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Jason Mercer

BEBE AT A GLANCE

P/E ► -176   EV/EBITDA ► 26.6 HIGH ROA ► -0.5% AVG ROE ► -0.6% AVG Debt to Equity ► 0.211 VERY LOW Current Ratio ► 5.83 VERY HIGH

 

 

 

 

 

 

Bebe Stores, Inc. (NASDAQ: BEBE) produces and sells clothing and accessories to women between 21 and 35 years of age who follow the latest fashion trends. Sales of sweaters, shoes, handbags and jewelry have increased since last year, and its international business is rapidly expanding--international sales rose by 163% last year.^[1] Manufacturing costs are increasing for retail companies that produce their goods in China, which bebe is attempting to avoid by manufacturing its goods in other countries, such as Brazil and Italy. In addition, recessionary fears in the United States have led consumers to be more conservative with their spending, which the company is trying to account for by offering less trendy, more traditional items that it believes its clientèle will want to buy.

Business and Financials

Bebe produces and sells its own line of contemporary women's apparel. Its target demographic is women between the ages of 21 and 35 who follow fashion trends. Bebe markets its products under a number of different names:

• bebe is the company's main product line. It provides clothing for a number of different occasions, such as suits, coats, blazeres, sweaters and dresses.^[2] Bebe has its own team of designers that use the latest fashion trends as inspiration for its own collection.^[3]
• bebe design lab (formerly COLLECTION bebe) features collections by designers outside the bebe design team. This line provides new products that are different from the bebe product line, but are still meant for the same demographic.^[4]
• bebe SPORT sells athletic gear (track pants, jackets, shorts) in addition to jeans, dresses, t-shirts, bags, and shoes.^[5]
• bebe O is the outlet store segment of bebe. These stores have merchandise from other bebe stores as well as items produced exclusively for the outlets, at a lower price than other bebe stores.^[6]
• bebe.com is the company's website. It sells bebe and bebe SPORT merchandise, and serves as a medium for the company to communicate with its customers.^[7]

^[8] Note: bebe's fiscal year ends in June.^[9]

Bebe has had mixed performance: on one hand it had decreasing sales in the second quarter of the fiscal year.^[10] However, sales increased in the third quarter.^[11] Also, revenues have been increasing due to strong performance in shoes, handbags, and international sales. The company website has also been performing well, with a 23% increase in sales last year, due in part to a 21% increase in traffic to the site.^[12]

Bebe has been expanding its mainline and sport product lines in the past three years, while keeping the number of outlets relatively steady. Bebe also opened its first (and so far, only) accessories store in 2007, and has plans to expand its international presence from 14 to 22 stores in the next fiscal year. The company plans to open stores in Saudi Arabia, Egypt, Kuwait, Russia, Ukraine, Romania and Mexico. Bebe is almost doubling its international presence, demonstrating the company is optimistic about international expansion given total international sales rose by 163% during the first half of fiscal year 2008. ^[14]

Key Trends and Forces

International Expansion is Big Business for bebe

International sales increased by 163% during the first half of fiscal year 2008.^[15] This increase is attributed to a stable economy in the United Arab Emirates and an especially profitable year for Israel's economy-it grew 5.4% in 2007, the fastest pace since 2000.^[16] Bebe has stores in UAE, Israel, Thailand, Singapore, Malaysia and Indonesia, and plans to open even more stores to exploit its international success. The strength of the international market is one of the factors that have bolstered revenues despite less than stellar performance of the core Bebe product line in the North American market.^[17]

Economic Uncertainty Leads bebe to be More Cautious about Product Offerings

Due to the general uneasiness concerning the economy, many consumers are unsure of their financial security and thus have started spending less money on unnecessary items, which has led to lower sales for many retail companies. In response to this development, bebe--which usually provides merchandise that is up-to-date with the latest trends--has decided to decrease the number of "fashionable" items with unproven viability that it offers and instead focus on selling only those products that have proven to sell well and have a limited risk of being marked down. In other words, bebe wants to stock its stores with more items it is sure its customers will buy and decrease the risk of unpopular items that will stay on the shelves for months. Avoiding inventory buildup and keeping customers in its stores are bebe's main priorities.^[18]

Rising Manufacturing Costs

40% of all clothing purchased by Americans is imported from China. Bebe is one of many companies that have contracts with Chinese manufactures to produce their goods.^[19] However, in the past few years manufacturing costs in China have been increasing, due to higher energy costs and an 80% increase in wages.^[20] Bebe is hedged against these rising costs, however, as it already has contracts with manufacturers in other countries, such as Italy and Brazil.^[21]

Competition

Major Competitors:

Bebe's annual sales are higher than Wet Seal's but lower than both Guess? and Express. Wet Seal, like bebe, sells clothing exclusively for females. Express and Guess, on the other hand, sell clothing for both genders. Out of all bebe's main competitors, Express is the only one that does not sell its goods online.

Express, LLC operates over 620 stores in the U.S. It supplies men's and women's apparel and accessories. Express has been closing and consolidating its stores for the past few years in response to decreasing sales.^[29]

Guess? operates 350 standalone stores in the U.S. and Europe. It also sells its clothing through department stores such as Macy's and Bloomingdale's as well as its own website.

Wet Seal operates 490 stores under the Wet Seal and Arden B. brand names. It sells both brand name and company-produced apparel and accessories. Its clothing is geared towards young women. The company also sells clothing through two websites.

References

1. ↑ Bebe Stores F2Q08 (Qtr End 1/5/08) Earnings Call Transcript. Seeking Alpha.
2. ↑ http://www.bebe.com. Bebe website.
3. ↑ BEBE 2007 10-K. Item 1, Page 1.
4. ↑ Bebe Stores F2Q08 (Qtr End 1/5/08) Earnings Call Transcript. Seeking Alpha.
5. ↑ BEBE 2007 10-k. Item 1, Page 1.
6. ↑ BEBE 2007 10-k. Item 1, Page 1.
7. ↑ BEBE 2007 10-k. Item 1, Page 1.
8. ↑ BEBE 2007 10-K. Item 6, Page 17.
9. ↑ bebe Key Numbers-Hoover's.
10. ↑ Bebe Stores Misses Bull's-Eye. Seeking Alpha.
11. ↑ Raw Data Report: Clothing Companies. Seeking Alpha.
12. ↑ Bebe Stores F2Q08 (Qtr End 1/5/08) Earnings Call Transcript. Seeking Alpha.
13. ↑ Bebe Products/Operations Hoover's Report.
14. ↑ BEBE 2007 10-K. Item 1, Page 3.
15. ↑ Bebe Stores F2Q08 (Qtr End 1/5/08) Earnings Call Transcript. Seeking Alpha.
16. ↑ CIA World Factbook-Israel.
17. ↑ Bebe Stores F2Q08 (Qtr End 1/5/08) Earnings Call Transcript. Seeking Alpha.
18. ↑ Bebe Stores F2Q08 (Qtr End 1/5/08) Earnings Call Transcript. Seeking Alpha.
19. ↑ "China's Inflation Hits American Price Tags." The New York Times. February 1, 2008.
20. ↑ "China's Inflation Hits American Price Tags." The New York Times. February 1, 2008.
21. ↑ BEBE 2007 10-K. Item 1, Page 2.
22. ↑ Express, LLC Key Financials-Hoover's.
23. ↑ [http://proxy.library.upenn.edu:2112/subscribe/co/factsheet.xhtml?ID=fffrfhccfrtfhhrrcy. Express, LLC Company Overview-Hoover's
24. ↑ GES 2007 10-K. Item 6, Page 27.
25. ↑ GES 2007 10-K. Item 1, Page 8.
26. ↑ WTSL 2007 10-K. Item 6, Page 24.
27. ↑ WTSL 2007 10-K. Item 2, Page 18.
28. ↑ Top Competitors. Bebe Hoover's Report
29. ↑ [http://www.hoovers.com/express,-llc/--ID__105440--/free-co-profile.xhtml. Express, LLC Company Overview-Hoover's