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Author: mpfd33 Big red star, 1000 posts Old School Fool CAPS All Star Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 646  
Subject: Bebe valuation Date: 4/15/2007 3:30 PM
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Hi Fools,

Here is an attempt to do a thumbnail valuation of bebe stores. I took all the numbers from 10-Ks, 10-Qs, Yahoo Finance and MSN. I am still a novice investor and have been investing little more than 3 years.


Fiscal Year Ends June 2007.

Financial Snapshot: (All numbers in the thousands except share price & M-Cap)

........................2005..........2006............TTM

Total Sales 509,527 579,073 657,300
Sales Growth Rate 37% 14% 14%
Owner's Earnings 68,500 73,800 77,400
Dilution Rate 5% 1% 2%
Total Cash & Invest 270,876 327,671 381,928
Total Debt (Cap Lease) 393 509 374
Recent Market Cap 1.65 Bil
Recent Share Price $17.72

Notes: TTM Total Sales includes the latest $151.3 mil for quarter 3 ended in April given in the latest SSS report. See Step 2 for notes to OE figures.


Step 1...Balance Sheet
Bebe has a solid balance sheet sporting 382m in cash and marketable securities and almost zero long-term debt (in the form of capital lease due). Most of this you can glean from the snapshot above. Inventories are at 46.3m as of Dec. 30, 2006 (QTR 2). Inventory consists of the following:
**************** DEC 06************ JULY 06 **********DEC 05

Raw Materials ……….9.7mil……………….10.4………………...7.2
Mdse. Available……. 36.6…………………..31.7………………28.3
Total Inventory ……..46.3…………………..41.2……………….35.5

I believe the rise is inventory can be attributed to the need to stock spring/summer cloths at this point in time. “As of April 7, 2007, finished goods inventory per square foot was flat compared to the prior year” per the April SSS report.

Step 2...Calculate Owner's Earnings
For the 6 months ended DEC, 2006 = $44,735mil roughly.
This is a 9% increase over 2005's 6 month's Owner earnings of $41,200.
( OE = Net Inc + Depr & Amort +/- any one-time items - CapEx)
I run 44,735 out 2 times to get a run rate of $89,000 for 2007. I rounded down here and would like to note that bebe's best quarter (holiday's) is included in the first six months figures already past (Fiscal year ends in June). I will see how this works but may adjust a mid-year exercise like this down for OE due to heavier sales in the first 2 quarters.
NOTE: Tom Gardner adds back to OE for growth capital expenditures (Feb 06 SA issue 70mil in OE). In 2005, bebe spent 10.5 mil (45% of CapEx figure of 23.3 mil) on new store openings and another 6.2 mil on store relocation/expansion. In 2006, bebe spent 19mil (61% of 31.4 mil of CapEx) on new store openings and another 6.8 mil in relocation/ expansion. I thought about adding back the new store opening figure back to OE and chalking up the relocation/expansion dollars to maintenance. That works fine but right now we are between 10k reports. I decided to account for dollars spent on growth by adding back 50% of the CapEx figure across the board (I'd rather err on the side of caution in this exercise as 61% was spent on new openings from the 2006 10k.). I treated the OE in the snapshot the same for each year.

Step 3...Estimate 5-year Growth Rates
Analyst from MSN call for 19%, Yahoo 20%.
I will use the rates of 15%, 20%, 23% for this exercise.

Step 4...Apply Growth and Multiples...and...
Step 5...Add Net Cash

Some rounding here. Take the #s above (15,20,23) and I used the 30% from Tom's example to get the multiple. (Example 10 x.30=3 + original 10 =13)
Note: The % multiplied by OE run rate is compounded over 5 years.

OE GR MULT CASH M-CAP
89m x 15% = 179.0 x 19.5 = 3490.5m + 382m = 3,872.5m (3.87bil)
89m x 20% = 221.5 x 26.0 = 5759.0m + 382m = 6,141.0m (6.14bil)
89m x 23% = 250.5 x 29.9 = 7490.0m + 382m = 7,872.0m (7.87bil)

Step 6...Share Dilution
There is roughly 93mil shares out today according to the latest 10Q. I will throw in 2% dilution per year compounded 5 years out and I will use 102.7m shares.

Step 7...Divide...and...
Step 8...Calculate Annual Projected Return


Market cap est. / shares est. = price est. [Then divide by present price ($17.72) and take 5th root = projected annual return]. So 5-year estimates for price and APR:

15) 3872.5 / 102.7 = $37.71......... 16.3%
20) 6141.0 / 102.7 = $59.80......... 27.5%
23) 7872.0 / 102.7 = $76.65......... 34.0%

Comments:

Bebe is a strong brand in the Chicago-land area that I live in. Bebe has stumbled recently with it's fashion line and price-per-share has stumbled along with the fashion miss. At this time I still feel that bebe will remain a brand in the forefront and will eventually get back on track.
From the 2006 10k:
We market our products under the bebe, COLLECTION bebe, Neda by bebe, Neda, BEBE SPORT and bebe O brand names through our 258 retail stores, of which 189 are bebe stores, 48 are BEBE SPORT stores, 20 are bebe outlet stores and 1 is a bebe accessories store. These stores are located in 32 states, the District of Columbia, Puerto Rico and Canada. In addition, we have an on-line store at www.bebe.com and our licensees operate 17 international stores, including shop in shops. During the three months ended December 30, 2006, we opened 10 stores including 5 bebe stores and 5 BEBE SPORT stores. During the six months ended December 30, 2006, we opened 16 stores, including 6 bebe stores, 9 BEBE SPORT stores and 1 bebe accessories store. We expect to open approximately 40 to 45 stores, including approximately 24 to 27 bebe stores, 15 to 17 BEBE SPORT stores and 1 bebe accessories store during the year. We also plan to renovate 12 existing stores, relocate or expand 10 existing stores and close approximately 4 stores, resulting in square footage growth of approximately 16%.


Bebe plans to close 3 stores this year as I believe they did last year. The average new store construction costs for 2006 was $525,000. Bebe states that their stores typically have achieved profitability within the first full year of operation.


I own shares of bebe purchased for $14.94 on Jan. 20, 2006. I have taken some profit in the mid-$20s and have since added more shares back. Further thoughts on trading ranges:


I have posted before that bebe has rarely traded at a PE much under 20 for at least the past 2 years. I see 18.60 looking at BigCharts quickly as the 2-year PE bottom and 51 or so as the high. Throw out the 51 PE (I think Tom G. sold that over-valuation prior to his rec) and the high PE more recently is roughly 33. If bebe comes in .01 below the low estimate of .13 and with .14 same qt. last year...EPS becomes .83.

.83 x 18.6 = $15.44 as a bottom range. Can certainly be breeched if bebe continues the path it has been traveling. I won't go into the upper because you guys can plug any number you want into it as bebe won't trade much higher than a low 20 PE in a good market. But...if SSS does start to to pick up momentum again and bebe puts out some positive PR....
a mid-20 PE gives about a $21 pps. Today's PE is 21.

I bought the bulk of my shares just under $15 when the PE was about 20.50. Today bebe trades near $18 with a 21 PE. I still think $16.50 to $17.50 is a good price if you believe that management can swing the tide. It will be interesting to watch how bebe trades. I think a lot of the bad is priced into the pps already. I have a full position, so with the added risk that today's PR brings (they have not turned the corner as of yet) I will target the lower range near $16.50 before I will add any additional shares.


This was a fun exercise to work through and to learn more about the business from looking through the SEC filings (where I got most of the numbers). Hopefully there are not any errors relating to math. Feel free to make comments or corrections that you find.


Fool On,

mpfd
...(Friendly FireFighterFool)
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