Gordmans gives back to private equity partners

Regional department store chain Gordmans gave shareholders a huge gift this week when the private equity controlled company’s board said it had borrowed $45 million to fund a $3.61 special dividend after reporting lackluster second quarter results.

The hefty payout comes as the Omaha, NE.,-based operator of 90 stores, majority owned by Sun Capital Partners, said sales for the second quarter ended Aug. 3, increased 6.7% to $136.8 million from $128.2 million and same store sales declined 2.6% compared to a 0.1% increase the prior year. Profits totaled $900,000, or five cents a share, which was better than the company’s guidance of one to three cents, but well below second quarter profits the prior year of $3.5 million, or 18 cents a share.

“We delivered comparable store sales that were consistent with expectations despite some continued headwinds and represented a meaningful improvement from the trend we experienced in the first quarter of 2013,” said Gordman’s president and CEO Jeff Gordman. “At the same time, our bottom line results were ahead of our guidance even as we had to increase our markdown cadence to clear seasonal product and better align inventory levels heading into the second half of the year. We believe that the adjustments we've made, and continue to make, to our merchandise assortments, combined with the rollout of our loyalty program, have positioned us to deliver further improvements over the remainder of fiscal 2013.”

If the company’s business results don’t seem like the backdrop against which to fund a whopping $3.61 dividend payment, Gordman explained the move this way: “Today's announcement of a special cash dividend underscores Gordmans' commitment to maximize shareholder value. Our strong balance sheet, strong projected future cash flows, and finally, a favorable lending environment, enable us to issue this special dividend without impairing our ability to continue to execute our growth plans."

The dividend payment will cost the company $70 million — roughly half the total of its second quarter sales — which it will fund with cash on hand and a new $45 million loan with Cerberus Business Finance. In addition, the company increased a line of credit against which it had no outstanding borrowings with Wells Fargo Bank to $80 million from $60 million.

Roughly half of the dividend payout will go to Sun Capital Partners which owns 50.9% of the company’s outstanding shares. Gordmans was sold to Sun Capital Partners in late 2008 and roughly two years later the company went public. Sun divested a portion of its stake at that time and it sold additional shares last year but remains in control of the company.

As for Gordmans growth plans, the company has opened seven new stores so far this year, including four in the second quarter, and plans three more units in the third quarter giving it a year-end store count of 93 locations.

In the third quarter, Gordmans is banking on a low single digit comp increase and additional selling space to generate sales in the range of $149 million to $151 million. Gross margin pressures the company experienced earlier in the year are expected to diminish, but expenses related to new store growth and the loan used to fund the dividend payment will pressure profits and reduce earnings per share by two cents to a range of 12 cents to 14 cents.