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EXTENDED FAMILY

Gymboree introduces new concepts to target moms and older kids

By Karen M. Kroll

Like many of the families and kids it serves, Gymboree Corp. has experienced a growth spurt.

In 2002 the San Francisco-based apparel retailer launched Janie and Jack, a higher-end children’s apparel division that now operates 64 stores. The company followed that in April 2004 with Janeville, whose 17 stores cater to the mothers of the Janie and Jack kids.

Gymboree does not break out financial results by division, but companywide, things are headed up. For the fiscal year ended Jan. 28, net sales from retail operations jumped 14 percent year on year, to $668 million.

“Sales have been so good the last few years,” said Bruce Johnston, vice president of leasing at The Macerich Co. “They are performing at a very high level across our portfolio.”

Before launching the new concepts, Gymboree had been struggling. In fiscal 2000 the company lost $36 million on sales of $437 million. The following year it managed to eke out a profit of about $5 million. Sources blamed the trouble on the failure of new merchandise lines that were edgier than Gymboree’s typically fun, colorful apparel.

CEO Lisa Harper, who was named to the top job from general merchandise manager in 2001, is credited with returning the company to its roots. It was she who announced the new divisions.

The company launched Janie and Jack after research showed that its more affluent customers were spending no more than its middle earners, indicating that something more was needed to spark their interest. Janie and Jack offers higher-end children’s wear in sizes up to 5T and boasts such features as hand embroidery and smocking. Prices run about 20 percent higher than Gymboree’s, according to a report by Paula Kalandiak, an equity analyst at Roth Capital Partners, Newport Beach, Calif.

Janie and Jack has staked out a niche that other retailers appear to be leaving alone, at least for now, observers say.

“It’s positioned between Gymboree and some European brands, like Jacadi and Tartine et Chocolat,” said Christina de Marval, a senior analyst at Next Generation Equity Research, in New York City. Gap, Children’s Place and the like are not targeting the higher-end children’s apparel market, de Marval said.

“A lot of development in children’s [retail] has been in more of the value option,” said Mary Brett Whitfield, senior vice president and soft-goods analyst at Retail Forward, a Columbus, Ohio, consulting firm. Target and Old Navy, for instance, aim for value-conscious moms and dads.

De Marval theorizes that Janie and Jack will hit its limit at about 200 stores. By contrast, there are some 570 Gymboree stores in the U.S.

Though Janie and Jack’s 64 stores are scattered across the country, they fit in best at centers that draw an affluent, educated customer, says Johnston. Five Macerich centers contain a Janie and Jack store. “We are very pleased with the performance of Janie and Jack at our centers,” Johnston said. “They fill a very unique niche in gifts and personally purchased products for newborns and very young children.”

Gymboree says it expects to open about 15 Janie and Jack stores this year. The company is using its Web site to build brand recognition, with the entire product line available. “It extends their reach,” said de Marval.

One obstacle to brick-and-mortar expansion is a lack of attractive real estate, Kalandiak says. “We are concerned that the company will continue to struggle with finding suitable locations at attractive prices,” she wrote in a research report last November. That could explain why the company opened only nine Janie and Jack stores last year, down from its original target of 15 to 20, she wrote.

If there is one market besides kids that Gymboree probably feels it knows well, it is their mothers, Whitfield says. The company’s knowledge of this group plus its stated belief that other retailers have failed to serve it well prompted the decision to launch Janeville in 2004. Janeville offers “clothing and accessories for women in their mid-30s and beyond who appreciate current styling, comfort and individuality,” according to its Web site.

Early on, however, de Marval’s conversations with store associates indicated that some of Janeville’s styles and prints appealed more to women in their 50s than to Janeville’s target market of 30- and 40-somethings. Management has since revamped the designs, and the new lines were on store shelves early this year.

“Getting the fit and fashion right has been more of a challenge with Janeville,” de Marval said. The sweater sets and slacks could work for women who stay at home as well as for those working in casual office settings.

Pricewise, Janeville’s offerings fall somewhere between Ann Taylor Loft and the original AnnTaylor stores, de Marval says.

If the company can successfully fine-tune its merchandise, it should find a receptive audience. “The issue is whether the product is compelling enough, because the opportunity is there,” said de Marval.

“It’s the ‘desperate housewives’ that want [this type of] a store,” said Christopher Boring, president of Boulevard Strategies, a Columbus retail consulting firm, in a reference to the night-time soap opera on ABC. “They may not need to get dressed up to go to the office, but don’t want to sit around in their sweats all day.”

Kalandiak, on the other hand, sounds less optimistic about Janeville’s prospects. She said in her report that she is “lukewarm” on the concept and questions whether the market is as under-served as the company insists. But she notes that if Janeville takes off, it will provide the company with a vehicle for longer-term growth. By contrast, she figures that Janie and Jack will have matured by 2009, if the company finds attractive real estate.

Another roadblock could be the cost of expanding the brand. The stores aim to re-create a Hamptons look, with a cottage facade, French doors and slip-covered furniture. De Marval questions whether the current store design is feasible on a big scale. “The build-out, while attractive and differentiated, looks pretty expensive,” she said.

Janeville currently has the market pretty much to itself, but the field is getting crowded, says Whitfield. “A lot of retailers are recognizing that their customer base is growing up, and they’re looking at concepts to keep them,” Whitfield said.

Forthe & Towne, which Gap Inc. introduced last year, is also geared to the 35-plus customer. Gap has not broken out numbers to indicate how the newcomer is performing. As of mid-March, about a half dozen stores were open.

In 2003 Fort Myers, Fla.-based Chico’s FAS acquired The White House. The chain of about 200 stores, doing business as White House Black Market, is geared to 40-somethings.

Though Gymboree has made available only limited information about Janeville’s performance, in analyst conference calls the company has indicated that results are improving, sources say. Even so, the lack of details about Janeville’s potential expansion makes it appear that the concept is still in test mode.

Macerich’s Johnston says the concept seems to be gaining a following among customers. It offers “a different point of view from the standard women’s ready-to-wear offerings,” he said. A Janeville store operates in Macerich’s Washington Square Center, in Tigard, Ore.

Gymboree’s introduction of these two new lines reflects a larger issue confronting specialty retailers, says Whitfield. “They’re running out of space in which to locate tier-one concepts,” she said.

Because most specialty retailers are already in many class-A malls, they are finding it more difficult to grow by simply opening stores in new malls, says Whitfield. “So increasingly these players are looking to spin-offs,” she said. These brand extensions allow retailers to capture larger shares of the malls they are already in and to leverage their competencies in sourcing and merchandising.

Although success is not assured, these concepts definitely leverage Gymboree’s knowledge of its own customers and the demographic makeup of the customers at many malls across the country, Johnston says. As a result, management is able to zero in on which malls will fit its brands best. In addition, once consumers know what the stores have to offer, they quickly become destination stores that prompt consumers to come to the centers, he says.

It appears this is happening. Gymboree’s sales for the four-week period ended Feb. 25 topped $53.5 million, up 19.9 percent from $45 million for the same period last year. Investors are taking a good look at the company too, more than doubling the stock price from about $11 last April to $24 as of early March. In short, things are looking up for Gymboree.

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