Seeking Alpha: Gordmans Stores Remains In An Unsustainable Structure

Credit where it's due - Josh Arnold was not only negative on Gordmans Stores (NASDAQ:GMAN) back in 2015, he was short the shares and that was absolutely the right call. While I had thought new management would move quickly to address a seriously out-of-whack cost structure, results over the past year suggest that the cost structure is liable to remain stubbornly too high relative to peers and the company's gross margin, and nothing in the same-store sales trend suggests that "growing out of the problem" with more operating scale is a valid or viable plan.

Gordmans should be able to survive for a while, but I don't see a probable path to prosperity given what appears to be a sticky high cost structure. Given that this company would have to cut its SG&A spending almost in half to be in line with its peer group and that operating margins are unlikely to climb above the mid-single-digits on a sustained basis, I've come to realize much too late that this company is likely to continue struggling. If there's a bright side, it's that expectations have been beaten down and there's a sizable short interest - if the company were to report a surprisingly strong quarter, the shares could pop on covering - but that's not the underpinning of a long-term story.

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Gordmans Stores Remains In An Unsustainable Structure

Seeking Alpha: Is Gordmans Stores Pulling Out Of Its Tailspin?

It's funny how much easier it can be to walk when you stop shooting yourself in the foot. That may not be a completely fair opening line for discussing Gordmans Stores (NASDAQ:GMAN), as not all of the company's problems have been self-inflicted, but there have been more than enough missteps in merchandising, marketing, and supply chain management to suggest that the bullet-ridden shoe still fits.

Credit where due - new (or relatively new) CEO Andy Hall seems to be moving quickly to fix many of the serious issues at Gordmans. The market has certainly noticed, with the shares more than doubling since my last article in the fall of 2014. I don't see as much potential in the shares as before, but if Gordmans' new approach to merchandising can boost traffic more than I expect, if supply chain improvements lead to better margin leverage, and/or if the company can credibly re-accelerate its store opening schedule there could still be upside.

That said, investors would do well to remember that retail is savagely competitive and very few companies can establish a compelling brand identity or assortment that makes them a "must have" in the retail sector over the long term.

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Is Gordmans Stores Pulling Out Of Its Tailspin?

Seekng Alpha: Gordmans Stores Has Better Management, Will Results Reflect It?

Six months ago I described Gordmans Stores (NASDAQ:GMAN) as a "falling knife", but since then the shares have acted more like a sharknado. The stock's 45% drop since then can't be explained away by a difficult environment - stocks like Stein Mart (NASDAQ:SMRT), TJX (NYSE:TJX), and Ross Stores (NASDAQ:ROST) haven't been ripping higher, but they haven't been nearly as weak as Gordmans. Despite better inventory management, Gordmans can't seem to get its merchandising/assortments right and the comps and margins are suffering as a result.

Maybe, just maybe, things might be looking up. Gordmans recently named Andy Hall as the new CEO, replacing interim CEO T. Scott King who took over when Jeff Gordman announced his retirement earlier in the year. Hall brings good experience as the former CEO of Stage Stores (NYSE:SSI) and has already laid out some common sense near-term initiatives. Gordmans is still looking at a long road back to growth, and I wouldn't dismiss the competitive threat of the likes of TJX's T.J. Maxx and Marshalls, Kohl's (NYSE:KSS), or Wal-Mart (NYSE:WMT), but the absolute pounding that this stock has seen (down 75% over the past year) has already washed out a lot of expectations.

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Gordmans Stores Has Better Management, Will Results Reflect It?

Seeking Alpha: Gordmans Stores' Merchandising Problems Linger

Discount retailer Gordmans Stores (GMAN) has been a falling knife since the fall of 2013, as the company has exacerbated a weak underlying retailing environment with poor merchandising decisions that have hit same-store sales hard and depressed margins. Although Gordmans' results weren't out of line with expectations for the quarter, they were still weak and the company announced that the CEO had elected to retire.

Gordmans Stores may benefit from a new vision or voice at the top, as the company's robust store growth of recent years is not producing compelling comp-growth. The good news here is that even in a tough quarter the company was still profitable and it does not take particularly aggressive model assumptions to suggest value in the shares. This is a speculative call, and the sell-side has slashed its price targets by almost half in the last four months, but simply stabilizing the comps could a make a significant difference.

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Gordmans Stores' Merchandising Problems Linger

Seeking Alpha: Gordmans Stores Needs To Fix Its Merchandising, And Soon

Relative to my feelings about Gordmans Stores (GMAN) nine months ago, a lot of my biggest worries have materialized and come home to roost, burying the stock under a mound of guano. Sluggish traffic is an issue across the retail space (amply demonstrated by many mall-based teen retailers), but Gordmans seems to have particular issues with its merchandising and it is taking a toll on same-store sales. What's more, I really disagree with the company's decision to pay out a sizable debt-funded special dividend earlier this year.

I feel as though I am in an uncertain and uncomfortable place with Gordmans now. I believe management is moving aggressively to deal with its merchandising issues, and I do take encouragement from the apparent willingness of developers to continue extending financing to the company. I also continue to believe that Gordmans has a differentiated discount retail model that can support a much bigger store footprint. The setbacks in same-store sales and a balance sheet-induced change to my discount rate lead me to meaningfully lower my estimated fair value here, but it still looks as though Gordmans is undervalued relative to what I see as its long-term prospects.

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Gordmans Stores Needs To Fix Its Merchandising, And Soon

Investopedia: Kohl's Could Work For A Trade, But It's In A Brutal Business

Retailers have to try to pick winners, and whenever a company builds its model upon picking winners it's just a matter of “when” (not “if”) the company stumbles. Kohl's (NYSE:KSS) did a lot of things right in building up its 1,150-store chain of value-oriented specialty department stores, but execution has been more problematic recently. Conventional valuation metrics suggest Kohl's could have further to run if/when the reported numbers improve, but investors thinking long term should be wary of the cash flow model and the ability of any company to establish long-term competitive edges in retailing.

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Investopedia: Kohl's Could Work For A Trade, But It's In A Brutal Business

Retailers have to try to pick winners, and whenever a company builds its model upon picking winners it's just a matter of “when” (not “if”) the company stumbles. Kohl's (NYSE:KSS) did a lot of things right in building up its 1,150-store chain of value-oriented specialty department stores, but execution has been more problematic recently. Conventional valuation metrics suggest Kohl's could have further to run if/when the reported numbers improve, but investors thinking long term should be wary of the cash flow model and the ability of any company to establish long-term competitive edges in retailing.

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Seeking Alpha: Gordmans Stores Looking To Carve Out A Niche In The Cutthroat Retail World

I go back a long way with Gordmans Stores (GMAN). When I was a little kid, the local Richman Gordman had a kids play area with these huge (to a 4-yr-old) fiberglass animals that you could climb on/through, slide down, and otherwise amuse yourself with. The play area was always pretty full, and I think Richman Gordman was locally popular if for no other reason than mothers could do some shopping (these were the days when you actually could leave kids unattended to play) while their shrieking hellions amused themselves without bothering other shoppers.

Fast forward all too many years, and it's worth asking if the U.S. retail scene really needs yet another shopping destination. In the case of Gordmans, I think there could be something here - the company is trying to combine discount store pricing with a specialty store "feel," and shoppers have proven over and over again that they love that combination. With a good balance sheet, an economically attractive store model, and a solid expansion plan, these shares may just be a discount themselves today.

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Gordmans Stores Looking To Carve Out A Niche In The Cutthroat Retail World