There's No Reason to Party With bebe stores

The potential that the flirty retailer can turn it around is as skimpy as its clothes.

Feb 10, 2014 at 8:05PM

With results as skimpy as the dresses it sells, it's not surprising that women's contemporary clothing retailer bebe (NASDAQ:BEBE) wants to get out of the public eye. According to a Reuters report this morning, the fashionista is looking to private equity to take it private.

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Shares of bebe, which have lost nearly a quarter of their value compared with their 52-week high, shot up 15% Friday after the retailer reported lousy but less-bad results for the fiscal second quarter. Revenues dropped 4% to $130 million but were better than the $121.3 million Wall Street was expecting, which resulted in losses of $0.07 per share, also narrower than the $0.14 loss analysts anticipated. Even poor same-store sales were an improvement as retail's party girl recorded a 2.8% drop in the first quarter, but only a 1.9% decline this time around.

2b or not 2bebe
bebe operates 228 stores catering to the 21-to-34-year-old fashionable party set. Following a disastrous 2012 that had the retailer looking like Lindsay Lohan after a long weekend, it recovered some of the ground it lost last year but has been trading in a fairly narrow range between $5 and $6 a share. The earnings report last week merely served to keep it in that tight belt.

Apparel stores in particular have been hard hit by the sluggish economy. Abercrombie & Fitch saw revenues tumble 12% in the third quarter to $1 billion, which, unlike bebe, is actually accelerating, since it was a steeper decline than it saw in the previous two quarters. American Eagle Outfitters similarly saw sales drop 2% as comps were off 7% for the fourth quarter. Chicos FAS reported dismal results as well. 

bebe has been going through its own version of Celebrity Rehab over the past few years, trying to remake itself several times into something that would resonate with shoppers. It abandoned its bebe sport stores in favor of an unpronounceable "Ph8" brand, only to jettison that in favor of the discount concept. Even so, bebe said it will be converting all of its outlet stores from 2b to the bebe brand by May; it believes products made directly for the outlets can comprise some two-thirds of its sales there.

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It also said store traffic improved in December, and though it's looking to keep up that momentum, that's likely pie-in-the-sky thinking, as many retailers saw the bump from Christmas sales quickly peter out in January. And bebe probably achieved that push only because it discounted everything in sight, noting that it "cleared through the vast majority of legacy merchandise" such that it ended the quarter with inventory per square foot 7% lower.

Party hearty
Bebe isn't the only retailer considering going private, as Aeropostale is possibly being lined up for a takeover too. rue21 was bought out for $1.1 billion by Apax Partners last year; Jones Group is being bought out by Sycamore Partners for $15 per share, or $2.2 billion including debt; and Fifth & Pacific sold its Lucky Brand Jeans unit to a PE firm for $225 million.

Is bebe overvalued, though? On a price-to-sales basis, it's trading about two to three times what Aeropostale, ANN, Cache, or Jones Group are going for, yet they're turning profits where bebe is not. The self-described "flirty" retailer might feel in this environment there's an opportunity to extract a premium, but investors may already be enjoying it with the latest pop in its stock.

Ready to party
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Rich Duprey owns shares of Abercrombie & Fitch. The Motley Fool has no position in any of the stocks mentioned. 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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