Despite the hopeful promise of a "sexy Christmas," bebe Stores' (Nasdaq: BEBE) most recent quarter wasn't very titillating.

Second-quarter net income decreased 3.7% to $23.4 million, or $0.26 per share. Total revenues increased 3% to $203.3 million, and same-store sales, as previously disclosed, decreased 7.9%. Gross margin dropped to 46.2% from 47.9% as the company used markdowns to move merchandise out the door.

Meanwhile, bebe's guidance for Q3 doesn't look thrilling either. The company said it expects earnings of $0.08 per share to $0.12 per share, decreasing from earnings of $0.14 per share in the third quarter last year. Same-store sales are expected to decrease in the mid-single-digit range.

Blue Christmas
Some of bebe's recent strategies didn't pan out. Even though bebe's Q2 includes the holiday season, management said in the conference call that December's first three weeks were challenging in terms of traffic and sales, and while the fourth and fifth weeks were better, the improvements weren't enough to offset the prior difficulties. For the entire quarter, bebe's transactions fell 3%, average dollar sales dropped 5%, and units per transaction decreased 3%.

If you recall, last quarter we heard that the retailer would try an experiment with some value-priced (but "amazing") merchandise. The test was logical given fears about consumer spending, but it also seemed risky given bebe's pricier reputation. Now management admits the experiment didn't go so well, and the bebe customer will pay up for items she really desires (and apparently isn't that enamored of lower-priced goods).

CEO Greg Scott said plans for Q3 include getting bebe back to its regular full-priced business. It's also going to emphasize reducing "non-proven fashion items" in deference to items the company knows will drive sales (and therefore have limited risk of red-line markdowns).  

For all the company has said about returning to sexiness -- certainly homage to its roots -- so far, bebe has a way to go to achieve it.

More on the design lab
Speaking of returns, last November I wrote about a Form 8-K that bebe filed with the SEC last November that implied chairman and founder Manny Mashouf would return to a more active role at the design helm. According to that 8-K, Mashouf's new compensation was set because of his "increasing duties" at the company's "design lab." His new salary would be $368,000, after he voluntarily lowered his annual pay to $120,000 in September 2006 (and he had turned down bonuses for several years running).

In the conference call, though, management clarified that this wasn't as big a change in Mashouf's duties and involvement as I assumed from the 8-K filing, although the bebe design lab is in fact a new initiative that replaces the former "collection bebe" runway initiative.

It appears I extrapolated too much from the 8-K disclosure and the increase in pay, so, mea culpa. However, the bebe design lab does sound like an interesting initiative, now that we have more information about it.

The bebe design lab, which will represent a small amount of merchandise, will feature a rotation of guest designers to, in part, help test new ideas. The first designer to collaborate with bebe in this is Tara Subkoff.

Furthermore, the company plans to work on its inventory management to create a sense of urgency in customers. This brings to mind fast fashion, in which retailers like Sweden's H&M (OTC BB: HMRZF.PK), Charlotte Russe (Nasdaq: CHIC), Forever 21, Britain's Topshop, and Spain's Zara have done very well. After all, customers are more likely to buy an item right on the spot if they love it and if they fear it won't be there when they come back. 

Adopt this bebe?
Many of my Foolish colleagues are bebe fans. (In fact, it's a Motley Fool Stock Advisor recommendation.) Indeed, looking at bebe's multiples, it does look like a bargain. A price-to-earnings ratio of 15 and a PEG ratio of 1.02 certainly sounds reasonable.

Then again, rival Guess (NYSE: GES) may trade at 20 times trailing earnings, but its PEG ratio is a mere 0.74. American Eagle Outfitters (NYSE: AEO) is trading at just 12 times earnings, and has a PEG ratio of 0.87. Charlotte Russe, mentioned above, is trading at 12 times earnings and has a PEG ratio of 0.77. If you're looking for retail bargains, there are some ideas out there.  

Personally, I've lost confidence in bebe here lately, given the difficulties it's had turning things around. Compound that with a tough consumer climate, and it could continue to be rough going. There are better places to put investing money right now until bebe shows more signs of getting back on track.

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Alyce Lomax does not own shares of any companies mentioned. The Fool has a disclosure policy.