| GYMBOREE CORP ITEM 1A RISK FACTORS Our results may be adversely affected by our failure to anticipate and respond to changes in fashion trends and consumer preferences |
| Our sales and profitability depend upon the continued demand by customers for our apparel and accessories |
| We believe that our success depends in large part upon our ability to anticipate, gauge and respond in a timely manner to changing consumer demands and fashion trends and upon the appeal of our products |
| There can be no assurance that the demand for our apparel or accessories will not decline or that we will be able to anticipate, gauge and respond to changes in fashion trends |
| A decline in demand for our apparel and accessories or a misjudgment of fashion trends could, among other things, lead to lower sales, excess inventories and higher markdowns which could have a material adverse effect on our business, financial condition and operating results |
| Competition and the strength of our competitors may impair our ability to maintain and grow our sales and adversely affect our operating results |
| The apparel segment of the specialty retail industry is highly competitive, and we may not be able to compete successfully in the future |
| The principal factors of competition for retail sales are product design, product quality, brand image, customer service and pricing |
| Our Gymboree and Janie and Jack brands compete on a national level with BabyGap and GapKids (divisions of The Gap, Inc |
| ), Talbots Kids and certain leading department stores operating in malls, outlet centers or street locations, as well as certain discount retail chains such as Old Navy (a division of The Gap, Inc |
| Our Gymboree and Janie and Jack brands also compete with a wide variety of local and regional specialty stores, with certain other retail chains, and with children’s retailers that sell their products by mail order, over the Internet or through outlet malls |
| Our Janeville brand competes on a national level with J Jill, Chico’s, Talbots, Anthropologie, Banana Republic and Ann Taylor |
| Many of these competitors are larger than the Company and have substantially greater financial, marketing and other resources |
| Increased competition may reduce sales and gross margins, increase operating expenses and decrease profit margins |
| We may not be able to operate successfully if we lose key personnel, are unable to hire qualified additional personnel, or experience turnover of our management team |
| The continued success of the Company is largely dependent on the individual efforts and abilities of our senior management and certain other key personnel and on our ability to retain current management and to attract and retain qualified key personnel in the future |
| The loss of certain key employees or our inability to continue to attract and retain other qualified key employees could have a material adverse effect on our growth, our operations and our financial position |
| Our new concepts and businesses require a substantial commitment of resources and are not certain of ultimate success |
| The Company’s ongoing efforts to develop, launch and grow new divisions, businesses and brands require significant capital expenditures and management attention |
| Our commitment of management resources and 7 ______________________________________________________________________ [31]Table of Contents capital to a new concept means that those resources and capital are unavailable for other Company activities and operations |
| Our decision to launch a new business is based on our assessment that a significant opportunity exists in the marketplace |
| We felt that such opportunity existed for Janeville, though it is too early to tell whether Janeville will grow into a consistently profitable division for the Company |
| The Janeville business generated net losses in fiscal 2005 and we expect that it will lose money in fiscal 2006 |
| There are no assurances that Janeville will receive sufficient consumer acceptance in its testing phase to justify further significant investment and management efforts necessary to establish the brand and business |
| Janeville, which targets women in their mid-30s, operates in a very competitive market in which the Company has not historically operated |
| If Janeville does not develop and grow substantially and achieve profitability, it could have a material adverse effect on the Company’s growth, operating results, margins and profitability |
| In addition, we began the Gymboree Outlet business during fiscal 2005 |
| The business was marginally profitable in fiscal 2005, however it is too early to tell if this business will be successful in the future |
| Our business may be harmed by additional United States regulation of foreign trade or delays caused by additional US customs requirements |
| Our business is subject to the risk that the United States may adopt additional regulations relating to imported apparel products, including quotas, duties, taxes and other charges or restrictions on imported apparel |
| We cannot predict whether additional United States quotas, duties, taxes or other charges or restrictions will be imposed upon the importation of our products in the future, or what effect any such actions would have on our business, financial position and results of operations |
| If the US government imposes any such charges or restrictions, the supply of products could be disrupted and their cost could substantially increase, either of which could have a material adverse effect on our operating results |
| Unforeseen delays in customs clearance of any goods could have a material adverse effect on our ability to deliver complete shipments to our stores, which in turn could have a material adverse effect on our business and operating results |
| Because we purchase our products internationally, our business is sensitive to risks associated with international business |
| Our products are currently manufactured to our specifications by independent factories located primarily in Asia, as well as Central America, South America, the United States and the United Arab Emirates |
| As a result, our business is subject to the risks generally associated with doing business abroad, such as foreign governmental regulations, currency fluctuations, adverse conditions including epidemics, natural disasters, social or political unrest, disruptions or delays in transportation or customs clearance, local business practices and changes in economic conditions in countries in which our suppliers are located |
| We cannot predict the effect of such factors on our business relationships with foreign suppliers or on our ability to deliver products into our stores in a timely manner |
| If even a small portion of our current foreign manufacturing sources or textile mills were to cease doing business with us for any reason, such actions could have a material adverse effect on our operating results and financial position |
| We may suffer negative publicity if any of our products are found to be unsafe |
| We currently test products sold in our stores, but we have in the past and may in the future, need to recall products that we later determine may present safety issues |
| If these products have safety problems of which we are not aware, or if the Consumer Product Safety Commission recalls a product sold in our stores, we could experience negative publicity and product liability lawsuits, which could have a material adverse effect on our reputation, business and financial position |
| We may be subject to negative publicity or be sued if our manufacturers violate labor laws or engage in practices that our customers believe are unethical |
| We seek to require our independent manufacturers to operate their businesses in compliance with the laws and regulations that apply to them |
| Our sourcing personnel periodically visit and monitor the operations of our 8 ______________________________________________________________________ [32]Table of Contents independent manufacturers, but we cannot control their business and labor practices |
| We also rely on an independent third party to audit all of our factories on an annual basis |
| If an independent manufacturer violates or is suspected of violating labor laws or other applicable regulations, or if a manufacturer engages in labor or other practices that diverge from those typically acceptable in the United States, Canada or Europe, we could in turn experience negative publicity or be sued |
| Negative publicity or legal actions regarding the production of our products could have a material adverse affect on our reputation, sales, business and financial position |
| The loss of a key buying agent could disrupt our ability to deliver our inventory supply in a timely fashion, impacting its value |
| In 2005 and 2004, one buying agent managed approximately 94prca and 90prca of the Company’s inventory purchases, respectively |
| Although we believe that other buying agents could be identified and retained to place our required foreign production, the loss of this buying agent could result in delays in procuring inventory and as a result could have a material adverse effect on our business and operating results |
| Our business is sensitive to economic conditions that impact consumer spending |
| Our financial performance is sensitive to changes in overall economic conditions that impact consumer spending, particularly discretionary spending |
| Future economic conditions affecting disposable consumer income such as employment levels, business conditions, interest rates and tax rates could reduce consumer spending or cause consumers to shift their spending to other products |
| A general reduction in the level of discretionary spending or shifts in consumer discretionary spending to other products could have a material adverse effect on our growth, sales and profitability |
| Our business is sensitive to changes in seasonal consumer spending patterns that are beyond our control |
| Historically, a disproportionate amount of our retail sales and a significant portion of our net income have been realized during the holiday season in November and December |
| We have also experienced periods of increased sales activity in the early spring, during the period leading up to the Easter holiday, and in the early fall, in connection with back-to-school sales |
| We have historically generated net losses during our second quarter and expect to generate such losses in the future due to seasonal consumer spending patterns |
| Such a circumstance could cause us to have excess inventory, necessitating markdowns to dispose of these excess inventories, which would reduce our profitability |
| Any failure by us to meet our business plans for, in particular, the third or fourth quarter of any fiscal year would have a material adverse effect on our earnings, which in all likelihood would not be offset by satisfactory results achieved in other quarters of the same fiscal year |
| Also, because we typically spend more in labor costs during the holiday season to hire temporary store employees in anticipation of holiday spending, a shortfall in expected sales during that period could result in a disproportionate decrease in our net income |
| Our ability to successfully implement significant information technology systems is critical to our business |
| In the coming year, we plan to undertake a series of initiatives to upgrade our information technology infrastructure |
| These initiatives include a program to upgrade our point-of-sale, sales audit and financial systems |
| Such technology systems changes are complex and could cause disruptions that would adversely affect our business |
| We cannot assure you that we will be able to successfully execute these changes without significant disruption to our business |
| If we are not successful, we may not achieve the expected benefits from these initiatives, despite having expended significant capital |
| We may also determine that additional investment is required to bring our systems to their desired state; this could result in a significant additional investment of time and money and increased implementation risk |
| Furthermore, the Company will rely on third parties to fulfill contractual obligations related to the upgrade of these systems |
| Failure of these third parties to fulfill their contractual obligations could lead to significant expenses or losses due to a disruption in business operations |
| 9 ______________________________________________________________________ [33]Table of Contents Our business may be harmed if our computer network security is compromised |
| Despite the Company’s considerable efforts and technology to secure our computer network, security could be compromised, confidential information, such as customer credit card numbers, could be misappropriated, or system disruptions could occur |
| This could lead to adverse publicity, loss of sales and profits or cause the Company to incur significant costs to reimburse third parties for damages |
| Our operations depend on our ability to maintain and protect our computer systems on which we rely to manage our purchase orders, store inventory levels, web applications, accounting functions and other aspects of our business |
| We have computer systems located in each of our stores, with the main database servers for our systems located in San Francisco, California, which exists on or near known earthquake fault zones |
| An earthquake or similar disaster could have a material adverse impact on our business and operating results not only by damaging our stores or corporate headquarters, but also by damaging our main servers, which could disrupt our business for an indeterminate length of time |
| Our systems are vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures, and similar events |
| We do not have back-up sites from which to conduct our business in the event of a natural disaster |
| There can also be no assurance that the Company can maintain or protect its on-line business application from a significant disruption that could result in a material adverse effect on its on-line revenue |
| Our growth will be hampered if we are unable to locate new stores and relocate existing stores in appropriate retail venues and shopping area |
| Our stores must be located in appropriate retail space in areas with demographic characteristics consistent with our customer base |
| These locations tend to be limited to upscale malls and similar venues where the market for space is very competitive |
| The location of acceptable store sites and the negotiation of acceptable lease arrangements require considerable time, effort and expense |
| Our ability to lease desirable retail space for expansion and relocation of stores, and to renew our existing store leases, on favorable economic terms is essential to our revenue growth |
| There can be no assurance that the Company will be able to achieve its store expansion goals, effectively manage its growth, successfully integrate the planned new stores into the Company’s operations, or profitably operate its new and remodeled stores |
| Failure to obtain and renew leases for a sufficient number of stores on acceptable terms would have a material adverse effect on our revenues and results of operations |
| Our comparable store sales fluctuate from period to period |
| Our comparable store sales have fluctuated significantly in the past and are expected to fluctuate in the future, especially for our newer brands, Janie and Jack, Janeville and Gymboree Outlet, as well as our growing on-line stores |
| Our comparable store sales are affected by a number of factors including our merchandise assortment, economic conditions, weather conditions, timing of our promotional offerings, competition and the overall retail environment |
| The investment community often tracks comparable store sales and a decline or significant fluctuation in comparable store sales, or a failure to meet investor expectations of comparable store sales, could affect the market price of our common stock |
| Management is responsible for establishing and maintaining adequate internal control over financial reporting |
| Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America |
| Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; providing reasonable assurance 10 ______________________________________________________________________ [34]Table of Contents that transactions are recorded as necessary for preparation of the financial statements; providing reasonable assurance that receipts and expenditures of the Company’s assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of Company assets that could have a material effect on the financial statements would be prevented or detected on a timely basis |
| Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company’s financial statements would be prevented or detected |
| Any failure to maintain an effective system of internal control over financial reporting could limit the Company’s ability to accurately and timely report its financial results or to detect and prevent fraud |
| The implementation of FAS 123(R) will reduce our reported earnings which could result in a decline in our stock price |
| The company headquarters is located in a geographic area in which there is significant competition for skilled managerial employees |
| As a result, the impact of the implementation of FAS 123(R) may be more significant for the Company than it is for other retailers not similarly located |
| To the extent that investors perceive the cost incurred for FAS 123(R) to be higher than that incurred by other retailers, our stock price may be negatively impacted |