Gottschalks Reports Second Quarter Fiscal 2007 Financial Results

FRESNO, Calif., Aug. 30 /PRNewswire-FirstCall/ -- Gottschalks Inc. today reported unaudited financial results for the second quarter of fiscal 2007. Net loss for the second quarter was $4.8 million, or $0.35 per diluted share, compared to net income of $486,000 or $0.04 per diluted share, for the second quarter of fiscal 2006.

For the first six months of fiscal 2007, net loss was $9.4 million, or $0.69 per diluted share, compared to a net loss of $3.5 million or $0.26 per diluted share in the first six months of fiscal 2006.

Impacting losses per share in the first six months of fiscal 2007 versus the same period last year are the following items:

-- In the first half of fiscal 2006 there was a pre-tax benefit of $0.4 million related to the Company's recovery from the Visa/MasterCard litigation settlement and $0.9 million related to the asset sale of a corporate aircraft. -- The first half of fiscal 2007 included approximately $0.8 million in pre-tax consulting fees and other costs associated with the Special Strategic Committee Process. -- The first half of fiscal 2007 had an income tax rate of 29.3% versus 38.8% in the first half of fiscal 2006. The decrease in the interim effective tax rate is primarily due to the expiration of certain federal tax credit programs during the first half of fiscal 2006, and the subsequent restoration in the fourth quarter of 2006, of such programs for calendar years 2006 and 2007, along with expected earnings below those of last year.

The combined effect of these factors resulted in a $0.19 increase in loss per share in the first half of fiscal 2007 versus the first half of fiscal 2006.

As previously reported, same store sales decreased 4.0% for the second quarter of 2007. Total sales decreased by 5.5% to $145.0 million from $153.4 million for the second fiscal quarter last year. Year to date same store sales decreased 2.4%. Total sales for the six months ended August 4th were $286.8 million compared to $296.9 million in the same period in fiscal 2006. The Company operated three fewer stores in the second quarter of fiscal 2007 compared to the same period of the prior year.

Jim Famalette, Chairman and Chief Executive Officer of Gottschalks, stated, "We are disappointed in our results for the quarter. We experienced softer sales and gross margin for the quarter, primarily due to weakness in our home store merchandise and select apparel merchandise categories, as well as increased promotional activity to manage our inventory. However, we continue to anticipate some gradual improvement in these merchandise categories, as we move into the fourth quarter. Even in the difficult retail environment we saw solid gains in cosmetics, dresses, special sizes, children's and intimate apparel. In addition, we continued to increase our credit card sales penetration and generate increased credit revenue during the second quarter, but offsetting this gain was a significant increase in costs associated with the strategic alternatives review process."

Commenting on the Company's outlook, Mr. Famalette stated, "As we announced today in a separate release, we initiated a new Value Improvement Program (VIP) geared towards increasing sales, improving operating performance and maximizing shareholder value. We believe that through the successful execution of the VIP, the Company is better positioned to capitalize on our core efficiencies, and enter the next phase of our corporate growth. We are confident that the operational and merchandising strategies in the VIP plan when fully implemented will benefit our long-term profitability."

Supplemental Operating Data:

In accordance with accounting standards generally accepted in the United States of America (GAAP), the operating results for selected closed stores are reported in the condensed financial statements as loss from discontinued operations and are excluded from the operating results from continuing operations. The following table provides additional information on operations and reconciles the total net sales, gross margin, and selling, general and administrative expenses to reported results from continuing operations:

Thirteen Weeks Twenty-six Weeks Ended Ended August 4 July 29, August 4 July 29, 2007 2006 2007 2006 Sales Continuing operations $144,982 $152,757 $286,770 $294,921 Discontinued operations 0 639 0 1,988 Total $144,982 $153,396 $286,770 $296,909 Gross margin Continuing operations $48,655 $54,268 $95,238 $101,710 Discontinued operations 0 224 0 435 Total $48,655 $54,492 $95,238 $102,145 Selling, general and administrative expenses Continuing operations $50,564 $49,802 $99,948 $99,349 Discontinued operations 0 380 0 1,017 Total $50,564 $50,182 $99,948 $100,366 Net income (loss) Continuing operations $(4,774) $600 $(9,442) $(3,097) Discontinued operations 0 (114) 0 (378) Total ($4,774) $486 ($9,442) ($3,475) Value Improvement Plan (VIP)

The Company also announced today in a separate release its Value Improvement Program (VIP). The program includes a series of aggressive initiatives being implemented to increase sales, improve the Company's operating margin, maximize shareholder value and position Gottschalks for long-term growth.

Earnings Teleconference and Webcast

Gottschalks will host a conference call today at 1:30 p.m. Pacific Time to review its results for the second quarter fiscal 2007. To access the call, dial 800-894-5910 to listen to the call on the day of the event. The Conference ID is GOTT. If you are unable to participate in the call, a replay will be made available through September 6, 2007. To access this service, please dial 800-283-8520. No passcode is required for replay. The live conference call and replay can also be accessed via audio web cast at the Investor Relations section of the Company's web site, located at http://www.gottschalks.com/.

About Gottschalks

Gottschalks is a regional department store chain, currently operating 59 department stores and 4 specialty apparel stores in six western states, including California (38), Washington (8), Alaska (5), Oregon (4), Nevada (2) and Idaho (2). Gottschalks offers better to moderate brand-name fashion apparel, cosmetics, shoes, accessories and home merchandise. Gottschalks offers corporate information and selected merchandise on its website located at http://www.gottschalks.com/.

Business Risks and Forward Looking Statements

This release contains forward-looking statements (within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995) that involve risks and uncertainties. In some instances, such statements may be identified by the use of forward-looking terminology such as "may," "will," "expects," "believes," "intends," "projects," "forecasts," "plans," "estimates," "anticipates," "continues," "targets," or similar terms, variations of such terms or the negative of such terms. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements, including, without limitation, the Company's ability to meet debt obligations and adhere to the restrictions and covenants imposed under its various debt agreements; the timely receipt of merchandise and the Company's ability to obtain adequate trade credit from its key factors and vendors; risks arising from general economic and market conditions (including uncertainties arising from acts of terrorism or war); the ability to improve the profitability and cash flows of its stores or to sell, sublease or close underperforming stores; the ability to modify operations in order to minimize the adverse impact of rising costs, including but not limited to health care, workers' compensation, property and casualty insurance and utilities costs; the effects of seasonality and weather conditions, changing consumer trends and preferences, competition, consumer credit, the Company's dependence on its key personnel and general labor conditions, all of which are described in more detail in Gottschalks' Annual Report on Form 10-K and other reports filed by Gottschalks with the Securities and Exchange Commission. GOTTSCHALKS DOES NOT PRESENTLY INTEND TO UPDATE THESE STATEMENTS AND UNDERTAKES NO DUTY TO ANY PERSON TO EFFECT ANY SUCH UPDATE UNDER ANY CIRCUMSTANCES.

(Tables Follow) GOTTSCHALKS INC. CONDENSED STATEMENTS OF OPERATIONS (In thousands, except share data) (unaudited) Thirteen Weeks Twenty-six Weeks Ended Ended August 4 July 29, August 4 July 29, 2007 2006 2007 2006 Net sales $144,982 $152,757 $286,770 $294,921 Net credit revenues 1,122 723 2,229 1,360 Net leased department revenues 606 694 1,255 1,435 Total revenues 146,710 154,174 290,254 297,716 Costs and expenses: Cost of sales 96,327 98,489 191,532 193,211 Selling, general and administrative expenses 50,564 49,802 99,948 99,349 Gain on sale of aircraft 0 (946) 0 (946) Depreciation and amortization 3,687 3,756 7,597 7,302 New store opening costs 15 52 15 52 Total costs and expenses 150,593 151,153 299,092 298,968 Operating income (loss) (3,883) 3,021 (8,838) (1,252) Other (income) expense: Interest expense 2,525 2,414 5,110 4,650 Miscellaneous income (315) (360) (591) (794) 2,210 2,054 4,519 3,856 Income (loss) before income tax effect (6,093) 967 (13,357) (5,108) Income tax expense (benefit) (1,319) 367 (3,915) (2,011) Income (loss) from continuing operations (4,774) 600 (9,442) (3,097) Discontinued operations: Loss from operation of closed stores 0 (172) 0 (645) Net gain on store closures 0 0 0 72 Income tax benefit 0 58 0 195 Loss on discontinued operations 0 (114) 0 (378) Net income (loss) $(4,774) $486 $(9,442) $(3,475) Net income (loss) per common share - basic: Income (loss) from continuing operations $(0.35) $0.05 ($0.69) ($0.23) Loss from discontinued operations $0.00 ($0.01) ($0.00) ($0.03) Net income (loss) per common share $(0.35) $0.04 ($0.69) ($0.26) Net income (loss) per common share - diluted: Income (loss) from continuing operations $(0.35) $0.05 ($0.69) ($0.23) Loss from discontinued operations $0.00 ($0.01) ($0.00) ($0.03) Net income (loss) per common share $(0.35) $0.04 ($0.69) ($0.26) Weighted average # of common shares outstanding: Basic 13,682 13,399 13,644 13,385 Diluted 13,682 13,685 13,644 13,385 GOTTSCHALKS INC. CONDENSED BALANCE SHEETS (In thousands) (unaudited) August 4, February 3, July 29, 2007 2007 2006 ASSETS CURRENT ASSETS: Cash $6,081 $6,051 $6,494 Receivables - net 3,612 8,198 3,483 Merchandise inventories 163,169 168,702 163,402 Other 20,369 19,421 18,280 Total current assets 193,231 202,372 191,659 PROPERTY AND EQUIPMENT - net 133,127 134,696 134,791 OTHER LONG-TERM ASSETS 12,747 12,998 13,238 $339,105 $350,066 $339,688 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable and other current liabilities $78,473 $83,395 $85,219 Current portion of long-term obligations 1,514 1,676 1,985 Total current liabilities 79,987 85,071 87,204 REVOLVING LINE OF CREDIT 86,478 83,762 75,764 LONG-TERM OBLIGATIONS (less current portion) 12,817 13,592 14,492 DEFERRED INCOME TAXES & OTHER 25,263 23,869 25,868 SUBORDINATED NOTE PAYABLE TO AFFILIATE 18,180 19,180 19,180 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY 116,380 124,592 117,180 $339,105 $350,066 $339,688