Stay Away From This Stock

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Retail stocks' prices have greatly appreciated in the market's recent rally -- some, unfortunately, to a degree way out of whack with their fundamentals. These overpriced stocks will burn investors. Count bebe stores (Nasdaq: BEBE) as one of the riskiest.

Shares of bebe have soared 62% in the last six months; it's currently trading at 94 times forward earnings! That's the kind of multiple you'd apply to a high-growth stock, and it's bizarre that someone would buy bebe at these levels.

For comparison, you could buy tech giants such as Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL) for around 21 times and 25 times forward earnings, respectively. Bebe's multiple even outclasses that of Amazon.com (Nasdaq: AMZN), which is trading at 37 times fiscal 2010 estimates. And come on -- e-retailer Amazon has a whole lot more irons in the fire to stoke growth than a simple mall-based apparel retailer does.

Meanwhile, bebe's business performance simply hasn't been that strong. It recently revealed that it will post a first-quarter loss (or at best, break even), owing partly to its continuing need to mark down merchandise. If you look at bebe's most recently completed fiscal year, the numbers are ugly. Sales fell 12.3%, same-store sales dropped a dismal 20.9%, and earnings fell 80%.

Even as bebe's sales and earnings growth have slowed to anemic levels in recent years, gross margin has plummeted. After peaking at 49.6% in the fiscal year ended July 2005, it's down to 40.3% now. The retailer's apparel has simply been unable to command the kind of prices it once did.

The shockingly high multiple placed on J. Crew (NYSE: JCG) made me think investors should ditch that stock. But at least J. Crew is a solid, high-quality brand, even if its current stock price has gotten a bit too inflated.

That argument doesn't hold for bebe. In troubled economic times, it's one of many retail stocks in desperate need of a turnaround -- and that's a tall order.

Compare bebe's waning fortunes to Buckle (NYSE: BKE), a high-quality retail stock trading at just 11 times trailing earnings (and even a bit cheaper on forward multiples). With a strong business and a cheap stock price, Buckle and companies like it are a far better choice for investors right now.

Savvy stock pickers who bought bebe at its lows have undoubtedly been enjoying its upward trajectory. If you're one of them, it may be time to take the money and run. And if you weren't so lucky, steer clear.

Am I missing something significant about bebe's chances for impressive growth? Share your thoughts in the comment boxes below.