A Little-Known Discount Story With Legs

 | Aug 16, 2012 | 11:30 AM EDT  | Comments
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rost

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Ross Stores (ROST), TJX Cos. (TJX), Wal-Mart (WMT) and Dollar Tree (DLTR) have all earned a lot of attention this year for leveraging a discount retail sales strategy into premium stock price appreciation, with gains of as much as 40% in this rather tepid year.

But there is one small-cap discount retailer that has beaten the pants off all of them -- one that you ought to put high on your shopping list.

The name is Gordmans (GMAN), and if you haven't heard of it, you probably don't live in Omaha, Neb., or shop in a Midwestern mall. I can't help you there, but I what I can do is tell you a little more about what has made Gordman shares tick 47% higher so far in 2012.

Gordmans is an off-price apparel and home-fashions retailer operating a chain of 81 stores representing more than 3.5 million square feet in 18 states. The retailer focuses on offering designer apparel, accessories, footwear, home décor, fragrances and more at savings of up to 60% off department and specialty store prices.

Although the company caters to the value segment of the industry, Gordmans looks to differentiate itself by utilizing a more upscale shopping environment that is more common to the brands it offers. It never buys imperfect product. Rather, in order to stock its stores it takes advantage of excess inventory or capacity restraints by apparel manufacturers.

The roots of the store date back to 1915, with a small Omaha, Neb., store owned and operated by Sam Richman. Several years later, Richman would meet his future son-in-law, Dan Gordman, who had left his career at Bloomingdale's to launch his own retail startup. They combined forces to start the chain initially known as Richman Gordman.

The stores were largely located in the Midwest, and in 1975 a new chain was launched called Half Price Stores. Reorganization in 1992 saw the company emerge from bankruptcy as a pure discount retailer, and by the end of the decade all the stores were operating solely under the Gordmans moniker.

The company is still in the Gordman family, as Dan's grandson Jeff Gordman now serves as CEO. Jeff joined Gordmans in 1990 and has held several positions across the company, including in merchandising, store operations and information technology.

The company's merchandisers offer select national brands such as Claiborne, Calvin Klein, Van Heusen, XOXO, Ralph Lauren and Perry Ellis. Gordmans looks to be more fashion-forward than many of its peers and, as such, it keeps a flexible inventory position by not making commitments to any of the apparel vendors with which it partners. Additionally, the company limits its home-fashions offerings to décor only, having decided to stay away from more promotional categories like linens and bed-and-bath accessories.

Another differentiator to most off-price retailers is that the chain uses a net-pricing buying strategy in which it doesn't ask vendors for advertising, markdown or any chargeback fees. This is beneficial to the vendor, as it provides more certainty and visibility on margins while allowing Gordmans to offer final "out-the-door" pricing to customers.

The typical Gordmans store is 50,000 square feet and located in a regional enclosed shopping center or lifestyle center in the Midwest. The firm's non-promotional, everyday-low-price strategy has resulted in about half of its revenue coming from apparel (53%), followed by home décor (29%) and accessories (18%). As with most discount retailers, Gordmans has a centralized checkout system, and its flexible floor plans have allowed the management team to take advantage of weak real estate conditions in the past few years.

According to investment firm R.W. Baird, the company only has a 16% penetration rate in the U.S., and has the potential for 500 more stores. That's very favorable growth opportunity that lies ahead, especially when compared with peers such as Kohl's (KSS) and TJX-owned Marshalls, which both have well over 1,000 stores already.

Gordmans (GMAN) -- Daily

Gordmans went public in August 2010, with shares debuting at $11. It's traded up about 56% since then, and is up 47% for the year to a still-small $350 million market capitalization. You're not just buying potential growth with this one, however, as the retailer has averaged 119% annual growth in net income in the past three years.

With a modest store size and a very flexible real estate strategy, the store footprint expansion should drive the firm's upside -- fundamentally, and in the stock market -- for years to come.

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