Novice Investing - Bebe Stores is a Baby

Date: Tuesday 13th 2008f May 2008 05:07:26 PM

Bebe Stores is a Baby - 12/28/2007

By: Hari Wibowo

Bebe Stores Inc. (BEBE) is a female teen fashion designer which also distributes and resell women's apparel and accessories. It also operates 273 retail stores in North America and 14 international stores world wide. Bebe is targeting younger female as you can see by clicking on its website below. Going further inside, you will see various teen and grownups trendy clothing and accessories.

Thus, obviously fashion is key for Bebe Stores to maintain its competitive advantage. And fashion is very fickle thing to do. In one year, you would do so excellent that your sales can be growing at a high clip. On the other hand, when you have a fashion misstep, your sales will plummet like a rock. Now, looking historically for net income at Bebe Stores, you get the following:

Net Profit for Fiscal Year
2007	2006	2005	2004	2003	2002
$ 77.3 M	$ 73.8 M	$ 66.3 M	$ 33.8 M	$ 19.3 M	$ 26.5 M
Earning Per Share
$ 0.81	$ 0.79	$ 0.71	$ 0.38	$ 0.22	$ 0.30

For the past six years, earning trough occurs in 2003. At the time stock price tumbled to a low of $ 4 per share. In late 2005 share price rose to as high as $ 30 per share before falling back to $ 13 per share currently. Looking at the pattern, Bebe trades as if earning will fall from its 2005 EPS of $ 0.71. Meanwhile, for 2008, EPS is predicted to rise slightly to $ 0.83 per share. In 2009, EPS is to rise further to $ 0.99 per share. Do we have an opportunity here? While recently all retailers had been under pressure on the fear of recession, we could pick shares of some unaffected companies for our sample portfolio. Bebe Stores may be one of this instance.

Looking at the balance sheet, Bebe has a strong net positive cash of $ 320 Million or $ 3.35 per share. That is more than enough for Bebe to survive. In fact, it never experience a net loss during the past six years despite the cyclical nature of a fashion business. You are less likely to find a more solid apparel stocks candidate than Bebe Stores. But anyway, let's calculate Bebe's fair value using the assumption that things will get better next fiscal year 2009. Thus, $ 0.99 per share profit estimation is not an unreasonable estimate.

Current 10-year treasury bond is trading at a yield of 4.09%. We would want Bebe Stores to yield us at 6%, which is a 2% premium from treasury bond. Therefore, Bebe Stores fair P/E value is at (1/ 6%) = 16.6. Also, as we expect Bebe has a higher chance to produce earning growth in the next five years, we would just give Bebe fair P/E value at 17. Using these informations, the fair value of Bebe Stores stock price is:

Real price = stock price - (cash+ short-term investment)+ long-term debt.

17 x $ 0.99 = stock price - ($ 3.35) + $ 0

Stock price = $ 20.18

While we do not construct any pro forma income statement to arrive at the EPS figure of $ 0.99, this figure may be in the ball park as currently, the state of retail industry is slowing down due to economic recession Furthermore, we can't predict exactly the sales and expense figure depending on how alert Bebe's management is to the rapidly changing environment of fashion industry.

Based on current price of $ 12.90, Bebe Stores represent 50% potential appreciation as it reaches fair value. Therefore, we have picked BEBE to be in our sample portfolio at current price.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Bebe Stores Inc. (BEBE) or any other securities.

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