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GMAN > SEC Filings for GMAN > Form 10-Q on 29-Aug-2013All Recent SEC Filings

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Form 10-Q for GORDMANS STORES, INC.


29-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project," "plan," "intend," "believe," "may," "will," "should," "can have," "likely" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. For example, all statements we make relating to our estimated and projected costs, expenditures, cash flows, growth rates and financial results, our plans and objectives for future operations, growth or initiatives, or strategies or the expected outcome or impact of pending or threatened litigation are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected, including the factors described in "Part II, Item 1A - Risk Factors" in this Quarterly Report and in "Item 1A - Risk Factors" in our fiscal year 2012 Annual Report on Form 10-K.

The forward-looking statements are only predictions based on our current expectations and our projections about future events. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements as well as other cautionary statements that are made from time to time in our other Securities and Exchange Commission ("SEC") filings and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties. The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

The following discussion and analysis should be read in conjunction with our fiscal year 2012 Annual Report on Form 10-K and the unaudited condensed consolidated financial statements and the related notes thereto included in Item 1. Consolidated Financial Statements of this Quarterly Report.

Executive Overview

Gordmans is an everyday value price department store retailer featuring a large selection of the latest brands, fashions and styles at up to 60% off department and specialty store prices every day in a fun, easy-to-shop environment. Our merchandise assortment includes apparel for all ages, accessories (including fragrances), footwear and home fashions. The origins of Gordmans date back to 1915, and as of August 3, 2013, we operated 90 stores in 19 states situated in a variety of shopping center developments, including regional enclosed shopping malls, lifestyle centers and power centers.

We opened seven new stores during the twenty-six weeks ended August 3, 2013 in four new markets and two existing markets, of which four new stores were opened during the second quarter of fiscal 2013, compared to seven new stores in four new markets and one existing market during the twenty-six weeks ended July 28, 2012, of which three new stores were opened during the second quarter of fiscal 2012.

In assessing the performance of our business, we consider a variety of performance and financial measures. These key measures include net sales and comparable store sales and other individual store performance factors, gross profit and selling, general and administrative expenses.

Net Sales. Net sales reflect our revenues from the sale of our merchandise less returns and discounts and exclusive of sales tax. Net sales include comparable store sales and non-comparable store sales.

Comparable Store Sales. Comparable store sales have been calculated based upon stores that were open at least 16 months as of the end of the reporting period. We also review average sale per transaction and comparable store transactions. Comparable store sales are an important indicator of current operating performance, with higher comparable store sales helping us to leverage our fixed expenses and positively impacting our operating results.

Gross Profit. Gross profit is equal to our net sales minus cost of sales, plus license fee income generated from sales of footwear and maternity apparel in our leased departments. Cost of sales includes the direct cost of purchased merchandise, inventory shrinkage, inventory write-downs and inbound freight to our distribution center. Gross margin measures gross profit as a percentage of our net sales. Our gross profit may not be comparable to other retailers, as some companies include all of the costs related to their distribution network in cost of sales while others, like us, exclude a portion of these costs from cost of sales and include those costs in selling, general and administrative expenses. Our gross margin is evaluated in terms of initial markup and the amount of markdowns, with higher initial markup and lower markdowns positively impacting our operating results.


Table of Contents

Selling, General and Administrative Expenses. Selling, general and administrative expenses include all operating costs not included in cost of sales. These expenses include payroll and other expenses related to operations at our corporate office, store expenses, occupancy costs, certain distribution and warehousing costs, pre-opening expenses, depreciation and amortization and advertising expense. Selling, general and administrative expenses as a percentage of net sales is generally higher in lower sales volume periods and lower in higher sales volume periods. Our ability to manage store level and certain other operating expenses directly impacts our operating results.

Overview

Net income for the thirteen and twenty-six week periods ended August 3, 2013 was $0.9 million and $4.2 million, respectively, as compared to net income of $3.5 million and $11.6 million, respectively, for the thirteen and twenty-six week periods ended July 28, 2012. The decrease in net income was due to a decrease in comparable store sales, a decrease in gross profit margin and higher selling, general and administrative expenses, partially offset by higher net sales attributable to new stores. Below are highlights of our financial results for the thirteen and twenty-six week periods ended August 3, 2013.

Net sales increased 6.7% and 2.3% for the thirteen and twenty-six weeks ended August 3, 2013, respectively, as compared to the thirteen and twenty-six weeks ended July 28, 2012 due to an increase in non-comparable store sales from the addition of nine new stores in fiscal 2012, three of which opened in the second quarter of fiscal 2012, the three new stores opened during the first quarter of fiscal 2013 and the four new stores opened at the end of the second quarter of fiscal 2013. Comparable store sales decreased 2.6% and 6.7%, respectively, for the thirteen and twenty-six weeks ended August 3, 2013.

Gross profit margin decreased 250 basis points in both the thirteen and twenty-six week periods ended August 3, 2013 as compared to the thirteen and twenty-six week periods ended July 28, 2012, respectively, primarily as a result of higher markdowns to reduce inventory levels.

Higher selling, general and administrative expenses were primarily attributable to the nine new stores opened during fiscal 2012 and the seven new stores opened during the twenty-six week periods ended August 3, 2013.

Basis of Presentation and Results of Operations

The consolidated financial statements include the accounts of Gordmans Stores, Inc. and its subsidiaries, Gordmans Intermediate Holding Corp., Gordmans, Inc., Gordmans Management Company, Inc., Gordmans Distribution Company, Inc. and Gordmans LLC. All intercompany transactions and balances have been eliminated in consolidation. We utilize a typical retail 52-53 week fiscal year whereby the fiscal year ends on the Saturday nearest January 31. Fiscal year 2013 represents a fifty-two week year ending February 1, 2014, while fiscal year 2012 was a fifty-three week year ended February 2, 2013. All references to fiscal years are to the calendar year in which the fiscal year begins. The thirteen weeks ended August 3, 2013 and the thirteen weeks ended July 28, 2012 represent the second quarters of fiscal 2013 and fiscal 2012, respectively. The twenty-six weeks ended August 3, 2013 and the twenty-six weeks ended July 28, 2012 represent the first half of fiscal 2013 and fiscal 2012, respectively.

The table below sets forth the condensed consolidated statements of operations data for the periods presented (in thousands):

                                           13 Weeks        13 Weeks         26 Weeks         26 Weeks
                                            Ended            Ended           Ended            Ended
                                          August 3,        July 28,        August 3,         July 28,
                                             2013            2012             2013             2012
Statements of Operation Data:
Net sales                                 $  136,769       $ 128,238       $  268,203       $  262,160
License fees from leased departments           1,768           1,620            3,689            3,557
Cost of sales                                (79,317 )       (71,165 )       (153,681 )       (143,533 )

Gross profit                                  59,220          58,693          118,211          122,184
Selling, general and administrative
expenses                                     (57,600 )       (52,898 )       (111,273 )       (103,384 )

Income from operations                         1,620           5,795            6,938           18,800
Interest expense, net                           (117 )          (123 )           (238 )           (248 )

Income before taxes                            1,503           5,672            6,700           18,552
Income tax expense                              (569 )        (2,127 )         (2,518 )         (6,957 )

Net income                                $      934       $   3,545       $    4,182       $   11,595


Table of Contents

The table below sets forth the components of the condensed consolidated statements of operations as a percentage of net sales:

                                           13 Weeks           13 Weeks          26 Weeks           26 Weeks
                                             Ended             Ended              Ended             Ended
                                           August 3,          July 28,          August 3,          July 28,
                                             2013               2012              2013               2012
Net sales                                       100.0 %           100.0 %            100.0 %           100.0 %
License fees from leased departments              1.3               1.3                1.4               1.4
Cost of sales                                   (58.0 )           (55.5 )            (57.3 )           (54.8 )

Gross profit                                     43.3              45.8               44.1              46.6
Selling, general and administrative
expenses                                        (42.1 )           (41.3 )            (41.5 )           (39.4 )

Income from operations                            1.2               4.5                2.6               7.2
Interest expense, net                            (0.1 )            (0.1 )             (0.1 )            (0.1 )

Income before taxes                               1.1               4.4                2.5               7.1
Income tax expense                               (0.4 )            (1.6 )             (0.9 )            (2.7 )

Net income                                        0.7 %             2.8 %              1.6 %             4.4 %

Thirteen Weeks Ended August 3, 2013 Compared to Thirteen Weeks Ended July 28, 2012

Net Sales

Net sales for the thirteen weeks ended August 3, 2013 increased $8.5 million, or 6.7%, to $136.8 million as compared to $128.2 million for the thirteen weeks ended July 28, 2012. This increase was the result of an $11.7 million increase in non-comparable store sales due to the addition of five new stores in the last three quarters of fiscal 2012, three of which opened at the end of the second quarter of fiscal 2012, and the opening of three new stores in the first quarter of fiscal 2013 and four new stores at the end of the second quarter of fiscal 2013. Comparable store sales decreased $3.1 million, or 2.6%, primarily due to a mid-single digit decrease in comparable transactions, which represents our measure for guest traffic. The decrease in comparable transactions was partially offset by a mid-single digit increase in the average sale per transaction, which improved from the first quarter of fiscal 2013 in part due to the roll out of our guest loyalty program, gRewards, to all stores in the second quarter. From a major merchandising category perspective, Apparel generated a low single digit comparable store sales increase for the thirteen weeks ended August 3, 2013 compared to the thirteen weeks ended July 28, 2012, led by our Childrens and Mens divisions, while Home Fashions and Accessories (including Fragrances) both experienced high single digit comparable store sales decreases for the same period.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for the thirteen weeks ended August 3, 2013 increased $0.1 million, or 9.1%, to $1.8 million as compared to $1.6 million for the thirteen weeks ended July 28, 2012 primarily due to new store growth.

Gross Profit

Gross profit, which includes license fees from leased departments, for the thirteen weeks ended August 3, 2013 increased $0.5 million, or 0.9%, to $59.2 million as compared to $58.7 million for the thirteen weeks ended July 28, 2012. Gross profit margin decreased 250 basis points to 43.3% of net sales as compared to 45.8% of net sales for the second quarter of 2012. Of this decrease, 230 basis points was due to an increase in markdowns as a percentage of net sales during the second quarter of 2013 to clear excess merchandise that resulted from the comparable store sales decrease. The remaining decrease primarily related to a decrease in mark-up on merchandise purchases.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the thirteen weeks ended August 3, 2013 increased $4.7 million, or 8.9%, to $57.6 million as compared to $52.9 million for the thirteen weeks ended July 28, 2012. As a percentage of net sales, selling, general and administrative expenses increased to 42.1% as compared to 41.3% for the second quarter of 2012, an 80 basis point increase. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to higher depreciation expense, higher store expenses and higher corporate expenses associated with a decrease in comparable store sales, higher advertising expenses and higher pre-opening expenses, partially offset by lower distribution center expenses.


Table of Contents

Store expenses increased $2.5 million in the second quarter of fiscal 2013 as compared to the second quarter of fiscal 2012 primarily due to increased rent, payroll, maintenance and utilities expenses associated with new store growth, partially offset by lower benefit expenses primarily related to lower health insurance and workers compensation insurance claims. Store expenses were 27.0% of net sales in the second quarter of fiscal 2013 as compared to 26.8% of net sales in the second quarter of fiscal 2012, a 20 basis point increase, primarily resulting from higher rent and real estate, higher payroll and higher maintenance expenses as a percentage of net sales associated with the decrease in comparable store sales, partially offset by lower benefit expenses.

Depreciation and amortization expenses increased $0.7 million, or 50 basis points as a percentage of net sales, in the second quarter of fiscal 2013 as compared to the second quarter of fiscal 2012 due to increased property additions associated with new store openings and investments in upgrading our information technology systems.

Corporate expenses increased $0.7 million in the second quarter of fiscal 2013 as compared to the second quarter of fiscal 2012 primarily due to higher information technology costs of $0.4 million related to upgrading our information technology systems and supporting our enterprise merchandise system that was implemented in fiscal 2012 and higher consulting and legal expenses of $0.3 million. Corporate expenses were 6.3% of net sales in the second quarter of fiscal 2013 as compared to 6.2% of net sales in the second quarter of fiscal 2012, a 10 basis point increase, primarily resulting from higher information technology costs as a percentage of net sales.

The $0.5 million increase in advertising expenses was primarily the result of higher television advertising expenses associated with new store growth and expenses associated with the promotion of our loyalty program, which was rolled out to all of our stores in the second quarter of fiscal 2013. Advertising expenses increased 20 basis points to 2.5% of net sales in the second quarter of fiscal 2013 as compared to the second quarter of fiscal 2012 primarily due to the loyalty program expenses.

Store pre-opening expenses increased $0.2 million, or 10 basis points as a percentage of net sales, in the second quarter of fiscal 2013 due to the opening of four new stores in the second quarter of fiscal 2013 as compared to the three new stores opened in the second quarter of fiscal 2012.

Distribution center expenses remained consistent from the second quarter of fiscal 2012 to the second quarter of fiscal 2013. Distribution center expenses were 3.7% of net sales in the second quarter of fiscal 2013 as compared to 3.9% of net sales in the second quarter of fiscal 2012, a 20 basis point decrease, primarily resulting from lower payroll costs as a percentage of net sales associated with lower merchandise receipts and processing efficiencies.

Interest Expense

Interest expense was $0.1 million for the thirteen weeks ended August 3, 2013 and July 28, 2012. There were no borrowings on the revolving line of credit during the second quarter of fiscal 2013 or 2012.

Income before Taxes

Income before taxes for the second quarter of fiscal 2013 was $1.5 million compared to $5.7 million in the second quarter of fiscal 2012. As a percentage of net sales, income before taxes was 1.1% for the second quarter of fiscal 2013 compared to 4.4% for the second quarter of fiscal 2012.

Income Tax Expense

Income tax expense for the thirteen weeks ended August 3, 2013 was $0.6 million compared to income tax expense of $2.1 million for the thirteen weeks ended July 28, 2012. The effective income tax rate for the second quarter of fiscal 2013 was 37.8% compared to an effective rate of 37.5% for the second quarter of fiscal 2012. The effective rate differed from the federal enacted rate of 35% primarily due to state taxes, net of federal benefits.

Net Income

Net income for the second quarter of fiscal 2013 decreased $2.6 million, or 73.7%, to $0.9 million compared to $3.5 million for the second quarter of fiscal 2012. As a percentage of net sales, net income was 0.7% for the second quarter of fiscal 2013 compared to 2.8% for the second quarter of fiscal 2012. The decrease in net income as a percentage of net sales resulted primarily from the decrease in comparable store sales, the 250 basis point decrease in gross profit margin and the increase in selling, general and administrative expenses primarily associated with our new store growth.


Table of Contents

Twenty-six Weeks Ended August 3, 2013 Compared to Twenty-six Weeks Ended July 28, 2012

Net Sales

Net sales for the twenty-six weeks ended August 3, 2013 increased $6.0 million, or 2.3%, to $268.2 million as compared to $262.2 million for the twenty-six weeks ended July 28, 2012. This increase was the result of a $22.8 million increase in non-comparable store sales due to the addition of nine new stores in fiscal 2012, seven of which opened in the first half of fiscal 2012, and the opening of three new stores in the first quarter of fiscal 2013 and four new stores at the end of the second quarter of fiscal 2013. Comparable store sales decreased $16.7 million, or 6.7%, due to a high single digit decrease in comparable transactions, which represents our measure for guest traffic, partially offset by a low single digit increase in the average sale per transaction. We rolled out our guest loyalty program to all stores in May 2013, which contributed to improvements in guest traffic and the average sale per transaction in the first half of fiscal 2013. From a major merchandising category perspective, Apparel experienced a mid-single digit comparable store sales decrease for the twenty-six weeks ended August 3, 2013 compared to the twenty-six weeks ended July 28, 2012, although sales results improved from the first quarter of fiscal 2013 to the second quarter of fiscal 2013, as evidenced by the low single digit comparable store sales increase for Apparel in the second quarter. Home Fashions experienced a high single digit comparable stores sales decrease and Accessories (including Fragrances) experienced a low double digit comparable store sales decrease for the first half of fiscal 2013.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for the twenty-six weeks ended August 3, 2013 increased $0.1 million, or 3.7%, to $3.7 million as compared to $3.6 million for the twenty-six weeks ended July 28, 2012 primarily due to new store growth.

Gross Profit

Gross profit, which includes license fees from leased departments, for the twenty-six weeks ended August 3, 2013 decreased $4.0 million, or 3.3%, to $118.2 million as compared to $122.2 million for the twenty-six weeks ended July 28, 2012. Gross profit margin decreased 250 basis points to 44.1% of net sales as compared to 46.6% of net sales for the twenty-six weeks ended July 28, 2012. The 250 basis point decrease was due to an increase in markdowns as a percentage of net sales during the first half of 2013 to clear excess merchandise that resulted from the comparable store sales decrease in the first half of fiscal 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the twenty-six weeks ended August 3, 2013 increased $7.9 million, or 7.6%, to $111.3 million as compared to $103.4 million for the twenty-six weeks ended July 28, 2012. As a percentage of net sales, selling, general and administrative expenses increased to 41.5% as compared to 39.4% for the first half of 2012, a 210 basis point increase. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to higher store expenses and higher corporate expenses associated with a decrease in comparable store sales, as well as higher depreciation expense and higher advertising expenses, partially offset by lower pre-opening expenses.

Store expenses increased $4.8 million in the first half of fiscal 2013 as compared to the first half of fiscal 2012 primarily due to increased rent and real estate, payroll, maintenance and utilities expenses associated with new store growth. Store expenses were 26.6% of net sales in the first half of fiscal 2013 as compared to 25.4% of net sales in the first half of fiscal 2012, a 120 basis point increase, primarily resulting from higher rent and real estate, higher payroll, higher maintenance and higher utilities expenses as a percentage of net sales associated with a decrease in comparable store sales.

Depreciation and amortization expenses increased $1.6 million, or 60 basis points as a percentage of net sales, in the first half of fiscal 2013 as compared to the first half of fiscal 2012 due to increased property additions associated with new store openings and investments in upgrading our information technology systems.

Corporate expenses increased $0.8 million in the first half of fiscal 2013 as compared to the first half of fiscal 2012 primarily due to higher information technology costs of $0.7 million related to upgrading our information technology systems and supporting our enterprise merchandise system that was implemented in fiscal 2012, higher share-based compensation expense of $0.3 million for stock options and restricted stock issued in the second half of fiscal 2012 and the first half of fiscal 2013, and higher payroll costs of $0.1 million for the addition of new staff positions to support our growth and merit compensation increases, partially offset by lower benefit costs of $0.3 million. Corporate expenses were 6.2% of net sales in the first half of fiscal 2013 as compared to 6.0% of net sales in the first half of fiscal 2012, a 20 basis point increase, primarily resulting from higher information technology costs as a percentage of net sales associated with a decrease in comparable store sales.

Advertising expenses increased $0.5 million in the first half of fiscal 2013 as compared to the first half of fiscal 2012 primarily as a result of the rollout of our loyalty program in the second quarter of fiscal 2013. Advertising expenses were 2.3% of net sales in the first half of fiscal 2013 as compared to 2.2% of net sales in the first half of fiscal 2012.


Table of Contents

The $0.3 million increase in distribution center expenses was primarily the result of higher outbound freight delivery charges related to the increase in merchandise inventory receipts associated with new store growth. Distribution center expenses were 3.7% of net sales in both the first half of fiscal 2013 and the first half of fiscal 2012.

Store pre-opening expenses decreased $0.2 million, or 10 basis points as a percentage of net sales, in the first half of fiscal 2013. Although we opened seven new stores in the first half of fiscal 2013 as compared to the seven new stores opened in the first half of fiscal 2012, pre-opening expenses incurred on the three new stores opened in the first quarter of fiscal 2013, which were all opened in existing markets, were lower on a per store basis compared to the four new stores opened in the same period last year.

Interest Expense

Interest expense was $0.2 million for the twenty-six weeks ended August 3, 2013 and July 28, 2012. There were no borrowings on the revolving line of credit during the first half of fiscal 2013 or 2012.

Income before Taxes

. . .

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