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BEBE > SEC Filings for BEBE > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BEBE STORES, INC.

Form 10-Q for BEBE STORES, INC.


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," "thinks," and similar expressions are forward-looking statements. Forward-looking statements include statements about seasonality, our expected results of operations, working capital requirements and capital expenditures, and store openings. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that our goals will be achieved. These forward-looking statements are made as of the date of this Form 10-Q, and we assume no obligation to update or revise them or provide reasons why actual results may differ. Factors that might cause such a difference include, but are not limited to, our ability to respond to changing fashion trends, obtain raw materials and find manufacturing facilities, attract and retain key management personnel, develop new concepts, successfully open future stores, successfully manage our online business, maintain and protect information technology, respond effectively to competitive pressures in the apparel industry and adverse economic conditions and protect our intellectual property as well as declines in comparable store sales performance, changes in the level of consumer spending or preferences in apparel and/or other factors discussed in "Risk Factors" and elsewhere in this Form 10-Q.

OVERVIEW

We are a global specialty retailer who designs, develops and produces a distinctive line of contemporary women's apparel and accessories. The "bebe look" appeals to a hip, sexy, sophisticated, body-conscious woman who takes pride in her appearance and seeks current fashion trends to suit her lifestyle. The bebe customer expects value in the form of current fashion and high quality at a competitive price.

Our distinctive product offering includes a full range of separates, tops, sweaters, dresses, active wear and accessories in the following lifestyle categories: wear-to-work, weekend and party. We design and develop the majority of our merchandise in-house, which is manufactured to our specifications. The remainder of our merchandise is sourced directly from third-party manufacturers.

We market our products under the bebe, BEBE SPORT, bbsp and 2b bebe brand names through our 250 retail stores, of which 198 are bebe stores, including an on-line store at www.bebe.com, and 52 are 2b bebe stores, including an on-line store at www.2bstores.com, as of September 29, 2012. These stores are located in 36 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Japan. In addition, our licensees operate 121 international point-of-sale locations in 21 countries as of September 29, 2012. During the three months ended September 29, 2012, we opened 5 2b bebe stores and successfully migrated our bebe.com product offerings to a company-managed platform.

bebe. We were founded by Manny Mashouf, our Chief Executive Officer and Chairman of the Board. We opened our first store in San Francisco, California in 1976, which was also the year we incorporated in California. As of September 29, 2012, we operated 198 bebe stores in 36 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada, Japan and on-line. www.bebe.com is our bebe on-line retail store and an extension of the bebe store experience that provides a complete assortment of bebe and BEBE SPORT merchandise and is used as a vehicle to communicate with our customers.

2b bebe. Our 2b bebe ("2b") stores were originally structured as outlet fronts for bebe and were later expanded into the 2b concept stores. We focus on fun and playful everyday lifestyle offerings for our aspirational buyers. As of September 29, 2012, we operated a total of 52 2b stores, including an on-line store at www.2bstores.com . Of these, 18 are mall based stores that sell 2b merchandise only, 14 are hybrid 2b stores that sell a combination of 2b merchandise and bebe logo merchandise and 19 are outlet concept 2b stores that sell a mix of 2b, bebe logo and bebe retail markdown merchandise. www.2bstores.com is our 2b bebe on-line retail store and an extension of the 2b bebe store experience that provides a complete assortment of 2b bebe merchandise and is also used as a vehicle to communicate with our customers.

CRITICAL ACCOUNTING POLICIES

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.

The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. Our most critical accounting policies are those related to revenue recognition, stock based compensation, inventories, marketable securities, impairment of long lived assets and uncertain tax positions. We continually evaluate these accounting policies and estimates, and we make adjustments when facts and circumstances dictate a change. Our accounting policies are described in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended June 30, 2012. This discussion and analysis should be read in conjunction with such discussion and with our condensed consolidated financial statements and related notes included in Part 1, Item 1 of this quarterly report.


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RESULTS OF OPERATIONS

Our fiscal year is a 52 or 53 week period, each period ending on the first Saturday after June 30. Fiscal year 2013 includes 53 weeks and fiscal year 2012 includes 52 weeks. The three months ended September 29, 2012 and October 1, 2011 each include 13 weeks.

The following table sets forth certain financial data as a percentage of net sales for the periods indicated:

                                                               Three Months Ended
                                                      September 29,              October 1,
                                                          2012                      2011
Net sales                                                      100.0 %                 100.0 %
Cost of sales, including production and
occupancy (1)                                                   63.9                    60.0

Gross margin                                                    36.1                    40.0
Selling, general and administrative expenses
(2)                                                             39.4                    37.3

Operating income (loss)                                         (3.3 )                   2.7
Interest and other income, net                                   0.2                     0.2

Income before income taxes                                      (3.1 )                   3.0
Income tax provision (benefit)                                  (0.9 )                   1.1

Net income (loss)                                               (2.2 %)                  1.9 %

(1) Cost of sales includes the cost of merchandise, occupancy costs, distribution center costs and production costs.

(2) Selling, general and administrative expenses primarily consist of non-occupancy store costs, corporate overhead and advertising costs.

Net Sales. Net sales from continuing operations decreased to $117.1 million during the three months ended September 29, 2012 from $126.3 million for the comparable period of the prior year, a decrease of $9.2 million, or 7.3%. The decrease in net sales was primarily due to an 8.7% decrease in comparable store sales driven by the deceleration in store traffic.


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                                                                 Three Months Ended
                                                         September 29,            October 1,
                                                             2012                    2011
Net sales (In thousands)                                $       117,091          $    126,272
Total net sales increase (decrease) percentage                     (7.3 %)                9.5 %
Comparable store sales increase (decrease)
percentage (1)                                                     (8.7 %)                7.0 %
Net sales per average square foot (2)                   $            95          $        115
Square footage at end of period (in thousands)                    1,001                 1,008
Number of store locations:
Beginning of period                                                 252                   253
New store locations                                                   5                    -
Closed store locations                                                7                     2
Number of stores open at end of period                              250                   251

(1) We calculate comparable store sales by including the net sales of stores that have been open at least one year. Therefore, a store is included in the comparable store sales base beginning with its thirteenth month. Stores that have been expanded or remodeled by 15 percent or more or have been permanently relocated are excluded from the comparable store sales base. In addition, we calculate comparable store sales using a same day sales comparison.

(2) We calculate net sales per average square foot using net store sales and monthly average store square footage.

Gross Margin. Gross margin from continuing operations decreased to $42.3 million during the three months ended September 29, 2012 from $50.5 million for the comparable period of the prior year, a decrease of $8.2 million, or 16.3%. As a percentage of net sales, gross margin decreased to 36.1% for the three months ended September 29, 2012 from 40.0% in the comparable period of the prior year. The decrease in gross margin as a percentage of net sales was primarily due to increased markdowns coupled with unfavorable occupancy leverage.

Selling, General and Administrative Expenses. Selling, general and administrative expenses from continuing operations decreased to $46.2 million during the three months ended September 29, 2012 from $47.0 million for the comparable period of the prior year, a decrease of $0.8 million, or 1.8 %. As a percentage of net sales, selling, general and administrative expenses increased to 39.4% during the three months ended September 29, 2012 from 37.3% in the comparable period of the prior year. The dollar decrease from the prior year period was primarily driven by a decrease in compensation expense.

Provision for Income Taxes. The tax rate in the first quarter of 2012 was 30.0% compared to the rate for the comparable period of the prior year of 37.2%. The lower effective tax rate in the current quarter was primarily due to various discrete items including a valuation allowance against a foreign NOL recorded during the quarter.


Table of Contents

SEASONALITY OF BUSINESS AND QUARTERLY RESULTS

Our business varies with general seasonal trends that are characteristic of the retail and apparel industries. As a result, our typical store generates a higher percentage of our annual net sales and profitability in the second quarter of our fiscal year, which includes the holiday selling season, compared to the other quarters of our fiscal year. If for any reason our sales were below seasonal norms during the second quarter of our fiscal year, our annual operating results would be negatively impacted. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital requirements vary widely throughout the year and generally peak during the first and second fiscal quarters. As of September 29, 2012, we had approximately $222.4 million of cash and equivalents and investments on hand of which $96.7 million were cash and equivalents, approximately $56.9 million were invested in government treasury bills, approximately $27.5 million were invested in certificates of deposit and approximately $41.4 million, net of impairment charges of $6.7 million, were invested in auction rate securities ("ARS"). We do not anticipate the lack of liquidity in the ARS to impact our ability to fund our operations in the foreseeable future and believe we have sufficient cash and equivalents to fund ongoing operations for at least the next twelve months. In addition, we have a revolving line of credit, under which we may borrow or issue letters of credit up to a combined total of $25 million. As of September 29, 2012, there were no cash borrowings outstanding under the line of credit, and letters of credit outstanding totaled $0.5 million of trade letters of credit as well as a $3.0 million stand-by letter of credit. This credit facility requires us to comply with certain financial covenants, including minimum tangible net worth, unencumbered liquid assets and profitability requirements, and certain restrictions on making loans and investments. As of September 29, 2012, we were in compliance with all covenants.

As of September 29, 2012, we had cash and equivalents of $96.7 million held in accounts managed by third-party financial institutions consisting of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing funds managed by third-party financial institutions. These funds invest in direct obligations of the government of the United States. To date, we have experienced no loss or lack of access to our invested cash or equivalents; however, we can provide no assurances that access to our invested cash and equivalents will not be impacted by adverse conditions in the financial markets.

We hold our operating and invested cash in accounts with third-party financial institutions. These balances exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to invested cash or cash in our operating accounts.

Net cash used by operating activities for the three months ended September 29, 2012 was $10.7 million compared to net cash provided by operating activities of $4.2 million for the three months ended October 1, 2011. The decrease of $14.9 million from the comparable period was primarily due to lower overall net income and a changes in working capital decrease of $9.6 million, primarily related to changes in accrued expenses related to the payout of incentive compensation related to the prior year as well as increased inventory expenditures related to our initiatives to expand our wear-to-work collection, focused localization initiatives and higher average unit costs related to elevated product offerings.

Net cash provided by investing activities for the three months ended September 29, 2012 was $3.9 million versus $5.7 million provided by investing activities for the three months ended October 1, 2011. The decrease of $1.8 million versus the prior year comparable period was primarily due to higher capital expenditures. We expect that total capital expenditures will be $27 million in fiscal 2013, which will include capital expenditures for new stores, remodels, store expansions, information technology systems and office improvements.

Net cash used by financing activities was $2.0 million for the three months ended September 29, 2012 compared to $1.9 million for the three months ended October 1, 2011 and primarily consisted of dividends paid.

We hold a variety of interest bearing ARS consisting of federally insured student loan backed securities and insured municipal authority bonds. As of September 29, 2012, our ARS portfolio totaled approximately $41.4 million classified as available for sale securities. As of that date, our ARS portfolio included approximately 92% federally insured student loan backed securities and 8% municipal authority bonds and consisted of approximately 20% AAA rated investments, 8% AA rated investments, 37% A rated investments, 21% BBB rated investments and 14% CCC rated investments. As of June 30, 2012, the Company's ARS consisted of 27% AAA rated investments, 23% AA rated investments, 28% A rated investments, 12% BBB rated investments and 10% CCC rated investments. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The uncertainties in the credit markets that began in February 2008 have affected our holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Historically the fair value of ARS investments had approximated par value due to the frequent resets through the auction process. While we continue to earn interest on our ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. Consequently, the investments are not currently liquid, and we will not be able to access these funds until a future auction of these investments is successful, the issuer redeems the securities, or at maturity. Maturity dates for these ARS investments range from 2018 to 2042 with principal distributions occurring on certain securities prior to maturity.

We also hold short-term available for sale securities totaling $64.4 million at September 29, 2012 that consist of treasury bills and certificates of deposit as well as long-term available for sale securities totaling $61.3 million that consist of ARS and treasury bills.

We believe that our cash and cash equivalents on hand will be sufficient to meet our capital and operating requirements for at least the next twelve months. Our future capital requirements, however, will depend on numerous factors, including without limitation, liquidity of our ARS, the size and number of new and expanded stores and/or store concepts, investment costs for management information systems, potential acquisitions and/or joint ventures, repurchases of stock and our future results of operations.

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