With a growing store count, comes growing inventories, and Gordmans is no exception. With all the new stores and a weak holiday season, 57% of the company’s assets are inventory. Holding this much inventory, Gordmans will inevitably take a hit on its margins, as it tries to clear its excess. However, as the new stores begin to mature and become fixtures in their new markets, Gordmans will see a return to its higher margins. Remember, 35% of the company’s storefront was added over the last 3 years — growth that may not generate high margins until we are a few more years down the road.
Over time, I believe Gordmans will capitalize on its best in class gross margin and will catch up to its peers’ profitability. Posting a gross margin 50% higher than its off-price retailing peers in Ross Stores, Inc. (NASDAQ:ROST) and The TJX Companies, Inc. (NYSE:TJX), Gordman has the opportunity to dominate its niche market. As for its more distant peer Kohl’s Corporation (NYSE:KSS)’s, Gordmans faces more direct competition, as 50% of the company’s stores are operated within one mile of a Kohl’s.
Solid Financials
Holding the best Cash/Debt ratio of the group, Gordmans will be able to continue funding its growth, but will face challenges as it unloads its excess inventory. Despite having the highest level of inventory, which account for 57% of their assets, the company is only one year removed from posting a 40% inventory level, in line with its peers. Similarly, with its inventory turnover, Gordmans was hit hard with the double whammy of expanding its store count while facing what turned out to be a bad holiday season. Three years earlier the company’s inventory turnover was a much healthier 5.76.
Furthermore, Gordmans has the most appealing Graham Number of the group, as it is only slightly overvalued as to what Ben Graham would like to see. While Kohl’s trades below its Graham number, it has a large debt load and a historically low inventory turnover level. As many traders wait to see Gordmans return its inventory levels back to its old standards, I am confident the company will see brighter days as its stores mature.
A “Buy” Valuation
With a 5 star rating from the population at Motley Fool, many have taken notice of Gordmans strikingly cheap valuations. While Kohl’s is slightly cheaper in terms of P/CF, it does not have the future growth story and is loaded up with over $4.5 Billion in debt. As the company has struggled to boost its EPS at the same rate of its off-price retailing peers, the market has cut their share price roughly in half. Trading with a PEG of 0.68, Gordmans growth runway is there, it is just a matter of meeting their internal expectations.
Regardless of their disappointing 2012, I firmly believe Gordmans was hurt by a weak holiday season and will rebound dramatically in 2012. In a recent outlook update, CEO Jeff Gordman announced the company had boosted same stores sales for the month of January by mid-single digits. Not ground breaking stuff, but enough to justify a CAPS pick on the debt-free company, as I await a return to prosperity at Gordmans.
The article Why Cramer Is Wrong on Gordmans originally appeared on Fool.com and is written by Josh Kohn-Lindquist.