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GMAN > SEC Filings for GMAN > Form 10-K on 3-Apr-2014All Recent SEC Filings

Show all filings for GORDMANS STORES, INC.

Form 10-K for GORDMANS STORES, INC.


3-Apr-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of our company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this report.

This discussion contains forward-looking statements that are based on the beliefs of, as well as assumptions made by and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including but not limited to those discussed in the section entitled "Risk Factors."

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 February 1, 2014, we operated 93 stores in 19 states situated in a variety of shopping center developments, including regional enclosed shopping malls, lifestyle centers and power centers.

Our expansion strategy includes opening seven new stores in fiscal 2014 and two new states after opening ten new stores in one new state in fiscal 2013 and nine new stores in fiscal 2012 in two new states. We plan to open seven new stores in fiscal 2014, in addition to closing three existing stores, as we focus on driving comparable stores sales and integrating our second distribution center into our current operating environment during fiscal 2014. Our objective is to increase our store base as appropriate.

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. Fiscal years 2013 and 2011 represent fifty-two week years ended February 1, 2014 and January 28, 2012, respectively, while fiscal year 2012 represents a fifty-three week year ended February 2, 2013.


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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. Comparable store sales include stores that were relocated or remodeled and exclude stores that are closed. We also review the average sale per transaction, comparable store transactions and sales conversion rates. 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, inbound freight to our distribution center, inventory shrinkage and inventory write-downs. 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.

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 fiscal year 2013 was $8.0 million as compared to net income of $23.5 million for fiscal year 2012. The decrease in net income for fiscal year 2013 as compared to fiscal year 2012 was primarily due to a 7.4% decrease in comparable store sales, a 130 basis point decrease in gross profit margin and higher selling, general and administrative expenses, partially offset by higher net sales attributable to new stores. We continue to have strong working capital and liquidity following the $69.9 million special cash dividend declared in August 2013, which was financed with a combination of cash from operations and a $45 million senior term loan. Below are highlights of our financial results for fiscal year 2013.

Net sales increased 2.0% for fiscal year 2013 as compared to fiscal year 2012. Higher net sales were driven by an increase in non-comparable store sales due to the addition of ten new stores during fiscal year 2013 and the nine new stores opened in fiscal year 2012. Comparable store sales decreased 7.4% in fiscal year 2013 as compared to the prior year (measured using the fifty-two week fiscal year 2013 ended February 1, 2014 compared to the 52 weeks ended January 26, 2013), which followed a comparable store sales decrease of 0.7% in fiscal year 2012. We have completed a number of initiatives in fiscal year 2013, including the launch of our guest loyalty program, gRewards, in the second quarter of fiscal year 2013. To improve our recent comparable store sales trend, we have a number of initiatives planned in fiscal year 2014, including several merchandising strategies focused on injecting breadth and diversity into our product selection and improving sales conversion at the store level.

Gross profit margin decreased 130 basis points in fiscal year 2013 as compared to the prior year primarily as a result of higher markdowns to reduce and align merchandise inventory levels. The 130 basis point decrease in gross profit margin followed a 30 basis point decrease in fiscal year 2012 and a 50 basis point improvement in fiscal year 2011.

Higher selling, general and administrative expenses were primarily attributable to the 12% expansion in our store base, as ten stores were opened during fiscal year 2013.


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Basis of Presentation and Results of Operations

Basis of Presentation

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. All references in these financial statements to fiscal years are to the calendar year in which the fiscal year begins. Fiscal years 2013 and 2011 represent fifty-two week years ended February 1, 2014 and January 28, 2012, respectively, while fiscal year 2012 represents a fifty-three week year ended February 2, 2013.

Results of Operations

The following table contains results of operations data for fiscal years 2013, 2012 and 2011.

                                               Year                  Year                  Year
                                               Ended                 Ended                 Ended
                                            February 1,           February 2,           January 28,
                                               2014                  2013                  2012
                                                                  (in 000's)
Statements of Operations Data:
Net sales                                  $     619,559         $     607,692         $     551,476
License fees from leased departments               7,828                 7,361                 6,670
Cost of sales                                   (365,463 )            (350,212 )            (316,167 )

Gross profit                                     261,924               264,841               241,979
Selling, general and administrative
expenses                                        (247,131 )            (226,710 )            (201,084 )

Income from operations                            14,793                38,131                40,895
Interest expense, net                             (2,482 )                (481 )                (610 )

Income before taxes                               12,311                37,650                40,285
Income tax expense                                (4,298 )             (14,119 )             (15,112 )

Net income                                 $       8,013         $      23,531         $      25,173

The table below sets forth the components of the consolidated statements of income as a percentage of net sales.

                                              Year                    Year                    Year
                                              Ended                   Ended                   Ended
                                           February 1,             February 2,             January 28,
                                             2014(1)                 2013(1)                 2012(1)
Statements of Operations Data:
Net sales                                         100.0 %                 100.0 %                 100.0 %
License fees from leased
departments                                         1.3                     1.2                     1.2
Cost of sales                                     (59.0 )                 (57.6 )                 (57.3 )

Gross profit                                       42.3                    43.6                    43.9
Selling, general and
administrative expenses                           (39.9 )                 (37.3 )                 (36.5 )

Income from operations                              2.4                     6.3                     7.4
Interest expense, net                              (0.4 )                  (0.1 )                  (0.1 )

Income before taxes                                 2.0                     6.2                     7.3
Income tax expense                                 (0.7 )                  (2.3 )                  (2.7 )

Net income                                          1.3 %                   3.9 %                   4.6 %

(1) Percentages may not foot due to rounding.


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Fiscal Year 2013 Compared to Fiscal Year 2012

Net Sales

Net sales for fiscal year 2013 increased $11.9 million, or 2.0%, to $619.6 million as compared to $607.7 million for fiscal year 2012. This increase was primarily the result of a $60.8 million increase in non-comparable store sales due to the opening of ten new stores in fiscal 2013 and nine new stores in fiscal 2012. Comparable store sales decreased $48.9 million, or 7.4%. The 7.4% comparable store sales decrease is for fifty-two week fiscal year 2013 ended February 1, 2014 compared to the 52 weeks ended January 26, 2013. Comparable store sales decreased 7.0% for fiscal year 2013 compared to the fifty-two weeks ended February 2, 2013. The comparable store sales decrease was primarily due to a low double 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, which improved from fiscal year 2012 in part due to the rollout of our guest loyalty program, gRewards, to all stores in the second quarter of fiscal year 2013. From a major merchandising category perspective, Apparel incurred a mid-single digit comparable store sales decrease for fiscal year 2013, Home Fashions incurred a high single digit comparable store sales decrease and Accessories (including Fragrances) experienced a low double digit comparable store sales decrease for fiscal year 2013.

We believe that the recent decline in comparable store sales, which began in the fourth quarter of fiscal 2012, is primarily the result of our merchandising selection. We believe initiatives, such as the company-wide launch of our guest loyalty program in fiscal 2013, and initiatives planned for fiscal year 2014, including several merchandising sales growth strategies focused on injecting breadth and diversity into our product selection across a number of our Apparel and Home Fashions businesses and revitalizing the presentation of merchandise and the shopping experience for our guests, combined with the addition of several talented associates to our merchandising and stores leadership teams, will lead to improved comparable store sales performance in fiscal year 2014 and beyond.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for fiscal year 2013 increased $0.5 million, or 6.3%, to $7.8 million as compared to $7.4 million for fiscal year 2012 primarily due to new store growth.

Gross Profit

Gross profit, which includes license fees from leased departments, for fiscal year 2013 decreased $2.9 million, or 1.1%, to $261.9 million as compared to $264.8 million in fiscal year 2012. Gross profit margin for fiscal year 2013 decreased 130 basis points to 42.3% of net sales as compared to 43.6% of net sales for fiscal year 2012. Of this decrease, 100 basis points was due to an increase in markdowns as a percentage of sales during fiscal year 2013 versus fiscal year 2012 to clear excess merchandise that resulted from sales falling short of expectations and align inventory levels and 20 basis points was due to a decrease in mark-up on merchandise purchases. The remaining 10 basis point decrease was primarily the result of an increase in the inventory obsolescence reserve adjustment in fiscal year 2013 as compared to fiscal year 2012 due to higher aged inventory levels at the end of fiscal year 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal year 2013 increased $20.4 million, or 9.0%, to $247.1 million as compared to $226.7 million for fiscal year 2012. As a percentage of net sales, selling, general and administrative expenses for fiscal 2013 increased to 39.9% as compared to 37.3% for fiscal 2012. The increase in selling, general and administrative expenses as a percentage of net sales was primarily due to higher store, corporate, distribution center and advertising expenses associated with the decrease in comparable store sales, as well as higher depreciation and amortization expense.


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Store expenses increased $11.6 million in fiscal year 2013 as compared to fiscal year 2012. This increase was primarily due to increased rent and real estate, payroll, maintenance and utilities expenses associated with new store growth. Store expenses were 25.3% of net sales in fiscal 2013 compared to 23.9% of net sales in fiscal 2012, a 140 basis point increase, primarily resulting from higher rent and real estate taxes, higher payroll and higher maintenance expenses as a percentage of net sales associated with a decrease in comparable store sales.

Corporate expenses increased $3.0 million in fiscal 2013 as compared to fiscal 2012 primarily due to a $1.5 million increase in information technology costs related to upgrading our information technology systems and support of our enterprise merchandise system that was implemented in fiscal 2012 and higher payroll expense of $1.2 million. The addition of new staff positions to support our growth and merit compensation increases resulted in a $1.4 million increase, while share-based compensation expense also increased by $0.3 million. These increases in payroll expense were partially offset by a $0.4 million decrease in management bonuses. The remaining increase in corporate expenses resulted primarily from higher store-related legal expenses of $0.3 million. Corporate expenses were 5.7% of net sales in fiscal 2013 compared to 5.3% of net sales in fiscal 2012, a 40 basis point increase, primarily resulting from higher information technology costs and higher payroll expenses as a percentage of net sales associated with a decrease in comparable store sales.

Depreciation and amortization expense increased $2.9 million, or 40 basis points as a percentage of net sales, in fiscal 2013 as compared to fiscal 2012 due to increased property additions associated with ten new store openings in fiscal 2013 and investments in upgrading our information technology systems, including the implementation of Oracle's enterprise merchandising system in fiscal year 2012. Depreciation and amortization expense in fiscal 2013 also includes $0.1 million of accelerated depreciation expense related to the Company's plan to close 3 existing stores in fiscal 2014 and the corporate office relocation that occurred in early fiscal 2014.

The $1.6 million increase in distribution center expenses was primarily the result of higher outbound freight delivery charges of $0.7 million primarily associated with new store growth and higher payroll and benefit costs of $0.6 million related to processing the increase in merchandise inventory receipts associated with new store growth. The increase was also the result of higher rent expense of $0.4 million associated with our second distribution center, as rent expense began in November 2013. Distribution center expenses increased 20 basis points as a percentage of net sales to 3.7% of net sales in fiscal 2013 primarily resulting from higher payroll and higher rent expense as a percentage of net sales associated with a decrease in comparable store sales.

The $1.2 million increase in advertising expenses in fiscal 2013 as compared to fiscal 2012 was a result of increases in preprint and direct mail costs, including costs related to ten new store openings during fiscal 2013, as well as costs associated with our guest loyalty program, which was launched company-wide in the second quarter of fiscal 2013. Advertising expenses were 3.0% of net sales in fiscal 2013 compared to 2.8% in fiscal 2012, with the increase associated with a decrease in comparable store sales.

Store pre-opening expenses increased $0.2 million in fiscal 2013 as compared to fiscal 2012 due to ten new store openings in fiscal 2013, compared to nine new store openings in fiscal 2012.

Interest Expense, Net

Interest expense, net for fiscal year 2013 increased $2.0 million to $2.5 million compared to $0.5 million in fiscal year 2012. This increase was primarily the result of interest expense, including the amortization of deferred financing fees, related to the $45.0 million senior term loan that we entered into on August 27, 2013 to partially fund the $69.9 million special cash dividend declared on August 26, 2013, as well as an increase in average borrowings on our revolving line of credit from $0 during fiscal 2012 to $4.0 million during fiscal 2013.

Income Before Taxes

Income before taxes for fiscal year 2013 decreased $25.3 million to $12.3 million compared to $37.7 million in fiscal year 2012. As a percentage of net sales, income before taxes was 2.0% of net sales for fiscal year 2013 compared to 6.2% of net sales in fiscal year 2012.


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Income Tax Expense

Income tax expense decreased $9.8 million in fiscal year 2013 to $4.3 million as compared to $14.1 million in fiscal year 2012. The effective income tax rate for fiscal year 2013 was 34.9% compared to an effective rate of 37.5% for fiscal year 2012, with the decrease in the effective income tax rate resulting primarily from federal tax credits having a larger tax percentage impact given the lower taxable income compared to fiscal 2012. Additionally, not all of our taxable income was subject to the 35% federal tax bracket based upon the Company's lower taxable income. The effective rate differed from the federal enacted rate of 35% primarily due to federal tax credits and state taxes, net of federal benefits.

Net Income

Net income for fiscal year 2013 was $8.0 million compared to $23.5 million in fiscal year 2012, a $15.5 million decrease. As a percentage of net sales, net income was 1.3% of net sales for fiscal year 2013 compared to 3.9% in fiscal year 2012. The decrease in net income resulted primarily from the comparable store sales decrease, the 130 basis point decrease in gross profit margin and the increase in selling, general and administrative expenses associated with our new store growth, partially offset by higher net sales attributable to new stores.

Fiscal Year 2012 Compared to Fiscal Year 2011

Net Sales

Net sales for fiscal year 2012 increased $56.2 million, or 10.2%, to $607.7 million as compared to $551.5 million for fiscal year 2011. This increase was primarily the result of a $54.4 million increase in non-comparable store sales due to the opening of nine new stores in fiscal 2012 and six new stores in fiscal 2011. Comparable store sales increased $2.1 million, which includes $5.6 million of comparable store sales for the 53rd week of fiscal year 2012. Comparable store sales decreased 0.7% for the 52 weeks ended January 26, 2013 compared to 52 week fiscal year 2011 primarily due to a low 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. Net sales for fiscal year 2012 includes $6.3 million in sales for the 53rd week of fiscal 2012. From a major merchandising category perspective, Apparel generated a low single digit comparable store sales increase in fiscal year 2012, led by our Misses and Childrens divisions, while Home Fashions experienced a low single digit comparable store sales decrease for fiscal year 2012 and Accessories (including Fragrances) incurred a mid-single digit comparable store sales decrease for fiscal year 2012.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for fiscal year 2012 increased $0.7 million, or 10.4%, to $7.4 million as compared to $6.7 million for fiscal year 2011 primarily due to new store growth.

Gross Profit

Gross profit, which includes license fees from leased departments, for fiscal year 2012 increased $22.9 million, or 9.4%, to $264.8 million as compared to $242.0 million in fiscal year 2011. Gross profit margin for fiscal year 2012 decreased 30 basis points to 43.6% of net sales as compared to 43.9% of net sales for fiscal year 2011. Of this decrease, 50 basis points was due to an increase in markdowns as a percentage of sales during fiscal year 2012 versus fiscal year 2011 to clear excess merchandise that resulted from sales falling short of expectations, primarily in the fourth quarter, and 10 basis points was due to an increase in inventory shrinkage. A 30 basis point increase in mark-up on merchandise purchases during the year versus fiscal 2011 resulting from buying efficiencies and competitive pricing opportunities partially offset the gross margin deterioration created by higher markdowns and shrinkage.


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Selling, General and Administrative Expenses

Selling, general and administrative expenses for fiscal year 2012 increased $25.6 million, or 12.7%, to $226.7 million as compared to $201.1 million for fiscal year 2011. As a percentage of net sales, selling, general and administrative expenses for fiscal 2012 increased to 37.3% as compared to 36.5% for fiscal 2011. 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 distribution center expenses combined with a decrease in comparable store sales.

Store expenses increased $14.5 million in fiscal year 2012 as compared to fiscal year 2011. This increase was primarily due to increased payroll and benefits, rent, maintenance, utilities and cleaning expenses associated with new store growth. Store expenses were 23.9% of net sales in fiscal 2012 compared to 23.7% of net sales in fiscal 2011, a 20 basis point increase, primarily resulting from higher rent and real estate taxes and higher payroll and benefits as a percentage of net sales, partially offset by lower credit card fees as a percentage of net sales.

Corporate expenses increased $2.8 million in fiscal 2012 as compared to fiscal 2011 primarily due to higher payroll and benefits expense of $1.5 million. The addition of new staff positions to support our growth and merit compensation increases resulted in a $2.5 million increase, which was partially offset by a $0.5 million decrease in management bonuses and a $0.5 million decrease in share-based compensation expense. The remaining increase in corporate expenses resulted primarily from a $0.9 million increase in information technology costs related to upgrading our information technology systems and supporting our enterprise merchandise system that was implemented in fiscal 2012 and higher travel expenses of $0.2 million related to our growth. Corporate expenses were 5.3% of net sales in both fiscal 2012 and fiscal 2011.

The $2.7 million increase in distribution center expenses was primarily the result of higher payroll and benefit costs of $1.3 million, higher outbound freight delivery charges of $1.1 million and higher processing expenses of $0.3 million, all related to processing the increase in merchandise inventory receipts associated with new store growth. Distribution center expenses were 3.6% of net sales in fiscal 2012 compared to 3.4% in fiscal 2011, a 20 basis point increase, primarily resulting from higher payroll and higher outbound freight delivery charges as a percentage of net sales combined with a decrease in comparable store sales.

Depreciation and amortization expense increased $2.7 million, or 30 basis points as a percentage of net sales, in fiscal 2012 as compared to fiscal 2011 due to increased property additions associated with nine new store openings in fiscal 2012 and investments in upgrading our information technology systems, including the implementation of Oracle's enterprise merchandising system in fiscal year 2012.

The $2.0 million increase in advertising expenses in fiscal 2012 as compared to fiscal 2011 was a result of increases in television and direct mail costs, including costs related to nine new store openings during fiscal 2012. Advertising expenses were 2.8% of net sales in fiscal 2012 compared to 2.7% in fiscal 2011.

Store pre-opening expenses increased $0.9 million, or 10 basis points as a percentage of net sales, in fiscal 2012 as compared to fiscal 2011 due to nine new store openings in fiscal 2012, compared to six new store openings and one . . .

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