Central Valley

Gottschalks teeters on edge of extinction

FRESNO – Even in the worst of times, when the economy provided little hope, the Central Valley at least had Gottschalks.

Now that's in danger, too.

Gottschalks Inc., the midpriced department store chain based in Fresno, might go out of business. A rescue plan with a Chinese merchant hasn't yet panned out. Negotiations are continuing, but Gottschalks said it could run out of money by the end of this month.

The company's demise would inflict yet another wound on this mostly working-class city. Foreclosures occur here at more than twice the national average, and unemployment is at 12.1 percent, compared with 8.4 percent statewide. Even Fresno's minor league hockey team just folded, cutting short its 41st season.

And Gottschalks is on the brink.

"Here you have a homegrown company that has spread its wings out to most of the West Coast," said Chamber of Commerce President Al Smith. "We all sit around with our fingers crossed."

Gottschalks' failure would hurt other parts of the Valley, too. The chain includes a store in Merced and two in Modesto. Yet, in some towns, it's one of the few places to buy clothing, cosmetics and housewares under one roof. Though Gottschalks is a relatively small retailer in greater Sacramento, in many communities it's simply part of the family.

"It's geared toward ordinary folks like us," said Judy Larrabee, 61, of rural Coarsegold, who was shopping recently at the Gottschalks in Fresno's River Park shopping center. "They seem to cater to the tastes of the Valley."

Said her mother, Marianne Dehmel, 86, "Everything in our closet is from Gottschalks."

In a sense, Gottschalks is a victim of its roots. Traditional department stores are getting hurt by high-end specialty retailers and bloodthirsty discounters. Smallish chains such as Gottschalks, with 62 stores and around $600 million in annual sales, are particularly fragile because they can't buy goods as cheaply as big chains like Macy's.

That cost disadvantage cripples Gottschalks, whose customers are often more price-conscious than, say, Nordstrom's. "Not having the buying power of a big company is very challenging," said George Whalin of Retail Management Consultants in San Marcos.

Throw in a recession that's brutalized California, where Gottschalks gets 80 percent of its sales, and you have trouble.

"There's just a matter of time when you get squeezed by these big retailers, and you get squeezed by the economy," said Gottschalks board member Joseph Penbera, an economist at California State University, Fresno.

Dale Chapman of Coalinga summed up the chain's woes as he shopped River Park just after Christmas: "I use Gottschalks only when they have their sales. Otherwise, there are alternatives with better value, Costco or online or catalog shopping."

Another handicap is geography. Running from Indio, near Palm Springs, to Fairbanks, Alaska, Gottschalks is located mainly in far-flung, second-tier markets.

Such a network stretches a company thin, creating enormous distribution and other operational costs.

"When you start to put stores in hard-to-get-to places, the cost of servicing those stores is just staggering," Whalin said.

Still, Gottschalks was making a go of it until the recession began. It made money in 2006.

But trouble signs existed even then. Revenue was sluggish, and the company did a lengthy study of whether it should sell out.

No deal materialized. Instead, Gottschalks said in 2007 it would focus on building smaller stores emphasizing high-margin apparel, shoes and cosmetics. The first store opened in Elk Grove.

Despite the new strategy, Gottschalks was overwhelmed by economic forces. In 2007 it reported an operating loss of $10.1 million and a 7 percent drop in revenue. Through the first nine months of 2008, operating losses grew 28 percent from a year earlier, to $18.8 million. Revenue fell 9 percent.

As the year went on, Gottschalks trimmed expenses, sold some real estate and renegotiated an IOU to postpone the maturity date.

But things worsened. In October Gottschalks was suspended by the New York Stock Exchange because its total stock value was below $25 million. It was relegated to the electronic "pink sheets" market, where it closed Monday at 22 cents a share, up a penny.