The Positive Takeaway From Bebe Stores' Earnings Release

| About: bebe stores, (BEBE)

Summary

There were positives in the latest earnings release.

The market seems to be missing them, as the stock is down after the release.

BEBE is still a speculative retail turnaround play.

The first and possibly most important item is that the underlying business of Bebe Stores (NASDAQ:BEBE) did not burn through very much cash in the quarter. The company undertook significant restructuring in the quarter, including terminating the CEO, exiting the 2b brand, and closing 17 stores. The cash and investments balance went from $139 million at the end of last quarter to $125 million at the end of this quarter. About $2 million in cash was paid out in dividends in the quarter. So all in all, it looks like the cash balance was stable absent some one time expenses such as severance costs, lease termination costs, "professional fees and transition charges" and dividend payments.

In case you haven't been following this company, BEBE has no debt outstanding and the cash and investments balance currently accounts for 57% of the company's market cap. In my view, the cash balance, or more accurately any cash burn by the underlying business, is one of the most important financial measures for investors to focus on at the moment. Cash from operations for the quarter is not available at the time of authorship because the full 10-Q is not yet filed.

Second, even though the loss from continuing operations was $.18 versus an expected $.17, it looks like the free fall in sales may have finally bottomed out. Comparable stores sales were down 7.9% yoy in fiscal Q4 2013, but only down 1.9% yoy in fiscal Q4 2014. The gross margin appears to be stabilizing as well, having only fallen from 31.4% in Q4 2013 to 30.9% in Q4 2014. That measure had been falling much more rapidly from higher levels, and was above 40% as recently as June 2012. This quarter is actually a nice improvement over the previous quarter, during which gross margin came in at 27.1%.

I know it sounds terrible to be happy about yoy sales and gross margin declines of any level, but that's the thing about deeply depressed stocks. Any sign of stabilization can actually be very positive for the stock. For an example, check out American Eagle Outfitters (NYSE:AEO), the underlying business of which can hardly be considered to have turned around, yet is up nearly 38% from the recent low after showing signs of stabilization.

However, BEBE is down about 7% since the release, leading me to believe the market focused mostly on the extra penny per share of loss, while ignoring the much more important signs of stabilization.

Qualitatively, I was encouraged by management's comments that indicated they are decidedly moving away from projecting a single marketing image of the "sexy party girl" and trying to become more of a full lifestyle brand. The changes in store layout described on the call were also positive. Grouping clothing by color, as opposed to displaying full outfits, probably was never the right way to display merchandise.

The stock remains highly speculative, as is true anytime a company's ttm Cash From Operations is negative (which has been the case for BEBE since December 2012). Also, I don't like that the company is giving certain executives pay raises while it is clearly struggling and even cutting dividend payments to shareholders. However, there looks to me to be signs of stabilization in the business, which is at least mildly encouraging. Given the nature of the balance sheet, those who wish to speculate on retail turnarounds may find BEBE an attractive place to do it at today's prices.

Disclosure: The author is long BEBE, AEO.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Apparel Stores, Earnings
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