<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24395
BEBE STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2450490
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
380 VALLEY DRIVE
BRISBANE, CALIFORNIA 94005
(Address of principal executive offices)
TELEPHONE: (415) 715-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE OF $0.001 PER SHARE, 22,889,997 SHARES OUTSTANDING
AS OF OCTOBER 26,1998.
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1
<PAGE>
BEBE STORES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
September 30, 1998 (unaudited), June 30, 1998 and September 30, 1997 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended September 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8K 15
SIGNATURES 16
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BEBE STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
SEPTEMBER 30, AS OF JUNE 30, SEPTEMBER 30,
1998 1998 1997
---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $42,615,736 $36,651,617 $15,008,667
Receivables:
Income tax refund 185,529 169,443 0
Construction allowance 90,000 106,416
Other (net of allowance of $63,787, $51,785
and $74,825) 139,569 87,124 102,582
Inventories, net 16,039,772 14,405,213 11,891,071
Deferred income taxes 842,835 842,835 849,619
Prepaid and other 116,784 134,760 39,463
----------- ----------- -----------
Total current assets 60,030,225 52,290,992 27,997,818
Equipment and improvements, net 9,455,769 9,213,358 8,050,016
Deferred income taxes 1,811,126 1,811,126 1,363,813
Other assets 1,239,755 893,252 755,816
----------- ----------- -----------
Total other assets 3,050,881 2,704,378 2,119,629
----------- ----------- -----------
Total assets $72,536,875 $64,208,728 $38,167,463
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $7,964,690 $6,921,981 $6,728,545
Accrued liabilities 8,171,421 8,470,623 6,728,756
Current portion of long-term debt 104,286 104,286 146,636
Income taxes payable 3,094,300 890,258 3,181,459
----------- ----------- -----------
Total current liabilities 19,334,697 16,387,148 16,335,396
Long-term debt 35,709 82,218 127,425
Deferred rent 2,457,195 2,475,883 2,378,469
----------- ----------- -----------
Total liabilities 21,827,601 18,945,249 18,841,290
Commitments and contingencies
Shareholders' equity:
Preferred stock-authorized 1,000,000 shares at
$0.001 par value per share: no shares issued
and outstanding
Common stock-authorized 40,000,000 shares at $0.001
par value per share; issued and outstanding
23,889,997 shares 23,890 23,890 22,640
Additional paid-in capital 16,993,201 17,078,200 15,270,610
Deferred compensation (1,861,216) (2,061,227) (2,568,500)
Retained earnings 35,553,399 30,222,616 16,601,423
----------- ----------- -----------
Total shareholders' equity 50,709,274 45,263,479 19,326,173
----------- ----------- -----------
Total liabilities and shareholders' equity $72,536,875 $64,208,728 $38,167,463
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $41,552,331 $31,217,537
Cost of sales, including buying and occupancy 19,800,694 15,564,440
----------- -----------
Gross profit 21,751,637 15,653,097
Selling, general and administrative expenses 13,200,538 9,382,766
----------- -----------
Income from operations 8,551,099 6,270,331
Other expense (income):
Interest expense 2,350 4,802
Interest income (487,765) (152,263)
Other 1,290 (20,743)
----------- -----------
Earnings before income taxes 9,035,224 6,438,535
Provision for income taxes 3,704,441 2,640,939
----------- -----------
Net earnings $ 5,330,783 $ 3,797,596
----------- -----------
----------- -----------
Basic earnings per share $0.22 $0.17
Diluted earnings per share $0.21 $0.16
Basic weighted average shares outstanding 23,889,997 22,639,997
Diluted weighted average shares outstanding 25,386,581 23,537,076
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
September 30
------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,330,783 $ 3,797,596
Adjustments to reconcile net earnings to cash provided
(used) by operating activities:
Non-cash compensation expense 115,011 236,500
Depreciation and amortization 653,690 499,131
Net loss on disposal of property 49,397 41,552
Impairment loss (30,415)
Deferred income taxes (630,590)
Deferred rent (18,688) 83,016
Changes in operating assets and liabilities:
Receivables (65,923) (45,521)
Inventories (1,634,559) (2,429,373)
Other assets (367,974) 38,995
Prepaid expenses 17,976 47,437
Accounts payable 1,042,709 1,663,916
Accrued liabilities (299,202) 674,327
Income taxes payable 2,204,041 2,651,104
----------- -----------
Net cash provided by operating activities 7,027,261 6,597,676
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (1,023,725) (755,207)
Proceeds from sales of equipment 9,699 (58,339)
Proceeds from sale of marketable securities 77,883
----------- -----------
Net cash used by investing activities (1,014,026) (735,663)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from (repayments to) shareholder (2,607) 518
Repayments on capital leases & other (46,508) (45,783)
----------- -----------
Net cash used by financing activities (49,115) (45,265)
Net increase in cash 5,964,120 5,816,748
CASH:
Beginning of year 36,651,616 9,191,919
----------- -----------
End of year $42,615,736 $15,008,667
----------- -----------
----------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 2,349 $ 4,802
----------- -----------
Cash paid for income taxes $ 1,500,400 $ 620,425
----------- -----------
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
BEBE STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERIM FINANCIAL STATEMENTS
The accompanying Condensed Consolidated Balance Sheets of bebe stores, inc.
(the "Company") as of September 30, 1998 (the "current period") and September
30, 1997 (the "prior period") and the interim Condensed Consolidated Statements
of Operations and Cash Flows for the three months ended September 30, 1998 and
September 30, 1997 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The Consolidated Balance
Sheet at June 30, 1998 was derived from the audited financial statements. The
Company's business is affected by the pattern of seasonality common to most
retail apparel businesses. The results for the current and prior periods are not
necessarily indicative of future financial results.
Certain notes and other information have been condensed or omitted from the
interim Consolidated Financial Statements presented in this Quarterly Report on
Form 10-Q. Therefore, these Condensed Consolidated Financial Statements should
be read in conjunction with the Company's Fiscal 1998 Annual Report on Form
10-K.
EARNINGS PER SHARE
Under SFAS No. 128, the Company provides dual presentation of EPS on a
basic and diluted basis. The Company's granting of certain stock options
resulted in potential dilution of basic EPS. The following table summarizes the
difference between basic weighted average shares outstanding and diluted
weighted average shares outstanding used to compute diluted EPS.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
------------
1998 1997
---- ----
<S> <C> <C>
Basic weighted average number of
Shares outstanding 23,889,997 22,639,997
Incremental shares from assumed
Issuance of stock options 1,496,584 897,079
---------- ----------
Diluted weighted average number of
Shares outstanding 25,386,581 23,537,076
---------- ----------
---------- ----------
</TABLE>
The number of incremental shares from the assumed issuance of stock options
is calculated applying the treasury stock method.
6
<PAGE>
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. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risks That May Affect Results"
in this section.
The Company's fiscal year ends on June 30 of each calendar year.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
-------------
STATEMENTS OF OPERATIONS DATA: 1998 1997
---- ----
<S> <C> <C>
Net sales........................................... 100.0% 100.0%
Cost of sales, including buying and occupancy (1)... 47.7 49.9
----- -----
Gross profit........................................ 52.3 50.1
Selling, general and administrative expenses (2).... 31.8 30.1
----- -----
Income from operations.............................. 20.5 20.0
Interest and other expenses (income), net........... (1.2) (0.5)
----- -----
Earnings before income taxes........................ 21.7 20.5
Provision (benefit) for income taxes................ 8.9 8.3
----- -----
Net earnings........................................ 12.8% 12.2%
----- -----
----- -----
</TABLE>
- ---------------
(1) Cost of sales includes the cost of merchandise, store occupancy costs and
buying costs.
(2) Selling, general and administrative expenses primarily consist of
non-occupancy store costs, corporate overhead and advertising costs.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
NET SALES. Net sales increased to $41.6 million during the three months
ended September 30, 1998 from $31.2 million in the same period of the prior
year, an increase of $10.4 million, or 33.3%. Of this increase, $7.9 million
was attributable to the 27% increase in comparable store sales, and $2.5 million
was attributable to stores not included in the comparable store sales base. The
increase in comparable store sales was attributable to a broader product line
offering, strong consumer acceptance of the product line and improvements in the
operational aspects of the Company's business. The Company operated 87 stores
at September 30, 1998 compared to 83 stores at September 30, 1997.
GROSS PROFIT. Gross profit, which includes the cost of merchandise, buying
and occupancy, increased to $21.7 million during the three months ended
September 30, 1998 from $15.6 million for the same period of the prior year, an
increase of $6.1 million, or 39.1%. As a percentage of net sales, gross profit
increased to 52.3% for the period from 50.1% in the same period of the prior
year. The increase in gross profit as a percentage of net sales resulted from
higher initial markups and lower markdowns associated with higher sell-through
rates, as well as reduced occupancy costs as a percentage of net sales resulting
from higher average store sales. The Company believes that the gross margins
attained during this most recent quarter are not sustainable and that gross
margins will likely be lower in the current and future periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, which primarily consist of non-occupancy store costs,
corporate overhead and advertising costs, increased to $13.2 million during the
three months ended September 30, 1998 from $9.4 million in the same period of
the prior year, an increase of $3.8 million, or 40.4%. As a percentage of net
sales, these expenses increased to 31.8% during the three months ended September
30, 1998 from 30.1% in the same period of the prior year. This
7
<PAGE>
increase as a percentage of net sales was largely a result of increased
compensation costs associated with increased corporate staffing and certain
profit sharing accruals.
For the three month period, advertising expense was $1.5 million, or 3.5%
of net sales, compared to $1.2 million, or 3.8% of net sales, in the same period
of the prior year. The Company currently plans to maintain annual advertising
expenses as a percentage of net sales at roughly the same level as experienced
in the prior year.
INTEREST AND OTHER EXPENSE (INCOME), NET. The Company generated $484,000
of interest and other income (net of other expenses) during the three months
ended September 30, 1998 as compared to $168,000 in the same period of the prior
year. The Company had no significant borrowings under its line of credit during
the period ended September 30, 1998. The increase of interest and other income
is a result of higher cash balances generated from operating results and
proceeds from the Company's initial public offering of stock in June 1998.
PROVISION (BENEFIT) FOR INCOME TAXES. The effective tax rate for the three
months ended September 30, 1998 was 41.0% and was consistent with the rate
experienced in the same period of the prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years ended June 30, 1998, bebe has satisfied its
cash requirements principally through cash flow from operations, borrowings
under its revolving lines of credit and term loans. Primary uses of cash have
been to purchase merchandise inventory, to fund the construction of new stores
and to remodel and renovate stores.
The Company's working capital requirements vary widely throughout the year
and generally peak in the first and second fiscal quarters. At September 30,
1998, the Company had approximately $42.6 million of cash and cash equivalents
on hand of which $11.9 million was derived from the Company's initial public
offering in June, 1998. In addition, the Company had a revolving line of
credit, under which it could borrow or issue letters of credit up to a combined
total of $5.0 million. As of September 30, 1998, there were no borrowings under
the line of credit and letters of credit outstanding totaled $1.2 million.
Net cash provided by operating activities for the three months ended
September 30, 1998 was $7.0 million. Cash provided by operating activities for
the period was primarily generated by income from operations and changes in
working capital.
Net cash used by investing activities for the period was $1.0 million. The
primary use of these funds was for the opening of new stores and the
implementation of new computer systems within the stores and the corporate
office.
The Company expects to make substantial capital expenditures in connection
with the opening and expansion of stores, the implementation of new systems to
support store and corporate office functions and the expansion or relocation of
its corporate offices and distribution center. The Company estimates that
capital expenditures will be between $9.0 million and $11.0 million in fiscal
1999. The Company opened one new store during the three months ended September
30, 1998. The Company expects to open approximately 14 additional stores in
fiscal 1999 and approximately 15 stores in fiscal 2000.
Net cash used by financing activities was $49,000 for the three months
ended September 30, 1998. The Company believes that its cash on hand, together
with its cash flow from operation, will be sufficient to meet its capital and
operating requirements through fiscal 1999. The Company's future capital
requirements, however, will depend on numerous factors, including without
limitation, the size and number of new and expanded stores, investment costs for
management information systems, potential acquisitions and/or joint ventures,
and future results of operations.
SEASONALITY OF BUSINESS AND QUARTERLY RESULTS
The Company's business varies with general seasonal trends that are
characteristic of the retail and apparel industries. As a result, the Company
generates a disproportionate amount of its annual net sales in the first half of
its fiscal year (which includes the fall and holiday selling seasons) compared
to the second half of its fiscal year. If for any reason the Company's sales
were below seasonal norms during the first half of its fiscal year, the
Company's annual operating results would be affected adversely. Because of the
seasonality of the Company's
8
<PAGE>
business, results for any quarter are not necessarily indicative of results that
may be achieved for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.
YEAR 2000 DATE CONVERSION
The Company has created a Year 2000 task force that is implementing a
six-phase plan with the objective of ensuring that its management information
systems will record, store, process, calculate and present calendar dates
falling on or after (and if applicable, spans of time including) January 1, 2000
in the same manner, and with the same functionality as it has in years prior to
2000 (collectively, "Year 2000 Compliant"). As part of this six-phase plan, the
Company has completed a comprehensive review of its information systems and is
involved in a program to update computer systems and applications in preparation
for the year 2000. The Company currently believes that this six-phase plan will
be completed by July 31, 1999: however, the Company has intentionally planned
its completion date well in advance of January 1, 2000 to allow adequate time to
further test and modify all mission critical applications should such further
work be necessary.
Total expenditures related to identification, testing, conversion,
contingency, replacement and upgrading system applications are expected to range
from $400,000 to $600,000 during fiscal 1999 and 2000. In certain cases, the
conversions to applications which are year 2000 compliant will be made in
conjunction with planned business system upgrades or enhancements. In the most
reasonably likely worst case scenario, the Company's store operating and back
end inventory management systems could fail. The consequence of such failure
could include the inability to record sales transactions in the Company's stores
and a breakdown in the supply chain. Such occurrence would likely result in a
loss of revenue; it is not possible to quantify the possible range of such loss.
This would necessitate reverting to a number of manual systems for recording
sales, ordering product and replenishing the Company's stores.
The Company is attempting to contact vendors and others on whom it relies
to assure that their systems will be converted before January 1, 2000. However,
there can be no assurance that the systems of other companies on which the
Company's systems rely will be year 2000 compliant by December 31, 1999. Any
such failure to convert by another company may have an adverse effect on the
Company's systems. In a most reasonably likely worst case scenario, one or more
significant supplier could be unable to continue to adequately supply the
Company after 1999. The Company's fallback position would be to seek an
alternative source of supply. However, there can be no assurance that such
alternative sources of supply would be available. Such a contingency plan will
be in place by the end of fiscal year 1999. It is not practical for management
to estimate the range of financial loss, if any, which could result from the
negative effect that a disruption in supply would have on the Company's
business. Furthermore, no assurance can be given that any or all of the
Company's systems are or will be year 2000 compliant, or that the ultimate costs
required to address the year 2000 issue or the impact of any failure to achieve
substantial year 2000 compliance will not have a material adverse effect on the
Company's financial condition.
RISKS THAT MAY AFFECT RESULTS
FASHION AND APPAREL INDUSTRY RISKS. The apparel industry is subject to
rapidly evolving fashion trends, shifting consumer demands and intense
competition. The Company believes that its future success will be dependent, in
part, on its ability to anticipate, identify and capitalize upon emerging
fashion trends, including products, styles, fabrics and colors, and to
distinguish itself within the women's apparel market. If, for any reason, the
Company misinterprets the current fashion trends or consumer tastes shift and
the Company fails to respond, consumer demand for bebe products and the
Company's profitability and brand image could be significantly impaired.
Additionally, there can be no assurance that competitors of the Company will not
carry similar designs, thus undermining bebe's distinctive image and potentially
having an adverse effect on the Company's financial condition and results of
operations.
MANAGEMENT OF INVENTORY. Success in the apparel industry is dependent on a
company's ability to manage its inventory of merchandise in proportion to the
demand for such merchandise. If bebe miscalculates the consumer demand for its
products it may be faced with significant excess inventory and excess fabric for
some products and missed opportunities for others. Weak sales and resulting
markdowns and/or write-offs could
9
<PAGE>
cause the Company's profitability to be significantly impaired and may
have a material adverse effect on the Company's financial condition and results
of operations.
RISKS OF GROWTH STRATEGY. The Company's continued growth is dependent, to
a significant degree, on its ability to identify sites and open and operate new
stores on a profitable basis. bebe opened 24 stores in fiscal 1995, 18 stores
in fiscal 1996, 10 stores in fiscal 1997, seven stores in fiscal 1998 and one
store in the three-month period ended September 30, 1998. The Company expects
to open approximately 14 stores in the remainder of fiscal 1999 and an
additional 15 stores in fiscal 2000. Such expansion may include the opening in
selected markets of flagship stores that will be larger and more expensive to
operate than existing stores. If the Company does not generate sufficient
revenues from these flagship stores to cover their higher costs, the Company's
financial results could be negatively affected. The success of this expansion
plan is dependent upon a number of factors, including the availability of
desirable locations, the successful negotiation of acceptable leases for such
locations, the ability to manage the expansion of the store base, the ability to
source inventory adequate to meet the needs of new stores, the ability to
operate stores profitably once opened, the development of adequate management
information systems to support expanded activity, the ability to recruit and
retain new employees, the availability of capital, and general economic and
business conditions affecting consumer confidence and spending. There can be no
assurance that the Company will be able to achieve its planned expansion on a
timely and profitable basis, if at all. In addition, a majority of the
Company's new store openings in the remainder of fiscal 1999 and fiscal 2000
will be in existing markets. There can be no assurance that these openings will
not result in reduced net sales volumes and profitability in existing stores in
those markets.
FUTURE RESULTS OF OPERATIONS. Although the Company has been profitable on
an annual basis for each of the past five fiscal years, profitability rates have
varied widely from quarter-to-quarter and from year-to-year. In particular, in
fiscal 1996, the Company experienced a significant financial downturn due to,
among other things, a significant disruption in supply of the Company's key
fabrication, difficulty in obtaining a replacement fabrication, certain related
fashion misjudgments, failure to obtain product deliveries in a timely manner,
rapid expansion of the Company's store base, and lack of sufficient controls and
personnel to support such expanded activity. There can be no assurance that the
Company will remain profitable in the future. Future results of operations will
depend on, among other things, the number and timing of new store openings and
the Company's ability to identify and capitalize upon changing fashion trends,
hire and retain qualified management and other personnel, maintain appropriate
inventory levels, obtain needed raw materials, identify and negotiate favorable
leases for successful store locations, reduce shrinkage and control operating
costs. Future results of operations will also depend on factors outside of the
Company's control, such as general economic conditions, availability of third
party sourcing and raw materials, and actions of competitors.
The Company believes that the rate of comparable store sales growth
achieved in recent periods is not sustainable and expects that such growth, if
any, in the current and future periods will be more moderate. Furthermore,
during these recent periods of relatively high comparable store sales growth,
the Company has experienced favorable merchandise margins due to strong
sell-through rates and attendant low markdown rates coupled with favorable
occupancy expense leverage. As comparable store sales growth moderates, the
Company anticipates a decline in merchandise margins and, accordingly, a
reduction in gross margins. The Company expects to experience increases in
selling, general and administrative expenses as a percentage of sales in certain
future three months periods as a result of planned investments to its
infrastructure and anticipated moderation of comparable stores sales growth
rates.
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS. In the past, the Company's
investments in information systems have focused on its core store, merchandise
and financial accounting systems. Currently, the Company's focus is on
upgrading its capabilities and systems associated with its production,
merchandise allocation and distribution functions, which have not kept pace with
the Company's growth. The Company intends to make significant investments to
improve existing management information systems and implement new systems in
these areas and to implement them during fiscal 1999. There can be no assurance
that these enhancements will be successfully implemented. Failure to implement
and integrate such systems could have a material adverse effect on the Company's
business, financial condition and results of operations.
NEW MANAGEMENT TEAM; DEPENDENCE ON KEY PERSONNEL. The Company is dependent
upon the efforts of its key employees, particularly Manny Mashouf, the founder,
Chairman, President and Chief Executive Officer. In addition, most of the
Company's officers and other key personnel have joined the Company since the
middle of fiscal 1996 and, therefore, have relatively little experience with the
Company. None of the Company's executive officers is bound by an employment
agreement, and the relationships of such officers with the
10
<PAGE>
Company are, therefore, at will. With the exception of Mr. Mashouf, the Company
does not have "key person" life insurance policies on any of its employees. The
loss of the services of Mr. Mashouf or any of its key officers or employees
could have a material adverse effect on the Company's business, financial
condition and results of operations. Furthermore, the Company will need to hire
experienced executive personnel to support the planned improvements and
expansions of its business; however, there can be no assurance that the Company
will be successful in hiring such personnel in a time frame necessary to manage
and support its expansion plans.
The Company's success also depends to a significant degree on its ability
to attract and retain experienced employees. There is substantial competition
for experienced personnel, which the Company expects to continue. Many of the
companies with which bebe competes for experienced personnel have greater
financial resources than the Company. In the past, the Company has experienced
significant turnover of its retail store personnel. The Company's failure to
attract, motivate and retain qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON INDEPENDENT MANUFACTURING FACILITIES AND RAW MATERIAL
SUPPLIERS. The Company does not own any production facilities and therefore is
dependent on third parties for the manufacturing of its products. Company
merchandise designed by the bebe in-house design team is manufactured by
independent manufacturers with raw materials purchased from independent mills
and other suppliers. The Company places all of its orders for production of
merchandise and raw materials by purchase order and does not have any long-term
contracts with any manufacturer or supplier. The Company competes with other
companies for production facilities and raw materials. In the past,
particularly in fiscal 1996, the Company had difficulty obtaining needed
quantities of raw materials on a timely basis because of competition with other
apparel vendors for raw materials. Such failure to obtain sufficient quantities
of raw materials has had an adverse effect on the Company's financial condition
in the past and may in the future. Furthermore, the Company has received in the
past, and may receive in the future, shipments of products from manufacturers
that fail to conform to the Company's quality control standards. In such event,
unless the Company is able to obtain replacement products in a timely manner,
the Company may lose sales. The Company's failure to maintain favorable
relationships with these production facilities and to obtain an adequate supply
of quality raw materials on commercially reasonable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The violation of labor or other laws by an independent manufacturer of the
Company, or the divergence of an independent manufacturer's labor practices from
those generally accepted as ethical in the United States, could have a material
adverse effect on the Company's business, financial condition, results of
operations and brand image. While the Company recently adopted a policy to
monitor the operations of its independent manufacturers by having an independent
firm inspect these manufacturing sites, the Company cannot control the actions
of such manufacturers, and there can be no assurance that these manufacturers
will conduct their businesses using ethical labor practices.
DEPENDENCE ON THIRD PARTY APPAREL MANUFACTURERS. A significant portion of
the Company's merchandise is developed in conjunction with third party apparel
manufacturers and, in some cases, selected directly from these manufacturers'
lines. The Company does not have long-term contracts with any third party
apparel manufacturers and purchases all of the merchandise from such
manufacturers by purchase order. Furthermore, the Company has received in the
past, and may receive in the future, shipments of products from manufacturers
that fail to conform to the Company's quality control standards. In such event,
unless the Company is able to obtain replacement products in a timely manner,
the Company may lose sales. There can be no assurance that third party
manufacturers will not supply similar products to the Company's competitors,
will not cease supplying products to the Company completely or will supply
products that satisfy the Company's quality control standards.
RISK OF FOREIGN SOURCING OF APPAREL. The Company purchases its raw
materials from mills and other suppliers, a significant portion of which is
purchased from suppliers outside the United States, primarily in Japan. A
significant portion of the manufacturing of its merchandise is sourced outside
the United States, primarily in Europe and Asia.
The Company is subject to the risks associated with doing business abroad.
These risks include adverse fluctuations in currency exchange rates
(particularly those of the U.S. dollar against certain foreign currencies),
changes in import duties or quotas, the imposition of taxes or other charges on
imports, the impact of foreign government regulation, political unrest,
disruption or delays of shipments and changes in economic conditions in
11
<PAGE>
countries in which the Company's suppliers are located. The occurrence of any
one or more of the foregoing could adversely affect the Company's business,
financial condition and results of operations.
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. These agreements, which have been negotiated bilaterally either
under the framework established by the Arrangement Regarding International Trade
in Textiles, known as the Multifiber Agreement, or other applicable treaties,
impose quotas on the amounts and types of merchandise which may be imported into
the United States from these countries. These agreements also allow the United
States to impose restraints at any time on the importation of categories of
merchandise that, under the terms of the agreements, are not currently subject
to specified limits. The Company's imported products are also subject to United
States customs duties which comprise a material portion of the cost of the
merchandise. A substantial increase in customs duties would have an adverse
effect on the Company's business, financial condition and results of operations.
The United States and the countries in which the Company's products are produced
or sold may, from time to time, impose new quotas, duties, tariffs, or other
restrictions, or adversely adjust prevailing quota, duty, or tariff levels, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, a significant portion of the Company's foreign-supplied
products is produced by manufacturing facilities in China. There have been a
number of recent trade disputes between China and the United States during which
the United States has threatened to impose punitive tariffs and duties on
products imported from China and to withdraw China's "most favored nation" trade
status. The loss of the most favored nation status for China, changes in
current tariff or duty structures or the adoption by the United States of other
trade polices or sanctions adverse to China could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE ON INTELLECTUAL PROPERTY. The Company believes that its
trademarks and other proprietary rights are important to its success and has
registered "bebe" and "bebe moda" in the United States and certain foreign
jurisdictions. There can be no assurance that actions taken by the Company to
establish and protect its trademarks and other proprietary rights will prevent
imitation of its products or infringement of its intellectual property rights by
others. In addition there can be no assurance that others will not resist or
seek to block the sale of the Company's products as violative of their trademark
and proprietary rights. In certain states other entities may have rights to
names that contain the word "bebe," which could limit the ability of the Company
to expand in such states.
The Company is seeking to register its trademarks in targeted international
markets that it believes represent large potential markets for the Company's
products. In some of these markets, local companies currently have registered
competing marks, and/or regulatory obstacles exist that may prevent the Company
from obtaining a trademark for the bebe name or related names. In such
countries, the Company may be unable to use the bebe name unless it purchases
the right or obtains a license to use the bebe name. There can be no assurance
that the Company will be able to register trademarks in such international
markets, purchase the right or obtain a license to use the bebe name on
commercially reasonable terms, if at all. Failure to obtain either trademark,
ownership or license rights would limit the Company's ability to expand into
certain international markets or enter such markets with the bebe name, and to
capitalize on the value of its brand.
The Company currently is evaluating its opportunities to expand its product
offering and extend its geographic reach through licensing or joint venture
arrangements. The Company has limited experience with any such arrangements,
and there can be no assurance that such arrangements will be successful.
Furthermore, while the Company intends to maintain control of the presentation
and pricing of bebe merchandise through the terms of any such agreement, there
can be no assurance that any licensee or joint venture partner will comply with
such contractual provisions. Any deviation from the terms of these contracts
may have a material adverse effect on the Company's brand image.
SEASONALITY AND QUARTERLY FLUCTUATIONS. The Company has experienced
historically, and expects to continue to experience, quarterly fluctuations in
its sales volumes and levels of profitability. The Company tends to generate
larger sales and, to an even greater extent, profitability levels in the first
and second quarters (which include the fall and holiday selling seasons) of its
fiscal year. If for any reason sales were below seasonal norms during the first
and second quarters of its fiscal year, as they were in fiscal 1996, the
Company's quarterly and annual results of operations would be adversely
affected. bebe's quarterly financial performance may also fluctuate widely as a
result of a number of other factors such as the number and timing of new store
openings,
12
<PAGE>
acceptance of product offerings, timing of product deliveries, actions by
competitors and effectiveness of advertising campaigns. Due to these factors,
the results of interim periods are not necessarily indicative of the results for
the year.
COMPETITION. The retail and apparel industries are highly competitive and
are characterized by low barriers to entry, and the Company expects competition
in its markets to increase. The primary competitive factors in the Company's
markets include brand name recognition, product styling, product presentation,
product pricing, store ambiance, customer service and convenience. The Company
competes with traditional department stores, specialty store retailers,
off-price retailers and direct marketers for, among other things, raw materials,
market share, retail space, finished goods, sourcing and personnel. Many of
these competitors are larger and have substantially greater financial,
distribution and marketing resources than the Company. Any failure to compete
would have a material adverse effect on the Company's business, financial
condition and results of operations.
SENSITIVITY TO ECONOMIC CONDITIONS AND CONSUMER SPENDING. The retail and
apparel industries historically have been subject to substantial cyclical
variation. A recession in the general economy or a decline in consumer spending
in the apparel industry could have a material adverse effect on the Company's
financial performance. Purchases of apparel and related merchandise tend to
decline during recessionary periods and may decline at other times. There can
be no assurance that a prolonged economic downturn would not have a material
adverse impact on the Company or that the Company's customers would continue to
make purchases during a recession.
CONTROL BY PRINCIPAL SHAREHOLDER. As of September 30, 1998, Manny Mashouf,
the Chairman, President and Chief Executive Officer of the Company beneficially
own approximately 86.9% of the outstanding shares of the Company's Common Stock
and as a result, acting alone, can control the election of directors of the
Company and the outcome of all issues submitted to the shareholders of the
Company. These factors may make it more difficult for a third party to acquire
shares, may discourage acquisition bids for the Company and could limit the
price that certain investors might be willing to pay for shares of Common Stock.
Such concentration of stock ownership may have the effect of delaying, deferring
or preventing a change in control of the Company.
POTENTIAL ANTI-TAKEOVER EFFECTS. The Board of Directors has authority to
issue up to 1,000,000 shares of Preferred Stock of the Company, $0.001 par value
per share, and to fix the rights, preferences, privileges and restrictions,
including voting rights, of these shares without any vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value of
the Common Stock. The Company has no present plan to issue shares of Preferred
Stock.
DEPENDENCE ON SINGLE FACILITY. The Company currently operates a corporate
office and distribution center in Brisbane, California. Any serious disruption
at this facility whether due to fire, earthquake or otherwise would have a
material adverse effect on the Company's operations and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
YEAR 2000 COMPLIANCE. Many existing computer programs use only two digits
to identify a year in the date field. These programs were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected, many computer applications could fail or create erroneous
results by or at the year 2000.
The Company has created a Year 2000 Task Force, which is implementing a
6-phase plan with the objective of ensuring that its management information
systems will be year 2000 compliant. The Company believes that this 6-phase
plan will be completed by July 31, 1999. There can be no assurance that this
6-phase plan will be successful or that year 2000 compliant issues will not
arise with respect to products furnished by third party manufactures or
suppliers that may result in unforeseen costs or delays to the Company and
therefore have a material adverse effect on the Company.
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to the Company's initial public offering on June 17, 1998, there has been no
public market for the Company's Common Stock. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade
13
<PAGE>
in the public market at or above the initial public offering price. The stock
market has from time to time experienced extreme price and volume volatility.
In addition, the market price of the Company's Common Stock, like that of the
stock of other retail and apparel companies, may be highly volatile due to
certain risks inherent in the apparel industry. Factors such as
quarter-to-quarter variations in the Company's net sales and earnings and
changes in financial estimates by equity research analysts or other events or
factors could cause the market price of the Common Stock to fluctuate
significantly. Further, due to the volatility of the stock market and the
prices of stocks of retail and apparel companies generally, the price of the
Common Stock could fluctuate for reasons unrelated to the operating performance
of the Company.
ABSENCE OF DIVIDENDS. The Company intends to retain any future earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends on Common Stock in the foreseeable future. Future dividend policy
will depend on the Company's earnings, capital requirements and financial
condition as well as any restrictions imposed by existing credit agreements and
other factors considered relevant by the Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALE. The Company has outstanding an aggregate
of 23,889,997 shares of Common Stock. Of these shares, 21,014,997 shares of
Common Stock held by the existing shareholders are "restricted securities," as
that term is defined in Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 promulgated under the
Securities Act. As a result of the provisions of Rule 144 and certain
contractual restrictions, no Restricted Shares will be eligible for sale in the
public market prior to the expiration of a lock-up period pursuant to lock-up
agreements or provisions under the 1997 Stock Plan 180 days after June 16, 1998
at which time all Restricted Shares will be eligible to be sold, subject to
certain volume and other limitations under Rule 144.
As of September 30, 1998, options to purchase 1,748,884 shares of Common
Stock were outstanding and exercisable, subject to certain vesting and
repurchase restrictions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter for which this report
is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated November 16, 1998
bebe stores, inc.
/s/ Blair W. Lambert
----------------------------------------
Blair W. Lambert, V.P. of Finance and
Chief Financial Officer
16
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<PERIOD-END> SEP-30-1998
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<SECURITIES> 0
<RECEIVABLES> 478,885
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