Bebe Stores Q3 Loss Narrows, Sales Slump - Analyst Blog

Bebe Stores Inc. BEBE reported third-quarter fiscal 2014 loss per share of 27 cents, narrower than the Zacks Consensus Estimate of a loss of 30 cents and the comparable prior-year quarter loss of 62 cents. Including impairment charges, the company's loss for the quarter stood at 31 cents per share.

The narrower year over year loss primarily reflects the effects of a valuation account being maintained against deferred tax assets, leading to an effective tax rate of nearly 0%.

Net sales of this women's clothing and accessories designer fell 17.2% to $93.5 million from $112.9 million last year. However, the top line results were almost in line with the Zacks Consensus Estimate of $93 million. Comparable store sales (comps) for the quarter ended Apr 5, 2014, descended nearly 5.7%.

Sales were disappointing owing to the loss of a retail week in January 2014, along with the shutdown of 19 non-performing stores, during the same period last year. Notably, excluding weather impact in the western region, the company estimates that comps for the quarter would have been flat compared to last year.

Results were also greatly impacted by adverse winter weather, which led to nearly 136 transitory store closures, triggering soft sales. Moreover, the shift of Easter into late April had a significant impact on the company's third quarter sales.

The company's gross profit fell 24.3% to $25.3 million from the comparable prior-year quarter, while as a percentage of net sales it contracted 260 basis points (bps) to 27.1%. The decline in gross margin is mainly due to the soft sales in the quarter.

Although merchandise margins during the quarter climbed nearly 50 bps from the comparable previous-year quarter, it came below expectations owing to the intense promotional headwinds prevailing in the retail environment.

Selling, general and administrative (SG&A) expenses declined 4.8% to $49.7 million. As a percentage of sales, it expanded 690 bps to 53.1%. Consequently, operating loss for the quarter rose to $24.4 million from the year-ago comparable quarter loss of $18.6 million.

Store Update

This multinational retail clothier shuttered 6 Bebe stores in the reported quarter, thereby reducing the total store count to 226.

Financial Update

The company ended the quarter with cash and cash equivalents of $115.9 million, up 41.7% from last year. Inventories fell 11.4% to $31.9 million while average finished goods inventory per square foot declined 1.7%. Total shareholder equity was $219.3 million, down 21.9% from the comparable quarter last year.

During the nine months of fiscal 2014, Bebe spent $11.8 million toward capital expenditure.

Outlook

For the fourth quarter, Bebe forecasts same store sales to be flat. Gross margin is expected to improve sequentially, while net loss for the quarter is expected to be in the mid-teens per share range due to continued impact from the maintenance of valuation accounts as discussed above.

In fiscal 2014, the company plans to spend about $25 million toward capital expenditures. Capital spends will be directed toward the opening of outlets, renovation, office enhancements, outlet expansions and the upgrade of information technology systems.

The inventory for finished goods at the end of fourth-quarter fiscal 2014, measured on per square foot basis, is projected to decrease in the low to mid-single digit range.

Further, this clothing brand is likely to open 1 Bebe store and close 1 2b bebe store through the rest of fiscal 2014, which will decrease its total floor area by nearly 8% from fiscal 2013.

Other Stocks to Consider

At present, Bebe Stores carries a Zacks Rank #5 (Strong Sell). Some better-ranked stocks in the retail apparel and shoe sector include American Apparel Inc. APP, Kate Spade & Company (KATE) and Carter's Inc. CRI, all of which carry a Zacks Rank #2 (Buy).