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Executives

Liyuan Woo – Chief Financial Officer and Principal Accounting Officer

Steve Birkhold – Chief Executive Officer

Analysts

Betty Chen – Wedbush Securities

Jeffrey Van Sinderen – B Riley & Co

Jennifer Black – Jennifer Black & Associates

Dana Telsey – Telsey Advisory Group

Betty Yinjung Chen – Wedbush Securities

bebe stores, inc. (BEBE) F3Q13 Earnings Call May 9, 2013 4:30 AM ET

Operator

Greetings and welcome to the Bebe Stores, Inc., Fiscal Third Quarter Results Conference Call. As a reminder the conference is being recorded. It is my pleasure to introduce Ms. Liyuan Woo, Chief Financial Officer. You may begin.

Liyuan Woo

Good afternoon and welcome to bebe’s fiscal third quarter 2013 update. On the call with me today is Steve Birkhold, Chief Executive Officers. After Steve’s opening remarks and business highlights, I will discus the fiscal third quarter results, as well as our expectations for the current quarter. Our call will be limited in time to one hour. After we have completed our prepared remarks, we will take your questions.

Before I get started, I would like to remind you of the company’s Safe Harbor language. 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 use 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 Form 10-K, 10-Q and other filings made with the SEC for the additional information on risk factors that could actual results to differ materially from our current expectations.

And now I’ll turn the call over to Steve for his opening remarks.

Steve Birkhold

Thanks Liyuan and good afternoon everyone. Despite the current top business which we have anticipated and shared with you during our last earnings call, I am encouraged by the process that we are making in our top three transitional strategic focuses, mainly talent and corporate structure, product and marketing.

First, talent and corporate structure, I am pleased to note that we have filled all major leadership positions across the entire company including merchandising, design, ecommerce, marketing, and 2b leadership. For merchandising we have hired Katrina Glusac as the Chief Merchandising Officer in April. She brought with her more than 20 years of experience in product development and product management for contemporary and ecommerce brands such as ShoeDazzle.com and GMM of Guess.

For design we welcome back our veteran Brigitte Bogart as our EVP of Design and Product Development. She was from 2001 to 2009 and has over two decades and ready-to-wear and product development experience with multiple fashion brands. Our Chief Digital Officer, Ben Baum has been with us since November, joining us from Google and as now hired key members for his Executive Team in ecommerce. Michelle Landgrebe, our new EVP and GMM of 2b has joined in April from VF Corporation, bringing with her over 20years of top level specialty retail and wholesale experience from Polo Jeans, Tommy Hilfiger, Donna Karan.

And as we announce this morning, Keith Keegan will be joining next Monday as our SVP of Marketing. Keith will bring his over 20 years of retail and marketing experience from Limited, Express, Abercrombie & Fitch and American Eagle Outfitters. We have a great deal of talent across all levels of the organization.

Despite the challenges and changes in the past year, the team remains passionate and committed. We have a history of being nimble and promoting an entrepreneurial environment. During the past four months in subjoin in addition to finding key team players we’ve limited layers and want everyone in this organization to common go.

We have an existing strong core group along with the new additions will help us achieve our goals. Last week, we have announced Liyuan’s promotion to the CFO position. She has been with us since 2010 and has brought with her 15 years of finance, accounting and merger and acquisition deal experience. We are refining the structures and processes among key group eliminating existing silos and encouraging open communication, fast decision making processes and allowing for opportunities for our team members to play to their strengths.

But we have eliminated the COO position, we have strong players and supply chain, production, human resources, IC and legal to support the business objective going forward. I’m covenant to share that now we have a great core team to position ourselves for the turnaround of our business.

Next is product, we fully acknowledged that the majority of our products – problems for the past years will product driven, mainly the directional change related to the product and branding that caused confusion to our core customers in giving that margin in the process. Our next, branding next but needless to stay we are focus majority of our energy and effort on product.

Since my arrival in January I have spent a great deal of time working with mechanizing design and the planning and allocation and production teams to deal with our inventory assortment to improve processes and refine future assortments. With Brigitte who is our EVP of design on board and the two lead merchants joining the team Katharina for BB and Mitchell for [2B]. We are highly motivated and excited to win our core customers back and attract new customers.

We redefined our inventory management process to lesser focused on opened by test chase or cancel depending on that success or failure of certain products. We have reestablished our relationship with select quick turn in quality vendors to supplement our in house design core products.

All of these changes are enabling us to create a new organization that is much more action oriented and will allow us to stay focused on our core and react quickly to the business trend. While we continue to anticipate some level of needed mark downs to our current assortments on the floor, I’m encouraged by the momentum we are starting to see a cross many categories. The new merchandise that we have been developing is more trend wise and we are encouraged by the strong reaction we have received from our customers in dresses, body-conscious silhouettes casual and impressive bottoms, the new BEBE SPORT logo and opening price points across all categories.

Last with marketing, we are very excited about the work that we’ve done since I’ve joined in January. We have gone through in-house customer surveys and external research partnered with an outside agency to assist us with our re-branding and messaging. The underlying strategy is very simple. We have gone back to our roots. Our emphasis is to set the trend, not just follows the trend. We will continue to focus on our core customer, who is very focused on contemporary faction, proud to be sexy and noticed, expect quality and value in the products that she purchases.

We are in the beginning stages of making our marketing and visual statements in print, in-store and online. Not only have our core e-commerce team members on board and engaged, you might have already noticed a substantial change in our online, mobile and e-mail presentation. We have much work to do to realign our visual messaging across all channels, nevertheless, we are encouraged by the process – progress that we are making and in addition with Keith a very seasonal marketer joining us, we are looking forward to his contribution in the branding amarketing efforts going forward.

Looking at the fiscal third quarter for bebe, we saw a sales decrease across all the bebe channels during the quarter and experience a significant mark downs and margin erosion. We are making progress in managing our inventory towards our target levels and chasing after our fast turning productive categories. We are starting to see some positive reaction to our newer product in the April Mailer offerings but remain causes given the level of previously committed incoming inventory through the end of fourth quarter fiscal 2013.

For bebe.com our third quarter comp sales growth has also slowed down against the strong prior year third quarter. However, we’ve seen some momentum that has been chasing after on-trend products and increasing wet exclusive offerings which we have been experiencing significant improvements.

In addition, we continue to make technological and merchandising enhancements to the online shopping experience. We’re also expanding our product offering integrating our loyalty program and refining the marketing message to our clients. For BEBE International our partners are experiencing comparable negative comparable sales which have been impacted by the product offering. Many of our partners have limitation on mark down gains and timing as a result we’ve controlling the level of wholesale inventory that we’ve been delivering to our partners for this quarter.

We continue to grow our portfolio, we’re now in 24 countries with a 129 points of sale compared to 110 points of sale across 19 countries in the prior fiscal third quarter. For 2b we’ve experienced positive sales comp for the quarter driven by a strong online selling, we continue to improve to experience improved sales in woven tops, jackets, bottoms and non-apparel offset somewhat by this is in the tops and dresses. We had a increased investment and marketing the brand awareness of 2b as well. As building up our ecom customer base.

With that, I’ll turn the call back over to Liyuan to go through our fiscal third quarter performance and current quarter guidance. Liyuan?

Liyuan Woo

Thanks, Steve, as we’ve mentioned in the sales release the fiscal third quarter comparable store sales was below our expectations, traffic comps improved to a single-digit negative comparing to double-digit negative in the second quarter of fiscal 2013, UPC comp continued to be at a low single-digit positive range. However, poor product acceptance on previous estimated inventory offerings negatively impacted the results.

As planned, we were highly promotional, hence able to move through inventories quickly, however, at the expense of our historical low merchandise margin rate. Net sales for the third quarter of fiscal 2013 including the extra retail week in January were $112.9 million, a decrease of 6.7% from $121 million reported for the first quarter a year ago.

As previously recorded, comparable store sales for the quarter ended April 6, 2013, excluding the extra retail week in January decreased 8.6%, compared to an increase of 7.2% in the comparable period of the prior year. Gross margin as a percentage of net sales decreased to 29.7% in the third quarter of fiscal 2013, compared to 38.7% in the third quarter of fiscal 2012. The decrease in gross margin as a percentage of net sales was primarily due to a significant increase in markdowns, coupled with unfavorable occupancy leverage.

SG&A expenses were $52.2 million or 46.2% of net sales, compared to $47.2 million or a 39% of net sales for the same period in the prior year. The dollar increasing SG&A expenses was primarily driven by certain costs totaling $4.8 million, which includes store impairment charges, cost of hiring a new CEO, rebranding agency costs as well as other transition related recruiting a severance costs. In the third quarter fiscal 2013, the Company recorded a non-cash provision for income tax of $31.4 million to establish a valuation allowance again, it net before income tax assets, as well as to recognize the year-to-date impact of establishing the valuation allowance.

Although the company generated taxable income from continuing operations for the past three fiscal years, through the quarter, the company were likely be in a three-year cumulative loss position at the end of fiscal 2013. Accounting rules required us to record a valuation allowance. The valuation allowance has no impact on our ability to utilize loss carry forwards or tax assets in the future, and is not a reflection of our point of view about increasing the profitability of the business in the future. This allowance reduce the current quarter EPS at $0.39 per share.

Net loss for the third quarter of fiscal 2013 was $49.3 million, or $0.62 per share, on 80.1 million shares outstanding compared to a net loss of $0.2 million, or zero per share, on 84.3 million shares outstanding for the same period of the prior year. Net loss in the third quarter of 2013, excluding the aforementioned non-cash deferred tax asset valuation allowance was $11.6 million, or $0.14 per diluted share.

Net sales for the year-to-date period ended April 6, 2013 were $365.5 million, a decrease of 8.5% from $399.3 million for the year-to-date period ended March 31, 2012. Comparable store sales for the year-to-date period ended April 6, 2013 decreased 9.3% compared to an increase of 8.1% in the prior year.

Net loss on year-to-date period ended April 6, 2013 was $56.7 million, compared to net income of $8.7 million in the prior year. Loss per share for the year-to-date period ended April 6, 2013 was $0.68 per share on 82.8 million shares outstanding compared to net earnings per share of $0.10 per share on 84.4 million diluted shares outstanding in the prior year. Net loss in the year-to-date period ended April 6, 2013, excluding the non-cash provision for deferred tax asset valuation allowance was $19 million or $0.23 per diluted share.

Our total cash and investments at April 6, 2013 were $182 million versus $241 million at June 30, 2012. The decrease was primarily driven by the repurchase of the Company’s common stock, loss to date and CapEx spends. Inventories as of April 6, 2013 were $36 million compared to $34.2 million last year.

At the end of third quarter, average finished goods inventory per square foot increased approximately 6.8% compared to the prior year. Capital expenditures for the fiscal year to date period were approximately $17 million and depreciation expense was approximately $16 million.

In November 2012, the Board of Directors authorized a program to repurchase up to $30 million of the Company’s common stock. As of May 8, 2013, the Company repurchased approximately 5.5 million shares, at a weighted average price per share of $3.85 for an aggregate purchase price of approximately $21 million.

During the quarter ended April 6, 2013, the Company opened 2 bebe stores, one 2b bebe store and close 7 bebe stores and one 2b bebe store. We ended the quarter with approximately 1 million square feet.

Now let me review the current quarter expectations and items that relate to the fiscal year.

For the fourth quarter of fiscal 2013, we currently anticipate comparable store sales in the negative high-single digit range. We anticipate we will continue to see a lower gross margin rate and an increase in SG&A due to a higher markdown and certain transitional costs in the fourth quarter.

The net loss before and after-tax is expected to be in the low to mid teens per share before any one-time item such as executive exit cost and other non-cash transitional charges. The expected loss per share range also reflects the continuing impact of maintaining valuation allowance against deferred tax assets as discussed earlier and that a very low effective tax rate. For the remainder of fiscal year 2013, the company anticipate opening on bebe store and closing one bebe store which will result in no material change to total square footage from the end of fiscal 2012. In addition, our international license fees are anticipated to add up to six points of sales for the remainder o the year.

Depreciation expense for the year will be approximately $21 million; total capital expenditures for the year are anticipated to be up to $27 million which will include capital expenditures for new stores, remodels, store expansion, information technology systems and office improvements. I will now turn the call over the Steve for his closing remarks.

Steve Birkhold

Thanks, Liyuan. As we look ahead to the last quarter of 2013, we will remain laser focused on three key transitional and strategic areas. I’m excited that we now have all of the key executive team members on Board and focused on working towards one clear strategic vision. While the macroeconomic environment remains uncertain and the (inaudible) fully behind us, we are quite optimistic about our near future turnaround.

Our team and I are working on our turnaround longer term strategic vision, and I will be sharing this with the Board in September. The plan is to schedule an Investors Day after the meeting with the Board to share some of the highlights.

Thank you very much and I would now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) your first question comes from the line of Betty Chen at Wedbush Securities.

Betty Chen – Wedbush Securities

Thank you, good afternoon Steve then congratulations on your promotion. I was wondering if you can talk a little bit more about any current trends you’re seeing Steve in the business because it seems like we’re starting to see some of the categories turn in the last quarter and perhaps how does that compare against your guidance for the fourth quarter. And then as related to that the inventory as we go into fourth-quarter, I know I think you’re still dealing with some of the legacy products. Where should we fair at the end of fourth quarter so that we can start to position for new arrivals around fall season? And then my final question is regarding the some other customer studies that you have conducted, any insights you can share with us regarding what are they hoping to see from Bebe going forward in terms of design, branding, pricing, et cetera. Thanks so much.

Steve Birkhold

Okay, yes, so I’m actually very encouraged by some of the changes that we were able to make in some of our quick turnaround product categories, the one area across the board I think I mentioned this early in my presentation is the importance of body conscious apparel. So we had really previously tailored the assortments to be longer and it seems a little less figure-hugging et cetera. And I think we’re really clearly finding out that those still are less that are closer to the body of all categories that are working really well. So the benefit of our very nimble production and searching team is that there are certain product categories that we can get back into quickly and we’ve seen really, really strong benefits there.

I think based on the challenges from a macroeconomic perspective, also I think as we upgraded some fabrics and categories going back to last fall and into early spring, we also maybe vacated a little too quickly some of the opening price categories.

And again, we’re not taking prices down. What we’re noticing is that the consumers are reacting very positively to some of these categories across our logo products, across their dresses, denim and multiple areas. So, we’re seeing great signs of life in those categories that we’ve been able to get back into. The dress category continues to be strong for us, although the components of it have changed a little from historic levels where day dresses and certain silhouettes are performing very well where we probably got away from the body conscious looks in some of the dressier styles. And as we get back into dressy, we’re noticing those body conscious stuff is really starting to accelerate.

Below the total inventory level, when you look at some of the changes that we made, we’ve seen really, some very, very encouraging results that as we work our way through some of the current inventories, we will continue to see improvements in the overall business.

From an inventory perspective, we’ve dealt very decisively with some of the product categories that were slowing our churns down and with some of the repricing that we’ve done organically in the stores on advertise and see tremendous velocity and liquidation of some of those categories. So, we’re in a very strong position when it come to aged inventory and really as we carry forward into first quarter, we should be in a very good position to deliver a lot of new products that are in the pipeline. The customer service that we’ve done has actually been very consistent.

So just thinking how we engaged outside agencies from a quantitative and qualitative perspective and then we also engage our own customer on their feedback whether would be in a retail stores in online, And probably the most interesting thing is really from a brand position perspective that she really does look at this brand, the brand that provides very strong choices for here social going out environment. So I think as we move forward, we will make sure that we index very strongly on what she looks at bebe for and make sure that we have the right assortments in place to satisfy her needs. There’s obviously a lot of detail form a consumer perspective but as you known we have a relatively young consumer who is very fit, so smaller sizes and a lot of work is being done on making sure that the content of our inventory reflects what our customer needs are.

Steve Birkhold

Great. That was very helpful. Thanks so much.

Betty Chen – Wedbush Securities

You’re welcome.

Operator

Our next question comes from Jeff Sinderen from B Riley & Company

Jeffrey Van Sinderen – B Riley & Co

Good afternoon and let me add my congratulations on the top that you have the leadership positions now. Does your guidance for the low to mid teens loss per share include anything extraordinary other than the tax situation or is it just regular go forward? Is there anything in there that we should be aware of that might be inflating expenses or…?

Steve Birkhold

Well, just to be clear, the guidance of low to mid teens excludes the tax situation that we talked to you about.

Jeffrey Van SinderenB Riley & Co

Okay. And is there anything we should think about in terms of gross margin rate? Do you think it’s –I mean versus year-over-year or do you think it gets sequentially a little better versus Q3 and any color you can give there?

Steve Birkhold

Well their incoming gross margin rates on our products had actually been very stable. And the biggest issue to our gross margin rates has actually been promotional activity. So we continue to drive through what I would call inventory problems in a very, very strong way. So we’re not looking for major, major changes although we are seeing some improvements.

Jeffrey Van Sinderen – B Riley & Co

Okay. And then Steve was there anything to point out in terms of geographic performance, differences in the quarter warmer markets versus colder markets. And then have you seen anything that’s changed in terms of that and the reasons of the last couple of weeks as weather is broken in some regions?

Steve Birkhold

You know honestly our business is as you know pretty diverse. Of course there are some regional differences, but I would say not at a macro level that’s really going to impact the overall business that we’ve seen. As the weathers warmed up across the country, we’ve seen a great reaction to our more seasonal categories of caprice and shorts and some of our sleeveless dress and day dress categories. But it’s been pretty consistent across the country. So we haven’t seen any major pockets of success or failure based on weather economic conditions.

Jeffrey Van Sinderen – B Riley & Co

Okay. And I know you talked about presenting your longer term strategic plan to the board late this year. Is there any thing more you could share, anything is sort of broad that maybe you can touch on in terms of getting back in the legacy categories or what you are thinking about price points. I know you mentioned getting back into more opening price point merchandize. And then also do you think there is an opportunity to eventually grow the store fleet at some point?

Steve Birkhold

Yeah, so I think it’s probably very clear from the level of talents that we’ve invested in as a company that we’re making some major changes and investments going forward and reigniting the brand. And really I think the bebe brand as we have done all of our research. The loyalty that we have with our core consumer even last consumers is pretty striking and we have to figure a way to really dialogue with her to another know that were still the brand that provides her with, what she sees the brand forward, which is again closing out close to body, it’s actually close. So, I would that statement probably leads to the path of new marketing initiatives communicating with our core consumer across all channels, increasing and shifting of marketing dollars into digital; social and another suspects.

And with that comes a hugely to create content in order to communicate in those channels, and I think with Keith joining obviously we are really going strongly after that kind of our positioning. So, I think there is lot of investment that have been done on new merchants design. Working with some of our key suppliers, so price wise again and I emphasize this, we’re not increasing or decreasing prices we’re just most focused on each price category delivers to the business,

There are certain categories where they are highly competitive in the marketplace that we have quick turnaround that we’re instead of trying to sell mid or higher price points within those categories. We’re making sure that we service the opening price point category, which is, we have a customer for us. I would say that being proud of our brand is critical, we working on everything from new store concepts to visual merchandising initiatives et cetera. So I think it’s safe to say that going forward, bebe will over index where our strengths are, and we will hit the consumer very hard from an impressions perspective. I will share a lot more detail in September when we get together we can further articulate our plans. But a lot of these investments are being made in the short term going into fall – first quarter 2014 for us.

Jeffrey Van Sinderen – B Riley & Co

Okay, that’s extremely helpful. Thanks very much and good luck for the rest of the quarter.

Steve Birkhold

Thank you.

Operator

Your next question comes from Adrian Kenneth at [Jamie Capital Markets].

Unidentified Analyst

So my question is, I guess the first thought – of the improvement that you’re seeing sort of quarter to date, I was wondering if we could assume that the negative high single digit comp is indeed what you’re running, it would seem that on a two year stock basis, perhaps we should have seen some improvements? So I’m just trying to marry some of the comments that you were making with kind of the guidance that’s been given so far.

Steve Birkhold

Yeah so, I mean the comments that I’m making about some successes is obviously as we take actions and we ship a tremendous amount of new products and we do testing, and we do reorders et cetera, we are seeing some substantial improvements in certain categories and certain styles within each category. That doesn’t mitigate the large amount of already purchased inventory that we will have to continue to get out the door in order for us to move forward in a clean way going into Q1 2014.

So the comment is more around the fact that there are very good signs between all the numbers that we see, but our guidance is still going to be a little tough for fourth quarter.

Unidentified Analyst

Okay, great. And then, can you talk about for the SG&A dollar, how we should think about the dollar growth for the fourth quarter? Steve, you had said that the guidance excludes the impact of the valuation of the tax allowance. So it would seem that if you did exclude it, we would have had a tax benefit right. So the pressure on margins from both the gross margin and the SG&A is pretty severe and I’m just trying to figure out should we assume that dollar growth and SG&A continues at this low double-digit rate for the fourth quarter and are they go forward, are there items in there that we should assume can be taken out at some point in the future? Thanks.

Steve Birkhold

Yeah, so, it’s me, I here. I think Steve did mean include the impact from the tax valuation allowance. So that’s the first thing I want to clarify and then if we look at from a Q4 run rate perspective, we are not assuming a lot of that transition in one-time in the guidance we are currently providing.

Unidentified Analyst

Okay, okay, that’s helpful. And then my last question is can you actually give us the end of quarter the fully diluted share count as if you had made money just so we can kind of know that for the share buyback purposes?

Steve Birkhold

Let me get back to you if we can continue with the next question on the same thing.

Unidentified Analyst

Okay, great. Okay, thank you very much.

Steve Birkhold

Thank you.

Operator

Your next question comes from Jennifer Black at Jennifer Black & Associates.

Jennifer Black – Jennifer Black & Associates

Good afternoon and congrats Liyuan.

Liyuan Woo

Thank you.

Jennifer Black – Jennifer Black & Associates

We noticed that you resumed sending out your direct mailers, because I think you had stopped for some period and I wonder we also noticed that there were four tiers and I just wondered how large of a part do you think that played in driving traffic and if you could talk speak to traffic, that would be great and I have a few more questions?

Steve Birkhold

The mailers are obviously an integral part of our business because we generally use them to communicate the theme of the current collection and the newness in our product offering. So the recent mailers in April and one that’s coming out in May, I think are going to be very, very successful. We did not stop our mailers just to be clear. So we have a cadence, it’s not every month, but we have not changed that cadence. So maybe you didn’t get one of them. I don’t know. Our mailer cadence had not changed just to be clear.

Jennifer Black – Jennifer Black & Associates

Okay, that’s interesting because I know a number of people who didn’t receive them. And then we heard you shifting your in-store events to Fridays versus Thursdays, which I think is great. And any comments about that?

Steve Birkhold

Well again, I think it’s a matter of these advanced, we want to kind of go in line with when there is more traffic in the stores and really give you core customers kind of what they need and really as we look that numbers, Friday just made more sense than Thursday.

Jennifer Black – Jennifer Black & Associates

Yeah, I think it makes a lot more sense. And then also, are you discontinuing wedding, we noticed that many of the dresses were 75% off?

Steve Birkhold

Yes.

Jennifer Black – Jennifer Black & Associates

Okay.

Steve Birkhold

Yes, it is not a category that is going forward.

Jennifer Black – Jennifer Black & Associates

And then I just wanted to know your thoughts -- and this might be a longer-term thing, but I know you've done a little bit of wholesale here and there. And how do you feel about wholesale, both domestically and internationally? That's another question.

Steve Birkhold

Listen wholesale is obviously an important channel across the board, I mean honestly we are so laser focused on making sure that we’re successful in our own brick and mortar, in our online sites prior to even any kind of consideration to wholesale, but obviously it’s a channel that has opportunities for all brands in the future.

Jennifer Black – Jennifer Black & Associates

Okay, great. And I guess – you talked a lot about merchandise categories. Are there any categories that you just feel like you needed that you could really, really plow more money into? And there are there any that you could eliminate, with the exception of wedding, which you just talked about?

Steve Birkhold

You know again our customer is very fashion, consumer that really adds employees across all different product categories from apparel to non-apparel So there's no major categories that I would just say to you that were currently in other than what we look to access. The good thing is with our new teams in place our key vendors, and our great designers that we have the ability to get reach in the market and – case categories has needed, and I think probably one of the biggest changes that we made, we’re actually very much taking advantage of our ability to be nimble and to have to plan business, but also readjust assortments as we get in to the season and what’s selling, you know there are great categories that we are going to maximize, in dresses and then body conscious work, day dresses, denim, logo, Bebe sport, these are all categories that we are seeing signs of life in so yes that's clearly where we are going.

Jennifer Black – Jennifer Black & Associates

Great, do you have anything on shoes is that something that you are going to keep as a license, just any thoughts at all I guess on shoes.

Steve Birkhold

Yes I mean shoes again we’re really investing heavily in as you probably read we have a licensed deal with all the (inaudible) from a retailer and a design development prospectus one of the top partners in the marketplace, we’ve actually already delivered some older shoes and seeing some great early success in some of that, so we have a long-term arrangement with them that’s our merchant teams along with their teams are working very hard on and it's going to turn out to be a really great partnership.

Jennifer Black – Jennifer Black & Associates

Great fantastic, well you have a great team in place and good luck.

Steve Birkhold

Great, thank you.

Jennifer Black – Jennifer Black & Associates

Just to address the questions from Jennifer earlier for the fourth you can assume $80 million and for the year you can assume $82 million.

Operator

Our last question comes from Dana Telsey with Telsey Advisory Group.

Dana Telsey – Telsey Advisory Group

Good afternoon everyone, as you think about the new marketing message for the brands, what do you see is a key element that will get the consumer to see the new adjustment in your personality and your message, and how do you ensure that they know about all the changes that are being made, when do we see the new advertising and then when you think about Bebe Sport and to Bebe, do they remain relevant and how do they fit in? Thank you.

Steve Birkhold

Yeah that’s a good question, so I think again as our researches told us we have a very clear perspective of our brand and our brand positioning, which is a pretty unique position in the market, over-investing on sexy going out kind of clothes. So I think what you will see is a highly aspirational and unique campaign that will have longevity. So when we created this campaign, we wanted a campaign that could live in some format over season after season as opposed to inconsistent one-off kind of messaging. So, without getting into a great amount of detail if I can tell you we have a very unique, creative agency working with us, which will discuss the road, great talent, that’s very visible along with a really artistic photographer that’s working with us. So I think that we will really speak to our core consumer in a very strong aspirational way.

BEBE SPORT and 2b, you asked, I mean, BEBE SPORT is obviously very relevant part of our business, being our lifestyle. We want to be able to service her from going out close to going to work and also going to the gym. And actually, set aside the gym, just being in those kind of casual, relax environment because we know a lot of the clothes that are designed to go the gym actually never make it into the gym. So we’re seeing signs of life in that business and with our new technical fireworks mixed with kind of our fashion sportswear elements, we expect to continue growth and gaining market share in that category.

2b, we’re seeing strong response to 2b. I think that the 2b concept is a very, very viable concept and as we get into 2b there will be some adjustments in the size of the assortments et cetera going forward, but definitely something that’s viable business for us and that we will continue to develop and invest in.

Dana Telsey – Telsey Advisory Group

Got it. Thank you.

Steve Birkhold

You’re welcome.

Operator

Our last question comes from Betty Chen at Wedbush Securities.

Betty Yinjung Chen – Wedbush Securities

Thank you. Steve I was hoping to follow up in terms of some of the legacy buys. It seems like we are going to be pressured by that during the fourth quarter. I guess where do you see the inventory position at the end of the fourth quarter. And will we still have to deal with any sort of legacy buys as we go into Q1 of next year? Thanks.

Steve Birkhold

Let me now speak to the actual inventory forecast and projections. I will tell you that again the buys that we have and that you call legacy buys are ones that are very obviously large parts of the current inventory. But we’ve taken cases of markdowns that should claim themselves up as we emerge into early first quarter coming out of fourth quarter.

So it would be optimistic to say that there will be gone at the end of the fourth quarter, but we are taking the steps to really analyze it is not working and take those markdowns now so that when we deliver our new products into marketing that the store will have a new perspective.

Liyuan Woo

So I have nothing much to add to Steve’s point, I mean our guidance Steve mentioned we are going to have, we are expecting mid to high single-digits in our inventory increase.

Betty Yinjung Chen – Wedbush Securities

At the end of the first quarter?

Liyuan Woo

Yes.

Betty Yinjung Chen – Wedbush Securities

Okay. Great thank you. Best of luck.

Steve Birkhold

Thank you.

Liyuan Woo

Thank you.

Operator

At this time, we have no further questions. This will conclude the third quarter results call for bebe. Thank you for joining us.

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