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With over 581 Gymboree retail stores, 57 Gymboree outlet stores and 81 Janie and Jack stores, San Francisco based Gymboree Corporation (NASDAQ:GYMB) has positioned itself well since 1986 in the growing area of clothes for children aged 0 to 12.

While Gymboree and its competitors Carter's (NYSE:CRI) and Children's Place (NASDAQ:PLCE) have been on my radar for quite some time, I started taking a closer look at the group in early May. Unfortunately, the group as a whole had an outstanding month before this article was published and Gymboree gained 17.07% in May. These gains were driven by better than expected quarterly results and because Gymboree raised its outlook for 2007 to a range of $2.42 to $2.46 from its previous guidance of $2.36 to $2.40.

As long-time readers are aware, I believe we are in the middle of a "new baby boom", which I discussed last July. Beyond anecdotal evidence of this trend, the US Census Bureau has stated that the number of children aged 5 and under is expected to grow more than 10% over the next decade. While this is certainly favorable for children's retailers like Gymboree, what excites me most about Gymboree at this juncture is the company's decision to launch a new division called Crazy Eights. This new division will sell clothes at a lower cost than its flagship brand and will target a wider range of kids from age 0 to 14. Just like Carter's entered Gymboree's space with its acquisition of OshKosh kids stores in July 2005, Gymboree appears to be entering Carter's space with the launch of Crazy Eights. If this new brand succeeds and if management can retain focus on the Gymboree brand, the stock has a lot of upward potential. Crazy Eights could become to Gymboree what Old Navy became to Gap (NYSE:GPS).

With a P/E of 22.99 and a P/S of 1.67, Gymboree does sell at a premium to its competitors but the company also enjoys better operating margins of 13.75% and a higher earnings growth rate of 16.6%. Considering that the forward P/E of 15.85 is less than the average P/E of the S&P 500 and less than Gymboree's 4 year P/E range of 17.1 to 34.2, this company that has no debt on its balance sheet begins to look quite attractive. The company also happens to have about $5 per share in cash and short-term investments on its balance sheet and will most likely be able to fund the expansion of the Crazy Eights stores from cash flow instead of debt.

Any discussion of a company in the retail sector is not complete without looking at an important metric called same-store sales that compares the sales at stores that have been open for a year or more. Gymboree saw same-store sales growth of 3% in the first quarter and expects same-store sales growth in the low-to-mid single digits in the second quarter. It should be noted that in the month of April, Gymboree actually saw same-store sales drop by 5%. I am not sure how much of that could be attributed to the shift of the Easter holiday to March.

Since the stock has appreciated so much in such a short period of time, I am considering waiting until the stock takes a breather before initiating a position just like I mentioned for Unilever (NYSE:UL). In fact, with its recent pullback and 4.1% dividend yield, Unilever is beginning to look very attractive right now, especially as the company plans to pay its "final" dividend of 32.04 pence (63.4 cents) sometime in June.

The Numbers:

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GYMB 1-yr chart

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Source: Gymboree Prepared to Capitalize on the New Baby Boom