The Gymboree Corporation (GYMB)
Q3 2008 Earnings Call Transcript
November 19, 2008 1:30 p.m. PT

Executives

Kip Garcia - President
Matthew McCauley – Chairman, Chief Executive Officer
Jeffrey Harris - Vice President of Finance
Blair Lambert – Chief Operating Officer, Chief Financial Officer

Analysts

Betty Chen – Wedbush Morgan
John Zolidis – Buckingham Research
Brian Tunick – J.P. Morgan
Margaret Whitfield – Stern Agee
Thomas Filandro – SIG
Linda Tsai – MKM Partners
Dana Telsey – Telsey Advisory Group
Rick Patel – Merrill Lynch
John Morris – Wachovia Capital Market
Janet Kloppenberg - JJK Research
Marni Shapiro – The Retail Tracker
Bill Dezellem – Titan Capital Management

Presentation

Operator

Good afternoon. My name is Christine and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter 2008 earnings call for the Gymboree Corporation. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions) If you''d like to ask a question during that time you may press * then the number 1 on your telephone keypad. If you’ve already done so, please press the pound sign now then press “*1” again to ensure that your question has registered.

Thank you Mr. Harris you may begin your call.

Jeffrey Harris – Vice President Finance

Thank you, Christie. Welcome to the Gymboree Corporation’s third quarter 2008 earnings call. I am Jeff Harris, Vice President of Finance for Gymboree. On the call with me today are Matthew McCauley, Chairman and CEO; Kip Garcia, President and Blair Lambert, COO and CFO. Blair will first make a few comments about our third quarter financial performance and plans for the remainder of 2008. Kip will discuss product performance during the quarter and update you on our merchandising initiatives. Matt will then provide some additional background and update you on our strategic plans for the remainder of 2008 and beyond. After our presentation is finished we will all be happy to take your questions.

Before we get started, I want to point out that our presentation today contains forward-looking statements including statements about trends in operations, future sales expectations and future financial performance. Actual results could differ materially from those forecast as a result of a number of factors including those set forth in our annual report on Form 10K for the year ended February 2, 2008 filed with the SEC. I would also like to point out that we intend to continue to comply with the SEC regulation FD. As such we will not be providing guidance or projections outside of public forums. You should also be aware that your participation in the Q&A session constitutes your permission to transcribe and re-broadcast any comments you may make.

Now here is Blair Lambert.

Blair Lambert – Chief Operating Officer and Chief Financial Officer

Thank you, Jeff. As reported in our press release net retail sales for the 13 weeks ended November 1, 2008 were $261.3 million, a 6% increase over the $247.6 million in net sales from retail operations reported for the 13 week fiscal quarter last year. Other revenue for the quarter attributable to our Play and Music operation was $2.8 million, compared to $3.2 million in the prior year. In total, net sales for the quarter were $264.1 million versus $250.7 million for the prior year, an increase of 5%. As previously reported comparable store sales for the third quarter decreased 2%, during the quarter we saw an increase in the total number of transactions and decreases in the average unit retail and units per transaction. The total number of stores open at the end of the quarter was 873, including 585 Gymboree Stores in the U.S., 29 Gymboree stores in Canada, 112 Gymboree Outlet stores, 110 Janie and Jack shops and 37 Crazy Eight stores. During the quarter we opened 39 new stores consisting of 9 new Gymboree Stores and 8 new Gymboree Outlet stores. We also opened 9 Janie and Jack shops and 13 new Crazy Eight stores. In addition, we closed 1 Gymboree store. Total square footage under management at the end of the quarter was 1,706,000 square feet with our average store size at roughly 1,954 square feet.

Turning now to gross profit, gross profit for the third quarter fiscal 2008 increased 130 basis points to 51% compared to 49.7% for the same quarter of the prior year. The improvement was the result of the company’s continuing product cost reduction strategies, leveraging of buying costs and higher average unit retails in the core Gymboree brand partially offset by increased occupancy costs and lower average unit retails in the other brands.

Looking at SG&A expense in the third quarter, SG&A as a percentage of sales was 31.9% of sales versus 32% in the prior year. The decrease was primarily driven by reductions in marketing, professional fees, operating supplies, communications and travel, partially offset by higher compensation. Notably, excluding non-cash stock based compensation expense; SG&A fell by 70 basis points versus the third quarter of the prior year. For the quarter, operating income rose 13% to $50.2 million versus $44.4 million in the third quarter of the prior year. As a percent of sales, operating income showed a terrific 130 basis point increase to 19% of sales. The tax rate for the third quarter was 38.5% versus 40.4% in the prior year. The lower tax rate was due in part to tax benefits associated with our international operations partially offset by additional state tax accruals.

Net income increased 15% to $30.9 million versus $26.9 million last year. Earnings per diluted share increased 16% to $1.06 per diluted share compared to $0.91 in the prior year. These earnings include a loss of roughly $0.03 per diluted share associated with Crazy Eight. Let me now move to the balance sheet. Cash, cash equivalents and investments at the end of the quarter were $93 million with no short or long-term borrowings outstanding. Inventories at the end of the quarter increased to $142 million versus $130.5 million in the prior year. On a ‘per square foot’ basis inventories decreased 6% compared to the prior year. Gross capital expenditures for the quarter were $16.2 million. Depreciation expense for the quarter was $8.8 million.

Turning now to our plans for the remainder of fiscal 2008, as noted in our press release for fiscal 2008 we are planning for diluted per share earnings in the range of $3.12 to $3.20. These earnings targets anticipate a full year net loss from Crazy Eight of roughly $0.14 per diluted share. Looking more specifically at earnings for the fourth quarter fiscal 2008, as you all know there is a great deal of turbulence in the consumer markets. While we have a great deal of confidence in our product assortments, marketing plans and efforts to improve our operational efficiency the macro economic factors make it very difficult to anticipate how the consumer will respond during the upcoming holiday season. With this risk in mind, we are planning fourth quarter earnings to be in the range of $0.92 to $1.00 per diluted share and 29.3 million diluted shares outstanding. This earnings estimate is based on a mid single digit decline in same store sales and anticipates a loss of $0.03 per diluted share related to Crazy Eight.

In planning the income statement for the fourth quarter we expect fourth quarter year-over-year gross margins to decrease slightly versus the prior year due to negative occupancy expense leverage and relatively lower gross margin rates in the Crazy Eight division partially offset by slightly higher merchandise margins in the other divisions and buying cost leverage. Looking at SG&A, we should see a little SG&A leverage even after taking into account the $3.2 million stock-based compensation catch-up charge recorded in the fourth quarter of the prior year. On balance, operating margins are expected to be a little higher than those experienced in the prior year. Looking at our real estate plans for the fourth quarter, we plan to open 15 new stores consisting of three new Gymboree stores, 9 new Gymboree Outlets, 5 new Janie and Jack shops and one new Crazy Eight store. We also plan to remodel, expand or relocate 5 Gymboree stores.