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Author: yattaboy Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 646  
Subject: Aug 23 earnings announcement Date: 8/9/2007 4:51 AM
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Thought I'd share some thoughts based on observations of local Bebe's and my own research. I like to look at store traffic, charts, and fundamentals and growth. Bebe has already announced qtr 4 top line revenue on July 12, but I guess they are going to roll it all together for the year with bottom line earnings on August 23, and probably give more guidance for the upcoming quarter. I hope at least some of you find this useful -- I should have been working on a report for work tonight!

(oh yeah, sorry if I capitalized the letter "B" in bebe, but I just can't spell it with a lower case "b". Besides, spell check keeps underlining it in red)


Store Observations

A new Bebe Sport opened in a local mall in north Phoenix around Christmas 2006, and is always empty. There is a Charlotte Russe beside it, and I look at the merchandising/displays/colors to compare, because CHIC is almost always busy. The spring 2007 colors and store traffic at BS (ah, that's a retail abbreviation) was terrible. Now in summer 2007, clothes looked a little more in fashion, but the store was still empty. The last two weeks were back to school shopping - the mall was just crazy - busier than day-after Thanksgiving (if you don't live in the US, that is the busiest shopping day of the year). Bebe Sport was still nearly devoid of shoppers.

This store is still in its first year, and the 'Sport' brand is still new, but I say it's a loser. Regular Bebe's still seem busy, though my friends of the female persuasion do not seem to like shopping there as much as they used to.

While I'm still a bit worried with what Bebe is offering as fashion, I don't think it is likely to misstep forever, although Neda Mashouf may wish that upon the current majority owner of Bebe. (Neda, would you at least consider WORKING for Bebe again?) Bebe has generated a level a "chic" for its name that outdoes most other fashion retailers, and I find it more likely that they'll hire or find someone within who can once again pick fashion, than become the next Gap.


Stock Chart

The stock hasn't been this low since October 2004, hitting $12.35 on Aug 6, 2007. It is well under the 50 and 200 moving averages, although this has happened before in 2001 and 2005 and the stock eventually went on to significant gains. The good news is today the stock surged 10.75% on triple normal volume. Even on Aug 6, while the stock hit its intraday low of $12.35, it then closed near it's high for that day at $13.03 on double normal volume. If this is all Greek to you, the summary is, it looks like BEBE finally found some support from large institutional buyers. The stock will probably test it's 50 day MA, currently around $15.75 per share. If it can go past that price and stay above it, from a technical standpoint, the stock may be on an upswing. On the downside, it's next level of support is $10/share, although Bebe's book value seems high enough to prevent going below this line.


Fundamentals

Bebe earned around $79.5M for stockholders over the trailing 12 months, and about $37.5 of that was levered free cash flow. Bebe is still growing. 2007 top line revenue of $665.5M grew 15% over 2006 top line revenue of $579M. Earnings growth slowed a bit for quarter 3 ended Apr 2007, due to higher cost of revenue and SG&A. Margins also slipped about 1.2% from 49.1% to 47.9% for the 9 months ended Apr 2007.

The company has around $365 million in cash/short term investments, which accounts for about $3.92/share, and virtually no debt. $43.5M of inventory is only modestly higher than this time last year despite higher sales, and the company does not record any goodwill or intangible assets -- a nice trait I look for because it reduces the chance of padding the assets. Equity has continued to march upwards, although it slowed recently due to Bebe's higher expenses.

Free cash flow has largely gone to pay for many of the 36 new stores opened in fiscal 2007, to the tune of $31M. Another $10M went to dividends, in case those of you who are long hadn't noticed.


Discounted Cash Flows

Using a earnings growth rate of 17% for the next 5 years, (analyst consensus found at http://finance.yahoo.com/q/ae?s=BEBE), then 10% for another 5 years, and a discount rate of 6%, all based on today's price of $15.25/share and cash per share of $3.92, I get future fair value of $33.50. That was a simple calculation only, but it provides some compelling value. Using the link at http://www.valuepro.net (thanks to Fool kahunacfa for this), it gives a quick and dirty value of $45/share.

I tried to reconcile these numbers with what WooPOd came up with in post 633 from 6/8/07 and I'm not quite sure why WooPOd got intrinsic of only $14.40. I might dare suggest re-trying this, possibly by using the http://www.valuepro.net link but with your own variables.


The Future of Bebe

Much of the consternation for Bebe's stock price seemed to be from the comps, which at 5.9% for the nine months ended April 2007, and an abysmal -0.4% for the three months ended April 2007, definitely did not meet expectations. They then slid 5.4% for June 2007 versus June 2006. Virtually all revenue and earnings growth came from new store openings. Bebe ended the nine month period on April 2007 with 259 stores, which was 31 more stores than in April 2006. From the July 12 release, this appears to be the same number of stores at the end of quarter 4, with 36 added and 5 closed, for a net addition of 31.

So where is the company headed? Well, what is the greatest challenge - same store comps - is also the greatest opportunity. Because the July 12 announcement already told the world that same store sales (comps) slipped, it's no surprise that earnings are going to be lower. Much of that is already baked into the price, although today's surge may indicate some optimism that Bebe may have some decent upcoming guidance, or perhaps cut expenses (and therefore boost earnings) more than expected. I have always been struck by how few Bebe stores there are, now 259. Perhaps this is one reason the name is so chic -- the clothes are somewhat exclusive because you cannot just buy them at any old mall. Even if same store sales stagnate (and let's hope that's just a big "if"), Bebe could open a lot more stores in the U.S., to say nothing of increasing its presence in Canada, Asia, or going to Europe if they wanted to. There are a lot of under-served markets for Bebe.

But IF Manny Mashouf can find the groove again, and get comps rolling, Bebe would be a huge success story. Even though Neda Mashouf is no longer with Bebe, Manny has been running the company since 1976. He probably knows something about how to run Bebe, its clientele, and maybe even just a bit about fashion. Not every retailer gets it right every season. It's hard to say for sure how much Neda's absence affects Bebe, and it's nevertheless unfortunate that Neda and Manny suffered irreconcilable differences.

Interestingly, if you look at insider transactions (such as the May 22 transaction at http://finance.yahoo.com/q/it?s=BEBE ) you will see Neda disposed of a couple of shares "internally"...that would mean to Manny. Actually, it was 50,440,508 of them. If that doesn't provide him with some incentive, nothing will. It also appears that Neda held onto 16,607,713 shares, if I've read that right. Perhaps Neda is willing to show her benevolent side on occasion and advise the company on what to make (since Bebe historically makes most of their own designs), as 16 million chunks of the company are worth a lot more at $30/share than at $15.

Back to some "ifs". Bebe grew revenue 15% this year by opening stores. What if it could grow comps by 5%? Or "pull a Guess" and grow same store revenue by 10%? It has the right type of brand and image to do this. We don't want to get too speculative here, but Bebe has done this kind of growth before....just last year.

In the short term, I am worried Bebe has missed fashion sense for quarter 4. Witness: their lower top line comps that have already been announced. If you're a short term holder of Bebe, this might not be the time to buy. If you short stocks, you may get a few more months of gradual declines, but Bebe's recent chart action seems to imply it may have hit bottom. If you're a long term bull, Bebe seems to have good prospects for new store growth and eventually same store comps, but this August 23 may offer further downside potential depending what Wall Street's expectations are like. I would not be surprised to see a Christmas run-up for Bebe in 2007.

As a personal view, I think Manny and Bebe have just too much experience to keep missing the fashion boat. They are more likely than not to hit their stride again, and as a long-term holder, I am willing to wait because I think it's just a matter of time before Bebe posts some very positive comps.


PS I've always wanted to ask...is it pronounced "bee-bee" or "bay-beh!"??
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