Bebe Stores: Deep Value or Deep Trouble?

Jul.15.11 | About: bebe stores, (BEBE)

This past recession has really done a number on some once high flying fashion retailers. Women’s apparel makers have been particularly hard hit. While some traditional discounters have been able to bounce back, many specialty clothing retailers are still slumping. With shares trading at multiyear lows, the astute investor would be wise to do some balance sheet digging, in the never-ending search for hidden value.

Historical bebe stores inc. Chart

Which brings me to the “Value Investigation” of the day, bebe stores Inc. (NASDAQ:BEBE). After shares reached an all time high of $29 in mid 2005, the stock price has been on an almost unrelenting slide. Currently trading in the mid $7 range, the company’s market capitalization is just $645 million. Revenues have been sliding as well, from $687 million in 2008 to only $509 million in 2010. The company seems to be suffering from a classic case of over expansion. In 2011 the company shuttered its PH8 Division, and the total company wide store count was reduced to 253, down from a high of 312 stores in 2007. Profits are down considerably as well, but despite all this; the company has still managed to basically break even.

From a balance sheet perspective, the company is running clean. It has zero debt, no goodwill or intangibles, and a healthy cash and short-term investments hoard of $173 million. And the company’s buying back shares too; having repurchased and cancelled almost 10% of the outstanding common shares since 2005. As of April 1, 2011, shareholder equity stood at $351 million.

The bottom line: The value is here, but it’s not a deep value play yet. Revenue seems to have stabilized and if consumer spending picks up, the company should be able to break even or show a small profit. The downside is that with rising commodity prices (especially cotton) it will likely be forced to raise priced significantly, which would hurt end consumer demand and margins. Although the stock is a bargain, it’s not enough of a deal to entice me.

At the end of the day, bebe stores inc. is a company with almost no growth, no profits and uninspiring cash flow. It has a strong balance sheet, but that can only take it so far. For me, the company does not yet represent the kind of stock we would buy given its current price. On a good day I think it should be trading at about 5$, giving it a market cap of just over $400 million. While this would still be above its net book value ($351 million), I consider it to be a reasonable margin of safety. Even with this premise, I would only be a strong buyer if shares were to dip into the low $4 range, which would not surprise me if the economy continued to slow and the US consumer weakens further.

Going Forward

Since bebe stores inc. is still breaking even and has positive cash flow it will likely survive even a very protracted downturn; at least it’s safe in that respect. But I do not see any strong positive catalyst for the stock other than a possible buyout. Given the large amount of private equity money floating around and the company’s strong balance sheet with lots of cash, it could potentially be a takeover target. J. Crew was recently taken private by TPG Capital and Leonard Green & Partners and Gymboree was taken over in 2010 by Bain Capital. bebe stores inc. shareholders should probably be praying for buyer to come forward, because at this point, it is probably the only thing that will power this stock higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.