Gymboree (GYMB)

2004 Compared to 2003

Net Sales
     Net retail sales for the fifty-two weeks ended January 29, 2005 increased to $583.2 million from $537.6 million in the fifty-two weeks ended January 31, 2004, an increase of $45.6 million, or 8.5%.  Comparable store sales for the 52-week period increased 2% or $17.1 million over the same 52-week period last year.  This increase was primarily due to an increase in the average transaction value driven by higher average retail sales on a per unit basis as customers responded favorably to the upgraded fashion, embellishments, and fabrication of our garments.  In addition, the number of transactions on a comparable store basis increased due to higher customer traffic.  These increases were partially offset by a decrease in the number of units sold per transaction.  Non-comparable store sales increased $32.6 million primarily due to net store and square footage growth of 52 stores and 122,000 square feet, respectively.  The number of retail stores open at the end of the period was 648, compared to 596 open at the end of fiscal 2003.  The increase in net retail sales includes a $0.9 million increase in shipping income resulting from the increase in our on-line store businesses, a decrease of $4.1 million in sales to off-price retailers as a result of our seasonal clearance strategy whereby markdown merchandise is primarily sold at our retail stores, and an increase of $0.9 million in sales returns and Gymbucks promotional discounts.

     Play & Music net sales for the fifty-two weeks ended January 29, 2005 decreased to $11.3 million from $11.6 million in the fifty-two weeks ended January 31, 2004, a decrease of $0.3 million or 2.6%.  The decrease was primarily due to the closure of 8 company-owned sites as part of the restructuring of our Play & Music business.  We ultimately plan to operate approximately 3 company-owned sites primarily for training purposes.  There were 528 Play & Music sites at the end of the period, compared to 532 at the end of fiscal 2003.

Gross Profit
     Gross profit for the fifty-two weeks ended January 29, 2005 increased to $232.1 million from $225.6 million in the fifty-two weeks ended January 31, 2004, an increase of $6.5 million, or 2.9%.  As a percentage of net sales, gross profit decreased to 39.0% from 41.1% in the same period last year.   The decrease in gross profit as a percentage of net sales was primarily attributable to the incremental investment in our buying infrastructure required to operate multiple concepts, as well as our additional investment in the quality, novelty, and fashion embellishments in our garments.  We expect gross profit as a percentage of net sales to decrease moderately in fiscal 2005, as our initiative to improve product cost will not impact financial results until the latter half of the year. 

Selling, General and Administrative Expenses
     Selling, general and administrative expenses (“SG&A”), which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, increased for the fifty-two weeks ended January 29, 2005 to $211.4 million from $185.5 million in the fifty-two weeks ended January 31, 2004.  As a percentage of net sales, SG&A increased to 35.6% in 2004 compared to 33.8% in fiscal 2003.  The increase in SG&A as a percentage of net sales resulted primarily from an increase in costs related to benefits,  corporate marketing and marketing infrastructure.  In addition, SG&A was impacted by increased costs at our distribution facility related to the increase in our on-line businesses and increased unit shipments resulting from store growth.  We expect SG&A as a percentage of net sales to be flat to slightly lower in fiscal 2005, as we are moving aggressively to reduce our expenses. 

Lease Termination Charges
     In connection with our move to our new corporate headquarters, our current landlord assumed our obligations under the lease for our previous corporate offices in Burlingame, California.  As a result, lease termination charges of $4.4 million consist of non-cash charges related to the Company’s headquarters relocation in the fourth quarter of fiscal 2004.  Approximately $4.2 million of this amount was recorded as a deferred lease incentive from the Company’s new landlord, which will be amortized over the life of the new corporate office lease as a reduction of rent expense.  See Note 14 of the Notes to the Consolidated Financial Statements.

Foreign Exchange Gains (Losses), Net
     Net foreign exchange losses totaled $82,000 for the fifty-two weeks ended January 29, 2005 compared to net gains of $137,000 for the same period last year.  These gains and losses resulted from currency fluctuations on inter-company transactions between our United States operations and foreign subsidiaries.  The amount of foreign exchange gains or losses is dependent on both monthly currency fluctuations and inter-company balances.

Interest Income
     Interest income increased to $1.0 million for the fifty-two weeks ended January 29, 2005 from $0.7 million in the same period last year due to interest earned on higher cash and cash equivalents and marketable securities balances during fiscal 2004.

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