Gymboree (GYMB) 10-Q 2008 Q0 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended August 4, 2007

OR

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from            to            

Commission file number 000-21250

THE GYMBOREE CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-2615258
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

500 Howard Street, San Francisco, California	94105
(Address of principal executive offices)	(Zip code)

(415) 278-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated Filer   ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 31, 2007, 30,317,038 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

Part I - FINANCIAL INFORMATION	3
Item 1. FINANCIAL STATEMENTS	3
CONDENSED CONSOLIDATED BALANCE SHEETS	3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME	4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	13
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	19
Item 4. CONTROLS AND PROCEDURES	19
Part II – OTHER INFORMATION	20
Item 1A. RISK FACTORS	20
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	20
Item 3. DEFAULTS UPON SENIOR SECURITIES	21
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	21
Item 5. OTHER INFORMATION	21
Item 6. EXHIBITS	22
SIGNATURES	23
Exhibit Index	24

2

Part I—FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	August 4, 2007			February 3, 2007			July 29, 2006
Assets
Current Assets
Cash and cash equivalents	$	34,023		$	27,493		$	31,581
Marketable securities		—			129,325			85,250
Accounts receivable		17,700			12,988			11,068
Merchandise inventories		115,677			104,293			92,541
Prepaid income taxes		18,412			—			16,056
Prepaid expenses		14,109			10,323			2,952
Deferred income taxes		9,297			9,298			4,470
Current assets of discontinued operations		—			126			11,726
Total current assets		209,218			293,846			255,644
Property and Equipment
Land and buildings		10,615			10,615			10,376
Leasehold improvements		185,379			164,546			151,912
Furniture, fixtures and equipment		176,744			158,104			151,284
		372,738			333,265			313,572
Less accumulated depreciation and amortization		(194,755	)		(183,014	)		(173,832	)
		177,983			150,251			139,740
Deferred Income Taxes		13,175			8,710			4,295
Lease Rights and Other Assets		1,540			1,401			1,285
Total Assets	$	401,916		$	454,208		$	400,964
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	57,391		$	55,872		$	43,901
Accrued liabilities		72,385			66,334			69,512
Income tax payable		—			8,002			—
Current liabilities of discontinued operations		—			1,928			3,849
Total current liabilities		129,776			132,136			117,262
Long-Term Liabilities
Deferred rent and other liabilities		51,104			46,345			46,475
Unrecognized tax benefits		9,081			—			—
Total Liabilities		189,961			178,481			163,737
Stockholders’ Equity
Common stock, including additional paid-in capital ($.001 par value: 100,000,000 shares authorized, 30,294,645, 31,769,608 and 31,464,176 shares issued and outstanding at August 4, 2007, February 3, 2007, and July 29, 2006, respectively)		135,002			132,603			105,106
Retained earnings		77,385			144,097			132,725
Accumulated other comprehensive loss		(432	)		(973	)		(604	)
Total stockholders’ equity		211,955			275,727			237,227
Total Liabilities and Stockholders’ Equity	$	401,916		$	454,208		$	400,964

See notes to condensed consolidated financial statements.

3

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	13 Weeks Ended						26 Weeks Ended
	August 4, 2007			July 29, 2006			August 4, 2007			July 29, 2006
Net sales:
Retail	$	179,854		$	149,643		$	386,575		$	332,679
Play & Music		2,500			2,481			5,079			5,248
Total net sales		182,354			152,124			391,654			337,927
Cost of goods sold, including buying and occupancy expenses		(102,141	)		(86,873	)		(207,641	)		(182,367	)
Gross profit		80,213			65,251			184,013			155,560
Selling, general and administrative expenses		(71,737	)		(65,434	)		(141,930	)		(127,268	)
Operating income (loss)		8,476			(183	)		42,083			28,292
Other income, net		637			1,748			1,755			2,986
Income from continuing operations, before income taxes		9,113			1,565			43,838			31,278
Income tax expense		(3,311	)		(405	)		(17,181	)		(11,506	)
Income from continuing operations, net of income taxes		5,802			1,160			26,657			19,772
Loss from discontinued operations, net of income taxes		—			(616	)		—			(1,345	)
Net income	$	5,802		$	544		$	26,657		$	18,427
Basic per share amounts:
Income from continuing operations, net of income taxes	$	0.20		$	0.04		$	0.90		$	0.62
Loss from discontinued operations, net of income taxes		—			(0.02	)		—			(0.04	)
Net income	$	0.20		$	0.02		$	0.90		$	0.58
Diluted per share amounts:
Income from continuing operations, net of income taxes	$	0.19		$	0.04		$	0.86		$	0.59
Loss from discontinued operations, net of income taxes		—			(0.02	)		—			(0.04	)
Net income	$	0.19		$	0.02		$	0.86		$	0.55
Weighted average shares outstanding:
Basic		29,323			31,570			29,659			32,031
Diluted		30,452			33,041			30,846			33,380

See notes to condensed consolidated financial statements.

4

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	26 Weeks Ended
	August 4, 2007			July 29, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	26,657		$	18,427
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,704			14,302
Deferred income tax benefit		—			(228	)
Loss on disposal of property and equipment and other		482			23
Excess tax benefits from share-based awards		(2,964	)		(2,529	)
Tax benefit from exercise of stock options		3,223			4,121
Share-based compensation expense		5,638			5,963
Change in assets and liabilities:
Accounts receivable		(4,646	)		918
Merchandise inventories		(11,292	)		6,401
Prepaid expenses and other assets		(3,793	)		858
Prepaid income taxes		(23,748	)		(10,771	)
Accounts payable		1,212			(652	)
Accrued liabilities		(230	)		12,389
Deferred and other liabilities		4,132			409
Net cash provided by operating activities		9,375			49,631
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities		404,978			698,685
Purchases of marketable securities		(275,653	)		(668,935	)
Capital expenditures		(38,485	)		(15,899	)
Proceeds from sale of assets and other		1			42
Net cash provided by investing activities		90,841			13,893
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options		4,196			10,494
Repurchases of common stock		(101,801	)		(77,127	)
Excess tax benefits from share-based awards		2,964			2,529
Net cash used in financing activities		(94,641	)		(64,104	)
Effect of exchange rate fluctuations on cash		955			124
Net Increase (Decrease) in Cash and Cash Equivalents		6,530			(456	)
CASH AND CASH EQUIVALENTS:
Beginning of Period		27,493			32,037
End of Period	$	34,023		$	31,581
NON-CASH INVESTING ACTIVITIES:
Capital expenditures incurred, but not yet paid	$	10,763		$	4,585
OTHER CASH FLOW INFORMATION:
Cash paid for income taxes	$	37,612		$	17,633
Cash paid for interest	$	26		$	65

See notes to condensed consolidated financial statements.

5

THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The unaudited interim condensed consolidated financial statements, which include The Gymboree Corporation and its subsidiaries, all of which are wholly owned (the “Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the notes to the annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007.

The accompanying interim condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results of operations, the financial position and cash flows for the periods presented. All such adjustments are of a normal and recurring nature except as disclosed in Note 2.

The results of operations for the 26 weeks ended August 4, 2007, are not necessarily indicative of the operating results that may be expected for the fiscal year ending February 2, 2008 (“fiscal 2007”).

2. Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”) – Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109, as of February 4, 2007, the first day of the 2007 fiscal year.

As a result of the Company’s adoption of FIN 48, the Company recognized a $2.3 million cumulative decrease to retained earnings. The Company also recognized a liability for unrecognized tax benefits of $9.5 million, of which $6.6 million (net of tax) would reduce the Company’s effective tax rate if recognized in future periods. The interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense. As of the beginning of fiscal 2007, the Company had $2.5 million of accrued interest and penalties included in unrecognized tax benefits.

Through August 4, 2007, the liability for unrecognized tax benefits decreased by $0.4 million to $9.1 million as a result of the favorable settlement of $1.6 million in state tax liabilities in certain jurisdictions, offset primarily by the additional accrual of $1.2 million for foreign tax withholdings as well as penalties and interest on existing FIN 48 liabilities. The Company currently does not expect significant changes related to unrecognized tax benefits through the end of fiscal 2007.

The Company files income tax returns in the U.S. federal jurisdiction, various states and Canada. With some exceptions, the Company is no longer subject to U.S. federal, state/local, or Canadian income tax examinations by tax authorities for years prior to fiscal year 2003, 2002 and 2001, respectively. The Company commenced certain state tax audits during the second quarter of fiscal 2007. At this time, the Company does not believe that the outcome of any examination will have a material impact on the Company’s consolidated financial statements.

6

3. Share Based Compensation

Share-based compensation expense is included as a component of selling, general and administrative expenses and consists of the following:

	13 weeks ended				26 weeks ended
	August 4, 2007		July 29, 2006		August 4, 2007		July 29, 2006
	(in thousands)
Stock Options	$	723	$	3,479	$	1,502	$	4,829
Restricted Stock Awards and Units		2,107		601		3,928		1,010
Employee Stock Purchase Plan		130		95		208		124
Total	$	2,960	$	4,175	$	5,638	$	5,963

Stock Options

The following table summarizes stock option activity during the 26 weeks ended August 4, 2007:

	Number of shares (in thousands)		Weighted average exercise price per share		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at February 3, 2007	1,800		$	14.13
Exercised	(243	)		14.79
Forfeited	(46	)		13.81
Expired	(1	)		9.38
Outstanding at August 4, 2007	1,510		$	14.04	6.7	$	41,579
Vested and Expected to Vest at August 4, 2007 (1)	1,412		$	14.00	6.6	$	38,955
Exercisable at August 4, 2007	895		$	14.21	6.1	$	24,485

(1) The expected to vest options are the result of applying the pre-vesting forfeiture rate assumptions to total unvested options outstanding.

There were no options granted during the 26 weeks ended August 4, 2007. The weighted average fair value of options granted during the 26 weeks ended July 29, 2006 was $9.26 per share. The total intrinsic value of options exercised during the 26 weeks ended August 4, 2007 and July 29, 2006 was $6.2 million and $11.4 million, respectively.

The Company used the Black-Scholes valuation model to calculate the fair value of options granted and shares purchased under the Company’s Employee Stock Purchase Plan during the period. Assumptions used in the Black-Scholes valuation model are presented below:

7

	26 weeks ended
	August 4, 2007		July 29, 2006
Expected dividend rate	0	%	0	%
Expected volatility	41.7	%	42.3	%
Risk-free interest rate - Stock options	N/A		4.7	%
Risk-free interest rate - Purchase Plan	4.8	%	4.8	%
Expected lives (years) - Stock options	N/A		4.1
Expected lives (years) - Purchase Plan	0.5		0.75

Restricted Stock and Restricted Stock Units

Restricted stock award activity during the 26 weeks ended August 4, 2007 is summarized as follows:

	Number of shares (in thousands)		Weighted average grant date fair value per share
Nonvested at February 3, 2007	466		$	20.90
Granted	800			36.89
Vested	(131	)		20.37
Nonvested at August 4, 2007	1,135		$	32.24

The following table summarizes restricted stock unit activity during the 26 weeks ended August 4, 2007:

	Number of units (in thousands)		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at February 3, 2007	191
Granted	110
Vested	(42	)
Forfeited	(12	)
Outstanding at August 4, 2007	247		1.8	$	10,279
Vested and Expected to Vest at August 4, 2007 (1)	196		1.7	$	8,140
Vested at August 4, 2007	—		—	$	—
(1)    The expected to vest restricted stock units are the result of applying the pre-vesting forfeiture rate assumptions to total unvested units outstanding.

8

The weighted average grant-date fair value of restricted stock units granted during the 26 weeks ended August 4, 2007 and July 29, 2006 was $40.20 and $23.05, respectively, per unit.

4. Net Income Per Share

Basic net income per share is calculated by dividing net income for the period by the weighted average common shares outstanding for the period. Diluted net income per share includes the effect of dilutive instruments, such as stock options and restricted stock, and uses the average share price for the period in determining the number of shares that are to be added to the weighted average number of shares outstanding. The following table summarizes the shares from these potentially dilutive securities, calculated using the treasury stock method:

	13 Weeks Ended		26 Weeks Ended
	August 4, 2007	July 29, 2006	August 4, 2007	July 29, 2006
	(in thousands)
Weighted average number of shares - basic	29,323	31,570	29,659	32,031
Add: effect of dilutive securities	1,129	1,471	1,187	1,349
Weighted average number of shares - diluted	30,452	33,041	30,846	33,380

The following table summarizes the number of share-based awards excluded from the computation of weighted average shares due to their anti-dilutive effect:

	13 Weeks Ended		26 Weeks Ended
	August 4, 2007	July 29, 2006	August 4, 2007	July 29, 2006
	(in thousands)
Anti-dilutive share-based awards	—	6	23	57

5. Comprehensive Income

Comprehensive income, which includes net income, foreign currency translation adjustments and fluctuations in the fair market value of certain derivative financial instruments, is as follows:

	13 Weeks Ended				26 Weeks Ended
	August 4, 2007		July 29, 2006		August 4, 2007		July 29, 2006
	(in thousands)
Net income	$	5,802	$	544	$	26,657	$	18,427
Other comprehensive income, net of tax		200		84		642		272
Total comprehensive income	$	6,002	$	628	$	27,299	$	18,699

6. Segments

The Company has two reportable segments: retail stores and Play & Music. The retail stores segment includes four brands which sell children’s apparel: Gymboree (including an on-line store), Gymboree Outlet, Janie and Jack (including an on-line store), and Crazy 8 (including an on-line store). Corporate overhead (costs related to the Company’s distribution center and shared corporate services) is included in the retail stores segment. The following table provides the summary financial data of each reportable segment (in thousands):

9

	13 Weeks Ended August 4, 2007								26 Weeks Ended August 4, 2007
	Retail Stores			Play & Music		Total			Retail Stores		Play & Music		Total
Net sales	$	179,854		$	2,500	$	182,354		$	386,575	$	5,079	$	391,654
Depreciation and amortization		7,398			112		7,510			14,478		226		14,704
Operating income		7,979			497		8,476			40,887		1,196		42,083
Total assets		397,866			4,050		401,916			397,866		4,050		401,916
Capital expenditures		21,129			29		21,158			38,456		29		38,485
	13 Weeks Ended July 29, 2006								26 Weeks Ended July 29, 2006
	Retail Stores			Play & Music		Total			Retail Stores		Play & Music		Total
Net sales	$	149,643		$	2,481	$	152,124		$	332,679	$	5,248	$	337,927
Depreciation and amortization		6,678			113		6,791			13,459		226		13,685
Operating income (loss)		(959	)		776		(183	)		26,598		1,694		28,292
Total assets		384,481			4,757		389,238			384,481		4,757		389,238
Capital expenditures		8,722			66		8,788			15,736		112		15,848

Net retail sales from the Company’s Canadian operations were $7.8 million and $6.8 million for the 13 weeks ended August 4, 2007 and July 29, 2006, respectively, and $15.6 million and $14.2 million for the 26 weeks ended August 4, 2007 and July 29, 2006, respectively. Long-lived assets held by the Company’s Canadian operations were $3.2 million and $2.3 million as of August 4, 2007 and July 29, 2006, respectively.

7. Common Stock Repurchases

On January 23, 2007, the Board of Directors authorized the Company to utilize $50 million to purchase shares of the Company’s outstanding common stock under a share repurchase program. On April 20, 2007, the Company completed this share repurchase program, having purchased a total of 1,295,338 shares of Company stock at an aggregate cost of $50 million, or approximately $38.57 per share. The Company retired the repurchased shares.

On April 17, 2007, the Board of Directors authorized the Company to utilize $50 million to purchase shares of the Company’s outstanding common stock under an additional share repurchase program. In the second quarter, the Company completed this repurchase program, having purchased a total of 1,240,478 shares of Company stock at an aggregate cost of $50 million, or approximately $40.29 per share. The Company plans to retire the repurchased shares.

On July 30, 2007, the Board of Directors authorized the Company to utilize $50 million to purchase shares of the Company’s outstanding common stock under an additional share repurchase program. Purchases under this share repurchase program will be made from time to time on the open market or in privately negotiated transactions, consistent with the Company’s previously authorized programs. Depending on market conditions and other factors, purchases under this program may be commenced or suspended without prior notice at any time, or from time to time, through July 31, 2008. As of August 4, 2007, the Company had repurchased 43,412 shares of Company stock at an aggregate cost of $1.8 million, or approximately $41.90 per share.

10

As a result, during the 26 weeks ended August 4, 2007, the Company repurchased a total of 2,579,228 shares of Company stock at a cost of $101.8 million ($91.0 million reduced retained earnings and $10.8 million reduced common stock).

8. Credit Facility Amendment

On July 31, 2007, the Company entered into an Eighth Amendment to Credit Agreement (the “Eighth Amendment”), by and between the Company and certain of its subsidiaries (collectively, the “Borrowers”) and the Bank of America, N.A. (the “Lender”). The Eighth Amendment amends certain terms of the Credit Agreement dated as of August 11, 2003, as previously amended, to (1) revise the definition of Consolidated Asset Coverage Ratio and (2) permit the Company to purchase, redeem or otherwise acquire shares of its capital stock for cash in an aggregate amount of up to $150,000,000 under certain circumstances, an increase from $100,000,000, as permitted under the terms of the Sixth Amendment to Credit Agreement dated April 24, 2007.

On August 27, 2007, the Company exercised its right under the Credit Agreement to increase its credit facility from $70 million to $80 million. The credit facility, which expires in August 2008, may be used for the issuance of documentary and standby letters of credit, working capital and capital expenditure needs. The credit facility requires the Company to meet financial covenants on a quarterly basis and limits annual capital expenditures. As of August 4, 2007, the Company was in compliance with these covenants. As of August 4, 2007, $61.2 million of documentary and standby letters of credit were outstanding, and no borrowings were outstanding.

9. Discontinued Operations

The Company closed its United Kingdom and Ireland (collectively “Europe”) operations in fiscal 2004 and its Janeville division in fiscal 2006. The results of the Europe and Janeville operations have been presented as discontinued operations in the accompanying financial statements for the 13 and 26 weeks ended July 29, 2006. Results of the Europe and Janeville operations in fiscal 2007 are insignificant and are included in continuing operations.

Results from discontinued operations for the 13 and 26 weeks ended July 29, 2006, net of income tax, were as follows:

11

	13 Weeks ended July 29, 2006
	Janeville			Europe			Total
	(In thousands)
Net retail sales	$	3,352		$	—		$	3,352
Income (loss) from discontinued operations	$	(895	)	$	12		$	(883	)
Income tax benefit (expense)		281			(14	)		267
Loss from discontinued operations, net of income tax	$	(614	)	$	(2	)	$	(616	)
	26 Weeks ended July 29, 2006
	Janeville			Europe			Total
	(In thousands)
Net retail sales	$	6,496		$	—		$	6,496
Income (loss) from discontinued operations	$	(2,303	)	$	144		$	(2,159	)
Income tax benefit (expense)		868			(54	)		814
Income (loss) from discontinued operations, net of income tax	$	(1,435	)	$	90		$	(1,345	)

12

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of

The Gymboree Corporation

San Francisco, CA:

We have reviewed the accompanying condensed consolidated balance sheets of The Gymboree Corporation and subsidiaries (the “Company”) as of August 4, 2007 and July 29, 2006, and the related condensed consolidated statements of income for the thirteen and twenty-six week periods then ended, and cash flows for the twenty-six week periods then ended. These interim financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The Gymboree Corporation as of February 3, 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 30, 2007, we expressed an unqualified opinion on those consolidated financial statements and included explanatory paragraphs related to a change in accounting method and the adoption of a new accounting principle. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 3, 2007, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

September 11, 2007

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking statements

The following discussion and analysis should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report. The discussion in this report contains forward-looking statements that involve risks and uncertainties, including statements regarding planned capital expenditures, planned store openings, expansions and renovations, systems infrastructure development, future cash generated from operations and future cash needs. Inaccurate assumptions and known and unknown risks and uncertainties can affect the accuracy of forward-looking statements, and the Company’s actual results could differ materially from results that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, customer reactions to new merchandise, service levels and new concepts, the level of promotional activity, gross margin achievement, the Company’s ability to manage inventory levels appropriately, general economic conditions such as, but not limited to, reductions in consumer spending generally attributed to current conditions in the housing and home mortgage markets, success in meeting delivery targets, competitive market conditions, effects of future embargoes from countries used to source product, instability in countries where the Company’s merchandise is manufactured and the other factors described in this document and in our form 10-K for the fiscal year ended February 3, 2007. When used in this document, the words “believes,” “expects,” “estimates,” “anticipates,” and similar expressions are intended to identify certain of these forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on information available as of the date of this report. The Company does not intend to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report, in the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007 and its other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company’s business, prospects and results of operations.

General

The Gymboree Corporation is a specialty retailer operating stores selling apparel and accessories for children under the GYMBOREE®, JANIE AND JACK® and Crazy 8™ brands, as well as play programs for children under the GYMBOREE PLAY & MUSIC® brand. As of August 4, 2007, the Company operated a total of 739 retail stores: 585 Gymboree stores (555 in the United States and 30 in Canada), 70 Gymboree Outlet stores, 83 Janie and Jack shops, and 1 Crazy 8 store in the United States. The Company also operates online stores atwww.gymboree.com andwww.janieandjack.com and opened its online store atwww.crazy8.com on August 16, 2007. The Company also offers directed parent-child developmental play programs at 541 franchised and Company-operated centers in the United States and 31 other countries.

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During the quarter, the Company opened 5 Gymboree stores (4 in the U.S. and 1 in Canada), 13 Gymboree Outlet stores, 1 Janie and Jack shop, and 1 Crazy 8 store. The Company also relocated or remodeled 31 Gymboree stores and closed 1 Gymboree store.

For the remainder of fiscal 2007, the Company plans to open approximately 13 Gymboree stores, 13 Gymboree Outlet stores, 10 Janie and Jack shops and 14 Crazy 8 stores. The Company also expects to relocate or remodel approximately 8 Gymboree stores.

The Company closed its Europe operations in fiscal 2004 and its Janeville division in fiscal 2006. The results of the Europe and Janeville operations have been presented as discontinued operations in the accompanying financial statements for the 13 and 26 weeks ended July 29, 2006. Results of the Europe and Janeville operations in fiscal 2007 are insignificant and are included in continuing operations.

Results of Operations

13 weeks ended August 4, 2007 compared to 13 weeks ended July 29, 2006

Net Sales

Net retail sales in the second quarter of fiscal 2007 increased to $179.9 million from $149.6 million in the same period last year, an increase of $30.3 million, or 20.3%. Comparable store sales increased 5% over the same period last year primarily due to continued strong results from our Boy departments, as well as from Gymboree Outlet and Janie and Jack. Non-comparable store sales increased due to net store and square footage growth of 72 stores and approximately 160,000 square feet, respectively. There were 739 stores open at the end of the second quarter of fiscal 2007 compared to 667 at the end of the same period last year.

Gross Profit

Gross profit for the second quarter of fiscal 2007 increased to $80.2 million from $65.3 million in the same period last year. As a percentage of net sales, gross profit for the second quarter of fiscal 2007 increased 1.1 percentage points to 44.0% from 42.9% in the same period last year. This increase was primarily due to lower product costs resulting from the Company’s product cost reduction strategies, occupancy expense leverage, freight cost savings, and lower inventory shrink accruals. Margin improvement was partially offset by lower full-priced selling and increased buying costs associated with the Company’s new retail concept, Crazy 8.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses, which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, increased to $71.7 million in the second quarter of fiscal 2007 from $65.4 million in the same period last year. As a percentage of net sales, SG&A expenses decreased 3.7 percentage points to 39.3% for the second

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quarter of fiscal 2007 compared to 43.0% in the same period last year. SG&A expenses in the second quarter of fiscal 2006 included a charge of $3.7 million related to the retirement of the Company’s former Chairman and Chief Creative Officer. Excluding this item, SG&A as a percentage of sales for the second quarter of fiscal 2007 decreased 1.3 percentage points from 40.6% in the same period last year. SG&A savings as a percentage of sales for the second quarter of fiscal 2007 were due to leveraging of compensation and depreciation expenses, partially offset by increases in marketing expenses of approximately 0.7 percentage points.

Other Income, Net

Other income decreased to $0.6 million in the second quarter of fiscal 2007 from $1.7 million in the same period last year, primarily due to lower investment balances resulting from the Company’s stock repurchase programs. Other income in the second quarter of fiscal 2006 also included approximately $400,000 received as a result of the settlement of class action antitrust litigation against Visa/Mastercard.

Income Taxes

The Company’s effective tax rates for the second quarters of fiscal 2007 and 2006 were 36.3% and 25.9%, respectively. The difference in tax rates is primarily due to the release of valuation allowances in fiscal 2006, which were no longer needed based on the Company’s recent history of profitable performance. In addition, in fiscal 2006, the Company recognized the future benefit of state income tax rate adjustments. As a result, the Company expects the current year tax rate to be higher than in the prior year. The effective tax rate in the second quarter of fiscal 2007 was also impacted by a favorable settlement with certain state taxing authorities of $1.1 million, offset in part by foreign withholding taxes of $0.9 million. The actual fiscal 2007 effective tax rate will ultimately depend on several variables, including the Company’s overall level of earnings in fiscal 2007, the mix of earnings between domestic and international operations, and the potential resolution of outstanding tax contingencies.

Discontinued Operations

The loss reported for the discontinued Europe and Janeville operations in the second quarter of fiscal 2006 primarily represents operating losses from the Janeville division.

Results of Operations

26 weeks ended August 4, 2007 compared to 26 weeks ended July 29, 2006

Net Sales

Net retail sales for the 26 weeks ended August 4, 2007 increased to $386.6 million from $332.7 million in the same period last year, an increase of $53.9 million, or 16.2%. Comparable store sales increased 4% over the same period last year. This increase was primarily driven by the positive response to the Company’s direct mail offerings and continued strength in sales from our Boy departments. Non-comparable store sales increased due to net store and square footage growth of 72 stores and approximately 160,000 square feet, respectively. There were 739 stores open at the end of the second quarter of fiscal 2007 compared to 667 at the end of the same period last year.

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Gross Profit

Gross profit for the 26 weeks ended August 4, 2007 increased to $184.0 million from $155.6 million in the same period last year. As a percentage of net sales, gross profit for the 26 weeks ended August 4, 2007 increased one percentage point to 47.0% from 46.0% in the same period last year. This increase was primarily due to lower product costs resulting from the Company’s product cost reduction strategies and, to a lesser extent, occupancy expense leverage, lower inventory shrink accruals and freight costs. Margin improvement was partially offset by lower full-priced selling and increased buying costs associated with the Company’s new retail concept, Crazy 8.

Selling, General and Administrative Expenses

SG&A expenses increased to $141.9 million in the 26 weeks ended August 4, 2007 from $127.3 million in the same period last year. As a percentage of net sales, SG&A expenses decreased 1.5 percentage points to 36.2% for the 26 weeks ended August 4, 2007 from 37.7% in the same period last year. SG&A expenses for the 26 weeks ended July 29, 2006 included a charge of $3.7 million related to the retirement of the Company’s former Chairman and Chief Creative Officer. Excluding this item, SG&A as a percentage of sales for the 26 weeks ended August 4, 2007 decreased 0.4 percentage points from 36.6% in the same period last year. SG&A savings as a percentage of sales for the 26 weeks ended August 4, 2007 were due to leveraging of compensation and depreciation expense, offset by increases in marketing expenses of approximately 0.6 percentage points.

Other Income, Net

Other income decreased to $1.8 million in the 26 weeks ended August 4, 2007 from $3.0 million in the same period last year primarily due to lower investment balances resulting from the Company’s stock repurchase programs. Other income for the 26 weeks ended July 29, 2006 also included approximately $400,000 received as a result of the settlement of class action antitrust litigation against Visa/Mastercard.

Income Taxes

The Company’s effective tax rates for the 26 weeks ended August 4, 2007 and July 29, 2006 were 39.2% and 36.8%, respectively. The difference in tax rates is primarily due to the release of valuation allowances in fiscal 2006, which were no longer needed based on the Company’s recent history of profitable performance. In addition, in fiscal 2006, the Company recognized the future benefit of state income tax rate adjustments. As a result, the Company expects the current year tax rate to be higher than in the prior year. The effective tax rate for the 26 weeks ended August 4, 2007 was also impacted by a favorable settlement with certain state taxing authorities of $1.1 million, offset in part by foreign withholding taxes of $0.9 million. The actual fiscal 2007 effective tax rate will ultimately depend on several variables, including the Company’s overall level of earnings in fiscal 2007, the mix of earnings between domestic and international operations, the potential resolution of outstanding tax contingencies, and the ongoing impact of FIN 48.

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Discontinued Operations

The loss reported for the discontinued Europe and Janeville operations in the 26 weeks ended August 4, 2007 primarily represents operating losses from the Janeville division.

Seasonality

The Company’s business is impacted by the general seasonal trends characteristic of the apparel and retail industries. Sales from retail operations have historically been highest during the fourth fiscal quarter, somewhat lower during the first and third fiscal quarters and lowest during the second fiscal quarter. Consequently, the results for any fiscal quarter are not necessarily indicative of results for the full year. These historical quarterly trends may not continue in the future.

Critical Accounting Policies and Estimates

There have been no material changes to the Company’s critical accounting policies and estimates affecting the application of those accounting policies since the Company’s Annual Report on Form 10-K for the fiscal year ended February 3, 2007, except for the adoption of FIN 48 discussed in Note 2 to the condensed consolidated financial statements.

Financial Condition

Liquidity and Capital Resources

Cash and cash equivalents were $34.0 million at August 4, 2007, an increase of $6.5 million from February 3, 2007. There were no marketable securities at August 4, 2007, a decrease of $129.3 million from fiscal 2006 year end. Working capital as of August 4, 2007 was $79.4 million compared to $161.7 million as of February 3, 2007. The decrease in working capital is primarily due to the Company’s stock repurchase program described in Note 7 to the condensed consolidated financial statements.

Net cash provided by operating activities for the 26 weeks ended August 4, 2007 was $9.4 million compared to $49.6 million in the same period last year. This decrease was primarily due to an increase in inventory purchases to support planned store and sales growth, an increase in prepaid income taxes due to increased profitability, as well as timing of other payments made due to the shift in the retail calendar associated with the 53^rd week of fiscal 2006.

Net cash provided by investing activities for the 26 weeks ended August 4, 2007 was $90.8 million compared to $13.9 million in the same period last year. Net cash provided by investing activities for the 26 weeks ended August 4, 2007 consisted of $129.3 million in net marketable securities proceeds, offset by $38.5 million in capital expenditures primarily for the opening of 45 new stores, relocation, remodeling and/or expansion of 44 existing stores, and investments in the Company’s distribution center and new point of sale system. The Company estimates that capital expenditures during the remainder of fiscal 2007 will be approximately $32 million.

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Net cash used in financing activities for the 26 weeks ended August 4, 2007 was $94.6 million compared to $64.1 million in the same period last year. This increase was primarily due to an increase in stock repurchases. Total repurchases in the 26 weeks ended August 4, 2007 were $101.8 million for 2,579,228 shares.

The Company has an unsecured revolving credit facility for borrowings of up to $80 million (increased from $70 million on August 27, 2007). The credit facility, which expires in August 2008, may be used for the issuance of documentary and standby letters of credit, working capital and capital expenditure needs. The credit facility requires the Company to meet financial covenants on a quarterly basis and limits annual capital expenditures. As of August 4, 2007, the Company was in compliance with these covenants. As of August 4, 2007, $61.2 million of documentary and standby letters of credit were outstanding, and no borrowings were outstanding. The maximum amount of documentary and standby letters of credit outstanding during the 26 weeks ended August 4, 2007 was $64.2 million.

There have been no material changes to the Company’s contractual obligations since its Annual Report on Form 10-K for the year ended February 3, 2007.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the notional amounts and fair values of the Company’s forward foreign exchange contracts since its Annual Report on Form 10-K for the year ended February 3, 2007.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure them that information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, the Company’s Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer concluded as of the end of the period

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covered by this report that the Company’s disclosure controls and procedures are also effective to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

The Company also maintains a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). During the second quarter of fiscal 2007, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended February 3, 2007, which could affect its business, prospects and results of operations.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Stock Repurchase

On April 17, 2007, the Board of Directors authorized the Company to utilize $50 million to purchase shares of the Company’s outstanding common stock under a share repurchase program. In the second quarter, the Company completed this repurchase program, having purchased a total of 1,240,478 shares of Company stock at an aggregate cost of $50 million, or approximately $40.29 per share. The Company plans to retire the repurchased shares.

On July 30, 2007, the Board of Directors authorized the Company to utilize $50 million to purchase shares of the Company’s outstanding common stock under an additional share repurchase program. Purchases under this share repurchase program will be made from time to time on the open market or in privately negotiated transactions, consistent with the Company’s previously authorized plan. Depending on market conditions and other factors, purchases under this program may be commenced or suspended without prior notice at any time, or from time to time, through July 31, 2008. As of August 4, 2007, the Company had repurchased 43,412 shares of Company stock at a cost of $1.8 million, or approximately $41.90 per share.

Stock repurchases for the quarter ended August 4, 2007, were as follows:

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
Month #1 (May 6 - June 2)	—	$	—	—	$	22,380,000
Month #2 (June 3 - July 7)	518,409	$	42.14	518,409	$	534,000
Month #3 (July 8 - August 4)	55,726	$	41.92	55,726	$	48,198,000
Total, August 4, 2007	574,135	$	42.12	574,135	$	48,198,000

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Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company’s 2007 Annual Meeting of Stockholders was held on June 12, 2007, at which time the stockholders voted on the following proposals:

(I) Election of two Class II directors, each to serve for a three-year term expiring upon the 2010 Annual Meeting of Stockholders or until their successors are elected.

	For	Withheld
Blair W. Lambert	24,539,693	2,325,083
Daniel R. Lyle	26,593,785	270,991

Continuing Class I directors, whose terms will expire at the Annual Meeting in 2009, are Matthew K. McCauley and Gary M. Heil. Continuing Class III directors, whose terms will expire at the Annual Meeting in 2008, are John C. Pound and William U. Westerfield.

(II) Advisory vote on the appointment of Deloitte & Touche LLP as the independent registered public accounting firm of the Company for the fiscal year ending February 2, 2008 was as follows:

For	Against	Abstain
26,188,431	666,617	9,728

Item 5. OTHER INFORMATION

None

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Item 6. EXHIBITS

10.84	Eighth Amendment to Credit Agreement, dated July 31, 2007 (1)
15	Letter re: Unaudited Interim Financial Information
31.1	Certification of Matthew K. McCauley Pursuant to §302 of the Sarbanes- Oxley Act of 2002.
31.2	Certification of Blair W. Lambert Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Matthew K. McCauley Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Blair W. Lambert Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to Exhibit 10.84 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2007.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		THE GYMBOREE CORPORATION
		(Registrant)
September 11, 2007	By:	/s/ Blair W. Lambert
Date		Blair W. Lambert
		Chief Operating Officer and Chief Financial Officer
		(Principal Financial Officer)

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Exhibit Index

Exhibit Number	Description
10.84	Eighth Amendment to Credit Agreement, dated July 31, 2007 (1)
15	Letter re: Unaudited Interim Financial Information
31.1	Certification of Matthew K. McCauley Pursuant to §302 of the Sarbanes- Oxley Act of 2002.
31.2	Certification of Blair W. Lambert Pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Matthew K. McCauley Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Blair W. Lambert Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to Exhibit 10.84 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 2, 2007.

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