Gordmans Stores Is Undervalued: 'Something Unexpected' Indeed

| About: Gordmans Stores (GMAN)

Firm Background

Gordmans Stores (NASDAQ:GMAN) is a low-cost, soft-lines retailer that primarily operates in small cities and rural towns. The company operates about 68 stores in the Midwest. Since I am originally from a rural area in Illinois, I have first-hand experience with Gordmans stores, having shopped there as a young adult. The company recently went public in August, 2010 and its main advertising catch-phrase is “Something Unexpected.” You’ll soon see the price of the stock is just that.

Industry Background

Although it is hard for those raised in large cities and suburbs to understand the nuances of small town living, the material desires of small-town folk are essentially the same. Country folk and urbanites want the same things: nice homes, nice lawns, and nice clothes. While city folk have a wide variety of outlets from which to purchase these things, the shopping options for country-folk are significantly restricted. Thus, a small-town retailer can make a name for itself by selling stylish clothing and trendy products to aspiring rustics.

Gordmans' Niche

I encourage you to take a look at Gordmans' website (see here). In exploring, you will probably discover the company’s offerings attempt mimic those of more established, big-city retailers such as Macy’s or Kohls. However, when you look at the geographic areas served, you will see that Gordmans tends to focus on those areas specifically not served by upscale retailers.

This is no mistake. Whereas Macy’s targets the cosmopolitan shopper, Gordmans targets the trendy rustic. Laugh at your own peril: There’s money in those rustics.

Why Gordmans Represents a Great Opportunity Missed by Many

Most of you have never set foot inside a Gordmans. Most of you never will. Therefore, you are unfamiliar with the aisles of gold you may be missing. A quick examination of Gordman's financials reveals “something unexpected” indeed – the company is tremendously undervalued.

A recent review of the company’s latest financial results is quite telling: compared to 2Q09, net sales increased 14.7% in 2Q10, comparable same store sales increased 8.3%, and net income increased 50.1%. Tell me, how does Macy’s or Kohls compare with those results? Answer: Not even close.

In fact, factoring out IPO expenses of $10.6 million which will be incurred in 3Q10, Gordmans is on track to earn $1.05 per share for FY2010 (including the IPO charges, the company predicts it will earn 71 cents per share – keep in mind analysts factor out one-time charges such as IPO charges because they will not recur. Consequently, I use the $1.05 projection as the appropriate earnings mark).

The Turn

In addition to its down-home charm, Gordmans' CEO has stated that he believes the retailer has years of expansion ahead of it (see here) and investment bank R.W. Baird believes the retailer will attain 20% long-term earnings per share growth per year. (See here.)

The Opportunity

Although I am not comfortable placing Gordmans in the same peer group as Macys and Kohls, I am more than comfortable placing it alongside J.C. Penny (NYSE:JCP) (although the management of Gordmans will likely be offended). J.C. Penny’s historical P/E average is 15.68; assuming no growth and valuing Gordmans on the same historical multiple as J.C. Penny, I arrive at a current value of $16.46 per share ($1.05 EPS x 15.68). This represents a 51.2% increase over today’s stock price of $10.88 per share.

However, when one considers Gordmans' incredible growth opportunities and the fact the US economy will likely recover at some point in the future, it seems Gordmans' best days lay ahead. Therefore, I am content to sit on my porch, rock in my favorite chair, and drink lemonade until Gordmans affords me Dom Perignon.

Disclosure: Long GMAN