EFTA01451152.pdf

Deutsche Bank Markets Research United States Company 13 December 2013 Gymboree Corp NY Corporate Credit Research Analyst Retailing Still Waiting For The Turnaround knday the 13th came a day uatly with fiscal 3O I:: rusultt; yusturcick: 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 light 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. C1O/1" 8 paie:,e 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 •c onvne roe plattorm fi unclervvay 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 company paid S1 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. Rsks 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. Issue Ticker Maturity Date Coupon Rate Price VW/ STW Ratingz 9.125% Sr Ms GYMB 1711118 9.125 91.00 11.6% 1002 Caa21CCC Toe,, loan GYMB 2/23110 L+350. 150 III 95.00 6.4% 92/9- Sarre Dark-AtC.4A Deutsche Bank Securities Inc. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0107400 CONFIDENTIAL SDNY_GM_00253584 EFTA01451152