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 November 1, 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 November 30, 1997 was 10,473,415.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARIES
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
November 1, 1997 and February 1, 1997 2
Consolidated statements of operations -
thirteen and thirty-nine weeks ended
November 1, 1997 and November 2, 1996 3
Condensed consolidated statements of cash
flows - thirty-nine weeks ended
November 1, 1997 and November 2, 1996 4
Notes to condensed consolidated financial
statements - thirteen and thirty-nine
weeks ended November 1, 1997 and
November 2, 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 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
November 1, 1997 February 1, 1997
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 4,204 $ 4,764
Cash held by GCC Trust 279 1,895
Receivables - net 14,802 25,507
Merchandise inventories 134,909 89,472
Other 16,643 12,593
Total current assets 170,837 134,231
PROPERTY AND EQUIPMENT 137,801 127,258
Less accumulated depreciation
and amortization 44,291 39,888
93,510 87,370
OTHER LONG-TERM ASSETS 8,858 11,592
$273,205 $233,193
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit $ 28,536 $ 13,904
Cash management liability 11,586 1,504
Trade accounts payable 41,521 19,906
Accrued expenses and other
liabilities 15,859 18,076
Taxes, other than income taxes 5,909 8,202
Current portion of long-term
obligations 2,776 2,408
Total current
liabilities 106,187 64,000
LONG-TERM OBLIGATIONS
(less current portion):
Revolving line of credit 25,000 25,000
Notes and mortgage loans payable 30,785 29,861
Capitalized lease obligations 5,236 5,380
61,021 60,241
DEFERRED INCOME 21,142 19,580
DEFERRED LEASE PAYMENTS AND OTHER 7,434 9,233
STOCKHOLDERS' EQUITY 77,421 80,139
$273,205 $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 Thirty-Nine Weeks
Ended Ended
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net sales $101,466 $ 95,675 $291,969 $276,910
Service charges
& other income 2,950 2,952 9,575 10,058
104,416 98,627 301,544 286,968
COSTS & EXPENSES:
Cost of sales 68,595 64,956 198,310 188,969
Selling, general &
administrative
expenses 33,198 31,497 94,515 89,870
Depreciation &
amortization 1,697 1,650 4,683 5,341
Interest expense 2,694 2,954 7,901 8,562
Acquisition related
expenses (Note 2) 748 748
106,932 101,057 306,157 292,742
LOSS BEFORE INCOME
TAX BENEFIT (2,516) (2,430) (4,613) (5,774)
Income tax benefit (1,031) (900) (1,892) (2,137)
NET LOSS $ (1,485) $ (1,530) $ (2,721) $ (3,637)
Net loss per
common share $ (0.14) $ (0.15) $ (0.26) $ (0.35)
Weighted average number of
common shares
outstanding 10,473 10,473 10,473 10,457
</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)
Thirty-Nine Weeks
Ended
November 1, November 2,
1997 1996
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (2,721) $ (3,637)
Adjustments:
Depreciation and
amortization 4,683 5,341
Provision for credit losses 1,812 1,837
Net gain from termination of
capital leases (1,344)
Income tax refunds received 3,311
Deferred income taxes (1,762) (2,459)
Acquisition related expenses (748)
Other adjustments, net (368) (267)
Changes in operating assets and
liabilities:
Receivables, net 8,892 10,818
Merchandise inventories (44,994) (37,066)
Trade accounts payable 21,631 10,682
Other current and long-term
assets and liabilities (4,004) (4,810)
Net cash used in operating
activities (17,579) (17,594)
INVESTING ACTIVITIES:
Purchases of property and
equipment, net of
reimbursements received (10,965) (5,469)
Proceeds from sale of assets and
sale/leaseback arrangement 352 1,938
Distribution from limited
partnership 169 72
Net cash used in investing
activities (10,444) (3,459)
FINANCING ACTIVITIES:
Net proceeds under revolving lines
of credit 14,632 9,578
Proceeds from securitization and
sale of receivables 6,000
Proceeds from long-term
obligations 3,214 3,000
Principal payments on long-term
obligations (2,066) (4,349)
Changes in cash management
liability and other 11,683 5,791
Net cash provided by
financing activities 27,463 20,020
DECREASE IN CASH (560) (1,033)
CASH AT BEGINNING OF YEAR 4,764 5,113
CASH AT END OF PERIOD $ 4,204 $ 4,080
</TABLE>
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Thirteen and Thirty-Nine Weeks Ended November 1, 1997
and November 2, 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-seven "Gottschalks" department
stores and twenty-two "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, shoes 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 thirty-nine week periods ended November 1, 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"). The letter of
intent contemplated the purchase of all of the common
stock of Harris, a wholly-owned subsidiary of ECI,
which currently operates nine department stores located
throughout Southern California. The parties were
unable to agree on the terms of the transaction,
however, and terminated negotiations in October 1997.
The Company incurred various non-recurring costs in
connection with the proposed acquisition, consisting
primarily of investment banking, legal and accounting
fees. Such costs, totaling $748,000, are classified as
acquisition related expenses in the accompanying
statement of operations.
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 November
1, 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. (See 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 November 1, 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 $10.9
million at November 1, 1997 and $11.8 million at
February 1, 1997, and such amounts are included in
receivables reported in the accompanying financial
statements. Such 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 $3.2
million as of November 1, 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% (8.3% at
November 1, 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% in fiscal 1998, with
a maximum possible reduction of 1/2% in fiscal 1999, if
specified pre-tax income levels are attained by the
Company. The maximum amount available for borrowings
under the line of credit was $76.8 million as of
November 1, 1997, of which $52.9 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 November 1, 1997.
The Company also has a revolving line of credit
arrangement with Bank Hapoalim (Note 3) 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
November 1, 1997). At November 1, 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 November 1, 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
November 1, 1997: (i) a 10.45% mortgage loan payable
with Heller Financial, Inc. ("Heller"), due January
2002, with an outstanding loan balance of $4.0 million;
(ii) an additional 9.97% mortgage loan payable with
Heller, due April 2004, with an outstanding loan
balance of $5.6 million; (iii) two 10.0% notes payable
to Federated Department Stores, Inc. ("Federated"), due
March and July 2001, with outstanding balances totaling
$2.0 million; and (iv) other long-term obligations with
outstanding balances totaling $2.2 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 November 1, 1997.
6. LEASE ARRANGEMENTS
In 1996, the Company entered into agreements with
Broadway Stores, Inc. ("Broadway"), a wholly-owned
subsidiary of Federated, and the respective 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
Fashion Fair Mall in Fresno, California 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 three
quarters 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.
8. NEW ACCOUNTING STANDARDS
Effective for periods ending after December 31, 1997,
the Company will be required to adopt the provisions of
Statement of Financial Accounting Standards ("SFAS")
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.
SFAS No. 130, "Reporting Comprehensive Income",
establishes standards for reporting and displaying
comprehensive income and its components in a full set
of general-purpose financial statements. The new rules
are effective for fiscal years beginning after December
15, 1997, with earlier application permitted.
SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", changes the manner
in which operating segments are defined and reported
externally to be consistent with the basis on which
they are defined and reported on internally. The new
rules are effective for periods beginning after
December 15, 1997, with earlier application permitted.
The application of SFAS No. 130 and 131 will not impact
the Company's financial position, results of operations
or cash flows, and any effect will be limited to the
form and content of its disclosures. The Company does
not anticipate adoption of these standards prior to
their effective dates.
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
fourth quarter of each fiscal year.
Thirteen Weeks Ended November 1, 1997 Compared To
Thirteen Weeks Ended November 2, 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>
Third Quarter
1997 1996
<S> <C> <C>
Net sales 100.0% 100.0%
Service charges & other income 2.9 3.1
102.9 103.1
Costs and Expenses:
Cost of sales 67.6 67.9
Selling, general &
administrative expenses 32.7 32.9
Depreciation & amortization 1.7 1.7
Interest expense 2.7 3.1
Acquisition related expenses 0.7
105.4 105.6
LOSS BEFORE INCOME TAX BENEFIT (2.5) (2.5)
Income tax benefit (1.0) (0.9)
NET LOSS (1.5)% (1.6)%
</TABLE>
Net Sales
Net sales increased by approximately $5.8 million to
$101.5 million in the third quarter of 1997 as compared
to $95.7 million in the third quarter of 1996, an
increase of 6.1%. This increase resulted from a 1.6%
increase in comparable store sales, combined with
additional sales volume generated by two new
Gottschalks stores opened during the period. The
Company opened one new store in Sonora, California in
August 1997 and an additional store in Santa Rosa,
California in September 1997, increasing the total
number of Gottschalks stores open to thirty-seven as
compared to thirty-five as of the end of the same
period of the prior year.
Service Charges and Other Income
Service charges and other income were unchanged at $3.0
million in the third quarters of 1997 and 1996. As a
percent of net sales, service charges and other income
decreased to 2.9% in the third quarter of 1997 as
compared to 3.1% in the third quarter of 1996.
Service charges associated with the Company's customer
credit cards increased by approximately $300,000 to
$2.7 million in the third quarter of 1997 as compared
to $2.4 million in the third quarter of 1996, an
increase of 12.5%. This increase is due to an increase
in credit sales as a percent of total sales (44.7% in
the third quarter of 1997 as compared to 43.9% in the
third quarter of 1996), combined with additional income
generated by modifications made to credit terms in
selected states 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
$200,000 in the third quarter of 1997 as compared to
$500,000 in the third quarter of 1996. Other income in
the third quarter of 1996 included a gain of $200,000
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) and
interest income related to certain previously
outstanding deposits.
Cost of Sales
Cost of sales increased by approximately $3.6 million
to $68.6 million in the third quarter of 1997 as
compared to $65.0 million in the third quarter of 1996,
an increase of 5.6%. Due to a reduction in markdowns
as a percentage of sales, cost of sales decreased as a
percentage of sales, resulting in an increase to the
Company's gross margin percent to 32.4% in the third
quarter of 1997 as compared to 32.1% in the third
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 38.1% in the third quarter of 1997 as
compared to 37.7% in the third 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. (See Note 4 to the accompanying
financial statements). 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 $1.7 million to $33.2 million in the
third quarter of 1997 as compared to $31.5 million in
the third quarter of 1996, an increase of 5.4%. As a
percent of net sales, selling, general and
administrative expenses decreased to 32.7% in the third
quarter of 1997 as compared to 32.9% in the third
quarter of 1996. This decrease is primarily related to
certain indirect costs related to inventory which are
reclassified to cost of sales for financial reporting
purposes. Including the effect of such costs, selling,
general and administrative costs as a percent of net
sales remained unchanged at 38.3% in the third quarter
of 1997 as compared to the third quarter of 1996.
Depreciation and Amortization
Depreciation and amortization expense, which includes
the amortization of new store pre-opening costs,
remained unchanged at $1.7 million in the third
quarters of 1997 and 1996. As a percent of net sales,
depreciation and amortization also remained unchanged
at 1.7% in the third 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. 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 third
quarters of 1997 and 1996. Management expects the
amortization of new store pre-opening costs to increase
in the fourth quarter 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
$300,000 to $2.7 million in the third quarter of 1997
as compared to $3.0 million in the third quarter of
1996, a decrease of 8.8%. Due to the increase in sales
volume, interest expense as a percent of net sales
decreased to 2.7% in the third quarter of 1997 as
compared to 3.1% in the third 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
(8.2% in the third quarter of 1997 as compared to 8.7%
in the third quarter of 1996), primarily due to a lower
interest rate applicable to the Company's line of
credit with Congress (see Note 5). This decrease was
partially offset by higher average outstanding
borrowings under the Company's lines of credit,
primarily to fund new store and existing store
construction and remodeling costs and increased
inventory requirements associated with new stores, in
addition to higher interest costs associated with
additional long-term financing arrangements entered
into during fiscal 1996, including the issuance of the
$6.0 million Fixed Base Certificate and the $6.0
million mortgage loan with Heller Financial, Inc.
("Heller"). (See "Liquidity and Capital Resources").
Acquisition Related Expenses
Acquisition related expenses of $748,000 were incurred
in connection with the proposed acquisition of Harris.
Such costs, consisting primarily of investment banking,
legal and accounting fees, were recognized by the
Company in the third quarter of 1997 after the parties
were unable to agree on the terms of the transaction
and discontinued negotiations in October 1997. (See
Note 2 in the accompanying financial statements).
Income Taxes
The Company's interim effective tax credits of (41.0%)
in the third quarter of 1997 and (37.0%) in the third
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 to ($1,485,000) in the third quarter of 1997
as compared to ($1,530,000) in the third quarter of
1996. On a per share basis, the net loss was reduced
to ($.14) per share in the third quarter of 1997 as
compared to ($.15) per share in the third quarter of
1996. Excluding the one-time pre-tax charge of
$748,000 for expenses incurred in connection with the
previously described proposed acquisition of Harris,
the net loss was $1,044,000, or ($.10) per share, for
the third quarter of 1997.
Thirty-Nine Weeks Ended November 1, 1997 Compared To
Thirty-Nine Weeks Ended November 2, 1996
<TABLE>
<CAPTION>
First Three Quarters
1997 1996
<S> <C> <C>
Net sales 100.0% 100.0%
Service charges & other income 3.3 3.6
103.3 103.6
Costs and Expenses:
Cost of sales 67.9 68.2
Selling, general & administrative
expenses 32.4 32.5
Depreciation & amortization 1.6 1.9
Interest expense 2.7 3.1
Acquisition related expenses 0.3
104.9 105.7
LOSS BEFORE INCOME TAX BENEFIT (1.6) (2.1)
Income tax benefit (0.7) (0.8)
NET LOSS (0.9)% (1.3)%
</TABLE>
Net Sales
Net sales increased by approximately $15.1 million to
$292.0 million in the first three quarters of 1997 as
compared to $276.9 million in the first three quarters
of 1996, an increase of 5.4%. This increase resulted
from a 3.9% increase in comparable store sales,
combined with additional sales volume generated by two
new Gottschalks stores opened during the period. The
Company opened one new store in Sonora, California in
August 1997 and one additional store in Santa Rosa,
California in September 1997, increasing the total
number of Gottschalks stores to thirty-seven as
compared to thirty-five stores as of the end of the
same period of the prior year.
Service Charges and Other Income
Service charges and other income decreased by
approximately $500,000 to $9.6 million in the first
three quarters of 1997 as compared to $10.1 million in
the first three quarters of 1996, a decrease of 5.0%.
As a percent of net sales, service charges and other
income decreased to 3.3% in the first three quarters of
1997 as compared to 3.6% in the first three quarters of
1996.
Service charges associated with the Company's customer
credit cards increased by approximately $800,000 to
$8.5 million in the first three quarters of 1997 as
compared to $7.7 million in the first three quarters of
1996, an increase of 10.4%. This increase is due to an
increase in credit sales as a percent of total sales
(45.1% in the first three quarters of 1997 as compared
to 44.6% in the first three quarters of 1996), combined
with additional income generated as a result of
modifications made to credit terms in selected states
initiated late in 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 $1.3 million
to $1.1 million in the first three quarters of 1997 as
compared to $2.4 million in the first three quarters
of 1996. Other income in the first three quarters 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 $9.3 million
to $198.3 million in the first three quarters of 1997
as compared to $189.0 million in the first three
quarters of 1996, an increase of 4.9%. Due to a
reduction in markdowns as a percentage of sales, cost
of sales decreased as a percentage of sales, resulting
in an increase in the Company's gross margin percent to
32.1% in the first three quarters of 1997 as compared
to 31.8% in the first three quarters 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 37.4% in the first three
quarters of 1997 as compared to 37.1% in the first
three quarters of 1996.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
by approximately $4.6 million to $94.5 million in the
first three quarters of 1997 as compared to $89.9
million in the first three quarters of 1996, an
increase of 5.2%. Due to the increase in sales volume,
selling, general and administrative expenses as a
percent of net sales decreased to 32.4% in the first
three quarters of 1997 as compared to 32.5% in the
first three quarters 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 net sales decreased to 37.6% in the first
three quarters of 1997 as compared to 37.7% in the
first three quarters of 1996.
Depreciation and Amortization
Depreciation and amortization expense, which includes
the amortization of new store pre-opening costs,
decreased by approximately $600,000 to $4.7 million in
the first three quarters of 1997 as compared to $5.3
million in the first three quarters of 1996, a decrease
of 12.3%. As a percent of net sales, depreciation and
amortization decreased to 1.6% in the first three
quarters of 1997 as compared to 1.9% in the first three
quarters of 1996. The decrease (in dollars) is
primarily due to the amortization of new store pre-opening
costs, which decreased by approximately
$800,000 as compared to the same period of the prior
year due to the full amortization of fiscal 1996 new
store pre-opening costs early in fiscal 1997. The
amortization of fiscal 1997 new store openings did not
commence until the third quarter of 1997. Excluding the
amortization of new store pre-opening costs,
depreciation and amortization expense as a percent of
net sales remained unchanged at 1.5% for the first
three quarters of 1997 and 1996.
Interest Expense
Interest expense, which includes the amortization of
deferred financing costs, decreased by approximately
$700,000 to $7.9 million in the first three quarters of
1997 as compared to $8.6 million in the first three
quarters of 1996, a decrease of 7.7%. Due to the
increase in sales volume, interest expense as a percent
of net sales decreased to 2.7% in the first three
quarters of 1997 as compared to 3.1% in the first three
quarters of 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 various lines of credit (8.2% in the
first three quarters of 1997 as compared to 8.7% in the
first three quarters of 1996), due to a lower interest
rate applicable to the Company's line of credit
agreement with Congress. (See Note 5 to the
accompanying financial statements.) This decrease was
partially offset by higher average outstanding
borrowings under the Company's lines of credit,
primarily to fund new and existing store construction
and remodeling costs and higher inventory requirements
associated with new stores, in addition to higher
interest costs associated with additional long-term
financing arrangements entered into during fiscal 1996,
including the issuance of the $6.0 million Fixed Base
Certificate and the $6.0 million mortgage loan with
Heller Financial, Inc. ("Heller"). (See "Liquidity and
Capital Resources").
Acquisition Related Expenses
Acquisition related expenses of $748,000 were incurred
in connection with the proposed acquisition of Harris.
Such costs, consisting primarily of investment banking,
legal and accounting fees, were recognized by the
Company in the third quarter of 1997 after the parties
were unable to agree on the terms of the transaction
and discontinued negotiations in October 1997. (See
Note 2 in the accompanying financial statements).
Income Taxes
The Company's interim effective tax credits of (41.0%)
in the first three quarters of 1997 and (37.0%) in the
first three quarters 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
($2.7) million in the first three quarters of 1997 as
compared to a net loss of ($3.6) million in the first
three quarters of 1996. On a per share basis, the net
loss was reduced by $.09 per share to a net loss of
($.26) per share in the first three quarters of 1997 as
compared to a net loss of ($.35) per share in the first
three quarters of 1996. Excluding the one-time charge
of $748,000 for expenses incurred in connection with
the previously described proposed acquisition of
Harris, the net loss was ($2.3) million, or ($.22) per
share for the first three quarters of 1997.
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, short-term
trade credit, and by 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% (8.3% at
November 1, 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%
in fiscal 1998, with a maximum possible reduction of
1/2% in fiscal 1999, 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 $76.8 million as of November 1, 1997, of
which $52.9 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 November
1, 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 November 1,
1997). At November 1, 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 November 1, 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 used in
operating activities remained unchanged at $17.6
million in the first three quarters of both 1997 and
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. The decrease in customer credit
card receivables was lower than in the prior year,
and was primarily due to lower levels of debit balances
with certain merchandise vendors than in the prior year.
The increase in merchandise inventory and trade
accounts payables as compared to the prior year also
reflects additional inventory requirements associated
with new stores. The increase in trade payables also
resulted from timing differences in the payment of
certain payables as compared to the same period of the
prior year.
Net cash used in investing activities was $10.4 million
in the first three quarters of 1997 as compared to $3.5
million in the first three quarters of 1996, an
increase of $6.9 million. Net cash used in investing
activities in the first three 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, and for enhancements to management
information systems. Such expenditures were also
partially offset by proceeds from the sale of certain
assets during those periods. The Company opened two new
stores in each of fiscal 1997 and 1996, and engaged in
a higher level of existing store remodeling projects in
1997. Cash required to open a particular new store may
vary significantly depending upon various factors,
including whether the store was fully constructed, the
age and condition of an existing store location if
assumed from another party, and the extent of
construction allowances to be received.
Net cash provided by financing activities was $27.5
million in the first three quarters of 1997 as compared
to $20.0 million in the first three quarters of 1996,
an increase of $7.5 million. Total advances under the
Company's various lines of credit, net of payments,
were higher in the first three quarters of 1997 as
compared to the first three quarters of 1996 due to
higher construction costs associated with the opening
of two new stores and additional store remodeling
projects as compared to the same period of the prior
year. Net cash provided by financing activities for
the first three quarters of 1997 also includes the
final $3.0 million proceeds received from the
previously described mortgage loan with Heller. Net
cash provided by financing activities in the first
three quarters of 1996 includes the proceeds from the
issuance of the previously described $6.0 million Fixed
Base Certificate and the initial $3.0 million proceeds
received from the Heller mortgage loan.
The Company's 1997 expansion program included the
completion and opening of one new department store in
Sonora, California in August 1997 and one new
department store in Santa Rosa, California in September
1997. The Company also completed the first phase of
the 23,000 square foot expansion and remodel of its
existing store located in the Valley Plaza Mall in
Bakersfield, California and certain other store remodel
projects. These projects were funded primarily with
cash generated by operations, proceeds from the
previously described long-term financing arrangements
entered into in late fiscal 1996 and with borrowings
under the Company's working capital facilities.
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"). The letter of
intent contemplated the purchase of all of the common
stock of Harris, a wholly-owned subsidiary of ECI,
which currently operates nine department stores located
throughout Southern California. The two parties were
unable to agree on the terms of the transaction and
terminated negotiations in October 1997. The Company
incurred non-recurring costs totaling $748,000 in
connection with the proposed acquisition, consisting
primarily of investment banking, legal and accounting
fees.
New Accounting Standards
As described more fully in Note 8 to the accompanying
financial statements, effective for periods ending
after December 31, 1997, the Company will be required
to adopt the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per
Share". The adoption of the new standard is not
expected to have a material impact on previously
reported earnings per share. The Company will also be
required to adopt SFAS No. 130, "Reporting
Comprehensive Income", and
SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", in fiscal 1998.
The application of SFAS No. 130 and 131 will not impact
the Company's financial position, results of operations
or cash flows, and any effect will be limited to the
form and content of its disclosures.
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 2. CHANGES IN SECURITIES AND RELATED
STOCKHOLDER MATTERS
There were no sales of unregistered securities by the
Company during the thirteen week period ended November
1, 1997.
The Company's credit agreement with Congress Financial
Corporation prohibits the Company from paying dividends
without prior written consent from that lender.
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 Schedule
(b) The Company did not file Current Reports
on Form 8-K during the thirteen week
period ended November 1, 1997.
<PAGE>
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)
December 16, 1997
\s\ Joseph W. Levy
(Joseph W. Levy,
Chairman and Chief
Executive Officer)
December 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 THIRD QUARTER ENDED NOVEMBER 1, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 4,204
<SECURITIES> 0
<RECEIVABLES> 15,995
<ALLOWANCES> 1,192
<INVENTORY> 134,909
<CURRENT-ASSETS> 170,836
<PP&E> 137,801
<DEPRECIATION> 44,291
<TOTAL-ASSETS> 273,205
<CURRENT-LIABILITIES> 106,188
<BONDS> 61,020
0
0
<COMMON> 105
<OTHER-SE> 77,316
<TOTAL-LIABILITY-AND-EQUITY> 273,205
<SALES> 291,969
<TOTAL-REVENUES> 301,544
<CGS> 198,310
<TOTAL-COSTS> 198,310
<OTHER-EXPENSES> 4,683
<LOSS-PROVISION> 1,812
<INTEREST-EXPENSE> 7,901
<INCOME-PRETAX> (4,613)
<INCOME-TAX> (1,892)
<INCOME-CONTINUING> (2,721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,721)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
