"Pop, pop, pop those bubbles." So go the lyrics to one popular ditty at a Gymboree (NASDAQ:GYMB) class here in suburban Virginia. And speaking of bubbles, after nearly doubling over the past year, Gymboree's stock price is stretched to breaking, looking about a molecule thin right now. Will tomorrow's Q4 and full-year 2005 earnings news pop it? Let's look for some clues.
Wall Street Wisdom:
- General consensus. Ten analysts watch Gymboree, and their views split right down the middle: Five say buy, five say hold.
- Revenues. Quarterly sales are expected to climb 17% to $205.4 million.
- Earnings. Stock price bubble or not, earnings are certainly expected to inflate. Analysts predict they will nearly triple year over year, to $0.54 per share.
Margin watch:
Gymboree's recent income statements have been well-stocked with one-time charges and one-time benefits, making fair comparisons between quarters difficult. A better way to make sense of where the company is heading is to look at the big picture, through the lens of trailing-12-month, or as I call them, "rolling" margins. From that vantage, we see that on average, gross margins have held steady over the past 18 months. Operating profitability is about where it was a year ago, and net profitability has fallen by nearly half.
|
Margins % |
7/04 |
10/04 |
1/05 |
4/05 |
7/05 |
10/05 |
|---|---|---|---|---|---|---|
|
Gross |
40.6 |
40 |
39 |
38.4 |
38.4 |
40.1 |
|
Op. |
6.3 |
5.1 |
3.5 |
2.9 |
2.8 |
5 |
|
Net |
4.3 |
3.5 |
1.5 |
0.8 |
0.9 |
1.9 |
Foolish lookout:
Last month, Gymboree reported lower sales than the analysts predicted for this quarter: $202.9 million. In that same sales announcement, Gymboree projected earnings between $0.52 and $0.54 per share. Meanwhile, the analysts say that despite Gymboree selling less than it had expected, and despite its current margins being about half what they were a year ago, the company will still report earnings at the top of its projected range tomorrow. Sorry, but I don't buy it.
Don't assume that I'm totally down on the company. For example, Gymboree appears to be managing its inventories and bill collection much better now than it did a year ago. Year over year, inventories grew only 10% last quarter, versus a 14% rise in sales. And accounts receivable actually declined against the rising sales. This helped Gymboree generate $29.4 million in year-to-date free cash flow, versus negative free cash flow through the first three quarters of 2004.
Competitors:
Gymboree's on the upswing, with operations improving and free cash flowing once more. But its resurgence won't go unchallenged. Be sure to keep an eye on its rivals: Children's Place (NASDAQ:PLCE), Gap (NYSE:GPS), and Target (NYSE:TGT).
Gap has been recommended by our Stock Advisor and Inside Value newsletters.
Fool contributor Rich Smith does not own shares of any company named above.
