Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Bebe Stores Inc. (NASDAQ:BEBE)

F2Q08 (Qtr End 1/5/08) Earnings Call

January 31, 2008 4:30 pm ET

Executives

Walter Parks - Chief Operating Officer

Greg Scott - Chief Executive Officer

Analysts

Betty Chen - Wedbush Morgan Securities

Lauren Levitan - Cowen & Company

Jeff Van Sinderen - B Riley

Liz Pierce - Roth Capital Partners

Chris Kim - JPMorgan

Brad Stephens - Morgan Keegan

Lyn Walther - Wachovia Securities

Holly Guthrie - Janney Montgomery Scott

Sam Panella - Raymond James

Janet Kloppenburg - JJK Research

Operator

Welcome to bebe stores 2008 Second Quarter Earnings Release Conference Call. As a reminder, this call is being recorded.

I would now like to introduce bebe’s COO, Mr. Walter Parks.

Walter Parks

Hello. I am Walter Parks, bebe’s Chief Operating Officer. Thank you for joining Greg Scott and me for bebe’s second quarter fiscal 2008 earnings release update. Our call will be limited in time to one hour. After our prepared comments, we will take questions for as long as time permits.

Let me start with our disclaimer. During the course of this call, we will make projections or other forward-looking statements regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions, and that actual events or results may differ materially. We refer you to the company’s Forms 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.

I will now turn it over to Greg.

Greg Scott

Thanks, Walter, and good afternoon, everyone. Let me start by saying that I continue to be disappointed with our comp store sales performance. However, I am satisfied that we delivered earnings within our guidance given the difficult retail environment.

This speaks to our ability to control our fixed expenses, inventory including both finished goods and raw materials, and our store payroll during the quarter. Our earnings also benefited from a favorable tax rate. For the quarter, net earnings were 23.4 million versus 24.3 million in the prior year, down 3.7%.

Earnings per share were $0.26 versus $0.26 in the prior year. Overall, our transactions decreased 3%, average dollar sale decreased 5%, and our units per transaction decreased 3%, resulting in a 7.9% comp store sales decrease compared to 5.5 comp store sales increase in the prior year. Net sales for the quarter were $203 million, and increased 3% compared to the same period of the prior year through new store growth and higher licensee and international sales and strong bebe.com sales.

Walter will take you through the details of the second quarter. I will then review some of the highlights of our business. We will then discuss our plans for the upcoming quarter. After that we will be happy to take your questions.

Walter Parks

Thank you, Greg. Net sales for the second quarter increased 3% to 203 million compared to sales of 197 million in the second quarter a year ago. Same store sales for the second quarter decreased 7.9% compared to an increase to 5.5% in the prior year.

Gross margin as a percentage of sales decreased to 46.2% from 47.9% in the prior year. This decrease of 1.7% was primarily due to higher markdowns and unfavorable occupancy leverage partially offset by a reduction in raw material reserves. SG&A expenses were 30.9% of net sales for the quarter compared to 30% in the same period in the prior year. The increase in SG&A expenses as a percent of sales is primarily due to higher total compensation expense as a result of timing differences associated with stock-based compensation and the recording of a small provision for bonuses in the current year versus a reversal of the bonus accrual in the prior year, partially offset by lower advertising.

The effective tax rate for the second quarter of fiscal 2008 decreased to 33.8% from 35.9%, primarily due to an increase in tax free interest income as a percent of total pre-tax income, and an increase in our allowable domestic manufacturing deduction during the current year.

Net earnings for the second quarter were 23.4 million compared to 24.3 million in the prior year. Diluted earnings per share for the second quarter of fiscal 2008 was flat at $0.26 on 90 million diluted weighted average shares outstanding compared to $0.26 per share on 95 million diluted weighted average shares outstanding for the second quarter of fiscal 2007.

Net sales for the year-to-date period ended January 5th, 2008 were 364 million compared to 354 million in the prior year, an increase of 3%. For the – for fiscal 2008, year-to-date period comparable store sales decreased 8.5% compared to an increase of 8.6% in the prior year. Gross margin for the year-to-date period ended January 5th, 2008 decreased to 46.8% compared to 49.1% in the prior year.

This decrease is primarily the result of higher markdowns and unfavorable occupancy leverage offset by lower raw material reserves. SG&A expenses for the year-to-date period ended January 5th, 2008 increased to 32.6% of sales compared to 30.9% of sales in the prior year, primarily as a result of higher compensation including stock-based. Net earnings for the year-to-date period ended January 5th, 2008 was 39 million compared to 45 million in the prior year.

Diluted earnings per share for the year-to-date period ended January 5th, 2008 is $0.42 on 92 million diluted weighted average shares outstanding compared to $0.47 on 95 million diluted weighted average sales outstanding for the prior year. Our total cash and investment at January 5th, 2008 were 365 million versus 382 million at December 30th, 2006.

Inventories at January 5th, 2008 were 46 million compared to 46 million at December 30th, 2006. At the end of the second quarter, finished goods inventory per square foot was approximately 6% less than the prior year. Capital expenditures for the fiscal year-to-date were approximately 18 million and depreciation expense was approximately 10.8 million. We ended the second quarter with 290 stores, which represent 1,051,000 square feet.

Now I will turn it back over to Greg.

Greg Scott

Thanks, Walter. Results for the second quarter 2008 speak to the challenges we've faced in our core bebe brand and the larger macroeconomic environment. As stated earlier, for the quarter we experienced a decrease in transactions, average dollar sale, and units per transaction compared to the prior year. During the month of December, our week-over-week sales build for the first three weeks was below the historical level when adjusted for the shift in the Christmas holiday. This was offset by better than historical sales builds in week four and five. In our 80 stores with traffic counters both this year and last year, traffic was down in four of the five weeks, with re-aligned weeks five being positive.

This weakness in traffic was offset by higher conversion when compared to the prior year. In response to the reduced traffic, markdowns were higher than anticipated as we were forced to clear inventory in December due to lower than anticipated sales on weeks one, two and three, and our desire to have a clean conversion in January. Our strategy of driving sale with key products offered at great values was not as successful as planned. We continue to see that price does not drive sales, but great and unique fashion do. As we go forward, we will focus on offering unique and sexy fashion, while managing inventory levels to reduce markdown risk. Consistent with the current quarter, we will continue to take markdowns aggressively on slow moving products to assure a clean conversion in future periods as we did in January.

On our last call, we reviewed our plans for the second quarter, and today, I would like to give you the highlights. One, the apparel business in our core bebe division struggled in the quarter as the gains that we saw on dresses, denim and sweaters could not offset the decreases we saw on sportswear including suiting, outerwear and logo.

As previously reported, November was the only month in the quarter that had positive comp store sales. This can be attributed to a strong Black Friday performance. So on what would – what we would consider a successful November, we were disappointed by December’s result. We believed that we were well positioned going into December in our apparel business, and planned key promotional events to drive the business in December.

This strategy and these events were not successful. We saw that price did not drive our business even during a tough macroeconomic environment. During weeks one, two and three of December both traffic and sales were challenging. In weeks four and five, we saw an improvement in both, but not enough to offset the shortfalls in the first three weeks. Our sportswear and suiting business were particularly challenged in the quarter, as we saw clients focused on dresses including sweater dresses as opposed to suiting and separates.

On a brighter note, the bebe accessory business was slightly positive for the quarter with a lower markdown rate, higher average unit retail and faster weeks of supply than the prior year.

Our shoe business continues to perform with a strong double-digit comp in the quarter. We ended the quarter with our new sunglass fixture in a 106 stores, and we are pleased with the category performance. Comp store sales increased double-digits in the quarter.

Our handbag business showed strong performance driven by our signature logo handbags. We saw double-digit comps in handbags during the quarter. The jewelry business also performed well, driven by signature bracelets and necklaces. Hosiery was also successful with strong triple digit comp performance in the quarter. While we saw sequential improvement in belts, we did not see the improvement we anticipated and we are still running below last year in this category.

Two, in BEBE SPORT, we saw slight improvement in our comp store sales and while SPORT continued to run negative, we were pleased with the improved margin performance in the quarter. We saw improvements in both our IMU and markdown rate, while turning the product slightly faster than prior year.

The business was driven by bbsp in sweaters, offset by the street side of the business, which continues to under-perform. During the quarter, we mailed 122,000 direct mail pieces focusing on the bbsp side of the business versus 245,000 last year. We mailed to the top 50% of our SPORT clients and delivered positive incremental revenue and coupon conversion. Three, the outlet business achieved a flat comp performance that was slightly below our incoming expectations for the quarter driven in part by a reduction in transfers of markdown inventory from our full price locations. We continue to be pleased with the bebe logo and bebe O business in the outlet stores, and remain on track to open our first "to be bebe" stores this spring.

Number four, our international business continues to exceed expectations. Comp store sales for the first half of fiscal year ‘08 increased 43% and total international sales grew 163%. In the first half of fiscal year ‘08, we opened three new stores bringing our total store count to 17 excluding shop and shop. These three new stores are located in Indonesia, Israel and Malaysia. We are excited to announce we recently signed new agreements for the territories in Mexico and Egypt, and are close to finalizing plans for Eastern Europe.

We currently have freestanding stores in the UAE, Israel, Thailand, Singapore, Malaysia and Indonesia. We continue to make the growth of our international business our priority for the company. Five, in the quarter we opened six bebe stores and five BEBE SPORT stores, and expanded one bebe store. We continue to believe that new store growth as well as the expansion of strong performing existing stores with high sales per square foot will be part of the growth story as we go forward.

We also believe that this growth will consist of expansion in the "to be bebe" business. In fiscal 2008, we remain on track to grow square footage 14%. This growth will include 19 new bebe stores, 9 new BEBE SPORT stores, 7 "to be bebe" stores, and expansion of 7 existing bebe stores. Six, for the quarter we spend 4.3% of sales on total advertising versus 4.7 in the prior year.

This reduction is the result of our decision to not anniversary (inaudible) TV in the prior year, offset by BEBE SPORT national advertising including the cast of Eva Longoria. Seven, in the November-December period, we mailed 2 bebe catalogs and 1 BEBE SPORT catalog with a total circulation of 2.1 million versus last year's 1.4 million, a 50% increase.

While the direct mail marginally exceeded last year’s direct mail sales, we did not get the lift that we anticipated from the increased circulation. We attribute this to a lower average dollar sale across all customer segments, and less than expected conversion from our expanded circulation. While our sales were disappointing, we changed the format of our November book, and managed other cost components of production which enabled us to mail 50% more catalogs at a lower cost than last year.

We also leveraged our increasing BEBE SPORT client base to improve the profitability of the BEBE SPORT catalog, which we mailed during the first week of December. Eight, bebe.com sales increased 23% over last year, driven by a 21% increase in traffic and improved conversion. We implemented several new launches during the first half of the year including shipping to Canada, several user experience enhancements such as multiple product views, and simplified navigation in addition to exclusive product launches of lingerie and swim. bebe.com continues to prove to be an important channel to test new products, engage with our clients, and enhance the communication of our brand, merchandise and marketing strategies.

Moving on to our plans for the third quarter, based on the current business trends and the larger macroeconomic conditions, we believe that a return to a regular price business needs to be our number one priority. To accomplish this, we will reduce the depth of our buy of non-proven fashion items, and invest in items that we believe will drive our sales based on previous sell-throughs with limited markdown risk. Inventory management and creating urgency with our client is our number one focus.

Based on the non-historical nature of the weekly sales builds in the business, and the current negative macroeconomic conditions, we are making a conservative yet realistic outlook on the upcoming quarter. As our release stated, we believe comp store sales will be in the negative mid-single digit range versus flat comps in the prior year.

We are currently not anticipating a benefit from the shift of Easter, which falls on week four versus week one of April last year. We are not anticipating a benefit in March this year when compared to the prior year, because both years include the build historically associated with the Easter holiday. We anticipate this historical build will be offset by Easter Sunday taking place in March versus April in the prior year.

Furthermore, this year our third quarter will have 13 weeks versus 14 weeks in the prior year, due to the calendar shift. We are taking the following steps to improve our comp store trend in the quarter, and to improve our merchandise margins.

One, as previously mentioned we will be reducing our depth in fashion buys in our core bebe brand to help offset the current economic uncertainty, and we will continue to support proven key items to drive the business. We understand the need to return to less depth with more fashion, more frequently.

Two, in bebe retail, the apparel division will continue to invest in dresses, denims and sweaters, including sweater dresses. We still believe that we will struggle with anniversarying our successful sportswear and suiting business as this business continues to perform below our expectations.

Three, we have re-organized our bebe merchandising department to be focused on lifestyle. We have separated our wear to work and going out business from our underdeveloped causal business including denim and logo. We believe this move will help us in merchandising our merchandise by lifestyle. Four, we have launched the bebe design lab which is under the direction of Manny Mashouf, our Chairman. This design initiative will replace our COLLECTION bebe runway effort which we discontinued last spring. To clarify, Manny’s role has not changed as was incorrectly reported in an analyst report. Currently he will be focusing on the design lab rather than the COLLECTION bebe effort, and he continues to be involved in the business on a daily basis. The bebe design team continues to report to our Vice President of Design, Susan Peterson.

The first product offering from the design lab is a collaboration between bebe and actress/designer, Tara Subkoff. Ms. Subkoff was one of the original founders of Imitation of Christ, and will be offering a collection of designs for the fashion for bebe client. This collection will launch in all of our stores during the first week of February, next week under the label Tara Subkoff for bebe.

There has been much buzz about the launch in today’s media. Five, for the quarter, we continue to believe that we’ll see strength in our bebe accessories business. We have seen continued improvement in the trends during January. We also launched our first accessory catalog last week to 500,000 customers.

We believe that we will see continued strength in handbag including signature handbags and shoes. In addition, we will rollout sunglasses to 40 additional locations this spring. Six, BEBE SPORT will be investing in bbsp logo and shoes. Our street business will be supported by (inaudible) in our fashion offerings.

The bbsp business will be supported by the investment in our iconic essentials, which will consist of three core bottoms, and an increased penetration of fashion offerings. Seven, on the international front, we will be opening two additional stores during the quarter.

Over the next 12 months, we plan to expand to seven new countries: Saudi Arabia, Egypt, Kuwait, Russia, Ukraine, Romania and Mexico. We are very excited about the opening of our first store in Mexico City this April, and look forward to continued international growth as a priority for the company. Eight, during the fiscal third quarter, Rebecca Romijn will be featured in the bebe advertising through the beginning of March. Beginning in the middle of March, we’ll return to be featuring a model in our bebe advertising as Rebecca’s contract has ended.

We have been very pleased with the results of our marketing featuring in Rebecca Romijn, and our core client has responded favorably. We thank Rebecca for everything she has done for the brand. Eva Longoria will continue to be featured in BEBE SPORT advertising through next spring.

For the quarter, we currently anticipate spending to be approximately 5% of sales on total advertising versus 3.9% in the prior year, as a result of the BEBE SPORT campaign with Eva, and doubling our circulation in bebe direct to 1.5 million from 550,000 last year. This increase is driven by our first accessory catalog in January, and an increase in circulation of our March book.

Our full year advertising spend will be 4.5% of sales versus 4.1% last year. This increase is driven by our investment in BEBE SPORT advertising, including Eva Longoria. bebe will be featured in Elle, Vogue, Cosmo, and InStyle; and BEBE SPORT will be featured in Elle, Glamour, InStyle and Shape. On January 24th, we launched our double point shopping event, and today in BEBE SPORT, we are hosting our be fit, be better, be you in store in an in-store event.

Last week, we mailed 500,000 of our first accessory catalogs featuring a Valentine's gift giving offer. In March, we have increased our bebe catalog from 550,000 last year to 1 million this year. We will hold our semi-annual collection preview event in March in both bebe and BEBE SPORT during week two of March versus week three last year.

This change is a result of the Easter holiday this year. Nine, during the quarter we will open three bebe stores including the signature store at Oak Street in Chicago with a newly designed logo areas. This store will have many features similar to our store on Rodeo Drive and Columbus Circle in New York City. We’ll expand one bebe store at Roosevelt Field on Long Island, and open one new SPORT store. The seven "to be bebe" stores are planned to open in our fiscal fourth quarter.

Thank you, and I would like to turn the call over to Walter.

Walter Parks

Thank you, Greg. We believe we will see an improvement in trend this quarter. As a result, we currently anticipate comparable store sales for the third quarter to be in the negative mid single digit range.

Diluted earnings per share should be in the range of $0.08 to $0.12 per share based on 91 million weighted average shares outstanding in the third quarter versus $0.14 per share based on 95 million weighted average shares outstanding in the third quarter of fiscal 2007. The company is currently anticipating an effective tax rate of 35% for the third quarter of fiscal 2008.

Inventory at the end of the quarter will be down versus the prior year per square foot in the low to mid single digits. Capital expenditures for fiscal 2008 are planned at approximately 45 million for new and expanded stores, IS&T and office improvements. Depreciation expense for the year will be approximately 23 million.

Total square footage at the end of fiscal 2008 is anticipated to be approximately 14% higher than fiscal year 2007. Advertising for the third quarter of fiscal 2008 will be approximately 5% versus 3.9% in the prior year as a percentage of sales.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Betty Chen, Wedbush Morgan Securities. Please ask your question.

Betty Chen - Wedbush Morgan Securities

Thank you. Good afternoon, Greg and Walter. Greg, I was wondering if you can talk a little bit more maybe about especially your club bebe customers, you mentioned that your shopper is very much looking for the right fashion, and not necessarily focus on price. Any trends regarding the average spend from your club bebe shoppers? And then on top of that I guess, what areas do you think that you would like to focus on in terms of making the product more fashion right to kind of retain even your last customer? Thanks

Greg Scott

I would say that we continue to be happy with our club bebe participation. And it's still – club bebe sales are still a large percent of our sales. I don’t think and I will have Walter respond after I finish, if we really quote the average spend of our clients on year-over-year, but he can refer to that. I would say that, what I really like to make clear is that, I believe that we should be offering continued fashion to our bebe customers. But that we should be offering less depth of fashion item than we have had in the past, in the sense that I still want to offer a lot of freshness and newness on a continued basis.

But not as much depth and the depth will come from proven reorder items. I think, the area that we really need to focus on in terms of a fashion perspective probably would be our sportswear, suiting and bottoms categories, where we really have seen – we have struggled in the last two quarters, where we continue to see great performance, say, in our denim business. We are really offering the right thing for her or in direct business, we are offering the right thing for her, and we are still having success in our tops and our sweaters business. So, I would say in a nutshell in the bebe apparel world collection including suiting and bottoms.

Walter Parks

And to answer your question, yes, the average dollar sale was down across the business this past quarter.

Betty Chen - Wedbush Morgan Securities

I think, would you be willing to quantify that a little bit, Walter, I think you were able to do that, I think, on the last call?

Walter Parks

Well, yeah, Greg said, it was down about 3%.

Greg Scott

And we did refer specifically to the club bebe clients what their spend was down.

Walter Parks

Exactly.

Betty Chen - Wedbush Morgan Securities

Okay. Great. Thank you, and good luck.

Greg Scott

Thank you.

Operator

Our next question comes from Lauren Levitan at Cowen & Company. Please ask your question.

Lauren Levitan - Cowen & Company

Thanks. Good afternoon. Couple questions. Greg, you talked about this reduction in depth of the fashion buys, can you give us a sense of how you feel about the inventory composition currently? Is the guidance incorporating, an assumption that you are going to work hard to clear through a greater depth of fashion items, than you would prefer? Maybe give us some sense of where you stand on that transition? And then I have a couple other quick questions for you as well.

Greg Scott

Okay. No. I think, as I stated, we did a really good job of convert – well, markdowns did are very good job of converting that into January. Our inventories opened 6% less on an average square foot basis. So that we were really positioned inventories with sales. As we stated I also believe by the end of this quarter, we will be down in the mid single digits, and I think, that’s in line with sales also.

We really have started this philosophy really, probably a quarter ago, and I still think maybe we are a little heavy on some of our fashion buys, that we have taken reductions already. And I feel we are headed in right direction. I am not anticipating today large markdowns that I am foreseeing, but as I really want to say, and I think, other retailers have said, this climate is non-historical, and I would say that as I look today I would say to you I’m happy with our inventory composition, I’m happy with our markdown levels, I wish they were low, and I think one of the ways to get them lower is to reduce our fashion risk. But it could change based on where the economic conditions for the overall consumer goes in the quarter.

Lauren Levitan - Cowen & Company

Okay. That’s helpful. Greg, if you look backwards on the holiday season, I mean, I know – I take your comment to heart that the climate is non-historical, but how would you – how much of the weakness that you have seen in the last couple of quarters would you attribute to an erosion in the confidence of your consumers overall, and how much would you attribute to fashion direction and merchandising decisions within bebe?

Greg Scott

Well, I will always take responsibility for our business. And I think, we refer to the macroeconomic conditions more than usual. The only reason I am referring to them is not to blame our business on them, but to just state that, that has really changed the historical patterns of our business. Now, what I – for instance, today, if the stock market drops a certain amount a day, you would necessarily see maybe not as many consumers shopping that day, and I do believe that.

However, I do take responsibility for our business and the products. And as we came out of November, we were actually optimistic, and I think, a lot of retailers probably were. And what happened was weeks one, two and three did not perform, and what I would say there is our strategy or my strategy of deciding to go after value, deciding to go after key price initiative was not successful.

And I take responsibility for that in the sense that she doesn’t care about price, we thought she would, we thought she would in this economy. She doesn’t. She wants fashion, and if it’s a right fashion, she will pay the price. And so I think I would say I will attribute December to 100% of our fashion, this is in bebe apparel, because at the same time I saw my non-apparel business very successful.

I saw my bebe.com business very successful. I saw the international business very successful, and I saw SPORT business having improved margins. So, I would have to say we did miss, we did the wrong strategy about going after price and depth in the December month.

Lauren Levitan - Cowen & Company

Okay. One last thing for you, if I could, Greg, it sounds like you are operating on the assumption that we shouldn’t look for any meaningful improvement in the external environment. If that’s the case, we see you taking a more conservative approach on inventory. But I’m curious what your thoughts are around expenses in store growth, the two other things that are largely in your control, understand the marketing increase, but I’m just curious what the thoughts are overall on ability to control expenses against a difficult environment?

Greg Scott

Well, I would say on expenses, I think Walter and his team and like the top team that are very -- I think a good job in controlling expenses in the quarter. In the sense that Walter, SG&A was – can you give me the exact numbers there?

Walter Parks

In absolute dollars?

Greg Scott

No percent.

Walter Parks

30.9 versus 30.

Greg Scott

So, even with the comp sales reported, we were able to control SG&A as a percent, fairly well. And what that was about was controlling our inventories; controlling our raw material, so, we are not taking hits on raw material; controlling our store payroll expenses, which was very good; controlling our corporate overhead; controlling our travel.

I think that and only reason compensation was up, was what I call accounting reasons, but they’re true reason. But we've really controlled expenses, and that is something this business has always done well except maybe for Q2 in the prior year, but we continue to do it. Well, Walter has really done a great job there, and what I have to do or we have to do, is control the markdown side of the business. And I believe, I have a strategy to do that.

Lauren Levitan - Cowen & Company

I was really looking more forward. So, does that mean then Greg, that the guidance is a low and we were assuming that incorporated pretty significant expense deleverage and gross margin pressure. Should we assume it's really more gross margin pressure, versus SG&A deleverage since you’ll get the timing difference turned around on the stock-based comp in the third quarter?

Walter Parks

Well again, without going into those specifics because we didn’t address them. I think that the expectation should be -- if the sales improve, we should continue to see deterioration involved but it shouldn’t be as substantial as it was. Part of the challenge for the next quarter, is that we’re giving up a weak, and well it doesn’t seem like a lot, $8 million moved the needle. And I think that all things be in equal, our expectations would be, we would continue to see the same, a similar kind of deleverage. And hopefully, continue to be within the range we provided.

Greg Scott

And Walter, are we quantifying that extra week in terms of how much that hits the EPS?

Walter Parks

Yes, about $0.02.

Greg Scott

So, you’ve got $0.02 of deleverage just on that extra week, just because of the sales being taken out of the expense. And I would say, I don’t want anyone to believe I’m happy with our business, and I don’t want anyone to believe that I’m sitting here idle what’s happening. But I would say that based on the fact that this company is still earning money. We still earn 23.4 million in the quarter down 3% over the prior year. It's a pretty good start, if you look at us compared to other retailers, and how they've gone out with their announcements. And I just don’t know people are giving us the credit for that.

Lauren Levitan - Cowen & Company

Well, thanks for your comments and good luck.

Operator

Our next question comes from Jeff Van Sinderen at B Riley. Please ask your question.

Jeff Van Sinderen - B Riley

Hi, good afternoon. Greg, I know you've talked quite a bit about fashion content in the core bebe business. And I am just wondering, what you think is that the route of the fashion content miss, where the miss is that you've experienced, and how do you improve the content. Do you need to modify the design team or I guess may be any thoughts you can give us on what your plan is in terms of improving the fashion content?

Greg Scott

Sure. Couple of things: One is, we won the design lab, while small, gives us an infiltration of new designers on an experimental basis, gives us some infiltration of new ideas, and Manny, had a great idea when he led this charge. And on Saturday, we launched Tara Subkoff for bebe, and I don’t know if any of you have read Women’s Wear today, the Fashion Blogs today.

It is all over the wires, it is one of biggest buds we've had in a long time, that’s one of the ways. Two, I think splitting the merchant team in terms of wear-to-work and going out versus casual will give us that delineation, and will also give us something able to address lifestyles for our client.

Three, I think that we are always looking for new design talent everyday at something we do, Susan Peterson, the Vice President, Design are always looking for new people who can infiltrate and come in and give us new ideas, and we will continue to do that, because I do believe it's all about design, and it’s a way we buy it. Honestly, design can present some great things and if we’re buying too deep on the wrong thing or too light on the other thing, that will hurt you. And I think that, I am making big strides right now, in the depth and the way we look at our buys.

And I did a 20 store tour in the month of January, for a week, and I really talked to our client, I really talk to the field again, I really saw what our markdowns were. And I realized the true issue was not the re-orders, not the things that are proven, but truly taking fashion and buying it with too much conviction. In the sense that, if I’ve taken that fashion and bought less of it, I would have been a lot more profitable, lot more successful, and that’s a strategy I am going with right now.

Jeff Van Sinderen - B Riley

Okay. And then, let me ask you as now that you are decreasing the depth of some of the fashion products, does that mean that you are going to change in terms of being broader with the assortment or you pretty much keep it the same but you are just not having quite as much depth of that and that’s it?

Greg Scott

I think one of the things in some of our lower volumes stores will be a little broader because honestly they would rather have more selection than depth because you have a lot less clients going into the doors, they would rather have less of more selection than the depth, and you will start.

We hope to see that in some of our lower volumes stores. In our higher volume stores, you are not going to see more breadth, it’s just not going to happen you are just going to see a little less depth in the fashion, probably be a little more depth of the proven sellers. I think the overall issue is not in those high volume stores that some of your customer has seen, it’s truly in the average stores or below average stores we will start seeing a change in the mix a little.

Jeff Van Sinderen - B Riley

Okay. And then just finally, any more color you can give us on BEBE SPORT? And how we should expect that business to evolve?

Greg Scott

Yeah. Erin Stern did a really good job in the quarter with comp sales were not what we wanted, they were slightly improved, but she really controlled the margin in terms of reducing the markdowns, raising the IMU a little, and really improving the return quicker than the prior year.

I see today, well, we have an event in our stores, which is our first event of the season. And our early reads for the stores are very strong on this event. I think we will continue to see or what we are continuing to see is improved margin performance in this business and I think it’s a little too early to tell how and when we’ll see the comp turn around in this business.

Jeff Van Sinderen - B Riley

Okay, fair enough. Thank you very much, and good luck this quarter.

Walter Parks

Thanks. Thank you.

Operator

Our next question comes from Liz Pierce of Roth Capital Partners. Please ask your question.

Liz Pierce - Roth Capital Partners

Thanks. Good afternoon, Greg. Question for you on – and Walter, sorry didn’t mean to ignore, Walter. Greg, if you think about your accessories and everything seems to be up grade.

Greg Scott

Yeah.

Liz Pierce - Roth Capital Partners

And what is it that in terms of -- I’m getting out this more from inspiration, and particularly now that you are approaching this from a lifestyle category. What is the inspiration on the accessory side that seems to be driving that, you said, you can’t or have trouble articulating on the apparel side, particularly on suiting and separate?

Greg Scott

Yeah. You've asked me a question, I don’t know if I could give you the best answer for, I can’t say that the accessory business started turning around in Q1, and we really did not think it was going to be as good as it was in Q2. And what just happened is the new – it's really based on a lot of logo designs, whether the logo handbags, the logo sunglasses; it's just really resonated with the client.

And I can’t say for sake of the inspiration, for both collection is coming from the same place, it truly is, and I guess, I would say that we had probably a little more control in how we bought the accessories versus the apparel, and our strategy for accessories was different than apparel, accessories we did not take up price point strategy, we did not take value strategy, where we did in apparel.

And that could have been one – and accessories also had been buying leaner on fashion for almost six months. So, they've already taken some of the strategies that we are implementing in apparel, and they've already implemented them and we are seeing success there.

Liz Pierce - Roth Capital Partners

Okay. And then, in terms of your comment about markdowns, you said you are going to be a little more aggressive. Does that mean steeper, faster or a combination of both?

Greg Scott

You know and I was reading -- I don’t know if my prepared comments are that aggressive and they might have, I don’t mean to say that. And if they did say the word aggressive, it’s probably – it is not a good word. What I would say is, as always in Q2, we took markdowns after response to the business in December, when she did not respond, we wanted to open January clean.

But what we are saying is, in this quarter, we will do the same in the sense that, if we find that by March, she did not respond like she did in December, we’ll take the markdowns so that we will have a clean conversion. And I think that's what we are talking we will control the inventories appropriately. I hope that does not have to happen. But as I say, the economic conditions outside are a little different, and when you normally run your business on historical build, and you find that historical builds may be aren’t as appropriate, there is a little more risk in your buying, that’s why we buying leaner.

Liz Pierce - Roth Capital Partners

Okay. That’s I think so. I think that speaks volume. Just one last question, as you are doing this by lifestyle, are you going to change the way the stores look. Does that mean we will see more of a lifestyle approach inside like the visual presentation?

Greg Scott

Well, we will probably by fourth quarter. But what we did is, we just asked to change the visual presentation for the first time, in almost ten years in January. And it’s a subtle distinction but some of you who shop our stores frequently will know, there is no longer a logo department.

Liz Pierce - Roth Capital Partners

Right.

Greg Scott

And we’ve started to mix logo within our collection such that we found that our client was shopping. She wanted to pick-up a suit, and then a jean, and then a T-shirt all at the same time. And it was very interesting. The logo business got better instantly when we did it. And it was interesting that we had never done such a thing, and we found that looking at some of the hot boutiques that are out there, they are really merchandised by color and mood versus just straight like here is the [logo] in the department and denim, they mix it all together. And we found early on that, that has been successful for us. And it’s really the first breakup merchandising we’ve done in our stores in 10 years.

The second thing we did as we start, we changed the configurations of our wall base to make things easier for our clients to shop. So, instead of having like things all over up and down, up or down, there is a linear shopping pattern to create outfits within that. So, we made some dramatic changes to our visual display on week two of January. And I think we are going to continue with it based on the early success.

Liz Pierce - Roth Capital Partners

But you still want to keep SPORT separate, because I guess it begs the question, if she’s buying that, would she – would it make sense to bring SPORT inside the box?

Greg Scott

Yeah. Well, right now we want to keep SPORT separate, and we know it's interesting about it as we give detailed analysis. We still do not see cannibalization of the logo business. If a SPORT store opens in the center, we do not see any cannibalization in the logo business in the core bebe brand. You would think you would, you do not. You just see both of them really still at high penetrations.

Liz Pierce - Roth Capital Partners

Okay. Great, that’s helpful. Thanks and good luck.

Greg Scott

Thank you.

Operator

Our next question comes from Brian Tunick at JPMorgan. Please ask your question.

Chris Kim - JPMorgan

Hi. Thanks. It’s Chris Kim for Brian. Hey Greg, you mentioned that perhaps you are not being given enough credit; at least the stock is not being given enough credit, given the pretty decent performance in a pretty tough environment. How much of your time is spent thinking about what to do with the cash here, you clearly have a pretty robust balance sheet?

Greg Scott

Well, I would say that, and I’ll let Walter take some of this also. We look at our cash position all the time. We have frequent discussions with our Board about it. And we are always looking for opportunistic things to do with our money, if they so appear.

I think, we believe that, investing in our own real estate continues to be a big way we use our money, and if that’s that expanding our stores, we are super successful in getting more square footage or going after the "to be bebe" concept, we are going to open seven of them in the quarter. So, we still look at it, I still spend time on it, and I’ll let Walter follow-up.

Walter Parks

Again, we were very pleased with debit transaction last fall. It added almost 4% to earnings this quarter. We’ll continue to look at those transactions if they present themselves, and we continue to look at businesses, but have not found one we thought was the appropriate acquisition, but we’ll continue to look.

Chris Kim - JPMorgan

Okay. Thanks guys and best of luck.

Greg Scott

Thank you.

Operator

Our next question comes from Brad Stephens at Morgan Keegan. Please ask your question.

Brad Stephens - Morgan Keegan

Hey guys, good afternoon. Could you talk about your leverage points for occupancy, where they are right now? And then, as you start to open outlet stores, I assume that's probably going to have a lower occupancy expense. How we should think about those going forward?

Greg Scott

Go ahead Walter, sorry.

Walter Parks

The leverage on occupancy hasn’t changed dramatically. We lost -- about two-thirds of the reduction in margin was the result of occupancy deleverage and with negative 7-9 comps, I would say that that’s acceptable. The challenge is obviously to get back the positive comps, and hopefully, we will see the kind of leverage we historically saw which was mid single-digits. As it relates to the outlets, yes, they do have lower costs per square foot. But historically, we haven’t done as much sales per square foot. Now, that might change with the new concept, but it is too early to comment.

Brad Stephens - Morgan Keegan

Okay. Greg, I think we all appreciate you blaming the fashion et cetera. But, when I look at your mix of stores, a lot of Southern California, a lot of Florida; can you talk more about the macro-standpoint amid what you've seen recently?

Greg Scott

Yeah, I mean, and you hit that, while you missed the big market Arizona. But really we definitely saw, weaker performance in the Arizona market. We saw weaker performance in our Southern California, particularly Orange County market. Really in the Central Valley market. And Florida surprisingly, even though that is not enough, Florida still continues to be a stronghold. Now, one part of our business in Florida obviously continues to be international tourists.

The South Americans, Latin Americans, people from Europe love the bebe brand. And I was just in 15 Florida stores in January. If you are in Aventura, if you are in Southeast, 50% of that client is from out of the country. So, we are still seeing strong business in the Florida region, though, the other areas that are significantly hit by the housing market, and really lines up from what I see from the news, we see it in our business.

Brad Stephens - Morgan Keegan

Okay.

Walter Parks

And clearly the two areas that Greg reviewed, Arizona and Southern Cal including San Bernardino, Riverside and Orange County negatively impact the business.

Brad Stephens - Morgan Keegan

Okay, so that’s sort of pretty substantial negative comps there. And then last question for you Greg, I think historically one other things that the customer really like about bebe it was, when she came in the store, she knew she saw an item, and it wasn’t going to be there three months later.

Now, when you do some of your buys, you are buying it and you are bringing back trench coats or whatever it is a month or two later. Is there any thought about changing it back to where it was before to make it more of a must-have item? Or do you like the flow the way it is now?

Greg Scott

You must be a client or you must --

Brad Stephens - Morgan Keegan

No, I go with a firm no on that Greg, firm no.

Greg Scott

You must because, that exactly what our clients say, that is definitely what we hear all the time, and what I’m talking about is returning our business to that model where she comes in and know she has to buy it there and it’s – there is not a lot on the floor and there is not a lot on the stock room.

However, within that model and as always been in that model, we had great reorder business that doesn’t seem to affect that customer's desire to buy that product, and what really you see on that, and I go back all the way to England on the roadshow, it’s about core bebe basics like the trench coat, like a pant, like a V-neck sweater, like a top, that are kind of staples in her wardrobe that she’s okay buying three or four colors and then she’s okay.

It’s really those fashion items, that those must have that she doesn’t want to see a lot. And it’s that mix and balance that I need to return our business to, which was really the hallmark of our business and really drove our success in the late 90s and also in 2004 and '05.

Brad Stephens - Morgan Keegan

Alright thanks. And once again that is a firm no, Greg.

Greg Scott

Thank you.

Operator

Our next question comes from Lyn Walther at Wachovia Securities. Please ask your question.

Lyn Walther - Wachovia Securities

Hi. Thanks guys. Couple of questions. Greg, can you give us a little bit more detail on the collaboration effort? Price points relative to bebe categories. Are you putting any marketing behind this?

Greg Scott

So, if you didn’t get to read Women’s Wear today or you will see that Tara Subkoff for bebe and the design lab mean, I don’t want anyone to really write about it because it is not confirmed, that name, but it’s really something that Manny has done, which is great and he has been finding some great designers to design special collections right now. The Tara Subkoff for bebe line actually has her name on it, not all of them will, and we actually did a small press luncheon.

There was a luncheon last week in New York, and we are going to have an event next – about next two weeks from now in New York for a fashion week event. It will be a small dinner for Tara. We are not doing a ton of marketing, but the great thing about Tara is that the underground PR on it has been amazing. It [hit a lot to] Women’s Wear this morning. It was on about ten blogs in about half an hour about it, and I think the response will be great on Saturday. So, the price points we believe should be about in line with the bebe collection. It shouldn’t be higher. It shouldn’t be lower. We think that’s the right formula.

Lyn Walther - Wachovia Securities

Okay, great. And then just following up on some of your other comments, you mentioned price doesn’t seem to be the main factor driving her. But we have seen some of the lower priced fashion retailers seem to faring a little bit better in this environment. What's your take on what’s going on there? Do you think it is because may be they have a broader assortment or what your thoughts are there?

Greg Scott

Yeah, I mean, obviously, we look at that and one of the reasons I went out for some prices because I thought the consumer might have less to spend. But time and time again, she proved to us in November and December that she wanted the fashion at a – at whatever retail that was right for the value versus – and fashion at the wrong retail or the lower retail. So, I really believe that especially because we tested it pretty significantly in November and December. I guess I really can’t comment why the lower price retailers continue to do well if they are, I don’t know who they are, but I can’t really comment why I think they are, honestly.

Lyn Walther - Wachovia Securities

And then finally just one for Walter. You guys have been posting negative comps for almost a year now and I know you have been managing expenses very tightly. Can you remind us when you really started reining in SG&A and how we annualize that now, which combined with the extra week is causing more de-leveraging this quarter?

Walter Parks

Well, we were flat in the fiscal third quarter last year. So, it’s been three quarters, just a slight correction.

Lyn Walther - Wachovia Securities

Sorry.

Walter Parks

I think that, both Greg and I, as Greg alluded to earlier were disappointed with our performance in the fiscal second quarter last year. So, I think since that time we’ve done a better job managing our variable expenses. And I believe that our expectation is as we go forward we’ll continue to do that.

Lyn Walther - Wachovia Securities

Okay. Thanks guys, good luck.

Greg Scott

Thank you.

Operator

Our next question comes from Holly Guthrie at Janney Montgomery Scott. Please ask your question.

Holly Guthrie - Janney Montgomery Scott

Thank you. Good afternoon. As far as your guidance goes, you said that your guidance for comp store sales are in the negative mid-single digit. Does that mean that January is running in that frame now? And if these things to work, may be it could get a little bit better or are you – or is January actually worse and you are looking for things to improve to get to that number?

Walter Parks

January is currently better than last quarter.

Holly Guthrie - Janney Montgomery Scott

Okay. So, it sounds like January is about in that perspective, negative mid single digits.

Walter Parks

Again, I think that if I was to look at the quarter, I would put the least amount of significance on January.

Holly Guthrie - Janney Montgomery Scott

Okay.

Walter Parks

Given its relationship to the total.

Holly Guthrie - Janney Montgomery Scott

Okay and then the circulation plan for the third quarter, could you go through both core and SPORTs.

Greg Scott

Yeah. So, I mentioned in circulation for bebe direct, correct? Is that what you said?

Holly Guthrie - Janney Montgomery Scott

For the catalogue.

Greg Scott

Yeah, okay. So, I said that circulation, and I am going to get my exact notes on that for the quarter. Okay. So, 1.5 million for bebe versus 550,000 last year and this is really driven by one, we introduced an incremental book, an accessory book in January for about I think it was around 500,000 clients of that on top of nothing and then we are going to mail in March I think about a million versus – Walter, can you give me the exact number on the March book.

Walter Parks

1 million, where as 550 last year.

Greg Scott

1 million, 550 last year. So, we’re truly seeing – we’re going to have incremental mailing this year though we believe we are heading in that March book to the right depth files and we really believe, it's going after the accessory book really in time for Valentine's Day was the right idea to add that book. There was, and Walter, correct me if I am wrong, there was no SPORT book last year. So, we do not have a SPORT catalog in March.

Walter Parks

Correct, but we have print advertising with Eva.

Greg Scott

Yes and we do have a direct mail for SPORT which we just mailed last week, and do you have the circ on those books on that mail, Walter?

Walter Parks

I want to say it was 100,000. But I’ll have to confirm that.

Greg Scott

Okay.

Holly Guthrie - Janney Montgomery Scott

Great. Thank you. And then questions on international. You mentioned quite a few countries, I think in the back half, you mentioned like six of them, Saudi Arabia…

Greg Scott

Yeah.

Holly Guthrie - Janney Montgomery Scott

…the Kuwait. I didn’t get them all down. But are those all new countries and when will – when do you expect those stores to be opened? And then could go through how the international revenue is recognized and the operating income? Are they wholly owned stores and can you just give us a little bit of understanding about the International?

Walter Parks

Right now, the expectation is to open possibly in Egypt this spring, but probably next fall. Definitely in Mexico, which is a new country and all the others will be next fall or next spring. As for the revenue, these are licensee agreements where they buy from us at a margin below our retail, but with essentially no cost, so a better flow through.

Greg Scott

And the seven new countries that I mentioned were Saudi Arabia, Egypt, Kuwait, Russia, Ukraine, Romania and Mexico. And we are planning to open in Mexico City this April. That will be the first of these new countries that we will be opening and we are excited about that opening a fairly large store in the Polanco area of Mexico City.

Holly Guthrie - Janney Montgomery Scott

Okay. So you said Mexico and Egypt, I thought you were going to open in the back half of this year? Is that correct?

Walter Parks

Actually, probably, Egypt will be next fall.

Holly Guthrie - Janney Montgomery Scott

Okay. Thanks a lot. Good luck.

Greg Scott

Thank you.

Operator

Our next question comes from Sam Panella at Raymond James. Please ask your question.

Sam Panella - Raymond James

Hi. Good afternoon. Walter, I am just curious, if you can quantify the benefit of the reduction in raw material reserve on your gross margin and then I also have one for Greg.

Walter Parks

It was less than a point. It wasn’t a lot of money.

Sam Panella - Raymond James

Okay. And then Greg, just curious, as you are talking to your customer and you are visiting the stores, if she is not finding the fashion at bebe, where is she shopping these days or is she just not buying. What’s your sense on that?

Greg Scott

I think I was out in a time, it’s interesting because I was out in a time when we landed resort and I was in the Florida market and everybody was really happy. So, the client was incredibly happy and she was finding everything and our Florida business has been much better this January because of that. I was also in the Carolinas, North and South Carolina at the same time and really what I saw there was, I think, the client is just in the right market. I was seeing her just not shopping as much.

I definitely see other bags when she is in our stores and I think they are the typical bags that I would – who I think are typical competition. You have seen Nordstrom. You are going to see a lot of Nordstrom bag. You might see Marciano bags here and there. But that would be, as I said, I think she is shopping everywhere. I think we have to be on our game because she will go to many different places to find the best item and that’s what I would say.

But when I was in the Miami market in the Southern Florida market, our client was very happy. And it's because we really did a resort strategy this year. We have never done it before and we converted to resort and it really was driven by what was going on in Miami last year and in Florida, and they were incredibly happy. And I think we were one of first to convert in that market and I think we picked up some extra points because of it.

Sam Panella - Raymond James

Okay, great. Thank you for that and good luck.

Greg Scott

Thanks.

Operator

Our last question comes from Janet Kloppenburg at JJK Research. Please ask your question.

Janet Kloppenburg - JJK Research

Hi. I didn’t think I was going to get it in. Greg, could you talk a little bit about this new design staff or the reconfiguration of it. Are you adding people? Are you restructuring the staff? I am not sure I understand how it’s going to work and what its objectives are?

Greg Scott

Yeah, okay. So, the design lab and we will just use that name today, because we probably will change the name when we label it in the stores. Really something that Manny and – many other things he does in the company things has been spearheading. And the great thing is now, we are not adding staff. We are really working with outside designers, on consultant a basis to design many types of collection for us or just many items and --

Janet Kloppenburg - JJK Research

Is it for all stores?

Greg Scott

Well, so, the Tara Subkoff for bebe is in off-stores. It really will depend on what the line looks like, what the collection looks like.

Janet Kloppenburg - JJK Research

I don’t think we are talking about the same thing, no. I think you’ve said prior to talking about the design lab that may be the design staff was changing and that…

Greg Scott

No, no, what I was saying was there was an analyst report out that came out somewhat I think it was October-November that said Manny’s role had changed and that he was now heading the bebe design team.

Janet Kloppenburg - JJK Research

Okay.

Greg Scott

…and that was just not correct. And that was never stated by our company and they picked it up and they wrote it and I think people thought it was the case. And I just wanted to clarify that Manny still has an active role in the company, always has and obviously on a daily basis, but he’s leading the design lab.

Janet Kloppenburg - JJK Research

Right, which is taking the place of collection, correct?

Greg Scott

Exactly.

Janet Kloppenburg - JJK Research

Right, okay. So, my next question is on the sportswear business which includes suiting. Are you revamping the idea of what that is and you are creating something called wear-to-work which might be different than suiting or maybe you could help me understand that.

Greg Scott

No. We would have like suits, but we wouldn’t have tops, so they went back to them. Or we have casual but we wouldn’t have tops going back to them. So really by the reorganization of the merch team a little, with that we would complete full look in that area. Now in terms of sportswear, I think we are having to step back and reflect on it. The traditional suit that our client has always wanted, she’s just not wanting right now.

Janet Kloppenburg - JJK Research

Right.

Greg Scott

And we are making those buys much leaner going after some other things that we think she will – because she still has to wear something to work.

Janet Kloppenburg - JJK Research

What is she wearing to work?

Greg Scott

Well, I think it has been a poplin top, a skit and a belt. And it has been more separates and than hard core suiting or sweater dresses. I definitely think the dress business overtook that and the problem with that from a sheer economic point of view is, our dress did not equal a jacket and a pant, in terms of average dollar sale, nor UPT.

Janet Kloppenburg - JJK Research

And then when you talk about –

Greg Scott

Go ahead.

Janet Kloppenburg - JJK Research

When you talk about buying on a item basis, but – I think buying it in less depth is what you’re talking about. I am wondering if that’s the solution. I mean you guys are pretty much on top of the trends. Do you feel like you have missed any trends by having the deeper presentation of fashion?

Do you feel like you could have had better or current fashion in the stores, but because you were buying certain key items in dept, you didn’t have the open to buy for it? Or I am wondering if that’s the key to the solution or if the fashion that you’ve been flowing into store is just may be isn’t as good as it has been in the past and maybe that’s not available. Maybe there is just a lack of newness out there, if you will, Greg?

Greg Scott

No, but I would say that we bought too deep in fashion items, because what happens is when some of our lower volume stores, they don’t need it much of that items as we were giving them. So, there's just not as many clients that need it, though they want other things. Now, everyone always talks about breadth versus depth.

And I would say our model even going back to 1995-96, breadth was always successful for us. People look at it as that we were over sorted. That might not be a bad thing for bebe in our true path. Now, I will say that we will have key items in our store and we’ll still have items with conviction. It’s just not going to be necessarily the fashion item of the moment and I’m going to have a conviction.

I just think what has to happen and I don’t want to get really bogged down in this, is that, we need to create urgency in our clients again. They need to know that if they come in and they see that dress, they need to buy it today, because there is not twelve down the floor and twelve in the stock room.

Janet Kloppenburg - JJK Research

Okay. And then I just wanted to ask a question about the square footage expansion which is at a pretty healthy double-digit rate right now. I mean if comps continue to be this difficult, would you consider slowing away the growth at all, Greg, Walter?

Walter Parks

Again, I think that of course, we significantly slowed down the SPORT, until Greg was more comfortable, going to nine. If "to be bebe" is widely successful, then the answer to your question is no. And if Erin is as successful in the future as she has been in her first quarter, the answer is probably no. There are a limited number of bebes, so that automatically will take care of itself in North America, and as it relates to expansions, there are really real estate opportunities in select malls.

Greg Scott

But I think the bigger thing that everyone should focus on is international. bebe is an international brand. We are really lucky.

Janet Kloppenburg - JJK Research

Right.

Greg Scott

And the success that Barbara Wambach and her team has had internationally has been better than we have ever seen in our past. And she's figured out the right model, she and her team, and I think that, that gives us great growth for the future because the world is a big place.

Janet Kloppenburg - JJK Research

When do you think it could become a big enough business given that it’s not your own – it’s not a retail business.

Greg Scott

Right.

Janet Kloppenburg - JJK Research

It's a wholesale business. When will it become big enough to move the needle for so – if your American comps are down five, but the international business is so strong that maybe it offsets that decline. When will that kind of situation happen?

Greg Scott

Walt, do you want to comment on that?

Walter Parks

Well, I think, it would be premature to comment on that Greg.

Greg Scott

There you go.

Janet Kloppenburg - JJK Research

Okay. I get nothing. I can't have a little tit-bit, nothing? Do you think with this new strategy in buying, Greg that you could see comps improve in March, or is it just recently implemented and it could take some time?

Greg Scott

I think, we have to focus on comps and margins. Okay. So I – what I want to do is get our markdowns back to historical levels. So I am going to see, I think, by – really by mid March, April, we will really see the buys effect the way I want to. I think, one thing I want to focus on is, yes, the comps will get better, my turn gets better, but I also want to see margin improvement.

Janet Kloppenburg - JJK Research

Well that could mean that comps actually are hurt by this new strategy, because you may have less key item promoting than you've had in the past.

Greg Scott

And I would not deny that.

Janet Kloppenburg - JJK Research

Okay.

Greg Scott

But I should be able to deliver better margin performance.

Janet Kloppenburg - JJK Research

Okay. But then we have the risk of occupancy deleverage and expense deleverage without some comp improvement.

Walter Parks

Well, that's why the current guidance is what we have given.

Janet Kloppenburg - JJK Research

Where it is. Yes. By the way, Walter, would you like us to be thinking about that as – I think, you might have said 0.08 to $0.12 versus $0.12 last year, instead of 14 or how would you…?

Walter Parks

While we earned 14, but we can’t earn the one week that doesn’t exist, which would approximate 2.

Janet Kloppenburg - JJK Research

Which gave you $0.02, but a lot of companies head us take our number, our real comparison down, when we took out that extra week. So, I don't know…

Walter Parks

So that's really the GAAP accounting, and I can not point on that.

Janet Kloppenburg - JJK Research

No. No. I know, it's not GAAP accounting, but it's a realistic way of looking at the business.

Greg Scott

So. I think, Janet, we talked about that, and really tried to make that clear in the release, I think.

Janet Kloppenburg - JJK Research

Okay.

Greg Scott

I don’t know, Walter if you made – you actually said the $0.02 in the release.

Walter Parks

I think, we did.

Greg Scott

Yeah.

Janet Kloppenburg - JJK Research

Okay. All right. Well, good, and lots of luck to you guys.

Greg Scott

Thank you, Janet.

Janet Kloppenburg - JJK Research

I hope things to improve. Thanks very much.

Greg Scott

Thank you.

Janet Kloppenburg - JJK Research

Bye, bye.

Greg Scott

Bye.

Operator

At this time, we have no further questions. This will conclude the 2008 second quarter earnings call for bebe. Thank you for joining us.

Greg Scott

Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts