Gymboree (GYMB) 10-Q 2009 Q1 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 November 1, 2008

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  þ                            No  ¨

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

Large accelerated filer  þ	Accelerated Filer  ¨	Non-accelerated filer  ¨	Smaller reporting company  ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨                            No  þ

As of November 29, 2008, 29,032,101 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	11
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12
Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	16
Item 4.CONTROLS AND PROCEDURES	18
Part II - OTHER INFORMATION	18
Item 1.LEGAL PROCEEDINGS	18
Item 1A.RISK FACTORS	18
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	19
Item 3.DEFAULTS UPON SENIOR SECURITIES	19
Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	19
Item 5.OTHER INFORMATION	19
Item 6.EXHIBITS	20
SIGNATURES	21
Exhibit Index	22

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Part I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	November 1, 2008			February 2, 2008			November 3, 2007
Assets
Current Assets
Cash and cash equivalents	$	93,153		$	33,313		$	24,096
Accounts receivable		15,793			12,640			19,403
Merchandise inventories		142,042			119,523			130,520
Prepaid expenses		13,115			12,096			12,695
Deferred income taxes		11,815			11,652			9,298
Total current assets		275,918			189,224			196,012
Property and Equipment
Land and buildings		15,776			12,476			12,362
Leasehold improvements		210,438			186,777			195,183
Furniture, fixtures and equipment		180,777			176,900			181,363
		406,991			376,153			388,908
Less accumulated depreciation and amortization		(200,361	)		(190,796	)		(202,228	)
		206,630			185,357			186,680
Deferred income taxes		16,309			21,028			13,175
Other assets		1,769			1,575			1,575
Total Assets	$	500,626		$	397,184		$	397,442
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable	$	59,941		$	52,915		$	62,974
Accrued liabilities		70,266			70,282			75,078
Income tax payable		—			7,989			1,641
Total current liabilities		130,207			131,186			139,693
Long-Term Liabilities
Deferred rent and other liabilities		64,462			51,722			52,401
Unrecognized tax benefits		5,810			5,981			8,841
Total Liabilities		200,479			188,889			200,935
Commitments and Contingencies		—			—			—
Stockholders’ Equity
Common stock, including additional paid-in capital ($.001 par value: 100,000,000 shares authorized; 29,029,877, 28,344,205, and 29,024,638 shares issued and outstanding at November 1, 2008, February 2, 2008, and November 3, 2007, respectively)		169,341			140,012			133,717
Retained earnings		130,694			67,340			62,529
Accumulated other comprehensive income		112			943			261
Total stockholders’ equity		300,147			208,295			196,507
Total Liabilities and Stockholders’ Equity	$	500,626		$	397,184		$	397,442

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	13 Weeks Ended						39 Weeks Ended
	November 1, 2008			November 3, 2007			November 1, 2008			November 3, 2007
Net sales:
Retail	$	261,296		$	247,569		$	703,031		$	634,145
Play & Music		2,809			3,163			8,926			8,242
Total net sales		264,105			250,732			711,957			642,387
Cost of goods sold, including buying and occupancy expenses		(129,520	)		(126,020	)		(360,012	)		(333,661	)
Gross profit		134,585			124,712			351,945			308,726
Selling, general and administrative expenses		(84,377	)		(80,314	)		(247,269	)		(222,244	)
Operating income		50,208			44,398			104,676			86,482
Other income, net		152			691			849			2,446
Income before income taxes		50,360			45,089			105,525			88,928
Income tax expense		(19,413	)		(18,194	)		(41,529	)		(35,376	)
Net income	$	30,947		$	26,895		$	63,996		$	53,552
Net income per share:
Basic	$	1.10		$	0.94		$	2.30		$	1.83
Diluted	$	1.06		$	0.91		$	2.20		$	1.76
Weighted-average shares outstanding:
Basic		28,051			28,565			27,861			29,294
Diluted		29,099			29,621			29,073			30,438

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	39 Weeks Ended
	November 1, 2008			November 3, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	63,996		$	53,552
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		25,782			22,686
Provision for deferred income taxes		4,555			—
Loss on disposal of property and equipment and other		394			632
Excess tax benefits from exercise of share-based awards		(6,188	)		(3,245	)
Tax benefit from exercise of stock options		6,612			3,537
Share-based compensation expense		14,363			8,805
Change in assets and liabilities:
Accounts receivable		(3,176	)		(6,306	)
Merchandise inventories		(22,582	)		(25,674	)
Prepaid expenses and other assets		(570	)		(2,348	)
Income tax payable		(8,797	)		(3,693	)
Accounts payable		7,499			6,481
Accrued liabilities		3,433			5,050
Deferred and other liabilities		13,138			4,584
Net cash provided by operating activities		98,459			64,061
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of marketable securities		34,700			413,978
Purchases of marketable securities		(34,700	)		(284,653	)
Capital expenditures		(46,253	)		(57,820	)
Proceeds from sale of assets and other		70			122
Net cash (used in) provided by investing activities		(46,183	)		71,627
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options		8,435			4,934
Repurchases of common stock		(5,549	)		(149,058	)
Excess tax benefits from exercise of share-based awards		6,188			3,245
Net cash provided by (used in) financing activities		9,074			(140,879	)
Effect of exchange rate fluctuations on cash		(1,510	)		1,794
Net increase (decrease) in cash and cash equivalents		59,840			(3,397	)
CASH AND CASH EQUIVALENTS:
Beginning of period		33,313			27,493
End of period	$	93,153		$	24,096
NON-CASH INVESTING ACTIVITIES:
Capital expenditures incurred, but not yet paid	$	6,158		$	7,894
OTHER CASH FLOW INFORMATION:
Cash paid for income taxes	$	38,833		$	35,969
Cash paid for interest	$	76		$	40

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 2, 2008.

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

The results of operations for the 39 weeks ended November 1, 2008 are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 31, 2009 (“fiscal 2008”).

2. Recently Issued Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) 157, “Fair Value Measurements,” which established a single authoritative definition of fair value and a framework for measuring fair value and expanded disclosure of fair value measurements for both financial and non-financial assets and liabilities. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS 157 for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value at least annually. The Company elected to partially adopt SFAS 157 as of the beginning of fiscal 2008, as permitted by FSP 157-2 (see Note 3). The Company does not expect the adoption of the remaining provisions of SFAS 157 (delayed by FSP 157-2) to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.” SFAS 159 permits companies to measure many financial instruments and certain other items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The Company adopted SFAS 159 as of the beginning of fiscal 2008 but elected not to record additional financial assets and liabilities at fair value. As a result, the adoption of SFAS 159 did not impact the Company’s consolidated financial position, results of operations, or cash flows.

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In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133,” which requires enhanced disclosures for derivative and hedging activities. The Company will adopt SFAS 161 as of the beginning of fiscal 2009. The Company does not expect the adoption of SFAS 161 to have a material impact on its consolidated financial statements.

3. Fair Value Measurements

SFAS 157 established a single authoritative definition of fair value and a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 requires financial assets and liabilities to be categorized based on the inputs used to calculate their fair values as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

As of November 1, 2008, the Company’s forward foreign exchange contracts had an estimated fair value of $429,000. The Company had no other financial assets or liabilities measured at fair value as of November 1, 2008. Fair value was determined using the market approach and Level 2 inputs. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.

4. Share-based Compensation

Share-based compensation expense for the 13 and 39 weeks ended November 1, 2008 and November 3, 2007, is included as a component of selling, general and administrative expenses and consists of the following:

	13 weeks ended				39 weeks ended
	November 1, 2008		November 3, 2007		November 1, 2008		November 3, 2007
	(in thousands)				(in thousands)
Stock options	$	393	$	612	$	1,289	$	2,114
Restricted stock awards and units		4,432		2,445		12,741		6,373
Employee stock purchase plan		114		110		333		318
Total	$	4,939	$	3,167	$	14,363	$	8,805

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Stock Options

The following table summarizes stock option activity during the 39 weeks ended November 1, 2008:

	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 2, 2008	1,369		$	13.89
Exercised	(547	)		14.31
Forfeited	(10	)		14.97
Expired	(2	)		13.57
Outstanding at November 1, 2008	810		$	13.58	5.8	$	9,953
Vested and expected to vest at November 1, 2008 (1)	807		$	13.56	5.8	$	9,919
Exercisable at November 1, 2008	698		$	13.40	5.6	$	8,697

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

The total intrinsic value of options exercised during each of the 39 weeks ended November 1, 2008 and November 3, 2007, was $16.0 million and $7.2 million, respectively.

Restricted Stock Awards and Units

The following tables summarize restricted stock award and restricted stock unit activity during the 39 weeks ended November 1, 2008:

	Restricted Stock Awards
	Number of shares (in thousands)		Weighted-average grant date fair value per share
Nonvested at February 2, 2008	1,129		$	32.35
Granted (1)	393			41.56
Vested	(226	)		29.66
Forfeited	(329	)		36.89
Nonvested at November 1, 2008	967			35.19

(1) Restricted stock awards granted in fiscal 2008 are subject to performance conditions for fiscal 2008, which will determine the total number of shares that could ultimately vest over four years. The satisfaction of the performance conditions will be finally determined during the first quarter of fiscal 2009 based on fiscal 2008 results.

	Restricted Stock Units
	Number of units (in thousands)		Weighted-average grant date fair value per share
Nonvested at February 2, 2008	237		$	28.49
Granted	147			39.83
Vested	(69	)		30.75
Forfeited	(26	)		33.94
Nonvested at November 1, 2008	289			33.23

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5. 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 awards and units, 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		39 Weeks Ended
	November 1, 2008	November 3, 2007	November 1, 2008	November 3, 2007
	(in thousands)
Weighted-average number of shares - basic	28,051	28,565	27,861	29,294
Add: effect of dilutive securities	1,048	1,056	1,212	1,144
Weighted-average number of shares - diluted	29,099	29,621	29,073	30,438

The number of share-based awards excluded from the computation of weighted-average shares due to their anti-dilutive effect was immaterial for all periods presented.

6. 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					39 Weeks Ended
	November 1, 2008			November 3, 2007		November 1, 2008			November 3, 2007
	(in thousands)
Net income	$	30,947		$	26,895	$	63,996		$	53,552
Other comprehensive income (loss), net of tax		(943	)		693		(832	)		1,335
Total comprehensive income	$	30,004		$	27,588	$	63,164		$	54,887

7. Segments

The Company has two reportable segments: retail stores and Play & Music. The retail stores segment includes four brands that sell apparel: GYMBOREE^® (including an online store), GYMBOREE OUTLET, JANIE AND JACK^® (including an online store), and CRAZY 8^® (including an online 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):

	13 Weeks Ended November 1, 2008						13 Weeks Ended November 3, 2007
	Retail Stores		Play & Music		Total		Retail Stores		Play & Music		Total
Net sales	$	261,296	$	2,809	$	264,105	$	247,569	$	3,163	$	250,732
Operating income		49,620		588		50,208		43,078		1,320		44,398
Total assets		496,515		4,111		500,626		393,092		4,350		397,442
	39 Weeks Ended November 1, 2008						39 Weeks Ended November 3, 2007
	Retail Stores		Play & Music		Total		Retail Stores		Play & Music		Total
Net sales	$	703,031	$	8,926	$	711,957	$	634,145	$	8,242	$	642,387
Operating income		101,787		2,889		104,676		83,966		2,516		86,482
Total assets		496,515		4,111		500,626		393,092		4,350		397,442

9

8. Credit Facility Amendment

On August 8, 2008, the Company entered into a Tenth Amendment to Credit Agreement (the “Tenth Amendment”), by and between the Company and certain of its subsidiaries and the Bank of America, N.A. The Tenth Amendment amends certain terms of the Credit Agreement dated August 11, 2003, as previously amended, to, among other things: (i) extend the maturity date of the unsecured revolving credit facility from August 11, 2008 to August 11, 2009; and (ii) reduce the maximum revolving loan limit from an aggregate principal amount of $100,000,000 to $80,000,000, subject to an option to increase such limit by an aggregate amount of up to $20,000,000.

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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 November 1, 2008 and November 3, 2007, and the related condensed consolidated statements of income for the thirteen and thirty-nine week periods then ended, and of cash flows for the thirty-nine 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 and 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 and subsidiaries as of February 2, 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for the fiscal year then ended (not presented herein); and in our report dated March 27, 2008, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph related to the adoption of a new accounting principle. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 2, 2008, 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

December 9, 2008

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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. This report contains forward-looking statements that involve risks and uncertainties, including statements regarding planned capital expenditures, planned store openings, expansions and renovations, the effect of manufacturing disruptions, 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, increasing levels of unemployment and consumer debt, extreme volatility in the financial markets, current recessionary economic conditions, 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, changes in the Company’s costs, 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 Annual Report on Form 10-K for the fiscal year ended February 2, 2008. 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 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 2, 2008 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^®, GYMBOREE OUTLET, JANIE AND JACK^® and CRAZY 8^® brands, as well as play programs for children under the GYMBOREE PLAY & MUSIC^® brand. As of November 1, 2008, the Company operated a total of 873 retail stores: 614 Gymboree stores (585 in the United States and 29 in Canada), 112 Gymboree Outlet stores, 110 Janie and Jack shops, and 37 Crazy 8 stores in the United States. The Company also operates online stores at www.gymboree.com, www.janieandjack.com, and www.crazy8.com, and offers directed parent-child developmental play programs at 597 franchised and company-operated centers in the United States and 30 other countries.

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During the third quarter of fiscal 2008, the Company opened 9 Gymboree stores, 8 Gymboree Outlet stores, 9 Janie and Jack shops, and 13 Crazy 8 stores. The Company also relocated or remodeled 8 Gymboree stores (7 in the United States and 1 in Canada) and closed 1 Gymboree store in the United States.

During the remainder of fiscal 2008, the Company plans to open approximately 15 new stores consisting of 3 Gymboree stores, 6 Gymboree Outlet stores, 5 Janie and Jack shops, and 1 Crazy 8 store. The Company also expects to relocate or remodel approximately 5 Gymboree stores in the fourth quarter of fiscal 2008.

Economic conditions have deteriorated in the United States economy over the past year with, among other things, rising unemployment, tight credit markets and declining home prices. As a result, consumers are spending less. The Company expects that these economic conditions will continue to put downward pressure on sales and gross margin in the fourth quarter and beyond.

Results of Operations

13 weeks ended November 1, 2008, compared to 13 weeks ended November 3, 2007

Net Sales

Net retail sales in the third quarter of fiscal 2008 increased to $261.3 million from $247.6 million in the same period last year, an increase of $13.7 million, or 5.5%. This increase was primarily due to net store and square footage growth of 100 stores and approximately 217,000 square feet. Comparable store sales decreased 2% over the corresponding period last year. This decrease was primarily due to a general softening of the overall retail environment driven by macro-economic conditions. The pullback in consumer spending resulted in an overall decrease in average unit retail prices and units per transaction, which was offset partially by an increase in the total number of transactions. There were 873 stores open at the end of the third quarter of fiscal 2008 compared to 773 as of the end of the same period last year.

Gymboree Play & Music net sales in the third quarter of fiscal 2008 decreased to $2.8 million from $3.2 million in the same period last year primarily due to a decrease in international franchisee fees.

Gross Profit

Gross profit for the third quarter of fiscal 2008 increased to $134.6 million from $124.7 million in the same period last year. As a percentage of net sales, gross profit for the third quarter of fiscal 2008 increased 1.3 percentage points to 51.0% from 49.7% in the same period last year. This increase was primarily due to the Company’s continuing product cost reduction strategies, leveraging of buying costs and an increase in average unit retail prices at the core Gymboree brand, partially offset by increased occupancy costs and lower average unit retail prices in the other brands.

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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 $84.4 million in the third quarter of fiscal 2008 from $80.3 million in the same period last year. As a percentage of net sales, SG&A expenses decreased to 31.9% of sales for the third quarter of fiscal 2008 compared to 32.0% of sales in the same period last year. This decrease was primarily due to reductions in professional fees and marketing costs, offset by higher compensation expense, including share-based compensation.

Income Taxes

The Company’s effective tax rates for the third quarters of fiscal 2008 and 2007 were 38.5% and 40.4%, respectively. The actual fiscal 2008 effective tax rate will ultimately depend on several variables, including the mix of earnings between domestic and international operations, the Company’s overall level of earnings in fiscal 2008, and the potential resolution of tax contingencies.

Results of Operations

39 weeks ended November 1, 2008, compared to 39 weeks ended November 3, 2007

Net Sales

Net retail sales for the 39 weeks ended November 1, 2008 increased to $703.0 million from $634.1 million in the same period last year, an increase of $68.9 million, or 10.9%. This increase was primarily due to net store and square footage growth of 100 stores and approximately 217,000 square feet. Comparable store sales increased 1% over the corresponding period last year. This increase was primarily due to continued product acceptance, particularly growth in our boy departments, as well as an increase in the number of transactions, and was offset by lower average transaction values.

Gymboree Play & Music net sales for the 39 weeks ended November 1, 2008 increased to $8.9 million from $8.2 million in the same period last year primarily due to increases in royalties and product sales, offset by a decrease in international franchise fees.

Gross Profit

Gross profit for the 39 weeks ended November 1, 2008 increased to $351.9 million from $308.7 million in the same period last year. As a percentage of net sales, gross profit for the 39 weeks ended November 1, 2008 increased 1.3 percentage points to 49.4% from 48.1% in the same period last year. This increase was primarily due to the Company’s continuing product cost reduction strategies and leveraging of buying costs, and was partially offset by increased occupancy costs.

Selling, General and Administrative Expenses

SG&A expenses increased to $247.3 million for the 39 weeks ended November 1, 2008 from $222.2 million in the same period last year. As a percentage of net sales, SG&A expenses increased to 34.7% of sales for the 39 weeks ended November 1, 2008, compared to 34.6% of sales in the same period last year. This increase was primarily due to higher share-based and incentive compensation expense as well as depreciation expense, and was partially offset by reductions in professional fees, marketing costs and communications expense.

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Income Taxes

The Company’s effective tax rates for the 39 weeks ended November 1, 2008 and for the 39 weeks ended November 3, 2007 were 39.4% and 39.8%, respectively.

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 2, 2008.

Financial Condition

Liquidity and Capital Resources

Cash and cash equivalents were $93.2 million at November 1, 2008, an increase of $59.8 million from February 2, 2008. Working capital as of November 1, 2008 was $145.7 million compared to $58.0 million as of February 2, 2008. The increase in working capital was due primarily to an increase in cash and cash equivalents resulting from an increase in operating income and decreased activity under Company authorized share repurchase programs.

Net cash provided by operating activities for the 39 weeks ended November 1, 2008 was $98.5 million compared to $64.1 million in the same period last year. This increase was primarily due to higher operating income, an increase in deferred liabilities, and changes in working capital items. The increase in deferred liabilities was primarily due to cash received from the Company’s co-branded credit card program and an increase in construction allowances related to new store leases.

Net cash used in investing activities for the 39 weeks ended November 1, 2008 was $46.2 million compared to net cash provided by investing activities of $71.6 million in the same period last year. This decrease was primarily due to the Company liquidating its marketable securities to repurchase shares in fiscal 2007. Capital expenditures during the 39 weeks ended November 1, 2008 were primarily related to the opening of 90 new stores, relocation, remodeling or expansion of 22 existing stores, information technology improvements, and continued investment in the Company’s distribution center. During the 39 weeks ended November 1, 2008, the Company also purchased land adjacent to its existing distribution center for the future expansion of its distribution facilities.

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Net cash provided by financing activities for the 39 weeks ended November 1, 2008 was $9.1 million compared to $140.9 million used in financing activities in the same period last year. This increase was primarily due to decreased activity under Company authorized share repurchase programs. Financing activities for the 39 weeks ended November 1, 2008 included $5.5 million in stock repurchases, primarily reflecting employee minimum statutory tax withholding requirements for restricted stock awards and units that vested during the period. Employees satisfy their minimum statutory tax requirements through a net settlement feature whereby restricted stock awards and units are sold on their vest date to cover tax obligations.

The Company has an unsecured revolving credit facility for borrowings of up to $80 million (subject to an option to increase the borrowing limit up to $100 million). The credit facility, which expires in August 2009, 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 November 1, 2008, the Company was in compliance with these covenants. As of November 1, 2008, $67.9 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 39 weeks ended November 1, 2008 was $77.5 million.

The Company anticipates that cash generated from operations, together with its existing cash resources and funds available from current and future credit facilities, will be sufficient to satisfy the Company’s cash needs through the next 12 months.

There have been no material changes outside the ordinary course of business to the Company’s contractual obligations since its Annual Report on Form 10-K for the year ended February 2, 2008.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company enters into forward foreign exchange contracts with respect to certain purchases in United States dollars of inventory to be sold in the Company’s retail stores in Canada. The purpose of these contracts is to protect the Company’s United States dollar margins on the eventual sale of the inventory from fluctations in the exchange rate for Canadian and United States dollars. The term of the forward exchange contracts is generally less than one year.

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The table below summarizes the notional amounts and fair values of the Company’s forward foreign exchange contracts in U.S. dollars.

	November 1, 2008
	Notional Amount		Fair Value Gain			Weighted- Average Rate
	(in thousands, except weighted-average rate data)
Canadian dollars	$	2,362	$	431		$	0.82
Total	$	2,362	$	431
	February 2, 2008
	Notional Amount		Fair Value Gain			Weighted Average Rate
	(in thousands, except weighted-average rate data)
Canadian dollars	$	4,662	$	6		$	1.01
Total	$	4,662	$	6
	November 3, 2007
	Notional Amount		Fair Value Loss			Weighted- Average Rate
	(in thousands, except weighted-average rate data)
Canadian dollars	$	2,483	$	(386	)	$	1.08
Total	$	2,483	$	(386	)

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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 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 third quarter of fiscal 2008, 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 1. LEGAL PROCEEDINGS

Not applicable.

Item 1A. RISK FACTORS

There has been no material change to the risk factors discussed in Part I, “Item 1A. Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended February 2, 2008.

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

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

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Item 6. EXHIBITS

10.87	Tenth Amendment to Credit Agreement, dated as of August 8, 2008. (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 10.87 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 14, 2008.

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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)
December 9, 2008	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
10.87	Tenth Amendment to Credit Agreement, dated as of August 8, 2008. (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 10.87 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 14, 2008.

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