EFTA01466613.pdf

Deutsche Bank Markets Research United States Company Gymboree Corp HY Corporate Credit Retailing Still Waiting For The Turnaround Friday the 13thth came a day early with fiscal 3Q13 results yesterday We were surprised and disappointed by the dismal results from Gymboree as the company took a step backwards on its turnaround effort. With new management installed in January 2013, admittedly there was little that could be done by them to refine committed designs for the fall and holiday seasons but the quarter was also beset by increased promotional activity and a fulfillment issue on the e-commerce platform. Modest silver linings on strong inventory control and a $25 million bond repurchase were encouraging but not nearly enough to turn investor sentiment on the credit. We recognize that the competitive environment in children's apparel is very challenging but feel that management is on the right path with its inventory control and a revised design aesthetic slated for the Spring 2014 season. With positive free cash flow and potential for additional bond repurchases, full access to the revolver as of the earnings call, no meaningful maturities until 2018 and attractive yield, we maintain our long-term positive view on the term loan and our BUY recommendation on the bonds. Getting design right We've heard a lot this year from the new management about needing to have clearer points of view on design, providing fresh takes on classic looks and continuing to stream new flow through the stores while still reducing the SKU proliferation but the major disappointment is that very little of these critical action items were actually actionable for the fall and holiday seasons. With nine month lead times in design the fall season was already done when management came on board and holiday was nearly complete as well. Crazy 8 pause The Janie & Jack and Gymboree banners outperformed the company's value oriented growth concept Crazy 8 for the quarter, which we believe is a good reason to take a pause in the hereto rapid growth of the brand. With 383 stores at quarter end, the Crazy 8 banner should be the outperforming concept in our opinion given the cautious consumer. Our sense from the earnings call is that management may scale back its Crazy 8 openings, roughly 85 this year, further in 2014, along with cap ex, as it works to get the assortment of basics and key items aligned with its target demographic. E-commerce platform fix underway The transition to a new 3rd party DC for web fulfillment in the quarter did not go smoothly as management was forced to scale back promotions so as to not overwhelm the system. In addition to missed top-line opportunities, the EFTA01466613 company paid $1 million in additional expenses to remedy customer orders. Management noted that it's on-line "Black Friday" promotions were handled correctly by the system and that while not yet 100%, they are continuing to make progress on this important part of the go to market strategy. Risks We remain cautious on competitive pressure, promotional environment, gross margin, inventory, input costs, e-commerce platform, capital expenditures, store openings, management changes and execution on design. Outstanding Issues Issue 9.125% Sr Nts Term Loan Source: Deutsche Bank Deutsche Bank Securities Inc. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013. Ticker GYMB GYMB Maturity Date 12/1/18 2/23/18 Coupon Rate 9.125 L+350, 150 flr Price 91.00 95.00 YTW 11.6% 6.4% STW 1002 Ratings Caa2/CCC B2/BDate 13 December 2013 Karru Martinson Research Analyst (+1) 212 250-1606 [email protected] EFTA01466614 Gymboree Corp HY Corporate Credit,Retailing 13 December 2013 Page 2 Deutsche Bank Securities Inc. Figure 1: Gymboree Corporation (GYMB) Historical and Estimated Results (dollars in millions) Gymboree Corporation Deutsche Bank High Yield Research Historical and Estimated Financial Performance (Dollars in Millions) FY07 Operating Data Net Sales Cost of goods sold Gross Profit Advertising, selling, general and administrative expense EBIT Interest expense, net Income taxes Other Net Income Cash Flow EBIT Depreciation & Amortization Other/Stock based compensation EBITDA Adjustments Adjusted EBITDA Capital Expenditures, net EBITDA-Capex Cash Interest Expense Cash Taxes Working Capital (income) Other Acquisitions, net Dispositions Free Cash Flow (loss) Growth & Margin Data Sales Growth EBITDA Growth Gross Margin SGA/ Sales Operating Margin EBITDA Margin Capitalization Cash ABL Revolver ($225mm, Mar-17) $820mm Term Loan (L+350, 150 bps flr, Feb-18) Total Senior Secured Debt $400mm 9.125% Sr Nts (Caa2/CCC, Dec-18) Other EFTA01466615 Total Debt Net Debt Interest Coverage and Leverage Total Sr Sec Debt/ LTM Adj EBITDA Total Sr Debt/ LTM Adj EBITDA Total Debt/ LTM EBITDA Net Debt/ LTM Adj EBITDA $ 478.0 442.8 312.5 130.2 0.2 53.1 (3.4) 80.3 130.2 31.2 16.4 177.8 177.8 68.8 109.0 0.0 58.6 11.4 39.0 $ $ $ FY08 1,000.7 524.5 FY09 535.0 476.2 327.9 $ 148.3 0.2 56.2 (1.5) 93.5 EFTA01466616 148.3 34.9 19.9 203.0 203.0 56.1 146.9 0.1 62.6 (9.8) 94.0 479.9 316.3 $ 163.6 0.2 62.8 (1.3) $ 101.9 $ 163.6 37.3 18.5 219.4 219.4 39.6 179.8 0.1 53.7 (16.0) $ $ $ FY10 616.2 458.3 386.2 72.1 17.4 26.4 (0.2) 28.6 72.1 39.9 EFTA01466617 16.3 128.4 107.8 236.1 52.3 183.8 17.7 25.8 53.3 1,410.9 $ 142.0 (1,323.9) $ $ FY11 1Q12 1,188.3 728.3 $ 175.9 459.9 380.1 79.8 89.7 (6.6) 42.0 $ (45.3) $ $ 79.8 57.9 5.9 143.6 49.0 192.6 36.6 156.1 74.6 1.3 (27.9) 17.4 1.4 $ 89.3 $ $ 121.8 91.7 $ 30.1 21.7 3.0 0.4 EFTA01466618 5.0 30.1 14.2 1.4 45.7 5.2 50.8 8.6 42.2 21.7 3.0 5.9 11.6 $ $ 2012 $ 268.8 179.6 3012 $ 311.5 185.9 (13.5) (0.8) $ $ (13.3) $ (6.4) $ 14.6 1.5 9.7 6.7 16.4 9.9 6.5 21.2 (13.5) 2.3 (3.4) $ 26.6 21.3 0.5 (0.1) 4.9 26.6 14.7 EFTA01466619 0.3 41.6 5.3 46.9 13.4 33.5 21.3 0.5 19.4 (7.7) $ 4Q12 FY12 $ 794.3 1Q13 2Q13 3Q13E 3Q13 $ 397.6 1,275.7$ 292.8 252.9 (6.4) $ 21.2 $ 144.8 125.4 19.4 21.5 4.4 (0.8) $ $ (5.7) $ 19.4 14.9 1.0 35.3 12.3 47.7 15.9 31.7 16.5 4.4 (33.4) 0.1 EFTA01466620 411.7 69.7 85.6 (5.6) (1.3) (9.0) $ 69.7 58.4 4.3 132.3 29.5 161.8 47.9 113.9 80.6 (5.6) (5.8) 0.1 44.6 16.3% 8.7% 1.4% 5.9% 10.6% 10.2% 3.8% 2.8% 11.7% 7.4% 22.1% 14.2% 8.1% 7.6% -18.4% -14.4% -35.9% -22.5% $ $ $ 171.8 89.2 95.6 125.6 99.0 121.0 104.1 16.8 20.4 (0.7) (0.4) (2.5) $ 16.8 12.6 1.5 31.0 5.0 36.0 10.7 25.3 20.4 (0.7) (8.3) EFTA01466621 13.8 $ $ 290.9 183.8 $ $ 337.7 191.5 $ $ LTM 4Q13E FY13E FY14E 31-Jan-08 31-Jan-09 30-Jan-10 31-Jan-11 31-Jan-12 30-Apr-12 31-Jul-12 31- Oct-12 31-Jan-13 31-Jan-13 30-Apr-13 31-Jul-13 2-Nov-13 2-Nov-13 2-Nov-13 31- Jan-14 31-Jan-14 31-Jan-15 920.8 $ 1,014.9$ 1,074 5 $ 297.8 $ 309.8 1,291.2 186.4 107.1 102.0 5.1 20.5 (6.1) 0.1 (9.3) $ 5.1 10.7 1.5 17.2 7.6 24.8 12.6 12.2 20.5 (3.1) 8.4 $ (13.5) $ $ 146.2 105.0 41.2 19.3 7.9 14.0 41.2 14.5 55.7 EFTA01466622 55.7 13.0 42.7 19.3 4.7 16.0 2.6 123.5 111.2 12.3 20.5 (0.0) (0.0) (8.2) $ 12.3 10.9 1.4 24.6 9.3 33.9 12.0 21.9 20.5 (0.0) (5.1) 6.6 -1.7% 8.2% 8.4% -0.5% 1.0% -16.0% -29.2% 51.4% 18.7% -27.7% 4.9% 5.5% 33.3 (33.3) 0.Ox 0.Ox 0.Ox EFTA01466623 -0.2x (140.5) 0.Ox 0.Ox 0.Ox -0.7x (257.7) 0.Ox 0.Ox 0.Ox -1.2x 769.1 769.1 371.0 5.8% 1.7% 12.2% 26.8 767.6 767.6 371.0 33.0 763.4 763.4 371.0 1,101.4 4.0% $ $ $ 794.9 496.3 442.7 53.6 82.8 (2.4) (1.1) (25.7) $ EFTA01466624 53.6 49.1 5.5 108.1 34.3 142.3 51.2 91.2 77.8 0.6 (38.3) 0.1 51.0 $ $ $ 374.6 1,268.2$ 1,295.3 240.5 $ 782.5 $ 134.1 116.1 18.0 19.3 (0.5) $ 485.6 433.5 52.2 80.6 (7.3) (0.4) (0.8) $ (20.8) $ 18.0 14.5 32.5 32.5 14.0 18.5 19.3 (0.3) (26.4) 25.9 EFTA01466625 $ $ 52.2 48.7 4.4 105.2 21.9 127.2 49.2 77.9 80.6 (4.1) (31.4) 32.8 $ $ $ 777.5 517.8 438.4 79.4 77.1 0.8 1.5 79.4 58.0 6.0 143.4 4.0 147.4 40.0 107.4 77.1 (0.3) (12.4) 43.0 -5.8% -0.6% 345.2% -31.9% -21.4% 494.4% 48.1% 47.6% 47.3% 42.7% 38.7% 40.9% 33.2% 40.3% 36.4% 37.7% 41.3% 36.8% 43.3% 39.8% 38.4% 35.8% 38.3% 40.0% 33.9% 32.8% 31.2% 35.9% 32.0% 30.8% 35.6% 31.8% 31.5% 32.3% 35.6% 35.1% 31.1% 35.9% 34.3% 31.0% 34.2% 33.8% 14.1% 14.8% 16.1% 6.7% 6.7% 10.1% -2.4% 8.5% 4.1% 4.8% 4.1% 6.1% EFTA01466626 19.3% 20.3% 21.6% 22.0% 16.2% 17.1% 6.1% 15.1% 12.0% 12.7% 12.3% 8.5% 16.5% 10.9% 11.0% 8.7% 10.0% 11.4% 33.3 140.5 257.7 32.1 820.0 820.0 400.0 77.9 811.8 811.8 400.0 88.3 807.9 807.9 400.0 1,119.6 54.6 792.3 792.3 400.0 1,137.7 42.6 790.3 790.3 400.0 1,147.7 33.3 769.1 769.1 371.0 1,106.8 1,106.8 43.1 767.5 EFTA01466627 767.5 371.0 1,095.3 1,111.8 19.1 24.0 767.7 791.7 346.0 1,118.6 19.1 24.0 767.7 791.7 346.0 1,118.6 19.0 765.7 765.7 346.0 19.0 765.7 765.7 346.0 53.8 757.5 757.5 346.0 1,220.0 1,211.8 1,207.9 1,192.3 1,190.3 1,140.1 1,140.1 1,138.5 1,138.6 1,134.4 1,137.7 1,137.7 1,111.7 1,111.7 1,103.5 1,187.9 1,133.9 3.5x 3.5x 5.2x 5.0x 4.2x 4.2x 6.3x 5.9x 4.8x 4.8x 7.0x 6.8x EFTA01466628 5.6x 5.6x 8.8x 7.9x 6.9x 6.9x 8.7x 8.6x 1,892.7 1,092.7 1,049.7 5.1x 5.1x 7.5x 7.1x Source: Deutsche Bank, Company Reports. Cash flow for 3Q13 estimated ahead of 10Q filing. EFTA01466629 13 December 2013 HY Corporate Credit,Retailing Gymboree Corp Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Institution Disclosure Gymboree Corp *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Karru Martinson Deutsche Bank debt rating key Buy: These bonds are expected to outperform other issues in the sector/industry group over the next three to six-month period. Hold: These bonds are fairly valued currently. If owned, no need to sell, but we await events/ releases/ conditions that would make the bond attractive enough for us to upgrade. In the interim, the bond will likely perform as well as the average issue in the sector/industry group. Sell: There exists a significant likelihood that these bonds will underperform relative to other issues in their sector/industry group, at least over the next three months. Deutsche Bank Securities Inc. Page 3 EFTA01466630 13 December 2013 HY Corporate Credit,Retailing Gymboree Corp Regulatory Disclosures 1. 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