Gottschalks' last days bring 'What if?' scenarios

FRESNO — As liquidation sales kick into gear at Gottschalks stores across the Western United States, there's a question hanging in the air: What went wrong?

From humble beginnings in the basement and first floor of downtown Fresno's Forsythe Building in 1904, Emil Gottschalk's single dry-goods store grew into a respected regional chain with more than 60 stores.

What seemed like a solid legacy came apart amid what retail experts describe as a perfect storm: high business costs, changing consumer tastes, more competition, ever-tighter credit and an economy in free fall.

The result: a bankruptcy filing in mid-January, followed by going-out-of-business sales to be wrapped up by mid-July.

Experts point not at management missteps, but at the very nature of Gottschalks' business to suggest executives likely could have done little to avoid bankruptcy and liquidation.

"In Gottschalks' case, this particular business model — a moderately priced department store — is simply obsolete," said Bob Gordman, head of the Gordman Group retail consulting firm in Colorado. "It's not working for anybody."

Joe Levy, chairman emeritus of Gottschalks and grand-nephew of the founder's wife, only shakes his head at the company's fate.

"It happened so rapidly," he said. "Back in November, I never dreamed seeing it at this level, what happened just in 90 days."

Although the demise of Gottschalks might seem rapid and marked by calamitous events — the company's ignoble bouncing from the New York Stock Exchange in October, the announcement last fall and subsequent collapse of a $30 million partnership deal with a Chinese investment group, the filing of the bankruptcy petition in January — the end likely began much earlier.

Warning signs surfaced earlier this decade, even as the economy was booming.

In 2004, Gottschalks reported profits of almost $5.3 million. It dipped slightly to $5.2 million in 2005 and slipped further to $2.6 million in 2006. The bottom fell out in 2007 as the economy soured: Gottschalks reported a loss of $12.4 million.

Gordman and others said they could think of only one comparable small regional department store retailer: Boscov's, which operates 39 stores in the mid-Atlantic region.

Like Gottschalks, Boscov's is in bankruptcy. Founded in 1911, Boscov's operated about 50 stores before it sought protection in August, listing $479 million in liabilities. Its bankruptcy case is being sorted out in Delaware.

Both companies occupy a precarious niche. They are smaller and more upscale in product lines than discounters Wal-Mart, Target or Kmart.

They are smaller and not quite as high-end as Macy's or Dillard's. And they are smaller than midpriced retailers such as the 280-store Bon-Ton chain in the Northeast and Midwest or Belk stores in the South.

Nearly all department store companies are seeing sales and profits tumble. Of Gottschalks' price-point peers, Bon-Ton reported a loss of $169 million in 2008 and the 307-store Belk chain lost $213 million. But wherever they are on the price spectrum, the bigger companies have greater cash flow and better access to credit, and are better positioned to outlast the economic turmoil.

Gordman said the model that Gottschalks and other regional chains followed through the 20th century just doesn't work anymore. "Very few people have taken that model and adapted it successfully," he said. "It's had its run, but it's coming to an end."

The competition is fierce for companies like Gottschalks, said George Whalin, a 48-year vet-eran retailer and consultant with Retail Management Consultants in Carlsbad.

"What you have today in general merchandise is massive companies like Wal-Mart, Target, J.C. Penney and Kohl's, and I don't think any regional general merchandiser can compete against that," Whalin said. "Volume is against them. They can't buy in enough volume and can't market enough to leverage competitive prices."

Levy acknowledged that the heyday of regional retailers is past.

"I think the regionals served their purpose up through the 1950s and '60s," he said. "Then you had the chains come up and become much stronger in the marketplace."

Large-scale buying power and import programs put nationwide chains in the driver's seat of supply costs, Levy said.

"They also came along and did every innovative thing they could to cut expenses, so you're really fighting two things," he said. "Really three, because they could also drive much better rents in the malls."

Last-ditch efforts

A landslide of events began in October, after Gottschalks' market value fell below $25 million. That prompted the New York Stock Exchange to remove the company from the Big Board.

Within weeks, one of the company's biggest lenders, GE Capital Corp., announced it was slicing Gottschalks' operating credit by about one-third, from $18 million to $12 million, cramping the retailer's access to cash.

In an interview last week, Levy revealed for the first time how close Gottschalks came to dodging bankruptcy and liquidation in late December and early January.

In September, Gottschalks officials announced they were working on a deal with Everbright Development Overseas Ltd., a China-based company that planned to invest $30 million in the U.S. retailer. But Everbright canceled the agreement in mid-December.

"They could have done the deal, and we talked to them for close to three years, and for some reason it just never came together," Levy said. The sheer amount of money needed might have been the problem, he said.

Time was running out.

"We really didn't start thinking about bankruptcy, I don't think, until about Christmastime, maybe a week before Christmas," Levy said.

Negotiations began in earnest with El Corte Inglés, a Spanish retail giant that owns 16 percent of Gottschalks stock.

"Isidoro Álvarez, who runs the company, made a pretty darned good effort to buy us before bankruptcy and keep the place going," Levy said. Gottschalks CEO James Famalette "flew to Spain about 10 days before Christmas and struck a deal that was acceptable to everybody. It was set, they shook on it, and by the time he got back to Fresno, El Corte decided to back out."

Levy said the El Corte Inglés board was concerned about the Spanish economy and reluctant to invest what Álvarez thought was necessary to refloat the Gottschalks boat. "So in a 24-hour pe-riod, we were up and then we were down again."

"It all got very complicated," Levy said, chuckling halfheartedly as he talked about a final round of negotiations with Everbright before Gottschalks filed its bankruptcy petition.

A last-ditch hope emerged late last month when a Chinese retail conglomerate, Shandong Commercial Group, tried to put together a bid to buy Gottschalks at the March 30 bankruptcy auction.

"The Shandong group came in out of nowhere, but they just didn't have enough time," Levy said. He said Shandong needed 60 to 90 days to transfer $90 million or more out of China and to get the necessary approval to buy an American company.

'If you're not growing, you're dying'

Gottschalks opened new stores throughout the 1970s and 1980s — including two in Modesto, at Vintage Faire Mall and Century Center — but much of its growth in the past decade came through acquisitions. The company bought the nine-store Harris chain in Southern California from El Corte Inglés in 1998, and two years later it acquired 34 stores of the Lamonts chain in the Northwest.

The Harris acquisition "was a very good move," Levy said. "Those are some of our most profitable stores."

But Gottschalks ended up closing many of the former Lamonts stores within a few years.

"We could have lived without Lamonts," Levy allowed. "But in this business, if you're not growing, you're dying."

Whalin said retail companies make acquisitions for various reasons: to expand territory, to add storefronts and improve cash flow with more sales, to leverage buying power with merchandise vendors, and to profit from economies of scale that aren't possible for smaller owners.

"Smart retailers buy other retailers because they see some way it will help," Whalin said.

If Gottschalks had vigorously pursued its out-of-state expansion a decade or so earlier, Whalin surmised, it might have had the additional heft to withstand the current downturn.

"But if they don't work, that doesn't mean it was a bad decision," he added. "It's just impossible to second-guess these things."

It's cheaper to grow through acquisition than to start new stores. Gottschalks spent about $17 million for 34 Lamonts stores — about the same amount, Levy said, as Gottschalks spent to open its three newest stores in Elk Grove, Fresno and Bend, Ore.

Did Gottschalks consider closing stores as a cost-cutting survival tactic? Levy declined to discuss management decisions. But experts say that in the current economic climate, cost-cutting and store closings would have done little but forestall the inevitable.

"Those steps are like putting a Band-Aid on a tumor," consultant Gordman said. "Closing stores is a defensive move. I've never seen a successful defensive retail strategy succeed over the long term."

"Places like Penney's and Kohl's are extremely aggressive at what would have been the opening price points for Gottschalks," Gordman said. "Then you've got Macy's and Dillard's competing at the upper end of their price point, and the moderate-priced retailer has simply become irrelevant to the consumer."

Add to that equation the sheer number of retail stores in the marketplace and, experts say, something's got to give.

In a Delaware courtroom last week, as a judge approved the order sealing Gottschalks' fate, company executives and attorneys said there might be an opportunity for Shandong to buy the Gottschalks brand name and some key store locations out of bankruptcy to eventually revive the company.

But Levy said he holds out little hope for a future for the Gottschalks name.

"Today, no," he said. "If I said yes, it would be wishful thinking."

Related stories from Merced Sun-Star