UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended April 30, 2005

OR

o 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

(415) 278-7000
(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 May 28, 2005, 31,196,616 shares of the registrant’s common stock were outstanding.

TABLE OF CONTENTS

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Part I - FINANCIAL INFORMATION

THE GYMBOREE CORPORATION

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

See notes to condensed consolidated financial statements.

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THE GYMBOREE CORPORATION

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 (“the Company”), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in the notes to the annual 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 January 29, 2005.

     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.

     The results of operations for the thirteen weeks ended April 30, 2005 are not necessarily indicative of the operating results that may be expected for the fiscal year ending January 28, 2006 (“fiscal 2005”).

2.	Stock Based Compensation

          The Company 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:

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     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:

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires companies to record compensation expense based on the fair value of stock-based compensation awards. Compensation expense will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The Company plans to adopt SFAS No. 123(R) as of the beginning of the first quarter of fiscal 2006, as required. The Company is currently evaluating the impact adoption of SFAS No. 123(R) will have on its financial condition and results of operations.

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.

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     Anti-dilutive options to purchase 3,268,068 and 1,558,897 shares of common stock were excluded from the above computations of weighted average shares for the 13 weeks ended April 30, 2005 and May 1, 2004, respectively.

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:

5.

Segments

     The Company 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 excluding discontinued operations (in thousands).

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     Net sales from our Canadian operations amounted to $6.2 million and $5.7 million in the first quarter of 2005 and 2004, respectively. Long-lived assets held by our Canadian operations approximated $2.8 and $3.0 million as of April 30, 2005 and May 1, 2004, respectively.

6.	Discontinued Operations

     The Company closed its United Kingdom and Ireland operations in fiscal 2004, and is in the process of liquidating the legal entities. The results of the United Kingdom and Ireland operations have been presented as discontinued operations in the accompanying financial statements for all periods presented.

Net sales and income from discontinued operations were as follows (in thousands):

     The changes in lease disposition accruals included in current liabilities of discontinued operations were as follows (in thousands):

7.	Change in Accounting Principle

     Effective February 1, 2004, the Company elected to change its accounting method for inventory valuation from the retail method to the lower of cost or market method, determined on a weighted average basis (the “cost method”). The Company believes the cost method is a preferable method for matching the cost of merchandise with the revenues generated. The cumulative effect of this accounting change, which was recorded in the first quarter of fiscal 2004, was income of $1.2 million, or $0.04 per diluted share, net of income taxes. It is not possible to determine the effect of this change on any other previously reported fiscal periods or on fiscal 2004 or fiscal 2005.

8.	Contingencies

     On April 21, 2005, Gymboree Operations, Inc. (“Gymboree Operations”), a wholly-owned subsidiary of the Company, was served in a lawsuit filed in the Superior Court of Riverside County, California. The complaint, on behalf of the manager of a Gymboree store in Temecula, California, alleges that Gymboree Operations failed to pay overtime wages and provide meal breaks. The plaintiff seeks unspecified damages, including interest and penalties, under the California Labor Code and other statutes. The complaint also seeks class action status on behalf of the plaintiff and other managers of Company stores in California. On May 20, 2005, the Company filed an answer generally denying the plaintiff’s allegations. The Company is currently defending the lawsuit.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 April 30, 2005 and May 1, 2004, and the related condensed consolidated statements of income and cash flows for the thirteen-week periods then ended. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board (United States), 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.

As discussed in Note 7 to the condensed consolidated financial statements, effective February 1, 2004, the Company changed its accounting method for inventory valuation from the retail method to the lower of cost or market method, determined on a weighted average basis.

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The Gymboree Corporation as of January 29, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated April 22, 2005, we expressed an unqualified opinion on those consolidated financial statements and included explanatory paragraphs related to a restatement and a change in accounting method. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of January 29, 2005, 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

June 3, 2005

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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. 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, service levels and new concepts, the level of promotional activity, gross margin achievement, our ability to manage inventory levels appropriately, general economic conditions, success in meeting delivery targets, competitive market conditions, trade restrictions, unanticipated costs actually incurred in connection with the winddown of our United Kingdom and Ireland operations, 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,” “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 the fiscal year ended January 29, 2005 and our other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

General

     The Gymboree Corporation is a specialty retailer operating stores selling high quality apparel and accessories for children and women, as well as play programs for children under the GYMBOREE®, JANIE AND JACK®, JANEVILLE™ and GYMBOREE PLAY & MUSIC™ brands. As of April 30, 2005, the Company had 647 stores, including 619 stores in the United States (including 57 Janie and Jack shops and 15 Janeville stores) and 28 stores in Canada. The Company also operates two on-line stores at www.gymboree.com and www.janieandjack.com.

     During the quarter, the Company relocated or remodeled 7 Gymboree stores, closed 4 Gymboree stores, and opened 2 Janie and Jack shops and 1 Janeville store. For the remainder of fiscal 2005, the Company plans to continue to grow its store base, opening approximately 16

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Gymboree stores (including approximately 10 outlet stores), 13 to 18 Janie and Jack shops, and 2 Janeville stores. The Company also expects to remodel, expand or relocate approximately 13 Gymboree stores and close approximately 8 under-performing Gymboree stores during the remainder of fiscal 2005.

     The Company closed its United Kingdom and Ireland operations in fiscal 2004, and is in the process of liquidating the legal entities. The results of the United Kingdom and Ireland operations have been presented as discontinued operations in the accompanying financial statements for all periods presented.

Results of Operations

Thirteen weeks ended April 30, 2005 compared to thirteen weeks ended May 1, 2004

Net Sales

     Net retail sales in the first quarter of fiscal 2005 increased to $160.8 million from $144.4 million in the same period last year, an increase of $16.4 million or 11.4%. Comparable store sales increased 3% or $5.2 million over the same 13-week period last year. This increase was primarily due to an increase in the number of transactions and average transaction size driven by strong product performance from our baby boy and kid boy product lines. Non-comparable store sales increased $8.6 million due to net store and square footage growth of 36 stores and 95,000 square feet, respectively. The number of stores open at the end of the quarter was 647 compared to 611 as of the end of the same period last year. The increase in net retail sales was also due to revenues from the Gymboree Visa credit card program, which was launched in April 2004, and contributed $0.8 million in the first quarter of fiscal 2005.

     Play & Music net sales in the first quarter of fiscal 2005 decreased to $2.2 million from $2.7 million in the same period last year, a decrease of $0.5 million or 18.5%. This decrease was primarily due to the closure of 5 corporate owned sites as part of our ongoing restructuring of the Play & Music business, as well as fewer product, equipment and franchise sales.

Gross Profit

     Gross profit for the first quarter of fiscal 2005 increased to $64.6 million from $62.4 million in the same period last year. As a percentage of net sales, gross profit decreased 2.7 percentage points to 39.7% from 42.4% in the same period last year. Our gross margins were negatively impacted by higher average product costs due to a product assortment that was skewed heavily towards higher priced products, while our average unit selling prices increased only slightly. We expect this trend to continue into the third quarter of fiscal 2005.

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, increased to $56.6 million in the first quarter of fiscal 2005 from $50.6 million in the same period last year. As a percentage of net sales, SG&A expenses increased 0.3 percentage points to 34.7% in the first quarter of fiscal 2005 from 34.4% in the same period last year. The increase in SG&A was primarily due to higher store operating expenses, as well as higher corporate expenses related

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to incentive compensation, workers’ compensation, professional services, severance and benefits. The increase in store operating expenses was primarily due to new stores, as well as the increase in our on-line business volume. The increase in corporate incentive compensation and benefits was primarily due to the Company’s first quarter bonus, which was tied to quarterly earnings performance, and higher medical insurance premiums. The increase in workers’ compensation expense was due to management’s revised estimate of outstanding claims. The increase in professional services expense was primarily due to Sarbanes-Oxley Section 404 compliance costs. SG&A includes approximately $500,000 in severance charges related to the Company’s corporate workforce reduction in the first quarter of fiscal 2005.

Other Income, Net

     Other income decreased to $206,000 in the first quarter of fiscal 2005 from $238,000 in the same period last year primarily due to foreign exchange losses, offset by an increase in interest income.

Income Taxes

     Our effective tax rate for the first quarter of fiscal 2005 and 2004 was 35.7% and 36.5%, respectively. We expect the fiscal 2005 effective tax rate to be within a range of 35.0% to 37.0%. The actual rate will ultimately depend on several variables, including our overall level of earnings in fiscal 2005.

Discontinued Operations

     Income reported for the discontinued United Kingdom and Ireland operations in the first quarter of fiscal 2005 primarily represents favorable adjustments to previous lease termination accruals based on actual settlements in connection with the liquidation of the United Kingdom and Ireland entities. Income reported for the discontinued United Kingdom and Ireland operations represents operating results in the first quarter of 2004.

Seasonality

     Our business is impacted by the general seasonal trends characteristic of the apparel and retail industries. Sales from retail operations have historically been highest during the fourth fiscal quarter, somewhat lower during the first and third fiscal quarters and lowest during the second fiscal quarter. Consequently, the results for any fiscal quarter are not necessarily indicative of results for the full year.

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Recently Issued Accounting Standards

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires companies to record compensation expense based on the fair value of stock-based compensation awards. Compensation expense will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The Company plans to adopt SFAS No. 123(R) as of the beginning of the first quarter of fiscal 2006, as required. The Company is currently evaluating the impact adoption of SFAS No. 123(R) will have on its financial condition and results of operations.

Financial Condition

Liquidity and Capital Resources

     Net cash provided by operating activities for the thirteen weeks ended April 30, 2005 was $25.2 million compared to $31.9 million provided by operating activities in the same period last year. This decrease was primarily due to an increase of $3.6 million in cash used in discontinued operations and a decrease of $3.7 million in net income.

     Net cash used in investing activities for the thirteen weeks ended April 30, 2005 was $22.8 million and consisted of $7.8 million in capital expenditures for the opening of 3 new stores, relocation, remodeling and/or expansion of 7 existing stores, capital expenditures related to store openings and relocations currently in progress, and information technology improvements, as well as a net decrease of $15.0 million in marketable securities. The Company estimates that capital expenditures during the remainder of fiscal 2005 will be approximately $22.0 million, and will primarily be used to relocate, remodel or expand 13 Gymboree stores, open 16 new Gymboree stores (including 10 outlet stores), open 13 to 18 new Janie and Jack shops and 2 new Janeville stores, as well as to continue the investment in the Company’s distribution center, website and systems infrastructure replacement.

     Cash provided by financing activities for the thirteen weeks ended April 30, 2005 totaled $0.7 million compared to $1.8 million in the same period last year. This decrease was due to fewer stock option exercises.

     Cash and cash equivalents were $33.8 million at April 30, 2005, an increase of $3.2 million from January 29, 2005. Working capital as of April 30, 2005 was $112.6 million compared to $98.3 million as of January 29, 2005.

     The Company has an unsecured revolving credit facility for borrowings of up to $70 million. This credit facility expires in August 2006, and 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 requires the Company to meet financial covenants on a quarterly basis and limits annual capital expenditures. During the quarter ended April 30, 2005, the Company did not meet one of its financial covenants. The bank subsequently provided the Company with a waiver of this covenant violation. As of April 30, 2005, $33.0 million of documentary and standby letters of credit were outstanding, and no borrowings were outstanding.

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     The Company has co-branded credit card agreements (the “Agreements”) with a third-party bank (the “Bank”) and Visa U.S.A. Inc. for the issuance of a Visa credit card bearing the Gymboree brand and administration of an associated incentive program for cardholders. The program, which was launched in April 2004, offers incentives to cardholders, including a 5% discount on in-store purchases using the Gymboree Visa card and annual rewards in the form of a Gymboree gift card equal to 1% of total non-Gymboree purchases. The Bank is the sole owner of the accounts issued under the program and absorbs all losses associated with non-payment by the cardholder and any fraudulent usage of the accounts by third parties. The Company is responsible for redeeming the incentives, including the issuance of any gift cards. The Bank pays fees to the Company based on the number of credit card accounts opened and card usage and makes certain guaranteed minimum annual payments. Visa U.S.A. Inc. also pays fees to the Company based on card usage. Cardholder incentives are funded from the fees paid by the Bank to the Company. The Company recognizes revenues related to these Agreements as follows:

	•	New account fees are recognized as retail revenues on a straight-line basis over the estimated life of the credit card relationship, currently estimated to be 3 years.
	•	Credit card usage fees are recognized as retail revenues as actual usage occurs.
	•	Minimum guaranteed annual payments, which exceed amounts earned based on the number of accounts opened and card usage, are recognized as retail revenues on a straight-line basis over the estimated life of the credit card relationship, currently estimated to be 3 years.
	•	Annual rewards earned are recorded as gift card liabilities and recognized as retail revenues when the gift cards are redeemed.

     As of April 30, 2005, the Company had received $6.0 million in advance payments under the Agreements. During the first quarter of fiscal 2005, the Company recognized approximately $0.8 million in new account and credit card usage fees, which are included in net retail sales in the accompanying Condensed Consolidated Statement of Income. As of April 30, 2005, $0.4 million in advance payments and $0.3 million in gift card liabilities are included in accrued liabilities, and deferred revenue of $3.8 million is included in other long-term liabilities, in the accompanying Condensed Consolidated Balance Sheet.

     There have been no material changes to the Company’s contractual obligations since its Annual Report on Form 10-K for the year ended January 29, 2005.

     The Company remains liable on lease agreements for its previous Burlingame, California headquarters assigned to its current landlord and for 4 Play & Music sites sold to franchisees. However, the Company does not believe that payment by the Company of its maximum potential amount of future payments under these lease agreements would have a material current or future effect on its liquidity or capital resources.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company 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

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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 April 30, 2005 and May 1, 2004.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

     We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), designed to provide reasonable assurance that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The Company conducted an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on their evaluation, the Chief Executive Officer and the Chief Operating Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report in providing reasonable assurance of achieving the Company’s control objectives.

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Changes in Internal Control over Financial Reporting

     We also maintain a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act). During the first quarter of fiscal 2005, management remediated the material weakness in internal control over financial reporting identified in the report on internal control over financial reporting in our Annual Report on Form 10-K for the fiscal year ended January 29, 2005, by implementing controls to ensure all future leases are reviewed and accounted for in accordance with SFAS No. 13, FTB No. 85-3 and FTB No. 88-1. No other changes in our internal control over financial reporting occurred during the quarter ended April 30, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

     On April 21, 2005, Gymboree Operations, Inc. (“Gymboree Operations”), a wholly-owned subsidiary of the Company, was served in a lawsuit filed in the Superior Court of Riverside County, California. The complaint, on behalf of the manager of a Gymboree store in Temecula, California, alleges that Gymboree Operations failed to pay overtime wages and provide meal breaks. The plaintiff seeks unspecified damages, including interest and penalties, under the California Labor Code and other statutes. The complaint also seeks class action status on behalf of the plaintiff and other managers of Company stores in California. On May 20, 2005, the Company filed an answer generally denying the plaintiff’s allegations. The Company is currently defending the lawsuit.

     The Company is subject to various legal proceedings and claims arising in the ordinary course of business. Our management does not expect that the results in any of these legal proceedings, either individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows.

Item 6. EXHIBITS

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Exhibit Index

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