Level 3: Unobservable inputs that are supported by little or no market data such as a company's
own assumptions or estimates. Fair value may be determined using pricing models, discounted cash flow methodologies, or similar techniques.
The Company currently has nonfinancial assets that utilize Level 3 inputs for which the provisions of SFAS 157 have been deferred in accordance
with FSP 157-2.
The following table provides the fair value hierarchy for financial assets measured at fair value on a recurring basis:
The Company currently has an interest rate swap contract outstanding to effectively convert a portion of its variable-rate
debt to fixed-rate debt. This contract entails the exchange of fixed-rate and floating-rate interest payments periodically over the agreement life.
The following table indicates the notional amount as of May 3, 2008 and the range of interest rates paid and received by the Company during the
first quarter of fiscal 2008:
In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," "SFAS 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," the Company recognizes all derivatives on the balance sheet at fair value. Although the swap essentially provides for
matched terms to its underlying obligation, and effectively mitigates its variability, it currently does not qualify for hedge accounting under SFAS
133 and therefore, the changes in fair value of the swap are recorded in the Statement of Operations.
On a quarterly basis, the Company uses the income approach to measure the fair value of the interest rate swap by
assessing the swap's net present value of future cash flows expected to be yielded over the remainder of the swap agreement based on the
forward LIBOR curve for 3-month LIBOR contracts, as derived from the Eurodollar futures market.
The $25 million interest rate swap will expire February 2, 2009. The net income or expense from the exchange of
interest rate payments is included in interest expense. The fair value of the interest rate swap agreement at May 3, 2008 was estimated to be a
liability of $427,000, which is recorded in Other Current Liabilities. Changes in the fair value of derivatives not designated as qualifying cash flow
hedges are reported in interest expense. Accordingly, interest expense for the thirteen weeks ended May 3, 2008 includes a favorable fair value
adjustment of $99,000 related to the interest rate swap.
8. INCOME TAXES
In June 2006, the Financial Accounting Standards Board (FASB) issued Financial Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes," (FIN 48). This interpretation, which the Company adopted on February 4, 2007, clarifies
the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." The interpretation prescribes a "more likely than not" recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The adoption of FIN 48 resulted in an immaterial change in retained earnings, after the application of a valuation allowance.
10
The Company has an unrecognized tax benefit of approximately $1.2 million, exclusive of interest, reported in the
Condensed Balance Sheets in Deferred Income Taxes and Other Liabilities at May 3, 2008. At February 2, 2008 and May 5, 2007, the
unrecognized tax benefit was approximately $1.2 million and $2.2 million, exclusive of interest, respectively. Of this amount, the amount that
would impact the Company's effective tax rate, if recognized, is $0.1 million at May 3, 2008 and February 2, 2008, and $0.2 million at May 5, 2007.
The Company estimates that its unrecognized tax benefit will decrease approximately $0.5 million within the next twelve months as federal and
state statutes expire.
The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of
income tax expense. Total accrued interest included in the FIN 48 liability was $0.2 million at May 3, 2008 and February 2, 2008 and $0.3 million
at May 5, 2007. No penalties were accrued at May 3, 2008, February 2, 2008, or May 5, 2007.
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company is no
longer subject to U.S. federal tax examinations for years before fiscal 2004, and for the various state jurisdictions for years before fiscal 2003,
although the Company believes any potential assessment would not have a material impact on the Company's financial position or results of
operations.
9. SHARE REPURCHASE PROGRAM
The Company's Board of Directors announced its share repurchase program in September 2007, which allows
for the repurchase of up to 2 million shares over 12 months subject to certain pricing conditions. During fiscal 2007, the Company repurchased
417,800 shares for $1,487,000, at an average cost of $3.56 per share including commissions. Such shares are reflected as treasury stock in the
Stockholder's Equity section of the Condensed Balance Sheets. Purchases may be made at management's discretion in the open market and in
privately negotiated transactions as market and business conditions warrant. There were no share repurchases in the first quarter of fiscal 2008.
10. WEIGHTED AVERAGE NUMBER OF SHARES
Net loss per common share is computed by dividing net
loss by the weighted average number of common shares outstanding during the period. Stock options represent potential common shares and are
included in computing diluted earnings per share when the effect is dilutive and the Company reports net income. A reconciliation of the weighted
average shares used in the basic and diluted earnings per share calculation is as follows:
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
|
May 3,
|
|
|
May 5,
|
|
|
|
|
2008
|
|
|
2007
|
|
Basic calculation
|
|
|
13,282,622
|
|
|
13,605,693
|
|
Effect of dilutive shares - options
|
|
|
-
|
|
|
-
|
|
Diluted calculation
|
|
|
13,282,622
|
|
|
13,605,693
|
11
Options with an exercise price greater than the average market price of the Company's common stock during the period, or
outstanding in a period in which the Company reports a net loss, are excluded from the computation of the weighted average number of shares on
a diluted basis, as such options are antidilutive. The following shares were antidilutive and, therefore, not included in the computation of diluted
earnings per share for the periods indicated:
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
|
May 3,
|
|
|
May 5,
|
|
|
|
|
2008
|
|
|
2007
|
|
Antidilutive shares - options
|
|
|
1,024,860
|
|
|
1,118,491
|
Certain of the antidilutive shares noted above were excluded from the computation of dilutive shares solely due to the
Company's net loss position in the thirteen weeks ended May 3, 2008 and May 5, 2007. The following table shows the approximate effect of
dilutive shares had the Company reported a profit for these periods:
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
|
May 3,
|
|
|
May 5,
|
|
|
|
|
2008
|
|
|
2007
|
|
Effect of dilutive shares - options
|
|
|
32,965
|
|
|
424,101
|
11. COMMITMENTS AND CONTINGENCIES
The Company is party to legal proceedings and claims which arise during the ordinary course of business. In the opinion of
management, the ultimate outcome of such litigation and claims are not expected to have a material adverse effect on the Company's financial
position or results of its operations.
In the fourth quarter of fiscal 2007, the Company signed a ground lease for a new store in Bend, Oregon. The Company
plans to construct a 55,000 square foot store at a cost of $6.8 million, including fixtures. The Company will own the building and anticipates that it
will open in late fall 2008.
As of May 3, 2008, the Company had issued a total of $1.5 million of standby letters of credit and documentary letters of
credit totaling $0.6 million. Management believes that the likelihood of any draws under the standby letters of credit is remote. Documentary
letters of credit are issued in the ordinary course of business to facilitate the purchase of merchandise from overseas suppliers. The suppliers
draw against the documentary letters of credit upon delivery of the merchandise to the Company's customs broker at a United States port.
12. RECENT ACCOUNTING PRONOUNCEMENTS
On February 3, 2008, the Company adopted FASB Statement No. 157, "Fair Value Measurements," (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 does
not require any new fair value measurements; instead, it applies to other accounting pronouncements that require or permit fair value
measurements. The effect of adoption of SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis did not have a
material impact on the Company's financial position, results of operations and cash flows. See Note 7 for further discussion of the Company's
adoption of SFAS 157.
In February 2008, the FASB issued Staff Position 157-2, "Effective Date of SFAS No. 157," (FSP 157-2). FSP
157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually). FSP 157-2 defers the effective date for items within its scope to fiscal
years beginning after November 15, 2008. The Company
12
has adopted the deferral of SFAS 157 with respect to its nonfinancial assets and
nonfinancial liabilities that fall within the scope of FSP 157-2.
On February 3, 2008, the Company adopted FASB Statement No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities," (SFAS 159). This statement permits entities to choose to measure many financial instruments and certain other
items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to reduce fluctuation in reported
earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Most of the
provisions of SFAS 159 apply only to entities that elect the fair value option. However, the amendment to FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," applies to all entities with available-for-sale and trading securities.
The Company did not elect the fair value option under SFAS 159 for any of its financial assets or liabilities upon adoption. The adoption of SFAS
159 did not have an impact on the Company's financial position, results of operations or cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging
Activities," (SFAS 161). This statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items
affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for the Company on February 1, 2009. The
Company is currently evaluating the impact, if any, of SFAS 161 on its financial position, results of operations and cash flows.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of significant factors which have affected the Company's financial
position and its results of operations for the periods presented in the accompanying condensed financial statements. The Company's operating
results, like those of most retailers, are subject to seasonal influences, with the major portion of sales, gross margin and operating results realized
during the fourth quarter of each fiscal year. Accordingly, performance for the thirteen week period ended May 3, 2008 (hereinafter referred to as
the "first quarter" of fiscal 2008), is not necessarily indicative of performance for the remainder of fiscal 2008.
Critical Accounting Policies
The Company's financial statements are based on the application of critical accounting policies, many of which require
management to make significant estimates and assumptions. Some of these critical accounting policies involve a higher degree of judgment or
complexity than its other accounting policies. The Company evaluates its estimates on an ongoing basis, including those related to its revenue
recognition policy, the carrying value of its merchandise inventories, and the valuation of its long-lived assets, including goodwill, and its deferred
tax assets. The impact and associated risks related to these policies on the Company's business operations are described more fully in the
Company's 2007 Annual Report on Form 10-K. The Company believes there have been no changes to the critical accounting policies described
therein.
13
Results of Operations
The following table sets forth the Company's Statements of Operations as a percent of net sales:
|
|
|
|
Thirteen Weeks Ended
|
|
|
|
|
|
May 3,
|
|
|
May 5,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Net credit revenues
|
|
|
1.4
|
|
|
0.8
|
|
|
Net leased department revenues
|
|
|
0.4
|
|
|
0.4
|
|
|
Total revenues
|
|
|
101.8
|
|
|
101.2
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
66.9
|
|
|
67.1
|
|
|
Selling, general and administrative expenses
|
|
|
37.0
|
|
|
34.8
|
|
|
Depreciation and amortization
|
|
|
3.1
|
|
|
2.8
|
|
|
Gain on disposal of assets
|
|
|
-
|
|
|
(0.1)
|
|
|
New store opening costs
|
|
|
0.1
|
|
|
-
|
|
|
Total costs and expenses
|
|
|
107.1
|
|
|
104.6
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5.3)
|
|
|
(3.4)
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1.6
|
|
|
1.8
|
|
|
Miscellaneous income
|
|
|
-
|
|
|
(0.1)
|
|
|
|
|
|
1.6
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(6.9)
|
|
|
(5.1)
|
|
|
Income tax benefit
|
|
|
(2.8)
|
|
|
(1.8)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4.1)
|
%
|
|
(3.3)
|
%
|
First Quarter of Fiscal 2008 Compared to First Quarter of Fiscal 2007
Net Sales
Net sales from continuing operations decreased by approximately $16.7 million to $125.1 million in the first quarter of fiscal
2008 as compared to $141.8 million in the first quarter of fiscal 2007, a decrease of 11.7%. Comparable store sales for the first quarter of fiscal
2008, which includes sales for stores open for the full period in both years, decreased by 10.3% as compared to the first quarter of fiscal 2007.
The first quarter of fiscal 2008 sales decrease is primarily attributable to the weak economic environment driven by the mortgage banking crisis
and the rising costs of gasoline and food, with the greatest impact in the Company's California locations, which produce 80% of sales volume.
The best performing merchandise categories of the first quarter of fiscal 2008, as compared to the comparable thirteen
week quarter of fiscal 2007, were women's activewear which grew by 10.7%, children's shoes which grew by 20.1%, women's better denim and
casual collections, which was up 2.2%, and basic housewares and cookware, which were up 1.7%. Merchandise categories with weak
performances were junior beach and denim categories, down a combined 27.0%, the men's clothing business, down 25.5%, and bedding and
sheets, down 29.0%.
The Company operated 59 department stores and 3 specialty stores as of the end of the first quarter of fiscal 2008, as
compared to 59 department stores and 4 specialty stores as of the end of the first quarter of fiscal 2007.
14
Net Credit Revenues
Net credit revenues related to the Company's proprietary credit cards increased approximately $0.7 million in the
first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007. As a percent of net sales, net credit revenues was 1.4% in the first
quarter of fiscal 2008 and 0.8% in the first quarter of fiscal 2007. This increase is attributable to the new Credit Card Program Agreement with
HSBC, which was effective February 3, 2007, which provides for an increase in the percentage of net sales revenue in the second through sixth
year of the agreement. Credit revenue is 250 basis points of net credit sales in fiscal 2008 compared to 136 basis points in fiscal 2007.
Net Leased Department Revenues
Net rental income generated by the Company's various leased departments in the first quarter of fiscal 2008 was $0.1
million lower than the first quarter of fiscal 2007.
Leased department sales are presented net of the related costs for financial reporting purposes. Sales generated in the
Company's leased departments in the first quarter of fiscal 2008 consisted primarily of sales in the fine jewelry departments and the beauty salons.
These leased department sales were $3.9 million in the first quarter of fiscal 2008 and $4.7 million in the first quarter of fiscal 2007.
Cost of Sales
Cost of sales, which includes costs associated with the buying, handling and distribution of merchandise, decreased by
approximately $11.5 million to $83.7 million in the first quarter of fiscal 2008 as compared to $95.2 million in the first quarter of fiscal 2007, a
decrease of 12.1%. The decrease is primarily attributable to the reduction in sales volume. The Company's gross margin percentage was 33.1%
in the first quarter of fiscal 2008 and 32.9% in the first quarter of fiscal 2007. The gross margin rate was slightly higher than the first quarter of
fiscal 2007 since various merchandise expense accounts had favorable variances, which more than offset a higher net markdown rate owing to the
current difficult economic environment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by approximately $2.9 million to $46.3 million in the first quarter of
fiscal 2008 as compared to $49.2 million in the first quarter of fiscal 2007, a decrease of 6.0%. The decrease is primarily attributable to expense
reduction initiatives the Company has implemented to offset the sales and gross margin decline in the weak economy. Store payroll expense is
approximately $1.6 million lower than the comparable period in fiscal 2007 owing to staffing adjustments in accordance with lower sales volume.
Associate fringe benefits have decreased by approximately $1.1 million primarily due to the reduced payroll base, lower unemployment tax rates
compared to last year, and a favorable adjustment to the workers' compensation reserve. The Company has also achieved reductions in
advertising expense by focusing on more productive spending, supply amounts have been closely monitored and are down 13.2%, an electricity
reduction campaign has led to a 6.2% decrease, and professional fees are down 39.1% due to the conclusion in the third quarter 2007 of the
strategic review process. Also, debit card pin pads were implemented in all stores in the first quarter of fiscal 2008, which has decreased bank
card fees compared to last year.
As a percent of net sales, selling, general and administrative expenses increased in the first quarter of fiscal 2008 by 2.2%
to 37.0% as compared to 34.8% for the first quarter of fiscal 2007. This increase is primarily attributable to reduced sales.
Subsequent to quarter end, the Company completed a reduction in force at its corporate headquarters, which will generate
approximately $1.0 million in annual cost savings.
Depreciation and Amortization
Depreciation and amortization expense, which includes the amortization of intangible assets other than goodwill, was $4.0
million in the first quarter of fiscal 2008 and $3.9 million in the first quarter of fiscal 2007. The small change from last year is the result of fiscal
2007 capital additions related to the Company's new store in Elk Grove, California and major remodel projects at certain existing stores, offset by
fully depreciated assets. As a percent of
15
net sales, depreciation and amortization expense increased to 3.1% in the first quarter of fiscal 2008, as
compared to 2.8% in the first quarter of fiscal 2007.
The Company's goodwill is associated with its Southern/Central California stores which have historically had strong
operating results. With the difficult present economic conditions, the Company will continue to monitor the performance of this reporting unit for
potential goodwill impairment.
Interest Expense
Interest expense, which includes the amortization of deferred financing costs, decreased by approximately $0.5 million to
$2.1 million in the first quarter of fiscal 2008 as compared to $2.6 million in the first quarter of fiscal 2007, a decrease of 20.4%. As a percent of
net sales, interest expense decreased to 1.6% in the first quarter of fiscal 2008 as compared to 1.8% in the first quarter of fiscal 2007. These
decreases are primarily due to continued decreases in interest rates charged on the Company's variable rate debt and a favorable fair value
adjustment of $0.1 million on the Company's $25 million notional amount interest rate swap, compared to an unfavorable fair value adjustment of
$0.1 million in the first quarter of fiscal 2007. The weighted average interest rate applicable to the revolving credit facility was 4.5% in the first
quarter of fiscal 2008 (4.2% at May 3, 2008), as compared to 7.2% in the first quarter of fiscal 2007.
Income Taxes
The Company's interim effective tax rates of 40.6% in the first quarter of fiscal 2008 and 35.7% in the first quarter of fiscal
2007 relate to the net loss reported in those periods. The final effective tax rate was 39.1% for fiscal 2007. The increase in the interim effective tax
rate in the first quarter of fiscal 2008, compared to the first quarter of fiscal 2007, is primarily due to the impact of certain federal tax credits in fiscal
2007.
The Company did not adjust its valuation allowance against anticipated future utilization of certain state tax credits in the
first quarter of fiscal 2008. The Company estimates its utilization of these credits based on projected 10-year operating results. The Company will
determine the need for an adjustment to its valuation allowance against these credits after its fiscal 2009 and long-term planning process, which
will take place in late fiscal 2008.
Net Loss
As a result of the foregoing, the Company reported a net loss of approximately $5.1 million in the first quarter of fiscal
2008, as compared to a net loss of $4.7 million in the first quarter of fiscal 2007. On a per share basis, the net loss was $0.38 per share (basic and
diluted) in the first quarter of fiscal 2008 as compared to a net loss of $0.34 per share (basic and diluted) in the first quarter of fiscal 2007.
Liquidity and Capital Resources
As described more fully in the Company's 2007 Annual Report on Form 10-K and Note 6 to the accompanying financial
statements, the Company's working capital requirements are currently met through a combination of cash provided by operations, borrowings
under its senior revolving credit facility, and by short-term trade and factor credit. The Company's liquidity position, like that of most retailers, is
affected by seasonal influences, with the greatest portion of cash from operations generated in the fourth quarter of each fiscal year.
The Company's use of cash in operations during the first quarter of fiscal 2008 is primarily the result of the build-up of
spring and summer inventory. The increase in net cash used in operations for the first quarter of fiscal 2008, as compared to the first quarter of
fiscal 2007, is primarily due to a higher build-up of inventories, a larger net loss and the deferral of the tax asset related to the loss.
The increase in net cash used in investing activities is the result of more capital spending in the first quarter of fiscal 2008
compared to the first quarter of fiscal 2007, which was also offset by cash from the sale and closure of one of the Company's stores in the Alaska
market. Capital spending during the first quarter of fiscal 2008 primarily relates to the new store construction in Bend, Oregon, the merger and
renovation of dual stores in the East Hills Mall in Bakersfield, California and upgrades to the Company's information systems. Capital spending during the first
16
quarter of fiscal 2007 primarily related to renovations of the Clovis, California store and upgrades to the Company's point of sale
systems.
Net cash provided by financing activities during the first quarter of fiscal 2008 and the first quarter of fiscal 2007 primarily
relates to increased borrowing on the Company's revolving credit facility to fund the acquisition of inventory and for capital expenditures, partially
offset by ongoing payment of principal on long-term obligations.
Sources of Liquidity
Senior Secured Credit Facility
The Company signed a second Amended and Restated Credit Agreement with General Electric Capital Corporation to
refinance its existing credit facility on September 26, 2007. The new credit facility consists of a $200 million senior secured revolving credit facility
(including a $20 million letter of credit sub-facility). Borrowings under the revolving credit facility are limited to the sum of (a) a specified
percentage of eligible credit card receivables, (b) a specified percentage of the net recovery value of eligible inventory, as determined by periodic
valuation performed by an independent appraiser, and (c) 65% of the fair market value of the Company's real estate. Such borrowings are further
limited by a requirement to maintain a minimum of $15 million of excess availability at all times, and other reserves. Substantially all of the
Company's assets, including its merchandise inventories, are pledged under the credit facility.
As of May 3, 2008, outstanding borrowings under the credit facility totaled $114.5 million, and availability for additional
borrowings under the credit facility, after the deduction of the minimum availability requirement and other reserves, was $34.3 million. Interest
charged on amounts borrowed under the credit facility is at the prime rate, or at the Company's option, at the applicable LIBOR rate plus 1.25%
per annum. In addition, the Company pays an unused commitment fee equal to 0.20% per annum on the average unused daily balance of the
credit facility. The interest rate is adjusted upwards or downwards on a quarterly basis based on a pricing matrix, which is tied to the Company's
daily average excess availability for the preceding fiscal quarter (as defined in the agreement). Under the pricing matrix, the applicable interest
rate could range from a rate as low as prime or LIBOR plus 1.25%, to as high as prime plus 0.5%, or LIBOR plus 2.5%.
The credit facility contains restrictive financial and operating covenants, including the requirement to maintain a fixed
charge coverage ratio of 1:1 (as defined in the agreement) if the Company's excess availability (as defined in the agreement) is below $20 million.
As of May 3, 2008, the Company was in compliance with all restrictive financial covenants applicable to the credit facility. The agreement has a
five year term expiring September 26, 2012.
The Company is exposed to market risk associated with changes in interest rates. To provide some protection against
potential rate increases associated with its variable-rate facilities, the Company has entered into a derivative financial transaction in the form of an
interest rate swap. This interest rate swap, used to hedge a portion of the underlying credit facility, matures in February 2009.
Trade Credit
The success of the Company's business is partially dependent upon the adequacy of trade credit offered by key factors
and vendors, the vendors' ability and willingness to sell their products at favorable prices and terms, and the willingness of vendors to ship
merchandise on a timely basis. The Company has been able to purchase adequate levels of merchandise to support its operations and expects
the level of trade credit to be sufficient to support its operations in the foreseeable future. Restrictions to the amount of trade credit granted by key
factors and vendors can adversely impact the volume of merchandise the Company is able to purchase. Any significant reduction in the volume of
merchandise the Company is able to purchase, or a prolonged disruption in the timing of when merchandise is received, could have a material
adverse affect on the Company's business, liquidity position, and results of operations.
17
Other Financings
The Company may consider various other sources of liquidity in the future, including but not limited to the issuance of
additional securities that might have a dilutive effect on existing shareholders, or incurring additional indebtedness which would increase the
Company's leverage.
Uses of Liquidity
The Company's primary uses of liquidity are for working capital, debt service requirements and capital expenditures.
Capital expenditures during the first quarter of fiscal 2008 totaling $4.4 million primarily relate to the new store construction in Bend, Oregon, the
merger and renovation of dual stores in the East Hills Mall in Bakersfield, California and upgrades to the Company's information systems.
As of May 3, 2008, the Company had issued a total of $1.5 million of standby letters of credit and documentary letters of
credit totaling $0.6 million. The standby letters of credit were issued to provide collateral for workers' compensation insurance policies.
Management believes that the likelihood of any draws under the standby letters of credit is remote. Documentary letters of credit are issued in the
ordinary course of business to facilitate the purchase of merchandise from overseas suppliers. The supplier draws against the documentary letter
of credit upon delivery of the merchandise.
Subject to the previously described risks and uncertainties relative to the Company's sources of liquidity, management
currently believes that the described sources of liquidity, including cash generated by operations, liquidity provided by the revolving credit facility
and other financial resources, will be adequate to meet the Company's planned cash requirements for at least the next 12 months. However, the
Company's actual results may differ from the expectations set forth in the preceding sentence. The Company's liquidity and capital resources may
be affected by a number of factors and risks (many of which are beyond the control of the Company), including but not limited to the availability of
adequate borrowing capacity, adequate cash flows generated by operations and the adequacy of factor and trade credit. If the estimates or
assumptions relative to any one of these sources of liquidity are not realized, or if these sources of liquidity are significantly reduced or eliminated,
the Company's liquidity position, financial condition and results of operations will be materially adversely affected.
Safe Harbor Statement
Certain statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements include the plans and objectives of
management for future operations and the future economic performance of the Company 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 future acts of terrorism or war); 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, unemployment 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 under the caption "Risk
Factors" in Part I, Item 1A. in the Company's 2007 Annual Report on Form 10-K and other reports filed by the Company with the Securities
and Exchange Commission. THE COMPANY DOES NOT PRESENTLY INTEND TO UPDATE THESE STATEMENTS AND UNDERTAKES NO
DUTY TO ANY PERSON TO EFFECT ANY SUCH UPDATE UNDER ANY CIRCUMSTANCES.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As described more fully in Part II, Item 7A of the Company's 2007 Annual Report on Form 10-K, the Company is exposed
to market risks in the normal course of business due to changes in interest rates on short-term borrowings under its revolving line of credit and on
certain of its long-term borrowing arrangements. Based on current market conditions, management does not believe there has been a material
change in the Company's exposure to interest rate risks as described in that report.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains "disclosure controls and procedures," for purposes of Rules 13a-14 and 15d-14 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in the Company's
reports, pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding the required disclosures. Management necessarily applied its judgment
in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding
management's control objectives. The Company has carried out an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer along with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon the foregoing, as of
May 3, 2008, the Company's President and Chief Executive Officer along with the Company's Chief Financial Officer, concluded that the
Company's disclosure controls and procedures are effective in reaching the level of reasonable assurance regarding management's control
objectives.
There has been no change during the Company's fiscal quarter ended May 3, 2008 in the Company's internal control over
financial reporting that was identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) which has materially affected, or
is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. RISK FACTORS
Multiple risk factors exist which could have a material effect on the Company's operations, results of operations,
profitability, financial position, liquidity and capital resources. These risk factors are more fully presented in the Company's 2007 Annual Report on
Form 10-K as filed with the SEC.
There have been no material changes with respect to the risk factors disclosed in our 2007 Annual Report on Form 10-K.
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Item 6. EXHIBITS
(1) Previously filed as an exhibit to Registration Statement on Form S-1 (File No. 33-3949).
(2) Previously filed as an exhibit to the Current Report on Form 8-K on December 7, 2007 (File No. 1-09100).
(3) Previously filed as an exhibit to the Current Report on Form 8-K dated March 31, 2008 (File No. 1-09100).
(4) Furnished concurrently herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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Gottschalks Inc.
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(Registrant)
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June 11, 2008
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By:
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/s/ James R. Famalette
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James R. Famalette
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(Chairman and Chief Executive Officer)
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June 11, 2008
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By:
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/s/ Daniel T. Warzenski
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Daniel T. Warzenski
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(Vice President and Chief Financial Officer)
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