Retailer bebe stores (NASDAQ:BEBE) reported a lower second-quarter profit on Thursday, but maybe it shouldn't come as too much of a surprise to investors, since bebe did warn this was coming earlier this month. And of course, anybody who follows the company has probably noticed that it tends toward choppy times.
Second-quarter net income dropped 3% to $24.3 million, or $0.26 per share. Sales increased 17.2% to $196.8 million. Same-store sales increased 5.5%, versus a 2.2% increase in the same quarter the year before. The last couple of months (including the holiday season) seemed to have been promotional for many retailers, and bebe was no exception.
Specifically, bebe's gross margin dropped to 47.9% from 50.7% because of higher markdowns, and then there's this red flag: bebe's inventories increased at a faster rate than sales, up 31%. CEO Greg Scott said in the company's conference call bebe wandered off its core focus of providing sexy apparel, instead providing clothing reflecting '60s fashion trends, and that it will return to its core focus this spring.
SG&A increased 26% to $58.9 million, which bebe related to advertising and increased store compensation. In the conference call, Scott said that a small run of TV advertising, on Viacom's (NYSE:VIA) VH-1 as well as the E! network, didn't drive much traffic to bebe stores, nor did Internet advertising on several entertainment and fashion sites. He said the company doesn't intend to try such advertising again in the near term. Meanwhile, though, Scott said catalogs and bebe.com enjoyed solid response.
When covering bebe's December sales and guidance earlier this month, I noted the resignation of Neda Mashouf, vice chairman and general merchandising manager of design and bebe Sport. I pointed out that while we can't say for sure her departure will have a significant impact on the company's merchandise strategy, it's a development that was certainly worth noting -- and it seems interesting considering what sounds like recent divergence from its usual product assortment.
This year's second quarter at bebe isn't that much different than last year's, although it recovered to more torrid performance later in the year. (Check out our Year in Review on bebe to see a synopsis of 2006.) Last year this time, bebe only increased profit by 3%, with a 10% increase in sales, and the stock price had halved over the previous year. bebe does seem to have a propensity to fluctuate with what I might call "uneven" results. Then again, one company that's considered a direct rival, Guess (NYSE:GES), seems to be doing just fine -- it recently raised its fourth-quarter earnings guidance by a long shot.
Let's not forget that Motley Fool Stock Advisor recommendation bebe does have strengths, particularly on its balance sheet; its cash and equivalents increased 17% to $381.9 million in the second quarter. Plus, it's got negligible debt, giving it great leeway to fund its business and expansion.
Given bebe's history, the second-quarter tidings feel a bit like deja vu, and a wait-and-see attitude might be a good idea. There are definitely some elements investors should keep their eyes on -- management admitting it lost its way a bit when it comes to the core theme of bebe merchandise is not least of the concerns, although investors should be glad it's being acknowledged and addressed. Same goes with admitting TV and Internet ads didn't have the desired positive effect on store traffic and backing off those, too. Given bebe's recent history, though -- which tends to include impressive ups as well as downs -- I can't help but wonder if running for the exits isn't prudent for investors who are in for the long term.
For more on bebe, see the full rundown of the second quarter with Fool by Numbers.
bebe is a Motley Fool Stock Advisor recommendation. To find out what other companies David and Tom Gardner have recommended to investors, click here for a 30-day free trial.
Alyce Lomax does not own shares of any of the companies mentioned.
