Bebe May Look More Like a Has-Been
By Jon D. Markman
RealMoney.com Contributor
4/25/2005 8:00 AM EDT
Click here for more stories by Jon D. Markman
bebe stores (BEBE:Nasdaq) BEARISH
Price: $32.53 / 52-Week Range: $11.45-$37.08
# If the economy continues to soften, bebe won't be able to keep up its exceptional growth.
# Investors would be wise to anticipate declines, especially because bebe is starting to show signs of slowing.
# Insiders already have started selling; short sellers might start in soon, with an eye on $22.50.
One of the hottest trends of late has been an effort to wedge into premium jeans selling at better than $250 a pair, as I noted last month. But there are other apparel trends that have been catching the eyes of aspiring hipsters with conforming hips, and they increasingly are found at specialty retailers like bebe stores (BEBE:Nasdaq - commentary - research).
However, the seams are fraying at this company, which has more than 200 stores domestically and another dozen overseas. The stock has zipped along with one new body-conscious concept after another in the past couple of years. One of its most successful efforts has been the development of bebe Sport stores, which cater to athletic women as well as ladies who lounge. The flagship bebe stores, combined with bebe Sport, have posted same-store sales growth in the 30%-plus range in recent months, truly an amazing feat in retail. But if the economy continues to soften, investors who have bid the company up to a $2 billion market value will wonder how much longer a company can produce such growth. And the answer will be: Not much.
To be sure, other specialty retail stores have been posting exceptional growth, such as American Eagle Outfitters (AEOS:Nasdaq - commentary - research). But the comparisons for future same-store sales growth for that chain are under suspicion now as well, and smart investors would be wise to anticipate declines, as I explained a few weeks ago. Both stocks have been among the strongest of the past year of any sector, with bebe up threefold since September alone.
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One of the first signs of slowing at bebe came Thursday night, when bebe said same-store sales growth will be in the "mid-teens" and earnings per share will be slightly below analysts' expectations. For most retailers, double-digit growth would be cause for celebration, but expectations are much higher here. The company also stated that it will open 25 more stores in 2006, which will increase its square footage -- and saturation potential -- by 10%. Investors reacted negatively to the news, just as they did two weeks ago when American Eagle announced same-store growth of nearly 30%. Shares of that firm have not yet recovered, despite a lot of analyst support.
Bebe still expects strong growth in the upcoming year -- upward of 19% -- but the price-to-earnings ratio is on the extreme side even for a good retailer at 30-plus. Women and girls will still shop in the stores, and the company still will make a lot of money, but early buyers of the stock got the best fit. Only scraps, or worse, may be left for everyone else. Insiders already have made the transition, selling millions of dollars' worth of shares in the past two months. That includes a $3.2 million sale by the CEO on March 18 and a pair of trades equaling $6 million by the chairman a week earlier.
Experienced traders with a taste for short-selling and eye for overdone fashion probably would start positions with a limit set below $32 and then add to the trade if it began to work until shares reached their rising intermediate-term support around $22.50. That would be a 30% move if it worked out.
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