GMAN - Gordmans

[boilermaker75]

Is anyone here familiar with Gordmans? There is a store in our town, but I probably have only been in it once or twice.

 

GMAN started as a department store in 1915. In 1975 it turned into the “1/2 Price Stores” selling department store quality merchandise at ½ department store prices to clear end-of-season items. These stores were repositioned and renamed Gordmans in 2000. In 2008 Sun Capital bought all the shares and IPOed GMAN in 2010. GMAN is a controlled company, Sun Gordmans, LP owns 51% of the stock.

 

The market cap is $231 million and the EV $186 million.

 

Year 08 09 10 11 12

capex 10 4 9 31 34

# stores 65 66 68 74 83

FCF 5 36 3 -4 -8

 

There will be 10 new stores in 2013.

 

There will be a capex of $23 million in 2013 to build a second distribution center to support planned growth beyond 2014.

 

In 2011 $2.6 million and in 2012 $3.3 million of the capex was used for existing stores, so most of the capex is for growth.

 

In 2012 there was $13.2 million and in 2012 $13 million in proceeds from sale-leaseback transactions. I don’t quite understand the accounting of this. For instance should this be added to FCF to get the actual change in cash position?

 

 

[CorpRaider]

Looks interesting.  Greenblatt has/had a position.

[mcliu]

You should probably exclude the sale-leaseback proceeds when calculating future normalized earnings, unless you believe there's a lot of this type of transaction occurring in the near future. You should also probably adjust future earnings for the additional rent that needs to be paid now that they've sold some of their real estate.

[valueaki]

They use the sales-leaseback mechanism to decrease total upfront capital expenditures when opening a new store. Currently, they report CAPEX to open a new store as: Total Cost of Open Store (Including Total Cost to purchase RE) - Proceeds from Selling RE. Since GMAN does not own the RE, they will have to pay rent to continue occupying their stores.

 

If you think they won't be able to engage is sale-leasebacks in the future, then CapEx to open new stores will go up (assuming they buy the RE). FCF will be lower. Earnings will be higher since they do not need to pay rent on properties they own. However, since they will be tying up more capital in long-dated assets, growth will likely be hindered (ie: they will probably trade at a lower multiple because they will be asset heavy and growing relatively slower).

 

I looked at them briefly, a few things I couldn't get comfort with:

 

(i) Why are their gross margins so much higher than their competitors (even after adj. for discrepancies in reporting)?  I assumed it is because they sell higher margin products compared to TJMaxx and Ross ... but I'm not fully convinced that that is true and that gross margins are sustainable

 

(ii) They have been turning inventory substantially slower in recent years ... I'd imagine this is because they are growing, but I'd like to see  inventories not be so bloated going forward.

 

(iii) They write-down inventories frequently. Probably part of the reason gross margins are so much higher

 

(iv) Why is traffic declining?

 

Any color the community has would be helpful.

[ItsAValueTrap]

(i) Why are their gross margins so much higher than their competitors (even after adj. for discrepancies in reporting)?  I assumed it is because they sell higher margin products compared to TJMaxx and Ross ... but I'm not fully convinced that that is true and that gross margins are sustainable

I believe that retailers often DO sustain higher margins.  There is a tendency for a few superstar CEOs to make most of the profit in the industry.  For everybody else, retail is a very, very tough business (e.g. look at Sears... smart people not making money).  Buffett broke even on Hochschild and Kohn.  He otherwise gravitates towards really good retailers like Nebraska Furniture Mart, Borsheim's, See's Candies, etc.

 

2- The CEO has been slowly increasing his ownership in the company.

 

I believe his grandfather(-in-law) founded the company.  I suspect that Gordman will stay with the company for a very long time.

 

3- The stock seems to be trading at a low valuation because same store sales have stayed flat (and in some quarters they have declined?).  This suggests that the operations of the stores have been getting worse on a per-store basis (though this could have something to do with less advertising spending???).