Bebe Stores' (BEBE) CEO Jim Wiggett On Q4 2014 Results - Earnings Call Transcript

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 |  About: bebe stores, inc. (BEBE)
by: SA Transcripts

bebe stores, inc. (NASDAQ:BEBE)

Q4 2014 Earnings Conference Call

September 4, 2014 04:30 PM ET

Executives

Jim Wiggett - CEO

Liyuan Woo - CFO

Analysts

Betty Chen - Mizuho Securities

Richard Magnuson - B. Riley & Company

Gabriella Carbone - Janney Capital Markets

Michael Richardson - Sidoti & Company

Operator

Greetings and welcome to bebe stores 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. Ms. Liyuan you may begin.

Liyuan Woo

Good afternoon and welcome to bebe's fiscal fourth quarter 2014 update. On the call with me today is Jim Wiggett, Chief Executive Officer. After Jim’s opening remarks and business highlights, I will discuss the fiscal fourth quarter preliminary results as well as our expectations for the first quarter of fiscal 2015. 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'd 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 actual results may differ materially. We refer you to the Company's forms 10-K, 10-Q and other filings made with 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 Jim for his opening remarks.

Jim Wiggett

Thanks, Liyuan, and good afternoon everyone. It’s my pleasure to be here today. Since I joined the bebe team in late June, I’ve had the opportunity to engage the organization at both corporate and by visiting many of our stores.

I’ve also had the chance to evaluate both the Company and its strategy. Overall, I believe the strategy to reposition the brand is absolutely correct. And I’ve worked with the organization to lean into that strategy.

There were a number of changes needed to be made to position the Company correctly and to accelerate the pace of the change. We’ve taken those steps by refocusing on the core bebe brand to make prudent investments while preserving cash, and to implement operating efficiencies across the organization. This has included leadership changes in both management and the board.

The closure of the 2b division, the restructuring of our organization to include a whole range of infrastructure expense reductions. I have received valuable support from the management team, from the Board, and from our Chairman Manny, to effect these changes.

And looking back to fiscal year 2014, despite the significant investments that were made in inventory, marketing, and new store concept, technology, and additional talent, the Company did not achieve the level of improvement that was expected.

Our design, merchandising and production process left us with an overly broad and shallow product offering that was not well coordinated or merchandised. This resulted in less than optimized product offerings and a high level of inventory commitment.

In addition, the previous 9 PM to 5 AM campaign and imagery was too focused on clubbing and party messaging, which reinforced very narrow brand positioning. In addition, within the macroeconomic environment, we find ourselves in, coupled with a highly promotional competitive backdrop. These factors delayed the progress of the turnaround.

As I said in the beginning, I believe that our strategic plan is sound. And with proper execution we’ve great opportunities ahead of us. With the adjustments we began implementing in June, we now have a passionate and capable executive team that is eager to execute that strategic plan.

Certainly we have a strong focus and a sense of urgency, both of which would be required to move the business forward. As a management team, we believe we have a highly attractive target customer in the bebe women. She is bold and confident in her self-expression.

She is glamorous, feminine, sophisticated and takes pride in her appearance. She is powerful and ageless and wants to standout in the crowd. Every facet of our business needs to reflect who she is from our product assortment and in-store presentation to our e-commerce business and our marketing.

I’d like to turn to some of the detailed highlights of our six strategic initiatives. Our first priority is to increase product distinction with the contemporary accessible fashion merchandised offering, designed to suite the lifestyle of this confident feminine, cosmopolitan woman.

We have a very strong design vision from Brigitte and her team, which is a major asset of the organization. We’ve revamped the merchandising process within the Company to ensure that design vision can be effectively translated to a presentation on the selling floor.

To help drive this effort, I’m very excited to announce that Mary Jimenez recently joined the bebe team as SVP, General Merchandise Manager. Mary comes to bebe with more than 20 years of successful executive level of merchandising experience that aligns very well to the bebe culture.

For the last seven years, Mary served as GMM of Marciano, a division of GUESS. Prior to GUESS, Mary was the VP of Design for bebe sport. Prior to that she was Vice President of merchandising, planning, content and creative with eluxury.com, a division of LVMH and held several roles within Duty Free Stores, DFS, including Vice President of Women’s, Men's and Children’s ready to wear, Vice President of destination and character and luxury hard lines.

Mary actually worked for me at LVMH and DFS for over 10 years. I’m very confident, her skills, her knowledge of the customer, and where we’re headed with our brand. We’ve changed our approach on product and specifically our approach to move away from buying items with extensive SKU counts.

The less depth and more breadth strategy in the past year, has been stopped. We confuse the customer with competing prints and piecemeal presentations, especially in our smaller stores.

We presented the customer with color palettes rather than outfits and full lifestyle assortments. The product reengineering process, to chase IMU; also sacrifice the quality of the product offerings which further complicated our repositioning of the brand.

Investments made in certain inventory categories such as day dresses, jumpsuits, knit tops and jackets simply did not pay off, which necessitated extensive mark downs and negatively impacted the merchandise margin.

During the past two months, I’ve worked closely with the design, merchandise, production, and planning teams to refine the process, improve the merchandise flow and focus the team on lifestyle merchandising versus departmental piecemeal. We’ve refined our merchandising strategy, with an improved open to buy and test chase or cancel process.

While the fourth quarter of fiscal 2014 experienced significant margin drain due to the promotional activities and markdowns, we are encouraged by the progress we’ve made in regular price selling of several categories including bottoms, woven tops, sweater tops, evening dresses, outerwear and non-apparel.

Our goal for the months of June and July was to ensure a clean start for the new fiscal year and the new season. We therefore promoted heavily to right size our inventory which has been completed. Coming from the branded world, I believe in a holistic approach to merchandising, offering our customers lifestyle oriented product for a range of her daily apparel needs from dressy casuals to business chic and special occasion.

You can see a clear fashion point of view in a strong value equation. You will begin to see outfits in our six lifestyles in our fall and holiday seasons. The fully executed merchandise strategy will be visible in February 2015.

I encourage all of you to log on to our Web site next week to see the digital catalogue for September, which is our first catalogue executed under our new approach to merchandising.

Our second strategy we focus was to align our marketing campaign from traditional to new media, focused on messaging that speaks to the bebe women. In the past 60 days plus, we’ve refocused our effort on the bebe brand to align with our defined target customer.

I believe in order to attract, engage and retain the bebe women, we must move beyond the one-note profile which has been sexy. It will take time to rebuild the traffic patterns and to regain her confidence. We are taking aggressive steps to refocus our brand and build a marketing program around this new vision.

We continue to believe our most effective communication with the bebe women is by educating her to where a fashion is going. Our priorities in marketing are moving from traditional print to more digital and personalized communication with individual customer. We are also making a major investment in our customer relationship management system to help us refine our current bebe club program offerings.

It is all about tailoring our approach to individual customers. Our online presence is our third strategy and a major part of our upside. Digital is an integral part of a true omnichannel relationship with the marketplace. This allows us to engage our customer wherever she shops.

During the fourth quarter our e-commerce channel delivered high teen sale growth as conversion continued to improve. We also experienced improved full price selling with a more compelling online assortment and achieved better margins overall.

We plan to maintain a balanced offering of full price and promotional merchandise in order to optimize regular price selling while utilizing our new flash site to clear through excess inventory. Our online site will be the fullest stocked channel since it provides a fulfillment mechanism for both the digital customer and digital sales from our smaller stores.

We are in the process of testing both iPad and interactive screen units in stores to give access to our full assortment to all of our customers, regardless of her initial point of contact with the Company. We see the upside growth in e-commerce to be one of our key opportunities.

Our fourth strategic focus is to close -- was to close all 2b stores to focus on the core bebe brand. 2b was not a feeder brand for bebe, and was both a distraction and a financial drain to the Company. We will slow our store growth short-term while we reposition our assortments in the lifestyles. Once the merchandising strategy is implemented, we will go back into a growth mode with stores.

We opened three new outlet stores in July with positive initial reads. However, our overall 35 outlet locations continue to experience negative traffic during the fiscal fourth quarter in the month of July.

The promotional environment continues to be a headwind for us, especially at outlet locations. In addition, given that it is early in our transition phase, we’ve both made-for-outlet and 2b products on the same floor.

We will continue to clear through committed 2b inventory in the first half of fiscal 2015, while improving our MFO bebe brand assortment. We expect made-for-outlet, which is the higher margin product to eventually represent 65% of our outlet sales in the second half of fiscal 2015, which should result in higher AUR and margins.

Our fifth strategic focus is our international business. Our partners have reported a positive reaction to our new product offerings. As we continue to work on enhancing our product assortment and branding efforts, we continue to believe there is a substantial growth potential globally for us in retail, wholesale and online.

Our sixth strategic focus is on the ROI based investment for a sustained long-term growth. We are absolutely in a cash preservation mode and have been disciplined in managing and planning for investments in SG&A and CapEx.

In addition to the headcount reductions in restructuring in late June and July, we’ve reduced our marketing by just $20 million for fiscal 2015, trimmed down an additional 10% of all applicable SG&A spending areas and been aggressive in our real estate rationalization efforts to reduce the fundamental cost structure of the Company.

For fiscal 2015, we will be in a pragmatic mode for our store positions and plan to close approximately a dozen more unproductive doors. We will, however, invest in less capital intensive and revenue enhancing areas such as non-apparel tables, store fixtures, and presentation tools which have performed well in our new store concept.

In summary, we’re advancing on our merchandising reengineering, our brand repositioning, and our omnichannel strategies with disciplined investments. We have consistently said that we plan to deliver sequential improvements in our results during our turnaround despite the challenging retail environment.

We will continue to be extremely disciplined in monitoring our sales performance, managing our inventory and controlling our expenses as we make our way through this turnaround. We also continue to test several innovations, which if successful, will -- we will invest in aggressively. Overall, we remain focused on executing our strategy to ensure solid shareholder returns.

With that, I’ll turn the call back to Liyuan to go through our fiscal fourth quarter and the fiscal year performance and to provide some color on the first quarter of fiscal 2015 guidance. Liyuan over to you.

Liyuan Woo

Thanks, Jim. The team is energized by Jim’s leadership. The collaborative and action oriented style and we’re excited about opportunities to turn the business around. Given the closure of the 17 2b mall doors and 2bstores.com, giving the fourth quarter of fiscal 2014 the results we’re discussing will be on a continuing basis without 2b.

Net sales from continuing operations were $103.6 million, a decrease of 8.7% from $113.5 million reported for the fourth quarter a year-ago. Comparable store sales for the quarter ended July 5, 2014, decreased 1.9% following a decrease of 7.9% in the fourth quarter of the prior year.

The decrease in total sales was primarily driven by the closure of 20 stores in fiscal 2014, in addition to the comparable store sales decline. Both traffic and AUR were down in the mid single-digit and were partially offset by the positive conversion in UPT, during the fourth quarter.

Gross margin from continuing operations were 30.9% as compared to 31.4% in the fourth quarter of fiscal 2013. Given the excess inventory from the third fiscal quarter and fourth fiscal quarter and our desire to have a clean inventory position, we’ve promoted heavily. The reduction in gross margin was due primarily to such higher promotion activity during the quarter as compared to the same period last year, partially offset by occupancy leverage.

We took aggressive markdowns on excess inventory, particularly, during the months of June in order to put us in the cleaner position for the new fiscal year.

SG&A expenses from continuing operations were $56.1 million, or 54.2% of net sales, compared to $52.2 million, or 46% of net sales, for the same period in the prior year. The increase in SG&A expense was primarily attributable to costs of $3.9 million related to corporate restructuring including CEO transition costs and store impairment and closure related charges of $4.1 million. This compares to prior year store impairment and closure-related charges of $2.2 million coupled with recruiting and retention costs of $2.6 million. In addition, advertising expenses in the fourth quarter of fiscal 2014 were $1.1 million higher than the prior year fourth quarter.

Net loss from continuing operations for the fourth quarter of fiscal 2014 was $24.2 million, or $0.30 per share, on 79.5 million diluted shares outstanding, compared to net loss of $16 million, or $0.20 per share, on 79 million diluted shares outstanding for the same period of the prior year.

Included in loss from continuing operations for the quarter was the aforementioned incremental costs totaling $9.8 million. You can see the details scheduled in our earnings release. Excluding the impact of these charges, net loss from continuing operations was $14.4 million or $0.18 per share for the fourth quarter of fiscal 2014. Both years reflected a continuing impact of maintaining evaluation allowance against deferred tax assets. And that’s a close to 0% effective tax rate.

Net sales from continuing operations for the fiscal year ended July 5, 2014, were $425.1 million, a decrease of 8.2% from $463.1 million for the fiscal year ended July 6, 2013, which included an extra retail week.

Comparable store sales for the fiscal year ended July 5th, 2014 decreased 3.2% following a decrease of 9.6% in the prior year. Net loss from continuing operations for the fiscal year ended July 5th, 2014 was $59.3 million or $0.75 per share compared to net loss of $69.1 million or $0.84 per share in the prior year. Included in loss from continuing operations for fiscal 2014 was $6.6 million in internal charges and other store closure costs, $4 million related to reduction in workforce and transitional cost including severance cost related to the former CEO and $1.7 million professional fees and transitional charges.

The full-year impact of all incremental cost totaled $12.3 million. Excluding the impact of these charges net loss from continuing operations was $47.2 million or $0.59 per share for fiscal 2014. Our total cash in investment July 5th, 2014 were $125 million. As of July 5th, 2014 inventory per square foot was approximately 8.6% higher as compared to the prior year. We continued our promotional effort through the Labor Day weekend to ensure a clean inventory position for the new season.

Capital expenditures for fiscal year were approximately $22.8 million and depreciation expense was approximately $18.4 million. During the quarter ended July 5th, 2014 we opened one outlet store, closed 2b bebe stores, 17 2b mall stores and 2b online store. We ended the quarter with approximately 820,000 square feet.

Now let me review the current first fiscal quarter expectations and items that relate to the fiscal year of 2015. For the first quarter of fiscal 2015 we expect comparable store sales to be in the negative low single-digit to flat range. For the first two months of the quarter we were aggressive with our promotional strategy in order to ensure a clean inventory position heading into fall. We have completed clearing process. As we bring in new product in September, we’re shifting our focus to full price selling and improving gross margin.

Gross margin is expected to be lower than the prior year similar to the decline we saw in our third quarter due to high markdowns earlier in the quarter as I just mentioned and de-leveraging our certain fixed costs. In addition we have committed to 2b inventory through November of 2014 which we expect to continue to sell through and trough the second quarter of fiscal 2015 which is expected to also negatively impact our margins. We expect the net loss per share to be in the high teens range. This reflects the continuing impact of maintaining our valuation allowance against differed tax assets as we suggest above and that’s close to zero percent effective tax rate.

Finished goods inventory per square foot as of the end of the first fiscal quarter of 2015 are anticipated to increase in the low single-digit range. Total CapEx for the year anticipate to be approximately $16 million for new stores, remodels and information technology systems. Dividend payment will be approximately 40% below fiscal 2014 or approximately $4.7 million for fiscal 2015.

For the fiscal year 2015, the company will complete up opening of the four bebe stores and two outlet stores as previously planned and to close up to 12 bebe and outlet stores which will result in approximately a 2% decrease in total store square footage from the end of fiscal 2014. In addition the number of points of distribution managed by our international licensees is expected to remain unchanged on the net basis for the fiscal year in spite of the turmoil in certain parts of the world.

I’d now turn the call over to Jim for his closing remarks.

Jim Wiggett

Thanks, Liyuan. As we look ahead to the rest of fiscal year 2015, I’m excited about the opportunities ahead of us. We will focus on executing our transitional strategies with an emphasis on rebuilding the bebe brand, enhancing the product offering and merchandising the stores by lifestyle. We will maintain a compelling fashion and value equation for our customers. In addition to driving sales and improving margins our focus will also be to continue on preserving cash with the goal of delivering value to our shareholders.

Thank you. And I would now like to open this up for questions.

Question-and-Answer-Session

Operator

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

Betty Chen - Mizuho Securities

Thank you. Good afternoon everyone and welcome to Jim.

Jim Wiggett

Thank you.

Betty Chen - Mizuho Securities

I was wondering Jim, so we appreciate your prepared remarks, very helpful in terms of setting the tone on the changes we should expect in the stores. Can you give us a little bit more color on, it sounds like we’re already seeing some improvement in some of the September deliveries. Can you give us more color on sort of which products she maybe reacting better to, and which categories we could see some improvements sooner rather than later? And I know you mentioned spring is when we should see everything.

Jim Wiggett

Right.

Betty Chen - Mizuho Securities

And secondly regarding the store opportunity, it makes a lot of sense for us to sort of rationalize in the meantime. Longer term, how many bebe retail or outlet stores do you envision for the company? Thank you.

Jim Wiggett

Thank you, Betty. We are obviously in the transition. So the way you see the merchandize presented in the stores at the moment is still by color pallete, but the design in the merchandising groups together with planning and allocation are working hard to get in the lifestyle assortments. We believe the customer shops that way. I don’t know of many customers who shop by color. And so part of this is to build the assortments, that when she comes in purposefully whether it be for work or a special occasion or party or dressy casual, she comes in and has a full assortment in front of her that’s fully accessorized is shown to her in full outlets and full looks. You’ll see more and more of that literally with each week beginning in September and moving to full completion of that transition in February of next year. To answer your first question, the upside categories we see are tops, the non-apparel category. We will maintain dresses, but we see outerwear and sweaters and knits, tops, there is also an upside opportunity for us.

Betty Chen - Mizuho Securities

Jim, can you talk a little bit about the store opportunity longer term?

Jim Wiggett

Well, clearly our approach to stores is to be pragmatic. We think we made most of the adjustments that we need to make. We took those actions quickly. Now what we see is that where there are leases or situations where it makes sense to walk away we will versus the stores we’re committed to, we sill open. We don’t see further dramatic changes going forward.

Betty Chen - Mizuho Securities

Okay. Thank you so much. Best of luck.

Jim Wiggett

Thank you.

Operator

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

Richard Magnuson - B. Riley & Company

Hello. Thank you for taking my question. This is Richard Magnuson in for Jeff Van Sinderen. My first question is, can you update us on what your strategy and timeframe is on finding a permanent CEO and what directives the Board has given on that?

Jim Wiggett

Right now both the Board and I are entirely focused on this turnaround. The Board and I are completely in sync on the strategy and what we’re doing right now with something that they’re fully supportive of. I think we have to complete the next few months and show results and then that question will -- I’m sure pop up again. But at the moment we’re just altogether focused on making the turnaround successful.

Richard Magnuson - B. Riley & Company

Okay. And then regarding your new merchant, Mary Jimenez and you mentioned also looking past or expanding your purpose beyond sexy for the bebe girl. Could you give us your estimate of when you expect that she will have a substantial impact on the assortment and would we be looking at spring for that, just trying to get a sense of when the new merchant will be accountable for the assortment? In other words, when she would actually own the assortment?

Jim Wiggett

Well the good news is, Mary comes from a category that’s directly related to our categories that the positioning of the two brands have some parallels to them. So, she landed with her feet going day 2. She’s very much in sync with where we’re trying to take the brand and that we believe the assortment needs to broader and to touch more dimensions of the customer’s life. And so, she is leaning into it aggressively. She will already impact the assortments that will be in the stores in mid fall and later. Obviously her full impact will be in the holiday season. But she’s already made some changes that had been helpful to us and I think we’re going to see more and more of that literally in each week.

Richard Magnuson - B. Riley & Company

Okay. And then lastly, could you talk a little bit more about Manny’s evolving role at the company and maybe update us a little bit more on your brand positioning. As I mentioned earlier about you mentioning going beyond sexy and maybe some more detail about how you’re moving away from the party girl type of merchandise and whether you’re engaging a new customer or how you expect it to impact your current existing customers?

Jim Wiggett

Couple of question’s there. Where we see the assortment going is to broaden out to more dimensions of her life. We’re not moving away from a customer or away from a lifestyle. We’re pretty defined in the party category. The world and the marketplace and our customer clearly understands that’s one of our strengths. So, what we want to build on is that we also think sport and logo and her going to work outfits through business chic. Her special occasion outfits, her dressy casual outfits. Those are all dimensions of her life as well. So what we’re doing is telling a broader story to our customer who has that desire for self expression, who likes quality, who’s looking for better fabrications, who is looking for more detail. Those are the things bebe stands for and those are the things we’re leaning into. We’re not moving from a customer, we’re educating her that we have more to offer her and we think in that process people who have apparel needs that aren’t of a party nature once they see our broader assortments will be attracted to the brand.

Liyuan Woo

And just to add to that point, if you think about the position we took earlier, and I believe what's really -- if we over emphasize 9PM to 5AM or reconfirm our brand position, she will come in and then by the way she will see there’s other offerings she can purchase from. I think the shift here is truly we’re seeing, we have all these different lifestyle offerings, so we don’t necessarily have to overly emphasize on that one note. We can actually let her know we have all that to offer.

Jim Wiggett

To the question on, Manny. Manny has always been a resource to management in the company both from a creative standpoint and also from a background on the brand and the DNA of the brand, the roots of the brand et cetera. He remains available as the Board chair, to me as a sounding Board and resource. He makes himself available when we have specific things where we’d like his input. He is a non-executive chair, but he’s available as a resource at any time.

Richard Magnuson - B. Riley & Company

Okay. Thank you very much.

Jim Wiggett

You are welcome.

Operator

Our next question comes from the line of Adrienne Tennant with Janney Capital Markets.

Gabriella Carbone - Janney Capital Markets

Good afternoon. This is Gabriella Carbone calling in for Adrienne. Thanks for taking my question. So, I just had one quick question, so it seems like you’re seeing better full price selling online compared to in the stores. Do you have any conclusion to why that might be and what you plan to do going forward to align the stores and online channel?

Jim Wiggett

We’re actually seeing better improvement on full price items in both stores and online.

Gabriella Carbone - Janney Capital Markets

Okay. Thanks for clarifying that.

Jim Wiggett

Of course.

Liyuan Woo

And this thing we wanted to emphasize there is really, we’re looking at online as the channel for us to be able to clear markdowns even more effectively than new store. So online can not only sell regular price but also sell markdowns. So it’s really a true extension for us.

Gabriella Carbone - Janney Capital Markets

Okay, just a quick follow-up. I know you haven’t really commented on how much e-comm contributes to your total sales. But just any color on how we should think about that would be great?

Liyuan Woo

We’re below 15%.

Gabriella Carbone - Janney Capital Markets

Below 15%?

Liyuan Woo

Hence we have a lot of upside.

Jim Wiggett

We believe very strongly in technology. We believe that’s one of the upside potentials we have as an organization. So we created a second online presence bebeoutlets.com that we use as a flash site. We launched it on August 21st, and had terrific results, so we will use it periodically throughout the year. It’s a great way to clear product and to have a promotional opportunity the customer reacts to. Secondly, we have been very aggressive as I said in my remarks in moving technology into the stores. We have iPad’s going into the stores now. They’re either in or will be soon delivered to 50 of our stores. We have seen an increase in electronic sales coming through that mechanism, so it gives the customer access to the full line of inventory regardless of the store she’s in or whether that store has that specific item. Secondly in November we will be hitting the stores with interactive screens which can either be directed by the customer themselves or by our stylist sales associate. And that too will result in access to the full inventory and an even farer increased visual way so that we can fulfill overnight to the customer no matte where she is with the products that she couldn’t pickup in the single location.

Gabriella Carbone - Janney Capital Markets

Okay. Thank you so much. Best of luck.

Jim Wiggett

Thank you.

Operator

Our last question comes from the line of Michael Richardson with Sidoti.

Michael Richardson - Sidoti & Company

Good afternoon and thanks for taking my questions. A couple of just to start. It doesn’t sound like the company is probably going to be profitable in fiscal ’15. So other than same store sales, what sort of metrics should we focus on to measure progress in the turnaround, and then second, I’m wondering if maybe directionally you can give us an idea how we should be thinking about gross margin and SG&A in fiscal ’15 and maybe you can give us an idea of how that might flow throughout the year? Thanks.

Liyuan Woo

Hi, Michael its Liyuan. So, I think we continue to believe regular price selling is key to our success. So what that means is, not only we will be looking to increase sales per square foot but also margin expansion and that’s really where we’re truly focused on. To your point, if you look at the beginning of the year given the situation with the 2b inventory, given we’re going to have to test out certain categories we probably will be more promotional in the beginning of the two quarters comparing to that later on of the year. So, SG&A, we had already, we restructured. So there’s certain level of savings already going to come into play in addition to exiting 2b. We already gave you the number where we’re going to be Michael in terms of marketing. We’re going to use the money wisely, invest wisely. So you should be able to see we’re going to decrease the SG&A expense in addition to raising sales and margins.

Michael Richardson - Sidoti & Company

Okay.

Jim Wiggett

To answer the question a little more, in the braded world if you’re relying on promotions for your existence you’re in trouble with the brand. We believe that there is real equity in the bebe brand and that our design group is a true asset of the organization. And what we’ve tried to do is reengineer the merchandising process, so that that vision makes it to the store and makes it in a way that the customer understands the messaging and can buy out of a fuller assortment. So she’s buying more items and not piecemeal. We believe we will be successful with that which allows us then to sell unique quality products at full price and not to be in a position where we’re selling pieces of merchandise at a discounted rate to clean it out of our system. We’re getting out of that business.

Liyuan Woo

And the other thing to add Michael, I think we mentioned this earlier too. If you look at a new store concept that we put into play for the three stores, when we’re not offering her a markdown product, we see the margin increased pretty significant. And we actually see it increase on the sales per square foot basis. So these things give us comfort or at least early indication that strategy will work if we just do it with discipline.

Jim Wiggett

The creating of the flash site is an example where we can do clearance and promotional work and not in any way damage the full price product that’s sitting in the store. I’d rather sell it online than distribute it out to a store or have the store sell it in its pack. It’s to build the brand equity continually over the long-term based on quality and based on uniqueness of product.

Michael Richardson - Sidoti & Company

Okay. So, gross margin maybe down first half of the year as you finish some clearance and test some things and then possibly up in the back half of the year. Is that reasonable?

Liyuan Woo

That’s what we anticipate.

Michael Richardson - Sidoti & Company

Okay. And just, I had a follow-up actually on the earlier question about Manny's involvement in the Company. I know he is there as a resource; is he actively involved in the day to day business or do you just tend to bounce a couple of ideas off of him if you’re …

Jim Wiggett

I bounce ideas off of him when he’s available to me any time when I have questions or I want to information. He’s not at the business on a day to day basis.

Michael Richardson - Sidoti & Company

Okay. And then, I guess just one other follow-up. Can you give us an idea, I know when the prior CEO was there, he brought a bunch of individuals in to run, head up various departments, obviously the Chief Merchant has been replaced. Any update? I know I think you brought in the Head of e-comm, maybe the Head of Marketing, are those folks staying, have they left? Can you give us any kind of color there?

Jim Wiggett

There have been several executives who through this restructuring and reassignment of responsibilities have left the organization. The Head of Marketing is not with us. The merchant has changed as we indicated previously and there are couple of other members of the executive team who have left as well. We shrunk the expense structure of the organization which means even at the leadership level it’s a smaller team.

Liyuan Woo

For the key members here. So, to answer your question, the Head of e-commerce is still with is and there is other members that you can say part of the Steve’s team is still with us.

Jim Wiggett

Right.

Michael Richardson - Sidoti & Company

Okay. I'm sorry, just the last one here. Obviously you're trying to rebuild the brand a little bit. And you've lowered your advertising costs to I guess about $20 million, I guess it's going to be this year -- I guess, any concern that, that’s -- its that going to put any kind of restrictions on you trying to rebuild the brand, I guess?

Jim Wiggett

Good question, and the answer is we believe no, that one of the things that have not worked historically for most brands are heavy catalogues that are think and very expensive and expensive to mail et cetera. We are reducing the number of print catalogues but we’re increasing the number of digital catalogue. So to the customer it’s in an available look at what's happening in fashion any season. We’ll do more with mailers as opposed to catalogues. We’ll do more with email and email clips than with catalogues. So it’s aiming the gun in a different way which we believe will still reach the customer with the right messaging but in a far more cost effective way.

Michael Richardson - Sidoti & Company

Okay. And what was the total ad spend last year? It is $24 million?

Liyuan Woo

Last year on the continuing basis it was about $27.5’ish.

Michael Richardson - Sidoti & Company

Great. Thank you very much and good luck.

Jim Wiggett

Thank you.

Liyuan Woo

Thanks, Michael.

Operator

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

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