Department store chain Gottschalks Inc is to receive a $30m investment from Everbright Development Overseas Ltd as part of a deal that will also see it source more products from China and start selling consignment merchandise.

Under the terms of the agreement announced yesterday (23 September), British Virgin Islands based Everbright will buy 5.6m of newly issued Gottschalks shares at a price of $1.80 per share - around 29% of the company's common stock.

Gottschalks will also issue a five-year, convertible secured note to Everbright for $20m, with unpaid interest that may be converted into Gottschalks common stock at a fixed price of $1.80 per share.

Milestone warrants permit Everbright to buy up to 60m of Gottschalks shares for $120m in cash or real estate assets.

The warrants can be exercised up to three years after the investment closes if Gottschalks stock trades at or above $6.00 per share for 60 consecutive trading days.

The deal also involves the two companies setting up a direct sourcing program with a network of Chinese manufacturers for a range of merchandise - one of Everbright's main areas of expertise.

This will provide Gottschalks with the leverage and scale needed to access key overseas manufacturers and enhance its private label offerings.

Another aspect of the partnership is to sell consignment merchandise in Gottschalks stores - enabling the retailer to expand its current merchandise assortment into new product categories.

And Gottschalks will be able to use Everbright's Luichi global sourcing business platform which links customers and manufacturers, thereby eliminating many of the mark-up layers in between.

Jim Famalette, chairman and chief executive officer of Gottschalks, says: "The letter of intent with Everbright not only provides for a significant infusion of capital into our business but also creates opportunities for us to strengthen and improve our operations through new strategic initiatives.

"Importantly, the partnership would allow us to leverage Everbright's strong network to source a variety of merchandise direct from Chinese manufacturers at advantageous terms and conditions.

"In addition, we would be able to introduce and test an expanded merchandise assortment with very limited risk by working with manufacturers that would offer products through our stores on consignment.

"We also expect to grow our business by having the opportunity through Everbright to expand our traditional business model with more direct business to business, and direct to consumer product sales from the network."

Mi Wang, chairman of Everbright, added that the deal "will extend the distribution in the US for many of Everbright's Chinese manufacturing partners."

Gottschalks, which operates 58 department stores and three specialty apparel stores, widened its first quarter loss to $5.1m, with sales falling 11.8% to $125.1m.