Bebe Swings to Profit on Bluestar Joint Venture

Retailer’s net sales plunged 9% while comparable store sales fell 4.6% in Q4 FY16

b1Global specialty retailer Bebe Stores Inc. (NASDAQ: BEBE) announced its Q4 FY16 and full year FY16 financial results on September 1st, 2016.

The Brisbane, California-based Company engages in the design, development, and production of women’s apparel and accessories under the bebe and BEBE SPORT brand names in the U.S., Puerto Rico, and Canada. The company provides a range of fashion separates, tops, dresses, active wear, outerwear, and accessories in various wardrobe occasions, as well as jewelry, sunglasses, fragrances, shoes, and handbag assortments.

As of June 8th, 2016, it operated 147 bebe retail stores;, an on-line store; and 38 bebe outlet stores. The company is also involved in the distribution and sale of bebe branded products through product licensees in approximately 100 doors in about 20 countries. Read more about Bebe’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Bebe’s net sales plunged 9% to $94.9 million from $104.3 million in the year ago period. Comparable store sales for the reporting quarter decreased 4.6% compared to a growth of 1.1% in the comparable period last year. As with other specialty retailers, the Company faces intense competition with online retailers. Bebe also faced headwinds in the form of a tourism slowdown and heavy reliance on large, flagship locations in major cities to drive sales. Gross margin as a percentage of net sales decreased to 30.9% compared to 34.8% in the year-ago period. The decrease in margin was primarily the effect of aggressive promotions, write-down of aged inventory, and lost leverage on fixed occupancy cost.

b2During Q4 FY16, Bebe’s selling, general, and administrative (SG&A) expenses fell to $36.3 million, or 38.2% of net sales, compared to $41.3 million, or 39.6% of net sales, for the same period in the prior year. The decrease in SG&A expenses was primarily due to lower compensation expense on account of savings from restructuring activities, offset by $1 million in asset impairment cost related to stores.

On the brighter side, the Company gained $31.7 million from the sale of intellectual property assets as a result of the transaction with Bluestar. As a result, Bebe swung to profits from continuing operations of $25.1 million, or $0.31 per share, compared to a loss of $5.5 million, or $0.07 per share, in the prior year period. Excluding the Bluestar transaction, loss from continuing operations was $6.8 million, or $0.08 per share, for Q4 FY16.

For the eight weeks ended August 27th, 2016, comparable store sales decreased 3.1%, due to an increase in the number and frequency of in-store and on-line promotions. Gross margin as a percentage of sales increased 150 basis points during the 8-week period.

Full year FY16 financial highlights

For the full year FY16, Bebe’s net sales fell 8% to $393.6 million from $428.0 million in the previous year. Comparable store sales for the year decreased 4.5% compared to an increase of 3.1% in the prior year.

As a result, Bebe’s loss from continuing operations widened to $27.5 million, or $0.34 per share, compared to a loss of $25.4 million, or $0.32 per share, in the prior year. Included in the loss from continuing operations for FY16 was the net gain of $31.7 million. Excluding the impact of the net gain, loss from continuing operations ballooned to $59.2 million, or $0.74 per share, for FY16, due to higher store impairment charges and expenses incurred related to store closures.

In addition, the Company incurred higher compensation expenses relative to net sales due to the effects of severance payments related to corporate restructuring.

As of July 2nd, 2016, Bebe’s cash and investments amounted to $55.5 million.

Other highlights

Inventory: As of July 2nd, 2016, Bebe’s average finished goods inventory per square foot remained flat compared to the prior year.

Capital expenditure: Capital expenditures for FY16 were approximately $6.3 million, and depreciation expense was approximately $20.0 million.

Store update: During Q4 FY16, the Company closed 4 bebe stores and opened one outlet store, ending the year with 186 stores with a square footage of 729,000.

Joint venture with Bluestar: On June 8th, 2016, Bebe announced that it has entered into a joint venture with Bluestar Alliance LLC and received $35 million in connection with the formation of the joint venture. Under the terms of the agreement, Bebe has contributed its trademarks and related intellectual property, while Bluestar will leverage its existing brand management organization and infrastructure to develop a wholesale domestic and international lifestyle licensing business for the joint venture. To date, Bluestar has signed 14 new licensees including Global Brands Group, Major Brands Pvt. Ltd., Mamiye Brothers Inc., and PPI Apparel Group.

Reduction in design to market process: Bebe has significantly reduced its design to market process from 220 days to 105 days, which enabled the Company to improve its product offerings and return to its historical model of test and chase.

Cost savings: The Company achieved annual reduction in SG&A of $25 million in FY16.

Guidance for full year FY17

For FY17, the Company expects comparable store sales to be in the negative low-single digit to positive low-single digit range. Gross margin is expected to be higher than the prior year as a result of inventory management initiatives, which include a 20% reduction in receipts and SKUs. Finished goods inventory per square foot is anticipated to decrease in the low-teens this fall and single digits next spring compared to the prior year as the Company implement its strategic plans.

In addition, total capital expenditures for FY17 are anticipated to be approximately $6 million for a relocation, remodels and information technology systems. For FY17, the Company does not plan to open any new store locations and to close up to 40 bebe and outlet stores, which will result in approximately a 20% decrease in total store square footage from the end of FY16.

Stock Performance

b3Bebe’s stock ended the day at $0.67, gaining 1.73%, at the close on Thursday, September 15th, 2016, having vacillated between an intraday high of $0.68 and a low of $0.67 during the session. The stock’s trading volume was at 38,564 for the day. The Company’s market cap was at $52.50 million as of Thursday’s close.

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