Heavy promotions and a difficult home business limited Gottschalks to a 3.7% gain in fourth-quarter profits, although its performance exceeded forecasts.

During the three months ended 3 February, the Fresno, California-based department store group had net income of US$8.9m, or 64 cents a diluted share, versus year-ago profits of $8.6m, or 62 cents.

Excluding the effect of the expensing of stock-based compensation, EPS in the most recent quarter would have been 65 cents, 4 cents above the consensus estimate.

Sales in the 14-week quarter were $238.1m, 3.6% above the $229.9m registered during the 13-week 2005 quarter. Excluding the extra week, net sales declined 0.2% to $229.5m. Same-store sales for the comparable 13-week quarter increased 0.8%.

"We are continuing to reposition our merchandise mix with increased emphasis on our soft-line merchandise categories," said Jim Famalette, president and chief executive officer of the company.

"The stores where we have completed re-fixturing in our accessories, shoes and cosmetics departments have generally shown significantly higher sales growth in those departments than in our other locations and we plan to continue to roll out upgrades in additional stores in 2007."

Real estate will continue to shift towards soft lines and away from home goods during the year.

The firm also said that it had incurred higher than expected costs as a result of its previously announced search for "strategic alternatives." It provided no update on progress of this initiative and said it didn't expect to do so prior to the authorisation or consummation of a transaction.

For the full year, net income was slashed by half, dropping to $2.6m, or 19 cents a diluted share, from $5.2m, or 38 cents, in fiscal 2005. For the year, sales were up 1.0% to $683.9m from $676.9m. Excluding the extra week in 2006, sales were down 0.3%. Same-store sales on a comparable 52-week basis were up 0.6%.

Gottschalks operates 60 department stores and five apparel specialty stores in California and five other states in the western US.

By Arnold J Karr.