Quarterly Report


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 2, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-34842

 

 

Gordmans Stores, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   26-3171987

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

12100 West Center Road,

Omaha, Nebraska 68144

(Address of principal executive offices) (Zip Code)

(402) 691-4000

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).    Yes   ¨     No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common Stock, $0.001 par value, outstanding as of December 2, 2013: 19,420,444 shares

 

 

 


GORDMANS STORES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

INDEX

 

PART I

  

FINANCIAL INFORMATION

     3   

ITEM 1.

  

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     3   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     13   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     23   

ITEM 4.

  

CONTROLS AND PROCEDURES

     23   

PART II

  

OTHER INFORMATION

     24   

ITEM 1.

  

LEGAL PROCEEDINGS

     24   

ITEM 1A.

  

RISK FACTORS

     24   

ITEM 2.

  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     25   

ITEM 3.

  

DEFAULTS UPON SENIOR SECURITIES

     25   

ITEM 4.

  

RESERVED

     25   

ITEM 5.

  

OTHER INFORMATION

     25   

ITEM 6.

  

EXHIBITS

     26   

SIGNATURES

     27   

 

2


PART I—FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

GORDMANS STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in 000’s except share data)

(Unaudited)

 

     13 Weeks
Ended
November 2,
2013
    13 Weeks
Ended
October 27,
2012
    39 Weeks
Ended
November 2,
2013
    39 Weeks
Ended
October 27,
2012
 

Net sales

   $ 151,333      $ 143,072      $ 419,536      $ 405,232   

License fees from leased departments

     2,157        1,917        5,846        5,474   

Cost of sales

     (86,452     (80,716     (240,133     (224,249
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     67,038        64,273        185,249        186,457   

Selling, general and administrative expenses

     (64,560     (57,763     (175,833     (161,147
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,478        6,510        9,416        25,310   

Interest expense, net

     (892     (118     (1,130     (366
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     1,586        6,392        8,286        24,944   

Income tax expense

     (487     (2,397     (3,005     (9,354
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,099      $ 3,995      $ 5,281      $ 15,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.06      $ 0.21      $ 0.27      $ 0.81   

Diluted earnings per share

   $ 0.06      $ 0.21      $ 0.27      $ 0.80   

Basic weighted average shares outstanding

     19,307,499        19,188,340        19,268,957        19,139,880   

Diluted weighted average shares outstanding

     19,385,032        19,437,988        19,337,684        19,387,080   

See notes to unaudited condensed consolidated financial statements.

 

3


GORDMANS STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in 000’s except share data)

(Unaudited)

 

     November 2,
2013
    February 2,
2013
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 9,307      $ 40,824   

Accounts receivable

     2,512        2,049   

Landlord receivable

     5,796        8,787   

Income taxes receivable

     5,157        1,300   

Merchandise inventories

     149,265        78,006   

Deferred income taxes

     2,819        2,617   

Prepaid expenses and other current assets

     9,727        6,552   
  

 

 

   

 

 

 

Total current assets

     184,583        140,135   

PROPERTY AND EQUIPMENT, net

     66,069        45,966   

INTANGIBLE ASSETS, net

     1,927        1,992   

OTHER ASSETS, net

     5,477        3,033   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 258,056      $ 191,126   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 89,516      $ 34,211   

Accrued expenses

     32,190        22,789   

Current portion of long-term debt

     15,972        189   
  

 

 

   

 

 

 

Total current liabilities

     137,678        57,189   
  

 

 

   

 

 

 

NONCURRENT LIABILITIES:

    

Long-term debt, less current portion

     44,719        —    

Deferred rent

     26,752        21,997   

Deferred income taxes

     9,680        9,236   

Other liabilities

     419        316   
  

 

 

   

 

 

 

Total noncurrent liabilities

     81,570        31,549   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDERS’ EQUITY:

    

Preferred stock — $0.001 par value, 5,000,000 shares authorized, none issued and outstanding as of November 2, 2013 and February 2, 2013

     —         —    

Common stock — $0.001 par value, 50,000,000 shares authorized, 19,824,856 issued and 19,420,444 outstanding as of November 2, 2013, 19,804,102 issued and 19,404,322 outstanding as of February 2, 2013

     19        19   

Additional paid-in capital

     53,530        52,461   

Retained earnings (accumulated deficit)

     (14,741     49,908   
  

 

 

   

 

 

 

Total stockholders’ equity

     38,808        102,388   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 258,056      $ 191,126   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

4


GORDMANS STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in 000’s except share data)

(Unaudited)

 

     Shares of
Common
Stock
    Common
Stock
     Additional
Paid-In
Capital
    Retained
Earnings
(Accumulated
Deficit)
    Total  

BALANCE, January 28, 2012

     19,315,664      $ 19       $ 51,327      $ 26,377      $ 77,723   

Share-based compensation expense

     —         —           711        —          711   

Issuance of common stock pursuant to secondary offering, net of transaction costs of $457

     40,000        —           178        —          178   

Issuance of restricted stock

     73,600        —           —          —          —     

Net income

     —          —           —          15,590        15,590   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, October 27, 2012

     19,429,264      $ 19       $ 52,216      $ 41,967      $ 94,202   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, February 2, 2013

     19,404,322      $ 19       $ 52,461      $ 49,908      $ 102,388   

Share-based compensation expense

     —          —           985        —          985   

Issuance of restricted stock

     8,400        —           —          —          —     

Repurchase of common stock

     (4,632     —           (52     —          (52

Exercise of stock options

     12,354        —           136        —          136   

Dividend declared ($3.60 per share)

     —          —           —          (69,930     (69,930

Net income

     —          —           —          5,281        5,281   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

BALANCE, November 2, 2013

     19,420,444      $ 19       $ 53,530      $ (14,741   $ 38,808   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

5


GORDMANS STORES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in 000’s)

(Unaudited)

 

     39 Weeks
Ended
November 2,
2013
    39 Weeks
Ended
October 27,
2012
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 5,281      $ 15,590   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization expense

     7,118        4,833   

Loss on disposal of property and equipment

     —          46   

Amortization of deferred financing fees

     280        239   

Deferred income taxes

     242        721   

Share-based compensation expense

     985        711   

Net changes in operating assets and liabilities:

    

Accounts, landlord and income taxes receivable

     (1,329     1,875   

Merchandise inventories

     (71,259     (65,816

Prepaid expenses and other current assets

     (3,175     1,443   

Other assets

     (714     (436

Accounts payable

     55,305        49,689   

Deferred rent

     4,755        4,824   

Accrued expenses and other liabilities

     7,177        1,516   
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,666        15,235   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property and equipment

     (41,467     (32,873

Proceeds from sale-leaseback transactions

     16,390        14,379   

Proceeds from insurance settlement

     —          423   
  

 

 

   

 

 

 

Net cash used in investing activities

     (25,077     (18,071
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Dividends paid

     (69,682     —     

Borrowings on revolving line of credit

     23,941        —     

Repayments on revolving line of credit

     (8,250     —     

Proceeds from senior term loan

     45,000        —     

Repurchase of common stock

     (52     —     

Debt issuance costs

     (2,010     —     

Payment of long-term debt

     (189     (543

Proceeds from the exercise of stock options

     136        —     

Proceeds from issuance of common stock pursuant to secondary offering, net of transaction costs of $457

     —          178   
  

 

 

   

 

 

 

Net cash used in financing activities

     (11,106     (365
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (31,517     (3,201

CASH AND CASH EQUIVALENTS, Beginning of period

     40,824        35,413   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, End of period

   $ 9,307      $ 32,212   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

6


GORDMANS STORES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands Except Share Data and Per Share Amounts)

(Unaudited)

A. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation – The condensed consolidated financial statements include the accounts of Gordmans Stores, Inc. (the “Company”) 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. The Company utilizes a 52-53 week fiscal year whereby the fiscal year ends on the Saturday nearest January 31. The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of February 2, 2013 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and reflect all adjustments which are, in the opinion of management, necessary to summarize fairly our financial position and results of operations and cash flows for the periods presented. All of these adjustments are of a normal recurring nature.

Summary of Significant Accounting Policies – The accounting policies followed by the Company are reflected in the notes to the consolidated financial statements for the fiscal year ended February 2, 2013, included in our fiscal year 2012 Annual Report on Form 10-K, filed with the Securities and Exchange Commission. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended February 2, 2013. Due to the seasonality of our business, the results of operations for any quarter are not necessarily indicative of the operating results for the full fiscal year. In addition, quarterly results of operations can vary based upon the timing and amount of net sales and costs associated with the opening of new stores.

B. DESCRIPTION OF THE BUSINESS

Gordmans Stores, Inc. operated 93 everyday value price department stores under the trade name “Gordmans” located in 19 states as of November 2, 2013. Gordmans offers a wide assortment of name brand clothing for all ages, accessories (including fragrances), footwear and home fashions for up to 60% off department and specialty store regular prices every day in a fun, easy-to-shop environment. The Company has one reportable segment. The Company’s operations include activities related to retail stores. The Company opened ten new stores during the thirty-nine weeks ended November 2, 2013 and opened nine new stores during the thirty-nine weeks ended October 27, 2012.

The following table reflects the percentage of revenues by major merchandising category:

 

     13 Weeks
Ended
November 2,
2013
    13 Weeks
Ended
October 27,
2012
    39 Weeks
Ended
November 2,
2013
    39 Weeks
Ended
October 27,
2012
 

Apparel

     60.1     59.8     59.3     58.6

Home Fashions

     25.5        25.1        25.3        25.2   

Accessories (including fragrances)

     14.4        15.1        15.4        16.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100.0     100.0     100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

C. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

 

     November 2,
2013
    February 2,
2013
 

Leasehold improvements

   $ 9,180      $ 6,716   

Furniture, fixtures and equipment

     45,482        35,526   

Computer software

     16,487        15,075   

Capitalized leases

     1,740        1,740   

Construction in progress

     15,627        2,331   
  

 

 

   

 

 

 
     88,516        61,388   

Less accumulated depreciation and amortization

     (22,447     (15,422
  

 

 

   

 

 

 
   $ 66,069      $ 45,966   
  

 

 

   

 

 

 

 

7


D. DEBT OBLIGATIONS

Revolving Line of Credit Facility – The Company has an $80.0 million revolving line of credit facility dated February 20, 2009, as amended effective August 27, 2013, with Wells Fargo Bank, N.A. (successor in merger with Wells Fargo Retail Finance, LLC) and PNC Bank (“WF LOC”). The credit facility expires on August 27, 2018. The amendment to the WF LOC amends certain terms of the revolving line of credit facility, including an increase in the maximum available borrowings from $60.0 million to $80.0 million, a 0.25% reduction in the interest rate for base rate advances and LIBOR rate advances both during seasonal and non-seasonal periods, a decrease in the unused line fee from 0.375% to 0.25%, and the removal of the limitation on annual capital expenditures. The WF LOC allows the Company to increase the maximum available borrowings under the facility to $100.0 million. Deferred financing fees of $0.2 million related to the amendment of the WF LOC were capitalized and are included in other assets, net and are being amortized on a straight line basis over the remaining term of the revolving line of credit facility. The Company had $15.7 million of borrowings outstanding under the WF LOC as of November 2, 2013, which are included in the current portion of long-term debt at November 2, 2013 as the Company intends to repay the outstanding borrowings within the next twelve months. The Company had no borrowings outstanding under the WF LOC as of February 2, 2013 or October 27, 2012.

Borrowings under this facility bear interest at various rates based on the excess availability and time of year, with two rate options at the discretion of management as follows: (1) For base rate advances, borrowings bear interest at the prime rate plus 0.75% during the non-seasonal period and the prime rate plus 1.50% during the seasonal period. When excess availability is $40.0 million or greater, borrowings for base rate advances bear interest at the prime rate plus 0.50% during the non-seasonal period and the prime rate plus 1.25% during the seasonal period; (2) For LIBOR rate advances, borrowings bear interest at the LIBOR rate plus 1.75% during the non-seasonal period and the LIBOR rate plus 2.50% during the seasonal period. When excess availability is $40.0 million or greater, borrowings for LIBOR rate advances bear interest at the LIBOR rate plus 1.50% during the non-seasonal period and the LIBOR rate plus 2.25% during the seasonal period. Borrowings available under the WF LOC may not exceed the borrowing base (consisting of specified percentages of credit card receivables and eligible inventory, less applicable reserves). The Company must maintain minimum excess availability equal to at least 10% of the borrowing base, or $8.0 million. The Company had $63.6 million and $51.0 million available to borrow at November 2, 2013 and February 2, 2013, respectively. Borrowings under this facility bore an interest rate of 3.75% under the base rate option at November 2, 2013 and would have borne an interest rate of 4.00% under the base rate option at February 2, 2013. The Company had outstanding letters of credit included in the borrowing base totaling approximately $0.7 million and $0.2 million as of November 2, 2013 and February 2, 2013, respectively.

An unused line fee is payable quarterly in an amount equal to 0.25% of the sum of the average daily unused revolving commitment plus the average daily unused letter of credit commitment. A customary fee is also payable to the administrative agent under the facility on an annual basis.

Borrowings are secured by the Company’s inventory, accounts receivable and all other personal property, except as specifically excluded in the agreement.

Among other provisions, the loan, guaranty and security agreement relating to the Company’s revolving line of credit facility contains customary affirmative and negative covenants, including a negative covenant that restricts the level and form of indebtedness entered into by the Company or its wholly owned subsidiaries. Exceptions to this covenant include borrowings under the $45.0 million Loan, Guaranty and Security Agreement by and among the Borrower, each of the other credit parties signatory thereto, and lenders party thereto and Cerberus Business Finance, LLC, as the administrative agent for the lenders (the “senior term loan”), and indebtedness not to exceed $11,000,000 in any fiscal year and $30,000,000 in the aggregate to finance the acquisition, construction or installation of equipment or fixtures at the Company’s retail store locations, distribution centers or corporate office. The revolving line of credit facility also includes a negative covenant that restricts dividends and other upstream distributions by the Company and its subsidiaries to the extent the Company does not meet minimum excess availability thresholds. Exceptions to this covenant include dividends or other upstream distributions: (i) by subsidiaries of Gordmans, Inc. to Gordmans, Inc. and its other subsidiaries, (ii) that consist of repurchases of stock of employees in an amount not to exceed $500,000 in any fiscal year, (iii) that consist of the payment of taxes on behalf of any employee, officer or director of the Company for vested restricted stock of the Company owned by such employee, officer or director, (iv) to the Company to pay federal, state and local income taxes and franchise taxes solely arising out of the consolidated operations of the Company and its subsidiaries and (v) to the Company to pay certain reasonable directors’ fees and out-of-pocket expenses, reasonable and customary indemnities to directors, officers and employees and other expenses in connection with ordinary corporate governance, overhead, legal and accounting and maintenance. The loan, guaranty and security agreement also includes a negative covenant that restricts subsidiaries of the Company from making any loans to the Company. As of November 2, 2013, the Company was in compliance with all of its debt covenants.

 

8


Senior Term Loan – On August 26, 2013, the Company declared a special cash dividend of $3.60 per share, or $69.9 million, of which $69.7 million was paid in the third quarter of fiscal 2013 and $0.2 million will be paid as non-vested restricted stock eligible to receive the dividend becomes vested. To finance a portion of the special cash dividend, Gordmans, Inc. (the “Borrower”), a wholly owned subsidiary of the Company, entered into a $45.0 million senior term loan on August 27, 2013. The senior term loan has a maturity date of August 27, 2018, with payments of $0.3 million due on a quarterly basis beginning in October 2014 and payments of $0.4 million due on a quarterly basis beginning in January 2016 through the maturity date, with the remaining principal due on the maturity date. The Company may repay at any time all or a portion of the outstanding principal amount, subject to a prepayment premium equal to 2% in the first year and 1% in the second year (there is no prepayment premium after the second year). The senior term loan carries an interest rate equal to the prime rate plus 5.25% with a floor of 3.25% or the LIBOR rate plus 7.0% with a floor of 1.5%, as selected by the Company. The interest rate at November 2, 2013 was 8.5%. Deferred financing fees of $1.8 million related to the senior term loan were capitalized and are included in other assets, net and are being amortized over the five year term of the senior term loan using the effective interest method.

The senior term loan is secured on a second lien basis by the Company’s inventory, accounts receivable and all other personal property, except as specifically excluded in the agreement.

The senior term loan contains customary affirmative and negative covenants, including a negative covenant that restricts the level and form of indebtedness entered into by the Company or its wholly owned subsidiaries. Exceptions to this covenant include indebtedness not to exceed $7,500,000 at any time to finance the acquisition of fixed assets, including capital lease obligations, borrowings under the revolving line of credit facility and other indebtedness not to exceed $15,000,000 in any fiscal year and $30,000,000 in the aggregate to finance the acquisition, construction or installation of equipment or fixtures at the Company’s retail store locations, distribution centers or corporate office. The senior term loan also includes a negative covenant that restricts dividends and other upstream distributions by the Company and its subsidiaries. The exceptions to this covenant are substantially similar to the exceptions under the revolving line of credit facility. The senior term loan also contains financial covenants requiring the Company to maintain compliance with a minimum fixed charge coverage ratio and a maximum leverage ratio, as well as limitations on the annual amount of capital expenditures. As of November 2, 2013, the Company was in compliance with all of its debt covenants.

Long-term Debt – Long-term debt consists of the following:

 

     November 2,
2013
    February 2,
2013
 

Revolving line of credit facility

   $ 15,691      $ —     

Senior term loan

     45,000        —     

Capital lease obligations

     —          189   
  

 

 

   

 

 

 

Total long-term debt

     60,691        189   

Less current portion of long-term debt

     (15,972     (189
  

 

 

   

 

 

 

Long-term debt, less current portion

   $ 44,719      $ —     
  

 

 

   

 

 

 

At November 2, 2013, annual maturities of long-term debt during the next five fiscal years and thereafter were as follows:

 

Remainder of 2013

   $ —     

2014

     562   

2015

     1,266   

2016

     1,688   

2017

     1,688   

After 2017

     55,487   
  

 

 

 

Total long-term debt

   $ 60,691   
  

 

 

 

Financial Instruments – Based on the borrowing rates currently available to the Company for debt with similar terms and the variable interest rate of the senior term loan, which has not changed since the agreement was signed in August 2013, the fair value of the senior term loan approximates its carrying amount of $45.0 million at November 2, 2013. Fair value approximates the carrying value of balances outstanding on the revolving line of credit facility due to both the short-term nature of these borrowings and the variable interest rates of this agreement. For all other financial instruments including cash and cash equivalents, receivables, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of those instruments.

 

9


E. LEASES

The Company has entered into short and long term operating lease agreements. These leases relate to retail store locations, the distribution centers and the corporate headquarters. The leases expire on various dates through the year 2029 with most of the leases containing renewal options. Leases for retail store locations typically have base lease terms of 10 years with one or more renewal periods, usually for five years. Certain retail store leases contain provisions for additional rent based on varying percentages of net sales.

Future minimum lease payments under operating leases as of November 2, 2013 are as follows:

 

Remainder of 2013

   $ 12,104   

2014

     50,462   

2015

     48,718   

2016

     41,304   

2017

     37,467   

After 2017

     168,163   
  

 

 

 

Total minimum lease payments

   $ 358,218   
  

 

 

 

F. SHARE BASED COMPENSATION

The Gordmans Stores, Inc. 2010 Omnibus Incentive Compensation Plan (the “2010 Plan”) provides for grants of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents and other share-based awards. Directors, officers and other associates of the Company and its subsidiaries, as well as others performing consulting or advisory services, are eligible for grants under the 2010 Plan. An aggregate of 2,573,086 shares of the Company’s common stock are available under the 2010 Plan, subject to adjustments for stock splits and other actions affecting the Company’s common stock. The exercise price of an option granted under the 2010 Plan will not be less than 100% of the fair value of a share of the Company’s common stock on the date of grant, provided the exercise price of an incentive stock option granted to a person holding greater than 10% of the Company’s voting power may not be less than 110% of such fair value on such date. The term of each option may not exceed ten years or, in the case of an incentive stock option granted to a ten percent stockholder, five years. Under the 2010 Plan, in the event of a dividend or other distribution other than regular cash dividends, recapitalization, or other transactions or events affecting the Company’s common stock, the Company must equitably adjust the number of shares of common stock subject to outstanding stock options and restricted stock and must adjust the exercise price of any outstanding stock options.

On August 26, 2013, the Company declared a special cash dividend of $69.9 million, or $3.60 per share, of which $69.7 million was paid during the thirty-nine weeks ended November 2, 2013. The remaining $0.2 million will be paid as the non-vested restricted stock eligible to receive the dividend becomes vested. Pursuant to the anti-dilution provisions of the 2010 Plan, the Company modified the exercise price of all outstanding stock options on the dividend date by reducing the exercise price of each non-qualified stock option by the dividend per share of $3.60 and the incentive stock options by $2.82 per share. In addition, pursuant to the 2010 Plan, the Company granted 77,195 shares of additional incentive stock options on September 24, 2013 to the existing holders of the incentive stock options to maintain the same intrinsic value of the awards both before and after the dividend payment, with the additional incentive stock options adopting the same vesting schedule as the original incentive stock options awarded. The Company compared the fair value of the original stock options immediately before the modifications to the fair value of the modified stock options immediately after the modifications to the awards and, as a result, no additional share-based compensation expense is required to be recognized over the remaining vesting periods of the stock options. There were no modifications to the restricted stock awards outstanding on the dividend date.

There were 483,790 shares of common stock available for future grants under the 2010 Plan at November 2, 2013.

A summary of restricted stock activity during the thirty-nine weeks ended November 2, 2013 is set forth in the table below:

 

     Number
of
Shares
    Weighted Average
Grant Date
Fair Value
 

Non-vested, February 2, 2013

     168,262      $ 8.58   

Granted

     8,400        12.81   

Repurchased

     (4,632     11.24   

Vested

     (102,972     4.08   
  

 

 

   

Non-vested, November 2, 2013

     69,058      $ 15.63   
  

 

 

   

 

10


Restricted stock vests at varying rates of 25% per year over four years or 20% per year over five years as applicable. Unrecognized compensation expense on the restricted stock was $1.0 million at November 2, 2013, which is expected to be recognized over a period of 1.8 years. The total fair value of shares vested during the thirty-nine weeks ended November 2, 2013 was $1.4 million. The Company repurchased 4,632 shares from participants on September 30, 2013 pursuant to the restricted stock agreements at a fair value of $11.24 per share, which is reflected as a financing cash outflow in the consolidated statement of cash flows for the thirty-nine weeks ended November 2, 2013. There was no excess tax benefit related to the restricted stock repurchased from participants.

A summary of stock option activity during the thirty-nine weeks ended November 2, 2013 is set forth in the table below and reflects the exercise price reductions noted above for all stock options resulting from the special cash dividend paid in September 2013:

 

     Number
of Stock
Options
    Weighted
Average
Exercise Price
     Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value (1)
(thousands)
 

Outstanding, February 2, 2013

     947,592      $ 12.07         

Granted

     127,895        8.67         

Exercised

     (12,354     11.00         

Forfeited

     (55,740     13.50         
  

 

 

         

Outstanding, November 2, 2013

     1,007,393        11.60       7.9 years    $ —    

Exercisable, November 2, 2013

     377,660        10.84       7.4      —     

Vested or expected to vest at November 2, 2013

     984,818        11.58       7.8      —     

 

(1) The aggregate intrinsic value for stock options is the difference between the current market value of the Company’s stock as of November 2, 2013 and the option strike price. The stock price at November 2, 2013 was $9.90, which was below the weighted average exercise price for options outstanding, exercisable and vested or expected to vest at November 2, 2013.

The Company received $0.1 million of proceeds from the exercise of stock options during the thirty-nine weeks ended November 2, 2013, which is reflected as a financing cash inflow in the condensed consolidated statement of cash flows for the thirty-nine weeks ended November 2, 2013. The aggregate intrinsic value of stock options exercised during the thirty-nine weeks ended November 2, 2013 was $35 thousand.

The Company uses the Black-Scholes option valuation model to estimate fair value of the options. This model requires an estimate of the volatility of the Company’s share price; however, because the Company’s shares or options were not publicly traded for a significant period of time, the Company determined that it was not practical to estimate the expected volatility of its share price. Thus, the Company accounted for equity share options based on a value calculated using the historical volatility of an appropriate industry sector index instead of the expected volatility of the entity’s share price. The historical volatility was calculated using comparisons to peers in the Company’s market sector, which was chosen due to the proximity of size and industry to the Company over the expected term of the option.

In determining the expense to be recorded for options, the significant assumptions utilized in applying the Black-Scholes option valuation model are the risk-free interest rate, expected term, dividend yield and expected volatility. The risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating the expected term used as the assumption in the model. The expected term of the option awards is estimated using the simplified method, or the average of the vesting period and the original contractual term, as it is not practical for the Company to use its historical experience to estimate the expected term because the Company’s shares have not been publicly traded for a significant period of time.

The weighted average assumptions used by the Company in applying the Black-Scholes valuation model for option grants during the thirty-nine weeks ended November 2, 2013 are illustrated in the following table:

 

     39 Weeks
Ended
November 2,
2013

Risk-free interest rate

   1.25% - 2.00%

Dividend yield

   2.0%

Expected volatility

   35.0% - 36.0%

Expected life (years)

   6.25

Weighted average fair value of options granted

   $3.90

 

 

11


Stock options have ten-year contractual terms and vest at varying rates of either 20% per year over five years or 25% per year over four years as applicable. None of the stock options outstanding at November 2, 2013 were subject to performance or market-based vesting conditions. As of November 2, 2013, the unrecognized compensation expense on stock options was $2.4 million, which is expected to be recognized over a weighted average period of 2.7 years.

For the thirteen week periods ended November 2, 2013 and October 27, 2012, share-based compensation expense was $0.3 million and $0.3 million, respectively. Share-based compensation expense for the thirty-nine week periods ended November 2, 2013 and October 27, 2012 was $1.0 million and $0.7 million, respectively. Share-based compensation expense is recorded in selling, general and administrative expenses in the condensed consolidated statements of operations.

G. EARNINGS PER SHARE

The following is a reconciliation of the outstanding shares utilized in the computation of earnings per share:

 

     13 Weeks
Ended
November 2,
2013
     13 Weeks
Ended
October 27,
2012
     39 Weeks
Ended
November 2,
2013
     39 Weeks
Ended
October 27,
2012
 

Basic weighted average shares outstanding

     19,307,499         19,188,340         19,268,957         19,139,880   

Dilutive effect of non-vested stock and stock options

     77,533         249,648         68,727         247,200   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     19,385,032         19,437,988         19,337,684         19,387,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

The anti-dilutive effect of 235,884 and 236,080 stock options and non-vested stock has been excluded from diluted weighted average shares outstanding for the thirteen and thirty-nine weeks ended November 2, 2013, respectively. There were 112,048 and 84,337 anti-dilutive stock options excluded from diluted weighted average shares outstanding for the thirteen and thirty-nine weeks ended October 27, 2012, respectively.

H. SUPPLEMENTAL CASH FLOW INFORMATION

The following table sets forth non-cash investing activities and other cash flow information:

 

     13 Weeks
Ended
November 2,
2013
     13 Weeks
Ended
October 27,
2012
     39 Weeks
Ended
November 2,
2013
     39 Weeks
Ended
October 27,
2012
 

Non-cash investing activities:

           

Purchases of property and equipment in accrued expenses at the end of the period

   $ 4,141       $ 1,927       $ 4,141       $ 1,927   

Sales of property and equipment pursuant to sale-leaseback accounting

     3,897         8,229         8,544         14,379   

Other cash flow information:

           

Cash paid for interest, net

     772         40         908         127   

Cash paid for income taxes, net

     —           3,776         6,623         8,569   

Sales of property and equipment pursuant to sale-leaseback accounting represents the amount of structural assets sold to the landlord at the completion of construction for which the Company was deemed the owner during the construction period, pursuant to sale-leaseback accounting, and for which no cash was received upon transfer of ownership.

 

12


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. Condensed 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 November 2, 2013, 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.

We opened ten new stores during the thirty-nine weeks ended November 2, 2013 in six new markets and two existing markets, of which three new stores were opened during the third quarter of fiscal 2013, compared to nine new stores in four new markets and two existing markets during the thirty-nine weeks ended October 27, 2012, of which two new stores were opened during the third 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.

 

13


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 thirty-nine week periods ended November 2, 2013 was $1.1 million and $5.3 million, respectively, as compared to net income of $4.0 million and $15.6 million, respectively, for the thirteen and thirty-nine week periods ended October 27, 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 thirty-nine week periods ended November 2, 2013.

 

    Net sales increased 5.8% and 3.5% for the thirteen and thirty-nine weeks ended November 2, 2013, respectively, as compared to the thirteen and thirty-nine weeks ended October 27, 2012 due to an increase in non-comparable store sales from the addition of nine new stores in fiscal 2012, two of which opened in the third quarter of fiscal 2012, and the ten new stores opened during the thirty-nine weeks ended November 2, 2013, including the three new stores opened during the third quarter of fiscal 2013. Comparable store sales decreased 6.1% and 6.5%, respectively, for the thirteen and thirty-nine weeks ended November 2, 2013.

 

    Gross profit margin decreased 60 basis points and 180 basis points in the thirteen and thirty-nine week periods ended November 2, 2013, respectively, as compared to the thirteen and thirty-nine week periods ended October 27, 2012 primarily as a result of higher markdowns to reduce inventory levels and to address slow selling merchandise.

 

    Higher selling, general and administrative expenses were primarily attributable to the nine new stores opened during fiscal 2012 and the ten new stores opened during the thirty-nine weeks ended November 2, 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 November 2, 2013 and the thirteen weeks ended October 27, 2012 represent the third quarters of fiscal 2013 and fiscal 2012, respectively. The thirty-nine weeks ended November 2, 2013 and the thirty-nine weeks ended October 27, 2012 represent the first three quarters 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
Ended
November 2,
2013
    13 Weeks
Ended
October 27,
2012
    39 Weeks
Ended
November 2,
2013
    39 Weeks
Ended
October 27,

2012
 

Statements of Operation Data:

        

Net sales

   $ 151,333      $ 143,072      $ 419,536      $ 405,232   

License fees from leased departments

     2,157        1,917        5,846        5,474   

Cost of sales

     (86,452     (80,716     (240,133     (224,249
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     67,038        64,273        185,249        186,457   

Selling, general and administrative expenses

     (64,560     (57,763     (175,833     (161,147
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     2,478        6,510        9,416        25,310   

Interest expense, net

     (892     (118     (1,130     (366
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     1,586        6,392        8,286        24,944   

Income tax expense

     (487     (2,397     (3,005     (9,354
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,099      $ 3,995      $ 5,281      $ 15,590   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14


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

 

     13 Weeks
Ended
November 2,
2013 (1)
    13 Weeks
Ended
October 27,
2012 (1)
    39 Weeks
Ended
November 2,
2013 (1)
    39 Weeks
Ended
October 27,
2012 (1)
 

Net sales

     100.0     100.0     100.0     100.0

License fees from leased departments

     1.4        1.3        1.4        1.4   

Cost of sales

     (57.1     (56.4     (57.2     (55.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     44.3        44.9        44.2        46.0   

Selling, general and administrative expenses

     (42.7     (40.4     (41.9     (39.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     1.6        4.6        2.2        6.2   

Interest expense, net

     (0.6     (0.1     (0.3     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     1.0        4.5        2.0        6.1   

Income tax expense

     (0.3     (1.7     (0.7     (2.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     0.7     2.8     1.3     3.8
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   Percentages may not foot due to rounding.

Thirteen Weeks Ended November 2, 2013 Compared to Thirteen Weeks Ended October 27, 2012

Net Sales

Net sales for the thirteen weeks ended November 2, 2013 increased $8.3 million, or 5.8%, to $151.3 million as compared to $143.1 million for the thirteen weeks ended October 27, 2012. This increase was the result of a $16.5 million increase in non-comparable store sales due to the addition of two new stores in the third quarter of fiscal 2012 and the opening of ten new stores in the first three quarters of fiscal 2013, three of which opened during the third quarter of fiscal 2013. Comparable store sales decreased $8.2 million, or 6.1%, primarily due to a high single digit decrease in comparable transactions. The decrease in comparable transactions was partially offset by a low single digit increase in the average sale per transaction, which improved from the third quarter of fiscal 2012 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 and Home Fashions incurred mid-single digit comparable store sales decreases for the thirteen weeks ended November 2, 2013 compared to the thirteen weeks ended October 27, 2012, while Accessories (including Fragrances) experienced a high single digit comparable store sales decrease 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 November 2, 2013 increased $0.2 million, or 12.5%, to $2.2 million as compared to $1.9 million for the thirteen weeks ended October 27, 2012 primarily due to new store growth.

Gross Profit

Gross profit, which includes license fees from leased departments, for the thirteen weeks ended November 2, 2013 increased $2.8 million, or 4.3%, to $67.0 million as compared to $64.3 million for the thirteen weeks ended October 27, 2012. Gross profit margin decreased 60 basis points to 44.3% of net sales as compared to 44.9% of net sales for the third quarter of 2012 primarily due to an increase in markdowns as a percentage of net sales during the third quarter of 2013 to clear slow selling merchandise.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the thirteen weeks ended November 2, 2013 increased $6.8 million, or 11.8%, to $64.6 million as compared to $57.8 million for the thirteen weeks ended October 27, 2012. As a percentage of net sales, selling, general and administrative expenses increased to 42.7% as compared to 40.4% for the third quarter of 2012, a 230 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, higher depreciation expense and higher pre-opening expenses.

 

15


Store expenses increased $3.9 million in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 primarily due to increased payroll, rent and real estate, maintenance and utilities expenses associated with new store growth, higher travel and higher credit card fees. Store expenses were 26.9% of net sales in the third quarter of fiscal 2013 as compared to 25.7% of net sales in the third quarter of fiscal 2012, a 120 basis point increase, primarily resulting from higher payroll, rent, real estate and maintenance expenses as a percentage of net sales associated with the decrease in comparable store sales.

Corporate expenses increased $1.2 million in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 primarily due to higher information technology costs of $0.4 million related to supporting our enterprise merchandise system that was implemented in fiscal 2012 and higher payroll costs of $0.3 million for the addition of new staff positions to support our growth and merit compensation increases, partially offset by a decrease in accrued management bonuses. In addition, higher consulting and legal expenses of $0.3 million and higher recruiting and relocation expenses of $0.2 million contributed to the increase in corporate expenses. Corporate expenses were 6.3% of net sales in the third quarter of fiscal 2013 as compared to 5.8% of net sales in the third quarter of fiscal 2012, a 50 basis point increase, primarily resulting from higher information technology costs, higher recruiting and relocation costs and higher payroll costs as a percentage of net sales associated with the decrease in comparable store sales.

Depreciation and amortization expenses increased $0.7 million, or 40 basis points as a percentage of net sales, in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 due to increased property additions associated with new store openings and investments related to our information technology systems.

Distribution center expenses increased $0.4 million in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012 primarily due to higher payroll expenses of $0.6 million and higher outbound freight delivery expenses of $0.5 million. These increases were partially offset by higher capitalized freight of $0.5 million in the third quarter of fiscal 2013 as compared to the same period a year ago, which represents a reduction in outbound freight delivery expense and a corresponding increase in inventory as inventory levels increase in the third quarter prior to the holiday season. Distribution center expenses were 4.3% of net sales in both the third quarter of fiscal 2013 and the third quarter of fiscal 2012.

Store pre-opening expenses increased $0.4 million, or 20 basis points as a percentage of net sales, in the third quarter of fiscal 2013 due to the opening of three new stores in the third quarter of fiscal 2013 as compared to the two new stores opened in the third quarter of fiscal 2012.

A $0.2 million increase in advertising expenses was primarily related to the expansion in the number of markets in which the Company operates stores as well as the increase in the number of stores, and also due to 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 were 2.8% of net sales in both the third quarter of fiscal 2013 and the third quarter of fiscal 2012.

Interest Expense, Net

Interest expense, net for the thirteen weeks ended November 2, 2013 increased $0.8 million to $0.9 million as compared to $0.1 million for the thirteen weeks ended October 27, 2012. This increase is primarily the result of interest expense, including the amortization of deferred financing fees, related to the $45.0 million senior term loan that the Company entered into on August 27, 2013 to partially fund the $69.9 million special cash dividend declared on August 26, 2013.

Income before Taxes

Income before taxes for the third quarter of fiscal 2013 was $1.6 million compared to $6.4 million in the third quarter of fiscal 2012. As a percentage of net sales, income before taxes was 1.0% for the third quarter of fiscal 2013 compared to 4.5% for the third quarter of fiscal 2012.

Income Tax Expense

Income tax expense for the thirteen weeks ended November 2, 2013 was $0.5 million compared to income tax expense of $2.4 million for the thirteen weeks ended October 27, 2012. The effective income tax rate for the third quarter of fiscal 2013 was 30.7% compared to an effective rate of 37.5% for the third quarter of fiscal 2012. During the third quarter of fiscal 2013, the estimated effective income tax rate for fiscal 2013 was lowered from 37.5% to 36.3%. 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 third quarter of fiscal 2013 decreased $2.9 million, or 72.5%, to $1.1 million compared to $4.0 million for the third quarter of fiscal 2012. As a percentage of net sales, net income was 0.7% for the third quarter of fiscal 2013 compared to 2.8% for the third 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 60 basis point decrease in gross profit margin and the increase in selling, general and administrative expenses primarily associated with our new store growth.

 

16


Thirty-nine Weeks Ended November 2, 2013 Compared to Thirty-nine Weeks Ended October 27, 2012

Net Sales

Net sales for the thirty-nine weeks ended November 2, 2013 increased $14.3 million, or 3.5%, to $419.5 million as compared to $405.2 million for the thirty-nine weeks ended October 27, 2012. This increase was the result of a $39.3 million increase in non-comparable store sales due to the addition of nine new stores in fiscal 2012, all of which opened in the first three quarters of fiscal 2012, and the opening of ten new stores in the first three quarters of fiscal 2013, three of which opened during the third quarter of fiscal 2013. Comparable store sales decreased $25.0 million, or 6.5%, due to a high single digit decrease in comparable transactions, partially offset by a low single digit increase in the average sale per transaction. From a major merchandising category perspective, Apparel and Home Fashions experienced mid-single digit comparable store sales decreases for the thirty-nine weeks ended November 2, 2013 compared to the thirty-nine weeks ended October 27, 2012, while Accessories (including Fragrances) experienced a high single digit comparable store sales decrease for the first three quarters of fiscal 2013.

License Fees from Leased Departments

License fee income related to sales of merchandise in leased departments for the thirty-nine weeks ended November 2, 2013 increased $0.4 million, or 6.8%, to $5.8 million as compared to $5.5 million for the thirty-nine weeks ended October 27, 2012 primarily due to new store growth.

Gross Profit

Gross profit, which includes license fees from leased departments, for the thirty-nine weeks ended November 2, 2013 decreased $1.2 million, or 0.6%, to $185.2 million as compared to $186.5 million for the thirty-nine weeks ended October 27, 2012. Gross profit margin decreased 180 basis points to 44.2% of net sales as compared to 46.0% of net sales for the thirty-nine weeks ended October 27, 2012. The 180 basis point decrease was primarily due to an increase in markdowns as a percentage of net sales during the first three quarters of 2013 to clear slow selling merchandise.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the thirty-nine weeks ended November 2, 2013 increased $14.7 million, or 9.1%, to $175.8 million as compared to $161.1 million for the thirty-nine weeks ended October 27, 2012. As a percentage of net sales, selling, general and administrative expenses increased to 41.9% as compared to 39.8% for the first three quarters 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.

Store expenses increased $8.8 million in the first three quarters of fiscal 2013 as compared to the first three quarters of fiscal 2012 primarily due to increased rent and real estate, payroll and maintenance expenses associated with new store growth. Store expenses were 26.7% of net sales in the first three quarters of fiscal 2013 as compared to 25.5% of net sales in the first three quarters of fiscal 2012, a 120 basis point increase, primarily resulting from higher rent, real estate, payroll and maintenance expenses as a percentage of net sales associated with a decrease in comparable store sales.

Depreciation and amortization expenses increased $2.3 million, or 50 basis points as a percentage of net sales, in the first three quarters of fiscal 2013 as compared to the first three quarters of fiscal 2012 due to increased property additions associated with new store openings and investments in upgrading our information technology systems.

Corporate expenses increased $2.0 million in the first three quarters of fiscal 2013 as compared to the first three quarters of fiscal 2012 primarily due to higher information technology costs of $1.0 million related to supporting our enterprise merchandise system that was implemented in fiscal 2012, higher consulting and legal expenses of $0.5 million, higher payroll costs of $0.4 million for the addition of new staff positions to support our growth and merit compensation increases, partially offset by a decrease in accrued management bonuses, and 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 three quarters of fiscal 2013, partially offset by lower benefit costs of $0.3 million. Corporate expenses were 6.2% of net sales in the first three quarters of fiscal 2013 as compared to 5.9% of net sales in the first three quarters of fiscal 2012, a 30 basis point increase, primarily resulting from higher information technology costs as a percentage of net sales associated with a decrease in comparable store sales.

 

17


The $0.8 million increase in distribution center expenses was primarily the result of higher outbound freight delivery expenses of $0.9 million and higher payroll expenses of $0.7 million. These increases were partially offset by higher capitalized freight of $0.7 million in the first three quarters of fiscal 2013 as compared to the same period in the prior year, which represents a reduction in outbound freight delivery expense and a corresponding increase in inventory as inventory levels increase in the third quarter prior to the holiday season. Distribution center expenses were 3.9% of net sales in both the first three quarters of fiscal 2013 and the first three quarters of fiscal 2012.

Advertising expenses increased $0.7 million in the first three quarters of fiscal 2013 as compared to the first three quarters of fiscal 2012 primarily as a result of the rollout of our loyalty program in the second quarter of fiscal 2013 and an increase in direct mail advertising as well as an increase in our store base. Advertising expenses were 2.5% of net sales in the first three quarters of fiscal 2013 as compared to 2.4% of net sales in the first three quarters of fiscal 2012.

Store pre-opening expenses increased $0.2 million in the first three quarters of fiscal 2013 as we opened ten new stores in the first three quarters of fiscal 2013 as compared to the nine new stores opened in the first three quarters of fiscal 2012.

Interest Expense, net

Interest expense, net for the thirty-nine weeks ended November 2, 2013 increased $0.8 million to $1.1 million as compared to $0.4 million for the thirty-nine weeks ended October 27, 2012. This increase is primarily the result of interest expense, including the amortization of deferred financing fees, related to the $45.0 million senior term loan that the Company entered into on August 27, 2013 to partially fund the $69.9 million special cash dividend declared on August 26, 2013.

Income before Taxes

Income before taxes for the first three quarters of fiscal 2013 was $8.3 million compared to $24.9 million in the first three quarters of fiscal 2012. As a percentage of net sales, income before taxes was 2.0% for the first three quarters of fiscal 2013 compared to 6.1% for the first three quarters of fiscal 2012.

Income Tax Expense

Income tax expense for the thirty-nine weeks ended November 2, 2013 was $3.0 million compared to income tax expense of $9.4 million for the thirty-nine weeks ended October 27, 2012. The effective income tax rate for the first three quarters of fiscal 2013 was 36.3% compared to an effective rate of 37.5% for the first three quarters of fiscal 2012 based upon the estimated effective tax rate for fiscal 2013. 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 first three quarters of fiscal 2013 decreased $10.3 million, or 66.1%, to $5.3 million compared to $15.6 million for the first three quarters of fiscal 2012. As a percentage of net sales, net income was 1.3% for the first three quarters of fiscal 2013 compared to 3.8% for the first three quarters of fiscal 2012. The decrease in net income as a percentage of net sales resulted primarily from the comparable store sales decrease, the 180 basis point decrease in gross profit margin and the increase in selling, general and administrative expenses primarily associated with our new store growth.

Seasonality

Our business is subject to seasonal fluctuations, which are typical of retailers that carry a similar merchandise offering. A disproportionate amount of our sales and net income are realized during the fourth fiscal quarter, which includes the holiday selling season. In fiscal years 2012, 2011 and 2010, respectively, 33.3%, 33.6% and 32.6% of our net sales were generated in the fourth quarter. Operating cash flows are typically higher in the fourth fiscal quarter due to inventory related working capital requirements in the third fiscal quarter. During fiscal years 2012, 2011 and 2010, we generated net income during the first nine months of $15.6 million, $15.0 million and $7.2 million, respectively, and 33.7%, 40.5% and 54.0% of net income was realized in the fourth quarters of fiscal years 2012, 2011 and 2010, respectively. Our business is also subject, at certain times, to calendar shifts, which may occur during key selling periods close to holidays such as Easter, Thanksgiving and Christmas and regional fluctuations for events such as sales tax holidays.

Liquidity and Capital Resources

Our primary ongoing cash requirements are for operating expenses, inventory, debt service, capital expenditures related to technology, distribution centers, including the second primary distribution center opening in mid-2014, and existing store improvements, as well as new store capital investment. Our typical investment in a new store is approximately $1.3 million, which represents pre-opening expenses of $0.4 million and inventory of $0.9 million (of which $0.3 million is typically financed through trade payables). The fixed assets and leasehold improvements associated with a new store opening of approximately $1.1 million have typically been financed by landlords through favorable tenant improvement allowances. Our primary sources of funds for our business activities are cash from operations, borrowings under our revolving line of credit facility, tenant improvement allowances and the use of operating leases for new stores.

 

18


Our working capital at November 2, 2013 decreased $36.0 million, or 43.5%, to $46.9 million compared to working capital of $82.9 million at February 2, 2013. On August 26, 2013, the Company’s board of directors approved and the Company declared a $69.9 million, or $3.60 per share, special cash dividend, of which $69.7 million was paid on September 23, 2013 with the remaining $0.2 million balance to be paid as non-vested restricted stock awards vest. To fund a portion of the dividend payment, the Company entered into a $45.0 million senior term loan with a maturity date of August 27, 2018. The majority of the principal is due on the maturity date, with quarterly principal payments due beginning in October 2014 through the maturity date. The senior term loan contains an early payment provision exercisable at the Company’s option, pursuant to which the Company may repay all or a portion of the outstanding principal amount at any time, subject to a prepayment penalty for any prepayments made during the first two years of the agreement. The remainder of the dividend payment was funded by cash from operations, and principal payments on the senior term loan will be funded by cash from operations and, if necessary, borrowings under the revolving line of credit facility. The revolving line of credit facility was amended on August 27, 2013 to increase the borrowing capacity from $60 million to $80 million and may be increased to a maximum borrowing capacity of $100 million. The amended revolving line of credit facility expires on August 27, 2018.

Borrowings of $15.7 million were outstanding under our revolving line of credit facility at November 2, 2013, as compared to no borrowings outstanding under our revolving line of credit facility on February 2, 2013. Cash and cash equivalents were $9.3 million and $40.8 million as of November 2, 2013 and February 2, 2013, respectively. Net cash provided by operating activities decreased $10.6 million and was $4.7 million for the thirty-nine weeks ended November 2, 2013, compared to net cash provided by operating activities of $15.2 million for the thirty-nine weeks ended October 27, 2012. Availability under our revolving line of credit facility increased 24.7% to $63.6 million at November 2, 2013 compared to $51.0 million at February 2, 2013. Stockholders’ equity, which includes the reduction in retained earnings for the $69.9 million special cash dividend declared on August 26, 2013, was $38.8 million as of November 2, 2013 compared to $102.4 million as of February 2, 2013.

During the course of our seasonal business cycle, working capital is needed to support inventory for existing stores, particularly during peak selling seasons. Historically, our working capital needs are lowest in the first quarter and peak late in the third quarter or early in the fourth quarter in anticipation of the holiday selling season. Management believes that the net cash provided by operating activities, bank borrowings, vendor trade terms, tenant improvement allowances and the use of operating leases for new stores will be sufficient to fund anticipated current and long-term capital expenditures and working capital requirements.

Capital Expenditures

Net capital expenditures during the thirty-nine weeks ended November 2, 2013 and October 27, 2012 were $25.1 million and $18.5 million, respectively. Net capital expenditures were comprised of the following (in thousands):

 

     39 Weeks
Ended
November 2,
2013
    39 Weeks
Ended
October 27,
2012
 

Recurring capital expenditures

    

New and existing stores

   $ 27,830      $ 26,297   

Technology-related investments

     2,747        5,025   

Existing distribution center improvements

     276        1,551   

Non-recurring capital expenditures

    

Second distribution center

     9,976        —    

New corporate office

     638        —    
  

 

 

   

 

 

 

Gross capital expenditures

     41,467        32,873   

Less: Proceeds from sale-leaseback transactions

     (16,390     (14,379
  

 

 

   

 

 

 

Net capital expenditures

   $ 25,077      $ 18,494   
  

 

 

   

 

 

 

We lease all of our store locations. In certain cases, we negotiate leases whereby we take responsibility for construction of a new store during the construction period and are reimbursed for our costs from the landlord. When this situation occurs, we report the construction costs as part of our capital expenditures and, as reimbursements are received from the landlord for construction costs where we are the accounting owner during the construction period, we report the proceeds received from the landlord as proceeds from sale-leaseback transactions.

 

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Cash Flow Analysis

A summary of operating, investing, and financing activities are shown in the following table (in thousands):

 

     39 Weeks
Ended
November 2,
2013
    39 Weeks
Ended
October 27,
2012
 

Cash flows provided by operating activities

   $ 4,666      $ 15,235   

Cash flows used in investing activities

     (25,077     (18,071

Cash flows used in financing activities

     (11,106     (365
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (31,517     (3,201

Cash and cash equivalents at beginning of period

     40,824        35,413   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 9,307      $ 32,212   
  

 

 

   

 

 

 

Cash Flows from Operating Activities

Net cash provided by operating activities in the thirty-nine weeks ended November 2, 2013 was $4.7 million, which included net income of $5.3 million and noncash charges of $8.6 million comprised of depreciation and amortization expense of $7.1 million, share-based compensation expense of $1.0 million, amortization of deferred financing fees of $0.3 million and $0.2 million of changes in deferred income taxes. Net cash provided by operating activities in the thirty-nine weeks ended November 2, 2013 were favorably impacted by an increase in accounts payable primarily related to inventory purchases of $55.3 million heading into the peak holiday season and due to the ten new stores opened during the first three quarters of fiscal 2013 and a $7.2 million increase in accrued expenses primarily due to an increase in new store activity for the ten new stores opened in the first three quarters of fiscal 2013, as well as furniture, fixtures and equipment related to our second primary distribution center opening in mid-2014 and our new corporate headquarters, and an increase in accrued payroll due to the timing of payroll. Net cash provided by operating activities were also favorably impacted by a $4.8 million increase in deferred rent associated with new store growth. These increases in operating cash flows for the thirty-nine weeks ended November 2, 2013 were partially offset by cash used to increase inventory of $71.3 million for the peak holiday season and for the ten new stores opened in the first three quarters of fiscal 2013, a $3.2 million increase in prepaid expenses and other current assets related to new store growth, prepaid marketing for the fourth quarter and the timing of insurance renewals, a $1.3 million increase in accounts, landlord and income taxes receivable primarily due to a $3.9 million increase in income taxes receivable and a $0.5 million increase in accounts receivable, partially offset by a $3.0 million decrease in landlord receivables, and a $0.7 million increase in other assets.

Net cash provided by operating activities in the thirty-nine weeks ended October 27, 2012 was $15.2 million, which included net income of $15.6 million and noncash charges of $6.6 million comprised of depreciation and amortization expense of $4.8 million, changes in deferred taxes of $0.7 million, share-based compensation expense of $0.7 million and amortization of deferred financing fees of $0.2 million. Net cash provided by operating activities in the thirty-nine weeks ended October 27, 2012 were favorably impacted by an increase in accounts payable primarily related to inventory purchases of $49.7 million heading into the peak holiday season and due to the nine new stores opened during the first three quarters of fiscal 2012, a $4.8 million increase in deferred rent related to tenant improvement allowances associated with new store growth, a $1.9 million increase resulting from a decrease in accounts, landlord and income taxes receivable primarily due to cash received from landlords during the first nine months of fiscal 2012, an increase of $1.5 million in accrued expenses and other liabilities and a decrease in prepaid expenses and other current assets of $1.4 million. These increases in operating cash flows for the thirty-nine weeks ended October 27, 2012 were offset primarily by cash used to increase inventory of $65.8 million heading into the peak holiday season and for the nine new stores opened in the first nine months of fiscal 2012 and an increase in other assets of $0.4 million.

Cash Flows from Investing Activities

Net cash used in investing activities in the thirty-nine weeks ended November 2, 2013 and October 27, 2012 was $25.1 million and $18.1 million, respectively. Cash of $41.5 million and $32.9 million was used for purchases of property and equipment during the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively. Cash used in investing activities related primarily to $27.8 million invested in new and existing stores during the first three quarters of fiscal 2013, of which $22.2 million was invested in the ten new stores opened during the thirty-nine weeks ended November 2, 2013 while the remaining $5.6 million was used for fixtures and store improvements for existing stores. This compares to $26.3 million for store investments during the thirty-nine weeks ended October 27, 2012, of which $22.7 million was invested in the nine new stores opened during the first three quarters of fiscal 2012 while the remaining $3.6 million was used for fixtures and store improvements for existing stores. Cash invested in new and existing stores in the first three quarters of fiscal 2013 was $1.5 million more than the same period last year due to an increase in cash invested for fixtures and store improvements for existing stores in the first nine months of fiscal 2013, in part due to the acceleration of such fixtures and store improvement projects for existing stores in the current year to be completed in advance of the holiday season.

 

20


The increase in cash used in investing activities in the thirty-nine weeks ended November 2, 2013 is also due to the $10.0 million invested in the second primary distribution center opening in mid-2014 for which construction began in the first quarter of fiscal 2013 and the $0.6 million invested in furniture, fixtures and equipment related to our corporate headquarters, which are being relocated to a new leased building in early 2014. Investments in information technology equipment and software during the thirty-nine weeks ended November 2, 2013 was $2.7 million compared to $5.0 million during the thirty-nine weeks ended October 27, 2012, with the decrease primarily relating to lower investments in our Oracle enterprise merchandising system which was implemented in the second quarter of fiscal 2012. Additionally, existing distribution center improvements were $0.3 million and $1.5 million for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively.

Proceeds from sale-leaseback transactions were $16.4 million and $14.4 million for the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively, where the Company was deemed the accounting owner of the property and equipment during the new store construction period pursuant to the underlying lease agreement.

Insurance proceeds of $0.4 million were received in the third quarter of fiscal 2012 related to claims for damages to an existing store.

Cash Flows from Financing Activities

Net cash used in financing activities was $11.1 million during the thirty-nine weeks ended November 2, 2013 and $0.4 million during the thirty-nine weeks ended October 27, 2012. To fund a portion of the $69.9 million, or $3.60 per share, special cash dividend declared on August 26, 2013, of which $69.7 million was paid in September 2013, the Company entered into a $45.0 million senior term loan on August 27, 2013. Borrowings and repayments on the revolving line of credit facility were $23.9 million and $8.3 million, respectively, during the thirty-nine weeks ended November 2, 2013, while there were no borrowings on the revolving line of credit facility in the first three quarters of fiscal 2012. Cash of $2.0 million was paid for debt issuance costs during the thirty-nine weeks ended November 2, 2013 related to the $45.0 million senior term loan and the refinancing of the revolving line of credit facility in August 2013. Cash of $0.2 million and $0.5 million was used during the thirty-nine weeks ended November 2, 2013 and October 27, 2012, respectively, for payments on capital lease and financing agreements. Cash of $0.1 million was used for the repurchase of common stock during the third quarter of fiscal 2013. Proceeds of $0.1 million were received during the thirty-nine weeks ended November 2, 2013 in connection with the exercise of stock options. In May 2012, we received net cash proceeds of $0.2 million in connection with a public offering of shares of our common stock.

Existing Credit Facilities

Gordmans, Inc. is the borrower under a loan, guaranty and security agreement dated as of February 20, 2009, as amended August 27, 2013, with Wells Fargo Bank, N.A. (successor in merger with Wells Fargo Retail Finance, LLC) as agent and a lender and certain other lenders party thereto from time to time. Gordmans Stores, Inc., Gordmans Intermediate Holding Corp., Gordmans Distribution Company, Inc., Gordmans Management Company, Inc., and Gordmans, LLC are all guarantors under the loan agreement. On August 27, 2013, the Company amended the loan, guaranty and security agreement to increase the borrowing capacity from $60.0 million to $80.0 million, with the ability to increase the maximum available borrowings under the facility to $100.0 million, and remove the covenant that limited the amount of capital expenditures.

The revolving line of credit facility is available for working capital and other general corporate purposes and, following the amendment on August 27, 2013, is scheduled to expire on August 27, 2018. At November 2, 2013, we had borrowings outstanding of $15.7 million under our revolving line of credit facility and availability of $63.6 million, including letters of credit issued with an aggregate face amount of $0.7 million. There were borrowings of $23.9 million under the revolving line of credit facility during the thirty-nine weeks ended November 2, 2013, of which $8.3 million was repaid during the first three quarters of fiscal 2013.

Interest is payable on borrowings under the revolving line of credit facility monthly at a rate equal to the LIBOR or the base rate as selected by management, plus an applicable margin which ranges from 0.50% to 2.50% and is set quarterly depending upon the seasonal or non-seasonal period and average net availability under the revolving line of credit facility during the previous quarter.

An unused line fee is payable quarterly in an amount equal to 0.25% of the sum of the average daily unused revolving commitment plus the average daily unused letter of credit commitment. A customary fee is also payable to the administrative agent under the loan agreement on an annual basis.

The availability of the revolving line of credit facility is subject to a borrowing base, which is comprised of eligible credit card receivables, the liquidation value of eligible landed inventory, eligible distribution center inventory and the liquidation value of eligible in-transit inventory.

 

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Among other provisions, the loan, guaranty and security agreement relating to the Company’s revolving line of credit facility contains customary affirmative and negative covenants, including a negative covenant that restricts the level and form of indebtedness entered into by the Company or its wholly owned subsidiaries. Exceptions to this covenant include borrowings under the $45.0 million senior term loan and indebtedness not to exceed $11,000,000 in any fiscal year and $30,000,000 in the aggregate to finance the acquisition, construction or installation of equipment or fixtures at the Company’s retail store locations, distribution centers or corporate office. The revolving line of credit facility also includes a negative covenant that restricts dividends and other upstream distributions by the Company and its subsidiaries to the extent the Company does not meet minimum excess availability thresholds. Exceptions to this covenant include dividends or other upstream distributions: (i) by subsidiaries of Gordmans, Inc. to Gordmans, Inc. and its other subsidiaries, (ii) that consist of repurchases of stock of employees in an amount not to exceed $500,000 in any fiscal year, (iii) that consist of the payment of taxes on behalf of any employee, officer or director of the Company for vested restricted stock of the Company owned by such employee, officer or director, (iv) to the Company to pay federal, state and local income taxes and franchise taxes solely arising out of the consolidated operations of the Company and its subsidiaries and (v) to the Company to pay certain reasonable directors’ fees and out-of-pocket expenses, reasonable and customary indemnities to directors, officers and employees and other expenses in connection with the ordinary corporate governance, overhead, legal and accounting and maintenance. The loan, guaranty and security agreement also includes a negative covenant that restricts subsidiaries of the Company from making any loans to the Company. As of November 2, 2013, the Company was in compliance with all of its debt covenants under the loan, guaranty and security agreement.

On August 27, 2013, Gordmans, Inc. entered into a $45.0 million senior term loan with Cerberus Business Finance, LLC. The senior term loan has a maturity date of August 27, 2018, with payments of $0.3 million due on a quarterly basis beginning in October 2014 through October 2015 and payments of $0.4 million due on a quarterly basis beginning January 2016 through the maturity date, with the remaining principal due on the maturity date. The senior term loan contains an early payment provision, exercisable at the Company’s option, pursuant to which the Company may repay all or a portion of the outstanding principal amount at any time, subject to a prepayment penalty applicable during the first two years. The senior term loan carries an interest rate of the prime rate plus 5.25% with a floor of 3.25% or the LIBOR rate plus 7.0% with a floor of 1.5%, as selected by the Company. The senior term loan is secured by the Company’s assets, except as specifically excluded in the agreement. The senior term loan contains certain financial covenants, including a minimum fixed charge coverage ratio, a maximum leverage ratio and limitations on the annual amount of capital expenditures, as well as customary affirmative and negative covenants substantially similar to those under the revolving line of credit facility. As of November 2, 2013, the Company was in compliance with all of its debt covenants under the senior term loan.

Contractual Obligations and Off-Balance-Sheet Arrangements

As noted in the table below, the Company has contractual obligations and commitments as of November 2, 2013 that may affect the financial condition of the Company. However, we believe there is no known trend, demand, commitment, event, or uncertainty that is reasonably likely to occur which would have a material effect on the Company’s financial condition, results of operations, or cash flows. Other than the letters of credit set forth in the table below, the Company had no off-balance-sheet arrangements as of November 2, 2013.

The following table summarizes our contractual obligations and commitments as of November 2, 2013:

 

     Payments Due by Period  
     Total      Less Than
1 Year
     1-3 Years      3-5 Years      More Than
5 Years
 

Contractual Obligations:

              

Operating leases (1)(2)

   $ 358,218       $ 12,104       $ 99,180       $ 78,771       $ 168,163   

Senior term loan (3)

     62,483         956         9,375         10,440         41,712   

Revolving line of credit

     15,691         —           —           —           15,691   

Letters of credit

     730         730         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 437,122       $ 13,790       $ 108,555       $ 89,211       $ 225,566   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(1)   Certain retail store leases contain provisions for additional rent based on varying percentages of sales when sales reach certain thresholds, but are not included in operating lease obligations.
(2)   Real estate taxes, common area maintenance and insurance are expenses considered additional rent that can vary from year to year, but are not included in operating lease obligations. These expenses represented approximately 37% of lease expense for our retail stores in the thirty-nine weeks ended November 2, 2013.
(3)   Includes $45.0 million of principal payments and $17.5 million of interest payments on the senior term loan.

 

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Critical Accounting Policies and Estimates

We have determined that our most critical accounting policies are those related to revenue recognition, merchandise inventories, long-lived assets, operating leases, self-insurance, share-based compensation and income taxes. We continue to monitor our accounting policies to ensure proper application of current rules and regulations. There have been no significant changes to these policies discussed in our fiscal year 2012 Annual Report on Form 10-K.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to interest rate risk primarily through borrowings under our revolving line of credit facility and through outstanding borrowings on our senior term loan, both of which bear interest at variable rates.

Borrowings under the revolving line of credit facility bear interest at the base rate plus 0.50% (3.75% at November 2, 2013) with an option to bear interest at the LIBOR interest rate plus 1.75%. Borrowings under the revolving line of credit facility may not exceed the lesser of a calculated borrowing base or $80.0 million. Borrowings under the revolving line of credit facility during the first three quarters of fiscal 2013 were $23.9 million, with borrowings of $15.7 million outstanding under our revolving credit facility at November 2, 2013. Average daily borrowings during the first three quarters of fiscal 2013 were $1.3 million. We performed a sensitivity analysis assuming a hypothetical 100 basis point movement in interest rates applied to the average daily borrowings of the revolving line of credit facility. As of November 2, 2013, the analysis indicated that such a movement would not have a material effect on our financial position or our results of operations or cash flows.

Borrowings under the senior term loan bear interest at the prime rate plus 5.25% with a floor of 3.25% (8.50% at November 2, 2013) with an option to bear interest at the LIBOR interest rate plus 7.0% with a floor of 1.5%. We performed a sensitivity analysis assuming a hypothetical 100 basis point increase in the interest rate applied to the average amount outstanding on the senior term loan (assumes no prepayments of principal), as the interest rate of 8.50% at November 2, 2013 represents the floor. As of November 2, 2013, the analysis indicated that such a movement would result in an increase to interest expense of approximately $0.4 million per year.

 

ITEM 4. CONTROLS AND PROCEDURES

The required certifications of our Chief Executive Officer and Chief Financial Officer are included as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures, internal control over financial reporting and changes in internal control over financial reporting referred to in those certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

Evaluation of Disclosure Controls and Procedure

Under the supervision and with the participation of management, including our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer), we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of November 2, 2013 to ensure that information we are required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Securities Exchange Act of 1934) that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

23


PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are subject to various legal claims and proceedings which arise in the ordinary course of our business, including employment related claims, involving routine claims incidental to our business. Although the outcome of these routine claims cannot be predicted with certainty, we do not believe that the ultimate resolution of these claims will have a material adverse effect on our results of operations, financial condition or cash flow.

 

ITEM 1A. RISK FACTORS

Except as set forth below, our risk factors have not changed materially from those disclosed in our fiscal year 2012 Annual Report on Form 10-K. The risk factors set forth below and the risk factors disclosed in our Annual Report on Form 10-K, in addition to the other information set forth in this Quarterly Report, could materially affect our business, financial condition or results.

Our loan agreements may restrict our current and future operations, which could adversely affect our ability to respond to changes in our business and to manage our operations and capital needs.

Our loan, security and guaranty agreement relating to our revolving line of credit facility, which provides for borrowings of up to $80 million, contains limitations on our ability to:

 

    incur additional indebtedness;

 

    create liens on assets;

 

    engage in mergers, consolidations, liquidations and dissolutions;

 

    sell assets (including pursuant to sale leaseback transactions);

 

    pay consulting fees, dividends and distributions or repurchase capital stock;

 

    make investments (including acquisitions), loans, or advances;

 

    engage in certain transactions with affiliates; and

 

    implement changes in our lines of business.

In addition, this loan agreement requires us to maintain minimum excess availability equal to at least 10% of the revolving line of credit facility.

In connection with the special cash dividend declared on August 26, 2013, we also entered into a senior term loan requiring principal and interest payments over the term of the senior term loan that increase the risk that we may be unable to generate cash sufficient to pay amounts as due or we may have to borrow on our revolving line of credit facility to fund the principal and interest payments. In addition, the interest rate on the senior term loan is subject to variability, which exposes us to interest rate risk and could have a material adverse effect on our financial condition and results of operations. The senior term loan also contains certain financial covenants and additional limitations on our business activities. In particular, our senior term loan requires us to maintain a certain leverage ratio and fixed charge coverage ratio. Our senior term loan includes restrictive covenants substantially similar to those in our loan, security and guaranty agreement relating to our revolving line of credit facility. As a result of these covenants, as well as the covenants in our loan, security and guaranty agreement related to our revolving line of credit facility, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs.

A failure by us or our subsidiaries to comply with the covenants under either of our loan agreements would result in an event of default under such indebtedness. The lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the loan agreements. If any of our indebtedness were to be accelerated, it could result in cross defaults under our other debt agreements and could adversely affect our ability to respond to changes in our business and manage our operations. In addition, upon an acceleration of any of our indebtedness, there can be no assurance that our assets would be sufficient to repay the accelerated indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern. Further, our loan agreements contain, and agreements evidencing or governing other future indebtedness may contain, restrictive covenants that will limit our ability to engage in activities that may be in our best long-term interests.

 

24


We cannot assure you that we will pay cash dividends on our common stock in the near future.

On August 26, 2013, our board of directors approved and we declared a $69.9 million, or $3.60 per share of common stock, special cash dividend. However, we do not currently anticipate that we will pay any additional cash dividends on shares of our common stock in the near future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions (including under our loan agreements), restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, our operating subsidiaries are currently restricted from paying cash dividends by the agreements governing their indebtedness, and we expect these restrictions to continue in the future.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information regarding the purchase of shares of our own common stock made by or on behalf of us or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) under the Exchange Act of 1934, during each month of the quarterly period ended November 2, 2013:

 

Month

   Total
Number of
Shares
Purchased
    Average
Price Paid
per Share
     Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs (2)
     Maximum
Number of
Shares That
May Yet be
Purchased
under the
Plans or
Programs  (2)
 

August 4, 2013 – August 31, 2013

     —          —           —           —     

September 1, 2013 – October 5, 2013

     4,632 (1)     $ 11.24         —           —     

October 6, 2013 – November 2, 2013

     —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

     4,632      $ 11.24         —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)   Represents shares repurchased from participants for their tax withholdings related to restricted stock vested on September 27, 2013.

 

(2) As of November 2, 2013, we do not have any authorization to repurchase stock in the open market nor any plans to do so.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. RESERVED

 

ITEM 5. OTHER INFORMATION

None

 

25


ITEM 6. EXHIBITS

The following exhibits are filed or furnished with this Quarterly Report:

EXHIBIT INDEX

 

Exhibit

Number

  

Description

  10.1    Loan, Guaranty and Security Agreement, dated August 27, 2013, by and among Gordmans, Inc., each of the other credit parties signatory thereto, the lenders party thereto and Cerberus Business Finance, LLC (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on August 28, 2013).
  10.2    Consent, Waiver and Sixth Amendment to Loan, Guaranty and Security Agreement, dated August 27, 2013, by and among Gordmans, Inc., each of the other credit parties signatory thereto, the lenders party thereto and Wells Fargo Bank, National Association, as arranger and administrative agent (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K, filed on August 28, 2013).
  31.1    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Calculation Linkbase Document.
101.LAB    XBRL Taxonomy Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.

 

26


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: December 3, 2013

 

GORDMANS STORES, INC.
By:  

/s/ JEFF GORDMAN

  Jeff Gordman
  President, Chief Executive Officer and Secretary
  (Principal Executive Officer)
By:  

/s/ MICHAEL D. JAMES

  Michael D. James
 

Senior Vice President, Chief Financial Officer,

Treasurer and Assistant Secretary

 

(Principal Financial Officer and Principal

Accounting Officer)

 

27

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jeff Gordman, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Gordmans Stores, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: December 3, 2013

 

/s/ JEFF GORDMAN

Jeff Gordman

Chief Executive Officer, President, and Secretary

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael D. James, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Gordmans Stores, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: December 3, 2013

 

/s/ MICHAEL D. JAMES

Michael D. James

Chief Financial Officer, Senior Vice President,

Treasurer and Assistant Secretary

(Principal Financial Officer and

Principal Accounting Officer)

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Gordmans Stores, Inc. (the “Company”) for the quarterly period ended November 2, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeff Gordman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ JEFF GORDMAN

Jeff Gordman

Chief Executive Officer, President, and Secretary

(Principal Executive Officer)

December 3, 2013

This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Gordmans Stores, Inc. (the “Company”) for the quarterly period ended November 2, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael D. James, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ MICHAEL D. JAMES

Michael D. James

Chief Financial Officer, Senior Vice President,

Treasurer and Assistant Secretary

(Principal Financial Officer and Principal

Accounting Officer)

December 3, 2013

This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.