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Executives

Liyuan Woo - Chief Financial Officer

Steve Birkhold - Chief Executive Officer

Analysts

Alex Pham - Wedbush Securities Inc.

Jeffrey Van Sinderen – B Riley & Co.

Jennifer Black- Jennifer Black & Associates

bebe stores, Inc. (BEBE) F4Q13 Earnings Conference Call August 29, 2013 4:30 AM ET

Operator

Greetings and welcome to the bebe stores, Incorporated Fiscal Fourth Quarter Results Conference Call.

As a reminder this conference is being recorded. It is now my pleasure to introduce Ms. Liyuan Woo, Chief Financial Officer. You may begin.

Liyuan Woo

Good afternoon and welcome to bebe’s fiscal fourth quarter 2013 update. On the call with me today is Steve Birkhold, Chief Executive Officer. After Steve’s opening remarks and business highlights I will discuss the fiscal fourth quarter and fiscal year results, as well as our expectations for the current first quarter of fiscal 2014. Our call will be limited in time to one hour. After we have completed our prepared remarks we will take your questions.

Before we 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 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 Form 10-K, 10-Q 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.

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

Steve Birkhold

Thanks Liyuan and good afternoon, everyone. Fiscal 2013 was a transformational year for the company, marked by changes in leadership, strategic direction and brand positioning. It was really a year of two halves, with the first half experiencing significant downturn in the business and the second half focused on building new executive team, improving processes and refining our brand position to turn the business around.

During this time we also took necessary action to move through legacy merchandise which led to significant sales and gross margin pressure. Despite the tough market environment and transitional changes I am encouraged by the progress that we are making in our top three transitional strategic focuses, namely products, marketing and our omni-channel initiatives.

Starting with our biggest priority which is products, our merchandise offering reflects contemporary fashion designs for the confident, sexy modern woman. Our customer is looking for fashion and quality while she is willing to invest in her looks, she also appreciates value. Based on early reads the team is encouraged by the positive response to the new merchandise and the new direction that the company is headed in.

We are also encouraged by the new merchandise acceptance level for our July and August catalogs and mailers. We have greater conviction on selecting outfits and key end buys to support the catalog mailers with great sell-through and better margins than the rest of the fleet.

In the fourth quarter we saw strong results in categories such as bottoms and day dresses and more importantly we are excited about the opportunities ahead of us in rebuilding such historical categories such as tops, denim and non-apparel.

Having said that 40% of our current assortments on the floor are still what we consider legacy merchandise and we have been taking aggressive mark-downs in order to clear through this product and provide a more cohesive assortment in the important fall holiday selling season. We anticipate that our margin will to be negatively impacted somewhat by this during the current quarter.

We continue to refine our inventory management processes to be laser focused on open to buy and test [case] or cancel strategies.

We are testing the going bebe essential flows to supplement the newness we bring everyday to our stores. In addition we are investing in key items and big idea outfits and supporting them with marketing across all channels. We are learning and reacting as a team to find the write-downs between product penetration, flow and speed to market.

While we continue to see strong signals that we're headed in the right direction this is an evolutionary process and we will fine-tune the assortments as we monitor selling trends. Therefore we are correcting the fiscal ’13 higher AUR legacy strategy and returning to our historically successful pricing strategies within each category. What this means is we’ll be maintaining our core price points but weighing certain categories towards more opening price points and also layer in our special buys that are higher price point items.

Next is marketing. We are very excited about the unveiling of our new marketing visual statements and trends in stores and online through the month of August. The images that represent the new face of bebe dropped in mid-August after a much anticipated unbranded teaser campaign that launched on July 15 in major markets. This campaign utilized imagery and script and incorporated social media caused action with be hashtag be9to5.

We have also worked with [barbers] and influencers to help spread the buzz. The new campaign phrases of 9 to 5 am, which are the best part of the day is the night and Good girls go to heaven, bad girls go everywhere are catching on very strongly with our girls. As a matter of fact we put these things on graphic T-shirts that almost sold out the first week on the floor.

Our marketing images and messaging are purposely overemphasizing our core brand position in going out in sexy dressy occasions. The aspirational images are what bebe is known for and we believe this powerful messaging will position bebe as a going out destination.

Of course other key categories such as going to work denim non-apparel will continue to be highly visible categories in our stores as well as in our monthly catalogs. We are highly encouraged by her positive response to our July and August catalog and believe that our investment in heightened marketing and branding are beginning to pay-off.

Turning to our omni-channel strategy on August 14th we re-launched our website with a cleaner and more sophisticated streamlined customer experience, reflecting our new brand direction with a sexier, edgier look and feel. The new site will offer easier browsing with better photos, enhanced product detail pages and more videos. And you should take a look at our looks and love outfits at our promotion video on the home page of our site.

The site will also have a shop by attitude section for the total [inaudible] flirty, edgy, trendsetter and daytime. We have seen -- we will have a be-seen instagram home page feature with a hashtag so that our customer can share her picture.

With both the new branding campaign and the website re-launch we are creating buzz and cool factors to re-engage our existing customers and attract new bebe girls. And the results so far in first few weeks are very encouraging, we’ve actually seen traffic increases in the initial stages.

We are also working on a new store prototype that will reflect our new sexy, edgier look. We’ll focus on improved store flow and incorporate better visual merchandising, including window displays that reflect a distinct flavor bebe. Our goal is to have consistency across our website, retail stores and in our marketing message. The store prototype is still in its initial stages and we’ll begin the testing phase around March of 2014.

We will evaluate the performance and fine tune the model to roll it out once we achieve our ROI objectives in this concept. We have new members in the team in visual merchandising following the addition of Keith Keegan who is our SVP of Marketing and we look forward to their collective contribution in branding, visual merchandising and marketing efforts. While we still have much work to do to align our visual messaging across all our channels we are nevertheless highly encouraged by the progress that we are making.

In conclusion we have a talented management team in place and we continue to refine the structure and the processes among key groups. We are advancing our merchandizing, marketing and omni-channel strategies with disciplined investment and analysis so we may measure our progress and adjust accordingly. While we expect to see sequential in our performance as we navigate this turnaround this will be a process and we expect to fine tune our business as we move forward.

We encourage all of you to come to our Analyst and Investor Day on September 12 in our New York City office where we will showcase more visual images to demonstrate the progress that we are making on the bebe brand across all channels.

With that I will turn the call over to Liyuan to go through our fiscal fourth quarter and the fiscal year of 2013 and provide some color on what first quarter looks like.

Liyuan Woo

Thanks, Steve. As mentioned in the press release the fiscal fourth quarter comparable store sales was consistent to our previously provided guidance. The negative 7% in comparable store sales was primarily due to a decline in traffic during the quarter. The comparable store sales and traffic were weakest in April and improved sequentially throughout May and June though the sales improvement was partially driven by heightened promotional activity.

While this resulted in merchandise margin pressure during the fourth quarter as well as the current quarter we are making progress in clearing legacy merchandize in order to ensure the same inventory position as we enter the fall and holiday selling season. Net sales for the fourth quarter of fiscal 2013 were $109.2 million, a decrease of 9.4% from $131.5 million reported for the fourth quarter a year ago.

Comparable store sales for the quarter ended July 6, 2013 decreased 7.1% compared to a decrease of 2.5% in the comparable period of the prior year. Gross margins decreased 30.6% compared to 40.2% in the fourth quarter of fiscal 2012. The decrease in gross margin was primarily due to the anticipated increase in markdowns coupled with unfavorable occupancy leverage.

Gross profit included $1.9 million in reserve for below cost inventory and fabric under the legacy strategy. Excluding the additional reserve gross margin for the fourth quarter was 32.2%.

SG&A expenses were $57.8 million or 48.5% of net sales compared to $47.5 million or 36.1% of net sales for the same period in prior year. The increase in SG&A expenses was primarily attributable to store impairment and closure charges of $5.5 million, costs related to executive transitions of $2.6 million, settlements related expenses of $1.4 million and rebranding agency cost of $0.7 million.

Net loss for the fourth quarter of fiscal ’13 was $20.8 million or $0.26 per share on 79 million shares outstanding compared to net income of $3 million or $0.04 per share on 84.4 million diluted shares outstanding for the same period of the prior year.

Excluding the aforementioned $10.1 million in transitional and/or incremental SG&A cost net loss for the fourth quarter of fiscal 2013 was $10.7 million or $0.14 per share compared to the previously provided guidance of low to mid-teens. Note that such loss reflects the continuing impact of maintaining a valuation allowance against deferred tax assets and that our effective tax rate is approximately 0%.

Net sales for the fiscal year ended July 6, 2013 including the actual retail raise in January were $484.7 million, a decrease of 8.7% from $530.8 million for the fiscal year ending June 30, 2013. Comparable store sales for the year ended July 6, 2013 decreased 8.8% compared to an increase of 5.3% in the prior year.

Net loss for the fiscal year ended July 6, 2013 was $77.4 million compared to net income of $11.7 million the prior year. Loss per share for the fiscal year ending July 6, 2013 were $0.95 per share on 81.8 million shares outstanding compared to net earnings per share of $0.14 on 84.4 million diluted shares outstanding in the prior year.

Excluding the provision for income tax to establish a deferred tax asset valuation allowance of $27 million and the full year impact of the aforementioned transitional and/or incremental SG&A cost of $18.9 million net loss for fiscal year 2013 was $31.6 million or $0.39 per share. We have provided a reconfirmation of GAAP to non-GAAP financial measures in our earnings release for your reference.

Our total cash and investments at July 6, 2013 were $180 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 July 6, 2013 were $33.9 million compared to $33.2 million last year.

At the end of the fourth quarter average finished goods inventory per square foot increased approximately 3.1% compared to the prior year. Capital expenditures for the fiscal year were approximately $21 million and depreciation expense was approximately $22 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 today the company repurchased approximately 5.5 million shares, at an average purchase price per share of $3.85 for an aggregate purchase price of approximately $21 million.

During the quarter ended July 6, 2013, the company closed three bebe stores, one 2b bebe store. We ended the quarter with approximately 1 million square feet.

Now let me review the current first fiscal quarter expectations and items related to the fiscal year of 2014. For the first quarter of fiscal 2014 the company expects comparable store sales to be in a negative low-to-mid single-digit range. Gross margin is expected to be lower than prior year, fiscal year Q1 due to higher markdowns on legacy inventory and de-leverage. However we do expect a slight sequential improvement from the fourth quarter of fiscal ’13.

Our investment in marketing and branding is planned higher in the first half of fiscal ’14 relative to last year in order to capitalize in the fall and holiday seasons. The net loss for the first quarter therefore is expected to be in the range of low to mid-teens per share. The expected loss per share range also reflect the continuing impact of maintaining evaluation allowance against deferred tax assets as discussed above and thus a close to 0% effective tax rate.

Finished goods inventory per square foot at the end of the fiscal first quarter of 2014 are anticipated to be flat. For the fiscal year 2014 the company plans to open one bebe store, one 2b bebe and to close up to 10 bebe stores and five 2b bebe stores, which will result in approximately a 5% decrease in total store square footage from the end of fiscal 2013. In addition our international licenses are anticipated to add another 20 point of distribution for the fiscal year.

Depreciation expense for the year will be approximately $21 million. Total capital expenditures for the year are anticipated to be up to $25 million which will improve capital expenditures for new store prototypes, remodels, store expansion, information technology system and also improvements.

I will now turn the call over to Steve for his closing remarks.

Steve Birkhold

Thanks, Liyuan. So as we look ahead to fiscal year 2014 we will continue to focus on our three key transitional strategies. While the macroeconomic environment remains uncertain and the mid-steps from the past are now fully behind us we are very optimistic about our turnaround in the near future.

My team and I have been working on our turnaround and longer term strategic vision, which we will be sharing with our Board next week. Again we hope to see you at our Analyst Investor Day on September 12th in our New York office to share some of the highlights.

So I would like to thank you and I would like to now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Alex Pham with Wedbush Securities.

Alex Pham - Wedbush Securities Inc.

Hi, there it's Alex Pham on for Betty Chen. I was wondering if you could potentially comment on the competitive landscape that you guys are seeing right now and maybe how's the team approaching Q1 and is the guidance closer to what you guys are seeing maybe quarter to-date? Thanks.

Steve Birkhold

Yeah, so obviously the competitive landscape continues to be a challenge and I think I don’t have to tell the marketplace what some of the announcements have been out there. So combination of good results and difficult results. I would say that we’re seeing improvement in traffic for our consumer and we are seeing really strong positive reaction to the new products that are in our mix.

Obviously from a mark-down cadence perspective we continue to see promotions to drive clearance products but we have seen some decent upticks in the new products that are hitting the floor. So all-in-all and like I said earlier in the call I’m pretty satisfied with the pace of the consumer reaction to our new products.

Alex Pham - Wedbush Securities Inc.

And then just as a quick follow-up, I think you mentioned that roughly 40% of the merchandize is currently legacy merchandize. When do you think most of that would potentially be cleared out by?

Steve Birkhold

Again we define legacy merchandize as obviously merchandize that was in the mix going into spring and summer that the new team did not have much of an impact on. And just to remind people that our Head of Marketing and our Head of Merchandising both joined in that April-May-June time period. So obviously there is a longer lead products that are part of our fall assortments that were not necessarily designed and merchandised by the current team.

So it's going to into October or so far all of that to move through. On the positive side a lot of the clearance merchandize we should be in -- we are in good shape as far as the cadence of what we are selling out and post Labor Day we should be in a good condition, especially in our major markets with strength in our mark-down products.

Alex Pham - Wedbush Securities Inc.

Great, very helpful, thank you.

Operator

Our next question comes from Jeff Van Sinderen with B Riley.

Jeffrey Van Sinderen – B Riley & Co.

Good afternoon, let me say congratulations on some of the early encouraging trends we are seeing. We are starting to see you introduce some products that are a lot better. I wondered if you can just talk maybe a little bit about what you are seeing so far in Q1 in terms of the comp traffic and maybe how, more about how the trend is coinciding with some of your newest product content being introduced and also maybe you can just touch on promotional activity.

And I know you mentioned traffic increases and I was just wondering if you are speaking about traffic in the stores or the traffic on the web with the new e-com launch. Just anything, anymore color you can give us on how the customers are responding to some of the new product and new marketing and so forth?

Steve Birkhold

Sure. So yeah for the traffic increases that I was [espousing] were actually on our eCommerce and in particular on our mobile site. So we are still challenged when it comes to traffic in our store location as the rest of our competitors are. What I will say is that we have seen an improvement in the traffic and intuitively our store teams are assimilating well with our new marketing campaign, we are getting that slightly different customer in the store and customers that hadn't -- that bebe hadn't been on their consideration for a while.

So I think that with our event strategy, social media strategy again if you go to our website you will be able to see content, user generating content from our key customers and that’s all stuff that they sent us in our hashtag be9to5 campaign. So I think what we are starting to feel and see positive results there.

I would say from a product perspective our going out direct your look occasion product whether it be dresses, whether it be cropped tops, whether it be bottoms and skirts, is really where we’re starting to see some really nice positive momentum along with category that we want to continue to grow like denim in terms of our weekend look. So although we emphasize our going out occasions in our marketing campaign obviously there is a lot of other components to our business and the bebe girl certainly by its, lot of products way beyond just our evening categories.

And I think if you look at our catalogs that went out in July and August we’ve seen huge comp sell-through rates in the product that’s in those catalogs which is basically all new products. And so we are very encouraged as a combination of casual looks and going out occasions.

So the new campaign with Nina Agdal has really allowed us to reinforce us as the go to destination for going out clothes but we are seeing strong conversion rates and other product categories that are following too.

Jeffrey Van Sinderen – B Riley & Co.

Okay good. And then Steve may be you can speak a little bit more about what you are doing in terms of opening price points and when that program or when that strategy will be more fully implemented and maybe it will be more noticeable in the stores.

Steve Birkhold

Yeah I mean again all we are doing is really re-looking at when we had our historical best performances, what price buckets really, within each categories of the business and quite honestly it’s a relatively simple evaluation for our merchandising teams and that process has already started in a lot of our major categories. And we are seeing no decrease in sell out rates of some of our higher price point products because they still have value even at the higher price point, but we are also seeing faster turn going back to some of our historical more core price points.

So it will be fully implemented as we navigate through the fall and holiday season but we are already starting to see the results of that.

Jeffrey Van Sinderen – B Riley & Co.

Okay good. And then for Liyuan can you just give us a may be a little better sense in terms of the marketing spend, ad spend in the first half of this year, order of magnitude, any other detail you can give us on that and then also should we be thinking that it will come back down in the second half?

Steve Birkhold

Yeah Jeff, it’s Steve I mean, to speak to that, I mean, obviously once we created the assets and we were marketing against our consumer and we’ll speak to it in a lot more depth at the meeting in September in New York, but obviously if you look at our marketing efforts they are really across a lot of different channels now and with the strength of the campaign and the way we create a buzz came out we really thought that it is was necessary to kind of accelerate some of our spend.

So we will continue to spend against our consumer but we are spending a lot of our marketing dollars digitally that have an ROI component that we can either increase the spend, adjust the spend et cetera. So we still obviously believe in traditional media, based on the presence that you see in magazines, but I think the messaging and the type of assets that we’ve created also lend themselves very strongly to even more digital spend and the nice thing about our digital spend is that we can very quickly measure the returns.

Liyuan Woo

So Jeff just to provide a little bit more color from a numbers perspective we definitely are anticipating to spend more compared to last year and from a timing perspective we are spending more in Q1 as Steve was describing early, doing the re-launch and trying to re-engage our customer and we are also trying to really build a catalog behind holiday.

Jeffrey Van Sinderen – B Riley & Co.

Okay. Good enough, thanks very much and good luck for the rest of quarter.

Liyuan Woo

Thanks.

Operator

Our last question comes from Jennifer Black with Jennifer Black & Associates.

Jennifer Black- Jennifer Black & Associates

Good afternoon and your website was fantastic.

Liyuan Woo

Thanks Jennifer.

Jennifer Black- Jennifer Black & Associates

You are welcome. I wondered -- I just wanted a clarification. Your conversion online versus your conversion in stores, you talked about traffic but I just wondered about conversions.

Steve Birkhold

Well again you know obviously from an industry perspective the conversion online is dramatically different than the conversion in the store. What I look, based on my experience and our conversion online by the way is increasing and sometimes as I mentioned you know when we increase your mobile traffic you can actually sometimes see a decrease in your overall conversion rates because mobile doesn’t convert at the same rate as the browser kind of traffic.

So what I would just say to that is we’ve seen similar upticks in our online conversion that we have from our style that’s in the stores. And honestly it remains one of the strengths of the company with the knowledge and the amount of unit per transaction and the product knowledge that our stylists have, they are really a key component to driving our business going forward.

Jennifer Black- Jennifer Black & Associates

Great and I wondered if you could tell us what percent of the merchandise online is exclusive?

Steve Birkhold

Yeah, so we run about 15% of the merchandise online being exclusive and a lot of that exclusive products with historical bebe dresses styles that we have still demand for but with the need to continually refresh and give the girl who walks in the store so we have a customer that shop with us more frequently we have to have these options.

So it really is a great venue for us to continue to deliver strong profitable sales on items that we have a lot of bandwidth with. But one of the things that I spoke to, I think in our earlier earnings call was one of the strategic decisions of having our head of merchandizing really be involved across the board in both bebe Retail bebe Online and bebe International and making sure that the assortments are reflective so that the consumer sees pretty similar assortments in our channels but also has the opportunity to find some special products in each area.

So our initiative is to continue to give and also to grow online some unique products but we are finding more and more synergies between what we sell online and what we sell in the stores. So it’s actually very good because it allows us to have more in-depth buys and make creative assets that have meaningful quantities behind them.

Jennifer Black- Jennifer Black & Associates

Okay. So what you are saying is it's a pretty small percent that’s exclusive online?

Steve Birkhold

Correct, varies by category but overall yes.

Jennifer Black- Jennifer Black & Associates

Okay. And I guess my last question I wondered if you could talk a little bit about your lead times by category where you are right, knit versus denim versus flutter, any information you could give us about that, that would be great?

Steve Birkhold

We don’t really comment on the specific lead times. So what I’ll say to you is that part of my first seven, eight months here has really been to really rationalize the combination of speed to market. And also being able to deliver the right products.

And what I say is that could we be faster if we wanted to, in some cases, yes because we could buy [office sketches] and status watches but our disciplines now are to make sure that we’re still faster than the industry but also make sure that we have enough lead time built in to look at fully vetted products as far as samples with the right trends, the right fabrics, the right fit and to make sure that we honestly view we can maximize our supply chain by putting some things on [vessels] versus air it’s a balancing activity between being fast and being profitable and right.

So I think we’ve achieved that balance in those categories by leveraging our Asia sourcing as well as our great vendor base domestically, that’s very responsive. So I’m not answering your question from a specific lead time perspective but we are very comfortable that we are best in class and I think we are making better decisions in rationalizing our calendars based on holistic approach not just trying to be fast.

Unidentified Analyst

Great, thank you. Good luck.

Steve Birkhold

Thank you.

Operator

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

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