To a great degree, trendy children's clothier Gymboree's (NASDAQ:GYMB) business model depends on one undeniable fact: Kids grow. More precisely, they outgrow clothes, necessitating the buying of new clothes. Within every child's growth spurt, therefore, lies the potential for profits for Gymboree.
Not so for every aspect of the company's own growth. For example, from May to November 2003, Gymboree's inventories experienced a growth spurt of their own, rising 62% against sales gains of less than 9%. Those kinds of numbers give retail investors the shudders. They create pictures in the mind's eye of shelves and warehouses packed to the ceiling with clothing taking up space, costing rent, and rapidly going out of fashion.
Problems with inventory management, such as Gymboree encountered last year, have to be monitored on a quarter-to-quarter basis if you really want to understand a company's sales trends. For example, a cursory glance at Gymboree's Tuesday earnings announcement can easily give the impression that the company is on a downward slide. From an annual perspective, the numbers show that, from the first quarter of 2003 to the first quarter of 2004, the company's respectable 11% increase in sales was completely undermined by a 34% increase in inventories.
But the real story is that in the early part of 2003, the company's inventories were much more out of control than they are today. And that November 2003's bloated inventory numbers have been cut by 17%, while sales and earnings continue to rise.
Sure, the company warned that it will probably have negative same-store sales next quarter. And sure, Gymboree will in all likelihood lose money for the quarter as well. But for the long term, things are looking up for the company. It raised the floor on its earnings outlook and now expects to earn no less than $0.92 for the year. Profits could even be as high as $0.98, which would give the company a price-to-enterprise value around 12. Not a screaming bargain, but still noticeably cheaper than competitors Children's Place (NASDAQ:PLCE) and OshKosh B'Gosh (NASDAQ:GOSHA).
Want to find out creative ways to stretch those clothing dollars for your kids? The Parents and Expecting Parents discussion board is filled with like-minded Fools just waiting to talk or answer questions.
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article. The Fool has a disclosure policy .
