Foolish Forecast: bebe Blazing Trails?

As most companies on Wall Start continue talking 2007, fashionista retailer bebe (Nasdaq: BEBE  ) is setting trends once again. When the company reports its latest earnings news tomorrow afternoon, it's fiscal Q1 2008 that will be in fashion.

What analysts say:

  • Buy, sell, or waffle? Fifteen analysts track the company. Nine think bebe's a buy, five more are holding, and one analyst says sell.
  • Revenue. On average, the analysts are looking for 3.3% sales growth to $162.3 million.
  • Earnings. Profits are predicted to plunge 23% to $0.17 per share.

What management says:
Bad news at Talbots (NYSE: TLB  ) left the women's apparel sector looking like a tipped-over clothes rack last week. Christopher & Banks (NYSE: CBK  ) , Ann Taylor (NYSE: ANN  ) , and Guess? (NYSE: GES  ) all suffered multipercent declines in sympathy, and bebe shed a few pounds, er, points, as well.

As perhaps it should have. After all, as fellow Fool Alyce Lomax pointed out earlier this month, bebe's same-store sales weren't exactly burning up the runway in Q1. Brean Murray may think the worst is behind bebe, but investors don't seem so sure.

The good news? bebe said that despite declining comps, new store growth helped it achieve a minimal level of positive sales growth overall this quarter. Alongside a 7% decline in inventory per square foot, that bodes well for cash flow in tomorrow's news.

What management does:
And the bad news? That would be that margins on bebe's near-flat sales are continuing to fall. Rolling gross, operating, and net margins have all fallen steadily for three quarters straight. We're not yet down to the level of a Wet Seal (Nasdaq: WTSLA  ) , but that does seem to be the direction in which things are heading.

Margins

4/06

7/06

9/06

12/06

4/07

7/07

Gross

49.6%

49.5%

49.8%

49%

48.5%

48%

Operating

18.6%

18%

18.6%

17.3%

16.5%

15.7%

Net

12.7%

12.7%

13.2%

12.5%

12%

11.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
With its stock lagging the S&P 500 by more than 50 percentage points over the last year, bebe is starting to look quite attractive from a valuation perspective. Continued store expansion makes it difficult to separate "expansion capex" from "maintenance capex." So focusing instead on the P/E, what we have here is a firm trading at 17 times trailing earnings, and expected to grow those earnings about 17% per year over the next five years. Divide one by the other, and you know what you get? A PEG ratio of 1.0 -- the very epitome of a fair price.


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