It's amazing what a focused management team can do for a floundering business.
Last year, kiddie retailer Gymboree (NASDAQ:GYMB) was an also-ran, playing second fiddle to The Children's Place (NASDAQ:PLCE) and Baby Gap (NYSE:GPS) with narrow margins and a diffuse marketing message.
In January 2006, Matthew McCauley took over as CEO and started righting the ship. In the neglected Play & Music segment, the company used Gymbucks promotions and highly targeted direct marketing to bring "hundreds of thousands" of new customers into its stores, and financial results have followed.
Latest and greatest
Gymboree blew the doors off the latest quarter, with sales and earnings that outstripped guidance that had been raised three times by a fair margin. EPS landed at $0.72 -- excluding the costs of closing out the Janeville brand -- up from $0.35 a year ago, and sales rose 22% year over year with just 6.9% more stores in business. That's powerful organic growth, kids.
"Results for the third quarter exceeded our expectations due to great product, strong marketing, and reduced product costs," McCauley said. "I am pleased with the third-quarter results, and continue to see additional sourcing, marketing and merchandising opportunities ahead of us."
He explained that there is a significant demographic overlap between Play & Music clients and Janie & Jack customers, though many playtime customers don't know about Janie & Jack or even the Gymboree retail stores. The challenge, then, is to convert single-brand customers into consumers of the entire Gymboree brand, and that work is well under way.
What's next?
In 2007, the company will introduce a store concept that will sell to bigger kids, ages 7 to 12. At the same time, Gymboree stores will stock new lines for slim and husky kids, and altogether, the customer base should grow significantly. With the addition of more Play & Music conversions and an increased marketing budget, there is no reason to believe that the sales growth is anywhere near the end of the line.
If that weren't enough to all but guarantee a bright near-term future, the longtime goal of producing stable operating margins in the 12% range has been met, and McCauley upped that goal to 15% in the conference call. That's a better score than all of its meaningful competitors, and even today, only Nordstrom (NYSE:JWN) ranks ahead of Gymboree with a 12.8% mark.
And I haven't even talked about the improvements in that feeder segment, Play & Music, yet. It's not a huge revenue contributor, but as described above, there's a huge opportunity to point these customers toward the nearest retail store. With the management change came new directions in the young children's educational programs, including reorganized age groups, a new month-by-month fee schedule alongside the traditional slate of up to 12-week schedules, and entirely new classes.
The most promising addition would be the school readiness program, fueled by LeapFrog (NYSE:LF) products that are only available to educators, not the general public. I have no doubt that McCauley has more programs like that one in mind, especially when you consider his plans to reach for older kids.
The stock certainly isn't cheap, even after today's rather unmotivated 5% drop, but it could be worth every last penny if management continues to execute the way it has been doing lately. I'm just kicking myself for not buying in when the stock caught my interest in the spring, at about half of today's price.
Further Foolishness:
- Gymborrific Quarter, Gymboree!: Fool by Numbers
- Foolish Forecast: Jamboree at Gymboree
- Know Your Numbers: Retail Sales
- What's Cool in Back-to-School
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Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure looks good on you.
