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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, 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 ORGANIZATIO 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 issuers of
common stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE OF $0.001 PER SHARE, 24,644,348 SHARES
OUTSTANDING AS OF NOVEMBER 1, 2000
================================================================================
1
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1
Financial Statements.............................................................3
Condensed Consolidated Balance Sheets as of September 30, 2000,
June 30, 2000 and September 30, 1999.............................................3
Condensed Consolidated Statements of Operations for the Three months
ended September 30, 2000 and 1999 ...............................................4
Condensed Consolidated Statements of Cash Flows for the Three months
ended September 30, 2000 and 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...............................................................16
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
t<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,
---------------------------------------------
2000 2000 1999
-------------- ------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents $ 72,455,570 $ 72,540,720 $ 66,033,305
Receivables (net of allowance of $224,254, $163,771
and $115,000) 1,683,728 2,198,862 961,959
Inventories, net 27,747,915 24,346,643 21,739,691
Deferred income taxes, net 2,901,980 2,901,980 1,660,375
Prepaid and other 1,828,826 1,148,573 707,845
-------------- ------------- --------------
Total current assets 106,618,019 103,136,778 91,103,175
Equipment and leasehold improvements, net 36,251,875 30,602,719 20,750,283
Deferred income taxes, net 2,257,693 2,261,159 2,003,236
Other assets 1,608,245 1,661,044 1,550,845
-------------- ------------- --------------
Total assets $ 146,735,832 $ 137,661,700 $ 115,407,539
============== ============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 13,097,906 $ 12,966,116 $ 9,565,075
Accrued liabilities 8,567,972 9,173,670 8,688,904
Current portion of long-term debt 92,933 114,342 144,937
Income taxes payable 3,257,022 171,448 5,157,414
-------------- ------------- --------------
Total current liabilities 25,015,833 22,425,576 23,556,330
Long-term debt 40,623 58,307 95,026
Deferred rent 3,556,457 3,377,881 3,567,966
-------------- ------------- --------------
Total liabilities $ 28,612,913 $ 25,861,764 $ 27,219,322
-------------- ------------- --------------
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; isssued and outstanding
24,640,960, 24,589,361 and 24,414,278 shares $ 24,642 $ 24,590 $ 24,415
Additional paid-in capital 25,039,076 24,661,509 23,536,712
Deferred compensation and other (415,102) (523,158) (1,094,306)
Retained earnings 93,474,303 87,636,995 65,721,396
-------------- ------------- --------------
Total shareholders' equity 118,122,919 111,799,936 88,188,217
-------------- ------------- --------------
Total liabilities and shareholders' equity $ 146,735,832 $ 137,661,700 $ 115,407,539
============== ============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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bebe stores, inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2000 1999
-------------------- ----------------
<S> <C> <C>
Net sales $ 61,957,688 $ 56,637,338
Cost of sales, including buying and occupancy 32,297,460 26,918,943
-------------------- ----------------
Gross profit 29,660,228 29,718,395
Selling, general and administrative expenses 21,039,131 17,854,590
-------------------- ----------------
Income from operations 8,621,097 11,863,805
Other expense (income):
Interest expense 5,379 7,381
Interest income (826,345) (609,463)
Other 6,835 3,156
-------------------- ----------------
Earnings before income taxes 9,435,228 12,462,731
Provision for income taxes 3,597,919 4,973,078
-------------------- ----------------
Net earnings $ 5,837,309 $ 7,489,653
==================== ================
Basic earnings per share $ 0.24 $ 0.31
Diluted earnings per share $ 0.23 $ 0.30
Basic weighted average shares outstanding 24,607,443 24,402,469
Diluted weighted average shares outstanding 25,263,702 25,318,460
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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bebe stores, inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
-------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,837,309 $ 7,489,653
Adjustments to reconcile net earnings to cash
provided by operating activities:
Non-cash compensation expense 148,151 181,830
Depreciation and amortization 1,800,577 1,170,792
Tax benefit from options exercised 155,962 76,397
Net loss on disposal of property 45,774 22,858
Store Closing Reserve (75,684) 6,780
Deferred rent 184,875 121,558
Changes in operating assets and liabilities:
Receivables 175,003 (203,111)
Inventories (3,409,178) 805,829
Other assets (1,905) (78,579)
Prepaid expenses (683,220) 856,083
Accounts payable 133,232 (3,753,738)
Accrued liabilities (513,094) (1,266,105)
Income taxes payable 3,087,975 4,827,376
-------------------- -----------------
Net cash provided by operating activities 6,885,777 10,257,623
-------------------- -----------------
Cash flows from investing activities:
Purchase of equipment and improvements (7,129,205) (3,893,566)
-------------------- -----------------
Cash flows from financing activities:
Repayments on existing and additions of capital leases (20,583) 7,145
Repayments of investment note (18,364) (26,771)
Net proceeds from issuance of common stock 241,765 318,557
-------------------- -----------------
Net cash provided by financing activities 202,818 298,931
-------------------- -----------------
Effect of exchange rate changes on cash (44,540) 28,662
-------------------- -----------------
Net increase (decrease) in cash and equivalents (85,150) 6,691,650
Cash and equivalents:
Beginning of year 72,540,720 59,341,655
-------------------- -----------------
End of year $ 72,455,570 $ 66,033,305
==================== =================
</TABLE>
See accompanying notes to condensed consolidated 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, 2000 and September 30, 1999 and the interim Condensed
Consolidated Statements of Operations for the three months ended September 30,
2000 and September 30, 1999 and Condensed Consolidated Statements of Cash Flows
for the three months ended September 30, 2000 and September 30, 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, 2000 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 2000 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,
2000 1999
----------- -------------
<S> <C> <C>
Basis weighted average number of
Shares outstanding 24,607,443 24,402,469
----------- -------------
Incremental shares from assumed
Issuance of stock options 656,259 915,991
----------- -------------
Diluted weighted average number of
Shares outstanding 25,263,702 25,318,460
----------- -------------
</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
6
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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.
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: 2000 1999
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales, including buying and occupancy (1) 52.1 47.5
----- -----
Gross profit 47.9 52.5
Selling, general and administrative expenses (2) 34.0 31.5
----- -----
Income from operations 13.9 21.0
Interest and other expenses (income), net (1.3) (1.0)
------ ------
Earnings before income taxes 15.2 22.0
Provision for income taxes 5.8 8.8
----- -----
Net earnings 9.4 13.2
===== =====
</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 $62.0 million during the three months
ended September 30, 2000 from $56.6 million in the same period of the prior
year, an increase of $5.4 million, or 9.5%. Net sales for the quarter were
comprised of $45.9 million from stores open more than one year, representing a
12.2% decrease in comparable store sales versus the prior year. The remaining
sales of $16.1 million were generated by stores not included in the comparable
store sales base and to a lesser extent on-line sales, wholesale sales to
international licensees, and royalty revenue from product licensees.
We operated 133 stores at September 30, 2000 compared to 104 stores
at September 30, 1999. We opened eleven new stores this quarter and
anticipate opening fourteen to nineteen additional new stores by the end of
the fiscal year. We closed two stores during the quarter and anticipate
closing two to three additional stores during 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.
GROSS PROFIT. Gross profit, which includes the cost of merchandise,
buying and occupancy, was $29.7 million during both quarters ended September 30,
2000 and September 30, 1999. As a percentage of net sales, gross profit
decreased to 47.9% for the three-month period ended September 30, 2000 from
52.5% 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 lower net merchandise margins.
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 $21.0 million during the
three months ended September 30, 2000 from $17.9 million in the same period of
the prior year, an increase of $3.1 million, or 17.3%. As a percentage of net
sales, these expenses increased to 34.0% during the three-month period from
31.5% 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
$0.80 million of interest and other income (net of other expenses) during the
three months ended September 30, 2000 as compared to approximately $0.60 million
in the same three-month period of the prior year. We had no borrowings under our
line of credit during the quarter ended September 30, 2000. The increase in
interest and other income is a result of higher cash balances.
PROVISION FOR INCOME TAXES. The effective tax rate for the quarter
ended September 30, 2000, was approximately 38.1% as compared to 39.9% in the
prior year. This quarter's tax rate decrease was largely due to income from
tax-advantaged investments.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital requirements vary widely throughout the year and
generally peak in the first and second fiscal quarters. At September 30, 2000,
we had approximately $72.5 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 $10.0 million. As of September
30, 2000, there were no borrowings under the line of credit and letters of
credit outstanding totaled $9.2 million.
Net cash provided by operating activities for the three months ended
September 30, 2000 was $ 6.9 million. Cash provided by operating activities for
the period was primarily generated by earnings and depreciation reduced by
changes in working capital.
Net cash used by investing activities for the three-month period ended
September 30, 2000 was $7.1 million. The primary use of these funds was for the
opening of new stores and investments in management information systems. We
opened 24 new stores in fiscal 2000 and expect to open approximately 25 to 30
stores in fiscal 2001. We estimate that capital expenditures will be between $18
million and $20 million in fiscal 2001.
Net cash provided by financing activities was $202,818 for the three
months ended September 30, 2000. Net cash provided by financing activities
primarily was derived from proceeds from the issuance of common stock arising
from stock option exercises.
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, corporate
office and distribution center expansions, potential acquisitions and/or joint
ventures, and future results of operations.
INFLATION
We do not believe that inflation has had a material effect on the
results of operations in the recent past. However, we cannot assure 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:
8
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1. IF WE MISCALCULATE THE DEMAND FOR OUR PRODUCTS, OUR SALES AND
PROFITABILITY MAY BE NEGATIVELY IMPACTED. 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 NEGATIVELY IMPACTED. 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 25 to 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 may 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 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 IN THE PAST AND MAY IN THE FUTURE EXPERIENCE A DECLINE IN OUR
COMPARABLE STORE SALES PERFORMANCE, WHICH COULD AFFECT OUR PROFITABILITY. In the
second half of fiscal 2000 and first quarter of fiscal 2001, 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 as compared
to the same period last year. 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 increased as a percentage of net sales in the recent quarters. To
the extent same store sales growth rates continue to moderate, 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,
9
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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 NOT ABLE TO EFFECTIVELY UPGRADE AND ENHANCE OUR ON-LINE STORE,
WE MAY LOSE ON-LINE SALES AND OUR IMAGE MAY BE HARMED. We intend to continue to
make 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.
7. 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 a limited number of 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 many 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. Furthermore, we cannot assure
that these production facilities will not supply similar raw materials to or
manufacture similar products for our competitors.
10
<PAGE>
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 maintain 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.
8. 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.
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
operating 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.
11
<PAGE>
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" 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
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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. 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.
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 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. Accordingly, we continually review the performance of these
international stores and cannot assure that such expansion will be successful.
Although we are currently reviewing alternatives to maintain our presence in
such market, such as a licensing or joint venture arrangement, we plan to close
the two stores in the United Kingdom prior to the end of fiscal 2001. We cannot
assure you that we will be able to maintain our presence in such market or that
any licensing or joint venture arrangement 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;
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- product pricing;
- store ambiance;
- customer service; and
- convenience.
We compete with traditional department stores, specialty store retailers,
business to consumer websites, 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, 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 THAT
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 30, 2000, only 3,743,014
shares of our common stock were 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. As of September
30, 2000, Manny Mashouf, the Chairman, President and Chief Executive Officer,
beneficially owned approximately 84.2% 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.
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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 September 30, 2000, we had a total of
24,640,960 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 September 30, 2000, options to purchase 2,235,993 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. Additionally, in
August 2000, the Board of Directors unanimously adopted an amendment to the
Stock Plan increasing the number of common stock reserved for issuance by
1,500,000, subject to shareholder approval at the Annual Meeting of
Shareholders on November 20, 2000. 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. See Note 8 of Notes to Financial
Statements.
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
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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
equal to 85% of the lower of fair market value of our common stock on the
first day of the purchase period or the Purchase Date. There were 36,965
shares issued under the Plan in the fiscal year ended June 30, 2000 and
10,663 shares issued during the quarter ended September 30, 2000 under the
Plan.
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
The Company is exposed to market risks, which include changes in U.S.
interest rates and, to a lesser extent, foreign exchange rates. The Company does
not engage in financial transactions for trading or speculative purposes.
INTEREST RATE RISK
The Company has fixed and variable income investments consisting of
cash equivalents and short-term investments, which are affected by changes in
market interest rates. The Company does not use derivative financial instruments
in its investment portfolio.
The interest payable on the Company's bank line of credit is based on
variable interest rates and therefore affected by changes in market interest
rates. If interest rates rose .95 basis points (a 10% change from the bank's
reference rate as of September 30, 2000), the Company's results from operations
and cash flows would not be materially affected.
FOREIGN CURRENCY RISKS
The Company enters into a significant amount of purchase obligations
outside of the U.S. which are settled in U.S. Dollars and, therefore, has only
minimal exposure to foreign currency exchange risks. The Company also operates
two subsidiaries with a base currency other than the U.S. Dollar. These
subsidiaries represented less than one percent of total revenues and, therefore,
present only minimal exposure to foreign currency exchange risks. The Company
does not hedge against foreign currency risks and believes that foreign currency
exchange risk is immaterial.
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
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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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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 14, 2000
bebe stores, inc.
/s/ Blair W. Lambert
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Blair W. Lambert,
Chief Financial Officer
(Principal Financial and Accounting Officer)
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