Novice Investing - Bebe Stores Are Not Selling

Date: Tuesday 13th 2008f May 2008 05:09:38 PM

Bebe Stores Are Not Selling - 01/10/2008

By: Hari Wibowo

Our sample portfolio pick, Bebe Stores Inc. (BEBE) posted a 7.9% drop in same store sales for December 2007. While we have expected BEBE to post weak sales temporarily as the US economy slows down, in hindsight, we were buying Bebe shares a bit early. Shares sank 8% to $10.79 per share.

While we don't know the exact severity of the retail sector, we have to be prepared for the worst for Bebe stores. Let's assume a 7% same store sales drop for two years in a row. Will Bebe still be a survival given these circumstances? We have done similar exercise with Starbucks Corp. (SBUX) but with an increasing same store sales. Now, we are going to do the reverse with Bebe Stores. For Bebe, we will use 2007 EPS estimated figure as the base case. During 2008, 2009 we assumed 7% same store sales drop every month and on 2010, things start to look up with at least 5% same store sales increase. Meanwhile, we project identical gross profit margin (48%) throughout the exercise.

Fiscal Year	2007	2008	2009	2010
Revenue	$ 670.9 M	$ 623.9 M	$ 580.3 M	$ 609.3 M
Gross Profit	$ 321.8 M	$ 299.5 M	$ 278.5 M	$ 292.5 M
Net Income	$ 77.28 M	$ 62.8 M	$ 49.2 M	$ 58.3 M
EPS	$ 0.87	$ 0.71	$ 0.55	$ 0.66
EPS Growth	N/A	- 18.4%	- 22.5%	+ 20%

Now, as you see, Bebe stores can undergo two years of negative performance with profits in hand. Further, with $ 320 Million of positive net cash, Bebe has very strong cash position. This latest setback is a blip in the face for Bebe. Therefore, even as Bebe reported a drop in its same store sales, we feel confident that Bebe can reach its targeted fair value as reported originally when we picked Bebe in our sample portfolio.

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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