Fool.com: bebe's Sales Growth Goes Bye-Bye [News] June 08, 2000

bebe's Sales Growth Goes Bye-Bye

By LouAnn Lofton (TMF Lou2)
June 08, 2000

bebe stores, inc. (Nasdaq: BEBE), the "body-conscious" retailer targeting women ages 18 to 35, reported dismal sales numbers Tuesday for the month of May. The company's total and same-store sales may be shrinking faster than Calista Flockhart. Total retail sales for May were off 10.2% compared to May 1999, with same-store sales down 20%.

bebe wasn't the only retailer feeling the bite of negative same-store sales numbers (or "comps") for May. Gap, Inc. (NYSE: GPS) and Abercrombie & Fitch (NYSE: ANF) reported comps of -2% and -14%, respectively. What should make bebe shareholders sit up with a worried look, though, is that total sales number.

The fact that comps were down 20% is bad in and of itself, as it means the company didn't sell as many slick suits in its older stores as it did in May of last year. But when you add to that the reality that sales in both old stores and new decreased overall for May, the picture becomes more troubling.

Comps can show investors how a company is funding its growth. When comps decrease, but total sales still increase, this means that the company's growth is coming more from new stores than from old ones, and that can be a very expensive way to grow. However, when both comps and total sales are down, the company as a whole is just not moving merchandise like it once did. Clearly, this isn't good.

bebe has suffered from a spate of negative same-store sales numbers this year. For April, total sales increased 5.6%, while comps declined 8.9%. For March, total sales were up 9.5%, with comps down 10.1%. Even one of bebe's famed super-short skirts couldn't pretty up those numbers.

Taking a look at bebe's most recent balance sheet from their fiscal third quarter (the 10-Q filed on May 15), we see a ballooning Foolish Flow Ratio. From an acceptably small "Flowie" of 0.83 in its second quarter of this fiscal year to an obese one of 1.32 in the third, it's no wonder bebe is having trouble. The company isn't managing its cash and inventory as tightly as it has in the past. In fact, the company's third-quarter sales grew by 15%, while inventories buzzed by and increased by 23%. For the quarter, comps decreased 4%.

The company does have some tough comps numbers to compete with from last year (increases for March, April, and May of 1999 of 27.5%, 19.6%, and 17.9%, respectively), but it's unlikely that this alone can account for the string of disappointing numbers. This is especially true given the May total sales decrease, and the fact that for both March and April comps decreased more than total sales increased. Investors should pay extra-close attention to bebe's monthly sales numbers and SEC filings from here on out to see if the company corrects these problems.

Decreasing comps alone may not spell disaster for this retailer right away. And not all is amiss at bebe. The company has solid gross margins of 49% and net margins of 10%, with only the tiniest amount of long-term debt. However, should total sales continue to decrease while the Flow Ratio and inventory grow like weeds on the balance sheet, the already battered stock (which briefly saw $50 last year and currently hovers around $8) could keep falling faster than hemlines.

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