Gander Mountain Climbing Slowly

Gander Mountain Co.’s (GMTN) second-quarter sales were in-line with our forecast, but its net loss per share was $0.07 below our estimate. The downside was due to the company’s operating costs coming in higher than our forecast. Still, we expect substantial improvement in operating profit margins in the second half of the year, and we are slightly boosting our EPS estimates the remainder of fiscal year 2008 and fiscal year 2009.

That said, Gander Mountain is still struggling in this difficult retail environment, but we think the company is taking the appropriate steps for a softer consumer spending environment. Those steps include scaling back store expansion plans, improving store-level productivity, and enhancing certain product lines. We maintain our Hold rating.

We are currently modeling that Gander Mountain will have a net loss during fiscal year 2008 and turn a small profit in fiscal year 2009. We note that Gander Mountain is trading at 0.5x book value and 0.1x sales. We think this depressed valuation prices in weak results in future quarters. As the company scales back its store expansion plans to focus on store operations, its topline growth will likely slow. But, this will enable the company to expand its profit margins. Our target price of $4 is about 15x our fiscal 2010 EPS estimate of $0.26.

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