1/16/2008
By Brian Sozzi

The troubles at Bebe Stores Inc. (ticker symbol: BEBE) continued during the holiday selling season as evidenced by its largely disappointing fiscal 2Q sales performance announced on January 10. Battling a challenging economic climate that is greatly impacting sales of women’s apparel, as well as lingering merchandising issues, the company recorded a negative 7.9% comp for fiscal 2Q compared to a positive 5.5% a year ago. The reading was short of management’s expectation for a low-single digit percentage decrease. In combination with a more targeted pricing strategy on a host of goods and a higher than projected drop in finished goods inventory per square foot at quarter end we believe outstanding fiscal 2Q earnings per share guidance of $0.25-$0.30 is in jeopardy of being met. Accordingly, we have cut our fiscal 2Q earnings per share forecast to $0.23 from $0.26.

During the quarter, comps were negative in all regions Bebe operates, and the industry traffic slowdown was apparent as comp transactions fell 3.0%. Units per transaction (UPT) also declined 3.0%, little surprise to us given industry conditions and initial softening in spending by Club Bebe members in fiscal 1Q.

Bebe shares have surpassed our downside price target of $10.00 and are 25.0% lower since we reiterated our Sell recommendation on December 19. Despite the steep pullback, we remain cautious on the stock as an investment opportunity in 2008. At times of economic uncertainty, which is currently the case, we recommend investors either avoid consumer discretionary stocks or maintain positions of enterprises with characteristic such as 1) strong brand equity 2) product differentiation 3) long-term expansion opportunities within merchandise categories or the store base and 4) fundamentally sound balance sheets. Although Bebe clears 50.0% of these hurdles, the fact is merchandise execution has been spotty in recent seasons and comp trends have deteriorated. We are reiterating our Sell recommendation.

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