bebe stores Falls Out of Fashion: Is Now the Time to Buy?

Shares of bebe stores (Nasdaq: BEBE  ) hit a 52-week low on Thursday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.

How it got here
A significantly warmer winter has been kind to some retail sectors, but not all. Shareholders of women's apparel chain bebe have been covering their heads in shame since the company's catastrophic third-quarter earnings report in early May.

In that report, bebe outlined that it would be internalizing its website operations, which means added marketing and advertising expenses over the coming quarters. Overall, management feels it's a good move for the company. However, the added costs of the in-house transition caused the company to guide fourth-quarter earnings per share to a range of $0.02-$0.04 versus expectations that called for EPS of $0.08. Increased levels of inventory are also weighing on results.

bebe stores is really one of the few retailers that hasn't done well with its product selection as warmer weather has coerced shoppers out of their homes and into stores earlier than ever. Limited Brands (NYSE: LTD  ) , owner of Victoria's Secret, reported a 6% rise in same-store sales in May. American Eagle Outfitters (NYSE: AEO  ) , which doesn't report monthly same-store figures, noted a 17% jump in comparable-store sales in the first-quarter. Even perennial underperformer Gap (NYSE: GPS  ) , which has an extensive history of ordering the wrong product, had a few months earlier in the year where its same-store sales outperformed Wall Street expectations (much to my dismay).

How it stacks up
Let's see how bebe stores stacks up next to its peers.

BEBE Chart

BEBE data by YCharts.

We've definitely seen a recent bifurcation between Limited Brands and Gap which have soared while Guess? (NYSE: GES  ) and bebe stores have taken a back seat.

Company

Price/Book

Price/Cash Flow

Forward P/E

5-Year Revenue CAGR

bebe stores 1.2 11.4 20.1 (3.2%)
Limited Brands N/M 11.2 12.2 (0.6%)
Gap 4.4 9.2 12.5 (1.8%)
Guess? 2.1 7.1 8.6 17.8%

Sources: Morningstar and author's calculations. N/M = not meaningful. CAGR = compound annual growth rate.

If anything, these figures show just how fickle the buyers between the ages of 20 and 40 have been over the past five years.

Only Guess? has shown consistent revenue gains over that period, with international stores providing the biggest boost. Now compare that to Gap, which has consistently chosen the wrong product and has needed to reduce inventory through deep discounts, yet is up considerably more than Guess? over the past few years. If you can explain that riddle to me, you should get a cookie.

Limited Brands' recent gains come on the back of a 9% rise in same-store comps for May for Victoria's Secret and 7% for Bath & Body Works. Limited's nearly $3.3 billion in net debt is a bit worrisome (and also the reason it has a negative book value), but it's also averaged $941 million in free cash flow over the past three years, so I wouldn't be too concerned.

bebe stores has actually demonstrated the steepest revenue decline over the past five years, as having fewer stores and less inventory has left it with a distinct disadvantage.

What's next
Now for the $64,000 question: What's next for bebe stores? The answer is going to depend on whether it can fix its inventory levels quickly and transition to an in-house website that demonstrates markedly stronger margins to investors before too long.

Our very own CAPS community gives the company a two-star rating (out of five), with 79.5% of members expecting it to outperform. In true contrarian fashion, I count myself among the one-in-five that have made a CAPScall of underperform on bebe and currently find myself up a healthy 38 points on the selection.

In late December I made the call to bet against bebe because of its declining gross margins, and that move appears to be working out thus far. Although the company has grown same-store sales strongly -- 7.2% in the past quarter -- earnings won't truly rebound until it can get the right mix of products back in front of customers. bebe is on the right track in terms of knowing what it wants to do on paper. Now it just needs to implement its near-term fixes. It's quite possible I could be looking to end this underperform pick at some point in the very near future, but for now, I'll leave it open with the expectation of further downside.

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Guess?. Motley Fool newsletter services have recommended writing covered calls on Guess?. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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