- At the second quarter of fiscal 2008, the company is planning second quarter earnings to be in the range of 18 cents to 20 cents per share on 29 million shares outstanding. This earnings estimate includes a loss of 4 cents per share related to Crazy 8.
- In terms of real estate, the company plans to open 24 new stores during the second quarter consisting of three new Gymboree stores, 8 new Gymboree outlets, 5 new Janie and Jack shops and 7 new Crazy 8 stores. The company plans to remodel, expand or relocate 8 Gymboree stores.
- The company is planning for a low single-digit comparable store sales increase for the quarter. In terms of gross margin the company expects second quarter year-over-year gross margins to decrease versus the prior year primarily due to the negative occupancy expense leverage associated with the large number of new store openings.
- The company expects slight SG&A leverage. On balance operating margins are expected to be consistent with those experienced in the prior year.
Fiscal 2008 Outlook
- The company is planning for per share earnings in the range of $3.10 to $3.15 on 29 million shares outstanding. These earnings targets anticipate a full-year net loss of 8 cents to 9 cents per share.
- The company plans for a low single-digit comparable store sales increase for the year with modest increases in gross margin and operating income.
Key questions from the first quarter earnings call conducted by The Gymboree Corporation on May 21, 2008.
Betty Chen (Wedbush Morgan): You made a commentary on SG&A for new stores being higher in the second quarter. Could you expand on that?
Blair Lambert: In the second quarter we said gross margin would be down due to higher occupancy costs and that is the result of the large number of renegotiated deals we have done over the last few years and the fact we have 23 to 25 stores that will open up in the second quarter so we are ending up with a fair amount of rent expense when we do not even have revenue in the stores yet because we have to start charging off that rent expense a couple of months prior to the opening. We charged it off as we start to take possession of the store. That is what the occupancy comment was. SG&A we think will be leveraged in the second quarter allowing us to get back to an operating margin that is consistent with the prior year.
Betty Chen (Wedbush Morgan): Could you talk about the rationale of why you have increased the store opening plan in terms of the Crazy 8?
Matthew McCauley: Crazy 8 is a combination of both of those things. We are feeling good about the sales we are seeing right now, are happy with the direction it is going and feel confident of the opportunities and things that we can improve on and a combination of having the right deal coming up and finding the right locations.
Betty Chen (Wedbush Morgan): Could you speak to the merchandise margin plans?
Blair Lambert: There is no change on that guidance for the full year. We are expecting about 100 basis points of gross margin improvement. Everything else remaining equal based on getting lower product costs for the full-year period. We have purchased, at this point most of the year is done so we feel good about those expectations.
Adrienne Tennant (Friedman, Billings, Ramsey): On the boy penetration at Gymboree, what inning are you in?
Matthew McCauley: The response to that is we still have a long ways to go and what we have said and continue to feel is that if we do stay on this track we are on with boy we should continue to see low single-digit comps for the entire company, holding everything else constant. There is still several more years of growth for us to get out of boy.
Adrienne Tennant (Friedman, Billings, Ramsey): On the Crazy 8 side of things thus far what have you learned with 16 stores open?
Matthew McCauley: We are learning all the time. We are still learning things in Gymboree. On Crazy 8 the things we have learned on the real estate side is we continue to feel good about opening in high traffic malls and prominent malls and we are trying to build a brand so that is exciting for us going forward. Learning a lot about the balance of boy and girl and kid to baby and feeling good about the direction we are going and still see opportunities for us to improve the girl business. We are happy with the boy strength and the baby girl strength and the kid girl opportunities where we are seeing more growth and we are excited about all of those things we have learned there. One other thing that we have learned in terms of where the customer is coming from is seeing a lot of the customers coming from Target, Old Navy and a lot coming from Children’s Place. The thing that surprised us the most was how many of them were coming from Target.
Adrienne Tennant (Friedman, Billings, Ramsey): Are the category strengths similar?
Matthew McCauley: The penetration is much higher in boy right off the bat in terms of departmental selling. We are happy with that. That is the opportunity for Gymboree to increase boy and the opportunity for Crazy 8 is to increase girl.
Adrienne Tennant (Friedman, Billings, Ramsey): There are a lot of concerns on cost inflation, minimum wage, freight, cotton prices. Are you seeing any of that?
Matthew McCauley: We are under the same pressures everybody is feeling particularly around production, cost of fuel, cost of labor, all of those things are putting pressure on us. The good news is we are still, in terms of Gymboree, we are still in the early stages of finding new opportunities for sourcing. We are still looking at new countries we can go to and that is still an opportunity for the Gymboree side even though the costing is plateauing there. It is offset by the fact we have Crazy 8, Janie and Jack and outlet that still have lots of room just based on the sheer quantity of the orders increasing that is helping the cost of goods.
Margaret Whitfield (Stern Agee): On Crazy 8 the loss was higher than thought in first and second quarter but now break-even is planned for the back half or close. Was that in your original thought?
Matthew McCauley: It is mostly seasonality. That was our expectation. The second quarter is challenging for most retailers especially for kids in shorts, tees and tanks at lower price points and then we are building the business and increasing the store count over time it helps offset some of the fixed costs here at the home office.
Margaret Whitfield (Stern Agee): On the stock based compensation would there be a similar increase year-over-year in the second quarter and third one as was reported in the first one?
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