Gymboree Looks Strong for This Decade and Beyond

This week, we continue with our list of favorite consumer stocks. Given the significant number of headwinds facing consumers (such as record-high gas prices, declining home values and the corresponding "wealth effect," and lingering credit concerns), we concede that this space may not be appropriate for all investor classes at the present time. That being said, we still believe there are a number of compelling investment ideas to be found in this sector.

Instead of a long-winded recap of the names, we've decided to release the names one-by-one and provide a brief summary. After we finish revealing our favorite stocks, we will pull together the list into an equal-weighted portfolio and compare our performance to a number of benchmarks over the next year. We may also adjust the list periodically, as there may be better investment opportunities that arise in the coming months.

Today, we add children's apparel retailer Gymboree (GYMB) to the list.

Investment Highlights

• Children's apparel has a necessary replacement cycle. By nature, children's apparel needs to be replenished several times a year, usually by a mature female demographic with a propensity to spend on their children. Yes, the Gymboree brand carries higher price points than its publicly-traded specialty competition - Carter's (CRI) and Children's Place (PLCE) - and the mass channel private labels. However, the average Gymboree customer represents a high-end audience with limited exposure to rising gas prices and other negative macroeconomic factors. We also expect a modest sales boost in coming years from baby boomer retirees who will likely have more time and resources to devote on their grandchildren. With the combination of established brands that resonate with mothers everywhere (Gymboree and Janie and Jack) and still-emerging brands (Crazy 8) , we anticipate robust sales growth (at least mid-teens) through the balance of the decade and likely beyond.
• Strong financial footing. When evaluating a consumer stock investment, the most important factors to evaluate are (1) top-line growth (including mature and new store growth), (2) the likelihood of sustained profitability and return on invested capital, (3) cash generation and flexibility, (4) debt requirements, and (5) inventory turnover. Gymboree generally passes the test on each of these considerations, with solid top-line growth, sector-leading operating margins and returns on invested capital (nearing 20%), ample cash on hand, a debt-free balance sheet, and inventory turnover over 4.0x (excellent for a mall-based apparel retailer).

Investment Risks