bebe Stores, Inc. F1Q09 (Quarter End 10/4/08) Earnings Call Transcript

Nov.20.08 | About: bebe stores, (BEBE)

bebe Stores, Inc. (NASDAQ:BEBE)

F1Q09 Earnings Call

November 18, 2008 1:30 PM PT

Executives

Walter Parks - Chief Financial Officer, Chief Operating Officer

Gregory Scott - Chief Executive Officer, Director

Analysts

Betty Chen - Wedbush Morgan Securities

Jeffrey Van Sinderen - B. Riley & Co.

Christine Chen - Needham & Co.

Analyst for Eric Beder - Brean Murray, Carret & Co.

Samantha Panella - Raymond James & Associates

Janet Kloppenburg - JJK Research

Amy Noblin - Pali Capital

Operator

Welcome to bebe stores 2009 first quarter earnings release conference call. As a reminder, this call is being recorded. Now I would like to introduce bebe’s COO, Mr. Walter Parks.

Walter Parks

Thank you for joining Greg and me for bebe’s first quarter 2009 earnings release update. Our call will be limited in time to one hour. After our prepared comments we will take questions for as long as time permits.

Let me start with our disclaimer. During the course of this call we will make projections and/or other forward-looking statements regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions and that actual events or results may differ materially. We refer you to the company’s Forms 10K, 10Q and other filings made with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectations.

I will now turn it over to Greg.

Gregory Scott

For the first quarter of 2009 bebe’s actual comp store sales were below the initial guidance we provide din our last call and therefore we updated our earnings per share guidance to $0.08 to $0.12 per share. Our actual results were $0.12 per share which is at the high end of our revised guidance and was in the range of the guidance provided in our fourth quarter earnings release. These results were primarily due to inventory and expense management during the quarter. We are not satisfied with our results this quarter and will be continuing to take steps to manage the business through this difficult retail and economic environment.

Total net sales for the quarter ending October 4, 2008 increased to $163 million versus $161 million reported for the corresponding quarter of the prior year. As reported previously comp store sales decreased 10.8% compared to a decrease in comp store sales of 9.3% in the prior year. Comp store sales were the best in July and were the lowest at the end of September. During the quarter the study of stores with traffic counters both this year and last, our traffic was down 8.2%, conversion decreased 3.2% and average unit retail increased 2.2%.

With negative comp store sales lower than planned we were still able to control total compensation and advertising as a percent of sales when compared to last year which contributed to our ability to earn $0.12 in the quarter. We continue to manage expenses and inventory as shown by inventory of -13.5% per square foot at the end of the quarter.

Walter will take you through the details of the first quarter; however I’ll review the highlights of our business. We will then discuss our plans for the upcoming quarter. After that we will take your questions.

Walter Parks

Net sales for the first quarter increased 1% to $163 million compared to sales of $161 million in the first quarter a year ago. Same-store sales for the first quarter decreased 10.8% compared to a decrease of 9.3% in the prior year. Gross margin as a percentage of sales decreased to 40.5% from 47.5% in the prior year. This decrease of 2.5% was primarily due to higher markdowns and unfavorable occupancy leverage.

SG&A expenses were 36.2% of net sales for the quarter compared to 34.9% in the same period of the prior year. The increase in SG&A expenses as a percent of sales is due primarily to the higher depreciation expense. The effective tax rate for the first quarter of fiscal 2009 decreased to 35% from 36%.

Net earnings for the first quarter were $11 million compared to $15 million in the prior year and diluted earnings per share for the first quarter of fiscal 2009 was $0.12 on 90 million diluted weighted average shares outstanding compared to $0.16 per share on 94 million diluted weighted average shares outstanding for the first quarter of fiscal 2008.

Our total cash and investments at October 4, 2008 were $348 million versus $325 million at October 6, 2007. Of the approximately $348 million in cash and investments approximately $228 million were invested in auction rate securities.

Due to the recent failure of these auctions we recorded an additional impairment charge during the quarter of approximately $5.4 million bringing the total impairment charge as of October 4, 2008 to $13.2 million. Subsequent to the end of the quarter approximately $10.7 million of our auction rate securities were called. Because our auction rate securities are comprised of federally insured student loan backed securities and insured municipal authority bonds, we believe the impairment to be temporary and therefore the impairment charges will be recorded in other comprehensive income, a component of shareholder equity as opposed to the income statement.

Inventories at October 4, 2008 were $49 million compared to $52 million at October 6, 2007. At the end of the first quarter finished goods inventory per square foot was approximately 13.5% less than the prior year.

Capital expenditures for the fiscal year-to-date period were approximately $9 million and depreciation expense was approximately $6 million.

We ended the first quarter with 307 stores representing 1,143,000 square feet.

Now I’ll turn it back over to Greg.

Gregory Scott

The results for the first quarter 2009 speak to the challenges we face in our core bebe brand BEBE SPORT as well as the larger macroeconomic environment. For the quarter we experienced a decrease in transactions and units per transaction compared to the prior year with an increase to our average dollar sales. The business in the quarter started as planned but began to decelerate the end of September. The slowing of the business has deteriorated further in October so we have taken steps to improve both traffic and conversion to our stores for November and December.

We have seen a significant change in our clients’ spending patterns in the first part of October that is not consistent with our historical trends and this has continued into November. We believe that based on the current economic climate as well as the difficult financial markets this trend will continue into December.

Our client is no longer shopping for dresses and going out clothes and this marks a clear change from our previous sales trends. Dresses have been a major part of our core bebe business through September for well over one year and this trend has ended suddenly. We are addressing our assortment for December as quickly as we can to focus on sweaters, tops and sportswear versus evening and going out clothes.

On our last call we discussed our plans for the first quarter and today I would like to review the results with you.

One. Previously our expectations for the quarter included our belief that we could run a less promotional business when compared to the first quarter of the prior year as we had done in the prior two quarters. As seen from the results we were not able to reduce the markdowns as a result of the lower-than-anticipated sales and the need to stimulate sales with markdowns and promotions. Our marked down inventory continues to be less than last year in the high double digits but we have had to run more promotions on sale merchandise and on regular price. For the quarter merchandise margins were 130 basis points less than last year.

Two. On August 21 we had our fall season collection premier event which generated positive comp store sales that did not translate into strong sales for the remainder of the quarter, especially September.

Three. The bebe apparel business continued to struggle in the quarter with strength in dresses and bebe design lap including Tara Subkoff for bebe. We did see continued improvement though not positive in COLLECTION sportswear and separate bottoms including our new pant program. We did see weakness in tops, sweaters, denim and logo.

Four. The bebe accessory business declined single-digit comps in the quarter. While our shoe business continued to perform well, this was offset by negative comps in jewelry and accessories. In the accessory category sunglasses, small leather goods and hosiery continued the positive comps offset by declines in handbags and belts. We continue to see this weakness into Q2.

Five. We do continue to see strength in our accessory side-by-side and shop-in-shop locations and continue to believe as real estate opportunities are available we will continue expansion in this business in 2009.

Six. At the end of the quarter we had 19 bebe outlet stores and 10 2b bebe stores. In November we will complete the conversion of all existing bebe outlets to the name 2b bebe. In the quarter we opened one new 2b bebe store and converted one outlet store and one bebe retail store to 2b and continue to be pleased with the initial results. While these locations are feeling the effects of the larger macroeconomic environment, we remain pleased with their bottom line performance and look forward to their future success.

During the quarter the customers responded well to dresses, tops, sweaters and denim offset by continued negative comps in logo. Our 2b bebe stores continue to deliver stronger merchandise margins than our outlet stores due to less markdown merchandise than our traditional outlet stores. We will continue to grow the exclusive 2b fashion component in these stores. In December we’ll begin to test the feasibility of 2b bebe in regional centers in Serramonte Center in Daly City, California.

Seven. BEBE SPORT continued to struggle in the quarter and while the results were consistent with the bebe retail business, we remain cautious until we see further improvement in the business.

Eight. During the quarter our bebe.com business continued to grow and experienced a 10% increase over the prior year driven by a 24% increase in accessory sales. We continue to see positive growth in bebe.com even during the month of October where our business struggled in all retail divisions.

Nine. During the quarter the international licensing stores continued to perform very well with a 35% comp store sales increase. During the quarter we opened one new international store in Cairo, Egypt and now operate 22 international license stores. Based on our success in our international business wholesale sales increased 82% from the same period in the prior year.

Ten. For Q1 we spent approximately 4.5% of sales on advertising versus 4.6% of sales in the prior year. As we reviewed on the last call, this year we focused our investment in online advertising, direct mail and in-store marketing. These investments were offset by a reduction in BEBE SPORT advertising which resulted from the reduction in print advertising. Moving forward we continue to evaluate our marketing spend and will continue to reduce the total dollars spent if sales do not show improvement.

Eleven. During the quarter we opened three bebe stores, one 2b bebe store and one SPORTS store which lease was signed in January 2008.

Moving on to the second quarter. As mentioned previously October was a very difficult month and comp store sales were double-digit negative in all three divisions. We did not follow historical patterns in the business and we saw significant deceleration in our dress business across all categories of bebe retail.

The client is not in a mood to celebrate nor go out and this is reflective in our traditional going out business which is a core to the bebe brands. We will change our messaging for holiday to reflect this new reality and will focus on key categories such as pants including skinny pants, cashmere, outerwear including bombers, and tops.

For November and December the core bebe brands will focus on the continuation of what has started out as a very successful pant program with the Lulu and the Audrey and the skinny pants which is our clients new jean. We also plan to take advantage of the recent improvement in tops and a Spanish selection of the art of the tee which has been successful.

The business remains unpredictable in light of the deterioration in the financial markets and the macroeconomic environment.

Two. October merchandise margins were down 109 basis points to last year as we were more promotional in all divisions with the exception of the bebe retail division which experienced flat merchandise margins to last year. Based on the current business we have re-strategized the November and December selling period and understand the need for increased promotional activity to drive volume this November and December.

Three. For bebe we’ll have an incremental friends and family event in November week two and offer a stronger discount than ever before. We will also have what we believe will be a strong Black Friday event during November week four and will offer stronger values during the morning of the event, something we have not done before. In December we’ll be less focused on going out and celebrating and more focused on key items in bottoms, outerwear and tops. We do believe that we’ll be more promotional than originally planned due to our very weak October sales.

Four. For the second quarter in 2b bebe we’ll be highly value oriented offering stronger value and lower prices than ever before. We believe that this will be a true traffic driver in this value oriented division.

In the quarter we are also planning the following: At the end of November we’ll have completed the conversion of all outlet stores to 2b bebe. For Black Friday we are planning our strongest Midnight Madness event ever that will feature special items at the best prices from midnight to 5 a.m. As previously mentioned we’ll be opening our first regional mall 2b bebe store at SerramonteCenter and currently plan on additional offerings at value prices across multiple categories.

Five. We will continue to manage our expense structure by controlling discretionary spending including advertising and travel, continued management of store payroll and central office headcount, and leveraging prior investments across the business. Consistent with the guidance we provided on our last call in 2009 we’ll spent less on new and expanded stores, [ISNT], and home office capital expenditures than the prior two years as a result of fewer new renewal and expanded stores. We are also evaluating the number of new stores that we will open in 2009.

Six. On the international front we will be opening seven additional stores during the quarter in Malaysia, Turkey, UAE, Mexico, Saudi Arabia and Russia. Over the next 12 months we plan to expand into five new countries: Saudi Arabia, Kuwait, Qatar and Ukraine. We look forward to continued international growth as a priority for the company. For the fiscal year we currently anticipate opening 16 stores internationally.

Seven. bebe.com continued to grow in October though only 5%. We are forecasting for bebe.com to be positive in the quarter. We are successfully using our email database more effectively than ever before to communicate both fashion and promotional messages to our clients across all channels.

Eight. For the quarter we currently anticipate our advertising spend to be below the prior year in absolute dollars. Due to reduction in sales we anticipate total advertising to be 4.6% of sales in the second quarter this year versus 4.3% last year. Our full year advertising spend will be approximately 4.3% of sales this year versus 4.5% last year. The reduction in spend as a percent of sales is driven by a reduction in SPORT advertising and re-evaluating our spend in bebe with a focus on outdoor marketing with a slight reduction in print advertising.

As mentioned previously we will re-evaluate our marketing spend for Q3 and Q4 based on the holiday selling period.

For the bebe brand we changed our advertising agency after 11 years and introduced a refreshed look to the bebe brand for holiday. We focused on a sexy edgy client with a particular focus on the aspirational client.

Direct marketing in the quarter will include the following. We have reduced circulation to those clients that will provide a true payback with the mailing. One. In home week one November we have mailed 750,000 catalogs versus 800,000 in the prior year. Two. In the last week of November we will mail the BEBE SPORT holiday book. We will mail 125,000 versus 125,000 last year. Three. For Black Friday 2b bebe will mail out 120,000 pieces with an offer versus 125,000 last year. Four. In December bebe will mail 850,000 24-page catalogs versus 1.2 million last year.

Nine. As stated on our last call the initial plans for fiscal 2009 contemplated opening 24 stores this year versus 35 last year. We currently believe that we will open 20 stores this year which includes opening nine 2b bebe stores and 10 bebe stores and one BEBE SPORT store. We will also expand three bebe stores, one BEBE SPORT store in Fashion Show Mall in Las Vegas, and we are expanding and converting an existing outlet store to a 2b bebe in Sawgrass Mills in Sunrise, Florida. We currently anticipate closing six stores. For the year we anticipate square footage will increase 5%.

I’d like to turn the call over to Walter.

Walter Parks

As Greg stated previously if comparable store sales remain consistent with October, diluted earnings per share should be in the range of $0.12 to $0.16 for the quarter based on 90 million weighted average shares outstanding versus $0.26 based on 90 million weighted average shares outstanding in the second quarter of fiscal 2008.

The company is currently anticipating an effective tax rate of 35% for the second quarter of fiscal 2009.

Inventory at the end of the quarter will be down versus the prior year per square foot in the high single digits. Capital expenditures are currently anticipated to be below $30 million. Depreciation expense for the year will be approximately $28 million. Total square footage will increase approximately 5%. Advertising dollars for the second quarter will be below fiscal 2008 in absolute dollars.

Now Greg and I will be happy to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Betty Chen - Wedbush Morgan Securities.

Betty Chen - Wedbush Morgan Securities

I was wondering if you can talk a little bit more about the plans for holiday. It sounds like we’re going to be emphasizing price proposition a lot more and also shifting focus to some of the other better trending categories. Definitely circulation will be changing. Will there be differences in the in-store signages or how else are we going to communicate this message to get people into the doors?

Gregory Scott

As I said October really changed our focus and really what happened in the macro-environment. Traditionally at this time of year we would really be ramping up our holiday dresses, going out clothes. It does not look like that will be happening for this year as parties are canceled, etc.

So a couple of things. Obviously in 2b bebe we will become even more value oriented than we’ve ever been and we’re really looking at ways to have great, great values on some items better than we’ve ever had before. Within the bebe brand the first thing that we’re going to do obviously is re-evaluate our inventories and make sure anything that we can get out that’s not selling, we can. We’re really trying to tightly control those inventories.

In terms of traffic drivers, one of our most effective ways that we are finding for traffic drivers is through email communications. As our email list has grown over the last year, this has been a very strong way that we can get people into the doors.

The first event will be next week with friends and family which is an incremental event. It’s usually in December. It’s a four-day event and it will be a significant discount off the entire store in all divisions. We’ve never done this before but based on what we’re seeing from the competition and what we believe we need to do to stimulate sales, we find this important.

We will also have in week three an event with our tops in bebe that will be email plus additional signage. And obviously for Black Friday we will have signage in our doors and we are communicating all through the middle of the month of November to the end about this event.

December, based on how the two events in weeks two and three of November go, we’ll have similar events in that strategy but we will wait to see the response of weeks two and three before we actually delineate the strategies. But it will be more price. I won’t say it’ll be price point but it will be more value oriented and really talking to the client about this is a great thing to have, something that will last in more than just this holiday. I think that’s very important that she sees value in it more than just heading into Christmas and New Year’s.

Betty Chen - Wedbush Morgan Securities

Obviously a lot of concern about fewer shopping days this holiday season between Black Friday and Christmas and certainly like you said we’re going to have to monitor what happens in late November. How are we thinking about the fewer days and how that could impact the Christmas business?

Gregory Scott

We’ve taken that into account in the guidance we’ve provided. It affects November, not December. We actually think we’ll see improvement in December because there are more days in the month before the holiday and there are two extra days in the week four heading into Christmas and two extra days in week five heading into New Year’s which obviously the days after those are weaker which will fall into January. We’re actually seeing December is a little more favorable on the calendar as we’re seeing it where November would be less favorable due to the calendar shift.

Betty Chen - Wedbush Morgan Securities

In terms of SPORT how are we thinking about that concept whether it’s for the holiday or longer term? Are we seeing some of the improvements we had seen the last quarter? And going into the future, obviously fewer store openings this year but how should be think about SPORT?

Walter Parks

We haven’t changed our outlook for the future as we speak today. The business was not as good in the fiscal first quarter as the prior two but consistent with the bebe business.

Gregory Scott

As we’ve spoken before we’ve really slowed the store growth in no new store openings right now. We’ve really re-shifted our focus to 2b bebe as really a focused strategy. As I said on the call we are very pleased with 2b bebe’s bottom line performance in Q1 and we’re actually encouraged about the growth of this division as we move forward.

Operator

Our next question comes from Jeffrey Van Sinderen - B. Riley & Co.

Jeffrey Van Sinderen - B. Riley & Co.

As far as the dress situation obviously that’s been sort of a surprise. How do you deal with the inventory that you have now in dresses? Do you just mark it down, blow out of it? Obviously I know you said you’re working on adjusting some of the incoming inventory that’s supposed to come in. How fast can you respond or how much of the holiday assortment can actually change at this point?

Gregory Scott

November really can’t change at all. I can really expect week three and four and five of December.

In regard to dresses, really it was overnight. September dresses were still strong in our assortment. About week one October they started to debuild and by week four October they just had the customer does not want to buy a dress. When it happens that fast as I said it is hard to react.

We’ve addressed it on the go-forward. We will make sure we are out of inventory through promotion and through the end of December. We do not want to carry this inventory into January. It would be not the right thing obviously for us to do but all I can say is I’ve never seen a trend decline or go off so fast, and this is a trend we’d been riding for about a year and a half. It just really was carrying the bebe business and she just did not want a dress. I do think it has a lot to do with what’s happening with her psyche, what’s happening in the environment and the holiday parties are probably few and far between. As I would say to the organization, it’s not a year that the client is going to be looking to celebrate per se in a traditional way.

Jeffrey Van Sinderen - B. Riley & Co.

As you look at kind of the traffic and conversion figures for October or I guess from the point at which the dress business really fell off hard, what did you see in traffic and conversion?

Gregory Scott

We definitely saw traffic and conversion decline in October from our Q1 trend and from September’s trend for sure. We definitely did.

Jeffrey Van Sinderen - B. Riley & Co.

Obviously you guys have to shift pretty fast at this point because things happened very fast.

Gregory Scott

In October which as I said on the call was completely off historical for us. I mean, completely off 10 year historical pattern we’ve ever had.

Jeffrey Van Sinderen - B. Riley & Co.

Along those lines how are you thinking about the steam of how you present the assortment now or how you present product as much as you can change it in the near term, what you do with visual display, how you impact advertising, the book that’s going out, any of those sorts of things?

Gregory Scott

In-store visual we’re really trying to downplay dresses quickly. By next week you’ll see that downplayed in all stores. You’ll see a much stronger emphasis on bottoms, sportswear, coats; things that the client can see a value in; if she buys them, it’s something she’ll keep for two, three, four months that she’ll wear through the entire winter. That’s very important from a window display and from an in-store presentation.

Marketing itself; magazines, bus shelters; is pretty much done through December. The catalog for December we did try to really focus it on our logo business, things to wear at home, outer wear, a little less celebration in mood, and it’s more about every day holiday, more about everyday life than the celebration. So we already had made that adjustment as we went to press on that book. So we are refocusing our whole efforts in the bebe division based on what we believe the mood of the client is today.

Operator

Our next question comes from Christine Chen - Needham & Co.

Christine Chen - Needham & Co.

I was curious if you have been able to continue to sign up new club bebe members and if you see any discrepancies between the shopping patterns of your club bebe members versus your non-club bebe members in this environment?

Walter Parks

We do continue to see growth in the category, not as rapidly as when it was originally introduced, and clearly there are [inaudible] within the membership that aren’t performing as well as they have.

Gregory Scott

To add to that we are not seeing the growth of new clients anywhere near, as Walter said, as we’ve had in the past. I think one of the issues is we need to be able to speak also to the non-club bebe clients because truly we can speak to the base over and over and finally she’s going to get exhausted with us. Our big effort in spring is really about the acquisition of and ways to use our marketing to acquire new clients and not really completely rely on our existing base.

Christine Chen - Needham & Co.

With respect to that, how do you balance the merchandise assortment between something that maybe more a core customer would wear versus somebody that might not be as adventurous from a fashion perspective?

Gregory Scott

It’s interesting. Really in the month of October what I saw happen for us in one of the first times in a long time is, I would never say basic for us but things like black pants, cashmere sweaters, things that have always been in our assortment that have never been drivers or the best things that she’s really excited about, seeing the client really respond to that. I think what that is is just people looking for great value, things that they can get great use of at this time and in this economy.

I think that is a big head step shift even in our core client. I just have to balance that because at the same time she still does respond. Every dress in our ad campaign today she still responds to, which [inaudible] is not working but whatever is in our campaign she responds to. What I’d say is we still have to offer special but I think you’ll see a little more and especially for the December, January, early February period on things that we think she’s going to wear more than just the month or two months in the future.

Christine Chen - Needham & Co.

Serramonte, when exactly does it open and is it a test for non-outlet mall locations or are you going ahead and going to be 2b bebe outlet malls like that?

Gregory Scott

It’s definitely a test. We’ll probably look for one other non-outlet location and regional mall location to do it also and we’re glad that this is very close to our headquarters is Brisbane. It will open week one of December.

Christine Chen - Needham & Co.

I look forward to it. I like that it’s close to me too.

Operator

Our next question comes from Analyst for Eric Beder - Brean Murray, Carret & Co.

Analyst for Eric Beder - Brean Murray, Carret & Co.

You did talk about international expansion and having comps of I think you said 35%. Is that correct?

Walter Parks

That’s correct.

Analyst for Eric Beder - Brean Murray, Carret & Co.

You can see it in the paper every day that there’s a slowdown in international growth as well. Are you not seeing that or just the regions you’re growing in are not impacted in any slowdown coming in international?

Walter Parks

We are not seeing a slowdown in the Middle East. We are seeing a slowdown in certain countries in Southeast Asia. We’re not comping the store that’s open in Eastern Europe or Turkey. We’re not in Western Europe which is feeling the biggest pullback.

Analyst for Eric Beder - Brean Murray, Carret & Co.

I have to say I really like some of the dresses you had for the fall. It’s kind of sad that people didn’t buy them. Just a little bit of more detail into fashion that we should expect for spring? I know you said more like sweaters, socks, sportswear, but in terms of like fashion. Any specific looks or just conservative kind of black sweaters and corduroy pants? What can we expect?

Gregory Scott

No black sweaters and corduroy pants from bebe. Basically what I would suggest is that dresses, just so you know, through September were very strong, really strong, so through the fall they were very strong. What happened really is in October as we saw a really steep drop off. The dresses you might see in our ad campaign have been very strong so she is responding to what you might see in the ad campaign.

Now speaking to fashion, you will still see for bebe the black pant is still very important for November and December, cashmere sweaters, but as we move into spring I think the great thing is it is not so dress focused no matter if dresses were happening or not. I think we’re going to see a return to a type of denim that’s a new look in denim that’s one with a boyfriend blazer with like a sequined tank.

There’s like a really fresh new look that came both from the street and the runways that I think will really excite the customer to buy because there’s all new lengths and new proportions in pants, there’s new lengths and proportions in skirts, there’s new interest in tops and the great thing for me is it’s not all about dresses as we head into spring which it has been for the last almost two years for us.

Analyst for Eric Beder - Brean Murray, Carret & Co.

A little bit about the new ad campaign; the ads that I see now that seem like more for I guess December, very stylish, just seems like higher fashion. Is that going to like you’re going to strike for the spring advertising campaign?

Gregory Scott

Yes. That was our new agency that developed our holiday advertising which was really very well received by our client, very high fashion. We shot with the same photographer for spring. We have a new model. We have the same art director. It looks I think amazing.

Analyst for Eric Beder - Brean Murray, Carret & Co.

Yes, it does. It looks much more polished and sophisticated in my opinion. In terms of buy-backs, are you planning any stock buy-backs in the near future?

Walter Parks

Two weeks ago we announced that the Board approved up to $30 million that will take affect the first time when the window opens next week.

Analyst for Eric Beder - Brean Murray, Carret & Co.

Are you planning to basically use all of that or just like slowly use it depending on the circumstances?

Walter Parks

It would be used as allowed under the 10B5 that we’re filing.

Analyst for Eric Beder - Brean Murray, Carret & Co.

One last question about SPORT. Any changes in fashion there? What kind of new looks should we expect for the spring in sportswear?

Gregory Scott

I think in SPORT in active, the bbsp portion, you will see similar looks but really we’re doing a new look for the street portion which is really mixing lightweight sweaters, great new fabrications in T shirts, back to both woven bottoms that are casual and in terms of knit bottoms, and the great thing is the legging continues. It’s a big thing for sport and we’re going to do that in a lot of tonal colors. We’re going to have multiple layering pieces that the customer can wear. This is a new line that we’ll introduce in the spring season in SPORT.

Analyst for Eric Beder - Brean Murray, Carret & Co.

About the accessories, you did say they definitely suffered. Is that basically the same affect that you had with the dresses? They were kind of dress up items that people just kind of shied away. Is that basically what’s going on or is there anything else going on with the accessories?

Gregory Scott

I think that what I said was for the first time we saw I think it was about a negative single-digit comp in the quarter. Really shoes was still strong. Really it was jewelry that suffered and a lot of that had to do with just not having enough of bebe logo jewelry in the assortment quite frankly. Now as we move into Q2 what I’m really seeing is handbags not performing as well and shoes slowing down a little. I think that is directly related to what’s happening in dresses for us in our core store.

Operator

Our next question comes from Samantha Panella - Raymond James & Associates.

Samantha Panella - Raymond James & Associates

I’m just wondering if you could update us on how our wear-to-work did in the quarter. I think that was something you were focused on on the last call.

Gregory Scott

As I said in the scripted remarks, it did much better than it had been doing in the prior year. It was still not positive. We saw better weeks on hand. We saw a significant improvement in the comps performance and we actually had a strong belief. The suits did work in Q1. What we’re seeing into Q2 is obviously the suit waning which it almost always does and we’re really focusing on bottoms, typically pants.

If I had more of our key pant program in the store, I would be doing more business today. That’s the Lulu, the Audrey and the skinny pants. If I had more inventory in all three of those, I’d be doing more business today. I do think that trend for us continues into spring because the new length pants is huge with a statement too. We see that as a good trend and something to really offset what’s happening in dresses today which has really been carrying our business for about the last year and a half.

Samantha Panella - Raymond James & Associates

Can you update us? Has Dyan Jozwick, is her impact being felt yet? When should we expect that?

Walter Parks

Obviously the business is softer than we had anticipated coming in so I would say at this juncture we haven’t felt the impact.

Gregory Scott

And it would be too soon. She joined us in July. We probably would not see her impact until spring.

Samantha Panella - Raymond James & Associates

Is there anything you’re thinking about maybe longer term in terms of your overall price point? Obviously the environment that we’re in is difficult and you need to be more promotional, but maybe just perhaps with the increase in the past fashion players, what have you, is that something that maybe you think about going forward?

Gregory Scott

Obviously I think about it a lot. I think a lot about both fashion domestically and obviously what’s happening when the Europeans come to the United States.

One place that we’ve really made a place where strategic decision was to create 2b bebe as somewhere where we believe could be a great fashion value player because we think there’s no reason we can’t be in the space. We think 2b bebe is the place to be.

Within bebe as I’ve said before I do believe if the macro wasn’t happening right now, the economic downturn, we’d still see good selling at regular price. What I have to do is offer value in terms of fashion and be even more on the forefront of leading fashion. That’s why we continue to invest in design even more than we have in years past; design is being really the most important part of our company.

Operator

Our next question comes from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

I wanted to just ask if I got the inventory levels right. Walter, did you say that at the end of this quarter they’re down about 13.5% per square foot?

Walter Parks

Yes.

Janet Kloppenburg - JJK Research

At the end of next quarter you expect them to be down high single digits?

Walter Parks

Yes.

Janet Kloppenburg - JJK Research

Is that where you want them to be at the end of next quarter just because you’re forecasting a comp that’s a bit higher than that?

Gregory Scott

It is not where we would like them to be at the end of Q2. What I would just say is what has happened there is with October, this is the first time Walter and I have not had our inventories in line with sales.

Janet Kloppenburg - JJK Research

Ever. First time I can remember.

Gregory Scott

Our turn is not faster and what that really is all about is October completely slowing down [inaudible].

Janet Kloppenburg - JJK Research

So suddenly.

Gregory Scott

I will work diligently to get those inventories even leaner by January 1. That doesn’t contemplate necessarily as promotionalized as I might be, what I might be able to cancel. We are going to work hard to get those inventories much more in line with sales. We’re not promising that. We’re telling you what it is today but we’re not sitting by saying that’s where we want it to be or where we hope it ends up to be.

Janet Kloppenburg - JJK Research

I wondered first of all if this change in the desire for dress up clothes, I don’t think you’ve ever seen it before, but if you have could you talk a little bit about what your expectation is for rebound? Could this be to some extent like 9/11 that we were all shocked and business was really bad for a couple months and then we saw a gradual improvement or is there more going on here?

Walter Parks

I think we have to take the forward-looking statement today and assume that business is tough until we see otherwise.

Janet Kloppenburg - JJK Research

No, no. That’s not what I’m asking. The client’s desire to dress up is markedly weak compared to what it’s been. I’m just asking Greg if he thinks in six weeks she might be in a better mood or if we think this is something that will transcend our culture for the next year or two?

Gregory Scott

I wish I knew that. I think what I have to do is manage the inventory to what she wants it to be knowing that going into January, February and March traditionally it’s not a dressy period anyway. So it’s just we’re in the most dressy period of our year and she doesn’t want anything to dress up in. Honestly it’s happened so suddenly and so quickly, I think what happened is what happened in the financial markets and I think as people canceled holiday parties, etc. she really saw, “You know what? I don’t maybe need a dress this holiday season.”

Janet Kloppenburg - JJK Research

Or maybe, “I have enough dresses.”

Gregory Scott

Exactly. But the good thing; not good thing; I don’t want to be overly positive. I just want to say that there are trends outside of dresses that we can grab onto for spring that we have not seen probably in two years. It’s really both from a fashion perspective and a street perspective so that for me is something good to move the merchandise forward to.

Janet Kloppenburg - JJK Research

I just wanted to ask if you were thinking at all about pricing? It looks like inroads continued to be made by the likes of Over 21 and H&M and others, and I’m just wondering as the leader in the better contemporary specialty market, what you’re thinking about pricing going forward and how you might be able to diminish the inroads that these competitors are making?

Gregory Scott

As I said on the last question 2b bebe’s my strategic play to get the inroads of that. At the same time as I said before many times, I have tried to fight the game or the price point in bebe to not reach success. If the fashion is right she pays for it, the fashion’s wrong, she doesn’t want it. At 2b bebe it’s a different story. She’s looking for a price and I feel we’re going to continue to grow that fashion assortment so this can be our value player in the company.

Janet Kloppenburg - JJK Research

Could you maybe over time develop this lower tier concept and have it in some of the B&T malls in the country?

Gregory Scott

We are definitely testing that. As I said we’re opening -

Janet Kloppenburg - JJK Research

I heard you say it.

Gregory Scott

That would be my hope. That would be my desire but I don’t want to be forecasting on that. I just want to say we are testing it; we’re putting resources behind it because it is profitable already. The signs are there and we all know that the fast fashion has really changed the environment every year. For me I want to be able to get some of that market share.

Janet Kloppenburg - JJK Research

When you look into the spring season, we’ve heard a lot of complaints from merchants that there’s not a lot of newness out there in the contemporary market, not a lot of trend. What’s happening for the spring? Are you seeing some new direction?

Gregory Scott

Coming out of the January and February assortments, I believe there’s a lot of trend. That as I said on specific to dresses I think new length pants, new proportions in pants, something she hasn’t had ever or in her closet for 10 or 20 years is going to happen. It relates to the statement shoe. I think we’ll see boyfriend blazers. I think we’ll see a lot of interest in tanks and tops. There is stuff to grab onto. I think for us we see a lot there and our spring advertising campaign I think will show a lot of different looks and not just specifically on the dress which we made a focused effort on that.

Janet Kloppenburg - JJK Research

Walter, I know you talked about the fact that you announced the share repurchase but do you think that you’ll be active in that program over the next few months?

Walter Parks

I can’t comment on that.

Operator

Our last question comes from Amy Noblin - Pali Capital.

Amy Noblin - Pali Capital

Maybe if you could draw the comparison of the environment today versus the environment ’00, ’01 for lack of a better word when you really took the fashion perhaps more defensive than offensive. If you think about the evolution of the products heading into late December and spring, should we think that it’s going to be safer or is it just moving into a new trend out of dresses, etc.?

Gregory Scott

I don’t think for bebe we could ever be safer. I think there will be two things going on. There’s a lot of new fashion to grab onto for spring season. There’s a new color palette she hasn’t had in many years, there’s new pant silhouettes, there’s new top silhouettes, and there are new jacket silhouettes. There’s a new uniform emerging both from the street and from the Paris runways that we believe is something that we can grab onto.

I think at the same time we’re seeing what bebe would call basics really selling right now, whether it be basic pants, whether it be turtlenecks, whether it be cashmere sweaters; we’re seeing the customer really responding to those more than she has in the past. I think that really is value for her money right now.

So we need to have a balance of both as we move in but for bebe the core brand, no matter what I’ve got to excite her with fashion. She doesn’t want a dress but I’ve got to give her something that she really does want.

Operator

This will conclude the first quarter earnings call for bebe. Thank you for joining us today.

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