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GOTTSCHALKS SHEDS WEIGHT FOR ITS OWN HEALTH

By Jennifer Hopfinger

Gottschalks has plans to invigorate its flagging business, in the wake of a yearlong review that included a possible sale.

Fresno, Calif.-based Gottschalks is one of just two regional department store chains remaining in California, following consolidation that has gobbled up national and regional names alike. Gottschalks appeared to be an acquisition candidate when its board hired UBS Investment Bank last December to explore a sale. Dillard’s, JC Penney and Wal-Mart were rumored to be potential buyers.

In the end, Gottschalks decided for undisclosed reasons not to sell, opting instead to reshape itself as a smaller, soft-line specialty department store. The company plans to update the merchandise mix, with women’s apparel as the primary focus. It will seek lifestyle and mixed-used developments for a new store size of about 55,000 square feet, considerably smaller than many of its current stores, which range from 120,000 to 200,000 square feet.
The chain’s same-store sales through September fell 3.4 percent from the comparable period a year ago while total sales declined 4.8 percent. Total sales declined to $382.4 million. Weak home furnishings sales dragged down overall performance; Gottschalks says it will devote significantly less square footage to hard goods in those new stores as a result.

The retailer says it will open three stores a year through 2010, which is aggressive, given that it has opened only one unit while closing 15 over the past five years. At press time a 58,000-square-foot prototype was slated to open in November in the Sacramento suburb of Elk Grove, Calif. And Gottschalks is in negotiations to open one new store in California and another in Oregon in late 2008. Management says it has identified about 20 potential locations.

Gottschalks says it will step up closures of underperforming stores, starting with two unidentified stores whose leases are up in the second quarter. But the company also wants to strengthen its existing store base; it will start remodeling stores this coming year, it says, at the rate of three major remodelings and two minor ones annually.

Gottschalks is working with Harte-Hanks, a San Antonio–based marketing firm, on a new strategy. Harte-Hanks will develop specialized programs for individual markets, including Hispanics. Gottschalks says it expects these initiatives to help sales beginning this coming year. The company is in discussions with several firms to outsource private-label merchandise. It is also working to improve its proprietary credit card business and says it expects credit revenue next year to increase 60 percent over this year. Improvements in its information technology systems for inventory and labor management are in the works too.

The chain is gearing up for a persistent fight, that’s for sure. In August it announced a plan for long-term growth, then in September said it would buy back up to 2 million of its shares over the next year. The company has a five-year, $200 million amended loan from GE Commercial Finance Corporate Lending to help fund all these efforts.

Gottschalks can look to its only other California-based competitor, Mervyns, as a model for success. After Target sold that struggling chain to an investment consortium in 2004, Mervyns closed about 70 stores, focused on its strongest markets, improved performance and began adding new stores. But Gottschalks competes in a market dominated by national names, alongside that ever-dwindling number of smaller chains. Macy’s has acquired many of the country’s regional chains, including California’s Emporium and Bullock’s. When Macy’s bought May Department Stores Co. in 2005, it picked up the regional names May operated, including California’s Robinsons-May. The main advantage the nationals enjoy is size, which gives them leverage with manufacturers and the ability to advertise nationally.

George Whalin, president of Retail Management Consultants, in Carlsbad, Calif., is pessimistic about Gottschalks’ prospects, at least in some markets. He says he believes the company may not be able to take on the bruisers. “Regional department stores — and there aren’t many left — operate in a tough environment, competing against the likes of Kohl’s and JCPenney and Macy’s,” Whalin said. “Chains like Gottschalks don’t have the scale those companies do. I think survival in this environment is simply a matter of scale.”

There are fewer competitors in the secondary markets where Gottschalks operates, however, and there the chain could find an advantage, Whalin says. “There may be some strength in the idea of smaller stores, especially since it allows them to go into places that are not well served by major companies,” he said.

But smaller stores aside, specialty apparel might be too limiting, Whalin says. “I think it’s a mistake to try to become a specialty apparel store,” he cautioned. “The only one that does it well is Nordstrom, and I don’t think Gottschalks is going to be able to do what Nordstrom does. If you’re going to be a department store, you should be a department store.”

All department stores are facing the same primary challenge: simply providing merchandise that customers want, says Bob Gordman, president of The Gordman Group, a retail consulting firm in Breckenridge, Colo. “The most important thing Gottschalks needs to do is address merchandising,” Gordman said. “If they can become more relevant and create some excitement about their product, then they certainly have the potential to become successful.”

Others agree that Gottschalks’ new moves hold promise, though pointing out that time is always the wild card. “I think the company’s plan is going to work, but it’s going to take longer than one year,” said Mark Montagna, an analyst at CL King & Associates, Albany, N.Y. “This isn’t a case of a specialty retailer that had one bad season. The company is very mature, and the store base is old. It’s going to be hard to bring in new customers and expand its share of the customer’s wallet. Expansion is the growth opportunity. This could take a few years.”