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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998
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, 23,944,064 SHARES OUTSTANDING
AS OF JANUARY 20,1999.
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BEBE STORES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
December 31, 1998 (unaudited), June 30, 1998 and
December 31, 1997 (unaudited) 3
Condensed Consolidated Statements of Operations (unaudited)
Three months ended December 31, 1998 and 1997 and
Six months ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended December 31, 1998 and 1997 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 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BEBE STORES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AS OF
DECEMBER 31, AS OF JUNE 30, DECEMBER 31,
1998 1998 1997
---- ---- ----
(Unaudited) (Unaudited)
ASSETS:
Current assets:
Cash and equivalents $55,166,161 $36,651,617 $22,112,142
Receivables (net of allowance of $94,273,
$51,785 and $88,970) 202,856 256,567 114,561
Inventories, net 14,148,061 14,405,213 9,964,480
Deferred income taxes 842,835 842,835 674,447
Prepaid and other 283,213 134,760 56,966
-------- ------- ------
Total current assets 70,643,126 52,290,992 32,922,596
Equipment and improvements, net 11,554,916 9,213,358 8,367,425
Deferred income taxes 1,811,126 1,811,126 1,527,595
Other assets 1,351,883 893,252 744,981
---------- ------- -------
Total other assets 3,163,009 2,704,378 2,272,576
---------- --------- ---------
Total assets $85,361,051 $64,208,728 $43,562,597
------------ ----------- -----------
------------ ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $8,856,084 $6,921,981 $5,369,305
Accrued liabilities 11,062,805 8,470,623 8,883,553
Current portion of long-term debt 105,410 104,286 127,835
Income taxes payable 1,859,643 890,258 1,536,198
---------- ------- ---------
Total current liabilities 21,883,942 16,387,148 15,916,871
Long-term debt 17,213 82,218 125,598
Deferred rent 2,500,494 2,475,883 2,473,276
---------- --------- ---------
Total liabilities 24,401,649 18,945,249 18,515,745
Commitments and contingencies 0 0 0
Shareholders' equity:
Preferred stock-authorized 1,000,000 shares at $0.001 par
value per share: no shares issued and outstanding
Common stock-authorized 40,000,000 shares at $0.001 par
value per share; issued and outstanding 23,944,064 shares 23,944 23,890 22,640
Additional paid-in capital 17,359,090 17,078,200 5,205,610
Deferred compensation (1,628,964) (2,061,227) (2,305,579)
Retained earnings 45,205,332 30,222,616 22,124,181
---------- ---------- ----------
Total shareholders' equity 60,959,402 45,263,479 25,046,852
----------- ---------- ----------
Total liabilities and shareholders' equity $85,361,051 $64,208,728 $43,562,597
----------- ---------- ----------
----------- ---------- ----------
See accompanying notes to financial statements.
3
BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 30, SIX MONTHS ENDED DECEMBER 30,
------------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $59,491,380 $43,558,084 $101,043,712 $74,775,621
Cost of sales, including buying and occupancy 27,215,360 21,145,190 47,016,054 36,709,630
---------- ---------- ---------- ----------
Gross profit 32,276,020 22,412,894 54,027,658 38,065,991
Selling, general and administrative expenses 16,306,630 13,182,460 29,507,167 22,565,225
---------- ---------- ---------- ----------
Income from operations 15,969,390 9,230,434 24,520,491 15,500,766
Other expense (income):
Interest expense 2,419 2,999 4,768 7,801
Interest income (556,038) (190,880) (1,043,801) (343,143)
Other (288) 44,062 1,003 23,319
----- ------- ----- ------
Earnings before income taxes 16,523,297 9,374,253 25,558,521 15,812,789
Provision for income taxes 6,871,365 3,851,495 10,575,805 6,492,434
---------- ---------- ---------- ---------
Net earnings $9,651,932 $5,522,758 $14,982,716 $9,320,355
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Basic earnings per share $0.40 $0.24 $0.63 $0.41
Diluted earnings per share $0.38 $0.23 $0.59 $0.39
Basic weighted average shares outstanding 23,894,384 22,639,997 23,895,289 22,639,997
Diluted weighted average shares outstanding 25,508,278 23,661,667 25,449,588 23,608,149
See accompanying notes to financial statements.
4
BEBE STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
DECEMBER 31,
-------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $14,982,716 $9,320,355
Adjustments to reconcile net earnings to cash provided
(used) by operating activities:
Non-cash compensation expense 240,851 434,421
Depreciation and amortization 1,384,896 1,039,189
Tax benefit from options exercised 106,620
Net loss on disposal of property 142,506 119,307
Store closing reserve (34,989) 626,618
Deferred income taxes (619,199)
Deferred rent (32,497) (215,777)
Changes in operating assets and liabilities:
Receivables 55,350 (51,105)
Inventories 257,153 (502,782)
Other assets (502,890) 6,970
Prepaid expenses (148,453) 29,934
Accounts payable 1,934,102 304,675
Accrued liabilities 2,592,183 2,953,372
Income taxes payable 969,385 1,005,843
-------- ---------
Net cash provided by operating activities 21,946,933 14,451,821
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (4,188,303) (1,834,889)
Proceeds from sales of equipment 9,700 1,040
Proceeds from tenant allowance 446,000 290,240
Proceeds from sale of marketable securities 77,883
---------- ------
Net cash used by investing activities (3,732,603) (1,465,726)
Cash flows from financing activities:
Borrowings from (repayments to) shareholder (1,639) 538
Repayments on capital leases & other (38,237) (38,261)
Repayments of investment note (25,645) (28,150)
Issuance of common stock 365,736
------- -------
Net cash used by financing activities 300,215 (65,873)
Net increase in cash 18,514,545 12,920,222
CASH:
Beginning of year 36,651,616 9,191,919
----------- ----------
End of year $55,166,161 $22,112,141
------------ ------------
------------ ------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 4,768 $ 7,801
------------ ------------
Cash paid for income taxes $ 9,499,800 $ 6,143,790
------------ ------------
See accompanying notes to financial statements.
5
BEBE STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTERIM FINANCIAL STATEMENTS
The accompanying Condensed Consolidated Balance Sheets of bebe stores,
inc. (the "Company") as of December 31, 1998 (the "current period") and
December 31, 1997 (the "prior period") and the interim Condensed Consolidated
Statements of Operations and Cash Flows for the three months and six months
ended December 31, 1998 and December 31, 1997 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,
1998 was derived from audited financial statements. The Company's 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 the Company's Fiscal
1998 Annual Report on Form 10-K.
EARNINGS PER SHARE
Under SFAS No. 128, the Company provides dual presentation of EPS on a
basic and diluted basis. The Company's 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.
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------- -----------
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Basic weighted average number of
Shares outstanding 23,894,384 22,639,997 23,895,289 22,639,997
Incremental shares from assumed
Issuance of stock options 1,613,894 1,021,680 1,554,299 968,152
--------- --------- --------- ----------
Diluted weighted average number of
Shares outstanding 25,508,278 23,661,677 25,449,588 23,608,149
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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. The Company's 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.
The Company's fiscal year ends on June 30 of each calendar year.
6
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
net sales for the periods indicated:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
STATEMENTS OF OPERATIONS DATA: 1998 1997 1998 1997
---- ---- ---- ----
Net sales................................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy (1)........ 45.7 48.5 46.5 49.1
---- ---- ---- ----
Gross profit............................................. 54.3 51.5 53.5 50.9
Selling, general and administrative expenses (2)......... 27.5 30.3 29.2 30.2
---- ---- ---- ----
Income from operations................................... 26.8 21.2 24.3 20.7
Interest and other expenses (income), net................ (1.0) (0.3) (1.0) (0.4)
----- ----- ----- -----
Earnings before income taxes............................. 27.8 21.5 25.3 21.1
Provision (benefit) for income taxes..................... 11.6 8.8 10.5 8.7
---- --- ---- ---
Net earnings............................................. 16.2% 12.7% 14.8% 12.4%
----- ----- ----- -----
----- ----- ----- -----
- -----------
(1) Cost of sales includes the cost of merchandise, store occupancy costs
and buying 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 $59.5 million during the three months
ended December 31, 1998 from $43.6 million in the same period of the prior year,
an increase of $15.9 million, or 36.5%. Of this increase, $10.8 million was
attributable to the 27.7% increase in comparable store sales, and $5.1 million
was attributable to on-line sales and stores not included in the comparable
store sales base. For the six months ended December 31, 1998, net sales
increased to $101.0 million from $74.8 million in the same six-month period of
the prior year, an increase of $26.2 million, or 35.0%. Of this increase, $18.7
million was attributable to the 27.4% increase in comparable store sales for the
six-month period, and $7.5 million was attributable to on-line sales and stores
not included in the comparable store sales base. 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
the Company's business. While the Company is experiencing comparable store sales
growth increases to date that are consistent with those experienced in the
quarter ended December 31, 1998, the Company believes that such increases may be
lower in the future. The Company operated 91 stores at December 31, 1998
compared to 85 stores at December 31, 1997. The Company also sells product
through its on-line store which can be found at www.bebe.com. Sales generated by
the on-line store were significantly less than sales generated by any one store
during the quarter.
GROSS PROFIT. Gross profit, which includes the cost of merchandise, buying
and occupancy, increased to $32.3 million during the three months ended December
31, 1998 from $22.4 million for the same three-month period of the prior year,
an increase of $9.9 million, or 44.2%. As a percentage of net sales, gross
profit increased to 54.3% for the three-month period ended December 31, 1998
from 51.5% in the same three-month period of the prior year. For the six months
ended December 31, 1998, gross profit increased to $54.0 million from $38.1
million for the same six-month period of the prior year, an increase of $15.9
million, or 41.7%. As a percentage of net sales, gross profit increased to 53.5%
for the six-month period from 50.9% in the same six-month period of the prior
year. The increase in gross profit as a percentage of net sales resulted from
higher initial markups and lower markdowns associated with higher sell-through
rates, as well as reduced occupancy costs as a percentage of net sales resulting
from higher average store sales. The Company believes that the gross margins
attained during this most recent quarter are not sustainable and that gross
margins in the current and future periods will likely be lower than those
experienced in the quarter ended December 31, 1998.
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 $16.3 million during the
three months ended December 31, 1998 from $13.2 million in the same period of
the prior year, an increase of $3.1 million, or 23.5%. As a percentage of net
sales, these expenses decreased to 27.5% during the three-month period from
30.3% in the same period of the prior year. For the six months ended December
31, 1998, expenses increased to $29.5 million from $22.6 million in the same
six-month period of the
7
prior year, an increase of $6.9 million, or 30.5%. As a percentage of net
sales, these expenses decreased to 29.2% during the six-month period from
30.2% in the same period of the prior year. This decrease as a percentage of
net sales was largely a result of decreased compensation costs.
INTEREST AND OTHER EXPENSE (INCOME), NET. The Company generated $554,000
of interest and other income (net of other expenses) during the three months
ended December 31, 1998 as compared to $144,000 in the same three-month
period of the prior year. For the six months ended December 31, 1998, the
Company generated $1.0 million of interest and other income (net of other
expenses) as compared to $312,000 in the same six-month period of the prior
year. The Company had no significant borrowings under its line of credit
during the period ended December 31, 1998. The increase of interest and other
income is a result of higher cash balances generated from operating results
and proceeds from the Company's initial public offering of stock in June 1998.
PROVISION (BENEFIT) FOR INCOME TAXES. The effective tax rate for the
three months ended December 31, 1998 was 41.6%. The rate for the six months
ended December 31, 1998 was 41.4% and for the three months ended September
30, 1998 was 41.0%.
LIQUIDITY AND CAPITAL RESOURCES
During the three fiscal years ended June 30, 1998, bebe has satisfied its
cash requirements principally through cash flow from operations, borrowings
under its revolving lines of credit and term loans. Primary uses of cash have
been to purchase merchandise inventory, to fund the construction of new stores
and to remodel and renovate stores.
The Company's working capital requirements vary widely throughout the year
and generally peak in the first and second fiscal quarters. At December 31,
1998, the Company had approximately $55.2 million of cash and cash equivalents
on hand of which $11.9 million was derived from the Company's initial public
offering in June 1998. In addition, the Company had a revolving line of credit,
under which it could borrow or issue letters of credit up to a combined total of
$5.0 million. As of December 31, 1998, there were no borrowings under the line
of credit, and letters of credit outstanding totaled $1.5 million.
Net cash provided by operating activities for the six months ended December
31, 1998 was $21.9 million. Cash provided by operating activities for the period
was primarily generated by income from operations and changes in working
capital.
Net cash used by investing activities for the six-month period was $3.7
million. The primary use of these funds was for the opening of new stores and
the implementation of new computer systems within the stores and the corporate
office.
The Company expects to make substantial capital expenditures in connection
with the opening and expansion of stores, the implementation of new systems to
support store and corporate office functions and the expansion or relocation of
its corporate offices and distribution center. The Company estimates that
capital expenditures will be between $9.0 million and $11.0 million in fiscal
1999, of which $4.2 million had been spent during the six months ended December
31, 1998. The Company expects to open approximately 10 additional stores in the
remainder of fiscal 1999 and approximately 15 stores in fiscal 2000. The Company
opened four new stores during the three months ended December 31, 1998.
Net cash provided by financing activities was $300,000 for the six months
ended December 31, 1998. The Company believes that its cash on hand, together
with its cash flow from operation, will be sufficient to meet its capital and
operating requirements through fiscal 1999. The Company's future capital
requirements, however, will depend on numerous factors, including without
limitation, the size and number of new and expanded stores, investment costs for
management information systems, potential acquisitions and/or joint ventures,
and future results of operations.
SEASONALITY OF BUSINESS AND QUARTERLY RESULTS
The Company's 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, the Company generates a disproportionate amount of
its annual net sales in the first half of its fiscal year (which includes the
fall and holiday selling seasons) compared to the second half of its fiscal
year. If for any reason the Company's sales were below seasonal norms during the
first half of its fiscal year, the Company's annual operating results would be
affected
8
adversely. Because of the seasonality of the Company's business,
results for any quarter are not necessarily indicative of results that may be
achieved for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.
YEAR 2000 DATE CONVERSION
The Company has created a Year 2000 task force that is implementing a
six-phase plan with the objective of ensuring that its management information
systems will record, store, process, calculate and present calendar dates
falling on or after (and if applicable, spans of time including) January 1,
2000 in the same manner, and with the same functionality as it has in years
prior to 2000 (collectively, "Year 2000 Compliant"). As part of this
six-phase plan, the Company has completed a comprehensive review of its
information systems and is involved in a program to update computer systems
and applications in preparation for the year 2000. The Company currently
believes that this six-phase plan will be completed by July 31, 1999;
however, the Company has intentionally planned its completion date well in
advance of January 1, 2000 to allow adequate time to further test and modify
all mission critical applications should such further work be necessary.
Total expenditures related to identification, testing, conversion,
contingency, replacement and upgrading system applications are expected to
range from $400,000 to $600,000 during fiscal 1999 and 2000. As of December
31, 1998, the Company's expenditures were below the expectations for such
six-month period. In certain cases, the conversions to applications that are
year 2000 compliant will be made in conjunction with planned business system
upgrades or enhancements. In the most reasonably likely worst case scenario,
the Company's store operating and back end inventory management systems could
fail. The consequence of such failure could include the inability to record
sales transactions in the Company's stores and a breakdown in the supply
chain. Such occurrence would likely result in a loss of revenue; it is not
possible to quantify the possible range of such loss. This would necessitate
reverting to a number of manual systems for recording sales, ordering product
and replenishing the Company's stores.
The Company is attempting to contact vendors and others on whom it
relies to assure that their systems will be converted before January 1, 2000.
However, there can be no assurance that the systems of other companies on
which the Company's systems rely will be year 2000 compliant by December 31,
1999. Any such failure to convert by another company may have an adverse
effect on the Company's systems. In the most reasonably likely worst case
scenario, one or more significant supplier could be unable to continue to
adequately supply the Company after 1999. The Company's fallback position
would be to seek an alternative source of supply. However, there can be no
assurance that such alternative sources of supply would be available on
reasonable terms or at all. Such a contingency plan will be in place by the
end of fiscal year 1999. It is not practical for management to estimate the
range of financial loss, if any, which could result from the negative effect
that a disruption in supply would have on the Company's business.
Furthermore, no assurance can be given that any or all of the Company's
systems are or will be year 2000 compliant, or that the ultimate costs
required to address the year 2000 issue or the impact of any failure to
achieve substantial year 2000 compliance will not have a material adverse
effect on the Company's financial condition.
RISKS THAT MAY AFFECT RESULTS
FASHION AND APPAREL INDUSTRY RISKS. The apparel industry is subject to
rapidly evolving fashion trends, shifting consumer demands and intense
competition. The Company believes that its future success will be dependent,
in part, on its ability to anticipate, identify and capitalize upon emerging
fashion trends, including products, styles, fabrics and colors, and to
distinguish itself within the women's apparel market. If, for any reason, the
Company misinterprets the current fashion trends or consumer tastes shift and
the Company fails to respond, consumer demand for bebe products and the
Company's profitability and brand image could be significantly impaired.
Additionally, there can be no assurance that competitors of the Company will
not carry similar designs, thus undermining bebe's distinctive image and
potentially having an adverse effect on the Company's financial condition and
results of operations.
MANAGEMENT OF INVENTORY. Success in the apparel industry is dependent on a
company's ability to manage its inventory of merchandise in proportion to the
demand for such merchandise. If bebe miscalculates the consumer demand for its
products it may be faced with significant excess inventory and excess fabric for
some
9
products and missed opportunities for others. Weak sales and resulting
markdowns and/or write-offs could cause the Company's profitability to be
significantly impaired and may have a material adverse effect on the Company's
financial condition and results of operations.
RISKS OF GROWTH STRATEGY. The Company's continued growth is dependent,
to a significant degree, on its ability to identify sites and open and
operate new stores on a profitable basis. bebe opened 24 stores in fiscal
1995, 18 stores in fiscal 1996, 10 stores in fiscal 1997, seven stores in
fiscal 1998 and five stores in the six-month period ended December 31, 1998.
The Company expects to open approximately 10 additional stores in the
remainder of fiscal 1999 and an additional 15 stores in fiscal 2000. Such
expansion may include the opening in selected markets of flagship stores that
will be larger and more expensive to operate than existing stores. If the
Company does not generate sufficient revenues from these flagship stores to
cover their higher costs, the Company's financial results could be negatively
affected. The success of this expansion plan is dependent upon a number of
factors, including the availability of desirable locations, the successful
negotiation of 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. There can be no assurance that
the Company will be able to achieve its planned expansion on a timely and
profitable basis, if at all. In addition, a majority of the Company's new
store openings in the remainder of fiscal 1999 and fiscal 2000 will be in
existing markets. There can be no assurance that these openings will not
result in reduced net sales volumes and profitability in existing stores in
those markets.
FUTURE RESULTS OF OPERATIONS. Although the Company has been profitable
on an annual basis for each of the past five fiscal years, profitability
rates have varied widely from quarter-to-quarter and from year-to-year. In
particular, in fiscal 1996, the Company experienced a significant financial
downturn due to, among other things, a significant disruption in supply of
the Company's key fabrication, difficulty in obtaining a replacement
fabrication, certain related fashion misjudgments, failure to obtain product
deliveries in a timely manner, rapid expansion of the Company's store base,
and lack of sufficient controls and personnel to support such expanded
activity. There can be no assurance that the Company will remain profitable
in the future. Future results of operations will depend on, among other
things, the number and timing of new store openings and the Company's 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.
Future results of operations will also depend on factors outside of the
Company's control, such as general economic conditions, availability of third
party sourcing and raw materials, and actions of competitors.
The Company believes that the rate of comparable store sales growth
achieved in recent periods is not sustainable and expects that such growth,
if any, in the current and future periods will be more moderate. Furthermore,
during these recent periods of relatively high comparable store sales growth,
the Company has experienced favorable merchandise margins due to strong
sell-through rates and attendant low markdown rates coupled with favorable
occupancy expense leverage. As comparable store sales growth moderates, the
Company anticipates a decline in merchandise margins and, accordingly, a
reduction in gross margins.
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS. In the past, the Company's
investments in information systems have focused on its core store,
merchandise and financial accounting systems. Currently, the Company's focus
is on upgrading its capabilities and systems associated with its production,
merchandise allocation and distribution functions, which have not kept pace
with the Company's growth. The Company intends to make significant
investments to improve existing management information systems and implement
new systems in these areas and to implement them during fiscal 1999 and
beyond. There can be no assurance that these enhancements will be
successfully implemented. Failure to implement and integrate such systems
could have a material adverse effect on the Company's business, financial
condition and results of operations.
NEW MANAGEMENT TEAM; DEPENDENCE ON KEY PERSONNEL. The Company is
dependent upon the efforts of its key employees, particularly Manny Mashouf,
the founder, Chairman, President and Chief Executive Officer. In addition,
most of the Company's officers and other key personnel have joined the
Company since the middle of fiscal 1996 and, therefore, have relatively
little experience with the Company. None of the Company's executive officers
is bound by an employment agreement, and the relationships of such officers
with the Company are, therefore, at will. With the exception of Mr. Mashouf,
the Company does not have "key person" life insurance policies on any of its
employees. The loss of the services of Mr. Mashouf or any of its key
10
officers or employees could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, the
Company will need to hire experienced executive personnel to support the
planned improvements and expansions of its business; however, there can be no
assurance that the Company will be successful in hiring such personnel in a
time frame necessary to manage and support its expansion plans.
The Company's success also depends to a significant degree on its ability
to attract and retain experienced employees. There is substantial competition
for experienced personnel, which the Company expects to continue. Many of the
companies with which bebe competes for experienced personnel have greater
financial resources than the Company. In the past, the Company has experienced
significant turnover of its retail store personnel. The Company's failure to
attract, motivate and retain qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON INDEPENDENT MANUFACTURING FACILITIES AND RAW MATERIAL
SUPPLIERS. The Company does not own any production facilities and therefore
is dependent on third parties for the manufacturing of its products. Company
merchandise designed by the bebe in-house design team is manufactured by
independent manufacturers with raw materials purchased from independent mills
and other suppliers. The Company places all of its orders for production of
merchandise and raw materials by purchase order and does not have any
long-term contracts with any manufacturer or supplier. The Company competes
with other companies for production facilities and raw materials. In the
past, particularly in fiscal 1996, the Company had difficulty obtaining
needed quantities of raw materials on a timely basis because of competition
with other apparel vendors for raw materials. Such failure to obtain
sufficient quantities of raw materials has had an adverse effect on the
Company's financial condition in the past and may in the future. Furthermore,
the Company has received in the past, and may receive in the future,
shipments of products from manufacturers that fail to conform to the
Company's quality control standards. In such event, unless the Company is
able to obtain replacement products in a timely manner, the Company may lose
sales. The Company's failure to maintain favorable relationships with these
production facilities and to obtain an adequate supply of quality raw
materials on commercially reasonable terms could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The violation of labor or other laws by an independent manufacturer of
the Company, or the divergence of an independent manufacturer's labor
practices from those generally accepted as ethical in the United States,
could have a material adverse effect on the Company's business, financial
condition, results of operations and brand image. While the Company recently
adopted a policy to monitor the operations of its independent manufacturers
by having an independent firm inspect these manufacturing sites, the Company
cannot control the actions of such manufacturers, and there can be no
assurance that these manufacturers will conduct their businesses using
ethical labor practices.
DEPENDENCE ON THIRD PARTY APPAREL MANUFACTURERS. A significant portion
of the Company's merchandise is developed in conjunction with third party
apparel manufacturers and, in some cases, selected directly from these
manufacturers' lines. The Company does not have long-term contracts with any
third party apparel manufacturers and purchases all of the merchandise from
such manufacturers by purchase order. Furthermore, the Company has received
in the past, and may receive in the future, shipments of products from
manufacturers that fail to conform to the Company's quality control
standards. In such event, unless the Company is able to obtain replacement
products in a timely manner, the Company may lose sales. There can be no
assurance that third party manufacturers will not supply similar products to
the Company's competitors, will not cease supplying products to the Company
completely or will supply products that satisfy the Company's quality control
standards.
RISK OF FOREIGN SOURCING. The Company purchases its raw materials from
mills and other suppliers, a significant portion of which is purchased from
suppliers outside the United States, primarily in Japan. A significant portion
of the manufacturing of its merchandise is sourced outside the United States,
primarily in Europe and Asia.
The Company is subject to the 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, the impact of foreign government regulation, political unrest,
disruption or delays of shipments and changes in economic conditions in
countries in which the Company's suppliers are located. The occurrence of any
one or more of the foregoing could adversely affect the Company's business,
financial condition and results of operations.
11
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of
foreign countries. 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, impose quotas on the amounts and types of merchandise
which may be imported into the United States from these countries. These
agreements also allow the United States to impose restraints at any time on
the importation of categories of merchandise that, under the terms of the
agreements, are not currently subject to specified limits. The Company's
imported products are also subject to United States customs duties which
comprise a material portion of the cost of the merchandise. A substantial
increase in customs duties would have an adverse effect on the Company's
business, financial condition and results of operations. The United States
and the countries in which the Company's products are produced or sold may,
from time to time, impose new quotas, duties, tariffs, or other restrictions,
or adversely adjust prevailing quota, duty, or tariff levels, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, a significant portion of the Company's foreign-supplied
products is produced by manufacturing facilities in China. There have been a
number of recent trade disputes between China and the United States during
which 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. The loss of the most favored nation status for China, changes
in current tariff or duty structures or the adoption by the United States of
other trade polices or sanctions adverse to China could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON INTELLECTUAL PROPERTY. The Company believes that its
trademarks and other proprietary rights are important to its success and has
registered "bebe" and "bebe moda" in the United States and certain foreign
jurisdictions. There can be no assurance that actions taken by the Company to
establish and protect its trademarks and other proprietary rights will
prevent imitation of its products or infringement of its intellectual
property rights by others. In addition there can be no assurance that others
will not resist or seek to block the sale of the Company's products as
violative of their trademark and proprietary rights. In certain states other
entities may have rights to names that contain the word "bebe," which could
limit the ability of the Company to expand in such states.
The Company is seeking to register its trademarks in targeted
international markets that it believes represent large potential markets for
the Company's products. In some of these markets, local companies currently
have registered competing marks, and/or regulatory obstacles exist that may
prevent the Company from obtaining a trademark for the bebe name or related
names. In such countries, the Company may be unable to use the bebe name
unless it purchases the right or obtains a license to use the bebe name.
There can be no assurance that the Company will be able to register
trademarks in such international markets, purchase the right or obtain a
license to use the bebe name on commercially reasonable terms, if at all.
Failure to obtain either trademark, ownership or license rights would limit
the Company's ability to expand into certain international markets or enter
such markets with the bebe name, and to capitalize on the value of its brand.
The Company is currently evaluating its opportunities to expand its
product offering and extend its geographic reach through licensing or joint
venture arrangements. The Company has limited experience with any such
arrangements, and there can be no assurance that such arrangements will be
successful. Furthermore, while the Company intends to maintain the integrity
of the presentation of bebe merchandise through the terms of any such
agreement, there can be no assurance that any licensee or joint venture
partner will comply with such standards. Any deviation from these standards
of these contracts may have a material adverse effect on the Company's brand
image.
SEASONALITY AND QUARTERLY FLUCTUATIONS. The Company has experienced
historically, and expects to continue to experience, quarterly fluctuations
in its sales volumes and levels of profitability. Net of the impact of new
store openings, the Company tends 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 its fiscal year. If for any
reason sales were below seasonal norms during the first and second quarters
of its fiscal year, as they were in fiscal 1996, the Company's quarterly and
annual results of operations would be adversely affected. bebe's 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, the results
of interim periods are not necessarily indicative of the results for the year.
12
COMPETITION. The retail and apparel industries are highly competitive
and are characterized by low barriers to entry, and the Company expects
competition in its markets to increase. The primary competitive factors in
the Company's markets include brand name recognition, product styling,
product presentation, product pricing, store ambiance, customer service and
convenience. The Company competes 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. Many of these competitors are larger and have
substantially greater financial, distribution and marketing resources than
the Company. Any failure to compete would have a material adverse effect on
the Company's business, financial condition and results of operations.
SENSITIVITY TO ECONOMIC CONDITIONS AND CONSUMER SPENDING. The retail
and apparel industries historically have been subject to substantial
cyclical variation. A recession in the general economy or a decline in
consumer spending in the apparel industry could have a material adverse
effect on the Company's financial performance. Purchases of apparel and
related merchandise tend to decline during recessionary periods and may
decline at other times. There can be no assurance that a prolonged
economic downturn would not have a material adverse impact on the Company
or that the Company's customers would continue to make purchases during a
recession.
CONTROL BY PRINCIPAL SHAREHOLDER. As of December 31, 1998, Manny
Mashouf, the Chairman, President and Chief Executive Officer of the Company
beneficially owned approximately 86.7% of the outstanding shares of the
Company's Common Stock and as a result, acting alone, can control the
election of directors of the Company and the outcome of all issues submitted
to the shareholders of the Company. These factors may make it more
difficult for a third party to acquire shares, may discourage acquisition
bids for the Company and could limit the price that certain investors might
be willing to pay for shares of Common Stock. Such concentration of stock
ownership may have the effect of delaying, deferring or preventing a change
in control of the Company.
POTENTIAL ANTI-TAKEOVER EFFECTS. The Board of Directors has authority to
issue up to 1,000,000 shares of Preferred Stock of the Company, $0.001 par
value per share, and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any vote or
action by the shareholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of
any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred
Stock may have other rights, including economic rights, senior to the Common
Stock, and as a result, the issuance of such Preferred Stock could have a
material adverse effect on the market value of the Common Stock. The Company
has no present plan to issue shares of Preferred Stock.
DEPENDENCE ON SINGLE FACILITY. The Company currently operates a
corporate office and distribution center in Brisbane, California. Any serious
disruption at this facility whether due to fire, earthquake or otherwise
would have a material adverse effect on the Company's operations and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
YEAR 2000 COMPLIANCE. Many existing computer programs use only two
digits to identify a year in the date field. These programs were designed and
developed without considering the impact of the upcoming change in the
century. If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000.
The Company has created a Year 2000 Task Force, which is implementing a
6-phase plan with the objective of ensuring that its management information
systems will be year 2000 compliant. The Company believes that this 6-phase
plan will be completed by July 31, 1999. There can be no assurance that this
6-phase plan will be successful or that year 2000 compliant issues will not
arise with respect to products furnished by third party manufactures or
suppliers that may result in unforeseen costs or delays to the Company and
therefore have a material adverse effect on the Company.
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE.
Prior to the Company's initial public offering on June 17, 1998, there has
been no public market for the Company's Common Stock. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market at or above the initial
public offering price. The stock market has from time to time experienced
extreme price and volume volatility. In addition, the market price of the
Company's 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
Company's net sales and
13
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 the operating
performance of the Company.
ABSENCE OF DIVIDENDS. The Company intends to retain any future earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends on Common Stock in the foreseeable future. Future dividend policy
will depend on the Company's earnings, capital requirements and financial
condition as well as any restrictions imposed by existing credit agreements
and other factors considered relevant by the Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALE. The Company has outstanding an
aggregate of 23,944,064 shares of Common Stock. Of these shares, 21,012,997
shares of Common Stock held by the existing shareholders are "restricted
securities," as that term is defined in Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration
under Rule 144 promulgated under the Securities Act.
As of December 31, 1998, options to purchase 1,948,108 shares of Common
Stock were outstanding and exercisable, subject to certain vesting and
repurchase restrictions.
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.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.6 Standard Industrial/Commercial Single Tenant Lease-Net dated November
30, 1998 between the Registrant and Far Western Land and Investment
Company, Inc., as amended (lease for 400 Valley Drive in Brisbane,
California).
10.7* Retail Store License Agreement between the Registrant and Sakal Duty
Free Ltd., a duly registered Israeli private company, and Sakal Sports
Ltd., a duly registered Israeli private company.
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.
-------------------------------------
* Certain information in this exhibit has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b), 200.83 and 230.406.
15
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 16, 1999
bebe stores, inc.
/s/ Blair W. Lambert
-----------------------------------------
Blair W. Lambert, V.P. of Finance and
Chief Financial Officer