Gymboree Analysis

Gymboree Investment Highlights
Children's apparel has a necessary replacement cycle.
By nature, children's apparel needs to be replenished several times a year, usually by a mature female demographic with a propensity to spend on their children. Yes, the Gymboree brand carries higher price points than its publicly-traded specialty competition - Carter's (CRI) and Children's Place (PLCE) - and the mass channel private labels.
However, the average Gymboree customer represents a high-end audience with limited exposure to rising gas prices and other negative macroeconomic factors. We also expect a modest sales boost in coming years from baby boomer retirees who will likely have more time and resources to devote on their grandchildren.
With the combination of established brands that resonate with mothers everywhere (Gymboree and Janie and Jack) and still-emerging brands (Crazy 8) , we anticipate robust sales growth (at least mid-teens) through the balance of the decade and likely beyond.
Strong financial footing.
When evaluating a consumer stock investment, the most important factors to evaluate are:
Top-line growth (including mature and new store growth),
The likelihood of sustained profitability and return on invested capital,
Cash generation and flexibility,
Debt requirements, and
Inventory turnover.
Gymboree generally passes the test on each of these considerations, with solid top-line growth, sector-leading operating margins and returns on invested capital (nearing 20%), ample cash on hand, a debt-free balance sheet, and inventory turnover over 4.0x (excellent for a mall-based apparel retailer).
Investment Risks
Valuation. Admittedly, we are a bit concerned about Gymboree's valuation, given the stock's impressive run this year (the stock has climbed back from a low of $27 in January to a recent close of just under $44). However, at about 14x forward earnings (the consensus fiscal 2009 estimate is $3.16, according to Yahoo Finance), we still find this stock relatively cheap to its peer group (about 15x, aided by Children's Place inflated valuation) and anticipated earnings growth (mid-to-high teens). As such, we would comfortable with owning Gymboree's stock into the high-$50 range.