Gordmans Cuts Outlook: Will The Sector Follow?

Includes: GMAN, XLP, XLY
by: Valuentum

Discount retailer Gordmans Stores (NASDAQ:GMAN) slashed its second half revenue and earnings outlook due to same-store sales that fell 2.1% during its third quarter. Third quarter revenue will likely be $142-$144 million compared to its previous guidance range of $145-$147 million, while earnings per share guidance was reduced to $0.18-$0.20 from $0.24-$0.26. The firm also slashed its revenue outlook for the fourth quarter to $213-$215 million from its previous outlook of $217-$219 million, while it reduced its earnings outlook to $0.58-$0.61 per share from $0.61-$0.65 per share.

Though a few million dollars doesn't seem too significant, the company's earnings reduction signaled a real profit warning for the entire sector. With consumers still struggling, we suspect the discounters like Family Dollar (NYSE:FDO), Dollar General (NYSE:DG), Big Lots (NYSE:BIG), and Dollar Tree (NASDAQ:DLTR) could be engaging in price wars that could put meaningful downward pressure on margins. After Wal-Mart (NYSE:WMT) regained its stride earlier this year, we think consumers are leaving the dollar stores for the one-stop shop value proposition that Wal-Mart, Sam's Club, and Costco (NASDAQ:COST) offer. Still, the dollar stores remain fairly valued at current levels.

Oddly enough, we do not think this is necessarily bad for retail as a whole. Given the strong results we've seen from Nike (NYSE:NKE) in North America and Lululemon (NASDAQ:LULU), we think consumers are trying to save on core necessities in order to splurge on more desirable products. However, we suspect the grocery segment could get clobbered yet again. We've noticed Supervalu (NYSE:SVU) and Roundy's (NYSE:RNDY) have been highly promotional, with the latter's Mariano's stores even offering 1% cash back during the fall and winter months. Target (NYSE:TGT) should hold up reasonably well, though we wouldn't be surprised by some slight margin compression.

Unfortunately, the market appears to be well aware of these trends, as those that will benefit from frugal spending on necessities like Wal-Mart and Costco are fairly valued at current levels. We're more interested in companies like Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ) that have decent pricing power and pay nice and growing dividends. We hold both of these firms in the portfolio of our Dividend Growth Newsletter (please see links on our left sidebar for more information).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Some of the firms mentioned in this article are included in our Dividend Growth Newsletter.