Although I like to track retail stocks and believe they have longer-term potential, the group could face a fair amount of headwind in the near-term. I don't plan to dive headlong into the sector or aggressively bottom fish at the moment.

However, I am keeping an eye out for good companies and making a wish list of sorts. That said, one company on that wish list or radar screen, if you will, is Gymboree (Nasdaq:GYMB), the children's apparel retailer.

Here's why:

It's In The Black
Retailers of all stripes are struggling these days. One only needs to look at recent results from some of the big-name chains including J.C. Penney (NYSE:JCP), Nordstrom (NYSE:JWN) and Macy's (NYSE:M) to see that things aren't entirely a bed of roses.

However, when it comes to the kids' department, things seem to be a bit better. For example, although I'm not totally keen on the stock, New Jersey-based Children's Place (Nasdaq:PLCE) posted revenue and earnings growth in its third quarter, which was reported in November. Considering the environment, that's a plus!

As for Gymboree, it's coming off a solid third quarter. For the period ended November 1, it earned $1.06 a share, whereas analysts had been looking for $1.03 a share. It also grew net sales by a little more than 5% over the comparable period in the prior year. Again – solid. In the first nine months of the year, Gymboree's EPS came in at $2.20 per diluted share. That's 25% north of the $1.76 a share it posted in the first nine months of 2007.

Finally, according to the earnings release: "For the full fiscal year 2008, the company expects net income to be in the range of $3.12 to $3.20 per diluted share." That certainly made by ears perk up. Again, that's a solid number given the savage beating retail has taken.

The Bear Argument
The bears will argue that the company stated in mid-December (along with salary reduction plans) that 2009 probably wasn't going to be so hot. In a release its chief executive pointed out, "While it is too early to provide formal guidance for fiscal 2009, based on our expectation of continued weakness in consumer spending, we believe that our 2009 earnings will be below 2008 levels even after implementing our expense-reduction strategies." (Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

Earlier in the week on January 6, Margaret Whitfield, an analyst at Sterne Agee, reportedly cut her Q4 estimate from 97 cents to 93 cents. That's two cents south of what the Street is looking for. It's also not exactly what investors want to hear coming back from the holidays.

My Take On The Bear Argument
Obviously I can't say for sure where numbers will shake out in either Q4 or for next year. But even if next year's number came in at $2.50 a share, that would be a plus given that the stock can currently be had for $25 and change.

For the record, per Yahoo Finance, analysts are looking for $2.98 a share in the next year. That means it trades at just about 8.5 times the current estimate for next year. That's cheap given that the company, according to data on Yahoo Finance, is expected to grow at an 11.5% clip per annum in the next five years.

Metrics That Shouldn't Be Missed
Gymboree's Q3 balance sheet shows it wasn't overly leveraged. The long-term liabilities section, which included "deferred rent and other liabilities" and "unrecognized tax benefits", totaled about $70.3 million. That's not too shabby given that total current assets totaled about $275.9 million.

Plus, according to Yahoo Finance data, its book value was in excess of $10 a share and it enjoyed more than $3 a share in cash and cash equivalents. This could help provide some downside protection. Oh, and one more thing: In its latest quarter, its gross margin came in at about 51%. That's decent given that Children's Place posted a gross margin of about 43.6% in its Q3.

Bottom Line
I'm not phoning a trade to buy the shares. However, I do plan to keep the stock on my radar screen. Gymboree is one of those companies that I think will see a nice rebound in share price once the economic cloud lifts. Stay tuned!

For more on analyzing companies in this sector, be sure to read our related article, Analyzing Retail Stocks.