Poor Little bebe [News] July 31, 2000

Poor Little bebe

Sexy retailer bebe stores reported its Q4 earnings last week. Sales and margins were down, while inventory levels were up. bebe's had a rough six months, and so have shareholders. The company promises a more fashionable fall, and shareholders hope it will get its clothes in line with what customers want and its inventory under control.

By LouAnn Lofton (TMF Lou2)
July 31, 2000

bebe stores (Nasdaq: BEBE) announced its fiscal fourth-quarter (ended June 30) results last Thursday. bebe's focus is women between 18 and 35 who want trendy, sophisticated, and sexy looks. The company operates 124 stores in the U.S., U.K., and Canada.

A glance at the company's sales from this quarter suggests that bebe's not dressing many of those women at the moment, though. In fact, the first six months of this year have not been exceptional for the company known for its exceptionally short skirts. And shareholders are feeling the pain, riding the stock down from a 1999 high of around $50 to a current offering of around $9.

The Q4 lowdown
Let's take a look at the company's just-reported numbers, then spin some perspective on this... er... baby. For the quarter ended June 30, bebe's sales were down to $54.1 million from $54.2 million the year before. Diluted earnings per share were $0.16, compared to $0.30 a year ago. Inventories, meanwhile, increased 8%. Same-store sales (or "comps") deceased 15.2%.

Comps have been negative for a while
That same-store sales number shouldn't surprise anyone following the company regularly. Here are bebe's comps results so far this year:

January     - 2.0%
February    + 0.2%
March      - 10.1%
April       - 8.9%
May        - 20.0%
June       - 16.5%

Margins down, Flowie up
It's actually surprising the fourth quarter's drop-off wasn't worse given recent history. Margins in the fourth quarter were affected, though, with bebe's gross margin falling to 46.4% from around 52% the year before. bebe's net margin was about cut in half -- down to 7.4% from 14% the year before. Margins were affected by reduced prices on clothes in an attempt to move inventory, as well as some higher occupancy costs. It should be noted, though, that bebe's margins, even when marked down, are still solid.

What about the company's Foolish Flow Ratio? While bebe's certainly not a Rule Maker, the Flow Ratio can be helpful in evaluating the company's inventory and cash management. For its fourth quarter, bebe's Flowie comes in around 1.37. This number is imprecise because the company didn't release its balance sheet in full detail yet. This is up from 1.32 in the company's fiscal Q3 of this year, and up from 1.12 for Q4 1999. We like the Flowie to be below 1.25, so the last two quarters have demonstrated the company's inventory and sales issues in black and white.

bebe owns up to its problems
bebe is a retailer in trouble. "The June quarter was very challenging for us," said President and CEO Manny Mashouf. "We did not address some of our customer's [sic] apparel needs as well as we have over the past few years."

Aside from stating the obvious, Mashouf went on to say the company is focused on its customers' needs (again) and that fall should provide a turnaround opportunity. Comps can be expected to be negative for July and August, but starting in September, some improvements should be seen -- helped in part by easier year-ago comparisons. bebe also blamed some of its summer weakness on the doe-eyed, multi-hair-colored painted models that have adorned recent advertisements. The company has already returned to its usual ad campaign style, using real models, for the fall.

Fall holds promise
Shareholders have been sitting patiently now through six months of mistakes from bebe. While this quarter's numbers were not unexpected given the trend of decreased comps and last quarter's results, they still don't offer a lot of confidence for current shareholders, and certainly don't make bebe look attractive for new investors.

The company needs to get its act together and fast. Getting its merchandise mix right and controlling its inventory more tightly would be welcome steps. For now, all we can do is hope that the fall line is an improvement. Investors who believe this derailed company could return to its glory days now need to do more than read the financials. Get out to the malls and check the stores yourself to get an early read, then compare notes with other Fools on our bebe discussion board.

Your Turn:
Is bebe down for the count? Will bad fashion decisions hurt the retailer past the fall season? What do you think about bebe's famed super-short skirts? Tell us what you think, Fool, on the bebe discussion board.

Suggested Links:

  • bebe's Sales Growth Goes Bye-Bye, Fool News, 6/8/00
  • bebe's website
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