BEBE STORES INC BEBE
November 06, 2010 - 11:41am EST by
SpocksBrainX
2010 2011
Price: 6.67 EPS $0.00 $0.00
Shares Out. (in M): 88 P/E 0.0x 0.0x
Market Cap (in $M): 587 P/FCF 0.0x 0.0x
Net Debt (in $M): -244 EBIT 0 0
TEV ($): 343 TEV/EBIT 0.0x 0.0x

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Description

Turnaround/Asset Play bebe Stores is a revision to the mean idea.  Business has been lousy for a while which sets them up for better performance when things begin to turn.  The company has an exceptionally strong balance sheet, a history of significant profitability, faces easy sales comparisons, and is seeing some acceleration in sales as a new merchandising management team takes the company in a new direction.  The price has been beaten down on the recognition that this is a purely commodity business, not currently profitable with negative same store sales along with a grim near-term forecast with cost pressures set to impact gross margins.  I am recommending BEBE today as the company appears to be hitting an inflection point on the upside and the cash on the BS affords patience in case this is a false start. 
 
Business.  bebe is an apparel retailer currently operating 214 bebe stores (core), 25 PH8 (sport), 36 2b bebe (half are outlets), and 1 bebe accessories.  The PH8 stores should be entirely closed by Q2 (Dec 2011).  bebe also licences 53 stores in 14 other countries.    The clothes appeal to 'fashion-forward' women with high-incomes who are on the thin side (think Danica Patrick - see www.bebe.com for a very clear presentation as to who they target).
 
here is a list of positives and negatives:
 
Positives
1) Strong Balance sheet.  As of Q1 (Sep 10), bebe had 157m in cash and 87m in investments or roughly $2.80 a share.  This is your downside protection and represents the asset in this asset play.
 
2)  History of Strong Profits.  In the past 10 years, BEBE has generated 641m in cash flow from operations with 260m in CapEx.  Even in the past three down years (esp. the last two), bebe generated more cash flow than CapEx.  From 2000 to 2010, net margins exceeded 10% four different times.
 
3) Closure of PH8 chain.  The former Bebe sport chain (athletic inspired apparel) didn't work out as planned on management is closing the chain down.  Sans impairment charges, PH8 had an operating loss of 15.5m last year.  
 
4) Easy sales compares.  As a consequence of dismal sales for the past couple years, comps are easy going forward.
 

10-10     276         -4.7%                   

6-10        297         -3.4%                    
3-10        300         -11.2%                 
12-09     309         -22.5%                 
9-09        307         -25.7%                 
6-09        308         -29%                     
3-09        308         -23.5%
12-08                     -12.7%
9-08                        -10.8% 
5) New merchandising direction.  To be blunt, I don't spend much time on merchandising and really have no clue why some chains go in and out of favor, especially when it comes to niche brands like this one.  However, a change in merchandising direction usually happens for the most pedestrian of reasons - things aren't working out - and often times new management teams recharge the business.  Emilia Fabricant is the new Chief Merchandising Officer and you can read about her background in the 10K.  The only point here is that usually when things get better, they don't fall apart the next quarter - they keep getting better for a while.  Thus, any sort of merchandising change in a dormat retailer is a good thing.
6) Strong Near-term Sales Results and Hopeful Management commentary.  bebe just reported earnings and the market initially reacted badly to the report and near term forecast for lower profits before reversing itself yesterday on an upgrade.  A low public float in these shares exaggerates the volatility in these shares which of course is compounded by the deranged monkey behavior which characterizes speciality retail as a rule.  The conference call mentioned a couple hopeful signs:  a) Oct comps are mid single positive, and the past two weeks have been high singles.  The CFO specifically noted that "...I do think after four tough years that we found the bottom of the river. October actually had positive West Coast comps and I think it has been four years, so we think we found the bottom."  As far as the grim forecast, the company noted - prudently - that they were being conservative with guidance. 
7) Satisfactory Capital Allocation.  bebe does pay a regular dividend, recently paid a special $1 dividend, and has purchased shares from time to time (some in relation to a divorce).  Since 2005, option issuances have been very reasonable (1.5% of the share count, with high cancellations). 
Negatives
1) Commodity business.  In the end, they just sell clothes.  As a commodity business, bebe goes through significant cyclical fluctuations and the stock price's roller coaster action reflects emotional extremes that are usually out of proportion to operating results.  If massive one day moves up and down bother you, bebe is not the sort of stock you should look at.  If anything, there is no reason to view anything other than 20% moves as meaning anything. 
2)  Poor recent sales history and lack of profits.  Obviously the company lost its mojo for quite a while and trailing income is negative. 
3) Grim near term sales forecast.  Company forecasted 2 to 6c in Q2 (84.5m shares) vs. 9c (86.8m shares).  However, note that this includes higher SGA projection due to one time 1.1m gift card breakage from last year (but excludes any costs associated with discontinued operations)
4) China cost pressures.  As most who follow retail know, cost pressures are going to hit margins next year and bebe is no exception.  Of course, higher comps can conquer any pricing issues and bebe did note that Oct sales had come with reduced markdowns.
5) One month does not make a trend (yet).  Of course, the CFO's comment that this is the bottom might turn into a mirage.  Sales trends can turn on a dime, and there is no assurance that things are really getting better (at least, I can't tell from looking at my local store).  Of course, if employment is picking up however so slowly, if there is an improvement in the overall environment (and many retailers appear like they may actually survive 2010) and if merchandising issues are resolved, then bebe could march a lot higher, but nothing is guaranteed.
6) Little store growth.  The bebe sport concept was supposed to be the new growth vehicle but that was a failure.  Sans closures, bebe is opening 7 stores this year and saturation is probably around 300.  Of course, this isn't such a horrible thing - bebe will be less likely to develop secondary concepts until the core is doing better (something a lot of companies realized in the past couple years).
In the end, I think bebe might be hitting an inflection point with good news possible from here which is usually rewarded well by the market, esp. for a cash rich company like this one.  However, as with most retailers I would recommend this as one position in an otherwise diversified portfolio.

Catalyst

Better sales
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    Description

    Turnaround/Asset Play bebe Stores is a revision to the mean idea.  Business has been lousy for a while which sets them up for better performance when things begin to turn.  The company has an exceptionally strong balance sheet, a history of significant profitability, faces easy sales comparisons, and is seeing some acceleration in sales as a new merchandising management team takes the company in a new direction.  The price has been beaten down on the recognition that this is a purely commodity business, not currently profitable with negative same store sales along with a grim near-term forecast with cost pressures set to impact gross margins.  I am recommending BEBE today as the company appears to be hitting an inflection point on the upside and the cash on the BS affords patience in case this is a false start. 
     
    Business.  bebe is an apparel retailer currently operating 214 bebe stores (core), 25 PH8 (sport), 36 2b bebe (half are outlets), and 1 bebe accessories.  The PH8 stores should be entirely closed by Q2 (Dec 2011).  bebe also licences 53 stores in 14 other countries.    The clothes appeal to 'fashion-forward' women with high-incomes who are on the thin side (think Danica Patrick - see www.bebe.com for a very clear presentation as to who they target).
     
    here is a list of positives and negatives:
     
    Positives
    1) Strong Balance sheet.  As of Q1 (Sep 10), bebe had 157m in cash and 87m in investments or roughly $2.80 a share.  This is your downside protection and represents the asset in this asset play.
     
    2)  History of Strong Profits.  In the past 10 years, BEBE has generated 641m in cash flow from operations with 260m in CapEx.  Even in the past three down years (esp. the last two), bebe generated more cash flow than CapEx.  From 2000 to 2010, net margins exceeded 10% four different times.
     
    3) Closure of PH8 chain.  The former Bebe sport chain (athletic inspired apparel) didn't work out as planned on management is closing the chain down.  Sans impairment charges, PH8 had an operating loss of 15.5m last year.  
     
    4) Easy sales compares.  As a consequence of dismal sales for the past couple years, comps are easy going forward.
     

    10-10     276         -4.7%                   

    6-10        297         -3.4%                    
    3-10        300         -11.2%                 
    12-09     309         -22.5%                 
    9-09        307         -25.7%                 
    6-09        308         -29%                     
    3-09        308         -23.5%
    12-08                     -12.7%
    9-08                        -10.8% 
    5) New merchandising direction.  To be blunt, I don't spend much time on merchandising and really have no clue why some chains go in and out of favor, especially when it comes to niche brands like this one.  However, a change in merchandising direction usually happens for the most pedestrian of reasons - things aren't working out - and often times new management teams recharge the business.  Emilia Fabricant is the new Chief Merchandising Officer and you can read about her background in the 10K.  The only point here is that usually when things get better, they don't fall apart the next quarter - they keep getting better for a while.  Thus, any sort of merchandising change in a dormat retailer is a good thing.
    6) Strong Near-term Sales Results and Hopeful Management commentary.  bebe just reported earnings and the market initially reacted badly to the report and near term forecast for lower profits before reversing itself yesterday on an upgrade.  A low public float in these shares exaggerates the volatility in these shares which of course is compounded by the deranged monkey behavior which characterizes speciality retail as a rule.  The conference call mentioned a couple hopeful signs:  a) Oct comps are mid single positive, and the past two weeks have been high singles.  The CFO specifically noted that "...I do think after four tough years that we found the bottom of the river. October actually had positive West Coast comps and I think it has been four years, so we think we found the bottom."  As far as the grim forecast, the company noted - prudently - that they were being conservative with guidance. 
    7) Satisfactory Capital Allocation.  bebe does pay a regular dividend, recently paid a special $1 dividend, and has purchased shares from time to time (some in relation to a divorce).  Since 2005, option issuances have been very reasonable (1.5% of the share count, with high cancellations). 
    Negatives
    1) Commodity business.  In the end, they just sell clothes.  As a commodity business, bebe goes through significant cyclical fluctuations and the stock price's roller coaster action reflects emotional extremes that are usually out of proportion to operating results.  If massive one day moves up and down bother you, bebe is not the sort of stock you should look at.  If anything, there is no reason to view anything other than 20% moves as meaning anything. 
    2)  Poor recent sales history and lack of profits.  Obviously the company lost its mojo for quite a while and trailing income is negative. 
    3) Grim near term sales forecast.  Company forecasted 2 to 6c in Q2 (84.5m shares) vs. 9c (86.8m shares).  However, note that this includes higher SGA projection due to one time 1.1m gift card breakage from last year (but excludes any costs associated with discontinued operations)
    4) China cost pressures.  As most who follow retail know, cost pressures are going to hit margins next year and bebe is no exception.  Of course, higher comps can conquer any pricing issues and bebe did note that Oct sales had come with reduced markdowns.
    5) One month does not make a trend (yet).  Of course, the CFO's comment that this is the bottom might turn into a mirage.  Sales trends can turn on a dime, and there is no assurance that things are really getting better (at least, I can't tell from looking at my local store).  Of course, if employment is picking up however so slowly, if there is an improvement in the overall environment (and many retailers appear like they may actually survive 2010) and if merchandising issues are resolved, then bebe could march a lot higher, but nothing is guaranteed.
    6) Little store growth.  The bebe sport concept was supposed to be the new growth vehicle but that was a failure.  Sans closures, bebe is opening 7 stores this year and saturation is probably around 300.  Of course, this isn't such a horrible thing - bebe will be less likely to develop secondary concepts until the core is doing better (something a lot of companies realized in the past couple years).
    In the end, I think bebe might be hitting an inflection point with good news possible from here which is usually rewarded well by the market, esp. for a cash rich company like this one.  However, as with most retailers I would recommend this as one position in an otherwise diversified portfolio.

    Catalyst

    Better sales

    Messages


    Subjectformat
    Entry11/06/2010 11:50 AM
    MemberSpocksBrainX
    not sure of fomatting here - I put line spaces in and it wouldn't take...

    SubjectRE: how cheap
    Entry11/08/2010 08:30 AM
    MemberSpocksBrainX
    not much - that's a fair way to look at it long-term if the business does as it did the previous 10 years.  Course, that's a big if - the store base, for example, is already here, and thus CapEx in theory ought to trail down over time barring an exiciting new concept.  So if the company did as well as it had previously, more FCF should be generated.   

    SubjectRE: Cotton?
    Entry11/08/2010 01:37 PM
    MemberSpocksBrainX
    to be frank, I don't consider it or worry about it.  If the comps are strong then cotton isn't an issue.  If comps are weak, then cotton isn't an issue.  Given that I have no opinion on why cotton is priced where it is, I don't give it much worry or thought, especially since it is a variable that hits all retailers, not just this one.

    Subjectratings
    Entry11/08/2010 01:41 PM
    MemberSpocksBrainX
    thank goodness they are trending around 4 - given the history of ratings before on my ideas, that's a mighty good sign!

    Subject2Q Earnings in a Dead Wrong Idea
    Entry02/05/2011 05:25 PM
    MemberSpocksBrainX
    my writeup, as I continue to hold the shares, but there is absolutely positively no catalyst right now:
     

    2-5-11, $5.70, 503-243, 1.4x, $2.9 in cash

     Conclusion

    So much for a turn.  Management was clearly optimistic about the business which resulted in big markdowns in December when sales did not come thru as expected.  Despite a grim forecast, they are keeping a happy tone about better full-priced selling, and Fabricant (Pres) is just a few months into the job.  They are doing the things you want to see  in a potential turnarount - closing PH8, closing some money losing BEBE stores, restricting expansion, watching costs, buying shares.  It just hasn't come with sales improvement, but as long as they remain cash flow positive and have this balance sheet I'll be patient for now.

     Sans PH8, sales up 3% with flat comps

    Gross margin pressure from higher mark-downs

    SAG was worse due to legal and employment costs with 1m in impairment

    Higher tax rate

    2.5m in operating income vs. 9.9 last year

     YTD

    Sales up 1% with comps down 2.3%

    Earnings of 2m vs. 5.7m ly

     Stores

    Closed all rest of Ph8 stores; now with 253 stores

    Opened 2 bebe stores; sees 2 more though one is conversion with 7 closures; -2% sqft decrease for year

     Forecast

    Sees  23m d/a for year with under 20m CapEx

    Q3 comps seen negative msd; Jan was down big in markdown sales, full price down marginally which basically means they didn't mark down as much

    Sees Loss of 2 to 6c with 84m shares vs. 1c loss at 87m shares

    Sees another big drop in gross margins

    Inventory up mid to high teens vs. -5.4 last year - WHY?? Based on hope for better sales that didn't happen and they will discount more if they need to again

    Cautiously optimistic about full-priced selling

     BS

    Bot 13m in shares ytd

    Inventory up 9% vs. last year on sqft basis

     Notes

    They source 70% in China, 23-24% domestically

     


    Subjectsome life here
    Entry08/26/2011 09:24 AM
    MemberSpocksBrainX
    Q4 was just reported - ending June - and things were looking up.  some highlights:
    *comps 7%
    *operating margins up despite pressure from sourcing
    *comps in mid single right now
    *cash is $3 a share net, a bit less than half of cap
    *not much profit change seen in Q1 despite comp increase but they could be a bit conservative
    Course, they do have NorthEast stores, and you never know about hurricane disruptions and other short-term events, but you get the sense from this report that Emilia Fabricant has righted the ship and things are up looking up, though women's apparel does seem to be on upswing in the moment.   Plus, obviously you've got the BS to tide you over if there are more bumps. 
    I continue to hold my shares here. 

    SubjectQ1 update
    Entry11/04/2011 09:11 PM
    MemberSpocksBrainX
    more life - ending in Sep - important factoids:
    * comps up 7% though all transactions
    *operating margins up as they are getting SGA leverage
    *inventory is well controlled
    *beat the forecast for 1c but only did 3c
    *Oct was apparently really strong, and they are sounding pretty optimistic
     
    As noted, the ship appears righted and the CFO said that source cost issues shouldn't be a problem rest of of fiscal.  That means, hopefully, that BEBE can start to put both comps, GM, and SGA together and start to generate some meaningful profits. 
     
    Course, ongoing concern is lack of a plan for all the cash.  The CFO a few months ago  referenced HOTT's decision to pay a dividend and then going back down as evidence that all dividends are bad (my interpretation) which makes me shake my head, but the company has reason to be cautious with any cash plans given the type business model this is. 
     
    Still, all this said, BEBE is looking better these days - for now.

    SubjectRE: Q1 update
    Entry11/04/2011 09:12 PM
    MemberSpocksBrainX
    typo = comp up 7% but flat trans
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