UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF |
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For the quarterly period ended September 30, 2002 |
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OR |
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o TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF |
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Commission File Number 0-24395 |
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bebe stores, inc.
(Exact name of registrant as specified in its charter)
California |
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94-2450490 |
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(State or Jurisdiction of |
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(IRS Employer |
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Incorporation or Organization) |
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Identification Number) |
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400 Valley Drive |
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(Address of principal executive offices) |
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Telephone: (415) 715-3900 |
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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 $0.001 PER SHARE, 25,634,714 SHARES
OUTSTANDING AS OF OCTOBER 30, 2002
bebe stores, inc.
2
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
bebe stores, inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(unaudited)
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SEPTEMBER
30, |
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JUNE
30, |
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SEPTEMBER
30, |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
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$ |
121,166 |
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$ |
123,431 |
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$ |
98,404 |
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Marketable securities |
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6,228 |
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— |
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— |
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Receivables (net of allowance of $223, $190 and $502) |
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2,785 |
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2,249 |
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2,670 |
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Inventories |
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29,359 |
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23,357 |
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33,505 |
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Prepaid and other |
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7,854 |
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7,238 |
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5,024 |
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Total current assets |
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167,392 |
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156,275 |
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139,603 |
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Equipment and leasehold improvements, net |
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54,002 |
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50,573 |
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42,291 |
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Other assets |
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6,292 |
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6,317 |
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4,746 |
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Total assets |
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$ |
227,686 |
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$ |
213,165 |
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$ |
186,640 |
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Liabilities and Shareholders’ Equity: |
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Current liabilities: |
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Accounts payable |
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$ |
17,054 |
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$ |
12,138 |
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$ |
12,714 |
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Accrued liabilities |
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9,891 |
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10,337 |
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10,431 |
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Income taxes payable |
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3,046 |
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62 |
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2,122 |
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Total current liabilities |
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29,991 |
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22,537 |
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25,267 |
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Deferred rent |
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11,937 |
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10,087 |
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5,480 |
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Total liabilities |
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41,928 |
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32,624 |
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30,747 |
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Commitments and contingencies |
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Shareholders’ equity: |
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Preferred stock-authorized 1,000,000 shares at $0.001 par value per share; no shares issued and outstanding |
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— |
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— |
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— |
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Common stock-authorized 40,000,000 shares at $0.001 par value per share; issued and outstanding 25,625,819, 25,612,056 and 25,323,723 shares |
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26 |
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26 |
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25 |
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Additional paid-in capital |
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38,793 |
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38,624 |
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34,184 |
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Accumulated other comprehensive loss and other |
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(84 |
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(37 |
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(247 |
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Retained earnings |
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147,023 |
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141,928 |
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121,931 |
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Total shareholders’ equity |
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185,758 |
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180,541 |
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155,893 |
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Total liabilities and shareholders’ equity |
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$ |
227,686 |
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$ |
213,165 |
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$ |
186,640 |
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See accompanying notes to condensed consolidated financial statements.
3
bebe stores, inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands)
(Unaudited)
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Three Months Ended September 30, |
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2002 |
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2001 |
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Net sales |
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$ |
73,842 |
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$ |
73,645 |
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Cost of sales, including buying and occupancy |
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40,150 |
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39,375 |
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Gross profit |
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33,692 |
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34,270 |
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Selling, general and administrative expenses |
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26,026 |
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24,618 |
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Income from operations |
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7,666 |
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9,652 |
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Interest income, expense and other |
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(483 |
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(654 |
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Earnings before income taxes |
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8,149 |
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10,306 |
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Provision for income taxes |
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3,054 |
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3,819 |
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Net earnings |
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$ |
5,095 |
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$ |
6,487 |
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Basic earnings per share |
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$ |
0.20 |
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$ |
0.26 |
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Diluted earnings per share |
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$ |
0.20 |
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$ |
0.25 |
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Basic weighted average shares outstanding |
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25,621 |
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25,257 |
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Diluted weighted average shares outstanding |
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25,887 |
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26,088 |
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See accompanying notes to condensed consolidated financial statements.
4
bebe stores, inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
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Three Months Ended September 30, |
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2002 |
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2001 |
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Cash flows from operating activities |
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Net earnings |
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$ |
5,095 |
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$ |
6,487 |
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Adjustments to reconcile net earnings to cash provided by operating activities: |
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Depreciation and amortization |
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2,843 |
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2,298 |
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Tax benefit from stock options exercised |
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34 |
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910 |
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Net loss on disposal of property |
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5 |
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343 |
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Store closing reserve |
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— |
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(293 |
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Deferred rent |
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1,851 |
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1,524 |
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Changes in operating assets and liabilities: |
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Receivables |
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(75 |
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155 |
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Inventories |
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(6,013 |
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(5,741 |
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Other assets |
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(37 |
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(86 |
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Prepaid expenses |
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(619 |
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4,664 |
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Accounts payable |
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4,916 |
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1,836 |
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Accrued liabilities |
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(438 |
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(1,685 |
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Income taxes payable |
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2,976 |
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1,955 |
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Net cash provided by operating activities |
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10,538 |
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12,367 |
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Cash flows used in investing activities |
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Purchase of equipment and leasehold improvements |
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(6,663 |
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(6,138 |
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Proceeds from sales of equipment |
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6 |
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— |
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Purchase of marketable securities, net |
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(6,228 |
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— |
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Net cash used in investing activities |
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(12,885 |
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(6,138 |
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Cash flows from financing activities |
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Repayments on capital leases |
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(19 |
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(33 |
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Net proceeds from issuance of common stock |
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134 |
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1,256 |
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Net cash provided by financing activities |
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115 |
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1,223 |
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Effect of exchange rate changes on cash |
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(33 |
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(48 |
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Net increase (decrease) in cash and cash equivalents |
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(2,265 |
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7,404 |
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Cash and cash equivalents: |
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Beginning of period |
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123,431 |
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91,000 |
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End of period |
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$ |
121,166 |
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$ |
98,404 |
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See accompanying notes to condensed consolidated financial statements.
5
The accompanying condensed consolidated balance sheets of bebe stores, inc. as of September 30, 2002, June 30, 2002 and September 30, 2001, the condensed consolidated statements of earnings for the three months ended September 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the three months ended September 30, 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 months then ended have been included. The condensed consolidated balance sheet at June 30, 2002, presented herein, was derived from the audited balance sheet included in the Form 10-K for the fiscal year ended June 30, 2002.
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, 2002.
The Company’s marketable securities are classified as “available for sale”. Fluctuations in fair value are included in accumulated other comprehensive income (loss) on the accompanying consolidated balance sheets. Marketable securities are comprised primarily of tax-exempt municipal bonds.
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:
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Three
Months Ended |
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2002 |
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2001 |
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(In thousands) |
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Basic weighted average number of shares outstanding |
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25,621 |
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25,257 |
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Incremental shares from the assumed issuance of stock options |
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266 |
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831 |
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Diluted weighted average number of shares outstanding |
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25,887 |
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26,088 |
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6
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 387,000 and 296,550 for the three months ended September 30, 2002 and 2001, respectively.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. The Company adopted SFAS No. 142 on July 1, 2002. The adoption did not have a significant impact on the financial statements.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes 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 relating to the disposal of a segment of a business of Accounting Principals Board No. 30. The Company adopted SFAS No. 144 on July 1, 2002. The adoption did not have a significant impact on the financial statements.
In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt the provisions of SFAS 146 for any restructuring activities initiated after December 31, 2002. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may effect the timing of recognizing any future restructuring costs as well as the amounts recognized.
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.
We design, develop and produce a distinctive line of contemporary women’s apparel and accessories. We market our products under the bebe and bbsp (future bebe sport) brand names through our 171 specialty retail stores located in 30 states, the District of Columbia, Canada, 12 licensed stores in Greece, Israel, United Arab Emirates and Singapore, and an on-line store at www.bebe.com. While we attract a broad audience, our target customers are 18- to 35-year-old women who seek current fashion trends interpreted to suit their lifestyle needs. The “bebe look,” with an unmistakable hint of sensuality, appeals to a hip, sophisticated, body-conscious woman who takes pride in her appearance. The bebe customer is a
7
discriminating consumer who demands value in the form of quality at a competitive price. Our broad product offering includes tops, pants, skirts, dresses, suits, logo, casual sportswear, activewear, outerwear, handbags, fragrances and other accessories. We design and develop the majority of our merchandise in-house. The merchandise is then manufactured to our specifications. The remainder of our merchandise is selected directly from third party manufacturers’ lines.
Founded by Manny Mashouf, our current Chairman of the Board and Chief Executive Officer, we opened our first store in San Francisco, California in 1976. In the last five years, we significantly strengthened our employee base and have implemented several strategic initiatives that have contributed to our overall growth. These strategic initiatives address all aspects of our operations and in particular the merchandising, planning, production, design and distribution functions. Our merchandising initiatives focus primarily on expanding our product line to include lifestyle dressing at a competitive price that easily adapts from day to evening. In addition, to offering day to eveningwear, we offer a casual assortment of denim, logo and bebe sport. The logo product line highlights the bebe logo on a variety of casual silhouettes, enhancing brand awareness and providing younger, “aspirational” customers an entry to the bebe product line at lower price points. The bebe sport product line is active inspired sportswear featuring cotton knits, fleece, casual active bottoms, sweaters, outerwear and accessories that are easy, sexy and modern. The strategic initiatives that relate to the planning, production, design and distribution functions focus primarily on implementing more sophisticated processes. Also, these initiatives involve a more disciplined approach to our business operations.
We reinforce our brand with a distinctive lifestyle image advertising campaign, using prominent fashion photographers. We believe that our emphasis on non-product specific lifestyle advertising promotes brand awareness and attracts customers who are intrigued by the playfully sensual and evocative imagery. We communicate the images to consumers through a variety of advertising vehicles including fashion magazines, bus shelters, in-store displays and customer mailings. We further enhance the bebe brand image by designing our on-line and retail stores to create an upscale, inviting boutique environment.
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to the financial statements in our annual report on Form 10-K for the year ended June 30, 2002.
We have identified certain critical accounting policies, which are described below.
Inventories. Our inventories are stated at the lower of weighted average cost or market. In order to assess that inventory is recorded properly at the lower of cost or market, we make certain assumptions based on historical experience and current information. These assumptions can have a significant impact on current and future operating results and financial position.
Long-lived assets. We review long-lived assets for impairment whenever events or changes in circumstances, such as store closures, indicate that the carrying value of an asset may not be recoverable. At the time a decision is made to close a store, we record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life. We believe at this time that the long-lived assets’ carrying values and useful lives continue to be appropriate.
8
The following table sets forth certain financial data as a percentage of net sales for the periods indicated:
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Three
Months Ended |
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2002 |
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2001 |
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Statements of Operations Data: |
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Net Sales |
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100.0 |
% |
100.0 |
% |
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Cost of sales, including buying and occupancy (1) |
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54.4 |
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53.5 |
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Gross profit |
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45.6 |
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46.5 |
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Selling, general and administrative expenses (2) |
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35.2 |
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33.4 |
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Income from operations |
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10.4 |
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13.1 |
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Interest and other expense (income), net |
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(0.6 |
) |
(0.9 |
) |
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Earnings before income taxes |
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11.0 |
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14.0 |
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Provision for income taxes |
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4.1 |
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5.2 |
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Net earnings |
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6.9 |
% |
8.8 |
% |
(1) Cost of sales includes the cost of merchandise, buying costs and occupancy costs.
(2) Selling, general and administrative expenses primarily consist of non-occupancy store costs, corporate overhead and advertising costs.
We operated 171 stores at September 30, 2002 compared to 149 stores at September 30, 2001. We opened 6 new stores in the first three months of fiscal 2003 and expect to open approximately 25 stores during fiscal 2003. 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 $73.8 million during the three months ended September 30, 2002 from $73.6 million in the same period of the prior year, an increase of $0.2 million, or 0.3%. Net sales for the quarter included $62.1 million from stores open more than one year. During the quarter comparable store sales decreased 10.3% versus the prior year. Management believes the decrease in comparable store sales was attributed to missed opportunities in key product categories and a product assortment heavily skewed toward the casual lifestyle, which resulted in lower average selling prices. The remaining sales of $11.7 million, were generated by stores not included in the comparable store sales base, on-line sales, wholesale sales to international licensees, and royalty revenue from product licensees.
Gross Profit. Gross profit decreased to $33.7 million during the three months ended September 30, 2002 from $34.3 million for the same three-month period of the prior year, a decrease of $0.6 million, or 1.7%.As a percentage of net sales, gross profit decreased to 45.6% for the three-month period ended September 30, 2002 from 46.5% in the same three-month period of the prior year. The decrease in gross profit as a percentage of net sales was the result of negative occupancy leverage offset partially by higher net merchandise margins.
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 $26.0 million during the three months ended September 30, 2002 from $24.6 million in the same period of the prior year, an increase of $1.4 million, or 5.7%. As a percentage of net sales, these expenses increased to 35.2% during the three-month period from 33.4% in the same period of the prior year. This increase as a percentage of net sales was largely the result of higher professional fees, advertising fees and depreciation expenses offset by lower compensation expenses. Higher professional fees were a result of the corporate legal entity restructuring and an increase in legal fees. Higher advertising fees were a result of an increase in national
9
outdoor advertising and Miss America sponsorship expenses. Depreciation expenses were a result of new stores, the relocation of our distribution center and consolidation of our administrative offices.
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 September 30, 2002 as compared to approximately $0.7 million in the same three-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 three months ended September 30, 2002, was approximately 37.5% as compared to 37.1% in the prior year.
Seasonality of Business and Quarterly Results
Our business varies with general seasonal trends that are characteristic of the retail and apparel industries. As a result, our typical store generates a disproportionate amount of our annual net sales in the first half of our fiscal year (which includes the fall and holiday selling seasons) compared to the second half of our fiscal year. If for any reason our sales were below seasonal norms during the first half of our fiscal year, our annual operating results would be negatively impacted. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.
Our working capital requirements vary widely throughout the year and generally peak in the first and second fiscal quarters. At September 30, 2002, we had approximately $127.4 million of cash, cash equivalents and marketable securities 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 September 30, 2002, there were no borrowings under the line of credit and letters of credit outstanding totaled $4.7 million.
Net cash provided by operating activities for the three months ended September 30, 2002 was $10.5 million. Cash provided by operating activities for the period was primarily generated by earnings adjusted for depreciation, deferred rent and a decrease in working capital.
Net cash used by investing activities for the three-month period ended September 30, 2002 was $12.9 million primarily due to the opening of new stores, investments in management information systems, and the increase in marketable securities. We opened 6 new stores in the first three months of fiscal 2003 and expect to open approximately 25 stores during fiscal 2003.
We estimate that total capital expenditures will be approximately $20.0 million to $25.0 million in fiscal 2003.
Net cash provided by financing activities was $0.1 million for the three months ended September 30, 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 2003. 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.
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.
10
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 with our new personnel in Los Angeles, California, we could lose sales and increase our cost of goods. In March 2002, we shifted the production responsibilities from existing personnel in Brisbane, California, to new personnel in Los Angeles, California. We have and may continue to experience difficulty in implementing our production processes with these new personnel. 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 sales and 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 2000, we experienced a significantly lower rate of growth in earnings than experienced in the prior three fiscal years. Although we were profitable, in fiscal 2001 and fiscal 2002, we experienced a decrease in earnings 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.
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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 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 expect to open approximately 25 stores in fiscal 2003. 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 2003 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 of the Board, 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.
Our success depends also on our ability to attract and retain experienced employees and our ability to utilize all of our employees’ strengths. There is substantial competition for experienced personnel, which
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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 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. 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. Currently, there are two litigation matters pending that involve labor disputes. Although the amount of liability with respect to these actions cannot be accurately predicted, in the opinion of management, any such liability will not individually or in the aggregate have a material adverse effect on our business, financial condition or results of operations.
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 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.
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11. Any serious disruption at our major facilities could have a harmful effect on our business. We currently operate our corporate office in Brisbane, California, and a distribution facility 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 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 or acquire businesses that extend our product lines, 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 or acquire businesses. For example, we have tested a new concept store format, bbsp, soon to be renamed bebe sport, in which our product offering is limited to active inspired sportswear branded with the “bebe” and “bbsp (future bebe sport)” logo. If this limited product offering is not successful or if the bbsp (future bebe sport) brand name does not achieve the same recognition as the bebe brand name, our ability to expand into additional markets with this concept store may be impaired.
13. If we are not able to successfully protect our existing copyrights and trademarks, our ability to capitalize on the value of our brand name may be impaired. We have to ensure our licensees are using the intellectual property correctly or the goodwill associated with these trademarks will be diluted which will have an impact on our business. Currently, we are protecting our trademarks in litigation, which resulted in us posting a $3.0 million bond.
We are seeking to register our trademarks in targeted international markets, which we believe represents large potential markets for our products. In some of these markets, local companies currently have registered competing marks, and/or regulatory obstacles exist that may prevent us from obtaining a trademark for the bebe name or related names. In such countries, we may be unable to use the bebe name unless we purchase the right or obtain a license to use the bebe name. We may not be able to register trademarks in these international markets, purchase the right or obtain a license to use the bebe name on commercially reasonable terms. If we fail to obtain trademark, ownership or license rights, it would limit our ability to expand into certain international markets or enter such markets with the bebe name, and to capitalize on the value of our brand.
Furthermore in some jurisdictions, despite successful registration of our trademarks, third parties may allege infringement and bring actions against us.
14. Legislative actions and potential new accounting pronouncements are likely to cause our general and administrative expenses to increase and impact our future financial position and results of operations. In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to increase our internal controls, hire additional personnel and additional outside legal, accounting and advisory services, all of which could cause our general and administrative costs to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employees stock options as compensation expense among others, could increase the expenses we report under GAAP and adversely affect our operating results.
RISKS RELATING TO OUR INDUSTRY:
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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 September 30, 2002, only 4,853,588 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.
2. Because a principal shareholder controls the company, other shareholders may not be able to influence the direction the company takes. As of September 30, 2002, Manny Mashouf, the Chairman and Chief Executive Officer, beneficially owned approximately 81.1% 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
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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.
We are exposed to market risks, which include changes in U.S. interest rates and, to a lesser extent, foreign exchange rates. We do not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk
We currently maintain a portfolio of fixed and variable investments consisting of cash equivalents and short term marketable securities, which are affected by changes in market interest rates. According to our investment policy, we may invest in taxable and tax exempt instruments. In addition, the policy establishes limits on credit quality, maturity, issuer and type of instrument. Marketable securities are classified as “available for sale”. Fluctuations in fair value are included in accumulated other comprehensive income (loss) on the accompanying consolidated balance sheets. Marketable securities are comprised of tax-exempt municipal bonds. We do not use derivative financial instruments in our investment portfolio.
All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. The remaining investments are considered short-term marketable securities if maturities range between four and twelve months or long term marketable securities if maturities range between thirteen and twenty four months.
The following table lists our cash equivalents and short-term marketable securities at September 30, 2002:
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2002 |
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Fair Value |
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(Dollars in thousands) |
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||||||
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Cash equivalents |
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$ |
118,401 |
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$ |
118,401 |
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|
|
Weighted average interest rate |
|
2.38 |
% |
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|
|
|||
|
Short term marketable securities |
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6,228 |
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|
6,228 |
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|||
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Weighted average interest rate |
|
2.70 |
% |
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|||
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Total |
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$ |
124,629 |
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|
$ |
124,629 |
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The interest payable on our 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 September 30, 2002), our results from operations and cash flows would not be materially affected.
Foreign Currency Risks
We enter into a significant amount of purchase obligations outside of the U.S. which are settled in U.S. Dollars and, therefore, have only minimal exposure to foreign currency exchange risks. We also operate a subsidiary with a base currency other than the U.S. Dollar. This subsidiary represented less than two percent of total revenues for the quarter ended September 30, 2002 and, therefore, presents only minimal exposure to foreign currency exchange risks. We do not hedge against foreign currency risks and believe that foreign currency exchange risk is immaterial.
(a) Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and
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procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days prior to the filing date of this report. Based on their evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective.
(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising out of its operations. As of the date of this filing, we are not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our business, financial condition or results of operations.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
(a) Exhibits. The following is a list of exhibits filed as part of this Report on Form 10-Q.
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Exhibit Number |
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Description |
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99.1 |
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Certification of Chief Executive Officer |
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99.2 |
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Certification of Chief Financial Officer |
(b) Reports on Form 8-K. None.
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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.
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Dated November 14, 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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I, Manny Mashouf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of bebe stores, inc. (the “Registrant”);
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4. I:
(A) am responsible for establishing and maintaining the Registrant’s disclosure controls and procedures;
(B) have designed such disclosure controls and procedures to ensure that material relating to the Registrant and its consolidated subsidiaries is made known to me by others within those entities for the period in which this quarterly report was prepared;
(C) have evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the “Evaluation Date”); and
(D) have presented in this quarterly report my conclusions about the effectiveness of the Registrant’s disclosure controls and procedures based upon my evaluation as of the Evaluation Date.
5. I have disclosed to the Registrant’s auditors and the audit committee of the Registrant’s board of directors the following:
(A) all significant deficiencies in the design or operation of disclosure controls and procedures which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in disclosure controls and procedures; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s disclosure controls and procedures.
6. I have indicated in this quarterly report whether or not there were significant changes in disclosure controls and procedures or in other factors that could significantly affect the disclosure controls and procedures subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Date: November 14, 2002 |
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/s/ Manny Mashouf |
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Manny Mashouf |
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Chief Executive Officer |
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I, John Kyees, certify that:
1. I have reviewed this quarterly report on Form 10-Q of bebe stores, inc. (the “Registrant”);
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4. I:
(A) am responsible for establishing and maintaining the Registrant’s disclosure controls and procedures;
(B) have designed such disclosure controls and procedures to ensure that material relating to the Registrant and its consolidated subsidiaries is made known to me by others within those entities for the period in which this quarterly report was prepared;
(C) have evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing of this quarterly report (the “Evaluation Date”); and
(D) have presented in this quarterly report my conclusions about the effectiveness of the Registrant’s disclosure controls and procedures based upon my evaluation as of the Evaluation Date.
5. I have disclosed to the Registrant’s auditors and the audit committee of the Registrant’s board of directors the following:
(A) all significant deficiencies in the design or operation of disclosure controls and procedures which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in disclosure controls and procedures; and
(B) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s disclosure controls and procedures.
6. I have indicated in this quarterly report whether or not there were significant changes in disclosure controls and procedures or in other factors that could significantly affect the disclosure controls and procedures subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
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Date: November 14, 2002 |
/s/ John Kyees |
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John Kyees |
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Chief Financial Officer |
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Exhibit |
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Description |
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99.1 |
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Certification of Chief Executive Officer |
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99.2 |
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Certification of Chief Financial Officer |
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