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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)
[ X ]     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended November 1, 2003

[    ]     Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from                     to                     

Commission file number 000-21250

THE GYMBOREE CORPORATION

(650) 579-0600
Registrant’s telephone number, including area code

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     As of November 29, 2003, 29,914,609 shares of the registrant’s common stock were outstanding.

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Part I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.

Basis of Presentation

The unaudited interim condensed consolidated financial statements, which include The Gymboree Corporation and its subsidiaries, all of which are wholly owned (“Gymboree”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended February 1, 2003.

The accompanying interim condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to present fairly the results of operations, the financial position and cash flows for the periods presented. All such adjustments are of a normal and recurring nature. Certain prior year amounts have been reclassified to conform to the current year presentation.

	The results of operations for the thirty-nine weeks ended November 1, 2003 are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 31, 2004.

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2.

Stock Based Compensation

Gymboree accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Had the Company recorded compensation expense for its stock option plans and purchase plan based on the fair value method consistent with the method of Statement of Financial Accounting Standards (“SFAS”) No.123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, net income and net income per share would have been as follows:

	The fair value of option grants and shares issued under stock option plans and the purchase plan are estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

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3.

Net Income Per Share

Basic net income per share is calculated by dividing net income for the period by the weighted average common shares outstanding for that period. Diluted net income per share includes the effects of dilutive instruments, such as stock options, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. The following summarizes the incremental shares from these potentially dilutive securities, calculated using the treasury stock method.

	Anti-dilutive options and warrants to purchase 1,995,934 and 868,786 shares of common stock for the 13 weeks ended November 1, 2003 and November 2, 2002, respectively, and 1,730,262 and 654,571 shares of common stock for the 39 weeks ended November 1, 2003 and November 2, 2002, respectively, were excluded from the above computations of weighted average shares.

4.

Comprehensive Income

	Comprehensive income, which includes net income, foreign currency translation adjustments and fluctuations in the fair market value of certain derivative financial instruments, is as follows:

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5.

Segments

	Gymboree operates two reportable segments, retail stores and Play & Music. Corporate overhead and income taxes are included in the retail stores segment. The following table provides the summary financial data of each reportable segment (in thousands).

Net retail sales from international subsidiaries amounted to $13.9 million and $13.8 million for the 13 weeks ended November 1, 2003 and November 2, 2002, respectively, and $36.7 million and $35.3 million for the 39 weeks ended November 1, 2003 and November 2, 2002, respectively. Long-lived assets held by international subsidiaries amounted to $7.7 million and $7.8 million as of November 1, 2003 and November 2, 2002, respectively.

6.

New Credit Facility

On August 11, 2003, Gymboree entered into an unsecured revolving credit facility for borrowings of up to $60 million, replacing a previous asset-based secured credit facility that was due to expire on September 20, 2003. This credit facility may be used for working capital and capital expenditure needs, as well as the issuance of documentary and standby letters of credit. This credit facility has a three-year term and may, at the option of the Company, be increased to $70 million at any time during the first two years of the term. The interest rate for each borrowing under the facility will be, at the option of Gymboree, either a base rate plus an additional marginal rate or the Eurodollar rate plus an additional marginal rate. The base rate margin is currently 0% and the Eurodollar rate margin is currently 1.25%. This credit facility requires Gymboree to meet financial covenants on a quarterly basis and limits annual capital expenditures. As of November 1, 2003, $43.0 million of documentary and stand-by letters of credit were outstanding and cash equivalents totaling $2 million were held as collateral for certain cash management services to be provided by the prior lender in the period ending November 30, 2003. The balance of the cash collateral will thereafter be released to Gymboree.

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INDEPENDENT ACCOUNTANTS’ REPORT

To The Board of Directors and Stockholders of The Gymboree Corporation:

We have reviewed the accompanying condensed consolidated balance sheets of The Gymboree Corporation and subsidiaries (the “Company”) as of November 1, 2003 and November 2, 2002, and the related condensed consolidated statements of income for the three-month and nine-month periods then ended, and cash flows for the nine-month periods then ended. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of The Gymboree Corporation as of February 1, 2003, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 14, 2003 (April 24, 2003 as to Note 5), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 1, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Deloitte & Touche LLP

San Francisco, California

December 16, 2003

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward looking statements

          The following discussion and analysis should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The discussion in this report contains forward-looking statements that involve risks and uncertainties, including statements regarding planned capital expenditures, planned store openings, expansions and renovations, systems infrastructure development, future cash generated from operations and future cash needs. Inaccurate assumptions and known and unknown risks and uncertainties can affect the accuracy of forward-looking statements, and our actual results could differ materially from results that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, customer reactions to new merchandise, concepts and marketing activity, gross margin achievement, our ability to manage inventory levels appropriately, general economic conditions, success in meeting delivery targets, competitive market conditions, trade restrictions, instability in countries where our merchandise is manufactured and the other factors described in this document. When used in this document, the words “believes”, “expects”, “estimates” or “anticipates” and similar expressions are intended to identify certain of these forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Readers are cautioned not to place undue reliance on these forward-looking statements, which are based on information available as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report, in our Annual Report on Form 10-K for fiscal year 2002 and our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

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Results of Operations

     The following table sets forth selected statement of operations data expressed as a percentage of net sales:

Thirteen weeks ended November 1, 2003 compared to thirteen weeks ended November 2, 2002

Net Sales

     Net retail sales in the third quarter of 2003 increased to $148.1 million from $144.5 million in the same period last year, an increase of $3.6 million or 2%. Management attributes the sales increase to an increase in the number of Gymboree and Janie and Jack stores open compared to the prior year. This impact was partially offset by a 3% decrease in comparable store sales largely resulting from a reduction in the number of transactions during the quarter. The number of stores open at the end of the quarter was 612, compared to 585 open as of the end of the same period last year. As of November 1, 2003, Gymboree operated 561 stores in the United States (including 25 Janie and Jack stores), 27 stores in Canada, and 24 stores in Europe. The Company also operates online stores at gymboree.com and janieandjack.com.

     Play & Music net sales in the third quarter of 2003 decreased to $2.9 million from $3.3 million in the same period last year, a decrease of $0.4 million or 12%. The decrease was primarily due to a decrease in new franchise and related equipment sales during the third quarter of 2003 as compared to the same period last year.

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Gross Profit

     Gross profit for the third quarter of 2003 increased to $62.3 million from $60.9 million in the same period last year. As a percentage of net sales, gross profit increased 0.1 percentage points to 41.3% in the third quarter of 2003 from 41.2% in the same period last year. Our gross margins were positively impacted by markdown optimization, whereby markdowns are targeted to maximize SKU level sales and margins, as well as micro-merchandising, whereby product assortments are tailored by store according to individual store characteristics. This effect was offset by lower margins at our Janie and Jack division, which is still in its development phase, reduced leverage on occupancy expenses related to stores with negative comparable sales, and the under-performance of our boy business.

Selling, General and Administrative Expenses

     Selling, general and administrative (“SG&A”) expenses, which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, decreased to $49.0 million in the third quarter of 2003 from $50.0 million in the same period last year. As a percentage of net sales, SG&A expenses decreased 1.4 percentage points to 32.4% in the third quarter of 2003 from 33.8% in the same period last year. The decrease in SG&A expenses as a percentage of net sales in the third quarter of 2003 was primarily due to lower incentive compensation, costs savings related to bringing certain information technology functions in-house, lower shipping costs related to the consolidation of freight vendors, and lower advertising expenses related to the Janie and Jack division, which was launched in the third quarter of 2002. This decrease was offset in part by an increase in expenses related to new retail stores opened in the third quarter of 2003.

Foreign Exchange Gains (Losses), Net

     Net foreign exchange losses totaled $31,000 during the third quarter of 2003 compared to $96,000 in the same period last year. These losses resulted primarily from foreign currency fluctuations on inter-company transactions between our United States operations and foreign subsidiaries.

Interest Income (Expense), Net

Interest income decreased to $152,000 in the third quarter of 2003 from $188,000 in the same period last year due to lower interest rates. Interest expense of $51,000 was incurred in the third quarter of 2003, compared to $714,000 for the same period last year. The decrease was due to lower average borrowings and lower interest rates. Interest expense in the third quarter of 2002 also included $432,000 in prepayment penalties and unamortized loan fees related to the early extinguishment of debt.

Income Taxes

     Our effective tax rate for the third quarters of 2003 and 2002 was 38.0% and 38.5%, respectively. During the second quarter of 2003, our effective tax rate was reduced from 38.5% to 38.0% based upon our estimated annual 2003 effective tax rate.

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Thirty-nine weeks ended November 1, 2003 compared to thirty-nine weeks ended November 2, 2002

Net Sales

     Net retail sales for the thirty-nine weeks ended November 1, 2003 increased to $394.6 million from $379.2 million in the same period last year, an increase of $15.4 million or 4%. Management attributes the sales increase to an increase in the number of Gymboree and Janie and Jack stores open compared to the prior year. Comparable store sales during the thirty-nine week period were flat compared to the prior year as an increase in the dollar value of average transactions was offset by a reduction in the number of transactions. The number of stores open at the end of the quarter was 612, compared to 585 open as of the end of the same period last year. As of November 1, 2003, Gymboree operated 561 stores in the United States (including 25 Janie and Jack stores), 27 stores in Canada, and 24 stores in Europe. The Company also operates online stores at gymboree.com and janieandjack.com.

     Play & Music net sales for the thirty-nine weeks ended November 1, 2003 decreased to $9.0 million from $10.5 million in the same period last year, a decrease of $1.5 million or 14%. The decrease was primarily due to a decrease in new franchise and related equipment sales during the thirty-nine weeks ended November 1, 2003 as compared to the same period last year.

Gross Profit

     Gross profit for the thirty-nine weeks ended November 1, 2003 increased 2% to $162.4 million from $159.3 million in the same period last year, an increase of $3.1 million. As a percentage of net sales, gross profit decreased 0.7 percentage points to 40.2% in the thirty-nine weeks ended November 1, 2003 from 40.9% in the same period last year. The decrease in gross profit as a percentage of net sales was attributable to the under-performance of our boy business and reduced leverage on occupancy expenses related to stores with negative comparable sales. In addition, our Janie and Jack division, which is still in its development phase, has lower gross margins when compared to the Gymboree division.

Selling, General and Administrative Expenses

     SG&A expenses, which principally consist of non-occupancy store expenses, corporate overhead and distribution expenses, decreased to $139.4 million in the thirty-nine weeks ended November 1, 2003 from $140.6 million in the same period last year. As a percentage of net sales, SG&A expenses decreased 1.6 percentage points to 34.5% in the thirty-nine weeks ended November 1, 2003 from 36.1% in the same period last year. The lower SG&A expenses for the thirty-nine weeks ended November 1, 2003 were primarily due to lower incentive compensation, costs savings related to bringing certain information technology functions in-house, and a decrease in direct mail marketing. These decreases were offset in part by a payment of approximately $1 million, net of costs of disposal, received for a lease buyout in the prior year, and expenses related to new retail stores opened in 2003.

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Foreign Exchange Gains (Losses), Net

     Net foreign exchange gains totaled $183,000 during the thirty-nine weeks ended November 1, 2003 compared to $385,000 in the same period last year. These gains resulted primarily from foreign currency fluctuations on inter-company transactions between our United States operations and foreign subsidiaries.

Interest Income (Expense), Net

Interest income increased to $516,000 in the thirty-nine weeks ended November 1, 2003 from $427,000 in the same period last year due to interest earned on higher cash and cash equivalent balances on a year-over-year basis, offset in part by lower interest rates. Interest expense of $250,000 was incurred in the thirty-nine weeks ended November 1, 2003, compared to $1.3 million for the same period last year. The decrease was due to lower average borrowings and lower interest rates. Interest expense in the third quarter of 2002 also included $432,000 in prepayment penalties and unamortized loan fees related to the early extinguishment of debt.

Income Taxes

     Our effective tax rate for the thirty-nine weeks ended November 1, 2003 and November 2, 2002 was 38.0% and 38.5%, respectively.

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Financial Condition

Liquidity and Capital Resources

     Cash provided by operating activities for the thirty-nine weeks ended November 1, 2003 was $17.9 million compared to $57.3 million provided by operating activities in the same period last year. This decrease was primarily due to the realization of a $16.6 million net operating loss carryforward in 2002, as well as changes in working capital items, including a decrease in income tax payable of $10.6 million.

     Net cash used in investing activities for the thirty-nine weeks ended November 1, 2003 was $24.2 million and consisted primarily of capital expenditures for the opening of new stores, relocation and/or expansion of certain existing stores, and information technology improvements. Capital expenditures were $24.8 million for the thirty-nine weeks ended November 1, 2003 and $20.3 million in the same period last year. Gymboree estimates that total capital expenditures during 2003 will be approximately $31 million, and has been used or will primarily be used to open 22 new Gymboree stores as well as 20 new Janie and Jack stores, relocate selected Gymboree stores and to continue the systems infrastructure improvements.

     Cash provided by financing activities for the thirty-nine weeks ended November 1, 2003 totaled $3.5 million compared to $6.6 million used in the same period last year. This increase was due to a decrease in debt payments for the thirty-nine weeks ended November 1, 2003 compared to the same period last year.

     Cash and cash equivalents were $56.5 million at November 1, 2003, a decrease of $4.2 million from February 1, 2003. Working capital as of November 1, 2003 was $91.6 million compared to $76.7 million as of February 1, 2003.

     On August 11, 2003, Gymboree entered into an unsecured revolving credit facility for borrowings of up to $60 million, replacing a previous asset-based secured credit facility that was due to expire on September 20, 2003. This credit facility may be used for working capital and capital expenditure needs, as well as the issuance of documentary and standby letters of credit. This credit facility has a three-year term and may, at the option of the Company, be increased to $70 million at any time during the first two years of the term. The interest rate for each borrowing under the facility will be, at the option of Gymboree, either a base rate plus an additional marginal rate or the Eurodollar rate plus an additional marginal rate. The base rate margin is currently 0% and the Eurodollar rate margin is currently 1.25%. This credit facility requires Gymboree to meet financial covenants on a quarterly basis and limits annual capital expenditures. As of November 1, 2003, $43.0 million of documentary and stand-by letters of credit were outstanding.

     At November 1, 2003, cash equivalents totaling $2 million were held as collateral for certain cash management services to be provided by the prior lender in the period ending November 30, 2003. The balance of the cash collateral will thereafter be released to Gymboree.

     Gymboree is the guarantor on lease agreements for 14 of the 19 Zutopia stores sold to The Wet Seal in 2000 and 5 Play & Music sites sold to franchisees. The guarantees on

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the Zutopia store leases are effective through 2009. The guarantees on the Play & Music sites are effective through 2007. The lease guarantees require that Gymboree make all required lease payments upon default by the current tenants. Gymboree’s maximum potential amount of future payments under the guarantees approximates $14.5 million, excluding amounts that would be payable based on a percentage of sales, as such amounts cannot be estimated. Gymboree does not have recourse against The Wet Seal, Inc. or the Play & Music franchisees in case of non-performance. The following table reflects a summary of our lease guarantees as of November 1, 2003.

Lease Guarantees

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Gymboree enters into forward foreign exchange contracts to hedge certain inter-company loans and inventory purchases. The term of the forward exchange contracts is generally less than one year. The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar net cash inflow resulting from the repayment of certain inter-company loans from our foreign subsidiaries and dollar margins resulting from inventory purchases will be adversely affected by changes in exchange rates.

     The tables below summarize by major currency the notional amounts and fair values of our forward foreign exchange contracts in U.S. dollars as of November 1, 2003 and November 2, 2002.