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Gottschalks fine-tunes its retail strategy: Smaller stores will be located closer to targeted shoppers.(Fresno Bee (CA) (KRT) Via Thomson Dialog NewsEdge) Mar. 9--In a retail center off Highway 99 in the Sacramento suburb of Elk Grove, a new Gottschalks department store -- the first of a new breed that could be the future of the 104-year-old Fresno-based chain -- came as a pleasant surprise to Toni DeLosada. DeLosada, 34, said she avoids shopping at mall-based department stores unless she knows a big sale is going on. But the strip mall that holds the Elk Grove Gottschalks -- a 58,000-square-foot former supermarket renovated to match the interior design and decor of the company's flagship Fresno store in River Park -- is far more convenient for her. So when she heard the radio ads telling her she could get the name brands she seeks at the mall with a simple stop at the Laguna 99 Shopping Center, she made her first trip to a Gottschalks on a recent Friday afternoon. "I didn't realize they had the name brands they do," DeLosada said as she emerged from the store with two shopping bags in her hands. "For Elk Grove, this is a good location, because we're so far from the mall." That kind of customer response is music to Gottschalks' weary ears. The company has seen revenue and profit drop as the economy soured and shoppers flocked to discount stores. In 2007, the company's stock price tumbled after the company ended a 13-month "exploration of strategic alternatives" without finding a buyer. The company expects to report only a marginal profit when it announces 2007 earnings on Tuesday. Gottschalks is banking on its new smaller-store strategy, along with a host of other improvements, to turn its fortunes around. "In some ways, it's a re-engineering of the store," said Jim Famalette, Gottschalks' chief executive officer and board chairman. "Our idea is to take the best that we do" -- the cosmetics, shoes and women's apparel that will be the focus of these new stores -- "and roll it out to locations where customers can't necessarily find those products." So far, the strategy appears to be working in Elk Grove, where sales have been strong since its November opening, Famalette said. Gottschalks isn't the only retailer following this strategy. Others, like department store chain J.C. Penney and electronics retailer Circuit City, also are downsizing to adapt to declining mall traffic, as shoppers shift to more accessible strip malls anchored by discounters like Wal-Mart and Target. "You're seeing more national chains trying to grow in strip centers," said Mark Montagna, an analyst at CL King & Associates in New York who has long been bullish on the Fresno chain's strategy. "For Gottschalks, it's smart to transition to these types of stores. You get better inventory turnover, you get better rent -- it's a good move." Gottschalks' next new store, in Bend, Ore., will be built in a similar smaller-scale retail center, and will incorporate the architectural design features that distinguish the chain's River Park store, such as an airy, open design with natural lighting and an updated store decor scheme, Famalette said. Gottschalks hopes to open another three stores this year and is looking at sites in California, Nevada and Arizona, he said. As part of the company's move out of the home furnishing business last year, the new stores will concentrate on the "soft" lines like women's apparel, shoes and accessories that Famalette said were the company's greatest strengths. But Gottschalks faces several challenges, some going beyond industrywide trends. While many department stores reported poor sales for the 2007 holiday season, Gottschalks' performance so far has been among the most disappointing. As one of a handful of remaining regional chains, Gottschalks' relatively small size puts it at a disadvantage when compared to competitors like Macy's Inc. and J.C. Penney, which can use economies of scale to drive down operating costs. Gottschalks now operates 59 stores in six Western states, employs about 4,000 people -- about 400 of them at its corporate office in Fresno -- and earned $2.65 million on sales of $681 million in 2006. By contrast, Macy's -- a conglomeration of chains once run under the former Federated Department Stores Inc. and May Department Stores Co. names -- operates more than 850 department stores in 45 states, employs more than 200,000 people and earned $995 million on sales of $26.9 billion in 2006. Then there is the dismal economic outlook for the coming year, as the subprime mortgage meltdown, the growing credit crisis on Wall Street and rising inflation and unemployment sap American consumers of their spending power. With economists now predicting an economic slowdown that could lead to a recession in the first half of the year, "2008 looks likely to be the year when consumers do some belt-tightening," said James Tenser, principal partner of VSN Strategies, a retail consultancy in Tucson, Ariz. "In that environment, if you don't stand for something in the consumers' mind, it's relatively easy for them to overlook you." For Gottschalks, which Tenser called a "middle-of-the-road" retailer serving middle-income shoppers, "they're the kind of chain that, in a tight economy, might earn some points with shoppers" by locating where the nearest competitor is more likely to be a Wal-Mart -- as is the case for Gottschalks' Elk Grove store -- than another department store, he said. Famalette cited the importance of matching the company's "moderate-to-better product line" with the needs and wants of local shoppers in making the new small-store strategy work. "It becomes very incumbent on our operational people to study each of these markets individually, to make sure we're, shall we say, as close to the right market as we can be," he said. In fact, Famalette credits the strong sales performance so far of the new Elk Grove store, in part, to demographic analysis that showed a demand for petite lines, allowing the store to stock and sell more in-demand sizes. In the shopper-centric world of retail, that kind of fine-tuning will be critical to the success or failure of Gottschalks' plan, said Pete Bucklin, professor emeritus of business administration at the University of California at Berkeley's Haas School of Business. By building smaller, off-mall stores, "the advantage is that you could reach a denser market and reduce the amount of gasoline and time people have to spend to reach you," Bucklin said. But "without having a sure-fire merchandise and promotional mix, it's not obvious that you're doing anything more than putting your existing stores closer to consumers," he said. "In the long run, we just have to see whether or not this strategy is going to work." Gottschalks shareholders will be keeping a keen eye on the results. They've watched the company's stock price fall to the $2 range in recent weeks -- down from a 15-year high of more than $15 last spring on rumors of the company's impending sale to a competitor or private-equity firm. Bigger chains that compete with Gottschalks for middle-income shoppers have had some success out of malls. Kohl's, an 834-store nationwide chain, has done well combining a focus on off-mall locations with higher-end brands, said Bill Dreher, senior equity analyst at Deutsche Bank Securities in New York. "Retailers can position these free-standing stores closer to where the customers live, and put them into better neighborhoods," he said. "So it allows increased customer traffic. And while the initial setup costs are higher, they're cheaper to run, so in the long run, they allow you to have greater operating profit." The 1,067-store J.C. Penney chain also has engineered a turnaround of its fortunes with a strong focus on expanding into neighborhood shopping centers and strip malls, with off-mall stores generally smaller than the chain's mall locations, Dreher said. And then there are the discount stores to contend with, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm in New York. "You can't say Gottschalks is crazy to go off the mall," he said. "Kohl's is a great success off the mall. J.C. Penney has announced almost all their future growth is going to be off the mall. Wal-Mart, Target, Costco -- the largest American retailers are all off the mall." The problem is, the country is in a consumer-driven recession, Davidowitz said. "And Gottschalks is in the worst place, which is department stores," he said. "If you look at the results of their segment, it's terrible." In fact, department stores have underperformed all other retail sectors in sales in recent months, according to analysts. In the most recent report on February same-store sales, department stores showed uniform declines compared with the same month last year, while discounters like Target, Wal-Mart and Costco showed increasing sales. And the declining economy has the industry worried. Macy's Inc. recently announced it was closing nine stores and cutting 2,300 jobs after reporting worse-than-expected holiday sales, and Sears and Talbots also are planning store closures and job cuts. Gottschalks has closed 22 of the 34 Pacific Northwest stores it gained by buying the Lamonts chain in 2000. Since 2001, Gottschalks also has closed stores in the affluent California communities of Scotts Valley and Danville, as well as the Fig Garden neighborhood of Fresno. Gottschalks acquired the nine-store Harris Co. chain in Southern California in 1998 but left all of those open. Gottschalks also plans to close two of its larger stores -- in the 90,000-square-foot range -- during the second quarter of this year. The company has not identified the stores. Gottschalks hasn't given up on the mall format, as its 2006 acquisition of a 124,000-square-foot former Macy's store in the Valley River Center mall in Eugene, Ore., attests. The company continues to seek attractive locations, Famalette said. In the short term, closing under-performing stores and opening new ones costs money. While revenue and profits are down, Gottschalks does have access to capital in the form of a $200 million credit line with General Electric Capital Corp. that it signed in September. As of November, the company had borrowed $117.3 million, with $64.5 million still available under the five-year agreement's terms, according to documents filed with the U.S. Securities and Exchange Commission. That line of credit, set up to finance the company's 2008 expansion and improvement plans, could allow Gottschalks to avoid borrowing more money in a very tight lending environment, Montagna said. Famalette acknowledged that 2008 was shaping up to be a "challenging" year for retailers, with California, one of the states hardest-hit by the bursting housing bubble, presenting a particular challenge. "It's a very tough economy out there, whether you're in the home-building business, the restaurant business or the retail business," he said. The company is taking care to reduce costs and keep inventory levels low to manage its way through the coming year, he said. Gottschalks isn't the only one, said Elk Grove shopper Louann Daley. The 53-year-old mortgage professional said she has been out of work for a year and came to the new neighborhood Gottschalks looking for bargains. While she said she was impressed by the quality and selection at the new Gottschalks store, "I've definitely changed my shopping habits," she said -- and that means she won't be spending nearly as much in the future. The reporter can be reached at [email protected] or(559) 441-6637. To see more of The Fresno Bee, or to subscribe to the newspaper, go to http://www.fresnobee.com Copyright (c) 2008, The Fresno Bee, Calif. Distributed by McClatchy-Tribune Information Services. For reprints, email [email protected], call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA. |