Gordmans Stores, Inc. (NASDAQ:GMAN) stock has sold off by 20% since their fourth quarter earnings report. The Street obviously did not like either the numbers or what management had to say about the outlook going forward. The current consensus forecast is for a decline in EPS from $1.21 per share in FY13, to $0.92 in FY14 and then rising to $1.28 in FY15. The cuts were dramatic so the shares should have declined based on the cuts to the FY14 forecast, which forecasted FY14 EPS of $1.34 just 30 days ago. This could be the first cut of many and an indication the company will struggle over the next few years or it could have oversold and there may be value here.
Recent Concerns led to Sell-off
Its stores primarily sell to moderate income consumers. Spending from this group on apparel was muted over the past quarter and faces further headwinds due to the payroll tax increase, fallout from the government sequestration, and economic concerns that led to a decline in consumer confidence levels. As a result of these pressures, management stated that first quarter same-store sales would face a decline in the low double digit percentage points. The weather also played a role in addition to the decline in spending by its customer base. This led to higher than expected inventory levels which will negatively impact gross margins in the first quarters and possibly subsequent quarters. While sales and the number of customer transactions were down, the size of transactions increased in the fourth quarter. Gross margins decline by 140 bps in 4Q and are expected to decline by 440 bps to around 43% in 1Q according to management. Since the earnings report, the weather has continued to weigh on retail sales. Given its geographic exposure to the Midwest region, Gordmans Stores, Inc. (NASDAQ:GMAN) could see a greater impact versus the rest of the industry.
Growth Initiatives
Management has initiated new initiatives in order to offset potential declines and increase same-store sales. First, it brought on a new chief merchandising officer earlier this year. It also implemented a loyalty program. This could help mitigate some customer loss to discount retailers during periods of softer consumer confidence. Last, the company is implemented various technologies across its stores.
It is also targeting growth from more traditional means by expanding square footage by over 10% annually. Also, Gordmans Stores, Inc. (NASDAQ:GMAN) remains a regional player so it has a lot of geographic room to expand their footprint. New stores have a payback period of less than two years, which is relatively short.
Competition
Dillard’s, Inc. (NYSE:DDS) is another larger department store operator as is Stage Stores Inc (NYSE:SSI). Both of these are subject similar pressures from softer consumer spending by moderate income consumers. The following chart compares data between these companies.
While Gordmans Stores, Inc. (NASDAQ:GMAN) does trade a lower P/E, its earnings are expected to decline significantly this year as will its return metrics. Dillard’s, Inc. (NYSE:DDS) is expected to earn $7.00 this year and $7.70 the following year according to the consensus forecast. This is up from $6.31 the prior year. In terms of return on assets, Gordmans crushes the competitors with an ROA of 13.5% vs Dilliards’ 8% and Stage’s 5.7%. The capital structure of these companies ranges drastically from a D/E ratio for Gordmans of 0.18 to 2.45 for Stages and 41.8 for Dilliards. Dilliards’ stock price is up 25% this last year, partially due to their share repurchase announcement, and Stage Stores Inc (NYSE:SSI) is up 69%. Gordmans Stores, Inc. (NASDAQ:GMAN) is down 43% in the same time frame.
Conclusion
Gordmans has hit a rough patch in its growth but if its growth initiatives have effect, it does not look expensive versus its longer term earnings power. Also, if same store sale can surprise versus expectations later in the year, the shares could appreciate substantially. At this point, unless consumer spending takes a bigger than expected hit, Gordmans Stores, Inc. (NASDAQ:GMAN) downside risk appears limited compared to the potential upside.
The article Time To Buy This Retailer? originally appeared on Fool.com and is written by Mike Thiessen.
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