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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 SEPTEMBER 30, 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, 24,414,278 SHARES
OUTSTANDING AS OF NOVEMBER 1, 1999.
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BEBE STORES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements...........................................................................3
Condensed Consolidated Balance Sheets..........................................................3
September 30, 1999 (unaudited), June 30, 1999 and September 30, 1998 (unaudited)
Condensed Consolidated Statements Of Operations................................................4
Three months ended September 30, 1999 and 1998
Condensed Consolidated Statements Of Cash Flows................................................5
Three months ended September 30, 1999 and 1998
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....................................15
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................15
ITEM 2. Changes in Securities and Use of Proceeds.....................................................16
ITEM 3. Defaults Upon Senior Securities...............................................................16
ITEM 4. Submission of Matters to a Vote of Security Holders...........................................16
ITEM 5. Other Information.............................................................................16
ITEM 6. Exhibits and Reports on Form 8-K..............................................................16
SIGNATURES...................................................................................................17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEBE STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
SEPTEMBER 30, JUNE 30, SEPTEMBER 30,
1999 1999 1998
------------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents........................................ $66,033,305 $59,341,655 $42,615,736
Receivables (net of allowance of $115,000, $108,078 and
$63,787).................................................... 961,959 759,456 415,098
Inventories, net............................................ 21,739,691 22,541,994 16,039,772
Prepaid and other........................................... 2,368,220 3,219,722 959,619
------------- ------------ -------------
Total current assets.................................... 91,103,175 85,862,827 60,030,225
Equipment and improvements, net............................... 20,750,283 17,999,980 9,455,769
Other assets.................................................. 3,554,081 3,503,136 3,050,881
------------- ------------ -------------
Total assets.................................................. $115,407,539 $107,365,943 $72,536,875
------------- ------------ -------------
------------- ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............................................ $9,565,075 $13,318,007 $7,964,690
Accrued liabilities......................................... 8,688,904 9,931,755 8,171,421
Current portion of long-term debt........................... 144,937 138,906 104,286
Income taxes payable........................................ 5,157,414 330,014 3,094,300
------------- ------------ -------------
Total current liabilities............................... 23,556,330 23,718,682 19,334,697
Long-term debt................................................ 95,026 120,646 35,709
Deferred rent................................................. 3,567,966 3,432,639 2,457,195
------------- ------------ -------------
Total liabilities............................................. 27,219,322 27,271,967 21,827,601
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 24,414,278 shares......... 24,415 24,388 23,890
Additional paid-in capital.................................. 23,536,712 23,147,795 16,993,201
Deferred compensation....................................... (1,094,306) (1,282,147) (1,861,216)
Retained earnings........................................... 65,721,396 58,203,940 35,553,399
------------- ------------ -------------
Total shareholders' equity.............................. 88,188,217 80,093,976 50,709,274
------------- ------------ -------------
Total liabilities and shareholders' equity.................... $115,407,539 $107,365,943 $72,536,875
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
----------- -----------
<S> <C> <C>
Net sales..................................................... $56,637,338 $41,552,331
Cost of sales, including buying and occupancy................. 26,918,943 19,800,694
----------- -----------
Gross profit................................................ 29,718,395 21,751,637
Selling, general and administrative expenses.................. 17,854,590 13,200,538
----------- -----------
Income from operations........................................ 11,863,805 8,551,099
Other expense (income):
Interest expense............................................ 7,381 2,350
Interest income............................................. (609,463) (487,765)
Other....................................................... 3,156 1,290
----------- -----------
Earnings before income taxes.................................. 12,462,731 9,035,224
Provision for income taxes.................................... 4,973,078 3,704,441
----------- -----------
Net earnings............................................ $7,489,653 $5,330,783
----------- -----------
----------- -----------
Basic earnings per share...................................... $0.31 $0.22
Diluted earnings per share.................................... $0.30 $0.21
Basic weighted average shares outstanding..................... 24,402,469 23,889,997
Diluted weighted average shares outstanding................... 25,318,460 25,386,581
</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 THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $7,489,653 $5,330,783
Adjustments to reconcile net earnings to cash provided by
operating activities:
Non-cash compensation expense............................... 181,830 115,011
Depreciation and amortization............................... 1,170,792 653,690
Tax benefit from options exercised.......................... 76,397
Net loss on disposal of property............................ 22,858 49,397
Store closing reserve....................................... 6,780
Deferred rent............................................... 121,558 (18,688)
Changes in operating assets and liabilities:
Receivables............................................. (203,111) (68,530)
Inventories............................................. 805,829 (1,634,559)
Other assets............................................ (78,579) (367,974)
Prepaid expenses........................................ 856,083 17,976
Accounts payable........................................ (3,753,738) 1,042,709
Accrued liabilities..................................... (1,266,105) (299,202)
Income taxes payable.................................... 4,827,376 2,204,041
----------- -----------
Net cash provided by operating activities .......... 10,257,623 7,024,654
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements...................... (3,893,658) (1,023,725)
Proceeds from sales of equipment............................ 92 9,699
----------- -----------
Net cash used by investing activities............... (3,893,566) (1,014,026)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments on) capital leases & other........ 7,145 (46,508)
Repayments of investment note............................... (26,771)
Issuance of common stock.................................... 318,557
----------- -----------
Net cash provided (used) by financing activities.... 298,931 (46,508)
Effect of exchange rate changes on cash and equivalents....... 28,662
----------- -----------
Net increase in cash and equivalents.......................... 6,691,650 5,964,120
CASH:
Beginning of year........................................... 59,341,655 36,651,616
----------- -----------
End of year................................................. $66,033,305 $42,615,736
----------- -----------
----------- -----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest...................................... $7,381 $2,349
----------- -----------
Cash paid for income taxes.................................. $206,000 $1,500,400
----------- -----------
</TABLE>
See accompanying notes to financial statements.
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. as of September 30, 1999 (the "current period") and September 30, 1998
(the "prior period") and the interim Condensed Consolidated Statements of
Operations and Cash Flows for the three months ended September 30, 1999 and
September 30, 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, 1999 was derived from audited
financial statements. Our 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 our Fiscal 1999
Annual Report on Form 10-K.
EARNINGS PER SHARE
Under SFAS No. 128, we provide dual presentation of EPS on a basic and
diluted basis. Our 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>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Basic weighted average number of
Shares outstanding........................... 24,402,469 23,889,997
Incremental shares from assumed
Issuance of stock options.................... 915,991 1,496,584
----------- -----------
Diluted weighted average number of
Shares outstanding........................... 25,318,460 25,386,581
----------- -----------
----------- -----------
</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. Our 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. Our fiscal year ends on June 30 of each calendar
year.
6
<PAGE>
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: 1999 1998
------ ------
<S> <C> <C>
Net sales..................................................... 100.0% 100.0%
Cost of sales, including buying and occupancy (1)............. 47.5 47.7
------ ------
Gross profit.................................................. 52.5 52.3
Selling, general and administrative expenses (2).............. 31.5 31.8
------ ------
Income from operations........................................ 21.0 20.5
Interest and other expenses (income), net..................... (1.1) (1.2)
------ ------
Earnings before income taxes.................................. 22.1 21.7
Provision for income taxes.................................... 8.9 8.9
------ ------
Net earnings.................................................. 13.2% 12.8%
------ ------
------ ------
- -----------
</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 $56.6 million during the three
months ended September 30, 1999 from $41.6 million in the same period of the
prior year, an increase of $15.0 million, or 36.1%. Of this increase, $4.5
million was attributable to the 12.2% increase in comparable store sales, and
$10.5 million was primarily attributed to stores not included in the
comparable store sales base and to a lessor extent on-line sales, wholesale
sales to licensees, and product royalty revenue. 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 our business. While we experienced double-digit comparable store
sales growth for the period, we believe that such percentage increases in the
current and future periods will be lower than those experienced in fiscal
1999. We operated 104 stores at September 30, 1999 compared to 87 stores at
September 30, 1998. In addition to our 104 stores, we also sell product
through our on-line store which can be found at www.bebe.com. Sales volume
generated by the on-line store was similar to sales generated by a
low-volume, brick-and-mortar bebe store during the quarter.
GROSS PROFIT. Gross profit, which includes the cost of merchandise,
buying and occupancy, increased to $29.7 million during the three months
ended September 30, 1999 from $21.8 million for the same three-month period
of the prior year, an increase of $8.0 million, or 37%. As a percentage of
net sales, gross profit increased to 52.5% for the three-month period ended
September 30, 1999 from 52.3% in the same three-month period of the prior
year. The increase in gross profit as a percentage of net sales resulted from
favorable inventory shrinkage results as well as modest product royalty
revenues offset by increased occupancy costs and slightly lower net
merchandise margins. We believe that the gross margins attained during the
four most recent quarters ended September 30, 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 September
30, 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 $17.9 million
during the three months ended September 30, 1999 from $13.2 million in the
same period of the prior year, an increase of $4.7 million, or 35.6%. As a
percentage of net sales, these expenses decreased to 31.5% during the
three-month period from 31.8% 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 offset by increased depreciation and
advertising expense.
INTEREST AND OTHER EXPENSE (INCOME), NET. We generated approximately
$599,000 of interest and other income (net of other expenses) during the
three months ended September 30, 1999 as compared to approximately $484,000
in the same three-month period of the prior year. We had no borrowings under
our line of credit during the period ended September 30, 1999. The increase
of interest and other income is a result of
7
<PAGE>
higher cash balances generated from operating results and proceeds from our
initial public offering of stock in June 1998.
PROVISION FOR INCOME TAXES. The effective tax rate for the quarter ended
September 30, 1999, was approximately 39.9% as compared to 41.0% in the prior
year. This quarter's tax rate decrease was largely due to income from
tax-advantaged investments.
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years ended June 30, 1999, we satisfied our
cash requirements principally through cash flow from operations, borrowings
under our 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.
Our working capital requirements vary widely throughout the year and
generally peak in the first and second fiscal quarters. At September 30,
1999, we had approximately $66.0 million of cash and cash equivalents on hand
of which $11.9 million was derived from our initial public offering in June
1998. In addition, we had a revolving line of credit, under which we could
borrow or issue letters of credit up to a combined total of $5.0 million. As
of September 30, 1999, there were no borrowings under the line of credit, and
letters of credit outstanding totaled $3.6 million.
Net cash provided by operating activities for the three months ended
September 30, 1999 was $10.3 million. Cash provided by operating activities
for the period was primarily generated by earnings and changes in working
capital.
Net cash used by investing activities for the three-month period ended
September 30, 1999 was $3.9 million. The primary use of these funds was for
the opening of new stores.
We expect to make substantial capital expenditures in connection with
the opening and expansion of stores and the implementation of new systems to
support store and corporate office functions. We estimate that capital
expenditures will be between $17.0 million and $19.0 million in fiscal 2000
and fiscal 2001, of which $3.9 million had been spent during the three months
ended September 30, 1999. We expect to open approximately 16 additional
stores in the remainder of fiscal 2000 and approximately 20 stores in fiscal
2001. We opened four new stores during the three months ended September 30,
1999.
Net cash provided by financing activities was $299,000 for the three
months ended September 30, 1999. We believe that our cash on hand, together
with our cash flow from operation, will be sufficient to meet our capital and
operating requirements through fiscal 2000. Our 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, joint ventures, and/or stock
repurchases, and future results of operations.
SEASONALITY OF BUSINESS AND QUARTERLY RESULTS
Our business varies with general seasonal trends that are
characteristic of the retail and apparel industries. As a result, net of the
impact of new store openings, we generate a disproportionate amount of our
annual net sales in the first half of our fiscal year (which includes the
fall and holiday selling seasons) compared to the second half of our fiscal
year. If for any reason our sales were below seasonal norms during the first
half of our fiscal year, our annual operating results would be affected
adversely. Because of the seasonality of our business, results for any
quarter are not necessarily indicative of results that may be achieved for a
full fiscal year.
INFLATION
We do not believe that inflation has had a material effect on the
results of operations in the recent past. There can be no assurance that our
business will not be affected by inflation in the future.
8
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YEAR 2000 DATE CONVERSION
We have created a Year 2000 Task Force that is implementing a six
phase plan with the objective of ensuring that our 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"). We have completed a
comprehensive review of our information systems and have updated our computer
systems and applications in preparation for the year 2000. We have recently
completed the sixth phase of our plan, the contingency plan, which will
remain in effect through the early portion of 2000.
Total expenditures related to identification, testing, conversion,
contingency, replacement and upgrading system applications are expected to
range from $300,000 to $500,000 in total. In certain cases, the conversions
to applications which are Year 2000 Compliant have been made in conjunction
with planned business system upgrades or enhancements. In the most reasonably
likely worst case scenario, our store operating and back end inventory
management systems could fail. If these systems fail, we may be unable to
record sales transactions in our stores, which would result in a breakdown in
the supply chain. If this occurs, we would have to revert to a number of
manual systems for recording sales, ordering product and replenishing our
stores. This would likely result in a loss of revenue, and it is not possible
to quantify the possible range of such loss.
We have contacted the majority of our vendors and others on whom we
rely to confirm that their systems will be converted before January 1, 2000.
However, we cannot assure that the systems of other companies on which our
systems rely will be Year 2000 Compliant by December 31, 1999. If another
company fails to convert, it would have a harmful effect on our systems. In a
most reasonably likely worst case scenario, one or more significant suppliers
or vendors could be unable to continue to adequately supply us after 1999.
Our fallback position would be to seek an alternative source of supply or
service. However, we cannot assure that such alternative sources of supply
would be available. Such a contingency plan will be in place through the
early portion of 2000. 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 our business. Furthermore, we
cannot assure that any or all of our 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 harmful effect on our financial condition.
RECENT DEVELOPMENTS
During the quarter ended September 30, 1999 we terminated the retail
store licensing agreement with our Mexican licensee effective August 26, 1999.
RISKS THAT MAY AFFECT RESULTS
Factors that might cause our actual results to differ materially from
the forward looking statements discussed elsewhere in this report, as well as
affect our ability to achieve our financial and other goals, include, but are
not limited to, the following:
RISKS RELATING TO OUR BUSINESS:
1. IF WE MISCALCULATE THE DEMAND FOR OUR PRODUCTS, OUR SALES AND
PROFITABILITY MAY BE HARMED. Our success depends on our ability to balance
our inventory of merchandise with the demand for such merchandise. If we
miscalculate the demand for our products, we may be faced with significant
excess inventory. This would result in excess fabric for some products and
missed opportunities for others. This may result in weak sales and markdowns
and/or write-offs, which could impair our profitability.
2. IF WE ARE NOT ABLE TO EFFECTIVELY MANAGE OUR GROWTH, OUR PROFITABILITY
MAY BE HARMED. Our continued growth depends, to a significant degree, on our
ability to identify sites and open and operate new stores on a profitable
basis. We expect to open approximately 20 stores in each of fiscal 2000 and
2001. Our plan to expand successfully depends on the following factors:
- the availability of desirable locations;
9
<PAGE>
- the ability to negotiate 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.
In selected markets, we plan to open flagship stores that will be
larger and more expensive to operate than existing stores. If these flagship
stores do not generate sufficient revenues to cover their higher costs, our
financial results could be negatively affected.
We cannot assure that we will achieve our planned expansion on a timely and
profitable basis. In addition, most of our new store openings in fiscal 2000
and 2001 will be in existing markets. These openings may affect the existing
stores' net sales volumes and profitability. Furthermore, we will need to
hire experienced executive personnel to support the planned improvements and
expansions of our business. We cannot assure that we will be successful in
hiring such personnel in a time frame necessary to manage and support our
expansion plans.
3. WE MAY EXPERIENCE A DECLINE IN OUR RATE OF COMPARABLE STORE SALES
GROWTH, WHICH COULD AFFECT OUR PROFITABILITY. We do not think that we can
sustain the rate of comparable store sales growth achieved in recent periods.
We expect that such growth, if any, in the current and future periods will be
lower than rates achieved in fiscal 1998 and 1999. During the recent periods
of relatively high comparable store sales growth, we experienced favorable
merchandise margins primarily because we were able to sell our merchandise
with lower markdown rates due in part to the higher growth of same store
sales. As comparable store sales growth rates continue to moderate, we
anticipate a decline in merchandise margins, which will reduce gross margins.
In addition, as newer and expanded stores become a larger percentage of the
entire store base, we anticipate that we will see a rise in occupancy cost as
a percentage of sales. We anticipate that this rise will further reduce gross
margins. In addition, our selling, general and administrative expenses have
decreased as a percentage of net sales in recent periods due in part to the
rapid growth in net sales. If same store sales growth rates slow, it will be
more difficult for us to generate favorable selling, general and
administrative expense leverage.
4. IF WE ARE NOT ABLE TO OPERATE ON A PROFITABLE BASIS, OUR STOCK PRICE
MAY BE NEGATIVELY AFFECTED. We cannot guarantee that we will remain
profitable in the future. In the past 5 years, profitability rates have
varied widely from quarter-to-quarter and from year-to-year. In particular,
in fiscal 1996, we experienced a significant financial downturn. This was
caused partly by problems in obtaining fabrication, misjudging related
fashion trends, failing to obtain product deliveries in a timely manner,
rapidly expanding our store base, and lacking sufficient controls and
personnel to support such expanded activity.
Our future results of operations will depend on the number and timing
of new store openings. Also, it will depend on, among other things, our
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.
In addition, future results of operations will depend on factors outside
of our control, such as general economic conditions, availability of third party
sourcing and raw materials, and actions of competitors.
5. IF WE ARE NOT ABLE TO EFFECTIVELY UPGRADE AND EXPAND OUR MANAGEMENT
INFORMATION SYSTEMS, OUR OPERATIONS MAY BE HARMED. We have made significant
investments to improve existing management information systems and implement
new systems in the areas of production, merchandise allocation and
10
<PAGE>
distribution functions. We cannot assure that these enhancements will be
successfully implemented. If we fail to implement and integrate such systems,
it can have a harmful effect on our results of operations.
6. IF WE ARE UNABLE TO OBTAIN RAW MATERIALS OR FIND PRODUCTION FACILITIES,
OUR FINANCIAL CONDITION MAY BE HARMED. We do not own any production
facilities and therefore depend on third parties to manufacture our products.
Independent manufacturers make merchandise designed by the bebe in-house
design team with raw materials purchased from independent mills and other
suppliers. We place all of our orders for production of merchandise and raw
materials by purchase order and do not have any long-term contracts with any
manufacturer or supplier. We compete with approximately 20 other companies
for production facilities and raw materials. If we fail to obtain sufficient
quantities of raw materials, it would have a harmful effect on our financial
condition. For example, in fiscal 1996, we had difficulty obtaining needed
quantities of raw materials on a timely basis because of competition with
other apparel vendors for raw materials. This resulted in a loss of sales and
a decrease in gross profit. Furthermore, we have received in the past, and
may receive in the future, shipments of products from manufacturers that fail
to conform to our quality control standards. In such event, unless we are
able to obtain replacement products in a timely manner, we may lose sales. If
we fail to maintain favorable relationships with these production facilities
and to obtain an adequate supply of quality raw materials on commercially
reasonable terms, it could harm our business and results of operations.
If an independent manufacturer violates labor or other laws, or if
their labor practices diverge from those generally accepted as ethical in the
United States, it could harm our business and brand image. While we recently
adopted a policy to monitor the operations of our domestic independent
manufacturers by having an independent firm inspect these manufacturing
sites, and all domestic and foreign manufacturers are contractually required
to comply with such labor practices, we cannot control the actions of such
manufacturers, nor can we assure that these manufacturers will conduct their
businesses using ethical labor practices.
7. WE DEPEND ON THIRD PARTY APPAREL MANUFACTURERS, AND OUR SALES MAY BE
NEGATIVELY AFFECTED IF THE MANUFACTURERS DO NOT PERFORM ACCEPTABLY. We
develop a significant portion of our merchandise in conjunction with third
party apparel manufacturers. In some cases, we select merchandise directly
from these manufacturers' lines. We do not have long-term contracts with any
third party apparel manufacturers and purchase all of the merchandise from
such manufacturers by purchase order. Furthermore, we have received in the
past, and may receive in the future, shipments of products from manufacturers
that fail to conform to our quality control standards. In such event, unless
we are able to obtain replacement products in a timely manner, we may lose
sales. We cannot assure that third party manufacturers (1) will not supply
similar products to our competitors, (2) will not stop supplying products to
us completely or (3) will supply products that satisfy our quality control
standards.
8. IF WE ARE NOT ABLE TO EFFECTIVELY UPGRADE AND ENHANCE OUR ON-LINE
VIRTUAL STORE, WE MAY LOSE ON-LINE SALES AND OUR IMAGE MAY BE HARMED. We plan
to make additional significant investments to improve the performance and
content of our existing web site over the next two fiscal years. We cannot
assure you that these enhancements will be successfully implemented. If we
fail to implement and integrate such enhancements successfully, our results
of operations may be harmed. Moreover, if we cannot develop an effective and
engaging web site, potential future revenue that we would have otherwise
gained through sales conducted over the internet and our image may be harmed.
9. IF OUR FOREIGN MANUFACTURERS ARE NOT ABLE TO PROVIDE US WITH SUFFICIENT
MERCHANDISE TO MEET CUSTOMER DEMAND OR IF OUR IMPORTS ARE DISRUPTED, OUR
SALES AND PROFITABILITY MAY BE HARMED. We purchase our raw materials from
mills and other suppliers, a significant portion of which is purchased from
suppliers outside the United States, primarily in Europe and Asia. We
purchase a portion of our merchandise outside the United States, primarily in
Israel, China, Hong Kong and Singapore.
We are subject to 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;
- changes in foreign government regulation, political unrest,
shipment disruption or delays; and
- changes in economic conditions in countries in which our suppliers
are located.
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If any of these occur, it could harm our business, financial condition
and operationing results.
Bilateral textile agreements between the United States and a number of
foreign countries impose constraints on our import operations. 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, limit the
amounts and types of merchandise which may be imported into the United States
from these countries. Also, these agreements allow the United States to
impose restraints at any time on importing merchandise that, under the terms
of the agreements, are not currently subject to specified limits.
In addition, our imported products are subject to United States customs
duties which make up a material portion of the cost of the merchandise. If
customs duties are substantially increased, it would harm our business and
results of operations. The United States and the countries in which our
products are produced or sold may impose new quotas, duties, tariffs, or
other restrictions, or adversely adjust prevailing quota, duty, or tariff
levels, any of which could have a harmful effect on our business and results
of operations.
Also, manufacturing facilities in China produce a significant portion
of our foreign-supplied products. Recently, China and the United States have
been in a number of trade disputes. 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. If China loses the most
favored nation status, there are changes in the current tariff or duty
structures or United States adopts other trade polices or sanctions adverse
to China, it could harm our sales and profitability.
10. OUR BUSINESS IS SEASONAL AND OUR QUARTERLY RESULTS MAY FLUCTUATE WHICH
MAY HARM OUR STOCK PRICE. OUR SALES VOLUMES AND LEVELS OF PROFITABILITY
FLUCTUATE ON A QUARTERLY BASIS. We tend 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 our fiscal year. If
for any reason sales are below seasonal norms during the first and second
quarters of our fiscal year, as they were in fiscal 1996, our quarterly and
annual results of operations would be harmed. Our 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, we believe that quarter to quarter comparisons of
our operating results are not necessarily meaningful and that these
comparisons cannot be relied upon as indicators of future performance.
11. OUR SUCCESS DEPENDS ON OUR KEY EMPLOYEES, THE LOSS OF WHOM COULD
DISRUPT OUR BUSINESS. WE DEPEND UPON THE EFFORTS OF OUR KEY EMPLOYEES,
PARTICULARLY MANNY MASHOUF, THE FOUNDER, CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER. None of our executive officers are bound by an employment
agreement and therefore their employment is at will. Except for Mr. Mashouf,
we do not carry "key person" life insurance policies on any of our employees.
If we lose the services of Mr. Mashouf or any key officers or employees, it
could harm our business and results of operations.
In addition, our success depends to a significant degree on our ability
to attract and retain experienced employees. There is substantial competition
for experienced personnel, which we expect to continue. We compete for
experienced personnel with companies who have greater financial resources
than we do. In the past, we have experienced significant turnover of our
retail store personnel. If we fail to attract, motivate and retain qualified
personnel, it could harm our business and results of operations.
12. IF WE ARE NOT ABLE TO REGISTER OR PROTECT OUR TRADEMARKS, OUR ABILITY
TO CAPITALIZE ON THE VALUE OF OUR BRAND NAME MAY BE IMPAIRED. We believe that
our trademarks and other proprietary rights are important to our success. We
have registered "bebe" and "bebe moda" in the United States and certain
foreign jurisdictions. Even though we take actions to establish and protect
our trademarks and other proprietary rights, we cannot assure you that others
will not imitate our products or infringe on our intellectual property
rights. In addition, we
12
<PAGE>
cannot assure that others will not resist or seek to block the sale of our
products as violative of their trademark and proprietary rights. In certain
jurisdictions, other entities may have rights to names that contain the word
"bebe," which could limit our ability to expand in such jurisdictions.
We are seeking to register our trademarks in targeted international
markets which we believe represents large potential markets for our products.
In some of these markets, local companies currently have registered competing
marks, and/or regulatory obstacles exist that may prevent us from obtaining a
trademark for the bebe name or related names. In such countries, we may be
unable to use the bebe name unless we purchase the right or obtain a license
to use the bebe name. We may not be able to register trademarks in these
international markets, purchase the right or obtain a license to use the bebe
name on commercially reasonable terms. If we fail to obtain trademark,
ownership or license rights, it would limit our ability to expand into
certain international markets or enter such markets with the bebe name, and
to capitalize on the value of our brand.
Furthermore in some jurisdictions, despite successful registration of
our trademarks, third parties may allege infringement and bring actions
against us.
Currently, we are evaluating our opportunities to expand our product
offering and extend our geographic reach through licensing or joint venture
arrangements. We have limited experience with any such arrangements, and we
cannot assure that such arrangements will be successful. Furthermore, while
we intend to maintain control of the presentation and pricing of bebe
merchandise through the terms of any such agreement, we cannot assure that
any licensee or joint venture partner will comply with such contractual
provisions. Any deviation from the contracts' terms may harm our brand image.
13. WE DEPEND ON TWO ADJACENT FACILITIES, THE LOSS OF WHICH COULD SERIOUSLY
DISRUPT OUR BUSINESS. CURRENTLY, WE OPERATE CORPORATE OFFICES AND A
DISTRIBUTION CENTER IN BRISBANE, CALIFORNIA. Any serious disruption at this
facility whether due to fire, earthquake or otherwise would harm our
operations and could have a harmful effect on our business and results of
operations.
14. YEAR 2000 FAILURES MAY HARM OUR OPERATIONS. 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 create erroneous results by or at the year 2000.
We have created a Year 2000 Task Force, which is implementing a
six-phase plan with the objective of ensuring that our management information
systems will be Year 2000 Compliant. We cannot assure that this six-phase
plan will be successful or that Year 2000 Compliant issues will not arise
with respect to products furnished by third party manufacturers or suppliers.
This may result in unforeseen costs or delays to us and therefore harm the
Company.
RISKS RELATING TO OUR INDUSTRY:
1. WE FACE SIGNIFICANT COMPETITION IN THE RETAIL AND APPAREL INDUSTRY, WHICH
COULD HARM OUR SALES AND PROFITABILITY. The retail and apparel industries are
highly competitive and are characterized by low barriers to entry. We expect
competition in our markets to increase. The primary competitive factors in our
markets are:
- brand name recognition;
- product styling;
- product presentation;
- product pricing;
- store ambiance;
- customer service; and
- convenience.
We compete 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. Because many of these competitors are larger and have
substantially greater financial, distribution and marketing resources than we
do, we may lack the resources to adequately compete with them. If we fail to
compete in any way, it could harm our business, financial condition and
results of operations.
13
<PAGE>
2. IF WE FAIL TO DEAL WITH THE RISKS INHERENT IN THE FASHION AND APPAREL
INDUSTRY, OUR PROFITABILITY AND BRAND IMAGE MAY BE IMPAIRED. The apparel
industry is subject to rapidly evolving fashion trends, shifting consumer
demands and intense competition. If we misinterpret the current fashion
trends or if we fail to respond to shifts in consumer tastes, demand for bebe
products, profitability and brand image could be impaired. Also, we cannot
assure that our competitors will not carry similar designs, which would
undermine bebe's distinctive image and may harm our brand image. Our future
success partly depends on our ability to anticipate, identify and capitalize
upon emerging fashion trends, including products, styles, fabrics and colors.
In addition, our success depends on our ability to distinguish ourselves
within the women's apparel market.
3. IF ECONOMIC CONDITIONS DETERIORATE, THEN IT COULD HAVE A NEGATIVE
IMPACT ON OUR BUSINESS, SALES AND PROFITABILITY. The retail and apparel
industries are subject to substantial cyclical variation. A recession in the
general economy or a decline in consumer spending in the apparel industry
could harm our financial performance. Consumers generally purchase less
apparel and related merchandise during recessionary periods and consumer
spending may decline at other times. A prolonged economic downturn could harm
our financial condition. We cannot assure that our customers would continue
to make purchases during a recession.
RISKS RELATING TO OUR COMMON STOCK:
1. OUR STOCK PRICE MAY FLUCTUATE BECAUSE OF THE SMALL NUMBER OF SHARES
WHICH CAN BE PUBLICLY TRADED AND THE LOW AVERAGE DAILY TRADING VOLUMES. The
vast majority of our outstanding shares of our common stock are not
registered and are subject to trading restrictions. As of September 22, 1999,
only 3,439,964 shares of our Common Stock are available to be publicly
traded, and as a result, our average daily trading volumes are relatively
low, and our stock price is vulnerable to market swings due to large
purchases, sales and short sales of our common stock.
2. BECAUSE A PRINCIPAL SHAREHOLDER CONTROLS THE COMPANY, OTHER
SHAREHOLDERS MAY NOT BE ABLE TO INFLUENCE THE DIRECTION THE COMPANY TAKES.
Manny Mashouf, the Chairman, President and Chief Executive Officer,
beneficially owns approximately 85.9% of the outstanding shares of our common
stock. As a result, he alone can control the election of directors and the
outcome of all issues submitted to the shareholders. This may make it more
difficult for a third party to acquire shares, may discourage acquisition
bids, and could limit the price that certain investors might be willing to
pay for shares of common stock. This concentration of stock ownership may
have the effect of delaying, deferring or preventing a change in control of
our company.
3. IF WE ISSUE PREFERRED STOCK IN THE FUTURE, IT MAY HARM THE MARKET PRICE
OF OUR COMMON STOCK. THE BOARD OF DIRECTORS HAS AUTHORITY TO ISSUE UP TO
1,000,000 SHARES OF PREFERRED STOCK AT $0.001 PAR VALUE PER SHARE. They also
can fix the rights, preferences, privileges and restrictions, including
voting rights, of these shares without any vote or action by the
shareholders. If preferred stock is issued in the future, the rights of the
holders of common stock will be subject to, and may be harmed by, the rights
of the holders of any preferred stock. If we issue preferred stock, it would
provide us with desirable flexibility in connection with possible
acquisitions and other corporate purposes. However, it could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of our company, thereby delaying, deferring or
preventing a change in control of our company. Furthermore, such preferred
stock may have other rights, including economic rights, senior to the common
stock. As a result, the issuance of such preferred stock could harm the
market value of the common stock. We have no present plan to issue shares of
preferred stock.
4. OUR STOCK PRICE MAY BE VOLATILE BECAUSE OF RISKS INHERENT IN THE RETAIL
INDUSTRY. THE STOCK MARKET HAS FROM TIME TO TIME EXPERIENCED EXTREME PRICE
AND VOLUME VOLATILITY. In addition, the market price of our 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 our 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 our operating
performance.
5. WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS, WHICH MAY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK. We intend to retain any future earnings for use in
our business and, therefore, do not anticipate paying any cash dividends on
common stock in the foreseeable future. Our future dividend policy will
depend on our
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<PAGE>
earnings, capital requirements and financial condition. In addition, it will
depend on any restrictions imposed by existing credit agreements and other
factors considered relevant by the Board of Directors.
6. ALL OF OUR RESTRICTED SECURITIES ARE ELIGIBLE TO BE SOLD, WHICH MAY
CAUSE DILUTION OF OUR COMMON STOCK. As of September 30, 1999 we had a total
of 24,414,278 shares of common stock outstanding. Of these shares, 20,967,302
are held by the existing shareholders as "restricted securities," which means
they acquired these securities from our company in a transaction that did not
involve a public offering. These shares may be sold in the public market only
if they are registered or if they qualify for an exemption from registration
under Rule 144 of the Securities Act. At this time, all restricted securities
will be eligible to be sold, subject to certain volume and other limitations
under Rule 144.
As of September 30, 1999, options to purchase 1,871,123 shares of
common stock were outstanding and exercisable, subject to certain vesting and
repurchase restrictions.
STOCK PLANS
On June 26, 1997 the Board of Directors adopted the 1997 Stock Plan
(the "Stock Plan"). Options granted under the Stock Plan have a ten-year term
and may be either incentive stock options, non-qualified stock options, stock
purchase rights or stock awards. We have reserved 2,830,000 shares of common
stock for issuance under the Stock Plan. The options granted are immediately
exercisable, but are subject to repurchase at the original exercise price in
the event that the optionee's employment ceases for any reason. Our right of
repurchase generally lapses over a four-year period as follows: 20% in each
of the first two years after the grant date and 30% in the third and fourth
years after the grant date, with full lapse of the repurchase option
occurring on the fourth anniversary date.
STOCK PURCHASE PLAN
On April 7, 1998, our 1998 Employee Stock Purchase Plan (the "Plan")
was adopted and approved by the shareholders. A total of 750,000 shares of
common stock has been reserved for issuance under the Plan. The Plan will
allow eligible employees to purchase our common stock in an amount which may
not exceed 10% of the employee's compensation. The Plan will be implemented
by sequential 24-month offerings. Each offering will generally be comprised
of four, six-month purchase periods, with shares purchased on the last day of
each purchase period (a "Purchase Date"). The price at which stock may be
purchased is equal to 85% of the lower of fair market value of our common
stock on the first day of the offering period or the Purchase Date. There
were 10,984 shares issued under the Purchase plan in the fiscal year ended
September 30, 1999.
PREFERRED STOCK
On April 7, 1998, our shareholders granted the Board of Directors the
authority to issue up to 1,000,000 shares of $0.001 par value preferred stock
and to fix the rights, preferences, privileges and restrictions including
voting rights, of these shares without any further vote or approval by the
shareholders. No preferred stock has been issued to date.
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.
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<PAGE>
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.
16
<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 10, 1999
bebe stores, inc.
/s/ Blair W. Lambert
---------------------------------
Blair W. Lambert, V.P. of Finance
and Chief Financial Officer
17
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 66,033,305
<SECURITIES> 0
<RECEIVABLES> 1,076,959
<ALLOWANCES> 115,000
<INVENTORY> 21,739,691
<CURRENT-ASSETS> 91,103,175
<PP&E> 31,127,914
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<COMMON> 24,415
<OTHER-SE> 88,163,802
<TOTAL-LIABILITY-AND-EQUITY> 115,407,539
<SALES> 56,637,338
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<CGS> 26,918,943
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