By nature, children are unpredictable. Apparently, so are the companies that cater to them.
Shares of children's apparel and accessories retailer Gymboree (NASDAQ:GYMB) lost a little more than 1% in yesterday's trading and then another 1.5% on the after-hours market following the announcement of company's third-quarter earnings. Though a 1% drop on a down-market day isn't exactly an exodus, you can't fault investors who lightened their positions in the company in the days before the earnings announcement. Recently, Gymboree's announcements have mostly fallen into the warnings category.
This time, though, there were no surprises. Well, almost. Some investors glancing through the report may have been ecstatic to see earnings of $0.28 per share, well above analyst estimates of $0.17. Unfortunately, that fabulous number was the result of a one-time tax benefit of $0.11. The company's overall sales rose 8% and same-store stales inched up 2%, but something -- most likely competition -- clearly took a sizable bite out of the margins and caused net income to decline by 34% from year-ago levels. Finally, packaging the good with the bad, the company re-affirmed its $0.25 to $0.30 earnings range for the upcoming fourth quarter but also stated that it expects flat comps.
Currently, things are looking a little uncertain for Gymboree. With the market hitting its yearly highs, the company's stock is lingering at the low end of its yearly trading range, 37% off the year's high. What's more, Gymboree's larger competitor Children's Place (NASDAQ:PLCE) is headed in the opposite direction, with income increasing 52% (and the stock price doubling) in the latest quarter.
On the other hand, Children's Place seems to be the prodigy of the bunch. This past quarter hasn't been kind to companies with similar market exposure -- neither clothing retailer Gap (NYSE:GPS) nor toy seller Toys "R" Us (NYSE:TOY) had particularly exciting quarters. For those who expected Gymboree to stumble some on its path to ultimate 16% annual growth and the corresponding profits, the current valuation probably appears attractive enough to add shares. But unless you really believe in the business model, I would caution against such a move -- analyst earnings estimates for 2005 vary from $0.65 to $0.90, which gives the stock a forward P/E ratio of anywhere from an attractive 13 to a somewhat pricier 18.
Fool contributor Marko Djuranovic does not own shares in any companies mentioned in this article (or children who would shop at such stores).
