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 October 30,1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
7 River Park Place East, Fresno,California 93720
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (559) 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 November 30, 1999 was 12,575,565.
INDEX
GOTTSCHALKS INC. AND SUBSIDIARY
Page No.
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed consolidated balance
sheets - October 30, 1999,
January 30, 1999 and
October 31, 1998 3
Consolidated statements of operations -
thirteen and thirty-nine weeks ended
October 30, 1999 and October 31, 1998 4
Condensed consolidated statements of cash flows -
thirty-nine weeks ended October 30, 1999 and
October 31, 1998 5
Notes to condensed consolidated financial
statements - thirteen and thirty-nine
weeks ended October 30, 1999 and
October 31, 1998 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 20
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
<TABLE>
PART I. FINANCIAL INFORMATION
<CAPTION>
Item I. GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (Note 1)
(In thousands of dollars)
- --------------------------------------------------------------
October 30, January 30, October 31,
1999 1999 1998
------------ ----------- ------------
(Unaudited) (Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C> <C>
Cash $ 2,462 $ 1,693 $ 2,171
Retained interest in receivables
sold 18,216 37,399 15,399
Receivables, net 5,237 18,985 17,023
Merchandise inventories 182,174 123,118 166,765
Other 8,676 13,116 14,697
------- ------- -------
Total current assets 216,765 194,311 216,055
PROPERTY AND EQUIPMENT, net 119,565 113,645 111,191
OTHER LONG-TERM ASSETS 17,559 16,688 14,059
------- ------- -------
$353,889 $324,644 $341,205
======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY CURRENT LIABILITIES:
Trade accounts payable and
other current liabilities $ 79,972 $ 73,373 $ 84,759
Revolving line of credit 28,840 20,273 32,693
Current portion of long-term
obligations 4,620 4,434 4,384
------- ------- -------
Total current liabilities 113,432 98,080 121,836
LONG-TERM OBLIGATIONS
(less current portion):
Line of credit 60,000 40,000 40,000
Notes and mortgage loans payable 25,847 27,506 28,112
Capitalized lease obligations 5,227 6,608 6,562
91,074 74,114 74,674
DEFERRED INCOME & OTHER 25,866 28,364 29,077
SUBORDINATED NOTE PAYABLE
TO AFFILIATE 20,875 20,618 20,533
STOCKHOLDERS' EQUITY 102,642 103,468 95,185
------- ------- -------
$353,889 $324,644 $341,205
======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - Note 1)
(In thousands of dollars, except share data)
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
---------------------- ----------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $127,357 $123,118 $372,996 $322,717
Net credit revenues 2,046 1,717 6,209 4,768
------- ------- ------- -------
129,403 124,835 379,205 327,485
COSTS & EXPENSES:
Cost of sales 82,726 79,930 247,410 216,987
Selling, general &
administrative expenses 40,896 39,861 119,144 103,646
Depreciation & amortization 2,408 2,071 6,992 5,753
New store pre-opening expenses 331 90 331 421
Business integration costs 564 564
------- ------- ------- -------
126,361 122,516 373,877 327,371
------- ------- ------- -------
Operating income 3,042 2,319 5,328 114
Other (income) expense:
Interest expense 2,847 2,234 7,975 6,292
Miscellaneous income (420) (519) (1,231) (1,064)
------- ------- ------- -------
2,427 1,715 6,744 5,228
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) 615 604 (1,416) (5,114)
Income tax expense (benefit) 257 259 (590) (2,113)
------- ------- ------- -------
NET INCOME (LOSS) $ 358 $ 345 $ (826) $ (3,001)
======= ======= ======= =======
Net income (loss) per common share:
Basic $ 0.03 $ 0.03 $ (0.07) $ (0.27)
Diluted $ 0.03 $ 0.03 $ (0.07) $ (0.27)
======= ======= ======= =======
Weighted average number of
common shares outstanding:
Basic 12,575 12,138 12,575 11,032
Diluted 12,644 12,158 12,575 11,032
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
GOTTSCHALKS INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - Note 1)
(In thousands of dollars)
- ----------------------------------------------------------------------
Thirty-Nine Weeks
Ended
---------------------------
October 30, October 31,
1999 1998
------------ -----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (826) $ (3,001)
Adjustments:
Depreciation and amortization 6,992 5,753
Provision for credit losses 917 640
Other adjustments, net (2,257) (2,485)
Changes in operating assets and liabilities:
Receivables, net 240 1,127
Merchandise inventories (58,399) (46,094)
Other current and long-term assets 3,016 1,192
Trade accounts payable 12,178 11,644
Other current and long-term liabilities (9,315) (548)
------- -------
Net cash used in operating
activities (47,454) (31,772)
INVESTING ACTIVITIES:
Available-for-sale securities:
Purchases (210,268) (156,847)
Maturities 220,059 161,211
Capital expenditures (13,263) (12,426)
Other 146 607
------- -------
Net cash used in investing
activities (3,326) (7,455)
FINANCING ACTIVITIES:
Proceeds from issuance of 1999-1
Series certificate 53,000
Principal payments on 1994-1 and 1996-1
Series certificates (30,900)
Net proceeds under revolving line
of credit 28,567 41,926
Principal payments on long-term obligations (3,354) (7,075)
Proceeds from long-term obligations 500
Changes in cash management liability
and other 3,736 4,946
------- -------
Net cash provided by financing
activities 51,549 39,797
------- -------
INCREASE IN CASH 769 570
CASH AT BEGINNING OF YEAR 1,693 1,601
------- -------
CASH AT END OF PERIOD $ 2,462 $ 2,171
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITY:
Consideration for acquisition of business (Note 2):
Issuance of 2,095,900 shares of common stock $ 14,273
Issuance of 8% Junior Subordinated Note 20,467
-------
$ 34,740
=======
</TABLE>
See notes to condensed consolidated financial statements.
GOTTSCHALKS INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Thirteen and Thirty-Nine Weeks Ended October 30, 1999 and October 31, 1998
- ---------------------------------------------------------------------------
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 forty-two full-line department
stores, including thirty-two "Gottschalks" and ten "Harris/Gottschalks"
department stores, and twenty specialty stores which carry a limited
selection of merchandise. The Company's department stores are located
primarily in non-major metropolitan cities throughout California and in
Oregon, Washington and Nevada, and typically offer a wide range of moderate
and better 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.
The accompanying unaudited condensed consolidated 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 October 30, 1999
are not necessarily indicative of the results that may be expected for the
year ending January 29, 2000 (fiscal 1999), 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
5). These financial statements should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended January 30, 1999
(the "1998 Annual Report on Form 10-K"). The condensed consolidated balance
sheet at January 30, 1999 has been derived from the audited consolidated
financial statements at that date.
2. BUSINESS ACQUISITION
As described more fully in the Company's 1998 Annual Report on Form 10-K,
the Company completed the acquisition of substantially all of the assets and
business of The Harris Company ("Harris") on August 20, 1998. Harris
operated nine full-line department stores located throughout southern
California. The assets acquired consisted primarily of merchandise
inventories, customer credit card receivables, fixtures and equipment and
certain intangibles. The Company also assumed certain liabilities relating
to the business, including vendor payables, store leases and certain other
contracts. The purchase price for the assets consisted of the issuance to
Harris of 2,095,900 shares of common stock of the Company and a $22.2
million principal amount 8% Subordinated Note due August 2003 (extendable to
August 2006 under certain circumstances). The acquisition was accounted for
under the purchase method of accounting and, accordingly, the results of
operations of the acquired stores are included in the Company's financial
statements from the acquisition date of August 20, 1998. The Company closed
one of the acquired stores on January 31, 1999, as planned.
3. EARNINGS PER SHARE
First
Third Quarter Three Quarters
--------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(Share data in thousands)
Weighted average number
of shares - basic 12,575 12,138 12,575 11,032
Incremental shares from
assumed issuance of
stock options
(treasury stock method) 69 20 --- ---
------ ------ ------ ------
Weighted average number
of shares - diluted 12,644 12,138 12,575 11,032
====== ====== ====== ======
Antidilutive options 380 431 910 549
====== ====== ====== ======
Options with an exercise price greater than the average market price of the
Company's common stock during the period, or outstanding in a period in
which the Company reported a net loss, are excluded from the computation of
the weighted average number of shares on a diluted basis as such options are
anti-dilutive.
4. RECEIVABLES SECURITIZATION FACILITY
As described more fully in the Company's 1998 Annual Report of Form 10-K,
the Company sells certain of its accounts receivable arising under its
private-label credit cards on an ongoing basis under a receivables
securitization facility. The facility provides the Company with a source of
working capital and long-term financing that is generally more cost-
effective than traditional debt financing. On March 1, 1999, the Company
issued a $53.0 million principal amount 7.66% Fixed Base Class A-1 Credit
Card Certificate (the "1999-1 Series"). Proceeds from the issuance of the
1999-1 Series were used to repay the outstanding balances of previously
issued certificates under the facility, totaling $26.9 million as of that
date, reduce outstanding borrowings under the Company's revolving line of
credit by $25.3 million and pay certain costs of the transaction. Interest
on the 1999-1 Series is earned by the certificate holder on a monthly basis
at a fixed interest rate of 7.66%, and the outstanding principal balance of
the certificate, which is treated as off-balance sheet for financial
reporting purposes, is to be repaid in twelve equal monthly installments
commencing September 2003 and continuing through August 2004. The Company is
required, among other things, to maintain certain portfolio performance
standards under the program. Subject to certain conditions, the Company may
expand the program to meet future receivables growth.
5. 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 30,
1999. 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
fiscal 1999 operating results.
6. TRADE ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
Trade accounts payable and other current liabilities consist of the
following:
October 30, January 30, October 31,
(In thousands of dollars) 1999 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Trade accounts payable $35,356 $23,178 $42,541
Cash management liability 15,912 12,176 15,078
Taxes, other than income taxes 7,466 11,078 7,469
Accrued expenses 7,351 10,877 8,386
Accrued payroll and related
liabilities 5,989 6,416 5,821
Federal and state income taxes
payable 3,428 5,178 1,681
Deferred income taxes 4,470 4,470 3,783
------ ------ ------
$79,972 $73,373 $84,759
====== ====== ======
</TABLE>
7.REVOLVING LINE OF CREDIT
The Company has a revolving line of credit arrangement with Congress
Financial Corporation ("Congress"), which provides the Company with a $140.0
million facility through March 30, 2001. Borrowings under the facility are
limited to a restrictive borrowing base equal to 65% of eligible merchandise
inventories, increasing to 70% from September 1 through January 31 and, at
the Company's option, to 80% for any period from November 1 through December
31 of each year, to fund increased seasonal inventory requirements. Interest
under the facility is charged at a rate of LIBOR plus 2.00% (LIBOR plus
2.25% on incremental borrowings in excess of the 70% advance rate), 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 $109.8 million
as of October 30, 1999, of which $88.8 million was outstanding as of that
date. Of that amount, $60.0 million ($40.0 million as of January 30, 1999
and October 31, 1998) 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 October 30, 1999.
8. COMMITMENTS AND CONTINGENCIES
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 is not expected to have a material
adverse effect on the Company's financial position or results of its
operations.
Capital expenditures in the first three quarters of 1999, totaling $13.3
million, were primarily related to two new department stores opened in the
second half of fiscal 1999 and in the renovation and refixturing of certain
existing locations and certain of the Company's new Harris/Gottschalks
locations. The estimated remaining cost of such projects as of October 30,
1999, totaling $2.5 million, is expected to be provided for from existing
financial resources.
9. NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as deferred by SFAS No.
137, requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company currently does not have any
derivatives and therefore does not expect that the adoption of this
standard, effective beginning fiscal year 2001, will have a material
impact 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 condition 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. This business seasonality may result in
performance for the thirteen and thirty-nine week periods ended October 30,
1999 (hereinafter referred to as the "third quarter" and "first three
quarters" of fiscal 1999, respectively) which is not necessarily indicative
of performance for the remainder of the year. In addition, the Company
completed the acquisition of nine stores from Harris on August 20, 1998,
closing one of the acquired stores on January 31, 1999, as planned. The
acquisition has affected the comparability of the Company's financial
results.
Results of Operations
- ---------------------
The following table sets forth for the periods indicated certain items from
the Company's Consolidated Statements of Operations as a percent of net
sales:
<TABLE>
<CAPTION>
First
Third Quarter Three Quarters
--------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Net credit revenues 1.6 1.4 1.7 1.5
----- ----- ----- -----
101.6 101.4 101.7 101.5
Cost and expenses:
Cost of sales 65.0 64.9 66.3 67.2
Selling, general and
administrative expenses 32.0 32.4 32.0 32.1
Depreciation and amortization 1.9 1.6 1.9 1.9
New store pre-opening expenses 0.3 0.1 0.1 0.1
Business integration costs 0.5 0.2
----- ----- ----- -----
99.2 99.5 100.3 101.5
----- ----- ----- -----
Operating income 2.4 1.9 1.4 0.0
Other (income) expense:
Interest expense 2.2 1.8 2.1 1.9
Miscellaneous income (0.3) (0.4) (0.3) (0.3)
----- ----- ----- -----
1.9 1.4 1.8 1.6
----- ----- ----- -----
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE (BENEFIT) 0.5 0.5 (0.4) (1.6)
Income tax expense (benefit) 0.2 0.2 (0.2) (0.7)
----- ----- ----- -----
NET INCOME (LOSS) 0.3% 0.3% (0.2)% (0.9)%
===== ===== ===== =====
</TABLE>
Third Quarter of Fiscal 1999 Compared to Third Quarter of Fiscal 1998
- ---------------------------------------------------------------------
Net Sales
- ---------
Net sales increased by approximately $4.2 million to $127.3 million in the
third quarter of 1999 as compared to $123.1 million in the third quarter of
1998, an increase of 3.4%. This increase is primarily due to additional
sales volume generated by the eight new Harris/Gottschalks locations which
were not open for the entire period in the prior year. On a comparable
store basis, sales increased by 4.4% in the third quarter of 1999 as
compared to the third quarter of 1998. Comparable store sales increased by
a higher percentage than total store sales due to the closure of one of the
stores acquired from Harris in January 1999, as planned.
The Company opened its forty-first and forty-second department store
locations in Danville and Davis, California at the end of the third quarter
and the beginning of the fourth quarter of 1999, respectively. No additional
new store openings are planned for the remainder of fiscal 1999. The Company
currently expects to open two new stores in the second half of fiscal 2000.
However, no assurance can be given that any new stores will be opened or
that such openings will not be delayed subject to a variety of conditions
precedent or other factors.
Net Credit Revenues
- -------------------
Net credit revenues related to the Company's credit card receivables
portfolio increased by $329,000, or 19.2%, in the third quarter of 1999 as
compared to the third quarter of 1998. As a percent of net sales, net credit
revenues was 1.6% of net sales in the third quarter of 1999 as compared to
1.4% in the third quarter of 1998. Net credit revenues consist of the
following:
<TABLE>
<CAPTION>
Third Quarter
(In thousands of dollars) 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Service charge revenues $3,728 $3,414
Interest expense on securitized receivables (1,015) (861)
Charge-offs on receivables sold and provision
for credit losses on receivables ineligible
for sale (653) (893)
Gain (loss) on sale of receivables (14) 57
----- -----
$2,046 $1,717
===== =====
</TABLE>
Service charge revenues increased by $314,000, or 9.2%, in the third quarter
of 1999 as compared to the third quarter of 1998. This increase is primarily
due to additional service charge revenues generated by customer credit card
receivables acquired from Harris, an increase in the volume of late charge
fees collected on delinquent credit card balances, and an increase in credit
sales as a percent of total sales (44.4% in the third quarter of 1999 as
compared to 43.6% in the third quarter of 1998).
Interest expense on securitized receivables increased by $154,000, or 17.9%,
in the third quarter of 1999 as compared to the third quarter of 1998. This
increase is primarily due to a higher level of outstanding securitized
borrowings, combined with a higher weighted-average interest rate applicable
to such borrowings during the period (7.7% in the third quarter of 1999 as
compared to 7.5% in the third quarter of 1998). Charge-offs on receivables
sold and the provision for credit losses on receivables ineligible for sale
decreased by $240,000, or 26.9%, in the third quarter of 1999 as compared to
the third quarter of 1998. This decrease reflects lower than expected write-
offs associated with the Company's credit card receivables portfolio.
Cost of Sales
- ---------------
Cost of sales, which includes costs associated with the buying, handling and
distribution of merchandise, increased by approximately $2.8 million to
$82.7 million in the third quarter of 1999 as compared to $79.9 million in
the third quarter of 1998, an increase of 3.5%. The Company's gross margin
percentage decreased slightly to 35.0% in the third quarter of 1999 as
compared to 35.1% in the third quarter of 1998.
Selling, General and Administrative Expenses
- ---------------------------------------------
Selling, general and administrative expenses increased by approximately $1.0
million to $40.9 million in the third quarter of 1999 as compared to $39.9
million in the third quarter of 1998, an increase of 2.6%. As a percent of
net sales, selling, general and administrative expenses decreased to 32.0%
in the third quarter of 1999 as compared to 32.4% in the third quarter of
1998. This decrease is primarily due to higher sales volume generated by the
new Harris/Gottschalks stores, combined with ongoing Company-wide cost
reduction efforts.
Depreciation and Amortization
- ------------------------------
Depreciation and amortization expense, which includes the amortization of
goodwill, increased by approximately $300,000 to $2.4 million in the third
quarter of 1999 as compared to $2.1 million in the third quarter of 1998, an
increase of 16.3%. As a percent of net sales, depreciation and amortization
expense increased to 1.9% in the third quarter of 1999 as compared to 1.6%
in the third quarter of 1998. These increases are primarily due to
additional depreciation related to assets acquired from Harris, capital
expenditures for the renovation of existing stores and an increase in the
amortization of goodwill resulting from the acquisition of the Harris
stores, which totaled $110,000 in the third quarter of 1999.
New Store Pre-Opening Costs
- ----------------------------
New store pre-opening costs of $331,000 were recognized in the third quarter
of 1999, representing costs incurred in connection with the opening of two
new stores in Danville and Davis, California.
Effective fiscal 1999, new store pre-opening costs are expensed as incurred.
Prior to fiscal 1999, certain new store pre-opening costs were amortized on
a straight line basis over the twelve month period after a new store
opening. The amortization of such costs totaled $90,000 in the third quarter
of 1998.
Business Integration Costs
- ---------------------------
Business integration costs of $564,000 were recognized in the third quarter
of 1998, consisting primarily of costs incurred prior to the closing of
certain duplicative operations of Harris, including certain merchandising,
advertising, credit and distribution functions. By the end of fiscal 1998,
all duplicative operations of Harris had been eliminated.
Interest Expense
- -----------------
Interest expense, which includes the amortization of deferred financing
costs, increased by approximately $600,000 to $2.8 million in the third
quarter of 1999 as compared to $2.2 million in the third quarter of 1998, an
increase of 27.4%. As a percent of net sales, interest expense increased to
2.2% in the third quarter of 1999 as compared to 1.8% in the third quarter
of 1998. These increases are primarily due to additional interest
associated with the Subordinated Note issued to Harris (see Note 2 to the
accompanying financial statements) and higher average outstanding
borrowings under the Company's working capital facility, primarily to
facilitate increased inventory purchases for new stores. These increases
are partially offset by a decrease in the weighted-average interest rate
applicable to outstanding borrowings under the Company's working capital
facility (7.4% in the third quarter of 1999 as compared to 7.9% in the third
quarter of 1998). The Company received a 1/4% reduction in the interest rate
on the Congress facility beginning March 1, 1999.
Interest expense related to securitized receivables is reflected as a
reduction of net credit revenues and is not included in interest expense for
financial reporting purposes.
Miscellaneous Income
- ---------------------
Miscellaneous income, which includes the amortization of deferred income and
other miscellaneous income and expense amounts, decreased by $99,000 to
$420,000 in the third quarter of 1999 as compared to $519,000 in the third
quarter of 1998. As a percent of net sales, miscellaneous income decreased
to 0.3% in the third quarter of 1999 as compared to 0.4% in the third
quarter of 1998. These decreases are primarily due to a gain on the sale of
equipment recorded in the third quarter of 1998.
Income Taxes
- -------------
The Company's interim effective tax rate of 41.7% in the third quarter of
1999 and 41.5% in the third quarter of 1998 represent the Company's best
estimates of the annual effective tax rates for those fiscal years.
Net Income
- -------------
As a result of the foregoing, the Company's net income remained essentially
unchanged at approximately $350,000 in the third quarters of 1999 and 1998.
On a per share basis (basic and diluted), net income also remained unchanged
at $0.03 per share in the third quarters of 1999 and 1998.
First Three Quarters of Fiscal 1999 Compared To First Three Quarters of
Fiscal 1998
- ----------------------------------------------------------------------------
Net Sales
- ----------
Net sales increased by approximately $50.3 million to $373.0 million in the
first three quarters of 1999 as compared to $322.7 million in the first
three quarters of 1998, an increase of 15.6%. This increase is primarily
due to additional sales volume generated by the eight new Harris/Gottschalks
locations not open for the entire period in the prior year. On a comparable
store basis, sales increased by 5.6% in the first three quarters of 1999 as
compared to the first three quarters of 1998.
Net Credit Revenues
- ---------------------
Net credit revenues related to the Company's credit card receivables
portfolio increased by approximately $1.4 million, or 30.2%, in the first
three quarters of 1999 as compared to the first three quarters of 1998. As a
percent of net sales, net credit revenues was 1.7% of net sales in the first
three quarters of 1999 as compared to 1.5% in the first three quarters of
1998. Net credit revenues consist of the following:
<TABLE>
<CAPTION>
First
Three Quarters
(In thousands of dollars) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Service charge revenues $11,319 $9,492
Interest expense on securitized receivables (3,054) (2,661)
Charge-offs on receivables sold and provision for
credit losses on receivables ineligible for sale (2,173) (2,142)
Gain on sale of receivables 117 79
------ -----
$ 6,209 $4,768
====== =====
</TABLE>
Service charge revenues increased by approximately $1.8 million, or 19.2%,
in the first three quarters of 1999 as compared to the first three quarters
of 1998. This increase is primarily due to additional service charge
revenues generated by customer credit card receivables acquired from Harris,
an increase in the volume of late charge fees collected on delinquent credit
card balances, and an increase in credit sales as a percent of total sales
(44.9% in the first three quarters of 1999 as compared to 43.4% in the first
three quarters of 1998).
Interest expense on securitized receivables increased by $393,000, or 14.8%,
in the first three quarters of 1999 as compared to the first three quarters
of 1998. This increase is primarily due to a higher level of outstanding
securitized borrowings, combined with a higher weighted-average interest
rate applicable to such borrowings during the period (7.6% in the first
three quarters of 1999 as compared to 7.4% in the first three quarters of
1998). Charge-offs on receivables sold and the provision for credit losses
on receivables ineligible for sale increased by $31,000, or 1.4%, in the
first three quarters of 1999 as compared to the first three quarters of
1998. As a percent of net sales, however, charge-offs on receivables sold
and the provision for credit losses on receivables ineligible for sale
decreased to 0.6% in the first three quarters of 1999 as compared to 0.7%
in the first three quarters of 1998. The Company has recently experienced
a decline in write-offs on its credit card receivable portfolio.
Cost of Sales
- --------------
Cost of sales, which includes costs associated with the buying, handling and
distribution of merchandise, increased by approximately $30.4 million to
$247.4 million in the first three quarters of 1999 as compared to $217.0
million in the first three quarters of 1998, an increase of 14.0%. The
Company's gross margin percentage increased to 33.7% in the first three
quarters of 1999 as compared to 32.8% in the first three quarters of 1998,
primarily due to increased sales of higher gross margin merchandise
categories, combined with lower markdowns as a percentage of sales and lower
costs associated with the processing of merchandise at the Company's
distribution center during the period.
Selling, General and Administrative Expenses
- -----------------------------------------------
Selling, general and administrative expenses increased by approximately
$15.5 million to $119.1 million in the first three quarters of 1999 as
compared to $103.6 million in the first three quarters of 1998, an increase
of 15.0%. Due primarily to the increased sales volume generated by the new
Harris/Gottschalks stores, selling, general and administrative expenses as a
percent of net sales decreased to 32.0% in the first three quarters of 1999
as compared to 32.1% in the first three quarters of 1998.
Depreciation and Amortization
- ------------------------------
Depreciation and amortization expense, which includes the amortization of
goodwill, increased by approximately $1.2 million to $7.0 million in the
first three quarters of 1999 as compared to $5.8 million in the first three
quarters of 1998, an increase of 21.5%. As a percent of net sales,
depreciation and amortization expense remained unchanged at 1.9% in the
first three quarters of 1999 and 1998. The dollar increase is due to
additional depreciation related to assets acquired from Harris, capital
expenditures for the renovation of existing stores and an increase in the
amortization of goodwill resulting from the acquisition of the Harris
stores, which totaled $320,000 in the first three quarters of 1999.
New Store Pre-Opening Costs
- ------------------------------
New store pre-opening costs of $331,000 were recognized in the first three
quarters of 1999, representing costs incurred in connection with the opening
of two new stores in Danville and Davis, California. New store pre-opening
costs of $421,000 were recognized in the first three quarters of 1998,
representing the amortization of costs associated with previous new store
openings.
Business Integration Costs
- --------------------------------
Business integration costs of $564,000 were recognized in the third quarter
of 1998, consisting primarily of costs incurred prior to the closing of
certain duplicative operations of Harris, including certain merchandising,
advertising, credit and distribution functions. By the end of fiscal 1998,
all duplicate operations of Harris had been eliminated.
Interest Expense
- --------------------
Interest expense, which includes the amortization of deferred financing
costs, increased by approximately $1.7 million to $8.0 million in the first
three quarters of 1999 as compared to $6.3 million in the first three
quarters of 1998, an increase of 26.7%. As a percent of net sales, interest
expense increased to 2.1% in the first three quarters of 1999 as compared to
1.9% in the first three quarters of 1998. These increases are primarily due
to additional interest associated with the Subordinated Note issued to
Harris. To a lesser extent, the increases are also due to higher average
outstanding borrowings under the Company's working capital facility,
primarily to fund inventory purchases for new stores, partially offset by a
decrease in the weighted-average interest rate applicable to outstanding
borrowings under the Company's working capital facility (7.2% in the first
three quarters of 1999 as compared to 7.9% in the first three quarters of
1998), in part due to a 14% reduction in the interest rate on the
facility beginning March 1, 1999.
Miscellaneous Income
- -----------------------
Miscellaneous income, which includes the amortization of deferred income and
other miscellaneous income and expense amounts, increased by $167,000 to
$1.2 million in the first three quarters of 1999 as compared to $1.1 million
in the first three quarters of 1998. As a percent of net sales,
miscellaneous income remained unchanged at 0.3% in the first three quarters
of 1999 and 1998. Miscellaneous income in the first three quarters of 1998
was reduced by start-up costs associated with a new customer loyalty
program.
Income Taxes
- -------------
The Company's interim effective tax credits of (41.7%) in the first three
quarters of 1999 and (41.5%) in the first three quarters of 1998 relate to
net losses incurred during those periods and represent the Company's best
estimates of the annual effective tax rates for those fiscal years.
Net Loss
- ----------
As a result of the foregoing, the Company's net loss decreased by
approximately $2.2 million to ($826,000) in the first three quarters of 1999
as compared to ($3.0 million) in the first three quarters of 1998. On a per
share basis (basic and diluted), the net loss decreased by $0.20 per share
to $(0.07) per share in the first three quarters of 1999 as compared to
$(0.27) per share in the first three quarters of 1998.
Liquidity and Capital Resources
- ---------------------------------
Sources of Liquidity.
As described more fully in the Company's 1998 Annual Report on Form 10-K and
Notes 4 and 7 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.
The Company has a $140.0 million revolving line of credit facility with
Congress through March 30, 2001. Borrowings under the arrangement are
limited to a restrictive borrowing base equal to 65% of eligible merchandise
inventories, increasing to 70% from September 1 through January 31 and, at
the Company's option, to 80% for any period from November 1 through December
31 of each year, to fund increased seasonal inventory requirements. Interest
under the facility is charged at a rate of approximately LIBOR plus 2.00%
(LIBOR plus 2.25% on incremental borrowings in excess of the 70% advance
rate), with no interest charged on the unused portion of the line of credit.
The Company had $21.0 million of excess availability under the credit
facility as of October 30, 1999.
Receivables Securitization Facility.
As described more fully in the Company's 1998 Annual Report on Form 10-K,
the Company sells certain of its accounts receivable arising under its
private-label credit cards on an ongoing basis under a receivables
securitization facility. The facility provides the Company with an
additional source of working capital and long-term financing that is
generally more cost-effective than traditional debt financing. On March 1,
1999, the Company issued a $53.0 million principal amount 7.66% Fixed Base
Class A-1 Credit Card Certificate (the "1999-1 Series") to a single investor
through a private placement. Proceeds from the issuance of the 1999-1 Series
were used to repay the outstanding balances of previously issued
certificates, totaling $26.9 million as of that date, reduce outstanding
borrowings under the Company's revolving line of credit by $25.3 million and
pay certain costs associated with the transaction. Interest on the 1999-1
Series is earned by the certificate holder on a monthly basis at a fixed
interest rate of 7.66%, and the outstanding principal balance of the
certificate, which is off-balance sheet for financial reporting purposes, is
to be repaid in twelve equal monthly installments commencing September 2003
and continuing through August 2004. Monthly cash flows generated by the
Company's credit card portfolio, consisting of principal and interest
collections, are first used to pay certain costs of the program, which
include interest payable to the investor, and are then available to fund the
working capital requirements of the Company. Subject to certain conditions,
the Company may expand the securitization program to meet future receivables
growth.
Uses of Liquidity.
Capital expenditures in the first three quarters of 1999, totaling $13.3
million, were primarily related to two new department stores opened in the
second half of fiscal 1999 and to the renovation and refixturing of certain
existing locations and certain of the Company's new Harris/Gottschalks
locations. Substantially all planned capital expenditure projects were
completed by the end of the third quarter of 1999. Estimated costs related
to certain of those completed projects, totaling $2.5 million, are expected
to be paid during the fourth quarter of 1999.
Management believes the previously described sources of liquidity will be
sufficient to provide for the Company's working capital, capital expenditure
and debt service requirements throughout the remainder of fiscal 1999 and
fiscal 2000. Management also believes it has sufficient sources of
liquidity for its long-term growth plans and capital improvements at
moderate levels. The Company may engage in other financing activities if it
is deemed to be advantageous.
Year 2000 Readiness
- ---------------------
The year 2000 problem is pervasive, with almost every business, large and
small, affected. The year 2000 problem impacts both information technology
("IT"), including hardware (mainframes, mid-range, client/server and desktop
computers) and software (packaged software and custom designed), and also
non-information technology ("non-IT"), including building security, climate
control and telephone systems. The problem also impacts data exchanges with
trade suppliers and other third parties. Like many other companies, the year
2000 computer issue creates risks and uncertainties for the Company. If
internal systems do not correctly recognize and process date information
beyond the year 1999, there could be a material adverse impact on the
Company's operations. To address year 2000 issues, the Company established a
task force in fiscal 1997 to coordinate the identification, evaluation and
implementation of changes to computer systems and applications necessary to
achieve a year 2000 date conversion with no disruption to business
operations. Plans and progress against plans are reviewed by the year 2000
task force and are reported to the Company's senior executive officers and
the Board of Directors on a regular basis.
The Company's State of Readiness.
As of October 30, 1999, the Company believes that all internal tasks towards
becoming year 2000 compliant with respect to its IT systems have been
completed. Based on testing to date, management believes its mainframe
operating system environment, point-of-sale systems and other computer
hardware is year 2000 compliant. Modifications to the Company's proprietary,
or custom designed software, and upgrades to certain purchased software
packages have been completed and tested, and are also believed to be year
2000 compliant. The Company's operating system contains a testing
environment specifically designed to test year 2000 compliance.
The Company has also completed the identification and evaluation of all of
its non-IT systems, which include, among other things, store alarm and
security systems, air conditioners and lighting, fire control, elevators and
escalators. The Company has already communicated with its suppliers,
dealers, financial institutions and other third parties with which it does
business to determine that the suppliers' operations and the products or
services they provide are year 2000 compliant or to monitor their progress
toward year 2000 compliance. Based on such communications, substantially all
of the Company's major suppliers are believed to already be year 2000
compliant. Some of the Company's less significant providers are not yet
year 2000 compliant and the Company is monitoring their progress on a
continual basis.
Costs Associated with Year 2000 Issues.
- ----------------------------------------
The costs incurred to date related to the IT year 2000 conversion are
approximately $540,000, which represents approximately 5.6% of the Company's
fiscal 1998-1999 IT budget. Such costs consist primarily of internal
personnel costs, external consulting fees and costs in excess of normal
hardware and software upgrades and replacements and do not include costs
related to the cost of internal software and hardware replaced in the normal
course of business. Hardware and software purchased in connection with its
year 2000 compliance efforts are capitalized in accordance with normal
policy. Personnel and all other costs related to the year 2000 project are
expensed as incurred. In some instances, the installation schedule of new
software and hardware in the normal course of business has been accelerated,
or deferred, in order to resolve year 2000 compatibility issues. Management
does not believe that the acceleration, or delay of such projects, will have
a material adverse effect on the Company's financial position or results of
operations.
Management intends to continue to test its IT hardware and software on its
operating system test environment through January 1, 2000 to ensure
continued year 2000 compliance. With the exception of payroll costs related
to certain internal IT staff that have been redeployed to conduct such
periodic testing, which is not expected to exceed $25,000, the Company does
not expect to incur any additional material costs related to the IT year
2000 conversion. The ultimate cost of the year 2000 project is based on the
Company's best estimates, which have been derived based on a number of
assumptions of future events including the success of ongoing year 2000
compliance testing and other factors, and may be subject to change as the
project progresses. Actual results may differ from original estimates. Costs
that may be associated with non-IT year 2000 issues, based on the results of
communications to date with the related suppliers, are not expected to be
material to the Company's financial position or results of operations.
Contingency Plans.
- --------------------
Management believes its efforts towards year 2000 compliance with respect to
its internal systems are complete. However, the Company will continue to
test its IT hardware and software on its operating system test environment
through January 1, 2000 to ensure continued year 2000 compliance.
Contingency plans have been specifically designed for each system in the
event a problem with an internal system is detected during the testing
period throughout the remainder of the year. Such plans include the
diversion of additional internal IT staff onto the year 2000 project, and,
if necessary, additional sources of contract programming specialists who are
familiar with the Company's operating environment.
The Company believes its most reasonably likely worst-case scenario would
relate to problems with the systems of third parties rather than with the
Company's internal systems, because the Company has less control over
assessing and remediating the year 2000 problems of third parties. Based on
communications to date with its third parties, however, management believes
its major suppliers, including those with which the Company exchanges data
electronically, are already year 2000 compliant. For less significant
suppliers, the Company's contingency plans include the identification of
alternative suppliers. The Company also believes that it has alternate
sources of suppliers for substantially all of its non-IT systems to replace
suppliers that are unable to become year 2000 compliant within an
appropriate time frame.
Based on currently available information, management does not believe that
the year 2000 matters discussed above related to internal systems will have
a material adverse impact on the Company's financial condition or its
results of operations; however, it is uncertain to what extent the Company
may be affected by such matters and no assurance can be given. In addition,
there can be no assurance that the failure to ensure year 2000 capability by
a supplier or another third party would not have a material adverse effect
on the Company.
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 that involve
risks and uncertainties. Such forward-looking statements may be identified
by words including, but not limited to: "will", "believes", "anticipates",
"intends", "seeks", "may", "expects", and "estimates", or similar terms,
variations of such terms or the negative of such terms.
The forward-looking statements are qualified by important factors that could
cause results to differ materially from those identified in such forward-
looking statements, including, without limitation, the following: (i)
fluctuations in consumer demand and confidence; (ii) fluctuations in costs
and expenses; (iii) the continued ability to purchase merchandise on normal
payment terms; (iv) the continued availability and terms of short-term and
long-term financing; (v) general economic conditions, such as rate of
employment, inflation, interest rates and the condition of capital markets,
both nationally and in the Company's specific market areas; (vi) the effect
of severe weather or natural disasters; (vii) the effect of competitive
pressures from other retailers; and (viii) the solution of year 2000 and
other systems issues by the Company and its suppliers. 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described more fully in Part II, Item 7A of the Company's 1998 Annual
Report on Form 10-K, the Company is exposed to market risks in the normal
course of business due to changes in interest rates on short-term borrowings
under its revolving line of credit. Based on current market conditions,
management does not believe there has been a material change in the
Company's exposure to interest rate risks as described in the 1998 Annual
Report.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a defendant along with other department stores (Macy's
California, Inc., Federated Department Stores, Bullocks, Inc., Nordstrom,
Inc., May Department Stores, Co., Neiman-Marcus, Inc., Saks & Co., Inc., and
Bloomingdales, Inc.) in nine separate but virtually identical lawsuits filed
in various Superior Courts of the State of California that have now been
consolidated in the Superior Court for the State of California, County of
Marin. The plaintiffs seek to represent a class of all California residents
who purchased cosmetics and fragrances for personal use from any of the
defendants during the period of May 1994 through May 1998. Plaintiffs'
consolidated complaint alleges that the Company and other department stores
agreed to charge identical prices for cosmetics and fragrances, not to
discount such prices, and to urge manufacturers to refuse to sell to
retailers who sell cosmetics and fragrances at discount prices, resulting in
artificially-inflated retail prices paid by the class in violation of
California state law. The plaintiffs seek treble damages in an unspecified
amount, attorneys' fees and prejudgment interest. Defendants, including the
Company, have answered the complaint denying the allegations. Discovery has
commenced and defendants have begun the process of producing documents and
responding to plaintiffs' discovery requests. The Company, along with the
other defendants in the case, expect to file for a Summary Judgement to
dismiss the case in early fiscal 2000. Management does not believe the
ultimate outcome of this case will have a material impact on the Company's
financial position or the results of its operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered securities by the Company during the
thirty-nine week period ended October 30, 1999.
The Company's credit agreement with Congress 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 exhibit is 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 any Current Reports on Form 8-K during the
thirteen week period ended October 30, 1999.
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 14, 1999 \s\ James R.Famalette
----------------- ------------------------------
(James R. Famalette, President
and Chief Executive Officer)
December 14, 1999 \s\ Michael S. Geele
----------------- -------------------------------
(Michael S. Geele,
Senior Vice President and
Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> OCT-30-1999
<CASH> 2,462
<SECURITIES> 18,216
<RECEIVABLES> 5,237
<ALLOWANCES> 548
<INVENTORY> 182,174
<CURRENT-ASSETS> 216,765
<PP&E> 180,824
<DEPRECIATION> 61,259
<TOTAL-ASSETS> 353,889
<CURRENT-LIABILITIES> 113,432
<BONDS> 111,949
0
0
<COMMON> 126
<OTHER-SE> 102,516
<TOTAL-LIABILITY-AND-EQUITY> 353,889
<SALES> 372,996
<TOTAL-REVENUES> 379,205
<CGS> 247,410
<TOTAL-COSTS> 247,410
<OTHER-EXPENSES> 6,992
<LOSS-PROVISION> 2,173
<INTEREST-EXPENSE> 7,975
<INCOME-PRETAX> (1,416)
<INCOME-TAX> (590)
<INCOME-CONTINUING> (826)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (826)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
