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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 MARCH 31, 1999
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, 24,196,989 SHARES OUTSTANDING
AS OF APRIL 28,1999.
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BEBE STORES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheet
March 31, 1999 (unaudited), June 30, 1998 and March 31, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended March 31, 1999 and 1998 and
Nine months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended March 31, 1999 and 1998 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
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 8-K 15
SIGNATURES 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
BEBE STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
MARCH 31, JUNE 30, MARCH 31,
1999 1998 1998
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $ 52,392,601 $ 36,651,617 $ 22,741,554
Receivables (net of allowance of $105,699, $51,785 and $46,851) 684,578 256,567 318,473
Inventories, net 17,030,009 14,405,213 11,016,322
Prepaid and other 5,139,259 977,595 1,541,892
------------ ------------ ------------
Total current assets 75,246,447 52,290,992 35,618,241
Equipment and improvements, net 14,800,160 9,213,358 8,067,981
Other assets 3,141,767 2,704,378 2,533,807
------------ ------------ ------------
Total assets $ 93,188,374 $ 64,208,728 $ 46,220,029
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 11,629,771 $ 6,921,981 $ 6,873,547
Accrued liabilities 9,306,149 8,470,623 7,373,817
Current portion of long-term debt 118,763 104,286 111,579
Income taxes payable 0 890,258 1,058,428
------------ ------------ ------------
Total current liabilities 21,054,683 16,387,148 15,417,371
Long-term debt 60,788 82,218 96,302
Deferred rent 2,628,778 2,475,883 2,344,706
------------ ------------ ------------
Total liabilities 23,744,249 18,945,249 17,858,379
Commitments and contingencies 0 0 0
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 24,196,989 shares 24,197 23,890 22,640
Additional paid-in capital 20,283,748 17,078,200 5,190,610
Deferred compensation (1,441,811) (2,061,227) (2,197,488)
Retained earnings 50,577,991 30,222,616 25,345,888
------------ ------------ ------------
Total shareholders' equity 69,444,125 45,263,479 28,361,650
------------ ------------ ------------
Total liabilities and shareholders' equity $ 93,188,374 $ 64,208,728 $ 46,220,029
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements.
3
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BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, NINE MONTHS ENDED MARCH 31,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 46,047,174 $ 33,296,872 $ 147,090,886 $ 108,072,493
Cost of sales, including buying and occupancy 22,486,702 17,048,261 69,502,756 53,757,891
------------- ------------- ------------- -------------
Gross profit 23,560,472 16,248,611 77,588,130 54,314,602
Selling, general and administrative expenses 15,158,117 10,993,664 44,665,284 33,558,889
------------- ------------- ------------- -------------
Income from operations 8,402,355 5,254,947 32,922,846 20,755,713
Other expense (income):
Interest expense 6,245 9,810 11,013 17,612
Interest income (639,444) (303,024) (1,683,245) (646,167)
Other 18,815 103,219 19,818 126,537
------------- ------------- ------------- -------------
Earnings before income taxes 9,016,739 5,444,942 34,575,260 21,257,731
Provision for income taxes 3,653,891 2,223,236 14,229,696 8,715,670
------------- ------------- ------------- -------------
Net earnings $ 5,362,848 $ 3,221,706 $ 20,345,564 $ 12,542,061
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Basic earnings per share $ 0.22 $ 0.14 $ 0.85 $ 0.55
Diluted earnings per share $ 0.21 $ 0.13 $ 0.80 $ 0.53
Basic weighted average shares outstanding 24,105,757 22,639,997 23,964,421 22,639,997
Diluted weighted average shares outstanding 25,676,236 23,886,363 25,541,097 23,705,312
</TABLE>
See accompanying notes to financial statements.
4
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BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED MARCH 31,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 20,345,564 $ 12,542,061
Adjustments to reconcile net earnings to cash provided
(used) by operating activities:
Non-cash compensation expense 388,382 527,512
Depreciation and amortization 2,196,005 1,584,957
Tax benefit from options exercised 2,493,975
Net loss on disposal of property 194,802 209,982
Store closing reserve (47,304) 437,077
Net loss from partnership 14,755
Deferred rent 70,850 (112,531)
Changes in operating assets and liabilities:
Receivables 111,705 (138,067)
Inventories (2,624,000) (1,554,623)
Other assets (504,715) (700,282)
Prepaid expenses (4,160,829) (1,003,775)
Accounts payable 4,708,736 1,808,918
Accrued liabilities 835,311 1,536,165
Income taxes payable (891,057) 528,074
------------ ------------
Net cash provided by operating activities 23,117,425 15,680,223
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (9,033,757) (2,513,675)
Proceeds from sales of equipment 9,777 1,029
Proceeds from tenant allowance 715,030 415,600
Proceeds from sale of marketable securities 0 77,883
------------ ------------
Net cash used by investing activities (8,308,950) (2,019,163)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from (repayments to) shareholder 0 539
Repayments on capital leases & other 44,124 (63,481)
Repayments of investment note (51,077) (48,483)
Issuance of common stock 942,913 0
------------ ------------
Net cash provided (used) by financing activities 935,960 (111,425)
Effect of exchange rate changes on cash (3,451) 0
Net increase in cash 15,740,984 13,549,635
CASH:
Beginning of year 36,651,617 9,191,919
------------ ------------
End of year $ 52,392,601 $ 22,741,554
------------ ------------
------------ ------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 11,013 $ 17,612
------------ ------------
Cash paid for income taxes $ 16,701,678 $ 10,030,392
------------ ------------
</TABLE>
5
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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 March 31, 1999 (the "current period") and March 31, 1998
(the "prior period") and the interim Condensed Consolidated Statements of
Operations and Cash Flows for the nine months ended March 31, 1999 and March 31,
1998 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 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 condensed 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 NINE MONTHS ENDED
MARCH 31 MARCH 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic weighted average number of
Shares outstanding 24,105,757 22,639,997 23,964,421 22,639,997
Incremental shares from assumed
Issuance of stock options 1,570,479 1,246,366 1,576,676 1,065,315
---------- ---------- ---------- ----------
Diluted weighted average number of
Shares outstanding 25,676,236 23,886,363 25,541,097 23,705,312
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The number of incremental shares from the assumed issuance of stock options
is calculated applying the treasury stock method.
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.
6
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RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31,
------------------ ------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales ........................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy (1).... 48.8 51.2 47.3 49.7
----- ----- ----- -----
Gross profit ........................................ 51.2 48.8 52.7 50.3
Selling, general and administrative expenses (2).... 32.9 33.0 30.3 31.1
----- ----- ----- -----
Income from operations .............................. 18.3 15.8 22.4 19.2
Interest and other expenses (income), net ........... (1.3) (0.6) (1.1) (0.5)
----- ----- ----- -----
Earnings before income taxes ........................ 19.6 16.4 23.5 19.7
Provision for income taxes .......................... 7.9 6.7 9.7 8.1
----- ----- ----- -----
Net earnings ........................................ 11.7% 9.7% 13.8% 11.6%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
- -----------
(1) Cost of sales includes the cost of merchandise, buying costs and store
occupancy costs.
(2) Selling, general and administrative expenses primarily consist of
non-occupancy store costs, corporate overhead and advertising costs.
NET SALES. Net sales increased to $46.0 million during the three months
ended March 31, 1999 from $33.3 million in the same period of the prior year, an
increase of $12.7 million, or 38.1%. Of this increase, $8.0 million was
attributable to the 26.2% increase in comparable store sales, and $4.7 million
was attributable to on-line sales, wholesale sales to licensees, and stores not
included in the comparable store sales base. For the nine months ended March 31,
1998, net sales increased to $147.1 million from $108.1 million in the same
nine-month period of the prior year, an increase of $39.0 million, or 36.1%. Of
this increase, $26.7 million was attributable to the 27.0% increase in
comparable store sales for the nine-month period, and $12.3 million was
attributable to on-line sales, wholesale sales to licensee, and 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. While the Company continues to experience double-digit
comparable store sales growth versus the prior year, the Company believes that
such percentage increases in the current and future periods will be lower than
those experienced in the first three quarters of fiscal 1999. The Company
operated 97 stores at March 31, 1999 compared to 85 stores at March 31, 1998.
The Company also sells product through its on-line store which can be found at
www.bebe.com. Sales generated by the on-line store were significantly less than
sales generated by any one store during the quarter.
GROSS PROFIT. Gross profit, which includes the cost of merchandise, buying
and occupancy, increased to $23.6 million during the three months ended March
31, 1999 from $16.2 million for the same three-month period of the prior year,
an increase of $7.4 million, or 45.7%. As a percentage of net sales, gross
profit increased to 51.2% for the three-month period ended March 31, 1999 from
48.8% in the same three-month period of the prior year. For the nine months
ended March 31, 1999, gross profit increased to $77.6 million from $54.3 million
for the same nine-month period of the prior year, an increase of $23.3 million,
or 42.9%. As a percentage of net sales, gross profit increased to 52.7% for the
nine-month period from 50.3% in the same nine-month 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 the four most recent quarters ended March 31, 1999, are not sustainable
and that quarterly gross margins in the current and future periods will likely
be lower than those experienced in the comparable four quarters ended March 31,
1999.
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 $15.2 million during the
three months ended March 31, 1999 from $11.0 million in the same period of the
prior year, an increase of $4.2 million, or 38.2%. As a percentage of net sales,
these expenses decreased to 32.9% during
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the three-month period from 33.0% in the same period of the prior year. For
the nine months ended March 31, 1999, expenses increased to $44.7 million
from $33.6 million in the same nine-month period of the prior year, an
increase of $11.1 million, or 33.0 %. As a percentage of net sales, these
expenses decreased to 30.3% during the nine-month period from 31.1% in the
same period of the prior year. This decrease as a percentage of net sales was
largely a result of favorable compensation expense leverage.
INTEREST AND OTHER EXPENSE (INCOME), NET. The Company generated $614,000 of
interest and other income (net of other expenses) during the three months ended
March 31, 1999 as compared to $190,000 in the same three-month period of the
prior year. For the nine months ended March 31, 1999, the Company generated
$1,652,000 of interest and other income (net of other expenses) as compared to
$502,000 in the same nine-month period of the prior year. The Company had no
significant borrowings under its line of credit during the period ended March
31, 1999. 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 FOR INCOME TAXES. The effective tax rate for all periods
presented was approximately 41%.
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years ended June 30, 1998, bebe 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 March 31, 1999,
the Company had approximately $52.4 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 March 31, 1999, there were no borrowings under the line of
credit, and letters of credit outstanding totaled $1.5 million.
Net cash provided by operating activities for the nine months ended March
31, 1999 was $23.1 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 nine-month period was $8.3
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 $10.0 million and $12.0 million in fiscal
1999, of which $9.0 million had been spent during the nine months ended March
31, 1999. The Company expects to open approximately 6 additional stores in the
remainder of fiscal 1999 and approximately 15 stores in fiscal 2000. The Company
opened six new stores during the three months ended March 31, 1999.
Net cash provided by financing activities was $936,000 for the nine months
ended March 31, 1999. 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 2000. 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, net of the
impact of new store openings, 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
8
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adversely. Because of the seasonality of the Company's 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 $300,000 to $500,000 during fiscal 1999 and 2000. As of March 31,
1999, the Company's expenditures were below the expectations for such
nine-month period. In certain cases, the conversions to applications that 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 the 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 on reasonable terms or at all.
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
9
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products and missed opportunities for others. Weak sales and resulting
markdowns and/or write-offs could 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 11 stores
in the nine-month period ended March 31, 1999. The Company expects to open
approximately 6 additional 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.
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 and beyond. 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 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
10
<PAGE>
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. 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
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.
11
<PAGE>
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 is currently 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 the integrity of the
presentation 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 standards. Any deviation from these standards 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. Net of the impact of new store
openings, 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, 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.
12
<PAGE>
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 March 31, 1999, Manny Mashouf, the
Chairman, President and Chief Executive Officer of the Company beneficially
owned approximately 86.8% 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 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
13
<PAGE>
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 24,196,989 shares of Common Stock. Of these shares, 21,012,997 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 of March 31, 1999, options to purchase 1,779,157 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.
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.
14
<PAGE>
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 April 30, 1999
bebe stores, inc.
/s/ Blair W. Lambert
-----------------------------------------
Blair W. Lambert, V.P. of Finance and
Chief Financial Officer
16
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 52,392,601
<SECURITIES> 0
<RECEIVABLES> 790,277
<ALLOWANCES> 105,699
<INVENTORY> 17,030,009
<CURRENT-ASSETS> 75,246,447
<PP&E> 23,816,564
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