In 2013 Gordmans Stores (NASDAQ:GMAN), a Midwest department store chain was forced by Sun Capital Partners to pay out a $70 million dividend of which $25 million was taken from cash reserves and the other $45 million via senior term loan from Cerberus Business Finance LLC. Before I go into why the stock should trade at $2 a share I would like to provide a timeline of the transactions of Sun Capital Partners to demonstrate how it is hurting Gordmans other shareholders, employees and more importantly its customers.
Sun Capital Parnters, in a private transaction, bought Gordmans in 2008 right before the brink of the global recession. The purchase price was unknown but given the S1 filing's clues, revenues, low margins and multiples paid for department stores I believe the purchase price was around $80 to $125 million.
In 2010, the company filed for an IPO in the range of $13 to $15 a share with an attempt to raise $75 million. The IPO was not received well and given the still weak economic environment was forced to price the IPO at $11 a share netting Sun Capital $54 million and leaving nothing for GMAN. This transaction brought the ownership of Sun Capital from 100% to around 70%.
In 2012, Sun Capital Partners conducted a secondary offering at $16.75 a share netting Sun Capital $51 million thus bringing their ownership from 70% to around 50%. Then in 2013 the company initiated a dividend of $70 million of which 50% was for Sun Capital bringing the total proceeds to $140 million in cash and 50% ownership of the Gordman's.
In March of 2014, the company's CEO and family founding member resigned and it has yet to find a new CEO. The interim CEO is a managing partner of Sun Capital so investors should be wary of the fact that the company and its management team will look to Sun Capital's best interest more so than yours.
Sun Capital has every right to do the transactions mentioned above given its ownership stake. However, let's not fool ourselves, Sun Capital saw the writing on the wall and knew that it had two choices:
1. Do nothing and let the company continue to grow and take a risk that the stock would appreciate.
2. Take a huge dividend now knowing it would be difficult if any of the mentioned above negative scenarios occurred.
The issue I have is that current shareholders should not "value trap themselves" into investing in Gordmans Stores given no real leadership, weak online presence and retail environment.
The company reduced expectations for 2014, and I believe will repeat that in 2015 as well. Any improvement that occurs in the short term will be due to financial engineering given the new members of the management will have their hands pretty tied up given the lack of financial flexibility.
As of the last quarter, the company had net debt of $26 million and will need capital for its expansion (I would imagine slowing given no CEO), new online initiatives and inventory buildup for the fall. The company has a credit facility but if the company produces a loss this year and next it will have fewer options to execute growth initiatives thus stalling growth.
How much would you pay for a business that is growing 6-7% top-line growth, with declining operating margins, borrowing cash and in a weak retail environment? At today's current price, GMAN is being valued at 20 times 2015 projected earnings which I find high for a department store chain. I believe given its increased risk profile that the stock should be trading at $2 to $3 a share.
Light at the end of the tunnel
The only catalysts I see that could move the stock higher are the new members of the management team improving online retail sales and better monetization with their loyalty rewards program. I understand that the company does have loyal following but has previously executed poorly with its loyalty program. A good loyalty program can do wonders for the brand, sales and margins. For example, GameStop's has been able to fend off Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN) for years.
Investors should be very cautious with Gordmans and should not initiate a position in the stock today given the amount of risk and the potential downside, lack of "real" leadership, new management members and weak retail environment.
Disclosure: The author has no positions in any stocks mentioned, but may initiate a short position in GMAN over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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