bebe stores, inc. – Q1 2016

Unfortunately I didn’t have the time to post this analysis earlier in the week when I managed to take a position. The reason I say unfortunately is that the company posted its Q2 earnings release yesterday. The figures below are therefor already dated but also note that the stock price jumped quite a bit on the release today.

NASDAQ:BEBE – 4,90 $

bebe stores, inc. designs, develops and produces a range of contemporary women’s apparel and accessories. The Company’s product offering includes a range of separates, tops, dresses, active wear and accessories for a range of occasions. It designs and develops its merchandise in-house, which is manufactured to its specifications and it also sources directly from third-party manufacturers. The Company also offers accessories, which include jewelry, optical, fragrance, shoes and handbags. The Company operates stores in the United States, Puerto Rico and Canada. In addition, it has an online store at http://www.bebe.com that ships to customers in the United States, Canada, Puerto Rico, the United States Protectorates and internationally via its third-party providers, International Checkout and Shoprunner. It has international stores operated by licensees in South East Asia, the United Arab Emirates, Russia, South America, Turkey and other territories. – Google Times.

1. The company is currently a net-net with an adequate margin of safety: 

a)

• P/NCAV < 1x
  • 0,78x ✓
  • MoS = 22 %

Assessment of why I think the margin of safety is adequate in relation to NCAV:

Although BEBE is a retail net-net, which many deep value investors stay away from, I believe this company has some favorable and interesting characteristics that makes it a good addition to a diversified net-net portfolio. For the majority of the last ten years the company has been profitable on an operating income level (6/10). Not too surprising, since the company today is selling below NCAV, the four non profitable years has been the most recent ones. Today the company is selling at record low levels since it was listed in 1998 and although the share price has been in a declining phase over the last ten years BEBE has not historically been a net-net (i.e. not a perennial net-net).

Source: Google finance

If we believe in some form of mean reversion for BEBE’s business the current ten year average for operating income of 6,4 M$ looks really favorable in relation to both the market capitalization of 39 M$ (6x) and especially in relation to the current negative enterprise value of -8 M$ (-1x). Other positive historical facts is that the company has been a stable dividend payer (2004-2015) and a frequent buyer of own shares. Also, the recent NCAV-brunrate amounts to +43 % QoQ and only -4,1 % YoY.

Last but not least, what I find interesting is that the famous deep value and activist investor Lloyd Miller III has taken quite a big position in the company (Värdebyrån has written a good post about him). In November he initiated a 5,5 % ownership and has since then increased the position to 8 % as of late January 2017. What his intentions are I don’t know. It might have some connection to the fact that the founder and majority shareholder Manny Mashouf of BEBE in June 2016 declared that he intends to gradually sell his then 59 % ownership stake.

Source: 4-traders

2. The risk of permanent loss is low:

2.1 The risk of bankruptcy is low (criterion a) or b) must be met):

a)

• Debt/Equity < 25 %
  • 0 % ✓

b)

• Z-score ≥ 3
  • 2,8 X

2.2 The company’s business model has historically been profitable (criterion a) or b) must be met):

a)

• Positive retained earnings:
  • -27,5 M$ X

b)

• Positive aggregate operating income for the last ten years:
  •   64,7 M$ ✓

3. The company does not have a shareholder unfriendly capital allocation (i.e. not diluting shareholders):

• Shareholder yield TTM ≥ -2 %
  • Dividend yield TTM = 0 %
  • Net buyback yield TTM = -0,3 %
    • =  -0,3 % ✓

Disclosure: The author is long NASDAQ:BEBE when this analysis is published. Also note that NASDAQ:BEBE is a nano-cap stock (39 M$ in market capitalization). The trading is illiquid.