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 2, 1998
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) 434-4800
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 31, 1998 was 10,479,665.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARY
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance sheets -
May 2, 1998 and January 31, 1998 2
Consolidated statements of operations -
thirteen weeks ended May 2, 1998 and
May 3, 1997 3
Condensed consolidated statements of cash
flows - thirteen weeks ended May 2, 1998
and May 3, 1997 4
Notes to condensed consolidated financial
statements - thirteen weeks ended May 2,
1998 and May 3, 1997 5 - 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9-16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I. FINANCIAL INFORMATION
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
May 2, 1998 January 31, 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,812 $ 1,601
Retained interest in receivables
sold (Note 2) 9,874 15,813
Receivables - net 4,160 6,560
Merchandise inventories 114,961 99,294
Other 10,565 11,444
Total current assets 141,372 134,712
PROPERTY AND EQUIPMENT 149,208 145,166
Less accumulated depreciation and
amortization 47,985 46,109
101,223 99,057
OTHER LONG-TERM ASSETS 8,238 8,542
$250,833 $242,311
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 24,116 $ 5,767
Cash management liability 7,700 10,141
Trade accounts payable 21,373 20,950
Accrued expenses and other liabilities 15,586 17,627
Taxes, other than income taxes 5,410 8,698
Current portion of long-term obligations 4,228 3,950
Total current liabilities 78,413 67,133
LONG-TERM OBLIGATIONS (less current portion):
Line of credit 25,000 25,000
Notes and mortgage loans payable 29,394 30,083
Capitalized lease obligations 7,380 7,337
61,774 62,420
DEFERRED INCOME 18,165 18,408
DEFERRED LEASE PAYMENTS AND OTHER 10,563 10,445
STOCKHOLDERS' EQUITY 81,918 83,905
$250,833 $242,311
See notes to condensed consolidated financial statements.
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GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
(In thousands of dollars, except share data)
Thirteen Weeks
Ended
May 2, May 3,
1998 1997
<S> <C> <C>
Net sales $95,468 $ 90,506
Net credit revenues 1,880 1,657
97,348 92,163
COSTS & EXPENSES:
Cost of sales 65,527 61,996
Selling, general & administrative
expenses 31,441 29,047
Depreciation & amortization 1,980 1,556
98,948 92,599
Operating loss (1,600) (436)
OTHER (INCOME) EXPENSE:
Interest expense 1,984 1,707
Miscellaneous income (176) (470)
1,808 1,237
LOSS BEFORE INCOME TAX BENEFIT (3,408) (1,673)
Income tax benefit (1,414) (686)
NET LOSS $ (1,994) $ (987)
Net loss per common share - basic
and diluted $ (.19) $ (.09)
Weighted average number of
common shares outstanding - 10,479 10,473
See notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
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GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - NOTE 1)
(In thousands of dollars)
Thirteen Weeks
Ended
May 2, May 3,
1998 1997
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,994) $ (987)
Adjustments:
Depreciation and amortization 1,980 1,556
Provision for credit losses 91 80
Gain on securitization and sale
of receivables (Note 2) (72) (195)
Other adjustments, net (1,540) (770)
Changes in operating assets
and liabilities:
Receivables 2,381 (1,786)
Merchandise inventories (15,510) (15,173)
Trade accounts payable 423 2,770
Other current and long-term
assets 2,432 4,088
Other current and long-term
liabilities (5,321) (7,585)
Net cash used in operating
activities (17,130) (14,430)
INVESTING ACTIVITIES:
Purchases of held-to-maturity
securities (Note 2) (49,581) (48,321)
Maturities of held-to-maturity
securities (Note 2) 55,520 59,746
Purchases of property and equipment,
net of reimbursements received (3,989) (1,287)
Proceeds from sale/leaseback
arrangements and other property
and equipment sales 458 350
Distribution from limited partnership 52 54
Net cash provided by
investing activities 2,460 10,542
FINANCING ACTIVITIES:
Net proceeds (repayments) under
revolving lines of credit 18,349 (6,186)
Proceeds from long-term obligations 3,214
Principal payments on long-term
obligations (1,027) (588)
Changes in cash management liability
and other (2,441) 7,745
Net cash provided by
financing activities 14,881 4,185
INCREASE IN CASH 211 297
CASH AT BEGINNING OF YEAR 1,601 1,496
CASH AT END OF PERIOD $ 1,812 $ 1,793
See notes to condensed consolidated financial statements.
</TABLE>
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Thirteen Weeks Ended May 2, 1998 and May 3, 1997
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. and its wholly-owned subsidiary,
Gottschalks Credit Receivables Corporation ("GCRC").
(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 2, 1998 are not necessarily
indicative of the results that may be expected for the
year ending January 30, 1999 (fiscal 1998), 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 financials statements should be read
in conjunction with the Company's Annual Report on Form
10-K for the year ended January 31, 1998 (the "1997
Annual Report on Form 10-K"). Effective the first
quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income", however the
statement had no impact on the Company's results of
operations or stockholders' equity.
The condensed consolidated balance sheet at January 31,
1998, has been derived from the audited consolidated
financial statements at that date. Certain amounts in
the accompanying financial statements for the fiscal
1997 interim period have been reclassified to conform
with fiscal 1998 presentation.
2. 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 a wholly-owned subsidiary, Gottschalks
Credit Receivables Corporation ("GCRC"), and 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. As described more fully in the Company's
1997 Annual Report on Form 10-K, the transfer of
receivables to GCC Trust are accounted for in
accordance with SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments
of Liabilities." The Company retains an ownership
interest in certain of the receivables sold under the
program, represented by Subordinated and Exchangeable
Certificates issued to GCRC by GCC Trust, and also
retains an uncertificated ownership interest in
receivables that do not meet certain eligibility
requirements of the program. The certificated retained
interest is valued in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" and is classified as held-to-maturity for
financial statement purposes. 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. Since 1994, $40.0 million
principal amount 7.35% Fixed Base Class A-1 Credit Card
Certificates and a $6.0 million principal amount 6.79%
Fixed Base Class A-1 Credit Card Certificate
(collectively the "Fixed Base Certificates") have been
issued under the program. Interest on the Fixed Base
Certificates is earned by the certificate holders on a
monthly basis and the outstanding principal balances of
such certificates are to be repaid in equal monthly
installments commencing September 15, 1998 through
September 15, 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 the Fixed Base
Certificates as of May 2, 1998 and January 31, 1998 and
the corresponding debt obligations have been excluded
from amounts reported in 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. The Company can
borrow against the Variable Base Certificate on a
revolving basis, similar to a revolving line of credit
arrangement. The transfer of receivables under the
Variable Base Certificate are also treated as sales for
financial reporting purposes. Accordingly, the retained
interest in receivables sold pertaining to the Variable
Base Certificate, totaling $2.4 million as of May 2,
1998 and $7.7 million as of January 31, 1998, and the
corresponding outstanding borrowings against the
Variable Base Certificate with Bank Hapoalim as of
those dates have been excluded from amounts reported in
the accompanying financial statements. Management also
intends to refinance the Variable Base Certificate with
a newly issued certificate upon its maturity in
September 1998.
Other Program Requirements. The Company is required,
among other things, to maintain certain portfolio
performance standards which include the maintenance of
a minimum portfolio yield, maximum levels of
delinquencies and write-offs of customer credit card
receivables and minimum levels of credit card
collection rates. The Company was in compliance with
all such requirements at May 2, 1998.
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 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 January 31,
1998. 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. Management does not currently
anticipate that its year-end LIFO adjustment will
materially effect its 1998 operating results.
4. DEBT OBLIGATIONS
Revolving Line of Credit and Working Capital Facility.
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 2.25% (8.10% at May 2, 1998), with no
interest charged on the unused portion of the line of
credit. The maximum amount available for borrowings
under the line of credit was $64.6 million as of May 2,
1998, of which $49.1 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 2, 1998.
The Company also has up to $15.0 million of additional
working capital financing available under the Variable
Base Certificate, issued to Bank Hapoalim (Note 2).
Borrowings against the Variable Base Certificate 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 facility is subject to seasonal
variations that may affect the outstanding principal
balance of such receivables. Interest on outstanding
borrowings on the facility is charged at a rate of
approximately LIBOR plus 1.0%, not to exceed a maximum
of 12.0% (6.63% at May 2, 1998). At May 2, 1998, $2.4
million was outstanding under the
facility with Bank Hapoalim, which was the maximum
amount available for borrowings as of that date.
Borrowings against the Variable Base Certificate with
Bank Hapoalim are treated as "off-balance sheet"
borrowings for financial reporting purposes and are
excluded from amounts reported in the accompanying
financial statements (see Note 2).
Long-Term Borrowings. The Company has four fifteen-year
mortgage loans with Midland Commercial Funding
("Midland") with outstanding balances totaling $19.4
million at May 2, 1998. 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 2,
1998: (i) a 10.45% mortgage loan payable with Heller
Financial, Inc. ("Heller"), due January 2002, with an
outstanding loan balance of $3.6 million; (ii) an
additional 9.97% mortgage loan payable with Heller, due
April 2004, with an outstanding loan balance of $5.1
million; (iii) two 10.0% notes payable to Federated
Department Stores, Inc. ("Federated"), due March and
July 2001, with outstanding balances totaling $1.8
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 restrictive
covenants as of May 2, 1998.
5. COMMITMENTS AND CONTINGENCIES
The Company received $3.3 million in 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.
GOTTSCHALKS INC. AND SUBSIDIARY
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. 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 May 2, 1998 Compared to Thirteen
Weeks Ended May 3, 1997
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:
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First Quarter
1998 1997
<S> <C> <C>
Net sales 100.0% 100.0%
Net credit revenues 2.0 1.8
102.0 101.8
Cost and expenses:
Cost of sales 68.6 68.5
Selling, general and
administrative
expenses 32.9 32.1
Depreciation and
amortization 2.1 1.7
103.6 102.3
Operating loss (1.6) (0.5)
Other (income) expense:
Interest expense 2.1 1.9
Miscellaneous income (0.2) (0.5)
1.9 1.4
LOSS BEFORE INCOME TAX
BENEFIT (3.5) (1.9)
Income tax benefit (1.4) (0.8)
NET LOSS (2.1)% (1.1)%
</TABLE>
Net Sales
Net sales increased by $5.0 million to $95.5 million in
the first quarter of 1998 as compared to $90.5 million
in the first quarter of 1997, an increase of 5.5%.
This increase resulted primarily from additional sales
volume generated by two new stores opened in Sonora and
Santa Rosa, California, during the third quarter of
1997, increasing the total number of Gottschalks stores
open to thirty-seven as of the end of the first quarter
of 1998 as compared to thirty-five as of the end of the
first quarter of 1997. Comparable store sales,
negatively impacted by unseasonably cold and wet
weather conditions caused by the El Nino weather
system, increased by 0.4% in the first quarter of 1998
as compared to the first quarter of 1997.
Net Credit Revenues
Net credit revenues, which includes service charges
associated with the Company's private label credit card
and certain income and expense amounts related to the
Company's receivables securitization program, increased
by approximately $200,000 to $1.9 million in the first
quarter of 1998 as compared to $1.7 million in the
first quarter of 1997, an increase of 13.5%. As a
percent of net sales, net credit revenues increased to
2.0% in the first quarter of 1998 as compared to 1.8%
in the first quarter of 1997.
Service charges increased by approximately $200,000 to
$3.2 million in the first quarter of 1998 as compared
to $3.0 million in the first quarter of 1997, an
increase of 7.7%. This increase is primarily due to an
increase in the volume of late charge fees collected on delinquent
credit card balances, partially offset by lower income
resulting from a decrease in credit sales as a percent
of total sales (43.5% in the first quarter of 1998 as
compared to 44.9% in the first quarter of 1997).
As described more fully in the Company's 1997 Annual
Report on Form 10-K, net credit revenues also include
the following amounts related to the Company's
receivables securitization program: (1) interest
expense related to securitized receivables, which
remained unchanged at approximately $900,000 in the
first quarters of 1998 and 1997; and (2) charge-offs
related to receivables sold and the provision for
credit losses related to receivables which were
ineligible for sale, which also remained unchanged at
approximately $500,000 in the first quarters of 1998
and 1997. There was no material gain or loss
recognized on the sale of receivables in the first
quarters of 1998 and 1997.
Cost of Sales
Cost of sales increased by approximately $3.5 million
to $65.5 million in the first quarter of 1998 as
compared to $62.0 million in the first quarter of 1997,
an increase of 5.7%. The Company's gross margin
percentage decreased to 31.4% in the first quarter of
1998 as compared to 31.5% in the first quarter of 1997,
primarily due to higher markdowns as a percentage of
sales taken in an attempt to improve sales of spring
and summer merchandise which were sluggish due to the
unseasonably cold and wet weather conditions caused by
the El Nino weather system. 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
decreased to 36.6% in the first quarter of 1998 as
compared to 36.9% in the first quarter of 1997.
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 1998 LIFO adjustment will not materially effect
its fiscal 1998 results of operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
by approximately $2.4 million to $31.4 million in the
first quarter of 1998 as compared to $29.0 million in
the first quarter of 1997, an increase of 8.2%. As a
percent of net sales, selling, general and
administrative expenses increased to 32.9% in the first
quarter of 1998 as compared to 32.1% in the first
quarter of 1997. These increases are primarily due to
lower than expected sales, combined with the impact of
the mandatory minimum wage increase in California (from
$5.15 to $5.75 per hour, an 11.7% increase) effective
March 1, 1998. Including the effect of certain
indirect costs related to the buying and distribution
of merchandise which are reclassified to cost of sales
for financial reporting purposes, selling, general and
administrative costs as a percent of sales increased to
38.5% in the first quarter of 1998 as compared to 37.9%
in the first quarter of 1997.
Charge-offs related to receivables sold and the
provision for credit losses related to receivables
which were ineligible for sale in the first quarters of
1998 and 1997 are reflected as reductions to net credit
revenues and are not included in selling, general and
administrative costs for financial reporting purposes.
Such amounts remained unchanged at approximately
$500,000 in the first quarters of 1998 and 1997.
Depreciation and Amortization
Depreciation and amortization expense, which includes
the amortization of new store pre-opening costs,
increased by approximately $400,000 to $2.0 million in
the first quarter of 1998 as compared to $1.6 million
in the first quarter of 1997, an increase of 27.2%. As
a percent of net sales, depreciation and amortization
expense increased to 2.1% in the first quarter of 1998
as compared to 1.7% in the first quarter of 1997. This
increase is primarily due to additional depreciation
related to capital and other expenditures for new
stores opened and capital lease obligations entered
into during the second half of fiscal 1997. Excluding
the amortization of new store pre-opening costs,
depreciation and amortization expense as a percent of
net sales increased to 1.9% in the first quarter of
1998 as compared to 1.6% in the first quarter of 1997.
Interest Expense
Interest expense, which includes the amortization of
deferred financing costs, increased by approximately
$300,000 to $2.0 million in the first quarter of 1998
as compared to $1.7 million in the first quarter of
1997, an increase of 16.2%. As a percent of net sales,
interest expense increased to 2.1% in the first quarter
of 1998 as compared to 1.9% in the first quarter of
1997. These increases are primarily due to higher
average outstanding borrowings under the Company's
lines of credit ($47.1 million in the first quarter of
1998 as compared to $34.0 million in the first quarter
of 1997) to fund inventory requirements for new and
existing stores, partially offset by a decrease in the
weighted-average interest rate applicable to
outstanding borrowings under the Company's lines of
credit (7.96% in the first quarter of 1998 as compared
to 8.10% in the first quarter of 1997). The Company
received a 1/4% reduction to the interest rate
applicable to the Congress facility starting in the
first quarter of 1998 upon achieving a specified
earning target for fiscal 1997.
Interest expense related to securitized receivables is
reflected as a reduction to net credit revenues and is
not included in interest expense for financial
reporting purposes. Such interest remained unchanged
at approximately $900,000 in the first quarters of 1998
and 1997.
Miscellaneous Income
Miscellaneous 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 first quarter of 1998 as compared to
$500,000 in the first quarter of 1997. Other income in
the first quarter of 1998 was reduced by start-up costs
of $155,000 for the Company's new KidZone program,
through which members can obtain additional merchandise
discounts and certain other benefits for purchases in
the childrens' department, partially offset by KidZone
membership revenue. Other income in the first quarter
of 1997 included a $142,000 gain on the sale of certain
assets.
Income Taxes
The Company's interim effective tax credits of (41.5%)
in the first quarter of 1998 and (41.0%) in the first
quarter of 1997 relates to net losses incurred during
those periods and represents the Company's best
estimate of the annual effective tax rates for those
fiscal years.
Net Loss
As a result of the foregoing, the Company's net loss
increased by approximately $1.0 million to a net loss
of ($1,994,000) in the first quarter of 1998 as
compared to a net loss of ($987,000) in the first
quarter of 1997. On a per share basis (basic and
diluted), the net loss increased by $.10 per share to a
net loss of ($.19) per share in the first quarter of
1998 as compared to a net loss of ($.09) per share in
the first quarter of 1997.
Liquidity and Capital Resources
Sources of Liquidity.
As described more fully in the Company's 1997 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 cash provided by operations, short-term
trade credit, and by borrowings under its
revolving line of credit and its receivables
securitization program. The Company's liquidity
position, like that of most retailers, is affected by
seasonal influences, with the greatest portion of cash
from operations generated in the fourth quarter of each
fiscal year.
Revolving Line of Credit and Working Capital Facility.
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 under the facility is charged at
a rate of approximately LIBOR plus 2.25% (8.10% at May
2, 1998), with no interest charged on the unused
portion of the line of credit. The maximum amount
available for borrowings under the line of credit with
Congress was $64.6 million as of May 2, 1998, of which
$49.1 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 2, 1998.
In addition to the Congress facility, the Company also
has up to $15.0 million of additional working capital
financing available under the Variable Base
Certificate, issued to Bank Hapoalim. The Company can
borrow against the Variable Base Certificate on a
revolving basis, similar to a line of credit
arrangement. Borrowings against the Variable Base
Certificate are limited to a percentage of the
outstanding balance of receivables underlying the
certificate, and therefore, the Company's borrowing
capacity under the facility is subject to seasonal
variations that may affect the outstanding balance of
such receivables. Interest on outstanding borrowings
on the facility is charged at a rate of approximately
LIBOR plus 1.0% (6.63% at May 2, 1998). At May 2,
1998, $2.4 million was outstanding against the Variable
Base Certificate, which was the maximum amount
available for borrowings as of that date. Such
borrowings are "off balance" sheet for financial
reporting purposes.
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. Accordingly,
the Company continually seeks to divert as large a
percentage of total borrowings as possible to its
securitization program. Since 1994, the Company has
issued $40.0 million principal amount 7.35% Fixed Base
Class A-1 Credit Card Certificates and a $6.0 million
principal amount 6.79% Fixed Base Certificate
(collectively the "Fixed Base Certificates") under the
program. Interest is earned by the certificateholders
on a monthly basis and is paid through finance charges
collected under the program. The outstanding principal
balance of the certificates are to be repaid in equal
monthly installments commencing September 1998 through
September 1999, through the application of credit card
receivable 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
and the corresponding debt obligations have been
excluded from the accompanying financial statements.
The Company also issued a Variable Base Class A-2
Credit Card Certificate ("Variable Base Certificate")
in 1994 in the principal amount of up to $15.0 million
to Bank Hapoalim. The Company can borrow against the
Variable Base Certificate on a revolving basis, similar
to a revolving line of credit arrangement. Management
also intends to refinance the Variable Base Certificate
upon its maturity in September 1998.
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
the total $6.0 million original principal amount
mortgage loan with Heller Financial, Inc. ("Heller").
Management believes the previously described sources of
liquidity are adequate to meet the Company's working
capital, capital expenditure and debt service
requirements for fiscal 1998. Management also believes
it has sufficient sources of liquidity for its long-term
growth plans at moderate levels. The Company may
engage in other financing activities if it is deemed to
be advantageous.
Additional Cash Flow Analysis.
Cash flows from operating activities consist primarily
of the net loss adjusted for certain non-cash income
and expense items, including, but not limited to,
depreciation and amortization, 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
increased by $2.7 million to ($17.1) million in the
first quarter of 1998 as compared to ($14.4) million in
the first quarter of 1997. This increase was primarily
due to an increase in inventory for new stores and from
lower than projected sales during the period, combined
with a decrease in accounts payable and accrued
expenses as compared to the same period of the prior
year, resulting from the timing of the payment of
certain routine items. Such uses of cash were
partially offset by an increase in cash provided from
the collection of customer credit card receivables as
compared to the same period of the prior year.
Net cash provided by investing activities decreased by
$8.0 million to $2.5 million in the first quarter of
1998 as compared to $10.5 million in the first quarter
of 1997. This decrease resulted from a $5.5 million
decrease in cash provided under the securitization
program ($5.9 million in the first quarter of 1998 as
compared to $11.4 million in the first quarter of
1997), related to the timing of the sale of customer
credit card accounts, combined with a $2.5 million
increase in capital expenditures for tenant
improvements, fixtures and equipment for new and
existing store locations, net of amounts received as
reimbursements for certain of those expenditures and
proceeds from sale of certain assets.
Net cash provided by financing activities increased by
$10.7 million to $14.9 million in the first quarter of
1998 as compared $4.2 million in the first quarter of
1997. This increase is primarily due to an increase in
borrowings under the Company's revolving lines of
credit in the first quarter of 1998 as compared to the
first quarter of 1997, to fund the previously described
increases in inventory and capital expenditures and the
decreases in accounts payable and accrued expenses, and
was partially offset by principal payments on various
long-term obligations and a decrease in the cash
management liability due to the timing of payments of
certain recurring payables.
The Company is in process of remodeling certain existing store
locations. As of May 2, 1998, the estimate remaining cost of such
projects is $5.6 million. Such projects are expected
to be fully complete in fiscal 1998, 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.
Year 2000 Conversion
The Company has established a task force to coordinate
the identification, evaluation and implementation of
changes to computer systems and applications necessary
to achieve a year 2000 date conversion with no
disruption to business operations. These actions are
necessary to ensure that the systems and applications
will recognize and process the year 2000 and beyond.
Major areas of potential business impact have been
identified and are being dimensioned, and initial
conversion efforts are underway. The Company is also
communicating with suppliers, dealers, financial
institutions and others with which it does business to
coordinate the year 2000 conversion. The total cost of
the conversion is currently estimated to be $350,000
and is not expected to materially affect the Company's
results of operations during the fiscal 1998-1999
conversion period. Such costs are expected to consist
primarily of external consulting fees and costs in
excess of normal software upgrades and replacements and
will be incurred throughout fiscal 1999. The year 2000
issue affects virtually all companies and
organizations.
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:
"believes", "anticipates", "expects", "intends",
"seeks", "may", "will" and "estimates".
The forward-looking statements are qualified by
important factors that could cause actual results to
differ materially from those identified in such
forward-looking statements, including, without
limitation, the following: (i) the ability of the
Company to gauge fashion trends and preferences of its
customers; (ii) the level of demand for the merchandise
offered by the Company; (iii) the ability of the
Company to locate and obtain favorable store sites,
negotiate acceptable lease terms, and hire and train
employees; (iv) the ability of management to manage the
planned expansion; (v) the continued ability to obtain
adequate credit from factors and vendors and the timely
availability of branded and other merchandise; (vi) the
effect of economic conditions, both nationally and in
the Company's specific market areas; (vii) the effect
of severe weather or natural disasters; and (viii) the
effect of competitive pressures from other retailers.
Results actually achieved thus may differ materially
from expected results in these statements as a result
of the foregoing factors or other factors affecting the
Company.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered securities by the
Company during the thirteen week period ended May 2,
1998.
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 May 2,
1998.
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, 1998
\s\ Joseph W. Levy
(Joseph W. Levy, Chairman and Chief
Executive Officer)
June 16, 1998
\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 2, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> MAY-02-1998
<CASH> 1,812
<SECURITIES> 9,874
<RECEIVABLES> 4,859
<ALLOWANCES> 699
<INVENTORY> 114,961
<CURRENT-ASSETS> 141,372
<PP&E> 149,208
<DEPRECIATION> 47,985
<TOTAL-ASSETS> 250,833
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<COMMON> 105
<OTHER-SE> 81,813
<TOTAL-LIABILITY-AND-EQUITY> 250,833
<SALES> 95,468
<TOTAL-REVENUES> 97,348
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<OTHER-EXPENSES> 1,980
<LOSS-PROVISION> 522
<INTEREST-EXPENSE> 1,984
<INCOME-PRETAX> (3,408)
<INCOME-TAX> (1,414)
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