Shares of children’s apparel retailer Gymboree Corp. (GYMB) tanked Thursday morning despite posting a rise in fourth-quarter profit, but weak economic conditions coupled with tighter regulations on children’s apparel and accessories will take a toll on first-quarter earnings.
The company, which operates Janie and Jack and Crazy 8 stores as well as its namesake chain, said it earned $29.5 million, or $1 per share for the three months ending January 31 compared to earnings of $26.8 million, or 93 cents per share a year ago. Revenue rose 4 percent to $288.7 million. Analysts polled by Thomson Reuters were expecting, on average, earnings of 98 cents per share on revenue of $288 million.
Normally a slight beat of analysts’ expectations is good for a small pop in the market, but these are not normal times. In addition to a weak retail environment, Gymboree said regulatory changes passed by Congress in 2008 under the Consumer Product Safety Improvement Act (CPSIA) will impact sales and margins through the first half of the year.
The Act requires enforcement of new phthalate standards for children’s products on February 10, 2009. The change in safety requirements related to levels of phthalate’s, a chemical used to increase flexibility in plastics, rendered about 1.7 million of Gymboree’s inventory obsolete. As a result, Gymboree said it sees first quarter earnings to be between 18 cents and 25 cents per share with same-store sales declining 20 percent to 25 percent.
Analysts were expecting earnings of 77 cents per share. That is a huge miss and explains why the stock is down some 30% today.
The CPSIA came about due to the scare in 2007 about levels of lead in children’s toys (thanks, China). Eventually children’s clothes became a target. Gymboree initially thought the new regulations would not affect its existing inventory, but later learned the regulations would be applied retroactively.
That forced the company to remove products on its shelves at all 800 plus stores that did not meet the new requirements. Given the company has a 9 to 12 month cycle time on its products sales will be impacted much of the year.
Despite the shortcomings regarding future prospects the company’s balance sheet remains healthy and shows $140 million in cash and equivalents and no debt. In addition Gymboree said it plans to open 75 new stores this year, consisting of 25 Gymboree stores, 20 Gymboree Outlet stores, 5 Janie and Jack shops, and 25 Crazy 8 stores.
Clearly the company believes it will weather the current storm. The market is not convinced.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
