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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 DECEMBER 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24395
BEBE STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2450490
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
380 VALLEY DRIVE
BRISBANE, CALIFORNIA 94005
(Address of principal executive offices)
TELEPHONE: (415) 715-3900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE OF $0.001 PER SHARE, 24,461,320 SHARES
OUTSTANDING AS OF JANUARY 20, 2000.
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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
December 31, 1999 (unaudited), June 30, 1999 and December 31, 1998 (unaudited)..............3
Condensed Consolidated Statements of Operations
Three months ended December 31, 1999 and 1998 and six months ended December 31, 1999
and 1998....................................................................................4
Condensed Consolidated Statements of Cash Flows Six months ended December 31, 1999 and
1998........................................................................................5
Notes to Financial Statements..................................................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........6
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....................................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
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEBE STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, JUNE 30, DECEMBER 31,
1999 1999 1998
---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and equivalents........................................ 84,086,564 59,341,655 55,166,161
Receivables (net of allowance of $106,120, $108,078 and
$94,273).................................................... 1,813,608 759,456 202,856
Inventories, net............................................ 19,304,201 22,541,994 14,148,061
Prepaid and other........................................... 2,661,728 3,219,722 1,126,048
--------- --------- ---------
Total current assets.................................... 107,866,101 85,862,827 70,643,126
Equipment and improvements, net............................... 22,575,585 17,999,980 11,554,916
Other assets.................................................. 3,584,364 3,503,136 3,163,009
--------- --------- ---------
Total assets.................................................. 134,026,050 107,365,943 85,361,051
----------- ----------- ----------
----------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............................................ 11,951,215 13,318,007 8,856,084
Accrued liabilities......................................... 12,588,359 9,931,755 11,062,805
Current portion of long-term debt........................... 147,329 138,906 105,410
Income taxes payable........................................ 4,062,063 330,014 1,859,643
--------- ------- ---------
Total current liabilities............................... 28,748,966 23,718,682 21,883,942
Long-term debt................................................ 65,830 120,646 17,213
Deferred rent................................................. 3,607,024 3,432,639 2,500,494
--------- --------- ---------
Total liabilities............................................. 32,421,820 27,271,967 24,401,649
Commitments and contingencies
Shareholders' equity:
Preferred stock-authorized 1,000,000 shares at $0.001 par
value per share; no shares issued and outstanding Common
stock-authorized 40,000,000 shares at $0.001 par value
per share; issued and outstanding 24,461,320 shares......... 24,462 24,388 23,944
Additional paid-in capital.................................. 24,227,764 23,147,795 17,359,090
Deferred compensation....................................... (906,586) (1,282,147) (1,628,964)
Retained earnings........................................... 78,258,590 58,203,940 45,205,332
---------- ---------- ----------
Total shareholders' equity.............................. 101,604,230 80,093,976 60,959,402
----------- ---------- ----------
Total liabilities and shareholders' equity.................... 134,026,050 107,365,943 85,361,051
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to financial statements.
3
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BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................................ 78,137,711 59,491,380 134,775,050 101,043,712
Cost of sales, including buying and occupancy............ 36,943,579 27,215,360 63,862,522 47,016,054
---------- ---------- ---------- ----------
Gross profit........................................... 41,194,132 32,276,020 70,912,528 54,027,658
Selling, general and administrative expenses............. 21,240,738 16,306,630 39,095,328 29,507,167
---------- ---------- ---------- ----------
Income from operations................................... 19,953,394 15,969,390 31,817,200 24,520,491
Other expense (income):
Interest expense....................................... 4,500 2,419 11,881 4,768
Interest income........................................ (807,801) (556,038) (1,417,264) (1,043,801)
Other.................................................. (1,688) (288) 1,469 1,003
------- ----- ----- -----
Earnings before income taxes............................. 20,758,383 16,523,297 33,221,114 25,558,521
Provision for income taxes............................... 8,254,397 6,871,365 13,227,475 10,575,805
--------- --------- ---------- ----------
Net earnings....................................... 12,503,986 9,651,932 19,993,639 14,982,716
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share................................. $0.51 $0.40 $0.82 $0.63
Diluted earnings per share............................... $0.49 $0.38 $0.79 $0.59
Basic weighted average shares outstanding................ 24,433,047 23,894,384 24,408,565 23,895,289
Diluted weighted average shares outstanding.............. 25,316,585 25,508,278 25,302,547 25,449,588
</TABLE>
See accompanying notes to financial statements.
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BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ 19,993,639 14,982,716
Adjustments to reconcile net earnings to cash provided by
operating activities:
Non-cash compensation expense............................... 362,730 240,851
Depreciation and amortization............................... 2,392,326 1,384,896
Tax benefit from options exercised.......................... 419,366 106,620
Net loss on disposal of property............................ 153,186 142,506
Deferred rent............................................... 170,888 (32,497)
Changes in operating assets and liabilities:
Receivables............................................. (524,604) 55,350
Inventories............................................. 3,244,337 257,153
Other assets............................................ (126,591) (502,890)
Prepaid expenses........................................ 560,388 (148,453)
Accounts payable........................................ (1,356,522) 1,934,102
Accrued liabilities..................................... 2,641,814 2,557,194
Income taxes payable.................................... 3,731,687 969,385
--------- -------
Net cash provided by operating activities .......... 31,662,644 21,946,933
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements...................... (8,172,609) (4,188,303)
Proceeds from tenant allowance.............................. 591,227 455,700
------- -------
Net cash used by investing activities............... (7,581,382) (3,732,603)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on capital leases & other........................ (19,855) (39,876)
Repayments of investment note............................... (26,771) (25,645)
Issuance of common stock.................................... 673,507 365,736
------- -------
Net cash provided by financing activities........... 626,881 300,215
Effect of exchange rate changes on cash and equivalents....... 36,766 0
Net increase in cash and equivalents.......................... 24,744,907 18,514,545
CASH:
Beginning of year........................................... 59,341,655 36,651,616
---------- ----------
End of year................................................. 84,086,564 55,166,161
---------- ----------
---------- ----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest...................................... 11,881 4,768
------ -----
Cash paid for income taxes.................................. 14,213,117 9,499,800
---------- ---------
</TABLE>
See accompanying notes to financial statements.
5
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BEBE STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERIM FINANCIAL STATEMENTS
The accompanying Condensed Consolidated Balance Sheets of bebe stores,
inc. as of December 31, 1999 (the "current period") and December 31, 1998 (the
"prior period") and the interim Condensed Consolidated Statements of Operations
for the three months and six months ended December 31, 1999 and December 31,
1998 and Cash Flows for the six months ended December 31, 1999 and December 31,
1998 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The Consolidated Balance Sheet at June 30,
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic weighted average number of
Shares outstanding........................... 24,433,047 23,894,384 24,408,565 23,895,289
Incremental shares from assumed
Issuance of stock options.................... 883,538 1,613,894 893,982 1,554,299
------- --------- ------- ---------
Diluted weighted average number of
Shares outstanding........................... 25,316,585 25,508,278 25,302,547 25,449,588
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</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
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RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
STATEMENTS OF OPERATIONS DATA: 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy (1)......... 47.3 45.7 47.4 46.5
---- ---- ---- ----
Gross profit.............................................. 52.7 54.3 52.6 53.5
Selling, general and administrative expenses (2).......... 27.2 27.5 29.0 29.2
---- ---- ---- ----
Income from operations.................................... 25.5 26.8 23.6 24.3
Interest and other expenses (income), net................. (1.0) (1.0) (1.0) (1.0)
----- ----- ----- -----
Earnings before income taxes.............................. 26.5 27.8 24.6 25.3
Provision for income taxes................................ 10.5 11.6 9.8 10.5
---- ---- --- ----
Net earnings.............................................. 16.0% 16.2% 14.8% 14.8%
----- ----- ----- -----
----- ----- ----- -----
</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 $78.1 million during the three months
ended December 31, 1999 from $59.5 million in the same period of the prior year,
an increase of $18.6 million, or 31.3%. Of this increase, $5.3 million was
attributable to the 10.1% increase in comparable store sales, and $13.4 million
was primarily attributed to stores not included in the comparable store sales
base and to a lessor extent on-line sales, wholesale sales to licensees, and
product royalty revenue. The increase in comparable store sales was attributable
to a broader product line offering, strong consumer acceptance of the product
line and improvements in the operational aspects of our business. While we
experienced double-digit comparable store sales growth for the period, we
believe that such percentage increases in the current and future periods will be
lower than those experienced in fiscal 1999 and the first half of fiscal 2000.
We operated 110 stores at December 31, 1999 compared to 91 stores at December
31, 1998. In addition to our 110 stores, we also sell product through our
on-line store which can be found at www.bebe.com. Sales volume generated by the
on-line store was similar to sales generated by a low-volume, brick-and-mortar
bebe store during the quarter.
GROSS PROFIT. Gross profit, which includes the cost of merchandise,
buying and occupancy, increased to $41.2 million during the three months ended
December 31, 1999 from $32.3 million for the same three-month period of the
prior year, an increase of $8.9 million, or 27.6%. As a percentage of net sales,
gross profit decreased to 52.7% for the three-month period ended December 31,
1999 from 54.3% in the same three-month period of the prior year. The decrease
in gross profit as a percentage of net sales resulted from slowing comparable
store sales growth and increased occupancy costs related to new and expanded
stores as well as slightly lower net merchandise margins. We believe that
quarterly gross margins in the current and future periods will likely be lower
than those experienced in the comparable four quarters ended December 31, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, which primarily consist of non-occupancy store costs,
corporate overhead and advertising costs, increased to $21.2 million during the
three months ended December 31, 1999 from $16.3 million in the same period of
the prior year, an increase of $4.9 million, or 30.1%. As a percentage of net
sales, these expenses decreased to 27.2% during the three-month period from
27.5% in the same period of the prior year. This decrease as a percentage of net
sales was largely a result of favorable compensation and supply expense leverage
offset by increased depreciation and advertising expense.
INTEREST AND OTHER EXPENSE (INCOME), NET. We generated approximately
$805,000 of interest and other income (net of other expenses) during the three
months ended December 31, 1999 as compared to approximately $554,000 in the same
three-month period of the prior year. We had no borrowings under our line of
credit during the period ended December 31, 1999. The increase of interest and
other income is a result of higher cash balances generated from operating
results.
7
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PROVISION FOR INCOME TAXES. The effective tax rate for the quarter
ended December 31, 1999, was approximately 39.8% as compared to 41.6% in the
prior year. This quarter's tax rate decrease was largely due to income from
tax-advantaged investments.
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years ended June 30, 1999, we satisfied our
cash requirements principally through cash flow from operations, borrowings
under our revolving lines of credit and term loans. Primary uses of cash have
been to purchase merchandise inventory, to fund the construction of new stores
and expanded corporate office, and to remodel and renovate stores.
Our working capital requirements vary widely throughout the year and
generally peak in the first and second fiscal quarters. At December 31, 1999, we
had approximately $84.1 million of cash and cash equivalents on hand of which
$11.9 million was derived from our initial public offering in June 1998. In
addition, we had a revolving line of credit, under which we could borrow or
issue letters of credit up to a combined total of $7.0 million. As of December
31, 1999, there were no borrowings under the line of credit, and letters of
credit outstanding totaled $4.2 million.
Net cash provided by operating activities for the six months ended
December 31, 1999 was $31.7 million. Cash provided by operating activities for
the period was primarily generated by earnings and changes in working capital.
Net cash used by investing activities for the six-month period ended
December 31, 1999 was $7.6 million. The primary use of these funds was for the
opening of new stores and investments in management information systems and
infrastructure.
We expect to make substantial capital expenditures in connection with
the opening and expansion of stores and the implementation of new systems to
support store and corporate office functions. We estimate that capital
expenditures will be between $17.0 million and $19.0 million in fiscal 2000 and
fiscal 2001, of which $8.2 million had been spent during the six months ended
December 31, 1999. We expect to open approximately 15 additional stores in the
remainder of fiscal 2000 and approximately 30 stores in fiscal 2001. We opened
six new stores during the three months ended December 31, 1999.
Net cash provided by financing activities was $626,881 for the six
months ended December 31, 1999. We believe that our cash on hand, together with
our cash flow from operation, will be sufficient to meet our capital and
operating requirements through fiscal 2000. Our future capital requirements,
however, will depend on numerous factors, including without limitation, the size
and number of new and expanded stores, investment costs for management
information systems, 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.
INFLATION
We do not believe that inflation has had a material effect on the
results of operations in the recent past. There can be no assurance that our
business will not be affected by inflation in the future.
8
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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 15 additional stores in 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 MAY EXPERIENCE A DECLINE IN OUR COMPARABLE STORE SALES PERFORMANCE,
WHICH COULD AFFECT OUR PROFITABILITY. We do not think that we can sustain the
rate of comparable store sales growth achieved in recent periods. We expect that
such growth, if any, in the current and future periods will be lower than rates
achieved in fiscal 1998 and 1999 and the first half of fiscal 2000. During the
recent periods of relatively high comparable store sales growth, we experienced
favorable merchandise margins primarily because we were able to sell our
merchandise with lower markdown rates due in part to the higher growth of same
store sales. As comparable store sales performance moderates, we anticipate a
decline in merchandise margins, which will reduce gross margins. In addition, as
newer and expanded stores become a larger percentage of the entire store base,
we anticipate that we will see a rise in occupancy cost as a percentage of
sales. We anticipate that this rise will further reduce gross margins. In
addition, our selling, general and administrative expenses have decreased as a
percentage of net sales in recent periods due in part to the rapid growth in net
sales. If same store sales growth rates slow, it will be more difficult for us
to generate favorable selling, general and administrative expense leverage.
4. IF WE ARE NOT ABLE TO OPERATE ON A PROFITABLE BASIS, OUR STOCK PRICE
MAY BE NEGATIVELY AFFECTED. We cannot guarantee that we will remain profitable
in the future. In the past 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
9
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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 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
10
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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:
- the number and timing of new store openings;
- acceptance of product offerings;
- timing of product deliveries;
- actions by competitors; and
- effectiveness of advertising campaigns.
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<PAGE>
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. 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 one store 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. If
we are not able to successfully enter international markets, our ability to
expand our geographic reach may be impaired.
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<PAGE>
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. If we fail to
introduce new categories of products or new store concepts or if such
introductions are not successful, our ability to expand our revenue base 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 December 31, 1999, only 3,559,713
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. Manny
Mashouf, the Chairman, President and Chief Executive Officer, beneficially owns
approximately 85.4% 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
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<PAGE>
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 December 31, 1999, we had a total of
24,461,320 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 December 31, 1999, options to purchase 1,844,220 shares of common
stock were outstanding and exercisable, subject to certain vesting and
repurchase restrictions.
STOCK PLANS
On June 26, 1997 the Board of Directors adopted the 1997 Stock Plan
(the "Stock Plan"). Options granted under the Stock Plan have a ten-year term
and may be either incentive stock options, non-qualified stock options, stock
purchase rights or stock awards. We have reserved 2,830,000 shares of common
stock for issuance under the Stock Plan. The options granted are immediately
exercisable, but are subject to repurchase at the original exercise price in the
event that the optionee's employment ceases for any reason. Our right of
repurchase generally lapses over a four-year period as follows: 20% in each of
the first two years after the grant date and 30% in the third and fourth years
after the grant date, with full lapse of the repurchase option occurring on the
fourth anniversary date.
STOCK PURCHASE PLAN
On April 7, 1998, our 1998 Employee Stock Purchase Plan (the "Plan")
was adopted and approved by the shareholders. A total of 750,000 shares of
common stock has been reserved for issuance under the Plan. The Plan will allow
eligible employees to purchase our common stock in an amount which may not
exceed 10% of
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<PAGE>
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 the Purchase Date. There
were 46,609 shares issued under the Plan in the calendar year ended
December 31, 1999.
PREFERRED STOCK
On April 7, 1998, our shareholders granted the Board of Directors the
authority to issue up to 1,000,000 shares of $0.001 par value preferred stock
and to fix the rights, preferences, privileges and restrictions including voting
rights, of these shares without any further vote or approval by the
shareholders. No preferred stock has been issued to date.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
No reports were filed on Form 8-K during the quarter for which this
report is filed.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated February 7, 2000
bebe stores, inc.
/s/ Blair W. Lambert
-----------------------------------------
Blair W. Lambert, Vice President of Finance
and Chief Financial Officer
16
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 84,086,564
<SECURITIES> 0
<RECEIVABLES> 1,919,728
<ALLOWANCES> 106,120
<INVENTORY> 19,304,201
<CURRENT-ASSETS> 107,866,101
<PP&E> 34,030,688
<DEPRECIATION> 11,455,103
<TOTAL-ASSETS> 134,026,050
<CURRENT-LIABILITIES> 28,748,966
<BONDS> 0
0
0
<COMMON> 24,462
<OTHER-SE> 101,579,768
<TOTAL-LIABILITY-AND-EQUITY> 134,026,050
<SALES> 134,755,050
<TOTAL-REVENUES> 134,755,050
<CGS> 63,862,522
<TOTAL-COSTS> 39,095,328
<OTHER-EXPENSES> 1,469
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,881
<INCOME-PRETAX> 33,221,114
<INCOME-TAX> 13,227,475
<INCOME-CONTINUING> 19,993,639
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