FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan

Gymboree Endures Rough and Tumble

If children's apparel retailer Gymboree (Nasdaq: GYMB) were a tyke, the folks in the ER would have someone call up Children's Services. The poor child keeps coming in bruised and battered, bones broken, dreams shattered. Confronted with the bloody pulp that is their baby, the parental units (i.e., management) act dumbfounded enough to be guilty of abuse.

The stock got hammered this morning, dropping $2 9/32 to $6 13/16 after getting pounded as low as $5. The bloodshed followed last night's warning of a disastrous second quarter loss of $0.20 to $0.25 per share, worse than the $0.02 per share loss Wall Street had expected. Sales for the five-week period ended July 3 sank 20% to $51 million, with same-store sales plunging 33% from the year-ago period.

Management also announced it would take a $13.5 million pre-tax restructuring charge (or $0.35 per share after taxes) to cover a writedown of assets, including 12 recently opened stores that aren't doing well plus obsolete inventories. The restructuring is part of a "comprehensive remerchandising of its brand" that will include "expanded and more innovative fashion offerings" plus changes in the look of the stores and the trademark.

Negative June comps were to be expected given that same-store sales leaped 65% a year ago when a massive inventory buildup led to steep discounting. But the overall trend remains ugly. Year-to-date comps are down 9%. Even worse, overall sales have increased just 9% to $199.3 million despite the fact that Gymboree has boosted the store count by 23% to 589 from 480 last July.

In retrospect, it's simply astonishing that Gymboree's management persisted in a rapid new store rollout when it should have been obvious 18 months ago, when inventories began to bulge, that they had a serious merchandising problem. The company has specialized in colorful, relatively pricey apparel for babies on up to 6-year-olds. Some critics consider the older boys line too clownish to appeal to increasingly sophisticated kids. That shortcoming is particularly problematic given that Gymboree wants to expand into the pre-teen market through its Zutopia concept.

Meanwhile, increasingly price-conscious parents have been lured into The Children's Place (Nasdaq: PLCE), the Gap's (NYSE: GPS) Old Navy, and Dayton Hudson's (NYSE: DH) Target stores by the much lower prices and more basic apparel.

Gymboree was in decent financial shape as of May 1, with $33.1 million in cash and $11.3 million in long-term debt. So the company may still manage a comeback. However, investors hoping for a turnaround this year must now face the fact that the company has to reposition its brand first. That will take time, and perhaps better sense than Gymboree's management team has shown of late. My own view is that cosmetic changes like new store signs won't have much impact. And changing the merchandise without fundamentally rethinking the company's price points amounts to little more than a cosmetic change.

UPS

Internet powerhouse Yahoo! (Nasdaq: YHOO) won $4 5/8 to $171 11/16 this morning after last night posting second-quarter pro forma earnings of $0.11 a share, up from $0.01 a year ago and ahead of analysts' mean estimate of $0.08. Pro forma results exclude merger-related charges as well as the effects of amortization of intangible assets. For more on the news, head to this morning's Breakfast With the Fool. The shares lost $8 1/16 yesterday in advance of the news.

Streaming media aggregator and broadcaster broadcast.com (Nasdaq: BCST), in the process of being acquired by Yahoo!, reported a second-quarter loss of $0.05 a share versus an $0.11 loss the year before. Analysts had predicted a loss of $0.09 for the quarter. Revenue came in at $13.5 million, representing a 130% gain from $5.9 million a year ago. The shares rose $3 3/8 to $132 1/4.

Internet portal and websites operator Go2Net (Nasdaq: GNET) went up $4 11/16 to $90 7/8 after reporting a deal with Intershop Communications, which will provide online storefronts for members of Go2Net's HyperMart and Virtual Avenue business hosting services.

Discount retailer Bradlees Inc. (Nasdaq: BRAD), which reported a 24.8% increase in June same-store sales, jumped $3 5/8 to $18 5/8 this morning. Total sales for the month were $162.3 million, up 23.8% from a year ago. The 102-store chain plans to open two new stores in October, its first openings in four years.

Forest products company Champion International (NYSE: CHA) earned $15/16 to $51 7/16 this morning. The company said it expects to report Q2 EPS that's higher than last year's $0.33 and "well above" the current consensus estimate of $0.17. The improved numbers reflect stronger markets for the company's wood products and domestic uncoated freesheet papers businesses, plus continued progress in its profit-improvement program. The company posts earnings July 15.

Mobile data networking technology company Metricom Inc. (Nasdaq: MCOM) added $4 1/2 to $47 1/4 this morning. The company announced a pact with electronics contract manufacturer Sanmina Corp. (Nasdaq: SANM) to build network equipment in support of Metricom's rollout of 128 kbps wireless data service.

Industrial piping systems construction and maintenance firm The Shaw Group (NYSE: SGR) piped up $1 1/2 to $17 1/2 on news of fiscal Q3 EPS of $0.43, down from last year's $0.47 but in line with First Call's three-analyst consensus estimate. Both gross and operating margins improved year-over-year: gross margins rose to 19.6% from 15.8% while operating margins were 7.8%, up from 7.1% a year ago.

Home healthcare services provider Apria Healthcare Group (NYSE: AHG) took $2 1/8 to $19 1/8 on news that the U.S. Attorney in Sacramento notified the company it closed its criminal investigation in regard to eight subpoenas served beginning a year ago. The company is still responding to subpoenas from the U.S. Department of Health and Human Services and the U.S. Attorney in San Diego.

Fabrication systems supplier Applied Materials (Nasdaq: AMAT) moved up $2 1/4 to $72 3/4 after saying it replaced its expired shareholder rights plan with a new one designed to deter unsolicited takeovers. The plan's "poison pill" provision kicks in when a person or group acquires a more than 20% stake in the company's common stock.

Communications tower leasing and development company SBA Communications (Nasdaq: SBAC) gained $1 3/16 to $12 1/16 after saying it added 184 towers to its portfolio in the second quarter ended June 30. All but 58 were built by the company with the others acquired in various transactions for about $18 million. SBA now owns 770 towers, up 31% from the end of Q1.

DOWNS

Airborne Express parent Airborne Freight (NYSE: ABF) fell $1 9/16 to $25 5/8 after warning that its second-quarter earnings will come in between $0.45 and $0.55 a share, short of analysts' consensus estimate of $0.63. The company blamed a lack of growth in domestic shipments for the shortfall. Both PaineWebber and Morgan Stanley Dean Witter downgraded the company this morning.

Information technology consultant Computer Horizons (Nasdaq: CHRZ) faded $1 7/8 to $11 1/8 after saying a market slowdown for IT services and investments in its non-core businesses will result in Q2 EPS between $0.23 and $0.25, down from last year's $0.34 and short of the $0.31 mean estimate the company said analysts had been anticipating. For the year, the company guided investors to expect EPS between $0.85 and $1.00, short of $1.27 First Call mean estimate.

Single-price discount retailer 99 Cents Only Stores (NYSE: NDN) was marked down $7 11/16 to $43 1/8 after saying its second quarter same-store sales rose 2.4% year-over-year compared to an 8.5% rise in the first quarter and a 5.8% increase during the same period a year ago.

Storage area networking (SAN) and enterprise application integration (EAI) firm Computer Network Technology (Nasdaq: CMNT) lost $1 7/16 to $14, adding to yesterday's 32% drop. Late in the trading day, the company warned that its Q2 earnings will be $0.03 to $0.04 short of analysts' expectations due mostly to several order delays for its EAI products.

Embedded software development company Wind River Systems (Nasdaq: WIND) was blown down $1 9/16 to $15 7/8 after Hambrecht & Quist cut its rating on the firm to "market perform" from "buy."

Midmarket enterprise software supplier Epicor Software (Nasdaq: EPIC) slid $1 1/2 to $5 1/2 after warning that sales problems resulting from the merger of Platinum Software and DataWorks (now Epicor) and the general slowdown in enterprise resource planning (ERP) software demand will result in slightly lower sequential revenue in Q2 and roughly breakeven earnings. The First Call mean estimate had called for EPS of $0.12 during the quarter.

Satellite communications technologies firm Gilat Satellite Networks (Nasdaq: GILTF) was knocked down $6 3/8 to $56 after Bloomberg News reported that BP Amoco (NYSE: BPA) will use rival Hughes Electronics' (NYSE: GMH) satellite equipment for all of its service-station credit card transaction data transmission needs. BP had used Gilat's services before its merger with Amoco, which had been a Hughes customer. CE Unterburg Towbin cut its rating on Gilat to "buy" from "strong buy."

Biotechnology company Immunex Corp. (Nasdaq: IMNX) slipped $6 15/16 to $124 1/4 following a downgrade to "accumulate" from "strong buy" by Adams, Harkness & Hill.

E-commerce software developer Sterling Commerce (NYSE: SE) continued to fall, losing another $7/8 to $25 7/8 on top of yesterday's 25% drop caused by a warning from the firm that its fiscal Q3 EPS will be $0.38 or $0.39, missing First Call's $0.41 mean estimate. This morning, two more brokerages cut their ratings on the company following yesterday's 9-firm downgrade-o-rama.

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Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool Editing Brian Bauer (TMF Hoops), another Fool Bob Bobala (TMF Bobala), a Fool's Fool Jennifer Silber (TMF Amused), Fool at last