Gottschalks loses less as retailer cuts its costs: Sales were down in the second quarter for the Fresno-based company.

Aug 29, 2008 (The Fresno Bee - McClatchy-Tribune News Service via COMTEX) -- GOT | Quote | Chart | News | PowerRating -- Aug. 29--Gottschalks Inc. reported Thursday that it lost $4.4 million in the second quarter of 2008 -- an improvement over the same quarter last year for the Fresno-based department store chain.

That was despite the fact that second-quarter 2008 total sales were down 7.8% to $133.7 million, compared with $145 million in the second quarter of 2007.

The second-quarter loss of $4.4 million, or 33 cents per share, was slightly lower than the net loss of $4.8 million, or 35 cents per share, in the same quarter of the previous year, the company reported.

For the first six months of fiscal year 2008, net loss was $9.5 million, or 72 cents per share, compared with a net loss of $9.4 million, or 69 cents per share, for the first six months of fiscal year 2007.

Jim Famalette, Gottschalks chief executive and chairman, pointed to the reduced loss as a sign that cost-cutting and other measures lessened the effects of the economic downturn that has hurt the company's sales and pushed it to a $12.4 million loss for fiscal year 2007.

Famalette told analysts in a conference call Thursday that with about four-fifths of Gottschalks' sales coming from California, a state hit hard by the housing market bust, "we were impacted by the faltering economy before much of the country. We reacted accordingly to mitigate these headwinds."

Gottschalks' strategies include reducing inventories, cutting sales and administrative expenses, improving proprietary credit card sales "streamlining our store base" with the closure of a store in Moreno Valley and consolidation from two stores to one store in malls in Bakersfield and Palmdale, Famalette said.

Gottschalks ended the second quarter with retail inventory levels down 9.7% compared with the same quarter last year. That's important for retailers, which try to keep inventories lean to avoid reducing prices to sell overstocked goods. Gottschalks also reduced expenses by $3.9 million in the second quarter compared with the same period last year.

"Despite dramatic sales drops, they were able to control expenses and inventory," said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm in New York. "In other words, they were able to control what they could control in a very tough environment. I think that demonstrates good management."

The company saved about $2.8 million in labor, benefits and workers' compensation costs in the quarter compared with the same period last year by laying off 24 employees at its Fresno corporate headquarters, Greg Ambro, executive vice president and chief operating officer, told analysts.

Gottschalks also grew its proprietary credit card business, which saw revenues increase 75% in the second quarter compared with the same period last year, Famalette said.

That not only brings in more money, but also helps the company better track and market buying patterns and preferences of its credit card customers, he said.

In a difficult credit environment that has seen fellow department store chains Mervyns LLC and Boscov's Inc. declare bankruptcy, Gottschalks remains on time with all its payments to suppliers and companies that extend credit to buy inventory, Famalette said.

Davidowitz said continuing that will be critical to Gottschalks' continued success.

"The biggest risk to Gottschalks is the confidence of their suppliers," he said. "If the suppliers start to pull back on credit, Gottschalks doesn't have enough cash to back that up."

Famalette also said that factors, the companies that supply credit to buy inventory, play a part in less than half of Gottschalks' vendor relationships, and that its largest vendors are "nonfactor" vendors.

That's "very significant," Davidowitz said, "because a factor can be a lot tougher, and generally is a lot tougher, than a vendor."

As for store growth, Gottschalks this year abandoned plans to open two new stores in California. But it still plans to open a new store in Bend, Ore., this fall, the second in a line of smaller stores focused on high-margin, strong-selling goods, Famalette said.

The first, a 58,000-square-foot store in Elk Grove, has performed well since its November opening, Famalette has said.

"We remain conservative in our outlook" for the rest of the year, he said.

"However, we believe we are better prepared to deal with the difficult macroeconomic environment."

The reporter can be reached at jeffstjohn@fresnobee.com or (559) 441-6637.

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