<PAGE>
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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, 2000
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, 24,562,747 SHARES
OUTSTANDING AS OF March 31, 2000.
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<PAGE>
BEBE STORES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements...........................................................................3
Condensed Consolidated Balance Sheets
March 31, 2000 (unaudited), June 30, 1999 and March 31, 1999 (unaudited)....................3
Condensed Consolidated Statements of Operations
Three months ended March 31, 2000 and March 31, 1999 and nine months ended March 31,
2000 and March 31, 1999.....................................................................4
Condensed Consolidated Statements of Cash Flows
Nine months ended March 31, 2000 and March 31, 1999.........................................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....................................15
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.............................................................................15
ITEM 2. Changes in Securities and Use of Proceeds.....................................................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>
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
MARCH 31, JUNE 30, MARCH 31,
2000 1999 1999
----------- -------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents........................................ $76,361,351 $59,341,655 $52,392,601
Receivables (net of allowance of $110,112, $108,078 and
$105,699)................................................... 2,645,851 759,456 684,578
Inventories, net............................................ 20,975,970 22,541,994 17,030,009
Deferred Income Taxes, net.................................. 1,660,374 1,660,374 843,629
Prepaid and other........................................... 4,436,236 1,559,348 4,295,630
--------- --------- ---------
Total current assets.................................... 106,079,782 85,862,827 75,246,447
Equipment and improvements, net............................... 24,153,059 17,999,980 14,800,160
Other assets.................................................. 3,608,693 3,503,136 3,141,767
--------- --------- ---------
Total assets.................................................. $133,841,534 $107,365,943 $93,188,374
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............................................ $12,336,577 $13,318,007 $11,629,771
Accrued liabilities......................................... 10,239,490 9,931,755 9,306,149
Current portion of long-term debt........................... 119,569 138,906 118,763
Income taxes payable........................................ 0 330,014 0
- ------- -
Total current liabilities............................... 22,695,636 23,718,682 21,054,683
Long-term debt................................................ 74,849 120,646 60,788
Deferred rent................................................. 3,471,003 3,432,639 2,628,778
--------- --------- ---------
Total liabilities............................................. 26,241,488 27,271,967 23,744,249
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 24,562,747, 24,387,773
and 24,196,989 shares....................................... 24,563 24,388 24,197
Additional paid-in capital.................................. 24,527,177 23,147,795 20,283,748
Deferred compensation....................................... (608,359) (1,282,147) (1,441,811)
Retained earnings........................................... 83,656,665 58,203,940 50,577,991
---------- ---------- ----------
Total shareholders' equity.............................. 107,600,046 80,093,976 69,444,125
----------- ---------- ----------
Total liabilities and shareholders' equity.................... $133,841,534 $107,365,943 $93,188,374
============ ============ ===========
</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 FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales............................................. $52,894,648 $46,047,174 $187,669,698 $147,090,886
Cost of sales, including buying and occupancy......... 26,998,885 22,486,702 90,861,408 69,502,756
---------- ---------- ---------- ----------
Gross profit......................................... 25,895,763 23,560,472 96,808,290 77,588,130
Selling, general and administrative expenses........... 18,210,892 15,158,117 57,306,221 44,665,284
---------- ---------- ---------- ----------
Income from operations................................. 7,684,871 8,402,355 39,502,069 32,922,846
Other expense (income):
Interest expense..................................... 5,044 6,245 16,925 11,013
Interest income...................................... (920,008) (639,444) (2,337,272) (1,683,245)
Other................................................ 12,497 18,815 13,966 19,818
------ ------ ------ ------
Earnings before income taxes........................... 8,587,338 9,016,739 41,808,450 34,575,260
Provision for income taxes............................. 3,166,361 3,653,891 16,393,836 14,229,696
--------- --------- ---------- ----------
Net earnings..................................... $5,420,977 $5,362,848 $25,414,614 $20,345,564
========== ========== =========== ===========
Basic earnings per share............................... $0.22 $0.22 $1.04 $0.85
Diluted earnings per share............................. $0.22 $0.21 $1.01 $0.80
Basic weighted average shares outstanding.............. 24,508,407 24,105,757 24,446,287 23,964,421
Diluted weighted average shares outstanding............ 25,168,005 25,676,236 25,269,735 25,541,097
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $25,414,614 $20,345,564
Adjustments to reconcile net earnings to cash provided by
operating activities:
Non-cash compensation expense............................... 520,092 388,382
Depreciation and amortization............................... 3,579,624 2,196,005
Tax benefit from options exercised.......................... 0 2,493,975
Net loss on disposal of property............................ 153,186 194,802
Deferred rent............................................... 39,595 70,850
Changes in operating assets and liabilities:
Receivables............................................. (926,341) 111,705
Inventories............................................. 1,569,949 (2,624,000)
Other assets............................................ (183,340) (504,715)
Prepaid expenses........................................ (2,876,231) (4,160,829)
Accounts payable........................................ (971,613) 4,708,736
Accrued liabilities..................................... 304,731 788,007
Tax benefit from options exercised...................... 481,387 0
Income taxes payable.................................... (330,246) (891,057)
--------- ---------
Net cash provided by operating activities........... 26,775,407 23,117,425
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements...................... (12,663,551) (9,023,980)
Proceeds from tenant allowance.............................. 1,905,680 715,030
--------- -------
Net cash used by investing activities............... (10,757,871) (8,308,950)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments on) capital leases & other........ (20,855) 44,124
Repayments of investment note............................... (44,430) (51,077)
Issuance of common stock.................................... 1,051,864 942,913
--------- -------
Net cash provided by financing activities........... 986,579 935,960
Effect of exchange rate changes on cash and equivalents....... 15,581 (3,451)
Net increase in cash and equivalents.......................... 17,019,696 15,740,984
CASH:
Beginning of year........................................... 59,341,655 36,651,617
---------- ----------
End of period............................................... $76,361,351 $52,392,601
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest...................................... $16,925 $11,013
======= =======
Cash paid for income taxes.................................. $19,359,117 $16,701,678
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
BEBE STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERIM FINANCIAL STATEMENTS
The accompanying Condensed Consolidated Balance Sheets of bebe stores,
inc. as of March 31, 2000 and March 31, 1999 and the interim Condensed
Consolidated Statements of Operations for the three months and nine months ended
March 31, 2000 and March 31, 1999 and Condensed Consolidated Statements of Cash
Flows for the nine months ended March 31, 2000 and March 31, 1999 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 FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic weighted average number of
Shares outstanding........................... 24,508,407 24,105,757 24,446,287 23,964,421
Incremental shares from assumed
Issuance of stock options.................... 659,598 1,570,479 823,448 1,576,676
------- --------- ------- ---------
Diluted weighted average number of
Shares outstanding........................... 25,168,005 25,676,236 25,269,735 25,541,097
========== ========== ========== ==========
</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 FOR THE NINE MONTHS ENDED
MARCH 31, MARCH 31,
STATEMENTS OF OPERATIONS DATA: 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.............................................. 100% 100% 100% 100%
Cost of sales, including buying and occupancy (1)...... 51.0 48.8 48.4 47.3
---- ---- ---- ----
Gross profit........................................... 49.0 51.2 51.6 52.7
Selling, general and administrative expenses (2)....... 34.5 32.9 30.5 30.3
---- ---- ---- ----
Income from operations................................. 14.5 18.3 21.1 22.4
Interest and other expenses (income), net.............. (1.7) (1.3) (1.2) (1.1)
----- ----- ----- -----
Earnings before income taxes........................... 16.2 19.6 22.3 23.5
Provision for income taxes............................. 6.0 7.9 8.8 9.7
--- --- --- ---
Net earnings........................................... 10.2% 11.7% 13.5% 13.8%
===== ===== ===== =====
</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 $52.9 million during the three
months ended March 31, 2000 from $46.0 million in the same period of the
prior year, an increase of $6.9 million, or 15.0%. Net sales for the quarter
were comprised of $41.4 million from stores open more than one year,
representing a 4.4% decrease in comparable store sales versus the prior year.
The remaining sales of $11.5 million were generated by stores not included in
the comparable store sales base and to a lesser extent on-line sales,
wholesale sales to licensees, and product royalty revenue. The decrease in
comparable store sales volumes was attributed to low inventory positions in
the knit and tops categories throughout the quarter and missed sales
opportunities in certain product categories that were in greater demand than
anticipated. We anticipate that comparable store sales volumes will decrease
in the current period as compared to the same period of the prior year.
We operated 113 stores at March 31, 2000 compared to 97 stores at March 31,
1999. We opened three new stores this quarter and anticipate opening twelve
additional new stores by the end of the fiscal year. In addition to our
traditional brick-and-mortar stores, we also operate an on-line store, which
can be found at www.bebe.com. Current period sales for the on-line store
increased 260% over the comparable quarter and are similar to sales generated
by a low-volume brick-and-mortar bebe store.
GROSS PROFIT. Gross profit, which includes the cost of merchandise,
buying and occupancy, increased to $25.9 million during the three months
ended March 31, 2000 from $23.6 million for the same three-month period of
the prior year, an increase of $2.3 million, or 9.7%. As a percentage of net
sales, gross profit decreased to 49.0% for the three-month period ended March
31, 2000 from 51.2% in the same three-month period of the prior year. The
decrease in gross profit as a percentage of net sales resulted from the
decrease of comparable store sales volume, increased occupancy costs related
to new and expanded stores and, to a lesser extent, slightly lower net
merchandise margins. We believe that gross margins in the current period will
likely be lower as compared to the same period of the prior year.
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 $18.2 million
during the three months ended March 31, 2000 from $15.2 million in the same
period of the prior year, an increase of $3.0 million, or 19.7%. As a
percentage of net sales, these expenses increased to 34.5% during the
three-month period from 32.9% in the same period of the prior year. This
increase as a percentage of net sales was largely a result of increased
compensation and depreciation expenses as a percentage of sales.
7
<PAGE>
INTEREST AND OTHER EXPENSE (INCOME), NET. We generated approximately
$0.90 million of interest and other income (net of other expenses) during the
three months ended March 31, 2000 as compared to approximately $0.61 million
in the same three-month period of the prior year. We had no borrowings under
our line of credit during the period ended March 31, 2000. The increase of
interest and other income is a result of higher cash balances generated from
operating results.
PROVISION FOR INCOME TAXES. The effective tax rate for the quarter
ended March 31, 2000, was approximately 36.9% as compared to 40.5% 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, expanded corporate offices, remodel and renovate stores and
installation of new computer systems and technology.
Our working capital requirements vary widely throughout the year and
generally peak in the first and second fiscal quarters. At March 31, 2000, we
had approximately $76.4 million of cash and cash equivalents on hand. 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 $7.0 million. As of March
31, 2000, there were no borrowings under the line of credit, and letters of
credit outstanding totaled $2.2 million.
Net cash provided by operating activities for the nine months ended
March 31, 2000 was $26.8 million as compared to $23.1 million for the same
period of the prior year. 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 nine-month period
ended March 31, 2000 was $10.8 million as compared to $8.3 million for the
same period of the prior year. The primary use of these funds was for the
opening of new stores and investments in management information systems and
infrastructure and development of the on-line store.
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 each
of fiscal 2000 and fiscal 2001, of which $10.8 million had been spent during
the nine months ended March 31, 2000. We expect to open approximately 12
additional stores in the remainder of fiscal 2000 and approximately 30 stores
in fiscal 2001. We opened three new stores during the three months ended
March 31, 2000.
Net cash provided by financing activities was $0.99 million for the
nine months ended March 31, 2000 as compared to $0.94 million for the same
period of the prior year. 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 2001. 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, the on-line store, 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.
8
<PAGE>
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.
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 12 additional stores in the
remainder of fiscal 2000 and 30 stores in fiscal 2001. Our plan to expand
successfully depends on the following factors:
- the availability of desirable locations;
- 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 HAVE AND MAY EXPERIENCE A DECLINE IN OUR COMPARABLE
STORE SALES PERFORMANCE, WHICH COULD AFFECT OUR PROFITABILITY. In the most
recent quarter, we experienced a decrease in comparable store sales volumes.
We expect to continue to experience decreases in comparable store sales
volumes in the current quarter. We also expect that comparable store growth,
if any, in the future periods will be lower than rates achieved in fiscal
1998 and 1999 and the first half of fiscal 2000. During those recent periods
of relatively high comparable store sales growth, we experienced favorable
merchandise margins primarily because (i) we were able to sell our
merchandise with lower markdown rates due in part to increases in same store
sales and (ii) large comparable store sales increases resulted in favorable
occupancy expense leverage. As comparable store sales performance has
moderated, the decline in merchandise margins has reduced gross margins. In
addition, newer and expanded stores have become a larger percentage of the
entire store base, which has increased occupancy costs as a percentage of
sales. These factors may 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
9
<PAGE>
growth in net sales. If same store sales growth rates continue to 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 five 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
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
10
<PAGE>
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
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.
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:
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- 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, and have applied for "bbsp" 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 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 AND A NEARBY FABRIC
WAREHOUSE, THE LOSS OF WHICH COULD SERIOUSLY DISRUPT OUR BUSINESS. CURRENTLY,
WE OPERATE CORPORATE OFFICES AND A DISTRIBUTION CENTER IN BRISBANE,
CALIFORNIA AND A FABRIC WAREHOUSE IN SOUTH SAN FRANCISCO. The lease for one
of the Corporate facilities buildings expires in August 2001. Any increases
in occupancy costs will negatively affect our profitability. Furthermore any
serious disruption at these facilities whether due to fire, earthquake or
otherwise would harm our operations and could have a harmful effect on our
business and results of operations.
12
<PAGE>
14. IF WE ARE NOT ABLE TO SUCCESSFULLY ENTER INTERNATIONAL MARKETS, OUR
ABILITY TO EXPAND BEYOND THE UNITED STATES MAY BE IMPAIRED. We currently
operate two stores in Canada and two stores in the United Kingdom. We are
evaluating our opportunities to expand our geographic reach in those and
additional markets. We have limited experience with doing business in foreign
countries and our brand names do not have the same recognition in such markets
as they do in the United States. Therefore we cannot assure that such expansion
will be successful.
15. IF WE ARE NOT ABLE TO SUCCESSFULLY DEVELOP PRODUCT LINES OR NEW STORE
CONCEPTS, OUR ABILITY TO EXPAND OUR REVENUE BASE MAY BE IMPAIRED. From time to
time, we may introduce new categories of products or new store concepts. For
example, we are currently testing in certain markets a "bbsp concept store" in
which our product offering is limited to a combination of activewear and
streetwear branded with the "bebe" and "bbsp" logos. If this limited product
offering is not successful or if the bbsp brand name does not achieve the same
recognition as the bebe and bebe moda brand names, our ability to expand into
additional markets with this concept store may be impaired.
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 quality;
- 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.
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 March 31, 2000, only 3,655,734
shares of our Common Stock were available to be publicly traded, and as a
result, our average daily trading volumes are
13
<PAGE>
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 84.5% 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 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 March 31, 2000, we had a total of
24,562,747 shares of common stock outstanding. Of these shares, 20,901,607
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 March 31, 2000, options to purchase 1,666,067 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
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<PAGE>
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 eight, three-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 determined by the Board of Directors and is currently equal to
85% of the fair market value of our common stock on Purchase Date. There were
24,271 shares issued under the Plan in the calendar year ended March 31, 2000.
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.
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.
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<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 May 15, 2000
bebe stores, inc.
/s/ Blair W. Lambert
----------------------------------------
Blair W. Lambert, Vice President of Finance
and Chief Financial Officer
16
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 76,361,351
<SECURITIES> 0
<RECEIVABLES> 2,755,963
<ALLOWANCES> 110,112
<INVENTORY> 20,975,970
<CURRENT-ASSETS> 106,079,782
<PP&E> 36,764,845
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