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BEBE > SEC Filings for BEBE > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for BEBE STORES, INC.

Form 10-Q for BEBE STORES, INC.


14-Nov-2013

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 our expected results of operations, 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. We are a global fashion brand that believes feeling sexy and looking great are the cornerstones of confidence for today's sophisticated woman. Our expert designs and personal retail experience aim to help our clients look and feel their sexiest. 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, dresses, active wear and accessories to satisfy her every day wardrobe needs across all occasions. 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 235 retail stores, of which 184 are bebe stores, including an on-line store at www.bebe.com, and 51 are 2b bebe stores, including an on-line store at www.2bstores.com, as of October 5, 2013. These stores are located in 34 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada. In addition, our licensees operate 112 international point-of-sale locations in 26 countries as of October 5, 2013. During the three months ended October 5, 2013, we opened 1 2b bebe store and closed 6 bebe and 2 2b bebe stores.

bebe stores. We were founded by Manny Mashouf, our Chairman of the Board. We opened our first store in San Francisco, California in 1976, which was also the year we incorporated. 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 stores. Our 2b bebe stores focus on fun and flirty everyday lifestyle offerings for our aspirational buyers. As of October 5, 2013, we operated a total of 51 2b bebe stores, including an on-line store at www.2bstores.com. Of these, 17 are mall based stores that sell 2b bebe merchandise only and 33 are outlet stores that sell a mix of 2b bebe, 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.


Table of Contents

CRITICAL ACCOUNTING POLICIES

Management's Discussion and Analysis of Financial Condition and Results of Operations are 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 income taxes. 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 July 6, 2013. 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.

RESULTS OF OPERATIONS

Our fiscal year is a 52 or 53 week period, each period ending on the first Saturday after June 30. Fiscal 2014 includes 52 weeks and fiscal 2013 includes 53 weeks. The three months ended October 5, 2013 and September 29, 2012 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
                                                      October 5,              September 29,
                                                         2013                     2012
Net sales                                                   100.0 %                    100.0 %
Cost of sales, including production and
occupancy (1)                                                64.4                       63.9

Gross margin                                                 35.6                       36.1
Selling, general and administrative expenses
(2)                                                          43.8                       39.4

Operating loss                                               (8.2 )                     (3.3 )
Interest and other income, net                                0.1                        0.2

Loss before income taxes                                     (8.1 )                     (3.1 )
Income tax benefit                                           (0.1 )                     (0.9 )

Net loss                                                     (8.0 )%                    (2.2 %)

(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 decreased to $114.1 million during the three months ended October 5, 2013 from $117.1 million for the comparable period of the prior year, a decrease of $3.0 million, or 2.6%. The decrease in net sales was primarily due to a decrease in comparable store sales during the quarter coupled with store closures during the quarter. On-line store sales increased 18.0% for the quarter. The increase in e-commerce sales was driven by increased sales of both bebe and 2b bebe brand merchandise. Comparable store sales for the quarter ended October 5, 2013 decreased 2.8% compared to a decrease of 8.7% in the first quarter of the prior year and a decrease of 7.1% in the fourth quarter of fiscal 2013. The sequential improvement in sales was driven by slight improvement in both traffic and conversion.


Table of Contents
                                                               Three Months Ended
                                                October 5, 2013               September 29, 2012
Net sales (In thousands)                       $         114,127             $            117,091
Total net sales decrease percentage                         (2.6 )%                          (7.3 %)
Comparable store decrease percentage
(1)                                                         (2.8 )%                          (8.7 %)
Net sales per average square foot (2)          $              92             $                 95
Square footage at end of period (In
thousands)                                                   945                            1,001
Number of store locations:
Beginning of period                                          242                              252
New store locations                                            1                                5
Closed store locations                                         8                                7
Number of stores open at end of period                       235                              250

(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. Our on-line store sales are also included in our comparable store sales base. The inclusion of our on-line store sales increased the comparable store sales percentage by 2.5% and 0.3% for the three months ended October 5, 2013 and September 29, 2012, respectively.

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

Gross Margin. Gross margin decreased to $40.6 million during the three months ended October 5, 2013 from $42.3 million for the comparable period of the prior year, a decrease of $1.7 million, or 4.0%. As a percentage of net sales, gross margin decreased to 35.6% for the three months ended October 5, 2013 from 36.1% 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 to clear through legacy products.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $50.1 million during the three months ended October 5, 2013 from $46.2 million for the comparable period of the prior year, an increase of $3.9 million, or 8.4 %. As a percentage of net sales, selling, general and administrative expenses increased to 43.9% during the three months ended October 5, 2013 from 39.4% in the comparable period of the prior year. The dollar and percentage increase over the prior year was primarily due to the earlier timing of marketing events and internal sales conference expenses.

Provision for Income Taxes. The tax rate for the first quarter of fiscal 2014 was 1.6% compared to 30.0% for the comparable period of the prior year. Due to the existence of the valuation allowance, the majority of the tax benefit related to the current quarter losses is not recognized. As a result, the Company's effective tax rate for the first quarter of fiscal 2014 is not comparable to the effective tax rate for the first quarter of fiscal 2013.


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 October 5, 2013, we had approximately $164.4 million of cash and equivalents and investments on hand of which $78.0 million were cash and equivalents, approximately $31.9 million were invested in government treasury bills, approximately $27.5 million were invested in certificates of deposit and approximately $27.0 million, net of temporary impairment charges of $4.4 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. 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 $10 million. As of October 5, 2013, there were no cash borrowings outstanding under the line of credit, no trade letters of credit outstanding and a $3.0 million stand-by letter of credit outstanding. This credit facility requires us to comply with certain financial covenants, including minimum tangible net worth and unencumbered liquid assets, and certain restrictions on making loans and investments. We are in compliance with all covenants.

As of October 5, 2013, we had cash and equivalents of $78.0 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 that are 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 October 5, 2013 was $11.2 million compared to net cash used by operating activities of $10.7 million for the three months ended September 29, 2012. The increase of $0.5 million from the comparable period was due to lower overall net income offset by a change in working capital. The decrease of $7.3 million in working capital was primarily related to decreased inventory expenditures.

Net cash provided by investing activities for the three months ended October 5, 2013 was $4.4 million compared to $3.9 million provided by investing activities for the three months ended September 29, 2012. The increase of $0.5 million versus the prior year comparable period was primarily due to proceeds from sale of investment securities combined with decreased investments in property and equipment. We expect that total capital expenditures will be approximately $25 million in fiscal 2014, which will include capital expenditures for new stores, remodels, store expansions, information technology systems and office improvements.

Net cash used by financing activities was $1.9 million for the three months ended October 5, 2013 compared to $2.0 million used by financing activities for the three months ended September 29, 2012. The decrease of $0.1 million from the prior year comparable period was primarily due to a smaller dividend payout as a result of repurchases of our common stock made in the prior year.

We hold a variety of interest bearing ARS consisting of federally insured student loan backed securities and insured municipal authority bonds. As of October 5, 2013, our ARS portfolio totaled approximately $27.0 million classified as available for sale securities. As of that date, our ARS portfolio included approximately 89% federally insured student loan backed securities and 11% municipal authority bonds and consisted of approximately 10% AAA rated investments, 24% AA rated investments, 18% A rated investments, 26% BBB rated investments and 22% CCC rated investments. As of July 6, 2013, the Company's ARS consisted of 21% AAA rated investments, 19% AA rated investments, 23% A rated investments, 20% BBB rated investments and 17% 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. During the three months ended October 5, 2013, $9.1 million of ARS were settled at par. Subsequent to the end of our first fiscal quarter, $15.9 million of additional ARS were settled at par.

We also hold short-term available for sale securities totaling $39.5 million at October 5, 2013 that consist of treasury bills and certificates of deposit as well as long-term available for sale securities totaling $46.9 million that consist of ARS and treasury bills.

In November 2012, our board of directors authorized a program to repurchase up to $30 million of our common stock. We intend, from time to time, as business conditions warrant, to purchase stock in the open market or through private transactions. Purchases may be increased, decreased or discontinued at any time without prior notice. The plan does not obligate us to repurchase any specific number of shares and may be suspended at any time at our discretion. No shares were repurchased during the three months ended October 5, 2013 and September 29, 2012.

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 auction rate securities, 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, repurchase of stock and future results of operations.

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