Gymboree Corporation (GYMB) Specialty retailer operates stores selling apparel and accessories for children and women under the Gymboree, Janie & Jack, and Janeville brands. Same store sales have been very impressive lately, remarkable considering that Gymboree faces stiff competition from department stores and mass merchandisers.
Because children's apparel is no-moat business (low switching costs/jumpy pricing environment), investing in Gymboree is somewhat risky. The fight for market share means inconsistent revenue patterns and meandering value propositions. All that said, we like how Janie & Jack has captured the high end portion of Gymboree's target market. The boutique-style operation is expected to have 80 outlets up and running by 07. With better inventory control, Gymboree could be a strong contender. We await a more predictable operating margin picture from Gymboree, which is debt free.
Kimberly Clark Corp. (KMB) Kim, which manufactures a plethora of paper, health, & hygiene products, remains the diaper king. Because baby got back, parents will need to load up on Huggies, the #1 diaper brand in the world. Smooth behinds are not the only thing behind this stock -- Kimberly Clark is currently carving out some new strategic paths to see what fits best; last July the firm announced a $775M restructuring plan.
We like how management has executed on the cost savings side. Now, we'd like see them figure out how to pass those high raw material inputs onto the consumer, as well as strike out with some new innovative, market penetrating add-ons.
Kimberly's revenues have grown in the middle single digits over the last 5 years, clearly not eye-popping numbers (Kim has positioned itself as a value-provider), but we admire the name's generous cash flows and solid financial health. Disclosure: This is a name we own for our own portfolio.
Leapfrog Enterprises Inc. (LF) The riskiest bet of the group, we think. Leapfrog makes toys for children in the 6 month to preteen segment. Toys are an unattractive industry if you're looking for a steady stream of earnings: what could be more volatile than that hottest gizmo your kid is pining day and night for? One day it's Pokemon, the next day it's Teletubbies.
Leapfrog had a terrific 3 year run (sales mushroomed fivefold form 2000 to 2003, thanks to the Leappad), but since then, it's been struggling to regain customer attention by aggressively marketing its core educational product niche. It's latest gadget is the FLY pentop computer, which most analysts predicted would stumble. They were right -- the pentop has yet to grab critical mass, so it look's like Leapfrog's time is running out. Since over 60% of Leapfrog's sales come from the Walmart/Target channel, a sudden dearth of product innovation could spell lower shelf space, which would in turn spell disaster.
Although LF has a clean balance sheet and $95M in cash to deploy on new projects, overall you have an unpredictable company operating in a fragmented industry -- approach this one with caution.
In conclusion, although they are accompanied by mildly uninspiring risk/rewards, we believe these names are at the center of what could very well be an explosive demographical shift.