GCC Trust 737 1,895
Receivables - net 14,311 25,507
Merchandise inventories 104,792 89,472
Other 6,692 12,593
Total current assets 131,593 134,231
PROPERTY AND EQUIPMENT 128,193 127,258
Less accumulated depreciation and
amortization 41,237 39,888
86,956 87,370
OTHER LONG-TERM ASSETS 9,683 11,592
$228,232 $233,193
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $ 9,619 $ 13,904
Cash management liability 4,122 1,504
Trade accounts payable 22,640 19,906
Accrued expenses and other liabilities 13,737 18,076
Taxes, other than income taxes 4,959 8,202
Current portion of long-term obligations 2,841 2,408
Total current liabilities 57,918 64,000
LONG-TERM OBLIGATIONS (less current portion):
Line of credit 25,000 25,000
Notes and mortgage loans payable 32,102 29,861
Capitalized lease obligations 5,332 5,380
62,434 60,241
DEFERRED INCOME 19,387 19,580
DEFERRED LEASE PAYMENTS AND OTHER 9,342 9,233
STOCKHOLDERS' EQUITY 79,151 80,139
$228,232 $233,193
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
(In thousands of dollars, except share data)
Thirteen Weeks
Ended
May 3, May 4,
1997 1996
<S> <C> <C>
Net sales $ 90,506 $ 85,560
Service charges & other income 3,492 3,829
93,998 89,389
COSTS & EXPENSES:
Cost of sales 61,996 58,730
Selling, general & administrative expenses 29,506 28,003
Depreciation & amortization 1,556 1,905
Interest expense 2,613 2,850
95,671 91,488
LOSS BEFORE INCOME TAX BENEFIT (1,673) (2,099)
Income tax benefit (686) (777)
NET LOSS $( 987) $(1,322)
Net loss per common share $ (.09) $ (.13)
Weighted average number of
common shares outstanding 10,473 10,428
</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)
Thirteen Weeks
Ended
May 3, May 4,
1997 1996
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (987) $ (1,322)
Adjustments:
Depreciation and amortization 1,556 1,905
Provision for credit losses 459 551
Net gain from termination of
capital lease (823)
Income tax refunds received 3,311
Other adjustments, net (770) (844)
Changes in operating assets
and liabilities:
Receivables, net 10,737 9,526
Merchandise inventories (15,173) (12,178)
Trade accounts payable 2,614 1,401
Other current and long-term
assets and liabilities 507 1,176
Net cash (used in) provided
by operating activities (1,057) 2,703
INVESTING ACTIVITIES:
Purchases of property and equipment,
net of reimbursements received (1,287) (3,494)
Proceeds from sale of assets and
sale/leaseback arrangement 350 280
Distribution from limited partnership 54 22
Net cash used in investing
activities ( 883) (3,192)
FINANCING ACTIVITIES:
Net payments under lines of credit (4,285) (1,539)
Proceeds from long-term obligations 3,214
Principal payments on long-term
obligations (588) ( 507)
Changes in cash management liability
and other 3,896 2,247
Net cash provided by financing
activities 2,237 201
INCREASE (DECREASE) IN CASH 297 (288)
CASH AT BEGINNING OF YEAR 4,764 5,113
CASH AT END OF PERIOD $ 5,061 $ 4,825
</TABLE>
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Thirteen Weeks Ended May 3, 1997 and May 4, 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-five "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 2). 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
week period ended May 3, 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 3). 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. RECEIVABLES SECURITIZATION PROGRAM
The Company's receivables securitization program,
entered into in 1994, 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 May 3,
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 4). 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 $2.3 million at May 3, 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 $8.6
million at May 3, 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 accrued finance charges and an
allowance for doubtful accounts on all receivables,
including receivables sold, and vendor claims and
receivables that did not meet certain eligibility
requirements of the program, totaling $3.4 million as
of May 3, 1997 and $4.7 million as of February 1, 1997.
3. 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 these 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.
4. 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 May 3,
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 $57.6 million as of May 3, 1997, of which
$32.7 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 May 3, 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% (6.7% at May 3,
1997). At May 3, 1997, $1.9 million, 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 $19.7
million at May 3, 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 May 3, 1997: (i)
a 10.45% mortgage loan payable with Heller Financial,
Inc. ("Heller"), due January 2002, with an outstanding
loan balance of $4.4 million; (ii) an additional
9.97% mortgage loan payable with Heller, due April
2004, with an outstanding loan balance of $6.0 million;
(iii) two 10.0% notes payable to Federated Department
Stores, Inc. ("Federated"), due March and July 2001,
with outstanding balances totaling $2.2 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 May 3, 1997.
5. LEASE ARRANGEMENT
As described more fully in the Company's 1996 Annual
Report on Form 10-K, in March 1996 the Company
finalized an agreement with Broadway Stores, Inc.
("Broadway"), a wholly-owned subsidiary of Federated,
and the landlord, 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 recognized a gain of
$823,000 in the first quarter of 1996 upon the
termination of the original lease, which was accounted
for as a capital lease by the Company, representing the
difference between the capital lease obligation and the
net book value of the related assets recorded under the
capital lease, and such gain is included in service
charges and other income in the accompanying financial
statements. The new lease has been accounted for as an
operating lease for financial reporting purposes.
6. 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 the
ultimate resolution of the matter will have a material
adverse effect on the financial position or results of
operations of the Company.
In addition to 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.
7. 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 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
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.
Thirteen Weeks Ended May 3, 1997 Compared To Thirteen
Weeks Ended May 4, 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:
First Quarter
1997 1996
Net sales 100.0% 100.0%
Service charges & other income 3.9 4.5
103.9 104.5
Costs and Expenses:
Cost of sales 68.5 68.6
Selling, general & administrative
expenses 32.6 32.7
Depreciation & amortization 1.7 2.2
Interest expense 2.9 3.4
105.7 106.9
LOSS BEFORE INCOME TAX BENEFIT (1.8) (2.4)
Income tax benefit (0.7) (0.9)
NET LOSS (1.1)% (1.5)%
Net Sales
Net sales increased by $4.9 million to $90.5 million in
the first quarter of 1997 as compared to $85.6 million
in the first quarter of 1996, an increase of 5.8%. This
increase resulted from a 5.2% increase in comparable
store sales, combined with additional sales volume
generated by one new store opened in Reno, Nevada in
March 1996 that was not open for the entire period in
the prior year.
The Company has entered into agreements to open two
additional stores in fiscal 1997, to be located in
Santa Rosa and Sonora, California. While these stores
are expected to open in the third quarter of fiscal
1997, there can be no assurance that such openings will
not be delayed subject to a variety of conditions
precedent or other factors.
Service Charges and Other Income
Service charges and other income decreased by
approximately $300,000 to $3.5 million in the first
quarter of 1997 as compared to $3.8 million in the
first quarter of 1996, a decrease of 8.8%. As a percent
of net sales, service charges and other income
decreased to 3.9% in the first quarter of 1997 as
compared to 4.5% in the first quarter of 1996.
Service charges associated with the Company's customer
credit cards increased by approximately $400,000 to
$3.0 million in the first quarter of 1997 as compared
to $2.6 million in the first quarter of 1996, an
increase of 13.8%. This increase is due to an increase
in credit sales as a percent of total sales (46.3% in
the first quarter of 1997 as compared to 43.7% in the
first 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 $700,000 to
$500,000 in the first quarter of 1997 as compared to
$1.2 million in the first quarter of 1996. Other
income in the first quarter of 1997 included a gain on
the sale of certain assets of $142,000. Other income
in the first quarter of 1996 included a pre-tax gain of
$823,000 resulting from the termination of a lease
previously accounted for as a capital lease by the
Company. (See Note 5 to the accompanying financial
statements).
Cost of Sales
Cost of sales increased by approximately $3.3 million
to $62.0 million in the first quarter of 1997 as
compared to $58.7 million in the first quarter of 1996,
an increase of 5.6%. The Company's gross margin percent
increased to 31.5% in the first quarter of 1997 as
compared to 31.4% in the first 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 remained unchanged at 36.9% in the first
quarters of 1997 and 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 $1.5 million to $29.5 million in the first quarter
of 1997 as compared to $28.0 million in the first
quarter of 1996, an increase of 5.4%. As a percent of
net sales, selling, general and administrative expenses
decreased to 32.6% in the first quarter of 1997 as
compared to 32.7% in the first 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
37.9% in the first quarter of 1997 as compared to 38.1%
in the first quarter of 1996. The Company has
continued to leverage its selling, general and
administrative expense structure against a higher
selling base.
Depreciation and Amortization
Depreciation and amortization expense, which includes
the amortization of new store pre-opening costs,
decreased by approximately $300,000 to $1.6 million in
the first quarter of 1997 as compared to $1.9 million
in the first quarter of 1996, a decrease of 18.3%. As
a percent of net sales, depreciation and amortization
decreased to 1.7% in the first quarter of 1997 as
compared to 2.2% in the first quarter of 1996. The
decrease (in dollars) is primarily due to the
amortization of new store pre-opening costs, which
decreased by $300,000 as compared to the same period of
the prior year. Excluding the amortization of new store
pre-opening costs, depreciation and amortization
expense as a percent of net sales remained unchanged at
1.6% in the first 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. All costs
related to fiscal 1996 new store openings were fully
amortized by the end of the first quarter of fiscal
1997.
Interest Expense
Interest expense, which includes the amortization of
deferred financing costs, decreased by approximately
$200,000 to $2.6 million in the first quarter of 1997
as compared to $2.8 million in the first quarter of
1996, a decrease of 8.3%. Due to the increase in sales
volume, interest expense as a percent of net sales
decreased to 2.9% in the first quarter of 1997 as
compared to 3.4% in the first 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
(8.0% in the first quarter of 1997 as compared to 8.5%
in the first quarter of 1996), combined with lower
average outstanding borrowings under the Company's
lines of credit due to improved operating results and
lower costs associated with new store openings as
compared to the same period of the prior year. This
decrease was 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 quarter of 1997 and (37.0%) in the first
quarter of 1996 relates to net losses incurred during
those periods and represents 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 $300,000 to a net loss of
$987,000 in the first quarter of 1997 as compared to a
net loss of $1.3 million in the first quarter of 1996.
On a per share basis, the net loss was reduced by $.04
per share to a net loss of ($.09) per share in the
first quarter of 1997 as compared to a net loss of
($.13) per share in the first quarter 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 2 and 4 to the
accompanying financial statements, the Company's
working capital requirements are currently met through
a combination of borrowings under its revolving lines
of credit and its 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 May 3,
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 $57.6 million as of May 3, 1997, of which
$32.7 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 May 3, 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%, (6.7% at May 3, 1997).
At May 3, 1997, $1.9 million, 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 May 3, 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 4 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 used in
operating activities was ($1.1) million in the first
quarter of 1997 as compared to net cash provided by
operating activities of $2.7 million in the first
quarter of 1996. Cash used in operating activities in
the first quarter of 1997 reflects an increase in
inventory resulting from the earlier receipt of certain
summer apparel merchandise and a decrease in accrued
expenses resulting from the timing of the payment of
certain routine items, including sales tax, as compared
to the prior year. Such uses of cash were partially
offset by cash provided by the return of certain
outstanding deposits and a larger decrease in customer
credit card receivables versus the prior year due to
the more timely payment of customer account balances
during the period. Net cash provided by operating
activities in the first quarter of 1996 benefitted from
the payment of approximately $7.6 million of operating
expenses related to the first quarter of 1996 during
the 53rd week of fiscal 1995 and the receipt of $3.3
million in connection with the filing of certain
amended income tax returns. 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 $883,000 in
the first quarter of 1997 as compared to $3.2 million
in the first quarter of 1996, a decrease of
approximately $2.3 million. Net cash used in investing
activities in the first quarters 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 be incurred more
heavily in the second half of fiscal 1997 as compared
to the first half of fiscal 1996.
Net cash provided by financing activities was $2.2
million in the first quarter of 1997 as compared to
$201,000 in the first quarter of 1996, an increase of
$2.0 million. Net cash provided by financing
activities in the first quarter of 1997 includes the
$3.0 million proceeds received from the previously
described mortgage loan with Heller.
The Company's 1997 expansion program currently includes
the opening of two new department stores to be located
in Santa Rosa and Sonora, California. 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 May 3, 1997, net of
amounts to be contributed by a mall owner, is $8.5
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.
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.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On June 12, 1997, the Company announced that it is
currently in discussions with another retail company to
form a strategic alliance which would result in an
increase in its department store base by approximately
20% to 30%. No agreement in principal as to the terms
of the alliance has been reached at this time.
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
99 Press Release dated June 12, 1997
27 Financial Data Schedule
(b) The Company did not file Current Reports
on Form 8-K during the thirteen week
period ended May 3, 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)
June 16, 1997
\s\ Joseph W. Levy
(Joseph W. Levy,
Chairman and Chief
Executive Officer)
June 16, 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 FIRST QUARTER ENDED MAY 3, 1997.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> MAY-03-1997
<CASH> 5,061
<SECURITIES> 0
<RECEIVABLES> 15,491
<ALLOWANCES> 1,180
<INVENTORY> 104,792
<CURRENT-ASSETS> 131,593
<PP&E> 128,193
<DEPRECIATION> 41,237
<TOTAL-ASSETS> 228,232
<CURRENT-LIABILITIES> 57,918
<BONDS> 62,434
0
0
<COMMON> 104
<OTHER-SE> 79,047
<TOTAL-LIABILITY-AND-EQUITY> 228,232
<SALES> 90,506
<TOTAL-REVENUES> 93,998
<CGS> 61,996
<TOTAL-COSTS> 61,996
<OTHER-EXPENSES> 1,556
<LOSS-PROVISION> 556
<INTEREST-EXPENSE> 2,613
<INCOME-PRETAX> (1,673)
<INCOME-TAX> (686)
<INCOME-CONTINUING> (987)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (987)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
June 12, 1997
DISTRIBUTION: US2, IRW & FAX LIST
FOR IMMEDIATE RELEASE
Gottschalks Inc. (NYSE:GOT) announced that it is
currently in discussions with another retail company to
form a strategic alliance which would result in an
increase in the Gottschalks Department store base by
approximately 20%-30%.
This announcement is precipitated by unusual volume in
Gottschalks' stock. No agreement in principal as to the
terms of the alliance has been reached at this time.
If and when an agreement is reached, a joint
announcement will be made with the alliance partner.
Gottschalks is a regional department store chain,
currently operating thirty-five Gottschalks department
stores and twenty-four Village East specialty apparel
stores in California, Washington, Oregon and Nevada.
Gottschalks offers moderate to upper moderately priced
brand-name fashion apparel and home merchandise.
