Should You Bet on the Action at Chic Retailer Bebe Stores?

Chic women's retailer Bebe Stores' long moribund stock price perked up in early February after a media report indicated that the company might be looking for suitors. Should investors climb on board?

Apr 2, 2014 at 7:00AM

Fashionable women's retailer Bebe Stores (NASDAQ:BEBE) has been anything but fashionable lately, with stagnant sales growth and a stock price that has barely moved over the past five years.  The company has anecdotally been hurt by a consumer shift away from pricey, trendy apparel toward more casual everyday attire at lower price points, and the ascension of so-called fast-fashion apparel sellers like Forever 21 and H&M provides evidence of this. However, Bebe's stock price perked up by a double-digit percentage in early February after a media report speculated that the company had hired a strategic advisor.  So, is Bebe a good bet for investors?

What's the value?
Bebe rose to prominence by offering a fun and flirty line of apparel with sexy styling to its core base of young adult women, selling a lifestyle image of attainable luxury.  The early success of its relatively high-priced apparel lines, which focused on dresses, attracted a loyal following and allowed the company to build a national chain of primarily mall-based stores. It currently has a footprint across 34 states and Canada.  Bebe's brand power also provided opportunities to expand into related product areas, and it made forays into a variety of categories that included jewelry, eye-wear, and fragrances.

Unfortunately, Bebe's recent results reveal a continued lack of business traction, highlighted by a 3.4% top-line decline in fiscal 2014 that has primarily been a function of lower comparable-store sales.  More importantly, the company seems to have little pricing power, as it reported a year-over-year decrease in its merchandise margin due to a high amount of sales discounts and promotions.  The net result for Bebe has been a continuation of operating losses and weak operating cash flow, not a good position for a company that needs to spend heavily on marketing in order to remain competitive in a challenging retail environment.

Looking for a better bet 
Of course, Bebe does have some positives that include a geographically diverse store base and a healthy financial profile, and its sizable net cash balance provides evidence of this.  However, the company still needs to find a way to earn a profit in the current retail environment. The company will most likely do this by further broadening its brand into casual wear, a process that the company has already initiated with its Bebe Sport brand as well as its forthcoming line of apparel items made exclusively for its outlet stores.  As such, investors should probably leave Bebe to the speculators and look for more diversified operators in the space, like Ann (NYSE:ANN).

The owner of the Ann Taylor brand started out, much like Bebe, as a purveyor of fashionable dresses and related apparel, focusing on a core market of affluent, modern working women.  Fortunately, the company's management was wise enough to foresee the changing fashion landscape and the company long ago diversified into the casual wear area through its Loft brand, which allowed Ann to capture sales form the value-conscious customer set.

The benefits of Ann's two-pronged strategy are evident from a glance at its five-year sales performance, as its 36% overall gain compares favorably to a decline for Bebe.  Much of that growth came from an enlarged store base for its Loft unit, which has more than offset the selective pruning of its Ann Taylor store base.  More importantly, Ann's strong focus on its customers' changing tastes has allowed it to generate strong, stable merchandise margins and fund its various growth initiatives, which include greater online capabilities.

Also performing well in the current retail environment is Chico's FAS (NYSE:CHS), the operator of a national network of its namesake stores. It focuses on a middle class, value-minded customer base.  The diversified women's retailer has been one of the solid growth stories over the past five years, as it reported a 63% overall sales jump thanks to a winning merchandise mix at its core store base. It has also successfully branched out into related product areas, like the intimate apparel category through its growing Soma unit.  While Chico's momentum petered out a bit in its latest fiscal year, and a slight decline in its comparable-store sales provided evidence of this, the company's consistent cash flow generation allows it to invest throughout the industry's ups and downs which makes it a good long-term bet.

The bottom line
Bebe may be looking at its strategic options, which makes it an interesting speculative position but probably not a good source of long-term returns. Instead, investors should focus on the women's retailers that have built valuable franchises with diversified mixes of products and price points, like Ann and Chico's FAS.

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Robert Hanley owns shares of Bebe Stores, Ann, and Chico's FAS. 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 may not 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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