Gordmans: More Downside Or Is The Stock Bottoming Out?

| About: Gordmans Stores (GMAN)

Gordmans (NASDAQ:GMAN) is a retail store department and discounter that is a small-cap growth company. In the retail sector there are many components and one that I want to focus on is the broadline retailers component. Some of the most notable broadline retailers are Target (NYSE:TGT) and Wal-Mart (NYSE:WMT). They provide a variety of products that are consumed every day and have competitive advantages over smaller retailers.

For retail store department and discounters that are not trying to compete with the big box discounters, this can sometimes be difficult as they don't offer segments in their business model that diversify themselves from their major competitors. Over the last couple of years competition has heated up in the apparel side of the retail industry as the internet and big box retailers have gained market shares from struggling retail apparel companies. Some companies had to radically change their store concept to adapt to changing demographics and other companies decided to expand and focus on promotions to drive business.

Gordmans has its headquarters in Omaha, Nebraska, and primarily operates stores across the Midwest with 83 stores in 18 states. Since October 2012, shares of Gordmans have lived up to their company's slogan "Something Unexpected" as shares of Gordmans have slipped to the downside in late August 2012, September 2012 and most recently January 14, 2013. Shares of Gordmans have stair stepped down during the last half of 2012 and going into 2013 due to lowering revenue guidance, falling margins and poor eps (just to name a few).

Currently, when taking a look back at Gordmans' decline over the last couple of months, Gordmans is now sitting at a level not last seen since January 2011. Prior to the $12 level, the $14 level has provided a nice level of support for almost four months before Gordmans released disappointing news on reducing its revenue guidance and lower comps for the fourth quarter fiscal 2012 ending February 2, 2013. With shares of Gordmans at new lows investors may wonder if the stock is bottoming out or if more downside is to continue?

Chart forGordmans Stores, Inc.

Chart courtesy of Yahoo Finance

Business Strategy

Gordmans stores operate in three segments comprising apparel at 59.8%, home fashion 25.1% and accessories at 15.1% of sales. Gordmans stores typically range in size of around 50,000 square feet and offer an array of items that can be found at most other retail stores or the internet. With apparel and home fashions making up 84.9% of sales, having an effective merchandising and branding strategy is important.

Some companies in the retail sector don't have to constantly provide promotions and discounts, while others do. When taking a look at Gordmans merchandising strategy, Gordmans is known for always providing promotions and discounts in order to drive traffic to their outlets. I have to admit as a consumer I love getting discounts through e-mail and traditional mail, but once you are known for discounting this can be hard to stop as consumers only want to come when there is a sale.

While there are pros and cons to continuous promotions and discounting by retail stores this strategy has always been with Gordmans. Gordmans CEO Jeff Gordman has been the CEO since 1996 and has been able to navigate the changes in the retail markets, while still keeping the core fundamentals of Gordmans intact. Over the years there have been many changes that various retail companies have had to do in order to stay competitive in a saturated retail apparel market.

The merchandise that Gordmans sells to prospective customers generally competes with traditional department stores, specialty stores and broadline retailers. When walking in a typical Gordmans store shoppers will notice that there is nothing unique about the products that Gordmans provides as there is no shortage of retailers offering similar deals to consumers. For a list of products that Gordmans provides please click here.

Throughout the years Gordmans has been able to compete in the marketplace by mainly offering consumers a variety of popular brands through their branding strategy. Gordmans' branding strategy focuses on consumers who have an average household income of $37,000-$57,000 with a third of the target audience making $75,000 or more. For a company that sells merchandise that can be found at most other retailers how the company brands itself is extremely important as Gordmans operates in a tough competitive environment.

Gordmans' branding strategy is mainly focused on natural brands that most consumers have come across through other discounters. The one advantage to offering many known consumer brands is that this creates the illusion Gordmans is more than just a one stop shop for a particular item. By offering a wide selection of sub-premium to premium brands Gordmans extends the branding image in providing merchandise that appeals to a mass audience, rather than focus on a specific demographic.

Within Gordmans' branding strategy how merchandise is priced can be seen as the most important component to Gordmans branding strategy being successful. Currently, Gordmans is known for "save up to 60% off everything, everyday!" and besides the everyday savings Gordmans focuses on a lot of direct mailings and in-store promotions in an effort to drive traffic (through promotions) in its stores.

Time For Changes

One company in the retail sector (out of the many) that has made changes to the business strategy is J.C. Penney (NYSE:JCP). I last wrote about the changes that J.C. Penney was going through and mainly focused on price perception. While the verdict is still out on how J.C. Penney's turnaround story is going forward, I believe if change is successful then this can serve as an example of ideas to smaller rivals (like Gordmans) that change can be good.

Since the April 2012 highs, shares of Gordmans have fallen almost equal to what the company promises customers will save in the stores and that is up to 60%. During the course of 2012 Gordmans' last two quarters of net income and comparable sales (compared with same quarter last year) both fell as rising inventories combined with more promotions took a toll on the company. With that being said, I believe that Gordmans needs to look at making changes to the business strategy or expectations for the company will continue to slide downward. Below is a summarization of four ideas that Gordmans should consider to drive existing and newer sales before getting to the point where it is forced to make changes.

1) On January 14, 2012 Johanna Lewis resigned from her position as Chief Merchandising Officer [CMO] and was replaced with Michael Morand who is an Executive Vice President of Planning, Allocation and Analysis. In my opinion in the retail industry the CMO is an important senior member of a company's team. The CMO is responsible for the merchandise being offered and working with senior leaders in marketing, logistics, and regional store managers to always meet or beat consumer expectations in order to drive more sales. I believe if Gordmans looks for a new CMO it should focus on someone that has extensive experience at bringing more licensee business to Gordmans. By slowly focusing away from only offering mostly natural brands the company can put some focus on destination brands that are exclusive or limited to a company. During Gordmans' last three quarters the company showed an increase in licensed fees from leased departments.

2) In the merchandise category, I would like to see less home merchandise based upon a season/holiday and would rather see more everyday living merchandise that caters to dressing up a certain room in one's house. Selling merchandise based upon a season/holiday will continuously have to be marked down and add to promotional costs if markdowns do not work. Also, seasonal/holiday merchandise often adds to stores becoming cluttered as constant transitions take place.

3) The competitive environment that Gordmans is engaged in can be viewed as seasonal. The apparel business tends to fluctuate as the seasons and respected holidays come and go. Gordmans tends to perform well leading up to and during holidays, a seasonal change or a particular theme (back to school), but managing through non-events is essential to managing inventory. In my opinion Gordmans needs to expand more on targeted ads during non-peak times rather than just every day is a sale in an effort to drive seasonal traffic patterns around non holiday driven events.

4) In Gordmans' branding strategy I would like to see the company try and improve on average sale per transaction. In Gordmans' marketing strategy there has been a lot of focus on discounting up to 20% on a single item. Discounting a single item through traditional mail can lead to consumers not wanting to make multiple purchases and over time customers tend to rely heavily on coupons when making there next visit to Gordmans

Looking Forward

Despite the big drop in Gordmans' share price since the April 2012 highs, Gordmans has been able to successfully manage the debt and its cash position that has allowed it to build additional stores in new and existing markets. For 2013, Gordmans plans on opening 10 new stores to increase its total store count from the current 83 to 93. When a company decides to continue opening more stores and expand into markets where it doesn't serve this can be a bullish sign. However, it can also be concluded that Gordmans has to expand to increase net sales and gross profits as existing stores have reached a plateau (in terms of sales) in their respected environments.

With shares of Gordmans doing a complete turn from their April 2012 highs, I am expecting to see some changes going forward in 2013 as the company is a key player in the Illinois and Missouri retail markets. Despite the competitive environment Gordmans operates in, I still enjoy shopping in the stores whenever I get a coupon in the mail. In the future, I believe the company will seek to make changes to its merchandising and branding strategies in an effort to adapt to a changing retail environment. With Gordmans in the low $12s and trading at around 9x earnings I believe the company is going to focus on making small incremental changes going forward that could help support a bottom in shares. While I am not overly bullish on shares of Gordmans, I view this company as a seasonal retail trade going into spring/ early summer shopping months if the $12 level can hold.

Disclosure: I am long GMAN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.