FBR Capital is upgrading their rating on Gymboree (NASDAQ:GYMB) to Outperform with $59 target:
We are upgrading shares of GYMB based on (1) market share gains from compelling product, (2) best-in-breed management, (3) accelerating unit growth, (4) potential return to sustained positive comps, and (5) valuation still compelling in our opinion.
Gaining market share with target- and price-right product. Management discussed the popularity of “recent fashion,” and noted strong customer reception to product on its recent quarterly call. Store checks have shown strong reception to the value message, as well as compelling product. On the 2Q09 conference call, the company pointed out that it oversold in some basic denim, and it expects the reorders to arrive in November. We believe GYMB is gaining market share, as GapKids continues to undergo a consolidation into the Gap adult business, Talbots Kids has now closed, and Children’s Place (PLCE-Not Covered) struggles with the top line. With sharpened price points, but retaining the quality Gymboree is known for, we believe GYMB is now one of the “go to” brands for parents.
Let there be growth; GYMB joins the ranks of the “growth” stories in specialty retail. As we have discussed, there is a shrinking pool of square-footage growth stories in specialty apparel. As a result, investors have awarded this select group higher multiples for their potential organic growth. We have seen shares of companies with the promise of mid-single-digit square-footage growth bid up by investors. On the 2Q09 conference call, management alluded to three vehicles for growth going forward: Crazy 8, boys, and international. We believe the product looks significantly improved at Crazy 8, and management noted it expects the concept to break even in 3Q09. It expects to have 66 stores by the end of FY09 and plans to open a minimum of 50 stores in FY10, implying annual square-footage growth in the high-single to low-double-digit range. Additionally, management pointed to potential growth from international markets and Gymboree boys, suggesting that without square-footage growth, the company believes it can grow boys' sales by $100 million over time.
Despite the share runup, GYMB remains at a compelling valuation. Although we recognize that investors may shy away from a stock that has run significantly, we believe that there remains upside, as 3Q09 guidance appears conservative, and shares trade at 13.7x our FY10 estimates compared to the peer average 21.4x. Based on our belief in the product, management, and unit growth, we rate shares Outperform and recommend accumulation.
Action: It would be lovely, lovely upgrade.. if only the shares hadn't had such a wild run over the past 6 months. I still think the shares will catch a bid today due to combination of FBR comments, strength of overall market, continued momo and high short interest. How much will it run today? My guess would be 4-5%.
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