Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED February 2, 2013

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)

 

(I.R.S. Employer

Identification No.)

500 Howard Street,

San Francisco, California

 

94105

(Zip Code)

(Address of principal executive offices)  

Registrant’s telephone number, including area code: (415) 278-7000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [  ]      No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [X]      No [  ]

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 [  ]      No [  ]*

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X]      No [  ]

*          The Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, but is not required to file such reports under such sections.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]

  

Accelerated filer [  ]

Non-accelerated filer [X] (Do not check if a smaller reporting company)

  

Smaller reporting company [  ]

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

As of May 2, 2013, the registrant had 1,000 shares of common stock outstanding, par value $0.001 per share, all of which are owned by Giraffe Holding, Inc., the registrant’s indirect parent holding company, and are not publicly traded.

DOCUMENTS INCORPORATED BY REFERENCE

None.


Table of Contents

THE GYMBOREE CORPORATION

TABLE OF CONTENTS

 

  PART I   
Item 1.  

Business

     3   
Item 1A.  

Risk Factors

     5   
Item 1B.  

Unresolved Staff Comments

     13   
Item 2.  

Properties

     13   
Item 3.  

Legal Proceedings

     13   
Item 4.  

Mine Safety Disclosures

     13   
  PART II   
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      14   
Item 6.  

Selected Financial Data

     14   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   
Item 7A.  

Quantitative and Qualitative Disclosures about Market Risk

     25   
Item 8.  

Financial Statements and Supplementary Data

     26   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     73   
Item 9A.  

Controls and Procedures

     73   
Item 9B.  

Other Information

     73   
  PART III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     74   
Item 11.  

Executive Compensation

     76   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     86   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     88   
Item 14.  

Principal Accounting Fees and Services

     91   
  PART IV   
Item 15.  

Exhibits, Financial Statement Schedules

     93   

 

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FORWARD LOOKING STATEMENTS

This annual report contains forward-looking statements. You can identify forward-looking statements because they contain words such as “believe,” “expect,” “may,” “will,” “should,” “could,” “seek,” “intend,” “plan,” “estimate,” or “anticipate” or similar expressions that concern our strategy, plans or intentions. All statements we make relating to: future sales, costs and expenses and gross profit percentages; the continuation of historical trends; our ability to operate our business under our capital and operating structure; and the sufficiency of our cash balances and cash generated from operating and financing activities for future liquidity and capital resource needs are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those that we had expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.

Important factors that could cause actual results to differ materially from our expectations (“cautionary statements”) are disclosed under “Item 1A, Risk Factors,” and elsewhere in this annual report. We encourage you to carefully read these risk factor disclosures. We caution investors not to place substantial reliance on the forward-looking statements contained in this annual report. These statements, like all statements in this annual report, speak only as of the date of this annual report (unless another date is indicated), and we undertake no obligation to update or revise the statements in light of future developments, except as otherwise required by law.

PART 1

Item 1. Business

General

The Gymboree Corporation (“we,” “us,” “our,” Gymboree” and “Company”) is one of the largest children’s apparel specialty retailers in North America, offering collections of high-quality apparel and accessories. As of February 2, 2013, we operated a total of 1,262 retail stores as well as 3 online stores at www.gymboree.com, www.janieandjack.com and www.crazy8.com. We also offer directed parent-child developmental play programs at 718 franchised and Company-operated Gymboree Play & Music® centers in the United States and 42 other countries. In addition, as of February 2, 2013, third-party overseas partners operated 44 Gymboree® retail stores in the Middle East and South Korea; Gymboree (China) Commercial and Trading Co. Ltd. (“Gymboree China”) operated 12 Gymboree retail stores in China; and Gymboree (Tianjin) Educational Information Consultation Co. Ltd. (“Gymboree Tianjin”) provided various services on Gymboree Play & Music’s behalf to Gymboree Play & Music’s franchisees in China (Gymboree China and Gymboree Tianjin are collectively referred to as the “variable interest entities” or “VIEs”).

Gymboree: As of February 2, 2013, we operated a total of 797 Gymboree stores (including 160 Gymboree Outlet stores), consisting of 746 stores (including 158 Gymboree Outlet stores) in the United States, 42 stores in Canada, 3 stores in Puerto Rico (including 2 Gymboree Outlet store), and 6 stores in Australia. Gymboree stores offer fashionable, age-appropriate apparel and accessories for boys and girls characterized by mix and match colors, patterns and graphics, complex embellishments, comfort, functionality and durability in sizes newborn through 12. Gymboree Outlet stores provide similar high-quality mix-and-match children’s apparel and accessories in the same size ranges but at outlet prices.

Janie and Jack: As of February 2, 2013, we operated a total of 133 Janie and Jack® shops in the United States. Janie and Jack shops offer distinctive, finely crafted clothing and accessories for boys and girls in sizes newborn through 12. Lush fabrics, a hand-made quality and details such as hand-embroidery, smocking and vintage prints are utilized to create classic looks. Shops have a European style reminiscent of a small Parisian boutique.

Crazy 8: As of February 2, 2013, we operated a total of 332 Crazy 8® stores in the United States. Crazy 8 stores provide wholesome age-appropriate fashion for boys and girls at initial price points approximately 25% to 30% lower than Gymboree. Through merchandise design, product presentation, store environment, customer service and packaging, Crazy 8 stores reflect an upscale store experience at value prices. Crazy 8 apparel is offered in sizes newborn through 14 and is intended to address a broader customer base than Gymboree.

Gymboree Play & Music: Gymboree Play & Music offers children ages newborn through five the opportunity to explore, learn and play in an innovative parent-child program. Gymboree Play & Music offers an array of classes developed by early childhood experts as well as birthday parties and developmental toys, books and music.

 

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Our online stores at www.gymboree.com, www.janieandjack.com and www.crazy8.com offer the entire Gymboree, Janie and Jack and Crazy 8 product offerings, respectively. We fully integrate online stores with retail stores by offering substantially the same products, pricing and promotions. We also have a policy whereby retail stores order merchandise for customers from the online stores and we allow customers to return merchandise purchased online at traditional retail stores and vice versa.

Gymboree was organized in October 1979 as a California corporation and re-incorporated as a Delaware corporation in June 1992.

Suppliers

The majority of our apparel is manufactured to our specifications by over 225 independent manufacturers located primarily in Asia (principally China (38%), Indonesia (22%), Bangladesh (8%), Thailand (6%), and Vietnam (6%) for the fiscal year ended February 2, 2013). All product purchases are denominated in U.S. dollars. One buying agent manages a substantial portion of our inventory purchases (approximately 72% for the fiscal year ended February 2, 2013). We have no long-term contracts with suppliers and typically transact business on an order-by-order basis. Factories typically undergo annual audits for social accountability by independent third parties. In addition, all of our products undergo a quality audit performed by independent third parties.

Seasonality and Competition

Our operations are seasonal in nature, with sales from retail operations peaking during the fourth quarter, primarily during the holiday season in November and December. During fiscal 2012, the fourth quarter accounted for approximately 31% of net sales. During fiscal 2011 and 2010, the fourth quarter accounted for approximately 30% of net sales from retail operations.

Our apparel brands compete on a national level with BabyGap and GapKids (divisions of Gap Inc.), department stores operating in malls, outlet centers or street locations, discount retail chains such as Old Navy (a division of Gap Inc.), The Children’s Place, Wal-Mart, Target and Carter’s, as well as with a wide variety of local and regional specialty stores, with other retail chains, and with children’s retailers that sell their products by mail order, online or through outlet malls. The principal factors affecting competition for retail sales are product design, product quality, brand image, customer service and pricing. Our goal is to provide our customers with high-quality apparel at a price that reflects excellent value. We design and produce apparel exclusively for sale at our retail and online stores.

Trademark and Service Marks

In the United States, we are the owner of a number of trademarks and service marks, including the trademarks and service marks “Gymboree,” “Janie and Jack,” “Crazy 8” and “Gymboree Play & Music,” and the trademarks “Gymbo” and “Gymbucks.” These marks and certain other of our marks are registered with the United States Patent and Trademark Office. The mark “Gymboree” is also registered, or is the subject of pending applications, in approximately 94 foreign countries. All other trademarks or service marks appearing in this annual report that are not identified as marks owned by us are the property of their respective owners. Each federal registration is renewable indefinitely if the mark is still in use at the time of renewal. The Company’s rights in the “Gymboree,” “Janie and Jack” and “Crazy 8” marks and other marks are a significant part of its business. Accordingly, we intend to maintain the marks and the related registrations. We are not aware of any material claims of infringement or other material challenges to our right to use the “Gymboree,” “Janie and Jack” and “Crazy 8” marks in the United States.

We use a number of other trademarks, certain of which have been registered with the U.S. Patent and Trademark Office and in certain foreign countries. We believe that our registered and common-law trademarks have significant value and that some of our trademarks are instrumental to our ability to both market our products and create and sustain demand for our products.

Employees

As of February 2, 2013, we had approximately 14,520 full-time and part-time employees or 5,816 full-time equivalents. In addition, a significant number of seasonal employees are hired during each holiday selling season. None of our employees are represented by a labor union.

Segment and International Financial Information

Certain financial information about our reportable segments and international areas is set forth under the heading “Segment Information” in Note 20 to the consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.

 

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Available Information

We currently make available on our website at www.gymboree.com, under “Company Information—Financial Resources & SEC filings,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such documents as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). We also currently make available under “Company Information—Corporate Governance” our code of ethics as well as other documents and materials relating to corporate governance. References to the Company’s website address do not constitute incorporation by reference of the information contained on the website, and the information contained on the website is not part of this annual report.

Item 1A. Risk Factors

Our financial performance is subject to various risks and uncertainties. The risks described below are those which we believe are the material risks we face. Any of the risk factors described below could significantly and adversely affect our business, prospects, sales, revenues, gross profit, cash flows, financial condition and results of operations.

Risks Related to Our Indebtedness and Certain Other Obligations

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations.

As a result of the Transactions (as defined under “Item 6. Selected Financial Data”), we are highly leveraged. The following chart shows our indebtedness as of February 2, 2013:

 

             February 2, 2013           
     ($ in millions)  

Term Loan(1)

    $ 769                        

ABL Facility(1)

     —                        

9.125% senior notes due 2018 (“Notes”)

     371                       
  

 

 

 

 Total indebtedness

    $                   1,140                        
  

 

 

 

 

(1)

The Company’s senior credit facilities (collectively, the “Senior Credit Facilities”) are comprised of an $820 million secured term loan agreement (“Term Loan”) and a $225 million asset backed revolving credit facility (“ABL Facility”). Amounts available under the ABL Facility are subject to customary borrowing base limitations and are reduced by letter of credit utilization. The Senior Credit Facilities also allow an aggregate of $200 million in uncommitted incremental facilities, the availability of which is subject to our meeting certain conditions. No incremental facilities are currently in effect.

Our high degree of leverage could have important consequences. For example, it could:

 

   

make it more difficult for us to make payments on our indebtedness;

   

increase our vulnerability to general economic and industry conditions;

   

require a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

   

expose us to the risk of increased interest rates as the borrowings under our Senior Credit Facilities will be at variable rates of interest;

   

restrict us from making strategic acquisitions or cause us to make non-strategic divestitures;

   

limit our ability to obtain additional financing for working capital, capital expenditures, research and development, debt service requirements, acquisitions and general corporate or other purposes; and

   

limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors who are less highly leveraged.

Despite current indebtedness levels and restrictive covenants, we and our subsidiaries may incur additional indebtedness in the future. This could further exacerbate the risks associated with our substantial financial leverage.

The terms of the indenture governing the Notes and the Senior Credit Facilities permit us to incur a substantial amount of  additional debt, including secured debt. Any additional borrowings under the Senior Credit Facilities, and any other secured debt, would be effectively senior to the Notes and any guarantees thereof to the extent of the value of the assets securing such indebtedness. If new debt is added to our current debt levels, the risks that we now face as a result of our leverage would intensify.

 

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Our debt agreements contain restrictions that limit our flexibility in operating our business.

Our Senior Credit Facilities and the indenture governing the Notes contain various covenants that limit our and our restricted subsidiaries’ ability to engage in specified types of transactions. These covenants limit our and our restricted subsidiaries’ ability to, among other things, incur or guarantee additional indebtedness, pay dividends on, or redeem or repurchase, our capital stock, make certain acquisitions or investments, enter into sale-leaseback transactions, materially change our business, incur or permit to exist certain liens, enter into transactions with affiliates or sell our assets to, or merge or consolidate with or into, another company. Further, our ability to comply with such covenants under the indenture may be affected by actions taken by the variable interest entities which we do not control, but the results of which we have consolidated into our financial statements and which are treated as restricted subsidiaries under the indenture governing the Notes (see Note 21 to the consolidated financial statements included elsewhere in this annual report). In addition to the foregoing covenants, under certain circumstances, the ABL Facility requires us to satisfy a financial test. Our ability to satisfy this test may be affected by events outside of our control.

Upon the occurrence of an event of default under the Senior Credit Facilities, the lenders could elect to declare all amounts outstanding under the Senior Credit Facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the Senior Credit Facilities could proceed against the collateral granted to them to secure that indebtedness. We have pledged substantially all of our assets as collateral under the Senior Credit Facilities. If the lenders under the Senior Credit Facilities accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay the Senior Credit Facilities, as well as our other secured and unsecured indebtedness, including the Notes.

To service our indebtedness, we require a significant amount of cash and our ability to generate cash depends on many factors beyond our control.

Our ability to make cash payments on and to refinance our indebtedness and to fund planned capital expenditures depend on our ability to generate significant operating cash flow in the future. This ability is, to a significant extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Our business may not generate sufficient cash flow from operations, and future borrowings may not be available under our Senior Credit Facilities, in an amount sufficient to enable us to pay our indebtedness, including the Notes, or to fund our other liquidity needs. In any such circumstance, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness, including the Senior Credit Facilities and the Notes, on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions and investments. Any such action, if necessary, may not be effected on commercially reasonable terms or at all. Our Senior Credit Facilities and the indenture governing the Notes restrict our ability to sell assets and use the proceeds from such sales.

If we are unable to generate sufficient cash flow or are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants in the instruments governing our indebtedness (including covenants in our Senior Credit Facilities and the indenture governing the Notes), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our Senior Credit Facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our Senior Credit Facilities to avoid being in default. If we breach our covenants under our Senior Credit Facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our Senior Credit Facilities, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

Risks Related to the Business

Global economic conditions may adversely affect our financial performance.

During the recent economic recession, global financial markets experienced extreme volatility, disruption and credit contraction. The volatility and disruption to the capital markets significantly and adversely affected global economic conditions, resulting in additional significant recessionary pressures and declines in employment levels, consumer and business confidence, disposable income and actual and perceived wealth. Although there have been some recent improvements, continuing or worsened adverse economic conditions, including higher unemployment, gasoline, energy and health care costs, taxes and tighter credit, could continue to affect consumer confidence and discretionary consumer spending adversely and may adversely affect our sales, cash flows and results of operations. Additionally, renewed financial turmoil in the financial and credit markets could adversely affect our costs of capital and the sources of liquidity available to us.

 

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Further, we work with a large number of small vendors, some of whom have been or may be significantly impacted by any of the factors described above. If a number of these vendors fail, the delays and costs that we would likely incur in replacing them and in finding replacement goods and services could have a material adverse effect on our business, financial condition and operating results.

Our results may be adversely affected by our failure to anticipate and respond to changes in consumer preferences in a timely manner.

Our sales and profitability depend upon the continued demand by customers for our apparel and accessories. We believe that our success depends in large part upon our ability to anticipate, gauge and respond in a timely manner to changing consumer demands and preferences and upon the appeal of our products. Further, current economic conditions and levels of discretionary spending also affect consumer preferences. We may not be able to anticipate, gauge and respond effectively to changes in consumer preferences, and, as a result, the demand for our apparel or accessories may decline. In addition, since much of our inventory is sourced from vendors located outside the United States, we usually must order merchandise and enter into contracts for the purchase and manufacture of such merchandise, up to nine months in advance of the applicable selling season and frequently before trends are known. A decline in demand for our apparel and accessories or a misjudgment could, among other things, lead to lower sales, excess inventories and higher markdowns, each of which could have a material adverse effect on our business, financial condition and operating results.

Changes in seasonal consumer spending patterns that are beyond our control could harm our business.

Historically, a significant portion of our retail sales have been realized during the holiday season in November and December. We have also experienced periods of increased sales activity in the early spring, during the period leading up to the Easter holiday, and in the early fall, in connection with back-to-school sales. Changes in seasonal consumer spending patterns for reasons beyond our control could result in lower-than-expected sales during these periods. For example, the nature and pace of the recovery from the global economic downturn may have unanticipated effects on consumer spending patterns. Such circumstances could cause us to have excess inventory, necessitating markdowns to dispose of these excess inventories, which would reduce our profitability. Any failure by us to meet our business plan for, in particular, the third or fourth quarter of any fiscal year could have a material adverse effect on our earnings, which in all likelihood would not be offset by satisfactory results achieved in other quarters of the same fiscal year in which sales are less concentrated. Also, because we typically spend more in labor costs during the holiday season to hire temporary store employees in anticipation of increased holiday business volume, a shortfall in expected sales during that period could result in a disproportionate decrease in our net income.

Our business may be negatively impacted by consumer product safety laws, regulations or related legal actions.

Our products are subject to consumer product safety laws, as well as regulations and standards with respect to product quality and safety set by various governmental authorities, including the Consumer Product Safety Commission. New consumer product safety laws or changes to existing laws and regulations may make certain products unsalable or require us to incur significant compliance costs, which could have a material adverse effect on our earnings. Our inability, or that of our vendors or manufacturers, to comply on a timely basis with such laws and regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and earnings.

Although we currently test products sold in our stores and at our Gymboree Play & Music sites, we have in the past recalled and may in the future need to recall products that we may later determine may present safety issues. If we or the Consumer Product Safety Commission recall a product sold in our stores, we could experience negative publicity and product liability lawsuits, which could have a material adverse effect on our reputation, financial position and earnings.

Increased production costs may adversely affect our results.

We are affected by inflation and changing prices primarily through purchasing products from our global suppliers, increased operating costs and expenses, and fluctuations in interest rates. If our customers are resistant to paying higher prices for our products, and if we are unable to absorb increased costs of goods by reducing our manufacturing or supply chain costs or lowering our overall cost structure, our profitability may be materially adversely affected.

 

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Our business may be harmed by additional U.S. regulation of foreign trade or delays caused by additional U.S. customs requirements.

Our business is subject to the risk that the United States may adopt additional regulations relating to imported apparel products, including quotas, duties, taxes and other charges or restrictions on imported apparel. We cannot predict whether additional U.S. quotas, duties, taxes or other charges or restrictions will be imposed upon the importation of our products in the future, or what effect any such actions would have on our business, financial position and operating results. If the U.S. government imposes any such charges or restrictions, our supply of products could be disrupted and their cost could substantially increase, either of which could have a material adverse effect on our operating results. Unforeseen delays in customs clearance of any goods could have a material adverse effect on our ability to deliver complete shipments to our stores in a timely manner, which in turn could have a material adverse effect on our business and operating results.

Competition and the strength of our competitors may impair our ability to maintain or grow our sales and adversely affect our operating results.

The apparel segment of the specialty retail industry is highly competitive. The principal factors of competition for retail sales are product design, product quality, brand image, customer service and pricing. Our Gymboree, Janie and Jack and Crazy 8 brands compete on a national level with BabyGap and GapKids (divisions of Gap Inc.), department stores operating in malls, outlet centers or street locations, discount retail chains such as Old Navy (a division of Gap Inc.), The Children’s Place, Wal-Mart, Target and Carter’s, as well as a wide variety of local and regional specialty stores, other retail chains, and children’s retailers that sell their products by mail order, online or through outlet malls. Many of these competitors are larger than us and have substantially greater financial, marketing and other resources. Increased competition may reduce sales and gross margins, and increase operating expenses, each of which could have a material adverse effect on our operating results.

Because we purchase our products abroad, our business is sensitive to risks associated with international business.

Our products are currently manufactured to our specifications by independent factories located primarily in Asia. As a result, our business is subject to the risks generally associated with doing business abroad, such as foreign governmental regulations, currency fluctuations, adverse conditions such as epidemics, natural disasters, wars, acts of terrorism, social or political unrest, disruptions or delays in transportation or customs clearance, local business practices and changes in economic conditions in countries in which our suppliers are located. We cannot predict the effect of such factors on our business relationships with foreign suppliers or on our ability to deliver products into our stores in a timely manner. If even a small portion of our current foreign manufacturing sources or textile mills were to cease doing business with us for any reason, such actions could have a material adverse effect on our operating results and financial position. If we experience significant increases in demand or need to replace an existing vendor, there can be no assurance that additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any vendor would allocate sufficient capacity to us in order to meet our requirements.

In addition, even if we are able to expand existing or find new manufacturing sources, we may encounter delays in production and added costs as a result of the time it takes to train our vendors in our methods, products, quality control standards, and environmental, labor, health, and safety standards. Moreover, in the event of a significant disruption in the supply of the fabrics or raw materials used by our vendors in the manufacture of our products, our vendors might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price, or at all. Any delays, interruption, or increased costs in the manufacture of our products could have an adverse effect on our ability to meet consumer demand for our products and result in lower sales and net income. In addition, we are currently pursuing strategies to reduce product costs. These strategies may result in sourcing products from factories from which we have not previously purchased products and which may be in countries in which we have not done business before and may subject us to additional risk.

Currency exchange rate fluctuations may adversely affect our business and operating results.

There has been significant volatility in the value of the U.S. dollar against other foreign currencies in the recent past. While our business is primarily conducted in U.S. dollars, we purchase substantially all of our products overseas (primarily from China, Indonesia, Bangladesh, Thailand and Vietnam). Cost increases caused by currency exchange rate fluctuations could make our products less competitive or have an adverse effect on our profitability. Currency exchange rate fluctuations could also disrupt the business of the third-party manufacturers that produce our apparel by making their purchases of raw materials more expensive and more difficult to finance. Such fluctuations could have a material adverse effect on our business and earnings as a result.

We are dependent on one facility for distribution of all of our merchandise.

We handle merchandise distribution for all of our stores (including our three online stores) from a single facility in Dixon, California. Any significant interruption in the operation of this distribution facility due to natural disasters, accidents, system failures or other events beyond our control or unforeseen causes could delay or impair our ability to distribute merchandise to our stores or customers, which could cause sales to decline and have a material adverse effect on our earnings and financial position. In addition, if the capacity of our distribution facility is exceeded (such as due to a high level of demand during peak periods), we may not be able to timely fulfill store and customer orders, which may have an adverse effect on our results of operations and our reputation.

 

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In addition, we use an automated unit sortation system to manage the order processing for all of our direct-to-consumer businesses. In the event that this unit sortation system becomes inoperable for any reason, we would not be able to ship all direct-to-consumer orders in the timely manner that our customers expect. As a result, we could experience a reduction in our direct-to-consumer business, which could negatively impact sales and profitability.

We may be subject to negative publicity or legal action if our manufacturers violate labor laws or engage in practices that our customers believe are unethical.

We require our independent manufacturers to operate their businesses in compliance with the laws and regulations that apply to them. Our sourcing personnel periodically visit and monitor the operations of our independent manufacturers, but we cannot control their business or labor practices. We also rely on independent third parties to audit factories annually for compliance with safety and labor laws. If one of our independent manufacturers violates or is suspected of violating labor laws or other applicable regulations, or if such manufacturer engages in labor or other practices that diverge from those typically acceptable in the United States or any of the other countries in which we operate, we could in turn experience negative publicity or be subject to legal action. Negative publicity or legal actions regarding our manufacturers or the production of our products could have a material adverse effect on our reputation, sales, business, financial position and operating results.

We are dependent on third parties for critical business functions, and their failure to provide services to us, or our inability to timely replace them when necessary, could have a material adverse effect on our business and operating results.

We rely on third parties for critical functions involving credit card processing and store communications. These third parties may experience financial difficulties and unforeseen business disruptions that could adversely affect their ability to perform their contractual obligations to us, including their obligations to comply with Payment Card Industry (“PCI”) data security standards. Any such failure to provide services to us or to comply with PCI security requirements could impact our internal communications systems, including our ability to accept payment cards, which could have an adverse impact on business operations and lead to lower sales. Although we believe that other vendors could be identified and retained to provide these services, we may not find an adequate replacement timely, which could result in a material adverse effect on our business and operating results and adverse publicity.

Damage to our computer systems could severely impair our ability to manage our business.

Our operations depend on our ability to maintain and protect the computer systems we use to manage our purchase orders, store inventory levels, web applications, accounting functions and other critical aspects of our business. Our systems are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures and similar events. We have computer systems in each of our stores, with the main database servers for our systems located in San Francisco, California, and additional web site support systems located in Redwood City, California, which are located on or near known earthquake fault zones. An earthquake or other disaster could have a material adverse impact on our business and operating results not only by damaging our stores or corporate headquarters, but also by damaging our main servers, which could disrupt our business for an indeterminate length of time.

Our online businesses face distinct operating risks.

The successful operation of our online businesses depends on efficient and uninterrupted operation of our order-taking and fulfillment operations. Disruptions or slowdowns in these areas could result from disruptions in telephone service or power outages, inadequate system capacity, system issues, computer viruses, human error, changes in programming, natural disasters or adverse weather conditions. Our online businesses are generally vulnerable to additional risks and uncertainties associated with the Internet, including changes in required technology and other technical failures, as well as changes in applicable federal and state regulations, security breaches, and consumer privacy concerns. Problems in any of these areas could result in a reduction in sales, increased costs and damage to our reputation and brands.

Our business may be harmed if our or our vendors’ computer network security or any of the databases containing customer or other personal information maintained by us or our third-party providers is compromised.

The protection of customer, employee and company data in the information technology systems we utilize (including those maintained by third-party providers) is critical. Despite the efforts by us and our vendors to secure computer networks utilized for our business, security could be compromised, confidential information, such as customer credit card numbers or other personally identifiable customer information we or our vendors collect, could be misappropriated, or system disruptions could occur. Improper activities by third parties, advances in technical capabilities, new tools and discoveries and other events or developments may facilitate or result in a breach of our or our vendors’ computer network security. Any of these events could lead to costly investigations and litigation, as well as potential regulatory or other actions by governmental agencies. As a result of any of the foregoing, we may experience adverse publicity, loss of sales, the cost of remedial measures, and/or significant expenditures to reimburse third parties for damages, which could adversely impact our results of operations.

 

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We believe that we are currently compliant with PCI data security standards, which require annual audits by independent qualified security assessors to assess compliance. Failure by us or our vendors to comply with the security requirements or rectify a security issue may result in fines and the imposition of restrictions on our ability to accept payment cards, which could adversely affect our operations. There can be no assurance that we will be able to continue to satisfy PCI security standards. In addition, PCI is controlled by a limited number of vendors who have the ability to impose changes in PCI’s fee structure and operational requirements without negotiation. Such changes in fees and operational requirements may result in our failure to comply with PCI security standards, as well as significant unanticipated expenses.

Our ability to successfully implement significant information technology systems is critical to our business.

Our information technology infrastructure is in regular need of upgrades, which we plan to continue to implement. Such technology systems changes are complex and could cause disruptions that may adversely affect our business, such as when our new or upgraded systems fail to perform adequately. While we strive to ensure the orderly implementation of various information technology systems, we may not be able to successfully execute these changes without potentially incurring a significant disruption to our business. Even if we are successful with implementation, we may not achieve the expected benefits from these initiatives, despite having expended significant capital. We may also determine that additional investment is required to bring our systems to their desired state, which could result in a significant investment of additional time and money and increased implementation risk. Furthermore, we intend to rely on third parties to fulfill contractual obligations related to some of these system upgrades. Failure of these third parties to fulfill their contractual obligations could lead to significant expenses or losses due to a disruption in business operations.

We must timely and effectively deliver merchandise to our stores and customers.

We cannot control all of the various factors that might affect our fulfillment rates for online sales and timely and effective merchandise delivery to our stores. We rely upon third-party carriers for our merchandise shipments to and from stores and reliable data regarding the timing of those shipments. In addition, we are heavily dependent upon two carriers for the delivery of our merchandise to online customers. Labor disputes, union organizing activity, inclement weather, natural disasters and acts of terrorism could affect those carriers’ ability to provide delivery services to meet our shipping needs. Failure to deliver merchandise in a timely and effective manner could damage our reputation and sales.

Fluctuations in comparative store sales and results of operations could cause our business performance to decline substantially.

Our results of operations for our individual stores have fluctuated in the past and can be expected to continue to fluctuate in the future. Numerous factors affect our comparable store sales, including, among others, merchandise assortment, retail prices, fashion trends, weather conditions, mall traffic, the retail sales environment, calendar shifts of holidays or seasonal periods, timing of promotional events, macro-economic conditions and our success in executing our business strategies.

Our ability to deliver strong comparable sales results and margins depends in large part on accurately forecasting demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our customer base, managing inventory effectively, using effective pricing strategies, and optimizing store performance. Failure to meet the expectations of investors, securities analysts, or credit rating agencies in one or more future periods could cause our credit ratings to decline.

We may not be able to successfully operate if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team.

As previously reported, we have recently had a number of changes to our executive management team. Our continued success is largely dependent on the individual efforts and abilities of our senior management team and certain other key personnel and on our ability to retain current management and to attract and retain qualified key personnel in the future. The loss of certain key employees or our inability to continue to attract and retain other qualified key employees could have a material adverse effect on our growth, operations and financial position.

Our performance is dependent on attracting and retaining a large and growing number of qualified team members.

Many of our team members are in entry-level or part-time positions with historically high rates of turnover. Our ability to meet our labor needs while controlling our costs is subject to external factors such as unemployment levels, minimum wage legislation, health care legislation and changing demographics. In addition, our labor costs are influenced by health care and workers’ compensation costs, both of which have been rising in recent years. If we cannot hire enough qualified employees, or if there is a disruption in the supply of personnel we hire from third-party providers, especially during our peak season or certain high-volume events, our customer service levels and our operations could be negatively impacted.

 

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The loss of a key buying agent could disrupt our ability to deliver our inventory supply in a timely fashion, impacting its value.

One buying agent manages a substantial portion of our inventory purchases (approximately 72% in fiscal year 2012). Although we believe that other buying agents could be identified and retained to place our required foreign production, the loss of this buying agent could result in delays in procuring inventory, which could result in a material adverse effect on our business and operating results.

We are, and may continue to be in the future, a party to legal proceedings that could result in unexpected adverse outcomes.

From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury and other proceedings arising in the ordinary course of business. In addition, there are an increasing number of cases being filed in the retail industry generally that contain class action allegations, such as such those relating to privacy and wage and hour laws. We evaluate our exposure to these legal proceedings and establish reserves for the estimated liabilities in accordance with generally accepted accounting principles. Assessing and predicting the outcome of these matters involves substantial uncertainties. Although not currently anticipated by management, unexpected outcomes in these legal proceedings, or changes in management’s evaluations or predictions and accompanying changes in established reserves, could have a material adverse impact on our financial results.

Our growth strategy includes the addition of a significant number of new stores each year. We may not be able to implement this strategy successfully, on a timely basis, or at all.

Our growth will largely depend on our ability to successfully open and operate new stores. We intend to continue to open new stores in future years. The success of this strategy is dependent upon, among other things, the current retail environment, the identification of suitable markets and sites for store locations, the negotiation of acceptable lease terms, the hiring, training and retention of competent sales personnel, our ability to complete construction within planned timelines and budgets and the effective management of inventory to meet the needs of new and existing stores on a timely basis. Our expansion also will place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our existing stores. In addition, to the extent that our new store openings are in existing markets, we may experience reduced net sales volumes in existing stores in those markets. We expect to fund our expansion of Company-owned stores through cash flow from operations and, if necessary, by borrowings under our ABL Facility; however, if we experience a decline in performance, we may slow or discontinue store openings. We may not be able to execute any of these strategies successfully, on a timely basis, or at all. If we fail to implement these strategies successfully, our financial condition and results of operations would be adversely affected.

Our growth would be hampered if we are unable to identify new store locations and relocate existing stores in appropriate retail venues and shopping areas.

Our stores must be located in appropriate retail spaces in areas with demographic characteristics consistent with our customer base. These locations tend to be limited to malls and similar venues where the market for available space has historically been very competitive. The location of acceptable store sites and the negotiation of acceptable lease arrangements require considerable time, effort and expense. Our ability to lease desirable retail space for expansion and relocation of stores, and to renew our existing store leases, on favorable economic terms is essential to our revenue and earnings growth. Approximately 120, 112 and 87 store leases will come up for renewal during fiscal 2013, fiscal 2014 and fiscal 2015, respectively. We are also in the process of negotiating lease terms for approximately 72 stores, which are currently operating under month-to-month terms. There can be no assurance that we will be able to achieve our store expansion goals, effectively manage our growth, successfully integrate the planned new stores into our operations, or profitably operate our new and remodeled stores. Failure to obtain and renew leases for a sufficient number of stores on acceptable terms could have a material adverse effect on our revenues and operating results.

 

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Our efforts to expand internationally through franchising and similar arrangements may not be successful and could impair the value of our brands.

We have entered into franchise agreements with unaffiliated third parties to operate stores in certain countries in the Middle East and in South Korea and with our affiliate (which we do not control) to operate stores in China. Under these agreements, third parties operate stores that sell apparel, purchased from us, under the Gymboree name. We have limited experience managing apparel retail franchise relationships and these arrangements may ultimately not be successful. While we expect that this will be a small part of our business in the near future, we plan to continue to increase these types of arrangements over time as part of our international expansion efforts. The effect of these arrangements on our business and operating results is uncertain and will depend upon various factors, including the demand for our products in new markets and our ability to successfully identify appropriate third parties to act as franchisees, distributors, or in a similar capacity. In addition, certain aspects of these arrangements are not directly within our control. Other risks that may affect these third parties include general economic conditions in specific countries or markets, changes in diplomatic and trade relationships, and political instability. Moreover, while the agreements we have entered into and plan to enter into in the future provide us with certain termination rights, to the extent that these parties do not operate their stores in a manner consistent with our requirements regarding our Gymboree brand identity and customer experience standards, the value of our Gymboree brand could be impaired. A failure to protect the value of our Gymboree brand or any other harmful acts or omissions by a franchisee could have an adverse effect on our operating results and our reputation.

We may be unable to protect our trademarks and other intellectual property rights.

We believe that our trademarks and service marks are important to our success and our competitive position due to their name recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and service marks on a worldwide basis. We are not aware of any material claims of infringement or material challenges to our right to use any of our trademarks and service marks in the United States or abroad. Nevertheless, the actions we have taken to establish and protect our trademarks and service marks may not be adequate to prevent imitation of our products by others or to prevent others from seeking to block sales of our products as a violation of the trademarks, service marks and proprietary rights of others, particularly as we continue to expand our business outside the United States. Also, others may assert rights in, or ownership of, trademarks and other proprietary rights of ours and we may not be able to successfully resolve these types of conflicts to our satisfaction. In addition, the laws of certain foreign countries may not protect proprietary rights to the same extent as do the laws of the United States.

We may experience fluctuations in our tax obligations and effective tax rate.

We are subject to income taxes in federal and applicable state and local tax jurisdictions in the United States, Canada, China, Australia, Puerto Rico, Kuwait, Hong Kong and South Korea. We record tax expense based on our estimates of future payments, which include reserves for estimates of uncertain tax positions. At any time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may impact the ultimate settlement of these tax positions. As a result, we expect that there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings.

We are also subject to sales and use taxes, as well as other local taxes, in applicable jurisdictions in the United States, Canada, China, Australia, Puerto Rico, and South Korea. At any time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may adversely impact the ultimate settlement of these tax positions and our financial results.

We may acquire businesses in the future to support long-term growth. We have limited experience acquiring and integrating businesses into our organization and we may not be successful.

We regularly evaluate businesses as potential acquisition targets to support our long-term growth. We have not acquired significant businesses in the past and we have limited experience acquiring, integrating and growing existing businesses. The acquisition of a business could divert management’s attention from our existing brands and operations, require significant operational support and increase demands on systems and staffing. All of these effects could negatively impact our existing business. In addition, the acquisition and integration of an acquired business could result in significant additional costs that could negatively impact our working capital position, cash flow and operating results.

Our performance is dependent on customer traffic in shopping malls.

We are dependent upon the continued popularity of malls as a shopping destination and the ability of shopping mall anchor tenants and other attractions to generate customer traffic. A sluggish recovery of the United States economy or an uncertain economic outlook could continue to lower consumer spending levels and cause a decrease in shopping mall traffic, each of which could adversely affect our growth, sales, and profitability. Further, any terrorist act, natural disaster, or public health concern, including infectious diseases, that decreases the level of mall traffic or other shopping traffic, or that affects our ability to open and operate stores in affected areas, could have a material adverse effect on our business.

 

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In addition, we lease a large number of our stores in malls owned and operated by highly leveraged real estate development companies. The inability of any one of these companies to refinance its debt when it comes due could result in mall closures or in foreclosures and distress sales of the mall properties. The closure of a mall or a change of ownership that results in changes or disruptions in mall operations, changes in tenant mix, or that otherwise impacts the character of the mall could affect the performance of our stores in those malls and could in turn have a material adverse effect on our business, financial condition and operating results.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We lease approximately 162,400 square feet of office space in a building in San Francisco, California, for our corporate offices. The lease expires in April 2018.

We own a 444,000 square-foot distribution center on approximately 31 acres in Dixon, California. All of our products are distributed from this facility. We also leased an additional 200,000 square feet of warehouse space in Dixon to supplement the Company-owned distribution center’s storage and processing capacity. This lease expires in July 2014.

As of February 2, 2013, our 1,262 stores included an aggregate of approximately 2,587,000 square feet of space. Store leases typically have 10-year terms and typically include a termination clause if minimum revenue levels are not achieved during a specified 12-month period during the lease term. Some leases are structured with a minimum rent component plus a percentage rent based on the store’s net sales in excess of a certain threshold. Substantially all of the leases require us to pay insurance, utilities, real estate taxes, and common area repair and maintenance expenses. Approximately 120, 112 and 87 store leases will come up for renewal during fiscal 2013, 2014 and 2015, respectively. We are also in the process of negotiating lease terms for approximately 72 stores currently operating under month-to-month terms. As of February 2, 2013, we also operated 7 Gymboree Play & Music corporate-owned sites in California, Florida and Arizona under leases that expire between fiscal 2013 and fiscal 2017. See Note 19 to the consolidated financial statements included elsewhere in this annual report.

Item 3. Legal Proceedings

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. Our management does not expect that the results of any of these legal proceedings, either individually or in the aggregate, could have a material effect on our financial position, results of operations or cash flows.

Item 4. Mine Safety Disclosures

None.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Gymboree Holding, Ltd., domiciled in the Cayman Islands, through Giraffe Holding, Inc. (“Parent”) and other direct and indirect subsidiaries, indirectly owns all of our outstanding equity interests. Shares of our common stock are not registered on any national securities exchange or otherwise publicly traded, there is no established public trading market for our common stock and none of the shares of our common stock are convertible into shares of any other class of stock or other securities.

In the fourth quarter of fiscal 2011 and fiscal 2012, we paid cash dividends on our common stock in aggregate amounts of $12.2 million and $3.3 million, respectively, to Parent. We do not have an established annual dividend policy. We may issue dividends to our shareholders from time to time, but are under no obligation to do so, and would do so only to the extent permitted under financing documents and approved by our Board of Directors.

Item 6. Selected Financial Data

The following table sets forth selected historical consolidated financial data at the dates and for the periods indicated below. Our selected financial data as of January 31, 2009 (Predecessor), January 30, 2010 (Predecessor), January 28, 2012 (Successor), and February 2, 2013 (Successor) and for the years then ended, and our selected financial data as of January 29, 2011 (Successor) and for the periods from January 31, 2010 to November 22, 2010 (Predecessor) and November 23, 2010 to January 29, 2011 (Successor), presented in this table have been derived from our historical audited consolidated financial statements.

On November 23, 2010 (the “Transaction Date”), we completed a merger (the “Merger”) with Giraffe Acquisition Corporation (“Acquisition Sub”) in accordance with an Agreement and Plan of Merger (the “Merger Agreement”) with Giraffe Holding, Inc. (“Parent”) and Acquisition Sub, a wholly owned subsidiary of Parent, on November 23, 2010 (the “Transaction Date”), with the Merger funded through a combination of debt and equity financing (collectively, “the Transactions”). We are continuing as the surviving corporation and 100%-owned indirect subsidiary of Parent. Investment funds sponsored by Bain Capital Partners, LLC (“Bain Capital”) own a controlling interest in Parent. The following selected historical consolidated financial data are presented for the Predecessor and Successor periods, which relate to the periods preceding and succeeding the Transaction Date, respectively.

In deriving the unaudited pro forma fiscal 2010 financial statement data, operating results for the year ended January 29, 2011 were calculated as the mathematical addition of our operating results for the predecessor period from January 31, 2010 to November 22, 2010 and the successor period from November 23, 2010 to January 29, 2011, and include pro forma adjustments. As a result of the Merger on the Transaction Date and the application of purchase accounting, a new basis of accounting began on the Transaction Date. This addition of the predecessor and successor amounts is not consistent with GAAP and may yield results that are not strictly comparable on a period-to-period basis due to the changes of accounting basis during these periods. For further information on the adjustments made to calculate the pro forma fiscal 2010 results, please refer to the section titled “Unaudited Pro Forma Condensed Consolidated Financial Information” in the Company’s prospectus filed with the SEC pursuant to Rule 424(b)(3) of the Securities Act on June 14, 2011.

 

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The following information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto contained in this annual report.

    Successor           Successor          Predecessor  
    Fiscal Year Ended     Fiscal Year Ended     Pro Forma                      Fiscal Year Ended  
    February 2,
2013
    January 28,
2012
     Fiscal Year Ended 
January 29, 2011
     November 23, 2010 to 
January 29, 2011
          January 31, 2010 to 
November 22, 2010
        January 30,
2010
        January 31, 
2009
 
                                  (unaudited)                                                       

Statement of operations data (in thousands):

                               

Net sales:

                               

Retail

  $          1,234,993        $          1,164,171        $          1,054,018        $          244,287            $          814,863        $          1,001,527        $          987,859     

Gymboree Play & Music

      23,941            13,885            13,661            2,814                10,847            13,384            12,819     

Retail Franchise

      16,730            10,232            1,372            447                925            -                -         

Other

      -                -                248            -                    248            -                -         
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Total net sales

      1,275,664            1,188,288            1,069,299            247,548                826,883            1,014,911            1,000,678     

Cost of goods sold, including buying and occupancy expenses

      (794,272)           (728,346)           (570,326)           (184,483)               (431,675)           (535,005)           (524,477)    
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Gross profit

      481,392            459,942            498,973            63,065                395,208            479,906            476,201     

Selling, general and administrative expenses

      (411,742)           (380,141)           (345,453)           (78,843)               (307,361)           (316,268)           (327,893)    

Goodwill impairment

      -                (28,300)           -                -                    -                -                -         
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Operating income (loss)

      69,650            51,501            153,520            (15,778)               87,847            163,638            148,308     

Interest income

      177            168            -                36                295            728            1,690     

Interest expense

      (85,640)           (89,807)           (91,375)           (17,387)               (248)           (243)           (208)    

Loss on extinguishment of debt

      (214)           (19,563)           -                -                    -                -                -         

Other (expense) income, net

      (12)           (109)           172            53                119            610            (151)    
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

      (16,039)           (57,810)           62,317            (33,076)               88,013            164,733            149,639     

Income tax benefit (expense)

      5,636            6,626            (29,295)           10,032                (36,449)           (62,814)           (56,159)    
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net (loss) income

      (10,403)           (51,184)           33,022            (23,044)               51,564            101,919            93,480     

Net loss attributable to noncontrolling interest

      2,561            5,839            -                -                    -                -                -         
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to The Gymboree Corporation

  $                (7,842)       $              (45,345)       $                    33,022        $                      (23,044)           $                        51,564        $              101,919        $                93,480     
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
 

Cash flows (in thousands):

                               

Net cash provided by operating activities

  $          73,794        $          91,545        $          68,839        $          21,080            $          90,951         $          176,595         $          155,024     

Net cash (used in) provided by investing activities

      (48,693)           (38,212)           (1,876,860)           (1,833,408)               (43,452)           (39,579)           (56,114)    

Net cash (used in) provided by financing activities

      (69,926)           (7,723)           1,538,035            1,648,690                (110,655)           (21,535)           9,728     

Capital expenditures

      (47,851)           (36,565)           (47,268)           (5,054)               (42,214)           (39,579)           (56,114)    
 

Balance sheet data (in thousands):

                               

Cash and cash equivalents

  $          33,328        $          77,910        $          *        $          32,124            $          *         $          257,672         $          140,472     

Accounts receivable, net

      27,542            27,277            *            13,669                *            9,911            18,735     

Working capital

      129,856            169,879            *            113,936                *            287,348            180,040     

Property and equipment, net

      205,325            202,152            *            212,491                *            205,461            204,227     

Total assets

      2,043,213            2,113,787            *            2,088,125                *            636,130            520,581     

Total debt

      1,138,455            1,211,800            *            1,215,991                *            -                -         

Total equity

      441,637            448,639            *            485,811                *            438,753            334,275     
 

Operating data (a):

                               

Number of stores at end of period

      1,262            1,149            1,065            1,065                1,062            953            886     

Net sales per gross square foot at period-end (b)

  $          476        $          499        $          493        $          114            $          380         $          529         $          564     

Net sales per store (c)

  $          975,734        $          1,011,940        $          990,000        $          229,000            $          762,000         $          1,043,000         $          1,105,000     
 

Comparable store net sales (a) (d):

                               

Including comparable online sales

      -2%           4%           -2%           *                *            -4%           0%    

Excluding comparable online sales

      -4%           3%           -3%           *                *            -6%           -2%    
 

Other financial data (in thousands):

                               

Adjusted EBITDA (e)

  $          161,845        $          192,585        $          236,952        $          57,912            $          179,040         $          221,348         $          203,309     

 

 

 

  *

Information not available for this period.

 (a)

Operating data and comparable store net sales excludes retail stores operated by third-party overseas partners and the VIE-operated Gymboree retail stores in China.

 (b)

Equals net sales from the Company’s retail stores and online stores, divided by total square feet of store space as of each date presented.

 (c)

Equals net sales from the Company’s retail stores and online stores, divided by stores open as of each date presented.

 (d)

A comparable store is one that has been open for a full 14 months. Stores that are relocated or expanded by more than 15% of their original square footage become comparable 14 months after final relocation or the completion of the expansion project. Comparable store net sales were calculated on 53-week basis for fiscal 2012 and a 52-week basis for all other periods presented.

 (e)

Refer to the table in the section titled “Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)” set forth in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this annual report and the reconciliation information provided therein. Amounts related to noncontrolling interest are excluded.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere in this report. Except for historical information, the following discussion contains forward-looking statements within the meaning of the securities laws. Our actual results could differ materially from results that may be anticipated by such forward-looking statements. The principal factors that could cause or contribute to such differences include, but are not limited to, those discussed in “Item 1A.Risk Factors,” and those discussed elsewhere in this report. We do not intend to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise.

Overview

We are one of the largest children’s apparel specialty retailers in North America, offering collections of high-quality apparel and accessories. As of February 2, 2013, we operated a total of 1,262 retail stores and online stores at www.gymboree.com, www.janieandjack.com and www.crazy8.com. We also offer directed parent-child developmental play programs under the Gymboree Play & Music brand at 718 franchised and Company-operated centers in the United States and 42 other countries. In addition, as of February 2, 2013, third-party overseas partners operated 44 Gymboree retail stores in the Middle East and South Korea and 12 VIE-operated Gymboree retail stores in China.

The following table summarizes store openings and closures by brand and country for fiscal year ended February 2, 2013 (“fiscal 2012”). Note that (i) all Janie and Jack and Crazy 8 stores are in the United States, and (ii) retail stores operated by third-party overseas partners and the VIE-operated Gymboree retail stores in China are excluded.

 

        Store Count as of        Store      Store         Store Count as of    
     January 28, 2012          Openings            Closures        February 2, 2013  

Gymboree US

     587           5           (4)          588     

Gymboree Canada

     41           1           -               42     

Gymboree Australia

     3           3           -               6     

Gymboree Puerto Rico

     1           -              -               1     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gymboree

     632           9           (4)          637     

Gymboree Outlet

     151           8           (1)          158     

Gymboree Outlet

           

Puerto Rico

     2           -              -               2     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gymboree Outlet

     153           8           (1)          160     

Janie and Jack

     127           11           (5)          133     

Crazy 8

     237           99           (4)          332     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total  

     1,149           127           (14)          1,262     
  

 

 

    

 

 

    

 

 

    

 

 

 

In fiscal 2013, we plan to continue to execute on our vision to reach every mom in America and moms around the world with our multi-tiered portfolio of brands. As part of our strategy, we plan to open approximately 100 new stores in fiscal 2013, with the majority of them being Crazy 8 stores. We expect our international franchise partners to open about 20 to 30 franchise stores in fiscal 2013.

Our year-end is on the Saturday closest to January 31. Fiscal 2012, which included 53 weeks, ended on February 2, 2013. Fiscal 2011 and 2010, which included 52 weeks each, ended on January 28, 2012 and January 29, 2011, respectively. Management estimates that the 53rd week of fiscal 2012 did not contribute a material amount to income from continuing operations.

 

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Critical Accounting Policies

Critical accounting policies are those accounting policies and estimates that management believes are important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Management has discussed the development and selection of the critical accounting policies and estimates applicable to the Company as of the date of the completion of the audit for the fiscal year ended February 2, 2013 with the Company’s Audit Committee.

Goodwill

As of February 2, 2013, we had goodwill of $899 million related to the Merger (as defined under “Effect of the Merger” below). Goodwill is tested for impairment in the fourth quarter of each fiscal year, by performing a two-step goodwill impairment test. The first step of the two-step goodwill impairment test is to compare the fair value of the reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the two-step goodwill impairment test is required to measure the goodwill impairment loss. The second step includes valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount.

Based on the results of the first step of the Company’s impairment test performed during the fourth quarter of fiscal 2012, we determined that the fair value of the Janie and Jack, Crazy 8, Gymboree Play & Music and International Retail Franchise reporting units each exceeded their carrying values by more than 25%. However, the fair value of the Gymboree Retail and Gymboree Outlet reporting units exceeded their carrying values by less than 10% and 5%, respectively. Goodwill of $531.6 million and $148.6 million was allocated to the Gymboree Retail and Gymboree Outlet reporting units, respectively.

Calculating the fair value of a reporting unit and the implied fair value of reporting unit goodwill requires significant judgment. The use of different assumptions, estimates or judgments in either step of the goodwill impairment testing process, such as the estimated future cash flows of reporting units, the discount rate used to discount such cash flows, or the estimated fair value of the reporting units’ tangible and intangible assets and liabilities, could significantly increase or decrease the estimated fair value of a reporting unit or its net assets.

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets primarily represent trade names for each of our brands. The Company does not amortize intangible assets with indefinite useful lives; rather, such assets are tested annually for impairment in the fourth quarter of each fiscal year or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The trade name is considered impaired if the estimated fair value of the trade name is less than the carrying amount. If the trade name is considered impaired, we recognize a loss equal to the difference between the carrying amount and the estimated fair value of the trade name. Calculating the fair value of trade names requires significant judgment. The use of different assumptions, estimates or judgments, such as the estimated future cash flows or the discount rate used to discount such cash flows, could significantly increase or decrease the estimated fair value of our trade names.

Other Intangible Assets and Liabilities

Other intangible assets primarily represent contractual customer relationships and below market leases. Other intangible liabilities represent above market leases and are included in deferred liabilities. Other intangible assets and liabilities are amortized on a straight-line basis over their estimated useful lives.

We review other intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of these other intangible assets is assessed based on the estimated undiscounted future cash flows expected to result from the use of the asset. If the undiscounted future cash flows are less than the carrying amount, the purchased other intangible assets with finite lives are considered to be impaired. The amount of the impairment is measured as the difference between the carrying amount of these assets and their estimated fair value. The fair value of the asset is estimated based on discounted future cash flows using a discount rate commensurate with the risk. Our estimate of future cash flows requires assumptions and judgment, including forecasting future sales and expenses and estimating useful lives of the assets.

 

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Merchandise Inventories

Merchandise inventories are recorded at the lower of cost or market (“LCM”), determined on a weighted-average basis. We review our inventory levels to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and record an adjustment when the future estimated selling price is less than cost. We take a physical count of inventories in all stores once a year and in some stores twice a year, and perform cycle counts throughout the year in our distribution center. We record an inventory shrink adjustment based upon physical counts and also provide for estimated shrink adjustments for the period between the last physical inventory count and each balance sheet date. Our inventory shrink estimate can be affected by changes in merchandise mix and changes in actual shrink trends. Our LCM estimate can be affected by changes in consumer demand and the promotional environment.

Store Asset Impairment

Store assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flows from the asset group are less than the carrying value, a loss is recognized equal to the difference between the carrying value of the asset group and its fair value. The fair value of the asset group is estimated based on discounted future cash flows using a discount rate commensurate with the risk. The asset group is determined at the store level, which is the lowest level for which identifiable cash flows are available. Decisions to close a store or facility can also result in accelerated depreciation over the revised useful life. For locations to be closed that are under long-term leases, we record a charge for lease buyout expense or the difference between our rent and the rate at which we expect to be able to sublease the properties and related costs, as appropriate. Most closures occur upon the lease expiration. The estimate of future cash flows is based on historical experience and typically third-party advice or market data. These estimates can be affected by factors such as future store profitability, real estate demand and economic conditions that can be difficult to predict. Our recorded asset impairment charges have not been material.

Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We maintain valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is warranted, we take into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. We are subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions such as the timing and amount of deductions and allocation of taxable income to the various tax jurisdictions. Determining income tax expense for tax contingencies requires management to make assumptions that are subject to factors such as proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations, and resolution of tax audits. Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in future years.

Revenue Recognition

Revenue is recognized at the point of sale in retail stores. Online revenue is recorded when we estimate merchandise is delivered to the customer. Online customers generally receive merchandise within three to six days of shipment. Shipping fees received from customers are included in net sales and the associated shipping costs are included in cost of goods sold. We also sell gift cards in our retail store locations, through our online stores and through third parties. Revenue is recognized in the period that the gift card is redeemed. We recognize unredeemed gift card and merchandise credit balances when we can determine the portion of the liability for which redemption is remote (generally three years after issuance). From time to time, customers may earn Gymbucks or Rise and Shine coupons and redeem them for merchandise at a discount during the redemption period. A liability is recorded for coupons earned, but not redeemed, within an accounting period. Sales are presented net of sales return reserve, which is estimated based on historical return trends. Net retail sales also include revenue from our co-branded credit card. We present taxes collected from customers and remitted to governmental authorities on a net basis.

 

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Effect of the Merger

On November 23, 2010 (the “Transaction Date”), we completed a merger (the “Merger”) with Giraffe Acquisition Corporation (“Acquisition Sub”) in accordance with an Agreement and Plan of Merger (the “Merger Agreement”) with Giraffe Holding, Inc. (“Parent”), and Acquisition Sub, a wholly owned subsidiary of Parent, with the Merger funded through a combination of debt and equity financing (collectively, the “Transactions”). The application of purchase accounting as a result of the Merger required the adjustment of our assets and liabilities to their fair value, which resulted in an increase in amortization expense related to intangible assets acquired as a result of the Merger. Also, as a result of the Transactions, our borrowings and interest expense significantly increased. The excess of purchase price over the estimated fair value of our net assets and identified intangible assets was allocated to goodwill. Our indefinite-lived intangible assets and goodwill are subject to periodic tests for impairment. The subsection “Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)” below shows other purchase accounting adjustments that affected fiscal 2012, 2011 and 2010, as well as a reconciliation of such measures to net income (loss).

Results of Operations

Fiscal 2012 compared to Fiscal 2011

Net Sales

Net retail sales for fiscal 2012 increased to $1.23 billion from net retail sales of $1.16 billion in fiscal 2011, an increase of $70.8 million, or 6.1%. This increase was primarily due to net store and square footage growth of 113 stores and approximately 255,000 square feet and growth in online sales, partially offset by decreased comparable store sales. Comparable store sales (including online sales) decreased by 2% in fiscal 2012. Comparable store sales (excluding online sales) decreased by 4% in fiscal 2012.

Gymboree Play & Music sales for fiscal 2012 increased to $23.9 million from sales of $13.9 million in fiscal 2011, an increase of $10.0 million. The increase was primarily due to the termination of our agreement with the Gymboree Play & Music master franchisee in China in the third quarter of fiscal 2011. Upon this termination, we assumed the role of master franchisor, resulting in us recording all, instead of a portion, of the royalties from the unit franchisees.

Retail franchise sales for fiscal 2012 increased to $16.7 million from sales of $10.2 million in fiscal 2011, an increase of $6.5 million. This increase was the result of international franchise expansion, with 22 new Gymboree stores opened and 2 closed by third-party overseas partners in fiscal 2012. There were 44 franchised Gymboree stores in the Middle East and South Korea at the end of fiscal 2012, compared to 24 franchised Gymboree stores at the end of fiscal 2011.

Gross Profit

Gross profit for fiscal 2012 increased to $481.4 million from $459.9 million in fiscal 2011. As a percentage of net sales, gross profit decreased 1.0 percentage point to 37.7% from 38.7% last year. The decrease in gross profit as a percentage of net sales was primarily due to higher commodity prices (primarily cotton) and a higher level of markdown selling in fiscal 2012. As we record certain distribution channel costs as a component of selling, general and administrative expenses (“SG&A”) and do not include such costs in cost of goods sold, our cost of goods sold and gross profit may not be comparable to those of other companies. Our distribution channel costs recorded in SG&A expenses represent primarily outbound shipping and handling expenses to our stores.

Selling, General and Administrative Expenses

SG&A, which principally consists of non-occupancy store expenses, corporate overhead and distribution expenses, increased to $411.7 million in fiscal 2012 from SG&A of $380.1 million in fiscal 2011, an increase of $31.6 million, or 8.3%. As a percentage of net sales, SG&A increased 0.3 percentage points to 32.3% in fiscal 2012 from 32% in fiscal 2011 primarily due to a decrease of 2% in comparable store sales (including online sales).

Interest Expense

Interest expense decreased to $85.6 million in fiscal 2012 from $89.8 million in fiscal 2011. The decrease of $4.2 million is primarily related to the decrease in the amount of our outstanding indebtedness following the repayment of $42.7 million of our Term Loan and a repurchase of an aggregate principal amount of $29 million of our Notes during fiscal 2012.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was approximately $0.2 million for fiscal 2012 compared to $19.6 million in fiscal 2011. In March 2012, we amended and restated our ABL Facility to, among other things, lower the interest rate and extend the maturity date, which resulted in a $1.2 million charge related to the write-off of deferred financing costs. In addition, during the fourth quarter of fiscal 2012, we repurchased Notes with an aggregate principal amount of $29.0 million for $26.6 million in cash, which resulted in a $2.4 million gain on extinguishment of debt and a $1.4 million charge related to the write-off of deferred financing costs.

The loss on extinguishment of debt recorded in fiscal 2011 was due to the refinancing of our Term Loan in February 2011.

 

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Income Taxes

Income tax benefit for fiscal 2012 and fiscal 2011 resulted in effective tax rates of approximately 35.1% and 11.5%, respectively. The fiscal 2011 rate is comparatively low as a percentage of pre-tax loss due primarily to the non-deductible goodwill impairment charge and non-deductible costs associated with the VIEs.

Fiscal 2011 compared to Pro Forma Fiscal 2010

In presenting a comparison of our results of operations for fiscal 2011 to our results of operations for the fiscal year ended January 29, 2011, we have presented unaudited pro forma results for the fiscal year ended January 29, 2011 (“fiscal 2010”). This presentation does not comply with generally accepted accounting principles (GAAP).

Net Sales

Net retail sales for fiscal 2011 increased to $1.2 billion from pro forma net retail sales of $1.1 billion in fiscal 2010, an increase of $110.2 million, or 10.5%. This increase was primarily due to net store and square footage growth of 84 stores and approximately 194,000 square feet. Comparable store sales (including online sales) increased by 4% in fiscal 2011. Comparable store sales (excluding online sales) increased by 3% in fiscal 2011.

Retail franchise sales for fiscal 2011 increased to $10.2 million from pro forma sales of $1.4 million in fiscal 2010, an increase of $8.8 million. This increase was the result of international expansion, with 22 new Gymboree stores opened by third-party overseas partners in fiscal 2011. There were 24 franchised Gymboree stores in the Middle East and South Korea at the end of fiscal 2011, compared to 2 franchised Gymboree stores in the Middle East at the end of fiscal 2010.

Gross Profit

Gross profit for fiscal 2011 decreased to $459.9 million from pro forma gross profit of $499.0 million in fiscal 2010. As a percentage of net sales, gross profit decreased 8.0 percentage points to 38.7% from pro forma gross profit of 46.7% last year. The decrease in gross profit as a percentage of net sales was primarily due to higher average unit costs in fiscal 2011 resulting from higher commodity prices (primarily cotton) and a higher level of markdown selling. As we record certain distribution channel costs as a component of SG&A expenses and do not include such costs in cost of goods sold, our cost of goods sold and gross profit may not be comparable to those of other companies. Our distribution channel costs recorded in SG&A expenses represent primarily outbound shipping and handling expenses to our stores.

Selling, General and Administrative Expenses

SG&A expenses, which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, increased to $380.1 million in fiscal 2011 from pro forma SG&A of $345.5 million in fiscal 2010, an increase of $34.6 million, or 10.0%. As a percentage of net sales, SG&A decreased 0.3 percentage points to 32% in fiscal 2011 from pro forma SG&A 32.3% in fiscal 2010. The SG&A decrease as a percentage of net sales for fiscal 2011 was primarily due to lower stock-based and incentive compensation costs partially offset by a one-time charge related to the termination of our master franchise relationship in China (see Note 18 to the consolidated financial statements included elsewhere in this annual report) and increased costs related to the operations of the VIE (see Note 21 to the consolidated financial statements included elsewhere in this annual report).

Goodwill Impairment

In the fourth quarter of 2011, due to higher average unit costs resulting from higher commodity prices (primarily cotton) and a higher level of markdown selling, we concluded that there was impairment related to goodwill allocated to Gymboree Outlet, one of our reporting units, and we recorded an impairment charge for goodwill of $28.3 million.

Interest Expense

Interest expense decreased to $89.8 million in fiscal 2011 from pro forma interest expense of $91.4 million in fiscal 2010 due to a fiscal 2011 refinance of our Term Loan (in February 2011), which, among other things, lowered the interest rate.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was approximately $19.6 million for fiscal 2011 and was due to the refinancing of our Term Loan. In February 2011, we refinanced our Term Loan through an amendment and restatement of our existing credit agreement to lower the interest rate, remove certain financial covenants and extend the maturity date from November 2017 to February 2018.

 

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Income Taxes

Income tax benefit for fiscal 2011 and pro forma income tax expense for fiscal 2010 resulted in effective tax rates of approximately 11.5% and 47.0%, respectively. The fiscal 2011 rate is comparatively low as a percentage of pre-tax loss due primarily to the non-deductible goodwill impairment charge and non-deductible costs associated with the VIEs. The fiscal 2010 rate is comparatively high as a percentage of pro forma pre-tax income due primarily to one-time non-deductible costs associated with the Merger.

Liquidity and Capital Resources

Cash and cash equivalents totaled $33.3 million as of February 2, 2013, $6.1 million of which was held by the VIEs of which we are the primary beneficiary, and the results of which we have consolidated into our financial statements (see Note 21 to the consolidated financial statements included elsewhere in this annual report) and $77.9 million as of January 29, 2011, $4.9 million of which was held by the VIEs. The assets of the VIEs cannot be used by us. Working capital as of February 2, 2013 totaled $129.9 million as compared to $169.9 million as of January 29, 2011.

Cash flows provided by operating activities

Net cash provided by operating activities for fiscal 2012 was $73.8 million compared to $91.5 million for fiscal 2011. The decrease in cash provided by operating activities was primarily due to changes in operating income and working capital.

Net cash provided by operating activities for fiscal 2011 was $91.5 million compared to $21.1 million for the period from November 23, 2010 to January 29, 2011 and $91.0 million for the period from January 31, 2010 to November 22, 2010. The decrease in cash provided by operating activities in fiscal 2011 was primarily due to interest payments on our Senior Credit Facilities entered into, and Notes issued, in connection with the Merger as well as increased average unit costs for inventory. The Senior Credit Facilities are comprised of an $820 million senior secured Term Loan and a $225 million ABL Facility.

Cash flows used in investing activities

Net cash used in investing activities was $48.7 million in fiscal 2012 compared to $38.2 million in fiscal 2011. Capital expenditures increased from $36.6 million during fiscal 2011 to $47.9 million during fiscal 2012 related primarily to the opening of new stores, relocation, remodeling and/or expansion of existing stores, information technology improvements, and investments in our distribution center (see the table below for further information on store openings in fiscal 2012).

Net cash used in investing activities was $38.2 million in fiscal 2011 compared to $1.8 billion during the period from November 23, 2010 to January 29, 2011 and $43.5 million during the period from January 31, 2010 to November 22, 2010. Net cash used in investing activities during the period from November 23, 2010 to January 29, 2011 primarily related to acquisition costs related to the Merger.

We estimate capital expenditures for fiscal 2013 will approximate $50 million, excluding non-cash capital leases. The capital expenditures will be used to open approximately 100 new stores, with the majority of them being Crazy 8 stores, and to remodel existing stores, as well as to continue investment in our distribution center and systems infrastructure. Our current plans for Gymboree, Gymboree Outlet, Janie and Jack, and Crazy 8 will require increasing capital expenditures for new stores for the next several years.

Cash flows used in financing activities

Net cash used in financing activities in fiscal 2012 was $69.9 million compared to $7.7 million in fiscal 2011. The net cash used in fiscal 2012 was primarily due to a $42.7 million payment on our Term Loan, a repurchase of our Notes with $26.6 million in cash and a $3.3 million cash dividend on our common stock paid to Parent, which was used by Parent to repurchase shares of its stock. Partially offsetting the decrease in net cash used in financing activities is a capital contribution of $2.4 million (see Note 17 to the consolidated financial statements included elsewhere in this annual report under the subheading “Receivable from Bain Capital Asia Integral Investors, L.P.”) made by an affiliate of Parent to us and a capital contribution of $1.6 million to the VIEs made by their immediate corporate parent.

 

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Net cash used in financing activities in fiscal 2011 was $7.7 million compared to net cash provided by financing activities of $1.6 billion during the period from November 23, 2010 to January 29, 2011, compared to net cash used in financing activities of $110.7 million during the period from January 31, 2010 and November 22, 2010. The net cash used in fiscal 2011 was primarily due to a $12.2 million cash dividend on our common stock paid to Parent, which was used by the shareholders of Parent to fund their equity investment in the VIE (see Note 21 to the consolidated financial statements included elsewhere in this annual report), $8.2 million in quarterly principal payments on our Term Loan and $6.7 million in deferred financing costs paid in connection with the February 2011 refinancing of our Term Loan, partially offset by capital contributions made by Parent to us of $14.9 million and to the VIEs by their immediate corporate parent of $4.5 million. Net cash provided by financing activities during the period from November 23, 2010 to January 29, 2011 was primarily due to $1.2 billion in proceeds from the Term Loan and Notes to fund the Transaction and $508 million in proceeds on issuance of common stock, partially offset by $63.3 million of deferred financing costs related to the Term Loan and Notes, and $12.1 million related to the purchase of interest rate cap contracts. Net cash used in financing activities during the period from January 31, 2010 and November 22, 2010 was primarily due to $124.6 million of repurchases of common stock, partially offset by excess tax benefits from exercise and vesting of share-based awards of $12.6 million and proceeds from issuance of common stock of $1.4 million.

We have an $820 million Term Loan and a $225 million ABL Facility. As of February 2, 2013, $769.1 million was outstanding under the Term Loan. Amounts available under the ABL are subject to customary borrowing base limitations and are reduced by letter of credit utilization. No amounts were outstanding and there was approximately $167.2 million of undrawn availability under the ABL as of February 2, 2013. The Term Loan and ABL also allow an aggregate of $200 million in uncommitted incremental facilities, the availability of which is subject to our meeting certain conditions. No incremental facilities are currently in effect. The Term Loan and ABL contain covenants that, among other things, restrict our ability to incur additional indebtedness and pay dividends. The ABL also contains financial covenants. As of February 2, 2013, we were in compliance with these covenants. In March 2012, we amended and restated the terms of our ABL Facility to, among other things, lower the interest rate and extend the maturity date from November 2015 to March 2017.

The Term Loan requires us to make quarterly payments each equal to 0.25% of the original $820 million principal amount of the Term Loan made on the closing date plus accrued and unpaid interest thereon, with the balance due in February 2018. The Term Loan also has mandatory and voluntary pre-payment provisions, including a requirement that we prepay the Term Loan with a certain percentage of our annual excess cash flow.

We calculated our excess cash flow using fiscal 2012 operating results and concluded that we are not required to make any excess cash flow payments on the Term Loan during fiscal 2013. During fiscal 2012, we made one quarterly amortization payment of $2.1 million, prepaid $15.6 million of our Term Loan with our excess cash flow, and made a voluntary prepayment of $25.0 million. The excess cash flow payment made during fiscal 2012 was calculated based on fiscal 2011 operating results. We applied the voluntary prepayment and the excess cash flow prepayment toward our remaining quarterly amortization payments payable under the Term Loan in fiscal 2012 and plan to apply the remainder of such prepayments toward our quarterly amortization payments payable under the Term Loan in fiscal 2013 through fiscal 2017.

Subject to certain limitations imposed on business combinations under the agreements governing our indebtedness, the Company’s capital resources allow us to consider business acquisitions as an alternative means of growth. We review acquisition opportunities from time to time and, while we do not have significant experience in acquiring an existing business, we would consider doing so in the future with respect to an appropriate opportunity.

We believe that cash generated by operations, the remaining funds available under our Senior Credit Facilities and existing cash and cash equivalents will be sufficient to meet working capital requirements, service our debt and finance capital expenditures over the next twelve months. We cannot assure you, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the Senior Credit Facilities in amounts sufficient to enable us to repay our indebtedness, including the Notes, or to fund other liquidity needs. See “Item 1A. Risk Factors—Risks Related to Our Indebtedness and Certain Other Obligations”.

Summary Disclosures about Contractual Obligations and Commercial Commitments

The following table reflects a summary of our contractual obligations as of February 2, 2013:

 

   

Payments due by period

 
($ in thousands)  

     Less than     
1 year

        1-3 years         3-5 years         After 5 years                   Total            

 

 

Operating leases (1)

    $ 91,728          $ 169,772          $ 140,704          $ 145,032          $ 547,236     

Inventory purchase obligations (2)

      193,366            -            -            -            193,366     

Other purchase obligations (3)

      18,484            6,988            1,320            -            26,792     

Long-term debt (4)

      -            -            6,502            1,133,600            1,140,102     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Total contractual cash obligations

    $         303,578          $       176,760          $         148,526          $         1,278,632          $ 1,907,496     
   

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

 

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(1)

Other lease-required expenses such as utilities, real estate taxes and common area repairs and maintenance are excluded. See Note 19 to the consolidated financial statements included elsewhere in this annual report for discussion of the Company’s operating leases.

 

(2)

Inventory purchase obligations include outstanding purchase orders for merchandise inventories that are enforceable and legally binding on the Company and that specify all significant terms (including fixed or minimum quantities to be purchased), fixed, minimum or variable price provisions, and the approximate timing of the transaction.

 

(3)

Other purchase obligations include commitments for fixtures and equipment, information technology and professional services.

 

(4)

Long-term debt is comprised of a $769.1 million Term Loan, an undrawn $225 million ABL Facility and an aggregate principal amount of $371 million of our Notes. The amounts presented in the table above exclude interest and original issuance discount of $1.6 million (see Note 9 to the consolidated financial statements included elsewhere in this annual report). The table above also excludes $30.5 million of commercial and standby letters of credit related to normal business transactions (see Note 8 to the consolidated financial statements included elsewhere in this annual report).

As of February 2, 2013, we had unrecognized tax benefits of $6.1 million, accrued interest of $1.1 million, and accrued penalties of $0.7 million. These amounts have been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined.

The expected timing of payment of the obligations discussed above is estimated based on current information. The timing of payments and actual amounts paid may differ depending on the timing of receipt of services, or, for some obligations, changes to agreed-upon amounts.

Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Non-GAAP Measure)

In the table below, we present Adjusted EBITDA (which is defined as net income (loss) attributable to The Gymboree Corporation before interest expense, interest income, income tax expense/benefit, and depreciation and amortization (EBITDA) adjusted for the other items described below), which is considered a non-GAAP financial measure. We present Adjusted EBITDA in this annual report because we consider it an important supplemental measure of performance used by management and we believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the retail industry. Adjusted EBITDA is calculated in substantially the same manner as “EBITDA” under the indenture governing the Notes and “Consolidated EBITDA” under the agreement governing our Senior Credit Facilities. We believe that the inclusion of supplementary adjustments applied to EBITDA in presenting Adjusted EBITDA is appropriate to provide additional information to investors about certain non-cash items and unusual or non-recurring items that we do not expect to continue in the future and to provide additional information with respect to our ability to meet our future debt service and to comply with various covenants in documents governing our indebtedness. However, Adjusted EBITDA is not a presentation made in accordance with GAAP, and our computation of Adjusted EBITDA may vary from others in the retail industry. Adjusted EBITDA should not be considered an alternative to operating income or net income (loss), as a measure of operating performance or cash flow, or as a measure of liquidity. Adjusted EBITDA has important limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, Adjusted EBITDA:

 

   

does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

   

does not reflect changes in, or cash requirements for, our working capital needs;

   

does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

   

excludes income tax payments that represent a reduction in cash available to us; and

   

does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of ongoing operations.

 

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The following table provides a reconciliation of net (loss) income attributable to The Gymboree Corporation to Adjusted EBITDA for the periods indicated (in thousands):

 

    Successor          Predecessor  
  53 Weeks  Ended
  February 2, 2013  
    52 Weeks  Ended
  January 28, 2012  
     November 23, 2010 to 
January 29, 2011
           January 31, 2010 to  
November 22, 2010  
    52 Weeks Ended  
                 January 30, 2010           January 31, 2009      
 

Net (loss) income attributable to The Gymboree Corporation

    $ (7,842)         $ (45,345)         $ (23,044)             $ 51,564          $ 101,919          $ 93,480     

Reconciling items (a):

               

Interest expense

    85,640          89,807          17,387              248          243          208     

Interest income

    (134)         (168)         (36)             (295)         (728)         (1,690)    

Income tax (benefit) expense

    (6,502)         (6,626)         (10,032)             36,449          62,814          56,159     

Depreciation and amortization (b)

    58,369          57,930          10,250              32,550          37,302          34,854     

Non-cash share-based compensation expense

    4,260          5,907          482              41,042          18,462          19,850     

Executive-related hiring expenses (c)

    1,884          -              -                  -              -              -         

Loss on disposal/impairment on assets

    2,981          4,339          1,150              880          1,336          448     

Loss on extinguishment of debt

    214          19,563          -                  -              -              -         

Gymboree Play & Music franchise transition

    -              7,200          -                  -              -              -         

Other (e)

    5,336          -              -                  -              -              -         

Goodwill impairment

    -              28,300          -                  -              -              -         

Acquisition-related adjustments (d)

    17,639          31,678          61,755              16,602          -              -         
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    $ 161,845          $ 192,585          $ 57,912              $ 179,040          $ 221,348          $ 203,309     
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
 

(a) Exclude amounts related to noncontrolling interest, which are already excluded from net (loss) income attributable to The Gymboree Corporation.

   

         
 

(b) Includes the following purchase accounting adjustments (in thousands):

               

Amortization of intangible assets (impacts SG&A)

    $ 17,360          $ 17,500          $ 3,011              $ -              $ -              $ -         

Amortization of below and above market leases (impacts COGS)

    (1,868)         (2,090)         (387)             -              -              -         
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
    $ 15,492          $ 15,410          $ 2,624              $ -           $ -           $ -       
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
 

(c) Include amounts related to the hiring of our CEO and CFO, including search-firm costs and sign-on bonuses.

    

             
 

(d) Includes the following adjustments (in thousands):

               

Adjustment to cost of goods sold from an increase in the net book value of inventory as a result of purchase accounting (impacts COGS)

    $ -              $ 10,731          $ 45,508              $ -              $ -              $ -         

Additional rent expense recognized due to the elimination of deferred rent and construction allowances in purchase accounting (impacts COGS)

    9,211          9,699          1,628              -              -              -         

Sponsor fees, legal and accounting, as well as other costs incurred as a result of the Acquisition or refinancing (impacts SG&A)

    4,069          5,607          13,624              16,602          -              -         

Decrease in net sales due to the elimination of deferred revenue related to the Company’s co-branded credit card program in purchase accounting (impacts net sales)

    4,359          5,641          995              -              -              -         
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 
    $ 17,639          $ 31,678          $ 61,755              $ 16,602          $ -           $ -      
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

(e) Other is comprised of a non-recurring charge in reserves and a non-recurring charge resulting from a termination of our shade retail concept.

 

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

The table below summarizes the notional amounts and fair values of our forward foreign exchange contracts in United States dollars (in thousands except weighted-average rate data):

 

         Notional    
Amount
     Fair Value
  Gain (Loss)  
       Weighted-
Average
Rate
 

February 2, 2013

     $ 7,419            $           (18)          $ 1.00   

January 28, 2012

     $       14,154            $ (13)          $       0.99   

Interest Rate Risk

We are subject to interest rate risk in connection with our long-term debt. Our principal interest rate risk relates to the Term Loan outstanding under the Senior Credit Facilities. As of February 2, 2013, we had $769.1 million outstanding under our Senior Credit Facilities, bearing interest at variable rates. The interest rate for borrowings under the Term Loan is, at our option, a base rate plus an additional marginal rate of 2.5% or the Adjusted LIBOR rate (with a 1.5% floor) plus an additional rate of 3.5%. As of February 2, 2013, the interest rate under our Term Loan was 5.0%. A 0.125% increase in the Adjusted LIBOR rate, above the 1.5% floor, would have increased annual interest expense by approximately $1.0 million, assuming $769.1 million of indebtedness thereunder was outstanding for the whole year. The Senior Credit Facilities also allow an aggregate of $200 million in uncommitted incremental facilities, bearing interest at variable rates. No incremental facilities are currently in effect.

In December 2010, we purchased four interest rate caps to hedge against rising interest rates associated with our senior secured term loan above the 5% strike rate of the caps through December 23, 2016, the maturity date of the caps. The notional amount of these caps is $700 million.

As of February 2, 2013, accumulated other comprehensive income included approximately $10.7 million in unrealized losses related to the interest rate caps and forward foreign exchange contracts.

Impact of Inflation

Except for the impact of higher commodity prices (primarily cotton) as described under “Results of Operations” above, the impact of inflation on results of operations has not been significant in any of the last three fiscal years.

 

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     PAGE
Report of Independent Registered Public Accounting Firm    27
Consolidated Balance Sheets as of February 2, 2013 (Successor) and January 28, 2012 (Successor)    28
Consolidated Statements of Operations for the years ended February 2, 2013 (Successor) and January  28, 2012 (Successor), and for the periods from November 23, 2010 to January 29, 2011 (Successor), and from January 31, 2010 to November 22, 2010 (Predecessor)    29
Consolidated Statements of Comprehensive Income (Loss) for the years ended February 2, 2013 (Successor) and January  28, 2012 (Successor), and for the periods from November 23, 2010 to January 29, 2011 (Successor), and from January 31, 2010 to November 22, 2010 (Predecessor)    30
Consolidated Statements of Cash Flows for the years ended February 2, 2013 (Successor) and January  28, 2012 (Successor), and for the periods from November 23, 2010 to January 29, 2011 (Successor), and from January 31, 2010 to November 22, 2010 (Predecessor)    31
Consolidated Statements of Stockholders’ Equity for the years ended February 2, 2013 (Successor) and January  28, 2012 (Successor), and for the periods from November 23, 2010 to January 29, 2011 (Successor), and from January 31, 2010 to November 22, 2010 (Predecessor)    32
Notes to Consolidated Financial Statements    33

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

The Gymboree Corporation:

We have audited the accompanying consolidated balance sheets of The Gymboree Corporation and subsidiaries (the “Company”) as of February 2, 2013 (Successor) and January 28, 2012 (Successor), and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the fiscal year ended February 2, 2013 (Successor), the fiscal year ended January 28, 2012 (Successor), the period from November 23, 2010 to January 29, 2011 (Successor), and the period from January 31, 2010 to November 22, 2010 (Predecessor). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of The Gymboree Corporation and subsidiaries as of February 2, 2013 (Successor) and January 28, 2012 (Successor), and the results of their operations and their cash flows for the fiscal year ended February 2, 2013 (Successor), the fiscal year ended January 28, 2012 (Successor), the period from November 23, 2010 to January 29, 2011 (Successor), and the period from January 31, 2010 to November 22, 2010 (Predecessor), in conformity with accounting principles generally accepted in the United States of America.

 

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

May 2, 2013

 

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THE GYMBOREE CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

     Successor  
           February 2,      
2013
           January 28,      
2012
 
     

ASSETS

     

Current assets:

     

Cash and cash equivalents

    $ 33,328          $ 77,910     

Accounts receivable, net of allowance of $216 and $114

     27,542           27,277     

Merchandise inventories

     197,935           210,212     

Prepaid income taxes

     2,903           3,736     

Prepaid expenses

     17,341           5,532     

Deferred income taxes

     31,383           36,115     
  

 

 

    

 

 

 

Total current assets

     310,432           360,782     
  

 

 

    

 

 

 

Property and equipment:

     

Land and buildings

     22,428           22,428     

Leasehold improvements

     174,616           146,497     

Furniture, fixtures and equipment

     99,120           82,606     
  

 

 

    

 

 

 
     296,164           251,531     

Less accumulated depreciation and amortization

     (90,839)          (49,379)    
  

 

 

    

 

 

 

Net property and equipment

     205,325           202,152     

Goodwill

     898,966           899,097     

Other intangible assets

     580,641           599,195     

Deferred financing costs

     40,040           47,915     

Other assets

     7,809           4,646     
  

 

 

    

 

 

 

Total assets

    $ 2,043,213          $ 2,113,787     
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Accounts payable

     $ 90,133          $ 79,027     

Accrued liabilities

     90,443           94,178     

Current portion of long-term debt

     -               17,698     
  

 

 

    

 

 

 

Total current liabilities

     180,576           190,903     

Long-term liabilities:

     

Long-term debt

     1,138,455           1,192,171     

Lease incentives and other deferred liabilities

     40,104           28,681     

Unrecognized tax benefits

     7,848           7,898     

Deferred income taxes

     234,593           245,495     
  

 

 

    

 

 

 

Total liabilities

     1,601,576           1,665,148     
  

 

 

    

 

 

 

Commitments and contingencies (see Notes 8, 9 and 19)

     

Stockholders’ equity:

     

Common stock, including additional paid-in capital ($.001 par value: 1,000 shares authorized, issued and outstanding)

     519,687           519,589     

Accumulated deficit

     (76,231)          (68,389)    

Accumulated other comprehensive loss

     (5,914)          (5,825)    
  

 

 

    

 

 

 

Total stockholders’ equity

     437,542           445,375     

Noncontrolling interest

     4,095           3,264     
  

 

 

    

 

 

 

Total equity

     441,637           448,639     
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

    $ 2,043,213          $ 2,113,787     
  

 

 

    

 

 

 

See notes to consolidated financial statements.

 

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THE GYMBOREE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

 

    Successor              Predecessor  
          Year Ended      
February  2,

2013
    Year Ended
      January 28,      

2012
          November 23, 2010 to 
January 29, 2011
              January 31, 2010 to 
November 22, 2010
 

Net sales:

             

Retail

   $ 1,234,993         $ 1,164,171         $ 244,287               $ 814,863     

Gymboree Play & Music

    23,941          13,885          2,814                10,847     

Retail Franchise

    16,730          10,232          447                925     

Other

    -              -              -                    248     
 

 

 

   

 

 

   

 

 

         

 

 

 

Total net sales

    1,275,664          1,188,288          247,548                826,883     

Cost of goods sold, including buying and occupancy expenses

    (794,272)         (728,346)         (184,483)               (431,675)    
 

 

 

   

 

 

   

 

 

         

 

 

 

Gross profit

    481,392          459,942          63,065                395,208     

Selling, general and administrative expenses

    (411,742)         (380,141)         (78,843)               (307,361)    

Goodwill impairment

    -              (28,300)         -                    -         
 

 

 

   

 

 

   

 

 

         

 

 

 

Operating income (loss)

    69,650          51,501          (15,778)               87,847     

Interest income

    177          168          36                295     

Interest expense

    (85,640)         (89,807)         (17,387)               (248)    

Loss on extinguishment of debt

    (214)         (19,563)         -                    -         

Other (expense) income, net

    (12)         (109)         53                119     
 

 

 

   

 

 

   

 

 

         

 

 

 

(Loss) income before income taxes

    (16,039)         (57,810)         (33,076)               88,013     

Income tax benefit (expense)

    5,636          6,626          10,032                (36,449)    
 

 

 

         

 

 

 

Net (loss) income

    (10,403)         (51,184)         (23,044)               51,564     

Net loss attributable to noncontrolling interest

    2,561          5,839          -                    -         
 

 

 

   

 

 

   

 

 

         

 

 

 

Net (loss) income attributable to The Gymboree Corporation

   $                   (7,842)        $                 (45,345)        $                 (23,044)              $                 51,564     
 

 

 

   

 

 

   

 

 

         

 

 

 

See notes to consolidated financial statements.

 

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THE GYMBOREE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

     Successor                 Predecessor  
     Year Ended
        February 2,         
2013
     Year Ended
        January 28,         
2012
      November 23, 2010 to 
January 29, 2011
                     January 31, 2010 to     
November 22, 2010
 
 

Net (loss) income

     $ (10,403)          $ (51,184)          $ (23,044)                  $ 51,564     
  

 

 

    

 

 

    

 

 

            

 

 

 

Other comprehensive income, net of tax:

                   

Foreign currency translation adjustments

     112           308           446                   (897)    

Unrealized net gain (loss) on cash flow hedges, net of tax of $67, $3,915, $- and $(83)

     (143)          (6,371)          (208)                  (297)    
  

 

 

    

 

 

    

 

 

            

 

 

 

Total other comprehensive (loss) income, net of tax

     (31)          (6,063)          238                   (1,194)    
  

 

 

    

 

 

    

 

 

            

 

 

 

Comprehensive (loss) income

     (10,434)          (57,247)          (22,806)                  50,370     

Comprehensive loss attributable to noncontrolling interest

     2,503           5,839           -                       -         
  

 

 

    

 

 

    

 

 

            

 

 

 

Comprehensive (loss) income attributable to The Gymboree Corporation

     $ (7,931)          $ (51,408)          $ (22,806)                  $ 50,370     
  

 

 

    

 

 

    

 

 

            

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

THE GYMBOREE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

    Successor              Predecessor
        Year Ended    
February 2,
2013
    Year Ended
  January  28,  
2012
          November 23, 2010 to      
January 29, 2011
             January 31, 2010 to
 November 22, 2010 

CASH FLOWS FROM OPERATING ACTIVITIES:

                       

Net (loss) income

  $          (10,403)       $          (51,184)       $          (23,044)             $          51,564       

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

                       

Loss on extinguishment of debt

      214            15,860            -                      -           

Goodwill impairment

      -                28,300            -                      -           

Depreciation and amortization

      58,847            57,930            10,250                  32,550       

Amortization of deferred financing costs and accretion of original issue discount

      6,902            6,830            1,357                  -           

Interest rate cap contracts - adjustment to market

      300            51            -                      -           

(Benefit) provision for deferred income taxes

      (7,009)           (8,946)           (11,246)                 4,128       

Share-based compensation expense

      4,260            5,907            482                  41,042       

Loss on disposal/impairment of assets

      3,152            4,339            1,150                  880       

Other non-cash expense

      1,732            4,608            -                      -           

Excess tax benefits from exercise and vesting of share-based awards

      -                -                -                      (12,584)      

Tax benefit from exercise of stock options and vesting of restricted stock awards and units

      -                -                -                      12,254       

Change in assets and liabilities:

                       

Accounts receivable

      (2,630)           (11,209)           7,035                  (10,791)      

Merchandise inventories

      12,060            (25,646)           48,607                  (55,512)      

Prepaid income taxes

      (47)           12,385            (345)                 (27,312)      

Prepaid expenses and other assets

      (13,820)           (743)           1,295                  (1,346)      

Accounts payable

      11,094            24,533            (11,782)                 19,749       

Accrued liabilities

      (5,481)           14,515            (4,820)                 32,959       

Lease incentives and other deferred liabilities

      14,623            14,015            2,141                  3,370       
 

 

 

   

 

 

   

 

 

         

 

 

   

Net cash provided by operating activities

      73,794            91,545            21,080                  90,951       
 

 

 

   

 

 

   

 

 

         

 

 

   

CASH FLOWS FROM INVESTING ACTIVITIES:

                       

Capital expenditures

      (47,851)           (36,565)           (5,054)                 (42,214)      

Acquisition of business, net of cash acquired

      -                (1,352)           (1,828,308)                 -           

Other

      (842)           (295)           (46)                 (1,238)      
 

 

 

   

 

 

   

 

 

         

 

 

   

Net cash used in investing activities

      (48,693)           (38,212)           (1,833,408)                 (43,452)      
 

 

 

   

 

 

   

 

 

         

 

 

   

CASH FLOWS FROM FINANCING ACTIVITIES:

                       

Proceeds from Term Loan

      -                820,000            815,900                  -           

Payments on Term Loan

      (42,698)           (828,200)           -                      -           

Proceeds from Notes

      -                -                400,000                  -           

Repurchase of Notes

      (26,613)           -                -                      -           

Proceeds from ABL facility

      14,000            60,656            30,000                  -           

Payments on ABL facility

      (14,000)           (60,656)           (30,000)                 -           

Deferred financing costs

      (1,344)           (6,665)           (63,266)                 -           

Investment by Parent

      -                14,865            -                      -           

Investment by affiliate of Parent

      2,400            -                -                      -           

Dividend payment to Parent

      (3,273)           (12,200)           -                      -           

Purchase of interest rate cap contracts

      -                -                (12,079)                 -           

Proceeds from issuance of common stock

      -                -                508,135                  1,371       

Excess tax benefits from exercise and vesting of share-based awards

      -                -                -                      12,584       

Repurchases of common stock

      -                -                -                      (124,610)      

Capital contribution to noncontrolling interest

      1,602            4,477            -                      -           
 

 

 

   

 

 

   

 

 

         

 

 

   

Net cash (used in) provided by financing activities

      (69,926)           (7,723)           1,648,690                  (110,655)      
 

 

 

   

 

 

   

 

 

         

 

 

   

Effect of exchange rate fluctuations on cash

      243            176            852                  394       
 

 

 

   

 

 

   

 

 

         

 

 

   

Net increase (decrease) in cash and cash equivalents

      (44,582)           45,786            (162,786)                 (62,762)      

CASH AND CASH EQUIVALENTS:

                       

Beginning of Period

      77,910            32,124            194,910                  257,672       
 

 

 

   

 

 

   

 

 

         

 

 

   

End of Period

  $                  33,328        $                      77,910        $                          32,124              $                      194,910       
 

 

 

   

 

 

   

 

 

         

 

 

   
 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

                       

Capital expenditures incurred, but not yet paid

  $          5,556        $          3,438        $          3,737              $          5,817       

Non-cash capital contribution to noncontrolling interest

  $          1,732        $          4,626        $          -                  $          -           

Capital contribution receivable from affiliate of Parent, but not yet paid

  $          -            $          2,400        $          -                  $          -           

Acquisition costs incurred, but not yet paid

  $          -            $          -            $          1,352              $          -           

Deferred financing costs incurred, but not yet paid

  $          -            $          -            $          -                  $          1,306       

OTHER CASH FLOW INFORMATION:

                       

Cash paid (refunds received) during the year for income taxes, net

  $          3,140        $          (10,785)       $          966              $          46,888       

Cash paid during the year for interest

  $          78,899        $          82,021        $          3,818              $          77       

See notes to consolidated financial statements.

 

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Table of Contents

THE GYMBOREE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(dollars in thousands)

 

           Additional                 

Accumulated

Other

    Total                          
    Common Stock     Paid In     Retained     Comprehensive          Stockholders’           Noncontrolling                
        Shares           Amount       Capital       Earnings (Deficit)           Income / (Loss)      Equity     Interest      Total Equity   

PREDECESSOR:

                             

BALANCE AT JANUARY 30, 2010

    29,369,126        $          29        $          198,850        $          239,531        $          343        $          438,753        $          -            $          438,753     

Issuance of common stock under equity incentive plan

    619,280            1            1,371            -                -                1,372            -                1,372     

Share-based compensation

    -                -                41,042            -                -                41,042            -                41,042     

Stock repurchases

    (2,613,375)           (3)           (17,512)           (96,132)           -                (113,647)           -                (113,647)    

Tax benefit from exercise of stock options and vesting of restricted stock awards and units

    -                -                12,254            -                -                12,254            -                12,254     

Translation adjustments and unrealized net loss on cash flow hedges, net of tax of $(83)

    -                -                -                -                (1,194)           (1,194)           -                (1,194)    

Net income

    -                -                -                51,564            -                51,564            -                51,564     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT NOVEMBER 22, 2010

         27,375,031        $                  27        $             236,005        $                    194,963        $          (851)       $          430,144        $          -            $              430,144     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

SUCCESSOR:

                             

BALANCE AT NOVEMBER 23, 2010

    -            $          -            $          -            $          -            $          -            $          -            $          -            $          -         

Issuance of common stock

    1,000            -                508,000            -                -                508,000            -                508,000     

Investment by Parent

    -                -                135            -                -                135            -                135     

Share-based compensation

    -                -                482            -                -                482            -                482     

Translation adjustments and unrealized net gains on cash flow hedges, net of tax of $-

    -                -                -                -                238            238            -                238     

Net loss

    -                -                -                (23,044)           -                (23,044)           -                (23,044)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 29, 2011

    1,000            -                508,617            (23,044)           238            485,811            -                485,811     

Share-based compensation

    -                -                5,907            -                -                5,907            -                5,907     

Investment by Parent

    -                -                14,865            -                -                14,865            -                14,865     

Capital contribution to noncontrolling interest

    -                -                -                -                -                -                9,103            9,103     

Investment by affiliate of Parent

    -                -                2,400            -                -                2,400            -                2,400     

Dividend payment to Parent

    -                -                (12,200)           -                -                (12,200)           -                (12,200)    

Translation adjustments and unrealized net loss on cash flow hedges, net of tax of $3,915

    -                -                -                -                (6,063)           (6,063)           -                (6,063)    

Net loss attributable to noncontrolling interest

    -                -                -                -                -                -                (5,839)           (5,839)    

Net loss attributable to The Gymboree Corporation

    -                -                -                (45,345)           -                (45,345)           -                (45,345)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT JANUARY 28, 2012

    1,000        $          -            $          519,589        $          (68,389)       $          (5,825)       $          445,375        $          3,264        $          448,639     

Share-based compensation

    -                -                4,260            -                -                4,260            -                4,260     

Dividend payment to Parent

    -                -                (3,273)           -                -                (3,273)           -                (3,273)    

Capital contribution to noncontrolling interest

    -                -                -                -                -                -                3,334            3,334     

Tax impact of investment by affiliate of Parent

    -                -                (889)           -                -                (889)           -                (889)    

Translation adjustments and unrealized net gains on cash flow hedges, net of tax of $67

    -                -                -                -                (89)           (89)           58            (31)    

Net loss attributable to noncontrolling interest

    -                -                -                -                -                    (2,561)           (2,561)    

Net loss attributable to The Gymboree Corporation

    -                -                -                (7,842)           -                (7,842)           -                (7,842)    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE AT FEBRUARY 2, 2013

    1,000        $          -            $          519,687        $          (76,231)       $                    (5,914)       $                    437,542        $                      4,095        $          441,637     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

THE GYMBOREE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Summary of Significant Accounting Policies

Nature of the Business

The Gymboree Corporation (the “Company,” “we” or “us”) is a specialty retailer, offering collections of high-quality apparel and accessories for children. As of February 2, 2013, we operated a total of 1,262 retail stores (797 Gymboree stores (including 160 Gymboree Outlet stores), 133 Janie and Jack shops and 332 Crazy 8 stores) and online stores at www.gymboree.com, www.janieandjack.com and www.crazy8.com. We also offer directed parent-child developmental play programs under the Gymboree Play & Music® brand at 718 franchised and Company-operated centers in the United States and 42 other countries. In addition, as of February 2, 2013, third-party overseas partners operated 44 Gymboree® retail stores in the Middle East and South Korea and the VIEs (as defined under “Basis of Presentation” below) operated 12 Gymboree retail stores in China.

Basis of Presentation

On November 23, 2010 (the “Transaction Date”), The Gymboree Corporation completed a merger (the “Merger”) with Giraffe Acquisition Corporation (“Acquisition Sub”) in accordance with an Agreement and Plan of Merger (the “Merger Agreement”) with Giraffe Holding, Inc. (“Parent”), and Acquisition Sub, a wholly owned subsidiary of Parent, with the Merger funded through a combination of debt and equity financing (collectively, the “Transactions”). The Company is continuing as the surviving corporation and a 100%-owned indirect subsidiary of the Parent. At the Transaction Date, investment funds sponsored by Bain Capital Partners, LLC (“Bain Capital”) indirectly owned a controlling interest in Parent.

The following principal equity capitalization and financing transactions occurred in connection with the Transaction:

 

   

Immediately prior to the closing of the Transaction, Acquisition Sub exercised the Top-Up Option in the Merger Agreement and irrevocably elected to purchase from the Predecessor Company a total of 30,713,523 Top-Up Option shares at an aggregate price of approximately $2 billion. Acquisition Sub executed a promissory note as payment for the Top-Up Option shares. The Top-Up Option shares and the promissory note were cancelled upon the closing of the Transaction;

   

Aggregate cash equity contributions of approximately $508 million were made by Parent; and

   

The Successor Company (1) entered into a new $225 million asset based revolving credit facility (“ABL”), of which $30 million was drawn at closing, (2) entered into a new $820 million secured term loan agreement (“Term Loan”), of which all but the original issue discount of $4.1 million was drawn at closing, and (3) issued $400 million face amount 9.125% senior notes (“Notes”) due 2018. These financing transactions are described in more detail in Notes 8 and 9.

The proceeds from the equity capitalization and financing transactions, together with approximately $164.9 million of our cash, were used to fund the:

 

   

Purchase of Predecessor Company common stock outstanding of approximately $1.8 billion (the former holders of the Company’s common stock, par value $.001 per share, received $65.40 per share);

   

Settlement of all unvested stock options and restricted stock units of the Predecessor Company of approximately $39.3 million; and

   

Fees and expenses related to the Transaction and the related financing transactions of approximately $17.9 million in the period from January 31, 2010 to November 22, 2010 and $71.2 million in the period from November 23, 2010 to January 29, 2011.

In December 2011, pursuant to a contribution, exchange and subscription agreement, the shareholders of Parent contributed in the aggregate 104,600,007 shares of Class A Common Stock and 11,622,223 shares of Class L Common Stock of Parent, representing all of Parent’s outstanding Common Stock, and approximately $12.2 million in cash to Gymboree Holding, Ltd., a Cayman Islands exempted company, in exchange for 104,600,007 Class A Common Shares, 11,622,223 Class L Common Shares and 1,220,003 Class C Common Shares of Gymboree Holding, Ltd., representing all of the outstanding Common Shares of Gymboree Holding, Ltd. (the “Asia Transaction”). Following the consummation of the Asia Transaction, Gymboree Holding, Ltd. became indirectly a 60% owner of Gymboree (China) Commercial and Trading Co. Ltd. (“Gymboree China”), and Gymboree (Tianjin) Educational Information Consultation Co. Ltd (“Gymboree Tianjin”) (collectively, the “VIEs”). While we do not control these two entities, they have been determined to be variable interest entities, as discussed further below in Note 21, and have been consolidated by the Company. Investment funds sponsored by Bain Capital own a controlling interest in Gymboree Holding, Ltd., which indirectly controls Parent.

 

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Table of Contents

To fund the Asia Transaction and the indirect investment in the VIEs, on November 3, 2011, (i) the Company declared and distributed an aggregate amount of $12.2 million in cash to its sole shareholder, Giraffe Intermediate B, Inc., a Delaware corporation and indirectly wholly owned subsidiary of Parent (“Giraffe B”), (ii) Giraffe B declared and distributed an aggregate amount of $12.2 million in cash to its sole shareholder, Giraffe Intermediate A, Inc., a Delaware corporation and indirectly wholly owned subsidiary of Parent (“Giraffe A”) and (iii) Giraffe A declared and distributed an aggregate amount of $12.2 million in cash to its sole shareholder, Parent, Parent then declared a dividend in the aggregate amount of $12.2 million to the holders of the Common Stock of Parent (the “Dividend”). The Dividend was then contributed to Gymboree Holding, Ltd. to fund the investment in the VIEs in return for Class C Common Shares of Gymboree Holding, Ltd.

Principles of Consolidation

The accompanying consolidated financial statements include entities in which we retain a controlling financial interest or entities that meet the definition of a VIE for which we are deemed to be the primary beneficiary. In performing our analysis of whether we are the primary beneficiary, at initial investment and at each quarterly reporting period, we consider whether we individually have the power to direct the activities of the VIE that most significantly affect the entity’s performance and also have the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. We also consider whether we are a member of a related party group that collectively meets the power and benefits criteria and, if so, whether we are most closely associated with the VIE. Intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year

Our fiscal year is the 52 or 53-week period that ends on the Saturday closest to January 31. As such, all references to “fiscal 2012” represent the 53-week fiscal year ended February 2, 2013, references to “fiscal 2011” represent the 52-week fiscal year ended January 28, 2012 and references to “fiscal 2010” represent the 52-week fiscal year ended January 29, 2011. The accompanying consolidated statements of operations, statements of comprehensive income (loss), statements of cash flows, and statements of stockholders’ equity, and the notes to the consolidated financial statements are presented for the Predecessor and Successor periods, which relate to the periods preceding the Transaction Date (periods prior to November 23, 2010) and the periods succeeding the Transaction Date (periods subsequent to November 23, 2010), respectively.

Financial Instruments

Cash Equivalents

Cash equivalents consist of highly liquid investment instruments with a maturity of three months or less at date of purchase. Our cash equivalents are placed primarily in money market funds. We value these investments at their original purchase prices plus interest that has accrued at the stated rate. Income related to these securities is recorded in interest income in the consolidated statements of operations.

Derivative Financial Instruments

We record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting for cash flow hedges generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the earnings effect of the hedged forecasted transactions (see Note 6).

 

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Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. At times, cash balances held at financial institutions are in excess of federally insured limits.

In fiscal 2012, fiscal 2011, the period from November 23, 2010 to January 29, 2011, and the period from January 31, 2010 to November 22, 2010, we purchased approximately 72%, 80%, 90% and 80%, respectively, of our inventory through one agent, which may potentially subject us to risks of concentration related to sourcing of our inventory.

Accounts Receivable

Accounts receivable primarily include amounts due from major credit card companies, amounts due from affiliated entities, amounts due from Gymboree Play & Music franchisees for royalties and consumer product sales, and amounts due from landlord construction allowances. Construction allowance receivable due dates vary. Royalties are due within 45 days of each month end and receivables from consumer product sales are generally due upon shipment. Amounts due from major credit card companies are generally collected within five days. We estimate our allowance for doubtful accounts by considering a number of factors, including the length of time accounts receivable are past due and our previous loss history. The provision for doubtful accounts receivable is included in SG&A expenses. Write-offs were insignificant for all periods presented.

Merchandise Inventories

Merchandise inventories are recorded at the lower of cost or market (“LCM”), determined on a weighted-average basis. We review our inventory levels to identify slow-moving merchandise and broken assortments (items no longer in stock in a sufficient range of sizes) and record an adjustment when the future estimated selling price is less than cost. We take a physical count of inventories in all stores once a year and in some stores twice a year, and perform cycle counts throughout the year in our distribution center. We record an inventory shrink adjustment based upon physical counts and also provide for estimated shrink adjustments for the period between the last physical inventory count and each balance sheet date. Our inventory shrink estimate can be affected by changes in merchandise mix and changes in actual shrink trends. Our LCM estimate can be affected by changes in consumer demand and the promotional environment.

Property and Equipment

Property and equipment acquired after the Transaction Date are recorded at cost. Property and equipment acquired in the Transaction are stated at estimated fair value as of the Transaction Date, less accumulated depreciation and amortization recorded subsequent to the Transaction. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from approximately 3 to 25 years, except for our distribution center in Dixon, California, which has a useful life of 39 years. Leasehold improvements, which include an allocation of directly-related internal payroll costs for employees dedicated to real estate construction projects, are amortized over the lesser of the applicable lease term, which ranges from 5 to 13 years, or the estimated useful life of the improvements. Software costs are amortized using the straight-line method based on an estimated useful life of three to seven years. Repair and maintenance costs are expensed as incurred.

Store Asset Impairment

Store assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the undiscounted future cash flows from the asset group are less than the carrying value, a loss is recognized equal to the difference between the carrying value of the asset group and its fair value. The fair value of the asset group is estimated based on discounted future cash flows using a discount rate commensurate with the risk. The asset group is determined at the store level, which is the lowest level for which identifiable cash flows are available. Decisions to close a store or facility can also result in accelerated depreciation over the revised useful life. For locations to be closed that are under long-term leases, we record a charge for lease buyout expense or the difference between our rent and the rate at which we expect to be able to sublease the properties and related costs, as appropriate. Most closures occur upon the lease expiration. The estimate of future cash flows is based on historical experience and typically third-party advice or market data. These estimates can be affected by factors such as future store profitability, real estate demand and economic conditions that can be difficult to predict. Our recorded asset impairment charges have not been material.

 

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Goodwill and Other Intangible Assets

Goodwill

As of the Merger, we allocated goodwill to our reporting units, which we concluded were the same as our operating segments (see Note 20): Gymboree Retail (including an online store), Gymboree Outlet, Janie and Jack (including an online store), Crazy 8 (including an online store), Gymboree Play & Music and International Retail Franchise. We allocated goodwill to the reporting units by calculating the fair value of each reporting unit and deriving the implied fair value of each reporting unit’s goodwill as of the Merger.

Goodwill is not amortized, but is tested for impairment annually in the fourth quarter of the fiscal year or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Events that result in an impairment review include significant changes in the business climate, declines in our operating results, or an expectation that the carrying amount may not be recoverable. We assess potential impairment by considering present economic conditions as well as future expectations.

We review goodwill for impairment by performing a two-step goodwill impairment test. The first step of the two-step goodwill impairment test is to compare the fair value of the reporting unit to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the two-step goodwill impairment test is required to measure the goodwill impairment loss. The second step includes valuing all the tangible and intangible assets of the reporting unit as if the reporting unit had been acquired in a business combination. Then, the implied fair value of the reporting unit’s goodwill is compared to the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying amount.

Calculating the fair value of a reporting unit and the implied fair value of reporting unit goodwill requires significant judgment. The use of different assumptions, estimates or judgments in either step of the goodwill impairment testing process, such as the estimated future cash flows of reporting units, the discount rate used to discount such cash flows, or the estimated fair value of the reporting units’ tangible and intangible assets and liabilities, could significantly increase or decrease the estimated fair value of a reporting unit or its net assets.

Indefinite-Lived Intangible Assets

Indefinite-lived intangible assets primarily represent trade names for each of our brands. The Company does not amortize intangible assets with indefinite useful lives rather, such assets are tested annually for impairment in the fourth quarter of each fiscal year or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The trade name is considered impaired if the estimated fair value of the trade name is less than the carrying amount. If the trade name is considered impaired, we recognize a loss equal to the difference between the carrying amount and the estimated fair value of the trade name. Calculating the fair value of trade names requires significant judgment. The use of different assumptions, estimates or judgments, such as the estimated future cash flows or the discount rate used to discount such cash flows could significantly increase or decrease the estimated fair value of our trade names. The Company did not recognize any impairment charges related to indefinite lived intangible assets during fiscal 2012, 2011 and 2010.

Other Intangible Assets and Liabilities

Other intangible assets primarily represent contractual customer relationships and below market leases. Other intangible liabilities represent above market leases and are included in deferred liabilities. Other intangible assets and liabilities are amortized on a straight-line basis over their estimated useful lives.

We review other intangible assets with finite lives for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability of these other intangible assets is assessed based on the estimated undiscounted future cash flows expected to result from the use of the asset. If the undiscounted future cash flows are less than the carrying amount, the purchased other intangible assets with finite lives are considered to be impaired. The amount of the impairment is measured as the difference between the carrying amount of the asset and their estimated fair value. The fair value of the asset is estimated based on discounted future cash flows using a discount rate commensurate with the risk. Our estimate of future cash flows requires assumptions and judgment, including forecasting future sales and expenses and estimating useful lives of the assets.

 

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Income Taxes

We recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. We maintain valuation allowances when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change. In determining whether a valuation allowance is warranted, we take into account such factors as prior earnings history, expected future earnings, carryback and carryforward periods, and tax planning strategies that could potentially enhance the likelihood of realization of a deferred tax asset. We are subject to periodic audits by the Internal Revenue Service and other taxing authorities. These audits may challenge certain of our tax positions such as the timing and amount of deductions and allocation of taxable income to the various tax jurisdictions. Determining income tax expense for tax contingencies requires management to make assumptions that are subject to factors such as proposed assessments by tax authorities, changes in facts and circumstances, issuance of new regulations, and resolution of tax audits. Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in future years.

Rent Expense

Many of our operating leases contain free rent periods and predetermined fixed increases of the minimum rental rate during the initial lease term. For these leases, we recognize the related rental expense on a straight-line basis over the life of the lease, starting at the time we take possession of the property. Certain leases provide for contingent rents that are not measurable at inception. These amounts are excluded from minimum rent and are included in the determination of rent expense when it is probable that an expense has been incurred and the amount is reasonably estimable.

Lease Allowances

As part of many lease agreements, we may receive allowances from landlords. The allowances are included in lease incentives and other deferred liabilities and are amortized as a reduction of rent expense on a straight-line basis over the term of the lease, starting at the time we take possession of the property.

Workers’ Compensation Liabilities

We are partially self-insured for workers’ compensation insurance. We record a liability based on claims filed and an actuarially determined amount of claims incurred, but not yet reported. This liability approximated $4.2 million as of February 2, 2013 and January 28, 2012. Any actuarial projection of losses is subject to a high degree of variability due to external factors, including future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. If the actual amount of claims filed exceeds our estimates, reserves recorded may not be sufficient and additional accruals may be required in future periods.

Foreign Currency Translation

Assets and liabilities of foreign subsidiaries are translated into United States dollars at the exchange rates effective on the balance sheet date. Revenues, costs of sales, expenses and other income are translated at average rates of exchange prevailing during the year. Translation adjustments resulting from this process are recorded as other comprehensive income within stockholders’ equity.

Revenue Recognition

Revenue is recognized at the point of sale in retail stores. Online revenue is recorded when we estimate merchandise is delivered to the customer, generally within three to six days of shipment. Shipping fees received from customers are included in net sales and the associated shipping costs are included in cost of goods sold. We also sell gift cards in our retail store locations, through our online stores and through third parties. Revenue is recognized in the period that the gift card is redeemed. We recognize unredeemed gift card and merchandise credit balances when we can determine the portion of the liability for which redemption is remote (generally three years after issuance). These amounts are recorded as other income within selling, general and administrative expenses (“SG&A expenses”) and totaled $1.6 million, $1.3 million, $0.4 million, and $1.2 million in fiscal 2012, fiscal 2011, the period from November 23, 2010 to January 29, 2011, and the period from January 31, 2010 to November 22, 2010, respectively. From time to time, customers may earn Gymbucks or Rise and Shine coupons and redeem them for merchandise at a discount during the redemption period. A liability is recorded for coupons earned, but not redeemed, within an accounting period. Sales are presented net of sales return reserve, which is estimated based on historical return trends. Net retail sales also include revenue from our co-branded credit card. We present taxes collected from customers and remitted to governmental authorities on a net basis (excluded from revenues). A summary of activities in the sales return reserve is as follows (in thousands):

 

     Successor               Predecessor  
     Year Ended
February 2, 2013
     Year Ended
January 28, 2012
     November 23, 2010 to
January 29, 2011
              January 31, 2010 to
November 22, 2010
 

Balance, beginning of period

    $ 2,363          $ 2,224          $ 4,763                $ 2,608     

Provision for sales return

     28,976           30,804           6,015                 25,867     

Actual sales returns

     (28,831)          (30,665)          (8,554)                (23,712)    
  

 

 

    

 

 

    

 

 

          

 

 

 

Balance, end of period

    $ 2,508          $ 2,363          $ 2,224                $ 4,763     
  

 

 

    

 

 

    

 

 

          

 

 

 

 

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For the Gymboree Play & Music operations, initial franchise and transfer fees for all sites sold in a territory are recognized as revenue when the franchisee has paid the initial franchise or transfer fee, in the form of cash and/or a note payable, the franchisee has fully executed a franchise agreement and we have substantially completed our obligations under such agreement. We receive royalties based on each franchisee’s gross receipts from operations. Such royalty fees are recorded when earned. We also recognize revenues from consumer products and equipment sold to franchisees at the time title transfers to the franchisees.

For our retail franchise business launched in August 2010, revenues may consist of initial franchise fees, royalties and/or sales of authorized product. Initial franchise fees relating to area franchise sales are recognized as revenue when the franchisee has met all material services and conditions and we have substantially completed our obligations under such agreement, typically upon store opening. Royalties are based on each franchisee’s gross receipts from operations and are recorded when earned. Revenues from consumer products sold to franchisees are recorded at the time title transfers to the franchisees, subject to an annual minimum purchase commitment. We present taxes withheld by international franchises and remitted to governmental authorities on a gross basis (included in revenues).

Loyalty Program

Customers who enroll in the Gymboree Rewards program earn points with every purchase at Gymboree and Gymboree Outlet stores. Those customers who reach a cumulative purchase threshold receive a coupon that can be used towards the future purchase of goods at Gymboree and Gymboree Outlet stores. We estimate the cost of rewards that will ultimately be redeemed and record this cost as a reduction of net retail sales as reward points are earned. This liability was approximately $2.3 million and $1.8 million as of February 2, 2013 and January 28, 2012, respectively.

Co-Branded Credit Card

We have co-branded credit card agreements (the “Agreements”) with a third-party bank and Visa U.S.A. Inc. for the issuance of a Visa credit card bearing the Gymboree brand and administration of an associated incentive program for cardholders. These Agreements expire in fiscal 2014. We recognize revenues related to the Agreements as follows:

 

   

New account fees are recognized as retail revenues as earned.

   

Credit card usage fees are recognized as retail revenues as actual credit card usage occurs.

   

Rewards earned are recorded as gift card liabilities and recognized as retail revenues when the gift cards are redeemed.

During fiscal 2012, fiscal 2011, the period from November 23, 2010 to January 29, 2011, and the period from January 31, 2010 to November 22, 2010, we recognized approximately $1.6 million, $1.5 million, $0.3 million, and $6.1 million in revenue from these Agreements, respectively. These amounts are included in net retail sales in the accompanying consolidated statements of operations. Upon consummation of the Transaction, deferred revenue from the Agreements was adjusted to its estimated fair value of zero (see Note 2).

Cost of Goods Sold

Cost of goods sold (“COGS”) includes cost of goods, buying expenses, occupancy expenses and shipping costs. Cost of goods consists of cost of merchandise, inbound freight and other inventory-related costs, such as shrink and lower of cost or market adjustments. Buying expenses include costs incurred to design, produce and allocate merchandise. Occupancy expenses consist of rent and other occupancy costs, including common area maintenance and utilities. Shipping costs consist of third-party delivery services to customers. As we record certain distribution channel costs as a component of SG&A expenses and do not include such costs in cost of goods sold, our cost of goods sold and gross profit may not be comparable to those of other companies.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of non-occupancy-related costs associated with our retail stores, distribution center and shared corporate services. These costs include payroll and benefits, depreciation and amortization, credit card fees, advertising, store pre-opening costs and other general expenses. Our distribution channel costs recorded in SG&A expenses represent primarily outbound shipping and handling expenses to our stores.

Store Pre-opening Costs

Store pre-opening costs are expensed as incurred.

Advertising

We capitalize direct costs for the development, production, and circulation of direct response advertising and amortize such costs over the expected sales realization cycle, typically four to six weeks. Deferred direct response costs, included in prepaid expenses, were $0.4 million as of February 2, 2013 and $0.7 million as of January 28, 2012.

All other advertising costs are expensed as incurred. Advertising expense, including costs related to direct mail campaigns, totaled approximately $20.8 million, $18.6 million, $2.7 million, and $14.5 million for fiscal 2012, fiscal 2011, the period from November 23, 2010 to January 29, 2011, and the period from January 31, 2010 to November 22, 2010, respectively.

Share-Based Compensation

We recognize compensation expense on a straight-line basis for options and awards with time-based service conditions and on an accelerated basis for awards with performance conditions.

2.  Acquisition

As described in Note 1, investment funds sponsored by Bain Capital consummated the Merger, whereby we became a 100%-owned indirect subsidiary of Parent. The Transaction was funded as follows on the Transaction Date (in thousands):

 

Term Loan

   $      815,900     

ABL

        30,000    

Notes

        400,000    

Cash equity contributions

        508,000    

Cash from Company’s balance sheet

        164,917    
  

 

 
   $                  1,918,817    
  

 

 

The terms of the Term Loan, ABL and Notes are described in detail in Notes 8 and 9. The funds in the table above were used as follows (in thousands):

 

Consideration paid to equity holders

   $      1,829,660    

Transaction costs

        89,157    
  

 

 
   $                  1,918,817    
  

 

 

Equity holders received $65.40 per share of Company common stock owned on November 23, 2010. Option holders received $65.40 per option held as of November 23, 2010, less the option exercise price. Transaction costs include legal and accounting fees and other external costs directly related to the Transaction and to the issuance of debt. Approximately $74.4 million in transaction costs were incurred in the period from November 23, 2010 to January 29, 2011, and $17.9 million were incurred in the period from January 31, 2010 to November 22, 2010. Approximately $63.3 million of these costs were determined to be related to the issuance of debt and were deferred initially (see Note 9).

Our acquisition was accounted for as a business combination. The purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values as of the Transaction Date. The excess of the purchase price over the net tangible and identifiable intangible assets acquired less liabilities assumed was recorded as goodwill. None of the goodwill recognized is expected to be deductible for income tax purposes.

 

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The following table summarizes the final allocation of the purchase price to assets acquired and liabilities assumed at the Transaction Date:

 

Inventory

         $  232,839    

Other current assets

     222,094    

Property and equipment

     218,179    

Goodwill

     927,397    

Trade names

     567,000    

Franchise agreements

     6,600    

Below market leases

     7,049    

Customer relationships

     36,400    

Co-branded credit card agreement

     4,000    

Other long-term assets

     4,515    

Gift card and merchandise credit liability

     (15,981)   

Current deferred income tax liability

     (8,983)   

Other current liabilities

     (122,532)