Description

Fashionable Risk/Reward

Thesis:

Overall, bebe is a well-funded call option with name brand recognition, with an insider with a significant stake aligned with shareholders. The flurry of activity at the board and CEO level over the past 12 months indicate status quo abysmal performance is no longer acceptable. New shareholders can win on a fundamental reversion to the mean for the business or strategic transaction in the high $4 range. 

Introduction:

bebe was founded by Manny Mashouf ( 59.35% shareholder) in San Francisco, California in 1976 with one store and has evolved into a global contemporary women’s apparel and accessories brand.  The products are marketed through 226 retail stores, of which is comprised of 176 bebe stores, including an e-commerce store and 50 2b bebe and outlet stores, including an e-commerce store. The stores are located in 34 states, Puerto Rico, the U.S. Virgin Islands and Canada. In addition, bebe licensees operate 106 international point-of sale locations in 25 countries.

Due to the current retail environment, bebe will continue to “right size their domestic fleet” which relates to real world store closures. Historically, bebe focused on selecting retail sites with an average of 4,000 square feet at high traffic locations in regional shopping centers and in freestanding street locations. In fiscal 2014 bebe planned to open 2 new stores, one bebe and one 2b bebe store and close up to 10 bebe stores and 5 2b bebe stores, which would have resulted in an approximately 5% net square footage reduction. However, on June 27, 2014 bebe announced the exit of its unprofitable “2b” business and has identified key initiatives that will generate approximately $9MM-$10MM in annualized pre-tax savings, beginning in fiscal 2015. The 16 “2b” mall-based stores and e-commerce store were expected to generate pre-tax losses of approximately $5MM-$6MM in FY 2014. This strategic action coupled with the recent dividend reduction indicates this board has finally acknowledged there is a problem.  The revolving door of executives was obviously not enough to raise questions, because the one mainstay at bebe has been Manny.   Investors and Wall Street have left bebe for dead with a current enterprise value of $110MM but therein lies the opportunity from a fresh perspective.

From a historical perspective it is important to understand how far and how fast bebe has fallen. In fiscal 2012 bebe reported revenue of $530.8MM and EBITDA of $39.4MM and in fiscal 2014 bebe turned in revenue of $441.1MM and an abysmal EBITDA of $43MM but also reported $125MM in net cash on the balance sheet. There is no dispute retail and in particular “fashionable” retail is suffering from an onslaught of competition on all fronts. But it is important to understand the most recent bebe timeline.

bebe Timeline:

• February 8, 2014: Reuters reported that bebe hired Guggenheim Securities to explore a potential sale
• May 30, 2014: Steve Birkhold, CEO sold 140,980 shares at $4.07; reducing his total holdings to zero
• June 12, 2014: Deal.com reported that bebe saw a “flurry” of buyer interest
• June 12, 2014: bebe Stores Inc. announces CEO Transition; “Steve Birkhold has resigned at CEO, effective today.” The press release was quite interesting as it lacked typical public company resignation pleasantries. This sequence of events left shareholders with more questions than answers.

• July 9, 2014: bebe stores, inc. today announced that Seth Johnson, Blair Lambert and Brett Brewer have replaced Caden Wang, Barbara Bass and Cynthia Cohen on the Company’s Board of Directors, effective immediately. Manny Mashouf, Chairman of the bebe Board of Directors, stated, “On behalf of the Board of Directors, we are excited to welcome Seth, Blair, and Brett to the team. They add a wealth of retail experience and strategic business knowledge to the Board and we look forward to their contributions. Overall, driving shareholder value is a priority for our Company and we believe that the appointment of Jim Wiggett as interim CEO and our new Board members will help us to achieve this objective. We would like to thank Caden, Barbara and Cynthia for their many years of service on the bebe Board.”
• August 18, 2014: Consac calls for bebe Stores Inc. Chairman Manny Mashouf and Board to sell or take retailer private. Consac is a shareholder who holds approximately 3MM shares of BEBE and does not paint a flattering picture of Manny Mashouf. It is encouraging a shareholder would be proactive but an activist campaign against a majority shareholder of 54% is futile at best.

From a historical perspective the buyback and nominal dividend has been the only thing the Manny regime has done for shareholders other than himself.  Please note on November 2012, the board of directors authorized a program to repurchase up to $30MM of bebe’s common stock. However, no shares were repurchased during the three or nine months ended April 5, 2014. And prior to that bebe repurchased 5.5MM shares at an average price per share of $3.88 for an aggregate purchase price of approximately $21.2MM. 

Catalyst

Overall, bebe is a well-funded call option with name brand recognition, with an insider with a significant stake aligned with shareholders. The flurry of activity at the board and CEO level over the past 12 months indicate status quo abysmal performance is no longer acceptable. New shareholders can win on a fundamental reversion to the mean for the business or strategic transaction in the high $4 range.