Mr. Market came home after close of business on Wall Street yesterday, and smiled to see little Gymboree (NASDAQ:GYMB) scampering about the house. The tyke was looking healthy and productive, and initially its shares rose slightly in Mr. Market's estimation. until he looked around and saw what a mess Gymboree had made. At that point, Mr. Market had no choice but to swat Gymboree down 4%.
What upset Mr. Market so? At first glance, he saw an 8.2% year-on-year increase in sales and a 2% increase in comparable sales for continuing operations -- that probably accounted for his brief moment of pleasure with Gymboree. But further examination revealed that Gymboree lost a whopping 150 basis points from the brand new set of 41.1% gross margins the li'l one had received for Christmas last year. And matching sets of operating margins and net margins were in even worse shape, with 340 and 300 basis points missing from each, respectively.
Mr. Market promptly went looking for the missing points, searching in all of Gymboree's usual hiding places. He didn't find them, but under the couch cushion he discovered 37% growth in inventory piled up. And stuffed into the VCR was not the usual handful of Cheerios, but rather 29 new stores. And this, after Mr. Market had sternly warned Gymboree to fix the problems with the stores it already had before playing with any new ones. Of course, it didn't help Mr. Market's mood any when he detected a whiff of something unpleasant -- and examining Gymboree's diaper, found it bursting with a 77% increase in accounts receivable. Ugh.
As the old saying goes, "spare the rod, spoil the child." The discipline that Wall Street metes out can seem harsh, but sometimes, it's just the motivation a company needs to get its operations in order. Tune in again in three months to see how well today's lesson takes with little Gymboree.
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Fool contributor Rich Smith has no position, short or long, in Gymboree.
