bebe Gets Burned

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Is bebe (Nasdaq: BEBE) getting old? One might think so, judging by the steep drop in the retailer's stock price after the company reported first-quarter earnings. Despite what looks to be a really impressive quarter, it seems people didn't like what they gathered from second-quarter earnings guidance. Are investors overreacting?

First-quarter earnings at bebe increased 57.1%, to $20.4 million or $0.22 per share. Sales grew 24.5% to $157.1 million, while same-store sales for the quarter increased 12.8%, even against an impressive 17.3% increase in comps this time last year.

bebe's gross margin improved to 50.5% from 49.3% on a year-over-year basis, and SG&A expense was 32% of net sales, down from 33.5% this time last year. In more good news, bebe's cash increased by 20% to $342.8 million. Unfortunately for us Fools, bebe didn't include a cash flow statement with its press release, so we can't get a good idea of its free cash flow at the moment. (To dig deeper into the quarterly numbers, be sure to check our related Fool by Numbers for bebe, due out later today.)

On the other hand, there is one significant red flag: bebe's inventories increased at a faster rate than sales, with a 35% increase there. So that's one thing investors might bear in mind going forward, since it's not a good sign when a retailer's inventories are stacking up.

It seems today's panic (shares were down 13% at my last check) relates to bebe's earnings guidance. For one thing, bebe said that in the second quarter, it expects same-store sales growth in the upper single-digit range. That is a different message than the double-digit increases bebe's been delivering lately. The company also said it expects earnings of $0.31 to $0.35 per share in the second quarter.

bebe has had a heck of a year, despite the fact that it's had some really tough times for some retailers (consider Gap (NYSE: GPS), Chico's (NYSE: CHS), and Urban Outfitters (Nasdaq: URBN)). It seems to manage to differentiate itself well from other retailers that peddle similarly sexy duds, like Guess (NYSE: GES), BCBG, Limited's (NYSE: LTD) Express, and some departments in Nordstrom (NYSE: JWN). Its shares have been on a roller-coaster ride, but confidence has been high recently as bebe fired on all cylinders during the summer months, which proved trying for many other retailers.

When Tom Gardner recommended bebe to Motley Fool Stock Advisor subscribers, he described a well-managed company with a strong balance sheet, and it doesn't seem like anything has changed in that regard, despite today's pessimism. At this point, there doesn't seem to be much good reason for long-term investors to throw bebe out with the bathwater.

For more on bebe, check out the following Foolish articles:

• Last quarter, bebe was hot to trot.
• Despite an overall impressive year, bebe hit a bump.
• Revisit last year's second-quarter results.

Bebe is a Motley Fool Stock Advisor selection. Gap has been recommended by both Motley Fool Stock Advisor and Motley Fool Inside Value .

Alyce Lomax owns shares of Urban Outfitters. The Fool has a disclosure policy.