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
| Delaware | 94-2615258 | |
| (State or other jurisdiction of | (IRS Employer Identification No.) | |
| incorporation or organization) |
| 500 Howard Street, San Francisco, California | 94105 | |
| (Address of principal executive offices) | (Zip code) |
(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.
| Yes þ | No o |
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
| Yes þ | No o |
As of May 28, 2005, 31,196,616 shares of the registrant’s common stock were outstanding.
TABLE OF CONTENTS
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| EXHIBIT 15 | ||||||||
| EXHIBIT 31.1 | ||||||||
| EXHIBIT 31.2 | ||||||||
| EXHIBIT 32.1 | ||||||||
| EXHIBIT 32.2 | ||||||||
2
Part I - FINANCIAL INFORMATION
THE GYMBOREE CORPORATION
| April 30, | January 29, | May 1, | ||||||||||
| 2005 | 2005 | 2004 | ||||||||||
Assets |
||||||||||||
Current Assets |
||||||||||||
Cash and cash equivalents |
$ | 33,759 | $ | 30,599 | $ | 30,906 | ||||||
Marketable securities |
45,000 | 30,000 | 79,300 | |||||||||
Accounts receivable |
11,333 | 16,547 | 9,267 | |||||||||
Merchandise inventories |
73,116 | 97,237 | 64,840 | |||||||||
Income tax receivable |
2,454 | 3,554 | — | |||||||||
Prepaid expenses |
3,218 | 2,994 | 8,652 | |||||||||
Deferred income taxes |
2,671 | 3,795 | 589 | |||||||||
Current assets of discontinued operations |
1,601 | 1,794 | 9,092 | |||||||||
Total current assets |
173,152 | 186,520 | 202,646 | |||||||||
Property and Equipment |
||||||||||||
Land and buildings |
10,376 | 10,376 | 10,376 | |||||||||
Leasehold improvements |
146,347 | 144,998 | 113,270 | |||||||||
Furniture, fixtures and equipment |
146,795 | 146,917 | 139,511 | |||||||||
| 303,518 | 302,291 | 263,157 | ||||||||||
Less accumulated depreciation and amortization |
(156,760 | ) | (151,545 | ) | (144,534 | ) | ||||||
| 146,758 | 150,746 | 118,623 | ||||||||||
Deferred Income Taxes |
12,386 | 12,891 | 7,735 | |||||||||
Lease Rights and Other Assets |
1,524 | 1,542 | 1,593 | |||||||||
Total Assets |
$ | 333,820 | $ | 351,699 | $ | 330,597 | ||||||
Liabilities and Stockholders’ Equity |
||||||||||||
Current Liabilities |
||||||||||||
Accounts payable |
$ | 20,698 | $ | 39,241 | $ | 35,998 | ||||||
Income tax payable |
— | — | 11,033 | |||||||||
Accrued liabilities |
35,958 | 41,803 | 32,732 | |||||||||
Current liabilities of discontinued operations |
3,906 | 7,144 | 3,950 | |||||||||
Total current liabilities |
60,562 | 88,188 | 83,713 | |||||||||
Long-Term Liabilities |
||||||||||||
Deferred rent and other liabilities |
49,220 | 46,105 | 33,710 | |||||||||
Total Liabilities |
109,782 | 134,293 | 117,423 | |||||||||
Stockholders’ Equity |
||||||||||||
Common stock, including additional paid-in capital
($.001 par value: 100,000,000 shares authorized,
31,192,868, 31,062,066 and 30,585,870 shares issued
and outstanding at April 30, 2005, January 29,
2005 and May 1, 2004, respectively) |
67,830 | 66,738 | 62,207 | |||||||||
Retained earnings |
156,433 | 150,915 | 151,503 | |||||||||
Accumulated other comprehensive loss |
(225 | ) | (247 | ) | (536 | ) | ||||||
Total stockholders’ equity |
224,038 | 217,406 | 213,174 | |||||||||
Total Liabilities and Stockholders’ Equity |
$ | 333,820 | $ | 351,699 | $ | 330,597 | ||||||
See notes to condensed consolidated financial statements.
3
THE GYMBOREE CORPORATION
| 13 Weeks Ended | ||||||||
| April 30, | May 1, | |||||||
| 2005 | 2004 | |||||||
Net sales: |
||||||||
Retail |
$ | 160,779 | $ | 144,448 | ||||
Play & Music |
2,187 | 2,667 | ||||||
Total net sales |
162,966 | 147,115 | ||||||
Cost of goods sold, including
buying and occupancy expenses |
(98,336 | ) | (84,758 | ) | ||||
Gross profit |
64,630 | 62,357 | ||||||
Selling, general and administrative expenses |
(56,621 | ) | (50,603 | ) | ||||
Operating income |
8,009 | 11,754 | ||||||
Other income, net |
206 | 238 | ||||||
Income from continuing operations
before income taxes |
8,215 | 11,992 | ||||||
Income tax expense |
(2,936 | ) | (4,377 | ) | ||||
Income from continuing operations,
net of income tax |
5,279 | 7,615 | ||||||
Income from discontinued operations,
net of income tax |
239 | 390 | ||||||
Income before cumulative effect of
change in accounting principle |
5,518 | 8,005 | ||||||
Cumulative effect of change in accounting
principle, net of income tax |
— | 1,227 | ||||||
Net income |
$ | 5,518 | $ | 9,232 | ||||
Basic per share amounts: |
||||||||
Income from continuing operations,
net of income tax |
$ | 0.17 | $ | 0.25 | ||||
Income from discontinued operations,
net of income tax |
0.01 | 0.01 | ||||||
Cumulative effect of change in accounting
principle, net of income tax |
— | 0.04 | ||||||
Net income |
$ | 0.18 | $ | 0.30 | ||||
Diluted per share amounts: |
||||||||
Income from continuing operations,
net of income tax |
$ | 0.17 | $ | 0.24 | ||||
Income from discontinued operations,
net of income tax |
0.01 | 0.01 | ||||||
Cumulative effect of change in accounting
principle, net of income tax |
— | 0.04 | ||||||
Net income |
$ | 0.18 | $ | 0.29 | ||||
Weighted average shares outstanding: |
||||||||
Basic |
31,166 | 30,476 | ||||||
Diluted |
31,502 | 31,348 | ||||||
See notes to condensed consolidated financial statements.
4
THE GYMBOREE CORPORATION
| 13 Weeks Ended | ||||||||
| April 30, | May 1, | |||||||
| 2005 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 5,518 | $ | 9,232 | ||||
Adjustments to reconcile net income to net cash
provided by operating activities: |
||||||||
Income from discontinued operations, net of income tax |
(239 | ) | (390 | ) | ||||
Cumulative effect of change in accounting principle,
net of income tax |
— | (1,227 | ) | |||||
Depreciation and amortization |
7,488 | 6,570 | ||||||
Deferred income tax provision (benefit) |
1,629 | (323 | ) | |||||
Loss on disposal of property and equipment |
93 | 38 | ||||||
Tax benefit from exercise of stock options |
330 | 1,935 | ||||||
Non-cash compensation expense |
39 | — | ||||||
Change in assets and liabilities: |
||||||||
Accounts receivable |
5,210 | 1,898 | ||||||
Merchandise inventories |
24,161 | 7,585 | ||||||
Prepaid expenses and other assets |
(207 | ) | (6,134 | ) | ||||
Accounts payable |
(18,527 | ) | 2,725 | |||||
Income tax payable |
1,166 | 2,444 | ||||||
Accrued liabilities |
(1,792 | ) | 4,712 | |||||
Deferred and other liabilities |
3,215 | 2,093 | ||||||
Net cash provided by continuing operations |
28,084 | 31,158 | ||||||
Net cash (used in) provided by
discontinued operations |
(2,900 | ) | 721 | |||||
Net cash provided by operating activities |
25,184 | 31,879 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from sales and maturities of marketable securities |
95,000 | 196,155 | ||||||
Purchases of marketable securities |
(110,000 | ) | (207,455 | ) | ||||
Capital expenditures |
(7,774 | ) | (13,053 | ) | ||||
Proceeds from sale of assets and other |
12 | 107 | ||||||
Net cash used in investing activities |
(22,762 | ) | (24,246 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from issuance of stock |
722 | 1,812 | ||||||
Net cash provided by financing activities |
722 | 1,812 | ||||||
Effect of exchange rate fluctuations on cash |
16 | (92 | ) | |||||
Net Increase in Cash and Cash Equivalents |
3,160 | 9,353 | ||||||
CASH AND CASH EQUIVALENTS: |
||||||||
Beginning of Period |
30,599 | 21,553 | ||||||
End of Period |
$ | 33,759 | $ | 30,906 | ||||
NON-CASH INVESTING ACTIVITIES: |
||||||||
Capital expenditures incurred, but not yet paid |
$ | 2,538 | $ | 8,193 | ||||
See notes to condensed consolidated financial statements.
5
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:
6
| 13 Weeks Ended | ||||||||
| April 30, | May 1, | |||||||
| 2005 | 2004 | |||||||
| (In thousands, except per share data) | ||||||||
Net income, as reported |
$ | 5,518 | $ | 9,232 | ||||
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects |
39 | — | ||||||
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, for awards granted
or settled, net of related tax effects |
(1,361 | ) | (1,141 | ) | ||||
Pro forma net income |
$ | 4,196 | $ | 8,091 | ||||
Basic income per share |
||||||||
As reported |
$ | 0.18 | $ | 0.30 | ||||
Pro forma |
0.13 | 0.27 | ||||||
Diluted income per share |
||||||||
As reported |
$ | 0.18 | $ | 0.29 | ||||
Pro forma |
0.13 | 0.26 | ||||||
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:
| Periods ended | ||||||||
| April 30, | May 1, | |||||||
| 2005 | 2004 | |||||||
Expected dividend rate |
0 | % | 0 | % | ||||
Expected volatility |
45.7 | % | 50.0 | % | ||||
Risk-free interest rate |
2.7 | % | 2.5 | % | ||||
Expected lives (yrs.) |
4.0 | 4.0 | ||||||
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.
7
| 13 Weeks Ended | ||||||||
| April 30, | May 1, | |||||||
| 2005 | 2004 | |||||||
| (In thousands) | ||||||||
Weighted average number of shares - basic |
31,166 | 30,476 | ||||||
Add: effect of dilutive securities |
336 | 872 | ||||||
Weighted average number of shares - diluted |
31,502 | 31,348 | ||||||
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:
| 13 Weeks Ended | ||||||||
| April 30, | May 1, | |||||||
| 2005 | 2004 | |||||||
| (In thousands) | ||||||||
Net income |
$ | 5,518 | $ | 9,232 | ||||
Other comprehensive income (loss) |
22 | (19 | ) | |||||
Total comprehensive income |
$ | 5,540 | $ | 9,213 | ||||
| 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).
| 13 Weeks Ended April 30, 2005 | ||||||||||||
| Retail | ||||||||||||
| Stores(1) | Play & Music | Total | ||||||||||
Net sales |
$ | 160,779 | $ | 2,187 | $ | 162,966 | ||||||
Depreciation and amortization |
7,327 | 161 | 7,488 | |||||||||
Operating income |
7,879 | 130 | 8,009 | |||||||||
Total assets |
326,650 | 5,569 | 332,219 | |||||||||
Capital expenditures |
7,707 | 67 | 7,774 | |||||||||
| 13 Weeks Ended May 1, 2004 | ||||||||||||
| Retail | ||||||||||||
| Stores(1) | Play & Music | Total | ||||||||||
Net sales |
$ | 144,448 | $ | 2,667 | $ | 147,115 | ||||||
Depreciation and amortization |
6,446 | 124 | 6,570 | |||||||||
Operating income |
11,434 | 320 | 11,754 | |||||||||
Total assets |
315,936 | 5,569 | 321,505 | |||||||||
Capital expenditures |
13,009 | 44 | 13,053 | |||||||||
| (1) | Includes Gymboree Visa credit card program, which was previously reported under the Play & Music and Other segment. |
8
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):
| 13 Weeks Ended | ||||||||
| April 30, | May 1, | |||||||
| 2005 | 2004 | |||||||
Net sales |
$ | — | $ | 6,933 | ||||
Income from discontinued operations |
$ | 524 | 614 | |||||
Income tax expense |
(285 | ) | (224 | ) | ||||
Income from discontinued operations,
net of income taxes |
$ | 239 | $ | 390 | ||||
The changes in lease disposition accruals included in current liabilities of discontinued operations were as follows (in thousands):
Lease disposition accruals as of
January 29, 2005 |
$ | 5,646 | ||
Payments |
(2,045 | ) | ||
Revisions to estimates |
(633 | ) | ||
Other |
28 | |||
Lease disposition accruals as of
April 30, 2005 |
$ | 2,996 | ||
| 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.
9
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
10
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
11
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 towar