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Executives

Jeff Harris – Vice President of Finance

Matthew McCauley –Chief Executive Officer

Kip Garcia – President

Blair Lambert – Chief Operating Officer and Chief Financial Officer

Analysts

John Zolidis – Buckingham Research

Connie Wong – Wedbush Securities

Rick Patel – Bank of America/Merrill Lynch

Linda Tsai – MKM Partners

Dana Telsey – Telsey Advisory Group

Adrienne Tennant – FBR

Robert Samuels - Oppenheimer

Margaret Whitfield – Sterne, Agee Capital

John Morris – Bank of Montreal

Stacy Pak – SP Research

Janet Kloppenburg – JJK Research

Lee Giordano – Imperial Capital

Dorothy Lakner – Caris & Co.

Marni Shapiro – The Retail Tracker

Bill Dezellem – Tieton Capital Management

Brian Tunick – JPMorgan

The Gymboree Corporation (GYMB) Q3 2009 Earnings Call November 18, 2009 4:30 PM ET

Operator

Welcome everyone to the Gymboree Corporation third quarter 2009 earnings conference call. (Operator instructions) Mr. Harris you may begin your conference.

Jeff Harris

Welcome to the Gymboree Corporation's third quarter 2009 earnings call. This is Jeff Harris, Vice President of Finance for Gymboree. On the call with me today are: Matthew McCauley, Chairman and CEO; Kip Garcia, President; and Blair Lambert, COO and CFO.

Matt will start off with a few comments on our long-term strategies. Kip will then discuss product performance for the third quarter and our other merchandising initiatives. Blair will then follow up with a few comments about our third quarter financial performance and plans for the fourth quarter of 2009. After everyone has completed their prepared remarks, we will all be happy to take your questions.

I want to point out that our presentation today contains forward-looking statements, including statements about trends and operations, future sales expectations and future financial performance. Actual results could differ materially from those forecast as a result of a number of factors, including those set forth in our Form 10-K for the year ended January 31, 2009, filed with the SEC. I would also like to point out that we intend to continue to comply with the SEC regulation FD. As such, we will not be providing guidance or projections outside of public forums. You should also be aware that your participation in the Q&A session constitutes your permission to transcribe and rebroadcast any comments you may make.

Now here's Matt.

Matthew McCauley

Thanks Jeff and thank you for joining us on our earnings call today. This quarter represented a challenging yet successful one for our company. While comp sales were down 4%, growth of our store base drove total sales up 2%. Our newest brand, Crazy 8 was profitable just two years after opening. Our ongoing expense management allowed us to continue to leverage.

As a result, operating income and net income each grew 12% while operating margin increased 200 basis points compared to last year. I will focus the bulk of my comments on long-term growth initiatives but before I do that I would like to make a few comments on our current environment and our near-term strategies.

We expect the trends we have seen throughout this year to continue into the fourth quarter. Clearly unemployment numbers are climbing and though the performance of the stock market has led to some consumers spending more we are still seeing a very price sensitive customer. Our near-term strategy has been and continues to be multifaceted.

First, acquire new customers to offset consumers spending less. Second, expand and leverage our existing promotions and events to protect the brand and avoid adding additional promotions. Third, reduce expenses in order to fund both customer acquisition and store growth while leases and building costs are very attractive.

These near-term strategies have driven year-to-date earnings growth and increase in total transactions and helped fund new stores and other growth initiatives. We have accomplished this while increasing our cash balance by over 50% to $212 million. Our approach has not been one of weather the storm but rather re-tooling our business to be successful in this new economy and therefore we are building every plan, budget and real estate deal with the idea that this is the new norm.

I would now like to move on to our long-term growth opportunities. There are three major growth areas. First, Crazy 8. Second, Gymboree Boy and third, international. All three of these growth vehicles are supported by a broad based marketing plan which I will speak about in a moment.

Turning now to our long-term growth drivers. Crazy 8,our lower price point concept continues to perform well. With our improved color palettes, more outfits, easy to understand denim assortments and lower product costs, Crazy 8 made $0.02 in the third quarter versus a loss of $0.03 for the third quarter last year. Our goal is for Crazy 8 to continue to be profitable going forward.

As I said before, this is an ideal time to be expanding Crazy 8. This new concept caters to a value conscious customer. Our cost of goods reductions are driving higher margins and we are signing more favorable leases on our stores. Armed with strong assortments, increasing IMUs and the growth in average store sales, we are now planning to open a total of 27 Crazy 8 stores in fiscal 2009 bringing the total store count to 65. In addition we are well on our way of reaching our goal of opening a minimum of 50 new Crazy 8 stores in 2010.

We also continue to be excited about our growth opportunity in our Gymboree Boy business. We are making progress as boy continues to lead the way in sales and margin growth year-over-year. Without increasing square footage we believe we can ultimately grow our boy’s business as much as 100 million through increased marketing efforts, expanded assortments in woven tops, bottoms and graphic tees.

We also continue to evaluate international growth opportunities. As I have said before there are three different ways to approach international markets. Direct ownership, licensing and joint ventures. During the third quarter we conducted a test in the U.K. Our test consisted of selling Crazy 8 product in two London stores. During the test period we were able to monitor sales, speak with customers about our product and in general gain a better understanding of what works and what doesn’t work in this market. We are pleased with the results and are continuing to review the opportunities in this and several other markets. We will share more definitive conclusions and plans in our fourth quarter earnings release.

Turning now to our marketing strategies. We all know that consumers are spending less. This just means we have to get more customers in our doors. To do this we have implemented a broad based marketing strategy. These efforts include far reaching advertising efforts such as our partnership with Procter and Gamble, more focused magazine and direct mail campaigns that target consumers that meet specific demographic and psychographic criteria, and direct mail and email campaigns at reactivating prior customers.

Now a newly introduced loyalty program that helps us stay connected and rewards our existing customers. We launched our loyalty program during the third quarter. This was a significant leap forward for our marketing efforts. This point-based program rewards customers for their ongoing purchases on a regular basis. Rewards come in the form of gift cards and special shopping days, among other things that are only made available to program members. The program has exceeded our expectations with over 750,000 customers signing up in just eight weeks. We have already issued over $1 million in rewards that are redeemable through December. We are in the early stages and look forward to utilizing this program to better understand our customers and provide more timely and relevant communication in the future.

Before I turn it over to Kip and Blair I want to make a few brief comments about some of our defensive strategies. Product cost reductions will continue to benefit our company in 2010. I just returned from meeting with many of our factories and agents in Asia where we reinforced our strong partnership and our unified mission to grow together but we have made [audio break] we still have room to improve especially in our Crazy 8 concept.

The steady store growth and sales demand is helping with our economies of scale and our ability to leverage our experience with our outlet sourcing is proving very beneficial. In addition, our stores organization along with our counterparts once again managed to not only leverage payroll with a negative comp but also achieve the highest Q3 customer service scores to date. This continues to be a great example of a mission impossible accomplished. These efforts along with numerous expense savings in other areas allowed us to leverage SG&A expense 200 basis points during the third quarter.

We are often asked how long our defensive strategies will last and have we hit peak operating margins. As I shared earlier our approach to this economic downturn was one of re-tooling our business as though this is the new norm. Although we anticipate de-leveraging a little in the fourth quarter and a few of our expense reductions are temporary, the vast majority our defensive strategies are permanent. We are focused on being more efficient each year and leveraging our expenses on an annual basis.

As far as operating margins go our philosophy is that we can always improve. We set aggressive goals for ourselves in every area of the business. So far we have been successful in reaching higher operating margins each year for the last four years and we anticipate reaching a new high this year. So when that is done we will set new margin targets for next year.

I would like to turn the time over to Kip to provide some color on our brand and line performances. He will be followed by Blair who will break down the financials. Then I will conclude and we will answer questions at that point. Kip?

Kip Garcia

Thanks Matt. I will go through specific product details for each brand but in general our third quarter reflected mixed results across the brands.

Starting with Gymboree after experiencing very strong line and category performance for our back-to-school season, we saw that lines received during times that we were less promotional did not perform as well. On a positive note, our customers are ready to jump into the holidays. Starting with Halloween we had a great costume season this year. Kids wanted to be flower fairies, glamorous flappers, 50’s boppers in poodle skirts, astronauts or doctors this year.

Additionally, our holiday picture taking collection which set the last week of September was also successful. The delivery included classic, family dressing family outfits featuring traditional plaids for the family plus a bold and whimsical red, black and white panda-themed one for girls and airplane themed collection for boys which were both well received. Girl’s dresses were particularly strong sellers for this delivery and the must have outfit included a dressy coat which was also a key sales driver.

Top volume driving classes for the quarter included graphic and artwork tees, fashion sweaters, dresses and skirts and skorts. Shoes was also a key driving category.

Turning to Gymboree Outlet, at the department level newborn was the strongest performer followed by boy and then girl. Holiday costumes, which were a new business for 2009 were also successful. Price pointed, limited time only promotions were successful for outlet and we will continue to build that strategy going forward.

Turning to Janie and Jack, during the course of the quarter we saw steady improvement in our reg line performance. Our holiday picture taking line which set in late September and our holiday cap line which set in early October were both strong performers. Janie and Jack is the headquarters for holiday and special occasion outfits and these lines epitomized the precious details, classic refined styling and fine fabrics that have become iconic for this brand. Our holiday picture taking line featured brother/sister looks in rich, vintage red and brown plaids. Our silk pink peony dresses were customer favorites and special details included hand smocking, tulle petticoats and flocked rose patterns.

Our boy line featured classic sweater vests with vintage train artwork, herringbone suite separates and a classic newsboy cap in super soft mull skin, all of which perfectly coordinated with his sister. Our holiday cap line went over the top with lux styling and details in regal blue tones highlighted with a touch of gold. Our girl line featured a show stopping, silk pink peony party dress with a multi layered tulle skirt and for boys the key outfit featured a unique, hand embroidered, vintage nutcracker artwork sweater. All boy and girl colors coordinate across lines so that customers can create a lux, blue themed family photo. We are pleased we are beginning to experience the positive sales trend at Janie and Jack from our lines of regular price and are encouraged by our recent line performance.

Turning now to Crazy 8, for Q3 we continued to see positive trends in our line performance particularly in girl and newborn which as we have stated in previous calls was our focus for improvement. We made adjustments to our product in girls to be more outfit driven, offer more feminine styling and improved our color palettes to be more understandable for our core customer. We continue to be pleased that the customer reaction to these changes has been very favorable.

For girls, our Q3 collections were easy to outfit, our colors were bright and easy to mix and match and our style was both trend right and age appropriate. Turning to boys our customer continues to respond to our classic, masculine styling, understandable, easy to outfit color palettes and fun artwork graphics.

At the category level, denim continues to drive sales across departments as well as graphic and artwork tees for both boys and girls. Fashion sweaters and skirts and skorts were also key volume drivers specifically for girls. Finally, we continue to get positive customer feedback about our trend right fashion, easy to outfit collections at affordable prices. In support of our value strategy, our every day promo categories which give our customers added value if they buy two or more, continue to be solid volume drivers.

Looking out at Q4 across our brands, we saw similar trends at the industry during the last two weeks of October. While that slow down has continued into the first two weeks of November, we are well positioned to maximize the upcoming holiday gift giving season.

First, all brands have created festive, holiday in-store environments and windows and we have improved our in-store music and video to enhance the holiday spirit. At the product level we have focused on giving our customers emotional, fashion right categories and outfits to create the perfect gift. Every brand has developed value strategies for our customers who continue to need to stretch their dollar and get the most for their limited holiday budgets.

For example, Gymboree and Gymboree Outlet will continue with the successful, limited time only Jingle Deals and Crazy 8 is bringing back the successful value gift campaign called Great Gifts at Crazy Low Prices which will offer exceptional value on most wanted gift items. Janie and Jack has developed a special GWP offer for December and all brands will have special surprise, super values for our customers during Black Friday weekend.

Now I would like to turn it over to Blair.

Blair Lambert

Thanks Kip. As reported in our press release, net sales from retail operations for the 13 weeks ended October 31, 2009 were $265.6 million, a 2% increase from the $261.3 million in net sales from retail operations for the 13 week fiscal quarter last year.

Other revenue for the quarter attributable to our Play and Music operations was $3.5 million compared to $2.8 million in the prior year. In total, net sales for the quarter were $269.1 million versus $264.1 million for the prior year, an increase of 2%. As previously reported comparable store sales for the third quarter decreased 4%. During the quarter we saw an increase in the total number of transactions and decreases in units per transaction, average unit retails and transaction size.

The total number of stores open at the end of the quarter was 951, including 594 Gymboree stores in the U.S., 34 Gymboree stores in Canada, two Gymboree stores in Puerto Rico, 139 Gymboree Outlet stores, 120 Janie and Jack shops, 62 Crazy 8 stores. During the quarter we opened a total of 25 new stores including six Gymboree stores, four Gymboree Outlets and 15 Crazy 8 stores. Total square foot under management at the end of the quarter was 1,866,000 square feet with our average store size at roughly 1,960 square feet.

Turning now to gross profit, gross profit rates for the third quarter of fiscal 2009 were consistent with the same quarter the prior year at 51%. During the quarter merchandise margins increased roughly 90 basis points due primarily to lower average unit costs in all brands, offset by negative occupancy expense leverage. Notably, average unit retails were up in both the Gymboree US and Crazy 8 brands.

Let me turn now to SG&A expense. In the third quarter SG&A as a percentage of sales decreased 200 basis points to 30% of sales compared to 32% in the prior year. The SG&A expense decreases were driven by lower corporate, store and incentive compensation, reduced professional fees and lower operating supply expense. These savings were partially offset by increased depreciation and worker’s compensation costs.

Moving to income for the quarter, operating income increased 12% to $56.4 million or 21% of sales compared to $50.2 million or 19% of sales in the prior year. Net income was $34.8 million or $1.15 per diluted share compared to $1.06 per diluted share in the prior year. Our tax rate for the quarter was consistent with the prior year at 38.6%. We anticipate a tax rate of 38-38.5% for the fourth fiscal quarter of the year.

Let me move now to the balance sheet. Cash and cash equivalents at the end of the quarter were roughly $212 million with no short or long-term borrowings outstanding. As mentioned in our press release, the board of directors has authorized management to repurchase up to $40 million of stock during the next year.

Inventories at the end of the quarter were $145 million compared to $142 million in the prior year. On a per square foot basis inventories were down about 7%. Due to lower average unit costs, average units per store were down less significantly. We believe inventories are well positioned as we enter the fourth quarter. At year-end we anticipate that inventories will be flat to up slightly on a per square foot basis.

Gross capital expenditures for the quarter were $12.1 million. Depreciation expense for the quarter was $9.3 million.

Let me now speak to our plans for the fourth quarter of fiscal 2009. As has been our practice, we have taken a cautious approach in developing our plans for the fourth quarter. We are planning for fourth quarter earnings to be in a range of $0.95 to $1.03 per diluted share. Notably, we are planning for the Crazy 8 concept to breakeven or earn a little bit in the fourth quarter versus a loss of $0.06 in the fourth quarter of the prior year.

Looking at sales, as previously mentioned we are planning for negative comparable store sales in a range of low to mid single digits during the fourth quarter. In terms of real estate, we plan to open eight new stores during the fourth quarter consisting of four new Gymboree stores, one new Gymboree Outlet and three Crazy 8 stores. We also plan to remodel, expand or relocate four Gymboree stores. For the full year we are planning for 72 new stores consisting of 18 new Gymboree stores, 22 Gymboree Outlet stores, 5 Janie and Jack shops and 27 Crazy 8 stores.

Total capital expenditures for the fourth quarter are planned at $10 million. For the full year we are currently planning capital expenditures of roughly $41 million. These expenditures will support new store openings, remodels and relocations along with targeted investments in the distribution center and other information technology systems and infrastructure investments in support of our various initiatives.

Depreciation for the fourth quarter is planned at $9.5 million while full-year depreciation is planned at $37 million. In terms of gross margin during the fourth quarter we plan for an increase of roughly 200-300 basis points including approximately 50 basis points of de-leverage related to occupancy.

SG&A as a percentage of sales is expected to increase a little versus the prior year in part due to planned increases in marketing expenses and higher professional fees, partially offset by compensation expense savings.

Operating margins for Q4 are expected to increase roughly 150-250 basis points versus the prior year. As previously mentioned we are planning Q4 based on a tax rate of 38-38.5% versus the prior year’s rate of 33%.

Now let me turn it back over to Matt.

Matthew McCauley

In summary, we are optimistic about our growth opportunities in Crazy 8, Gymboree Boy and International. Our aggressive offense is making headway on customer acquisitions. Our defensive strategies continue to fund marketing as well as significant store growth. With our solid cash flow, a strong balance sheet, tremendous brand equity and new brand growth ahead, we are optimistic about our ultimate vision of reaching every mom in America and mom’s around the world to drive substantial long-term growth for our shareholders.

Now we would be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of John Zolidis – Buckingham Research.

John Zolidis – Buckingham Research

I wanted to ask about the operating margins going forward as you see them. You did mention you thought operating margin could rise again next year and as you have this great track record of being up four years running and you said merchandise cost would be down so obviously that is a potential component is higher merchandise margins. Certainly Crazy 8 swinging to a larger profit can contribute to operating margin expansion as well. What other factors do you see coming into play and why do you feel confident you can get the operating margins higher given the tough sales climate that we have?

Matthew McCauley

Really those are the biggest components you just identified. Obviously we are optimistic about our ability to leverage Crazy 8. We have already got the design and merchandising teams in place. So we should just continue to leverage those as we add more stores and as our margins continue to go up in Crazy 8. So as that becomes a larger percentage of the store base, leveraging the existing overhead and at the same time existing margins going up, that is really a big part of it as well as the average unit cost of the rest of our brands going down. That is why we are feeling optimistic about next year.

John Zolidis – Buckingham Research

Expanding on the Crazy 8, if you add 50 stores and I think you said a minimum of 50 stores you will be at roughly 115 at the end of next year. Generally as I understand it at around 90-100 stores is when you can achieve that large enough volume purchasing to get the more attractive merchandise margins. What is the differential in merchandise margins you anticipate in 2009 for the Crazy 8 stores compared to the balance of the chain? How much of a spread is there?

Matthew McCauley

In 2010 versus the rest of the brands?

John Zolidis – Buckingham Research

More specifically, in 2009 what I am trying to figure out is how much the potential is for improvement. So in 2009 with 60 stores roughly, are you approximately 500 basis points below the rest of the chain on merchandise margins or is it kind of greater or lesser than that?

Matthew McCauley

I don’t want to comment on the specifics but I can tell you there is quite a spread right now between the Crazy 8 margin and the rest of the brands. Obviously volume has to do with that and a lot more time to develop relationships with factories and consistency. It is quite a spread. I don’t want to comment on the exact amount but it is significant. We should see improvement in Crazy 8 initial margins not just next year but in the years to come.

Operator

The next question comes from the line of Connie Wong – Wedbush Securities.

Connie Wong – Wedbush Securities

I have a question on inventory. Obviously inventory was leaner than expected throughout Q3 and had constrained top line. I know you had mentioned go-forward or Q4 end inventory to be flat to slightly up. Can you just talk about what the build is we can expect for Q4? I think you had mentioned before earlier in Q3 you were chasing denim. I was wondering if there were any other key categories you were chasing to build up to the flat to slightly up inventory levels for Q4 end?

Matthew McCauley

Basically denim is certainly one of the categories we chased back into but again we are also anniversarying inventory we wrote off at the end of the year last year. So just naturally our overall inventory should be up or more normalized. At the same time it is more of markdown management so as we went through the third quarter you will see us do the same thing through the fourth quarter. We are always trying to optimize our margin dollars. If we can pull back a little bit on the promotions to maximize our margin dollars we will do that. We spent a lot less time trying to manage that top line comp and a lot more about how we maximize every dollar on each unit we have. That is what you will see happening in the fourth quarter as well. So a combination of chasing back into denim, managing our mark downs and our comparison will end up close to flat to slightly up in the end of the fourth quarter.

Connie Wong – Wedbush Securities

A follow-up question, I know you do some cross-marketing initiatives with the in-store couponing between Gymboree and Crazy 8. Do you think Crazy 8 since it is performing very well benefited from some of the lean inventory levels you had at the core Gymboree concept?

Matthew McCauley

We haven’t been cross marketing in a Gymboree store to a Crazy 8 store, but we have been through an email campaign we will let the customers know it is our newest concept. We have also embraced it in some of our direct mail letting customers know that it is our newest concept. In a limited store mall base where we don’t also share a Gymboree we will let them know over the door it is a concept by Gymboree. So it is very limited use of the Gymboree email list but that is really how we have done it. I think Crazy 8 has really gained most of its market share by being very competitive on price and really by improving our outfits and our color palettes really resonating more with our girl customer than we did last year. So I think those are the real drivers that helped us gain more market share. Less from Gymboree and probably more from the marketplace.

Operator

The next question comes from the line of Rick Patel – Bank of America/Merrill Lynch.

Rick Patel – Bank of America/Merrill Lynch

Can you update us on how far out you have purchased your inventory? When we think about sourcing costs in 2010 when do you think inflationary headwinds are going to begin to offset some of the benefits you are seeing from economies of scale?

Matthew McCauley

We have purchased through the vast majority of 2010 so 2010 is mostly baked. We have the fourth quarter still to purchase, but ¾ of it is pretty much done. Factories and agents are all talking about inflation and talking about the value of the dollar. Our goal has always been regardless of the headwinds we have had, additional headwinds with costing and new testing requirements, our goal has always been to find ways to offset it through new sourcing strategies. There are still a lot of countries we are just entering that a lot of competitors have been in a long time. As we increase our volumes in Crazy 8 and as that becomes a larger percentage of the mix and we still see opportunities to reduce cost of goods. There are a lot of things we have in our mix that is a little bit unique to our story that should help us offset some of those headwinds.

Rick Patel – Bank of America/Merrill Lynch

Can you talk about your marketing plan as we head into the holiday season? I know you are planning to increase marketing in the fourth quarter but what are you doing differently there?

Matthew McCauley

Our strategy is going to continue from what we have been doing this year which is trying to leverage our existing promotions. Make them bigger, make them broader, reach more customers. You will see a very similar calendar, I don’t want to comment specifically for obvious reasons but you will see a very similar calendar to last year and a very similar strategy to try and leverage those existing branded events and make them bigger. We may extend the timing of it. We may go a little deeper in some cases but the vast majority they are very similar to last year. You will also see these partnerships that we have done with Procter and Gamble and Tide continue.

Operator

The next question comes from the line of Linda Tsai – MKM Partners.

Linda Tsai – MKM Partners

How much did AURs increase at Crazy 8 and Gymboree and if you look at your AURs right now where does this compare to where the company has been on a historical basis?

Matthew McCauley

Good question. I don’t want to talk about the amount they have come up. Really the point there we are trying to make is we have talked about how we are being a little bit less promotional. We are seeing better reaction to the girl business and the Crazy 8. So if you take Gymboree the average unit retail came up really because we pulled back on the promotions. We had less days of additional 20 compared to last year. We didn’t go quite as deep on some of our mark downs. In Crazy 8 really we were excited to see the average unit retail coming up because we are seeing a better response at regular price on our Girl’s business, really driven from outfits.

That was really the point we were trying to make. The overall average unit retail came down because Crazy 8 is a bigger part of the mix. Outlet is a bigger part of the mix and those bring the overall company average unit retail down. So we are just trying to give a little clarity to help you understand why the overall average unit retail came down. It is really just because of mix.

Linda Tsai – MKM Partners

With respect to better performance at Janie and Jack did you see more consistent sales trends there during the quarter than at Gymboree and Crazy 8?

Matthew McCauley

I wish we could say we are seeing a lot of consistency anywhere right now. It is very volatile. What we have seen, the one thing that is consistent with Janie and Jack is that it has been steadily improving. It is still volatile but overall kind of if you look at our stock price over time, overall it is volatile but overall over time it is continuing to be improving.

Linda Tsai – MKM Partners

How big of a business is denim right now across your brands and how big can it become in a specific key driver of growing your boy business?

Matthew McCauley

In Gymboree it is not a huge part of our business. That is definitely an opportunity for us. You saw us speak to that coming in the fourth quarter. In the past we have really kind of brought it in with small fashion pieces coming in and out. You will see a larger presence of a broader denim assortment in Gymboree going forward. Really in the fourth quarter and really blowing out in back-to-school next year. You will see the biggest change is that we are going to have more consistent presence of denim going forward in 2010.

It is definitely a bigger part of the boy business than it is for girl so yes that is a big piece of it at the boy market share growth. It has been a very nice percentage of our business in Crazy 8 and where we are seeing improvement there is not bringing a lot of fashion in, marking down and bringing in the next items. Really having a stronger base presence of our seasonal basics while still adding in the fashion. You will just see more consistency with our seasonal basics.

Operator

The next question comes from the line of Dana Telsey – Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Can you talk a little bit about the progress on the drivers of margins, whether it is the lower store build out costs, the impact of outlet and store compensation? How much more efficiency would you need given the promotions that are necessary in this market to move product and be where you need to be?

Matthew McCauley

The biggest drivers, obviously we have been focused on being a lot more efficient in our stores. It is paying off and those are long-term strategies really looking at how we manage our inventory, how we set new lines, how we execute our mark downs, how we hire, all the way to the inth degree on the traffic patterns and how we staff the stores.

So really our new payroll model is set up to help us leverage and be a lot more reactive, responsive to traffic patterns and the business. So we will see that continue to work in our favor as business trends are volatile. We will just be able to respond much, much better than we have in the past.

In terms of what we need to do to continue to maximize our margins, how much more promotional we need to be to drive the business in the fourth quarter, I think what we are trying to do is focus on the things that have been successful for us. All of our promotions, all of our strategies since the beginning of the year have really been to maximize our existing events and promotions. I don’t know, your question is how much deeper do we have to go. I don’t know that we necessarily have to go a lot deeper. Really it is about sometimes we may have to run them a little bit longer. Maybe we have to start them a little bit sooner. Maybe we have to message and promotions a little bit more aggressively and that is what we have been doing. That seems to be working well for us.

Overall our organization is set up to leverage. As I mentioned earlier we have got the staff hired for our new concepts and all of our growth vehicles. As we continue to open stores and as we continue to improve our margins you are going to see leverage across the organization over time. A long winded answer, but did I answer your question?

Dana Telsey – Telsey Advisory Group

Yes, thank you very much. Outlet still doing what you like?

Matthew McCauley

Outlet is very similar to the rest of the brands that when we are more promotional we are facing more headwinds. When we are more promotional we seem to get the consumer to respond. Unfortunately that kind of buckets the customer into more promotional [trends] and putting more pressure on the margins. We are feeling like we are able to change buying behavior with the way we are communicating and managing our promotions.

Operator

The next question comes from the line of Adrienne Tennant – FBR.

Adrienne Tennant – FBR

My question is can you give any color, I think Kip had made some comment on early November. I am sorry I missed it but can you give color on the progression of the comp? Was there a late October drop off as we saw mall-wide? If you can repeat the comment you had said about early November trends?

Matthew McCauley

We were commenting on the fact it seemed like most people in the industry saw a drop off the last couple of weeks of October. We saw the same thing. That downward pressure we felt has continued into November although it has improved slightly. We are still feeling the same kind of downward pressure going into November. Our comments were that we feel like we are well prepared for it. Our strategies are set up to be prepared for consumers who are looking for value.

So that is really our focus and all of our marketing plans and everything we have been doing all year, this doesn’t feel like anything new; that volatility. But it makes you cautious and we want to make sure we are doing everything we can to offset it and it basically feels a lot like the third quarter which is what I had said in my comments.

Adrienne Tennant – FBR

So does the guidance imply an acceleration in comp performance and do the comps compare get easier as we progress through the quarter?

Matthew McCauley

No actually I think this is actually kind of a bigger story for us. Our story is not so much going to be a comp story. If you look at our last year and you look at the comparisons, we didn’t drop off nearly as much as a lot of the retail world. So we are going to be up against very, very different comparisons. Our guidance in the fourth quarter is similar to what we guided in the third quarter. Our expectation is that what we have guided in our earnings is taking into account the trends we are seeing right now. Just like we always do.

Adrienne Tennant – FBR

On the international, if you could talk a little bit about what you would need to see there to move a little bit more aggressively there?

Matthew McCauley

We have really been educating ourselves. We have visited a lot of different countries. We have been exploring a lot of different possibilities and ways to enter these markets. We really want to make sure if we enter a market there is a reason for us to be there and that we can compete. We have been evaluating what price points we should enter those countries at. In the fourth quarter we are going to be giving some pretty definitive information on what countries we will be in, what if any partners we are going to work with and more of a rollout on store plans. So I would like to reserve more of those comments for the fourth quarter but just know we are moving quickly and we have really taken this last year to educate ourselves so that when we enter a market we are going to do it well.

Operator

The next question comes from the line of Robert Samuels – Oppenheimer.

Robert Samuels - Oppenheimer

Can you update us on what sort of cannibalization you may be seeing from Crazy 8 on Gymboree and then any regional differences during the quarter?

Matthew McCauley

Starting with the cannibalization as I said earlier when we first launched Crazy 8 when we had double digit stores we didn’t see any cannibalization which we were kind of dumbfounded with. We felt like something was wrong there because when we planned to launch Crazy 8 we expected pretty decent cannibalization. What we have seen over the last 3-4 months is that there is some cannibalization but it is still less than what we had planned for.

I can’t tell you much more than that other than the fact that we know the kids customer shops everybody who is in the mall and anybody who sells kids. Our goal has always been to take away the reason for our customers to shop the competition to shop the competition. Those that shop the competition, give them every reason to shop with us. That is what we have learned. We are really, really happy with the amount of cannibalization we have seen.

Your second question was about regional performance. The best performing region was the Midwest, followed by the South, south central was after that, Mid-Atlantic, then the lower performing markets were Great Lakes, Southwest, Northwest and Northeast in order.

Operator

The next question comes from the line of Margaret Whitfield – Sterne, Agee Capital.

Margaret Whitfield – Sterne, Agee Capital

Following up on Adrienne’s question and that last one, if you could comment on anything that was specific in the latter part of October or early November to geographic markets being more soft than others or categories perhaps tied to cold weather I would appreciate it.

Matthew McCauley

We wish we could tell you what it was but we saw kind of across the board, across all brands, all categories. Obviously the timing of Halloween might have some impact but just in general we are seeing softness that I have to be honest with you we have seen this happen all throughout the year where you are cruising along and things are great for a couple of weeks and then the next couple of weeks are off and they are down. You are scratching your head saying what changed? This speaks to the volatility we are seeing in the market and as cautious as we are I don’t want to over alarm people. It is very similar to what we have been seeing throughout the year. It is just the volatility in the market.

Margaret Whitfield – Sterne, Agee Capital

So it is a traffic issue you saw in the latter part of October and early November?

Matthew McCauley

We don’t have our store traffic counters across all of our brands. Obviously Shopper Track reported traffic numbers down in the malls for the last two weeks of October and it didn’t surprise us when we saw those numbers.

Margaret Whitfield – Sterne, Agee Capital

Any calendar issues for the holiday period you would like to call out? The extra shopping day in December? The earlier Hanukah?

Matthew McCauley

I wouldn’t call those out as anything that is going to significantly move the needle for us in the quarter. I think we have a lot of other moving parts that we have talked about that are more meaningful to our business.

Margaret Whitfield – Sterne, Agee Capital

Anything last year where you felt you could have executed better which might be an opportunity this year?

Matthew McCauley

We have continued to try to maximize our Jingle Deals and we feel there is an opportunity for us to message value better. We have worked on that, especially in Crazy 8. We feel like we can maximize our message of value both within the stores, in our emails and in our windows so you will see that. But definitely our messaging of value throughout the quarter. You will see that improve.

Margaret Whitfield – Sterne, Agee Capital

Last night in my local store they had set up a special occasion line at Gymboree in Shore Hills, apparently only in a limited number of doors. Can you amplify how many doors and what that is all about?

Matthew McCauley

It is not a lot of doors. You won’t see that across the board. Periodically we will test things in certain stores and measure the impact on traffic but it isn’t something we are going to be expanding on in a major way.

Operator

The next question comes from the line of John Morris – Bank of Montreal.

John Morris – Bank of Montreal

A follow-up question on Crazy 8. You have done a great job there by the way. In terms of where you see the mix of business going for Crazy 8 versus Gymboree, let me ask it specifically this way, by the end of 2010 how many Crazy 8 stores will be on the mall versus off-mall locations? What kind of a mix would you expect to see there and with that what kind of a mix would you expect to see steady-state over time?

Matthew McCauley

The vast majority are still in malls. We have a handful that are off-mall that are doing well for us but the vast majority are in malls. We feel like that is really the right place for us to start with trying to build a new brand. We have the traffic in the malls. It makes sense to start there as we build the brand. Then we eventually can spread out and move off-mall locations which have very attractive leases and the four walls look very, very nice there. But in order for us to build a brand we want to maximize the footsteps in malls.

John Morris – Bank of Montreal

I know you have talked before previously about the learning geographically as you open up those stores relative to where you put the Gymboree’s. As an example, by the end of next year what would be the overlap between Crazy 8 and Gymboree say within a five-mile radius of the Gymboree? Is it mostly around there or would it not be quite the case?

Matthew McCauley

There is going to be a large percentage of them that are actually in the same mall. Really what we are targeting is more of a demographic here. Sometimes there is a great Gymboree there and sometimes it may be a below-average Gymboree. We are finding, which is exciting for us because that is what we anticipated, but this is a different customer even though there is some overlap. It is a different customer and where we are going to have the most successful Crazy 8 doesn’t necessarily correlate with Gymboree performance.

Operator

The next question comes from the line of Stacy Pak – SP Research.

Stacy Pak – SP Research

Going back to SG&A and gross margin, Blair can you tell me again what were the drivers of the increase for Q4 and do you expect those to be drivers of an increase in SG&A dollars or percent, however you want to talk about it, for 2010? On the gross margin I guess I am a little surprised you are not expecting a greater increase given the 500 plus decline last year. So you are not even keeping pace on a two-year or three-year with 3Q and I am wondering if there is a reason for that? Is there something I don’t understand or is it just kind of being conservative because of potential promotion? Lastly, can you comment on the performance of denim in Q3? How happy were you with it? Would you be making changes to it, etc.?

Blair Lambert

On the SG&A side, the Q3 slow down or decrease in leverage and really going the other way is driven by more marketing costs which is really mostly a timing issue where we didn’t incur it in Q3 this year. We are incurring it in Q4. That is actually the biggest item. There are some professional fee differences. Then they are offset by savings in compensation. But the amount of savings is much less than the amount of savings we received in Q3. That is why you see sequentially some differences because we are starting to annualize a lot of those corporate compensation and incentive compensation differences and savings we incurred in the prior year.

Stacy Pak – SP Research

On the SG&A then how should we be thinking about that for 2010?

Blair Lambert

We haven’t put guidance out for 2010 but as Matt said we are always focused on trying to leverage expenses and as we grow the sales base we think organizationally we are set up in such a way to be able to continue to leverage the corporate office. I mean the simple things like we don’t have another design staff to hire for Crazy 8. We don’t have another merchandising staff for Crazy 8 and we use the shared services approach within places like real estate, construction and systems and even the distribution center. I think our distribution center can handle up to about1,500 stores in the current environment. So we have good opportunity to leverage those types of facilities.

In terms of gross margin if you look back at last year in the fourth quarter we had about a $5 million charge, actually $6 million in gross margin so about 200 basis point difference in terms of margin. Obviously that piece needs to come back. In addition to that we are counting on some additional savings. We are saying in that 100 basis point kind of range. Again, our 200-300 basis point estimate. That is offset by 50 basis points of de-leverage in occupancy. So on balance we think those numbers are pretty good relative to where we were last year. Then there is also some AUC savings that should support that margin.

Stacy Pak – SP Research

When you are looking again to 2010 on gross margin what are you thinking on the AUC savings?

Matthew McCauley

We haven’t said the amount but we anticipate savings to continue throughout 2010. When we actually give guidance for 2010 we will talk about roughly how much you can expect like we did this year and the year before. The real message is we are expecting it to continue to improve through 2010.

Kip Garcia

I can talk about denim a little bit. Denim was extremely important for us in the third quarter particularly in back-to-school. It was supported to varying degrees by brand and actually our plans right now are to make it so we can maximize denim in each brand concept going forward based on that brand strategy. Number one, Crazy 8 was the best prepared to maximize denim and that momentum has continued all the way through the third quarter and now. What has been important for that brand is we right from the beginning established a denim statement and have great sourcing in denim actually right now. The cherry on the top of the cake really was our fashion denim on top of our basics also performed very well.

Having said that, we are in a denim cycle right now and everything is happening within denim. Silhouettes there is varying silhouettes where we can really maximize our washes, details, trims are very fashionable right now. The skinny jean is happening but also the boyfriend and girl. So we think we are really set up to really maximize that business.

Gymboree we missed it in the third quarter because it far outsold our expectations. I am happy to say the famous reorder is being allocated right now. So we will be back in business.

Matthew McCauley

I think it is our first denim reorder.

Kip Garcia

We are really pleased that we actually hit the timing and deadlines we wanted to. We will be back in business in denim for Black Friday there. Commenting on Outlet and the Janie and Jack store, in Janie and Jack we are adding denim as a fashion business. It won’t be basic categories but it is also important in that brand. Outlet and Gymboree both are planning outlet headquarters on a much more extended basis nearly year-round for next year. To answer your question denim is very important to us and we are also very cognizant of the fact we are in a denim cycle right now and we will be prepared to maximize it. We will also be prepared on the downside.

Operator

The next question comes from the line of Janet Kloppenburg – JJK Research.

Janet Kloppenburg – JJK Research

Just a couple of questions on the trends. You talked about your inventory being pretty light in the third quarter and you just talked about being sold out on denim, etc. I know you are talking about the industry trends and the slow down but could it be when you analyze the business maybe you lost some sales because your inventories were too light and on that note when do you think they will be back where you want them to be during the fourth quarter?

Matthew McCauley

Certainly there is that possibility and we know in certain categories we have lost sales which we have talked about. I think you have a lot of moving pieces. Where we are comfortable with our inventory starts to get more normalized is at the end of the quarter. So it builds through the quarter. By the end of the quarter we are in more of a normalized position.

Janet Kloppenburg – JJK Research

I know you said your promotional plan was about the same this year as it was last. I am wondering if these kinds of trends continue if you have the ability to become more aggressive maybe in reaction to what is going on in the environment?

Matthew McCauley

For sure. You will see us be more aggressive pretty quickly and the way we will do that is we may start promotions a little earlier. We might let them run a little longer. We might start something where we have done a $25 off later in the promotional cycle and we might start that a bit earlier. We know that we can change buying behavior with our events and our promotions and our pricing. Yes, we have the ability to do it overnight. I have never seen a group or a team more dynamic and able to react to business than this group.

Janet Kloppenburg – JJK Research

I am just wondering, is there anywhere in October and here in November where the sales have maybe softened more than you expected? I think there is some inventory play in there too so it is hard to say, but is there any grouping or product category that perhaps you were disappointed in the performance of and maybe you could correct during the course? Or maybe just these things happen, right?

Matthew McCauley

I think it is really a combination of a lot of things happening at the same time. As I mentioned before it is across categories, across brands. It certainly seems to be pretty macro at that level. At the same time our inventory position is actually better than it was going into the third quarter. It is still not as high as we would like it but it is better than it was going into the third quarter. We just have different comparison challenges as we go into the fourth quarter.

January, as you know, we had much higher mark downs last year. We are going to try not to anniversary that as much so that puts a little bit more pressure on our comp. So it is not really an apples-to-apples comparison if you look at a negative 2 in Q3 last year and a negative 2 in Q4 this year. There is a little bit more pressure as a comparison in the fourth quarter.

Janet Kloppenburg – JJK Research

On that note, because there was so much mark down in the fourth quarter I know you are going to recapture the $6 million you lost on that write off last year, isn’t there some opportunity for additional gross margin improvement because of the fact that mark downs will be so much lower than last year?

Matthew McCauley

We certainly hope so and we are kind of banking on that for that month. Our guidance has really taken into account the trend that we are seeing right now.

Janet Kloppenburg – JJK Research

So there could be some change as we go through?

Matthew McCauley

Absolutely. We usually try to communicate as soon as we see that change we communicate it.

Janet Kloppenburg – JJK Research

Did I get it right SG&A should be up about 4% in the fourth quarter?

Blair Lambert

We didn’t put a percent on it. We talked directionally as a percent of sales we see flat to a little bit of an increase in basis points year-over-year.

Operator

The next question comes from the line of Lee Giordano – Imperial Capital.

Lee Giordano – Imperial Capital

A question on promotions. From what you have seen thus far, how are customers responding to promotions at Crazy 8 compared to Gymboree? Are you seeing any differences there? If so, how is it impacting your strategy?

Matthew McCauley

I think in general most customers regardless of brand or household income are responding favorably to price and to the message of value. We are seeing that in Janie and Jack even. The difference is that Gymboree has some pretty well established branded events that we have made some adjustments to increase the awareness on those so we are getting customers to respond kind of over the top with those big branded events when we launch them.

Crazy 8s is a little bit more of everyday low price. So it is less of a reaction to a big branded event whereas Gymboree has established those events for a long time and it really moves the needle when we launch them. So Crazy 8 every customer. Janie and Jack, Gymboree, Crazy 8 customer responds to value. Most reactive in Gymboree with branded events. Less reactive in a Crazy 8 where it is more of an everyday low price.

Lee Giordano – Imperial Capital

What are your expectations this year for the gift card business and are you planning anything special the week after Christmas?

Matthew McCauley

We don’t want to comment on our specific plans around those things but in general gift card has not been a huge part of our business. It hasn’t even grown at the same rate probably as what you have seen in the industry, a little bit less in the kids business in general. It is an opportunity that we have identified and have made efforts to communicate it better in our stores with our in-store marketing. You will see some in our emails but mostly in the in-store marketing but not a major driver.

Operator

The next question comes from the line of Dorothy Lakner – Caris & Co.

Dorothy Lakner – Caris & Co.

Just to go back to Kip for a second on the denim question I just wondered are you specifically planning to have more denim beginning in the spring or is this going to be more of a back-to-school thing in Outlet and Gymboree? Are you seeing any difference in traffic at the outlets versus the malls? Just thinking about the softness at the end of October and beginning of November. Lastly, is there anything you can share with us on the international side? Just in differences you are seeing in customer response versus the US?

Kip Garcia

On denims just by brand, you didn’t mention Crazy 8 but Crazy 8 is in great position on denim.

Dorothy Lakner – Caris & Co.

I meant outlet and Gymboree.

Kip Garcia

Gymboree will have more denim than they did last year. So we will be better positioned definitely peaking for early back-to-school and through the back half of the year after that. Outlet will be a little bit slower but we are planning on major denim statements in Outlet, about the same time around June.

Matthew McCauley

In terms of international, in general first of all the test we have done in the U.K. is over but what we have learned is a lot of our best sellers, our best sellers worldwide we are actually able to look at that analysis on our online selling as well. In the U.K. we learned a lot about the back-to-school business there, uniform business was probably one of the biggest take aways from when we were there last go around. So that is one of the big take aways. In general we are feeling optimistic about what we have learned there. There is definitely a great customer response to our product. So that is the exciting part.

I want to make one other comment about our promotional strategy going through the fourth quarter there was a question about whether or not we can react to it and we have built our plans all the way through the fourth quarter with backup plans and we are completely prepared with our marketing, in-store marketing, to pull levers depending on how the traffic trends are and the demand trends are. There won’t be a lot of knee jerking. We have three backup plans depending on how business goes.

Dorothy Lakner – Caris & Co.

Could you comment on if you are seeing any difference between the outlet traffic? Is it more consistent at the Outlets versus the mall or is it kind of the same pattern?

Matthew McCauley

There is still volatility there. One of the things we did to drive some of that volatility is we started issuing Gymbucks Coupons in the outlets which is a great thing. It drives average trans up and actually brings those customers into the retail stores for redemption. That is the only place they can redeem them. We have created some of that volatility and overall we are very happy with the results of that.

Operator

The next question comes from the line of Marni Shapiro – The Retail Tracker.

Marni Shapiro – The Retail Tracker

Kip a special congratulations to you because that holiday line is phenomenal and that blue and ivory dress at Janie and Jack was gone in about an hour and a half. It was amazing. Can you give me an update on your direct business across the brands? Is it consistent with what you are seeing in the stores? Are you seeing lift at different times? Can you talk a little bit about your online international business? If you can highlight also just some of the other categories you haven’t mentioned at all today? Accessories and shoes, pajamas, you mentioned Halloween but I was just curious about some of the ancillary products because there was some great accessories in the store.

Matthew McCauley

Speaking to directionally our web business is very similar to our stores. The web business response is probably amplified a little bit more when we do events and promotions. What we are seeing internationally on the web business is we have actually seen some benefit with the exchange rate and so year-over-year we are seeing some improvement in our international web business. In terms of categories, I will Kip break down the details but certainly shoes have been very, very strong for us in all brands. We are excited to see that.

Kip Garcia

Shoes have been phenomenal. As Matt said it is across the brand. What is selling is the more unique we are the better they sell. We have definitely had an uptick in boots. Boots is a trend right now. We had really great boots across the brands including Janie and Jack. Then going back to Janie and Jack specifically those over the top shoes, we actually did shoes with silk pink peony to match the dresses. Those shoes were phenomenal as well. It has been at every price channel that shoes have been phenomenal. I have to say that is where the majority of our growth in accessories has been.

Also, sleepwear is a new category for us in Janie and Jack and the response to that has been pretty exceptional so that is definitely an opportunity for that brand going forward. Our family dressing in Gymboree continue to be a favorable to customers. We have been pleased with that business as well.

Operator

The next question comes from the line of Bill Dezellem – Tieton Capital Management.

Bill Dezellem – Tieton Capital Management

You have actually hit on a couple of the aspects of this question but I am a bit confused given in the third quarter you had earnings per share that were better than the year-ago third quarter and yet your guidance for the fourth quarter essentially the earnings per share straddle the year-ago Q4. However, you have somewhere in the neighborhood I think you said of a $0.06 to $0.08 per share benefit simply from Crazy 8 alone and last year you had the January markdowns that would have negatively impacted profits last year. It sounds like there was some marketing that moved into this quarter but I am confused if that in and of itself is enough?

Blair Lambert

The first thing you have to do is take a look at that tax rate because the tax rate was only 33% last year. So back out the impact there. A more normalized rate is that 38-38.5% which is probably worth about $0.08 on a tax basis. Let’s start there.

Matthew McCauley

Overall, a kind of [QYOY] comparison, we also have to take into account that we had the tax benefit that offset the $6 million write off so really a real apples-to-apples comparison would be $1.04 last year $1.03 this year. So if you kind of start there on the baseline you are absolutely right, we are also banking on a swing in the Crazy 8 benefit. So that implies the rest of the business has lower earnings. That is exactly what we are saying. There is more pressure. Even though we had margin upside in January, we still drove margin dollars. We are hoping to benefit on that. We should drive not nearly as much comp, more margin dollars. As a whole, the rest of the business is under more pressure which we have been speaking to. Janie and Jack continues to be under pressure. We are hoping that is kind of normalizing now and improving. Gymboree continues to be under pressure.

What we have seen is we are getting great responses in the promotions and the events and a lot more pressure during the non-events. We are able to offset a lot of it but overall that puts more pressure on your Gymboree margins. Very profitable sales but compared to last year we are going to have a bigger bucket into the promotional sales which has more margin pressure. Hopefully that kind of clarifies what is happening. There is a lot o moving pieces there. Does that make sense?

Bill Dezellem – Tieton Capital Management

One point of clarification though, that volatility and pressure on the business it is not increasing for the fourth quarter it is just a continuation of more of the same?

Matthew McCauley

That is exactly right. So as a comparison to last year there are a lot of other moving pieces there. I think the bigger message here is looking at us going forward we are a very different story than the rest of retail out there. If you look at our comps this year, what we will be up against next year are much more modest decreases compared to the rest of the world. Our story is more about a growth story and a leverage story over time. The only exception to that would be the first quarter of 2009 where we have a little bit more upside and a little bit less pressure. In general that statement is true.

Operator

The next question comes from the line of Brian Tunick – JPMorgan.

Brian Tunick – JPMorgan

I guess following up on the last one, you talked about the volatility of the business or the growth. I am just curious of the buyback announcement. What was the timing? Why did the board feel now was appropriate? What are they seeing? Obviously what kind of CapEx thoughts does that imply for next year? Then Blair just trying to understand your comments on the fourth quarter SG&A a little, are you saying you are not going to have bonus and incentive accruals working against you in the fourth quarter? It seems to be a lot of the retailers that seems to be reversing for them.

Matthew McCauley

I will start with the buyback and the question is why now. I think there is a lot of conversation about the buyback at the beginning of the year. The cash balance continues to grow but yet there was a lot of questions about where is the business going. What is happening in the economy. How much do we need to be prepared. I think there is a comfort level now that even with a challenge in comps, we still generate a lot of cash. So it gives people more confidence and comfort with our ability to generate cash even with a down economy so you get a little bit more comfortable with how much cash you need and identifying excess cash. At this stage we feel like that is a good investment for us at the right prices and still leaves us with plenty of cash to support all of our long-term growth initiatives as well as being opportunistic about anything that comes our way.

Blair Lambert

In terms of incentive, the incentives we do at the company are always performance based. The top four are not taking an incentive bonus this year. Through the rest of the organization, in certain periods they have earned incentive compensation. Frankly we all hope and you all hope they get the incentive compensation in the fourth quarter because the performance will have to be there for that to happen. But it is performance based.

Brian Tunick – JPMorgan

How do you accrue for incentive comp? Is it 25% for the Q2, Q3 and a true up in Q4? How do you accrue for it?

Blair Lambert

It is actually much more of a quarter by quarter discussion.

Operator

There are no further questions.

Matthew McCauley

Thanks everyone for joining us on the call. If you have any further follow-up questions you can reach us at our Investor Relations line at 415-278-7933. Thanks so much.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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Source: The Gymboree Corporation Q3 2009 (Qtr End 10/31/09) Earnings Call Transcript
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