Shares of California department store retailer Gottschalks (NYSE:GOT) dropped 5% in Friday's session, following the Thursday night release of the company's fiscal Q4 (ended Jan. 29) and full-year financial results. Investors had reason to be unhappy: The company missed the market's Q4 consensus estimate of earnings per share by a good margin, and same-store sales fell year-over-year.
But aside from CEO Jim Famalette's complaint about disappointing top-line revenues, management was mostly pleased with the results. Why? Because Gottschalks is in a tough sector. Competition and changing shopper tastes have made the department-store business a challenge in recent years, and to make up for the trouble that companies in this area have had boosting comps, success elsewhere in the business becomes especially important. To that end, the company did show solid bottom-line benefits through cost management. Income from continuing operations more than doubled during the year.
The company also doesn't need massive comps growth to deliver appealing financial performance if it merchandises well. One measure of whether it's getting the job done is inventory turns, and since management is targeting that metric for improvement in 2005, now seems like a good time to take a closer look at it.
As past Fool articles have detailed, inventory turns make for a useful measure because they track the number of times a company sells out its entire stock in a given time period. The more, the better: Goods that don't move represent money that's sitting around doing nothing. Goods that sell can be turned into cash and plowed back into the business in some form.
Last year, the company managed to boost inventory turns to 2.79 from 2.70. That's a good sign: Gottschalks' average figure over the past seven years is 2.77. But it's still below the company's 2002 performance, so there's room for improvement. And improve it really must. This company isn't looking to expand wildly; it's just looking to build a financially attractive regional business.
Smart merchandising can help it do just that in the face of same-store sales-growth challenges. Management appears focused on the right ways to meet its goals, including initiatives to deepen its customer base that indicate a desire to find ways to stay in touch with changes in the markets. With Federated (NYSE:FD) and May (NYSE:MAY) agreeing to merge last week, I continue to wonder whether this company might someday have suitors of its own. A larger company looking to juice profits could do plenty worse.
Fool contributor Dave Marino-Nachison doesn't own any of the companies in this story.
