Gottschalks, Inc.

7 River Park Place East
Fresno, California 37201-1501
U.S.A.
(209) 434-8000
Fax: (209) 434-4806
Web site: http://www.gotts.com

Public Company
Incorporated: 1904
Employees: 5,181
Sales: $401.04 million (fiscal 1995, ended January 1)
Stock Exchanges: New York Pacific
SICs: 5311 Department Stores

Gottschalks, Inc. is the largest California-based independent department store chain, with 35 namesake department stores and 25 Village East women’s large-size apparel specialty stores throughout California, Oregon, Washington, and Nevada. It stood in the mid-1990s as one of America’s few independent department store chains. The 90-plus-year-old company has survived the difficult retail environment of the West Coast by leaving larger markets to others and concentrating on smaller, less competitive cities and towns. This and other key strategies helped make the chain of specialty shops and full-line department stores the sales leader of virtually all the markets in which it has chosen to compete. Descendants of the founders continued to hold significant stakes in Gottschalks—as well as four board seats—into the mid-1990s.

After chalking up 20 percent average annual sales increases in the late 1980s, Gottschalks slipped into the malaise that gripped much of the retail industry in the early 1990s. Although its sales increased by almost 40 percent from 1990 to 1995, the company recorded net losses in three out of those six years. Gottschalks hoped to regain profitability in the late 1990s by “increasing same store sales, opening new stores in growing markets, and continued cost containment programs.”

Turn-of-the-Century Roots

The chain was founded in 1904 by Emil Gottschalk in Fresno, California. Over half a century passed before the company opened its first branch store in 1961. It was around this time that grand-nephew Irving Levy—whose father had helped found the company—took the helm. In an effort to win over teenage baby-boomers, Gottschalks launched Bobbie West, a chain of junior apparel stores, in the late 1960s. Village East shops, which offered large-sized women’s clothing, were launched in 1970.

Irving Levy served as president until his death in 1980 at age 86, guiding Gottschalks’ growth into a chain of six department stores and over a dozen specialty boutiques with over $80 million in annual sales. That’s when Gerald Blum, whose father was a longtime partner of Irving Levy, assumed the presidency for about two years. Blum advanced to vice-chairman and consultant in 1982, making way for Levy’s son, Joseph, to claim his birthright.

Following the lead of other independent, family-owned department store chains like Dayton, Ohio’s, Elder-Beerman Stores Corporation (in fact, Elder-Beerman CEO Max Gutmann served on Gottschalks’ board of directors in the 1990s), Gottschalks formulated a successful strategy for profitable growth in the highly competitive retail industry. The core of the plan was Gottschalks’ concentration on smaller markets in California’s central valley, markets dubbed “the other California” by company executives. Gottschalks avoided ruthlessly competitive cities like Los Angeles and San Francisco, which were dominated by national department store chains. It opted instead for overlooked towns with populations of 20,000 to 60,000 people—areas too small to support larger, traditional-sized department stores—and targeted middle-income households. This tactic kept Gottschalks’ overhead low by allowing it to build smaller (80,000 to 110,000 square foot), single-level stores with lower real estate costs and cheaper labor. More often than not, it also made Gottschalks “the only game in town,” with virtually no competition from other department stores. As one of the state’s only major retailers willing to locate in smaller cities and towns, the chain was sought out by developers and often able to demand ideal anchor locations in the new medium-sized malls and shopping centers that sprang up throughout the 1970s and 1980s.

Moreover, unlike many of its small-town competitors in the retail segment, Gottschalks was often an area’s only source of nationally-branded soft goods. In the early 1990s, brand name products generated about 80 percent of total sales, with the remainder being private label or non-branded goods. Prominent brand names included Liz Claiborne, Calvin Klein, Levi Strauss, and Sony. High-end cosmetics from Estée Lauder, Clinique, and Lancome were particularly profitable, ranking as the company’s largest-selling product group. Gottschalks’ strong customer service quotient has been compared to that of Seattle’s Nordstrom. By concentrating on California’s inland markets, Gottschalks avoided the dramatic ups and downs endemic to West Coast cities.

Although the chain was relatively small, it was not technologically backwards. In fact, Gottschalks executives often found themselves at the front of the pack in the race to install the most modern equipment. Chain Store Age Executive’s Susan Warner attributed the chain’s progressivism to its private status, writing that “There’s no doubt that as an independently held company, Gottschalks enjoys certain freedoms to experiment with more entrepreneurial concepts that often elude publicly held companies that must constantly justify actions to shareholders.”

Gottschalks was Fresno’s premier retailer to install an air conditioner, and was among the first retailers in the area to accept bank credit cards. According to a 1977 Chain Store Age Executive article, in 1976 Gottschalks became America’s first department store to totally automate sales transactions. The company installed electronic point-of-sale (POS) “wands” that read bar codes and store credit cards. This technology helped increase efficiency, reduce errors, and keep inventory and customer billing up-to-date. A 1991 profile in Barron’s magazine noted that Gottschalks’ computer information system was capable of hourly monitoring of sales and inventory, giving Gottschalks one of the industry’s highest turnover rates. Joe Levy boasted in a 1988 WWD article that, “With our computer system we can plunk a new store on the moon if we want.”

Mid-1980s IPO Foreshadows Growth

Gottschalks went public in 1986, selling about fifty percent of its equity on the New York Stock Exchange. The proceeds were used to step up the pace of new store acquisition and construction, helping to make Gottschalks California’s fastest-growing department store chain in the late 1980s. The number of Gottschalks units doubled from nine in 1985 to 18 in 1988 and annual revenues increased from $112 million to $196 million in the process. Part of this growth came via the acquisition of two small family-run department store chains in 1987 and 1988. Totaling $11 million, the purchases of the privately-held Malcolm Brock and Samuel Leask & Sons chains added five stores. The chain also refined its specialty store offerings, converting its Bobbie West juniors stores into Petites West boutiques mid-decade in order to attract smaller-sized Asian and Latin women.

This period did not conclude without problems, however. In 1988, Gottschalks decided to close its only money-losing location, ironically the flagship store in downtown Fresno. That October, a devastating earthquake caused “irreparable damage” to a Santa Cruz store, forcing its closure as well. Notwithstanding these hurdles, Gottschalks fared “much better than other companies” in the late 1980s, according to Edward Johnson of Johnson Redbook Service (New York).

Losses Mount in 1990s

Buoyed by almost a decade of successful expansion, in 1990 Joe Levy predicted that Gottschalks would add at least 20 new markets and reach $1 billion in annual sales by 1997. While sticking to its essential strategy, Gottschalks made its first foray outside its home state in 1992, when it opened stores in Washington and Oregon. The company entered the Nevada market in 1995.

But like many of its retail industry rivals, Gottschalks succumbed to internal and external pressures in the early 1990s. A 1992 investigation by the Internal Revenue Service charged that chief financial officer Robert E. Lawson and controller Jack Farnesi had falsified financial records in order to evade federal taxes in the mid-1980s. The company fired the two executives and paid a $1.5 million settlement to the IRS in July 1992. Gottschalks found itself back in court in 1994, when it settled two shareholder lawsuits for a total of $3.5 million.

These issues only exacerbated competitive and economic difficulties that put the squeeze on Gottschalks earnings in the early 1990s. In a 1994 interview with Daily News Record’s Alexandra Nelson, CEO Joe Levy cited “drought, [military] base closures, cutbacks in aerospace and electronics, and the government cutting back pensions” as fundamental causes of his company’s malaise.

Company Perspectives:

Gottschalks strives to be the home town store in each market and is dedicated to continually providing total customer satisfaction while offering a broad variety of high-quality brand-name merchandise at moderate, competitive prices.

Although Gottschalks’ sales increased from $287 million in 1990 to over $400 million in 1995, it had a cumulative net loss over those six fiscal years of $4.9 million. Gottschalks planned to employ four basic strategies in an effort to revisit the “glory days” of the 1980s. The company sought improvements in year-over-year store performance, focusing especially on two underperforming stores. Gottschalks also hoped to lessen its overhead through layoffs at administrative levels; outsourcing; contract renegotiations; and paring of some optional expenses. The company planned to increase income by upping finance and service charges on its store credit card and to enhance cash flow by curtailing capital outlays. In fact, Gottschalks suspended previously-laid plans to open three new department stores in 1996, choosing instead to apply those funds to operations.

Whether these measures would enable Gottschalks to resume consistent profitability in the waning years of the 1990s remained to be seen, but one observer voiced doubts. Writing for Financial World in 1995, analyst Ed Dravo counseled investors to sell Gottschalks stock, citing competition from category-killer Wal-Mart and middle class wage erosion.

Principal Subsidiaries

Gottschalks Credit Receivables Corp.; Gottschalks Credit Card Master Trust.

Gottschalks, Inc.

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Gottschalks, Inc.

7 River Park Place East
Fresno, California 37201-1501
U.S.A.
(209) 434-8000
Fax: (209) 434-4806
Web site: http://www.gotts.com

Public Company
Incorporated: 1904
Employees: 5,181
Sales: $401.04 million (fiscal 1995, ended January 1)
Stock Exchanges: New York Pacific
SICs: 5311 Department Stores