Bebe Stores Isn’t As Attractive as Gap or TJX Companies

Bebe Stores (NASDAQ: BEBE  ) is all about making women feel confident and sexy. It's a great marketing angle, and in the case of Bebe Stores it's attainable, thanks to expert designs and highly personalized service. Therefore, the company would likely perform well in a normal consumer environment. Unfortunately, that's not the current situation. In fact, if you look at the company's stock performance throughout the years you will see that it often trades in tandem with booms and busts, which, by the way, seem to be quite common over the past 15 years.

Bebe Stores has bucked its own trend over the past several years, with the stock underperforming during a raging bull market. This is somewhat concerning, yet it makes sense considering recent underlying business performance. The question now is what's ahead, and whether or not sexy is the way to go when it comes to retail. In the end, you might be better off with a traditional retailer like Gap (NYSE: GPS  ) , or an off-price retailer like TJX Companies (NYSE: TJX  ) . We'll take a look at both, but first let's look at Bebe Stores.

Bringing sexy back?
If any company is capable of bringing sexy back for the female consumer -- in a classy way -- it's Bebe Stores. However, the current retail environment isn't conducive to discretionary spending. That is, except for very high-end retailers that cater to high-end consumers, who have enjoyed fruitful returns in the stock market over the past several years. Some of them have also placed themselves in the correct real estate markets that had suffered the most during the Great Recession. 

The problem for Bebe Stores is that it markets to what women want, but not what they need. This led to a 2.6% net sales decline for Bebe Stores in its first quarter. The company cited a comps decline of 2.8% and store closures. In regard to the latter, Bebe Stores now has 250 stores compared to 235 in the year-ago quarter. As far as comps are concerned, let's take a closer look.

Uncomplimentary comps
The bad news is that comps declined 2.8%. The good news is that comps had declined 8.7% in the year-ago quarter, as well as 7.1% in the fourth quarter of fiscal year 2012. Therefore, Bebe Stores at least showed some improvement.

Bebe Stores cited slightly improved traffic and conversion rates for its comps improvement. According to the company, there has been a favorable response to its new merchandise. However, while Bebe Stores states that it's confident in future prospects, its outlook shouldn't lead investors to overwhelming optimism.

Looking ahead
In the second quarter, Bebe Stores expects comps to be back in the mid-single digit range. There goes that momentum. This outlook is based on a challenging economic environment. Bebe Stores also expects its gross margin to decline due to higher promotions and legacy inventory markdowns. Losses-per-share are anticipated to be in the low-to-mid teens.

Bebe Stores plans on opening one store and closing five for the remainder of the year, which will at least help the bottom line a little. However, Bebe Stores needs top-line improvement as well.

One of the few bright spots is that online store sales jumped 18% in the first quarter year over year. Maybe this is one avenue for future success. Whether it's online performance, increased promotions, or future strategic marketing, Bebe Stores needs to do something to fuel top-line growth. Consider its top-line performance versus the aforementioned Gap and TJX Companies over the past five years:

GPS Revenue (TTM) Chart

GPS Revenue (TTM) data by YCharts

You will see a similar trend on the bottom line:

GPS EPS Diluted (TTM) Chart

GPS EPS Diluted (TTM) data by YCharts

When it comes to total shareholder return, one company stands out by a wide margin:

GPS Total Return Price Chart

GPS Total Return Price data by YCharts

TJX Companies is perfectly positioned for the current economic environment and tepid consumer. If a woman wants to find a sexy dress, she always has the option to look for it at 20%-60% off at Marshalls. The odds of finding something like this are slim compared to Bebe Stores, but today's value-conscious consumer is relentless. Marshalls' slogan is also fitting: "Never Pay Full Price for Fabulous." Considering today's consumer landscape, I would bet on TJX Companies (which also owns HomeGoods and TJ Maxx) to perform well over the holiday season.

As far as Gap is concerned, it's an iconic name that consistently draws heavy traffic to its stores, and it's broadly diversified. Gap is much more than its namesake brand, also owning Old Navy, Banana Republic, Piperlime, Athleta, and Intermix. This wide mix allows Gap to target a wide range of consumers. If Gap sees a hot trend, it might look to capitalize on that trend. Athleta is a perfect example of this.

The bottom line
Bebe Stores appears to be a quality company that's stuck in a weak consumer environment that doesn't favor the company's strategy. If the consumer strengthens, then Bebe Stores might be an exceptional bargain here, but there aren't enough potential catalysts for a strong consumer at the moment. Gap and TJX Companies appear to be stronger investment opportunities, with TJX Companies offering the most growth potential. 

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