UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2002
OR
o | 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 Incorporation or Organization) | | (IRS Employer 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 ý No o
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, 25,546,870 SHARES OUTSTANDING AS OF APRIL 30, 2002
bebe stores, inc.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Fianancial Statements
bebe stores, inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| | MARCH 31,
2002 | | JUNE 30,
2001 | | MARCH 31,
2001 | |
| | |
| | | | | | | |
Assets: | | | | | | | |
Current assets: | | | | | | | |
Cash and equivalents | | $ | 117,206,556 | | $ | 90,999,693 | | $ | 87,152,683 | |
Receivables (net of allowance of $557,295, $416,412 and $365,330) | | 2,412,024 | | 2,342,078 | | 2,685,656 | |
Inventories | | 19,860,908 | | 27,773,439 | | 24,594,951 | |
Prepaid and other | | 10,030,251 | | 9,683,267 | | 9,027,015 | |
Total current assets | | 149,509,739 | | 130,798,477 | | 123,460,305 | |
Equipment and leasehold improvements, net | | 50,008,066 | | 39,199,181 | | 36,644,985 | |
Other assets | | 4,786,365 | | 4,732,399 | | 3,919,071 | |
Total assets | | $ | 204,304,170 | | $ | 174,730,057 | | $ | 164,024,361 | |
| | | | | | | |
Liabilities and Shareholders’ Equity: | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | $ | 10,730,962 | | $ | 10,877,541 | | $ | 11,400,179 | |
Accrued liabilities | | 9,999,713 | | 12,597,298 | | 11,663,649 | |
Total current liabilities | | 20,730,675 | | 23,474,839 | | 23,063,828 | |
Long-term debt | | — | | 6,580 | | 10,668 | |
Deferred rent | | 9,177,364 | | 3,952,261 | | 3,733,391 | |
Total liabilities | | 29,908,039 | | 27,433,680 | | 26,807,887 | |
| | | | | | | |
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 25,537,084, 25,187,695 and 24,989,249 shares | | 25,537 | | 25,188 | | 24,989 | |
Additional paid-in capital | | 36,700,164 | | 32,017,280 | | 27,848,113 | |
Accumulated other comprehensive loss and other | | (293,407 | ) | (190,200 | ) | (292,103 | ) |
Retained earnings | | 137,963,837 | | 115,444,109 | | 109,635,475 | |
Total shareholders’ equity | | 174,396,131 | | 147,296,377 | | 137,216,474 | |
Total liabilities and shareholders’ equity | | $ | 204,304,170 | | $ | 174,730,057 | | $ | 164,024,361 | |
See accompanying notes to condensed consolidated financial statements.
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bebe stores, inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
| | Three Months Ended March 31, | | Nine Months Ended March 31, | |
| | 2002 | | 2001 | | 2002 | | 2001 | |
Net sales | | $ | 70,610,727 | | $ | 66,187,434 | | $ | 242,962,535 | | $ | 221,139,031 | |
Cost of sales, including buying and occupancy | | 41,630,174 | | 36,375,677 | | 132,693,859 | | 115,470,843 | |
Gross profit | | 28,980,553 | | 29,811,757 | | 110,268,676 | | 105,668,188 | |
Selling, general and administrative expenses | | 23,407,622 | | 23,782,901 | | 75,722,638 | | 72,438,585 | |
Income from operations | | 5,572,931 | | 6,028,856 | | 34,546,038 | | 33,229,603 | |
Interest income, expense and other | | (468,018 | ) | (928,422 | ) | (1,638,605 | ) | (2,599,018 | ) |
Earnings before income taxes | | 6,040,949 | | 6,957,278 | | 36,184,643 | | 35,828,621 | |
Provision for income taxes | | 2,266,499 | | 2,661,577 | | 13,664,915 | | 13,819,163 | |
Net earnings | | $ | 3,774,450 | | $ | 4,295,701 | | $ | 22,519,728 | | $ | 22,009,458 | |
Basic earnings per share | | $ | 0.15 | | $ | 0.17 | | $ | 0.89 | | $ | 0.89 | |
Diluted earnings per share | | $ | 0.15 | | $ | 0.17 | | $ | 0.87 | | $ | 0.86 | |
Basic weighted average shares outstanding | | 25,448,689 | | 24,839,090 | | 25,348,233 | | 24,703,841 | |
Diluted weighted average shares outstanding | | 25,956,026 | | 25,907,275 | | 25,966,871 | | 25,586,027 | |
See accompanying notes to condensed consolidated financial statements.
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bebe stores, inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Nine Months Ended March 31, | |
| | 2002 | | 2001 | |
Cash flows from operating activities | | | | | |
Net earnings | | $ | 22,519,728 | | $ | 22,009,458 | |
Adjustments to reconcile net earnings to cash provided by operating activities: | | | | | |
Non-cash compensation expense | | — | | 349,875 | |
Depreciation and amortization | | 7,322,242 | | 6,046,930 | |
Tax benefit from stock options exercised | | 1,364,351 | | 477,460 | |
Net loss on disposal of property | | 476,776 | | 1,601,256 | |
Store closing reserve | | (293,358 | ) | — | |
Deferred rent | | 5,222,682 | | 370,961 | |
Changes in operating assets and liabilities: | | | | | |
Receivables | | (52,830 | ) | 262,984 | |
Inventories | | 7,900,014 | | (267,671 | ) |
Other assets | | (228,469 | ) | (153,941 | ) |
Prepaid expenses | | (347,301 | ) | (4,994,964 | ) |
Accounts payable | | (145,086 | ) | (1,565,259 | ) |
Accrued liabilities | | (2,252,195 | ) | 2,381,603 | |
Net cash provided by operating activities | | 41,486,554 | | 26,518,692 | |
| | | | | |
Cash flows used in investing activities | | | | | |
Purchase of equipment and leasehold improvements | | (18,453,870 | ) | (13,220,774 | ) |
| | | | | |
Cash flows from financing activities | | | | | |
Repayments on capital leases and other | | (77,719 | ) | (74,056 | ) |
Net proceeds from issuance of common stock | | 3,318,882 | | 1,605,919 | |
Net cash provided by financing activities | | 3,241,163 | | 1,531,863 | |
| | | | | |
Effect of exchange rate changes on cash | | (66,984 | ) | (217,818 | ) |
Net increase in cash and equivalents | | 26,206,863 | | 14,611,963 | |
Cash and equivalents: | | | | | |
Beginning of period | | 90,999,693 | | 72,540,720 | |
End of period | | $ | 117,206,556 | | $ | 87,152,683 | |
See accompanying notes to condensed consolidated financial statements.
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bebe stores, inc.
INTERIM FINANCIAL STATEMENTS
The accompanying condensed consolidated balance sheets of bebe stores, inc. as of March 31, 2002 and 2001 and the condensed consolidated statements of earnings for the three months and nine months ended March 31, 2002 and 2001 and condensed consolidated statements of cash flows for the nine months ended March 31, 2002 and 2001 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X without audit. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position at the balance sheet dates and the results of earnings for three and nine months then ended have been included. The condensed consolidated balance sheet at June 30, 2001, presented herein, was derived from audited balance sheet included in the Form 10-K for the fiscal year ended June 30, 2001.
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 Annual Report on Form 10-K for the year ended June 30, 2001.
EARNINGS PER SHARE
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities.
The following is a reconciliation of the number of shares used in the basic and diluted earnings per share computations:
| | Three Months Ended March 31, | | Nine Months Ended March 31, | |
| | 2002 | | 2001 | | 2002 | | 2001 | |
Basic weighted average number of shares outstanding | | 25,448,689 | | 24,839,090 | | 25,348,233 | | 24,703,841 | |
Incremental shares from the assumed issuance of stock options | | 507,337 | | 1,068,185 | | 618,638 | | 882,186 | |
Diluted weighted average number of shares outstanding | | 25,956,026 | | 25,907,275 | | 25,966,871 | | 25,586,027 | |
The number of incremental shares from the assumed issuance of stock options is calculated applying the treasury stock method.
Excluded from the computation of the number of diluted weighted average shares outstanding were antidilutive options of 1,175,230 and 554,380 for the three months ended March 31, 2002 and 2001, respectively, and 970,230 and 693,880 for the nine months ended March 31, 2002 and 2001 respectively.
In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
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This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and establishes standards for the recognition and measurement of asset impairment and disposal cost. SFAS 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. This statement is effective for bebe in the fiscal year beginning July 1, 2002 and adoption is not expected to have a material impact on our financial position or results of operations.
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 year.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net sales for the periods indicated:
| | Three Months Ended March 31, | | Nine Months Ended March 31, | |
Statements of Operations Data: | | 2002 | | 2001 | | 2002 | | 2001 | |
| | | | | | | | | |
Net Sales | | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of sales, including buying and occupancy (1) | | 59.0 | | 55.0 | | 54.6 | | 52.2 | |
| | | | | | | | | |
Gross profit | | 41.0 | | 45.0 | | 45.4 | | 47.8 | |
Selling, general and administrative expenses (2) | | 33.2 | | 35.9 | | 31.2 | | 32.8 | |
| | | | | | | | | |
Income from operations | | 7.8 | | 9.1 | | 14.2 | | 15.0 | |
Interest and other expense (income), net | | (0.7 | ) | (1.4 | ) | (0.7 | ) | (1.2 | ) |
| | | | | | | | | |
Earnings before income taxes | | 8.5 | | 10.5 | | 14.9 | | 16.2 | |
Provision for income taxes | | 3.2 | | 4.0 | | 5.6 | | 6.2 | |
| | | | | | | | | |
Net earnings | | 5.3 | % | 6.5 | % | 9.3 | % | 10.0 | % |
(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.
We operated 162 stores at March 31, 2002 compared to 138 stores at March 31, 2001. We opened 16 new stores in the first nine months of fiscal 2002 and expect to open approximately 22 stores during fiscal 2002. In addition to our traditional brick-and-mortar stores, we also operate an on-line store, which can be found at www.bebe.com.
Net Sales. Net sales increased to $70.6 million during the three months ended March 31, 2002 from $66.2 million in the same period of the prior year, an increase of $4.4 million, or 6.6%. Net sales for the quarter included $55.5 million from stores open more than one year. During the quarter we generated an 8.2% decrease in comparable store sales versus the prior year. Management believes this decrease is due to lower than planned inventory levels as a result of the Production Department move. The remaining sales of $15.1 million were generated by stores not included in the comparable store sales base and to a lesser
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extent on-line sales, wholesale sales to international licensees, and royalty revenue from product licensees. For the nine months ended March 31, 2002, net sales increased to $243.0 million from $221.1 million in the same nine-month period of the prior year, an increase of $21.9 million, or 9.9%. Net sales for the nine-month period were comprised of $193.9 million from stores open more than one year, representing a 5.0% decrease in comparable store sales versus the prior year. The remaining sales of $49.1 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.
Gross Profit. Gross profit, which includes the cost of merchandise, buying and occupancy, decreased to $29.0 million during the three months ended March 31, 2002 from $29.8 million for the same three-month period of the prior year, a decrease of $0.8 million, or 2.7%. As a percentage of net sales, gross profit decreased to 41.0% for the three-month period ended March 31, 2002 from 45.0% in the same three-month period of the prior year. For the nine months ended March 31, 2002, gross profit increased to $110.3 million from $105.7 million for the same nine-month period of the prior year, an increase of $4.6 million, or 4.4%. As a percentage of net sales, gross profit decreased to 45.4% for the nine-month period ended March 31, 2002 from 47.8% in the same nine-month period of the prior year. The decrease in gross profit as a percentage of net sales resulted from lower merchandise margins and higher occupancy expense as a percentage of sales. The decrease in merchandise margins was due to the mix of outlets versus our full price stores and to more competitive pricing. There was also a $412K charge associated with the write-off of fabric.
Selling, General and Administrative Expenses. Selling, general and administrative expenses, which primarily consist of non-occupancy store costs, corporate overhead and advertising costs, decreased to $23.4 million during the three months ended March 31, 2002 from $23.8 million in the same period of the prior year, a decrease of $0.4 million, or 1.7%. As a percentage of net sales, these expenses decreased to 33.2% during the three-month period from 35.9% in the same period of the prior year. For the nine months ended March 31, 2002, selling, general and administrative expenses increased to $75.7 million from $72.4 million in the same nine-month period of the prior year, an increase of $3.3 million, or 4.6%. As a percentage of net sales, these expenses decreased to 31.2% during the nine-month period from 32.8% in the same period of the prior year. This decrease as a percentage of net sales was largely the result of lower compensation resulting from the reversal of an expense associated with the Company’s incentive plan, as well as the favorable claims received from settlements.
Interest and Other Expense (Income), Net. We generated approximately $0.5 million of interest and other income (net of other expenses) during the three months ended March 31, 2002 as compared to approximately $0.9 million in the same three-month period of the prior year. For the nine months ended March 31, 2002, the Company generated $1.6 million of interest and other income (net of other expense) as compared to $2.6 million in the same nine-month period of the prior year. The decrease in interest and other income is a result of lower interest rates offset by higher average cash balances.
Provision for Income Taxes. The effective tax rate for the nine months ended March 31, 2002, was approximately 37.8 % as compared to 38.6% in the prior year. This decrease was largely due to more income from tax-free investments and less income from taxable and 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 March 31, 2002, we had approximately $117.2 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 March 31, 2002, there were no borrowings under the line of credit and letters of credit outstanding totaled $1.4 million.
Net cash provided by operating activities for the nine months ended March 31, 2002 was $41.5 million. Cash provided by operating activities for the period was primarily generated by earnings adjusted for depreciation, deferred rent and reduced inventory and prepaid asset balances.
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Net cash used by investing activities for the nine month period ended March 31, 2002 was $18.5 million primarily for the opening of new stores, a new distribution facility and investments in management information systems. We opened 16 new stores in the first nine months of fiscal 2002 and expect to open approximately 22 stores during fiscal 2002.
During fiscal 2001, the Company entered into a lease agreement for a 144,000 square foot distribution facility in Benicia, CA. We incurred capital expenditures of approximately $2.9 million in fiscal 2002 and $1.6 million in fiscal 2001 related to the new facility.
We are currently consolidating our corporate offices into one space we currently lease at 400 Valley Drive, Brisbane, CA. This consolidation consists of the conversion of warehouse space into office space. We expect to incur capital expenditures of approximately $2 million related to the conversion and build-out during fiscal 2002.
We estimate that total capital expenditures will be approximately $20 million to $24 million in fiscal 2002 and $15 million to $20 million in fiscal 2003.
Net cash provided by financing activities was $3.2 million for the nine months ended March 31, 2002 and was primarily derived from proceeds from stock option exercises.
We believe that our cash on hand, together with our cash flows from operations, will be sufficient to meet our capital and operating requirements through fiscal 2002. Our future capital requirements, however, will depend on numerous factors, including without limitation, the size and number of new and expanded stores and/or store concepts, investment costs for management information systems, corporate office and distribution center expansions, potential acquisitions and/or joint ventures, stock repurchase, 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:
1. If we misjudge our customers’ acceptance of, or demand for, our products, our sales and profitability may be negatively impacted. Our success depends on our ability to develop or select the right products, present a balanced product assortment and manage our inventory with the demand for such merchandise. Our ability to accurately predict the demand for our products is further affected by uncertainties created by the slowed economy, recent international affairs and consumer spending fluctuations. If we miscalculate our customers’ product preferences or the demand for our products, we may be faced with significant excess inventory or lack of inventory. This could 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 would impair our profitability.
2. If we cannot successfully transition our production responsibilities to our new facility in Los Angeles, we could lose sales and increase our cost of goods. We moved our production responsibilities from our facility in Brisbane to a new production facility in Los Angeles, California. We have and may
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continue to experience difficulty in implementing our production processes in this new facility. Any disruption related to this transition whether due to the hiring and training of new personnel, differences in the techniques and processes used, system integration and implementation or other factors, may affect the timeliness of product deliveries, control of inventory including raw materials, work-in-process and finished goods and the quality of our merchandise, and could ultimately harm our sales, adversely affect our reputation and result in additional costs.
3. If we are not able to consistently show increases in net earnings or are not able to operate on a profitable basis, our stock price may be negatively affected. We cannot guarantee that we will generate net earnings increases period to period or 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. And although we were profitable, in fiscal 2000, we experienced a significantly lower rate of growth in earnings than experienced in the prior three fiscal years, and in fiscal 2001, earnings decreased versus the prior year.
Our future results of operations will depend on a number of factors including, but not limited to, our ability to manage and execute:
• the number and timing of new store openings;
• identify and capitalize upon changing fashion trends;
• identify, 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;
• comparable store sales performance;
• control inventory shrinkage results;
• control operating costs; and
• produce finished goods in a timely manner.
In addition, future results of operations will depend on factors outside of our control, such as general economic conditions (including the effects of the events of September 11, 2001 and uncertainties related to the ongoing conflicts), availability of third party sourcing and raw materials, and actions of competitors.
4. If we are unable to obtain raw materials or find manufacturing facilities, our financial condition may be harmed. We do not own any manufacturing 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. 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
10
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.
5. 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 have opened sixteen stores year to date and expect to open an additional six stores in fiscal 2002. Our plan to expand successfully depends on a number of factors, including but not limited to, the following:
• the availability of desirable locations;
• the ability to identify suitable 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 have opened and 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 2002 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.
6. Our success depends on our key employees, the loss of whom could disrupt our business. We depend upon the expertise and execution of our key employees, particularly Manny Mashouf, the founder, Chairman, Chief Executive Officer and majority shareholder. 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.
Also, our success depends on our ability to attract and retain experienced employees and utilize all employees’ strengths. 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 executive management team and retail store personnel. If we fail to attract, motivate and retain qualified personnel, or capitalize on such persons’ expertise, it could harm our business and results of operations.
7. If we are not able to effectively upgrade and expand our management information systems, our operations may be harmed. We have in the past and will continue in the future to make significant investments to improve existing management information systems and implement new systems in the areas of production, merchandise allocation, financial 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.
8. If an independent manufacturer violates labor or other laws, or is accused of violating any such laws, or if their labor practices diverge from those generally accepted as ethical, it could harm our business and brand image. While we maintain a policy to monitor the operations of our independent manufacturers by having an independent firm inspect these manufacturing sites, and all manufacturers are
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contractually required to comply with such labor practices, we cannot control the actions or the public’s perceptions of such manufacturers, nor can we assure that these manufacturers will conduct their businesses using ethical or legal labor practices. Recently courts have addressed whether apparel companies can be held jointly liable for the wrongdoings of the manufacturers of their products. While we do not control their employees’ employment conditions or the manufacturer’s business practices, and the manufacturers act in their own interest, they may act in a manner that results in negative public perceptions of us and/or employee allegations or court determinations that we are jointly liable.
9. 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 you 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.
10. Our business is seasonal and as a result 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 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. We currently operate two corporate offices and a distribution center in Benicia, California. We also operate a technology support center in Sacramento, California, and a design studio and production facility in Los Angeles, California. Any serious disruption at these facilities could have a harmful effect on our business. Additionally we are currently consolidating our corporate offices into the space we currently lease at 400 Valley Drive, Brisbane, California. Any serious disruption at these facilities whether due to the construction, relocation, employment needs of these facilities, fire, earthquake, terrorist acts or otherwise would harm our operations and could have a harmful effect on our business and results of operations. Furthermore, we have little experience operating essential functions away from our main corporate offices and are uncertain what effect operating such satellite facilities might have on business, personnel and results of operations.
Furthermore, merchandise is typically shipped as soon as possible after receipt in our distribution center using third-party carriers. If these third-party carriers are unable to deliver shipments to some or all of our stores in a timely or cost efficient manner or if shipments are slowed due to actual or threats of terrorist attacks, our business and results of operations may be harmed.
12. 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
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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. 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. Any economic slowdown or downturn could harm our financial condition. We cannot assure that our customers would continue to make purchases during such times.
2. 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;
• sourcing strategies;
• product styling;
• product quality;
• product presentation;
• product pricing;
• timeliness of product development and delivery to market;
• 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.
3. 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.
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 March 31, 2002, only 4,760,496 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.
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2. Because a principal shareholder controls the company, other shareholders may not be able to influence the direction the company takes. As of March 31, 2002, Manny Mashouf, the Chairman and Chief Executive Officer, beneficially owned approximately 81.4% the outstanding shares of our common stock. As a result, he alone can control the election of directors and the outcome of all issues submitted to the shareholders. This may make it more difficult for a third party to acquire shares, may discourage acquisition bids, and could limit the price that certain investors might be willing to pay for shares of common stock. This concentration of stock ownership may have the effect of delaying, deferring or preventing a change in control of our company.
3. All of our restricted securities are eligible to be sold, which may cause dilution of our common stock. As of March 31, 2002, we had a total of 25,537,084 shares of common stock outstanding. Of these shares, 20,776,588 are held by the existing shareholders as “restricted securities,” which means they acquired these securities from our company in a transaction that did not involve a public offering. These shares may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 of the Securities Act. At this time, all restricted securities will be eligible to be sold, subject to certain volume and other limitations under Rule 144.
As of March 31, 2002, options to purchase 1,820,086 shares of common stock were outstanding and exercisable, subject to certain vesting and repurchase restrictions.
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 .475 basis points (a 10% change from the bank’s reference rate as of March 31, 2002), 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 one subsidiary with a base currency other than the U.S. Dollar. This subsidiary represented less than one percent of total revenues and, therefore, presents 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.
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to claims arising out of its operations. As of the date of this filing, the Company is not engaged in any legal proceedings that are
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expected, individually or in the aggregate, to have a material adverse effect on the Company’s business, financial condition or results of operations.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
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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 May 15, 2002 |
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| bebe stores, inc. |
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| /s/ John Kyees | |
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| John Kyees, Chief Financial Officer and Chief Administrative Officer |
| |
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| /s/ Christina Perozzi | |
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| Christina Perozzi, V.P. of Finance |
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