Bebe Stores Q4 Earnings Call Transcript

123jump.com Staff
07 Sep, 2010
New York City

The women''s apparel and accessories maker net quarterly sales declined 2.1% to $127.42 million on comparable store sales fall of 3.4%. Net income in the quarter was $2.05 million or 2 cents per diluted share compared to a loss of $0.32 million or breakeven per share last year.

bebe stores, inc. ((BEBE))
Q4 2010 Earnings Call Transcript
August 26, 2010 4:30 p.m. ET

Executives

Walter J. Parks – Chief Operating Officer and Chief Financial Officer
Manny Mashouf – Chairman and Chief Executive Officer
Emilia Fabricant – President

Analysts

Elizabeth Pierce - Roth Capital Partners
Jeff Van Sinderen – B. Riley & Company
Eric Beder – Brean Murray, Carret & Co.
Paula Torch – Needham & Company
Elizabeth Hovel – Raymond James
Carla White – Jennifer Black & Associates
Janet Kloppenberg – JJK Research

Presentation

Operator

Welcome to the bebe stores Fourth Quarter Fiscal 2010 Earnings Release Conference Call. As a reminder, this call is being recorded. Now, I’d like to introduce bebe''s COO, Mr. Walter Parks. Mr. Parks.

Walter J. Parks

Thank you. Good afternoon, everyone and welcome to bebe''s fourth quarter and full year fiscal 2010 earnings call. With me on the call today are Manny Mashouf, Chairman and CEO, and Emilia Fabricant, President of bebe stores, inc.

We are glad to have the opportunity today to discuss our results with you. I will begin with the details of the fourth quarter and fiscal year results, Manny will then review some of the business highlights during the fourth quarter as well as our plans for the upcoming quarter. As our call will be limited in time to one hour, we will be happy to take your questions after we have completed our prepared remarks.

Before we get started, I would like to remind you of the company''s Safe Harbor language, which I am sure you''re all familiar with. During the course of this call, we will make projections and/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 the actual results -- or the 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. Now on to the financial results.

Net sales for the fourth quarter decreased 2.1% to $127.4 million compared to sales of $130.2 million in the fourth quarter last year. As previously reported, comparable store sales for fourth quarter decreased 3.4% compared to a decrease of 29.6% in the prior year.

During the quarter, our metrics improved over the incoming trend, with traffic moderating to a negative four comp and average transaction value decreasing 9%, which were offset by a plus 10% conversion comp in the 76 bebe and 2b stores where we have traffic counters.

Gross margin as a percentage of net sales increased to 40.8% in the fourth quarter of fiscal 2010 compared to 39.5% in the year-ago period. The 130 basis point improvement in gross margin as a percentage of net sales was driven by a 260 basis point improvement in merchandise margins as a result of lower markdowns and higher initial mark-up, partially offset by unfavorable occupancy leverage and an increase in inventory write-offs of $1 million over the prior year primarily relates to PH8.

SG&A expenses for the fourth quarter of fiscal 2010 decreased 6% to $52.6 million or 41.6% of net sales, resulting in 150 basis points of leverage over the prior year''s SG&A expense of $55.9 million or 42.9% of sales. The dollar and percentage decrease in SG&A expense was primarily due to lower compensation, offset by increases in advertising due to an incremental direct mailer compared to the prior year.

Also, the store impairment charges of $3.2 million, primarily associated with discontinuation of PH8 operations, impacted diluted earnings per share for the quarter, net of tax, by approximately $0.02. For the prior year, we recorded $4.1 million in store impairment charges or $0.03 per share, net of tax.

While the effective tax rate is expected to fluctuate from quarter to quarter due to discreet items, the tax benefit in the fourth quarter of fiscal 2010 is due to adjustments of temporary and permanent items, including a benefit in deferred stock compensation expense.

Operating loss for the fourth quarter of fiscal 2010 was $600,000 or 0.4% of net sales, compared to an operating loss of $4.5 million or 3.4% of net sales for the same period of the prior year.

Net income for the fourth quarter was $2 million compared to a net loss of $300,000 for the same period of the prior year. Diluted income per share for the fourth quarter was $0.02, which includes $0.02 per share net of tax and asset impairment, on $86.3 million diluted average weighted shares outstanding compared to a dilutive loss per share of zero in the prior year, which includes $0.03 per share net of tax, in asset impairment charges previously discussed.

Net sales for the fiscal year ended July 3, 2010 were $509 million, down 15.6% from $603 million for the fiscal year ended July 4, 2009. Comparable store sales for the fiscal year ended July 3, 2010 decreased 17.1% compared to a decrease of 20.9% in the prior year.

Gross margin as a percentage of net sales decreased to 38.9% for the fiscal year ended July 3, 2010, compared to 40.3% in fiscal 2009. While our merchandise margins expanded by 130 basis points over the prior year, the net decrease in gross margin as a percentage of net sales from the prior year of 140 basis points was due primarily to unfavorable occupancy leverage.

SG&A expenses for the fiscal year ended July 3, 2010 decreased 10% in dollars, though increased by 240 basis points to 41.1% of net sales over the prior year''s SG&A expense of 38.7%. The dollar increase in SG&A expense was -- the dollar increase in SG&A expense was primarily due to lower compensation and advertising as well as gift card breakage income recorded in the second quarter of fiscal 2010.

Also, the store impairment charges of $8 million, primarily associated with discontinuation of PH8 operations, impacted diluted earnings per share for the fiscal year net of tax, by approximately $0.06. For the prior year, we recorded $7.3 million in store impairment charges or $0.06 per share net of tax.

The effective tax rate for the fiscal year ended July 3, 2010 increased to 35% from 23.7% in fiscal 2009, primarily attributable to a lower tax rate in the prior fiscal year due to a tax refund recorded from amended 2006 returns and tax exempt interest income as a percentage of income before tax.

Net loss for the fiscal year ended July 3, 2010 was $5.2 million compared to net income of $12.6 million in the prior year. Diluted loss per share for the fiscal year ended July 3, 2010 was $0.06, which includes $0.06 per share after tax reduction due to store impairment charges, primarily associated with discontinuation of PH8 operations. This compares to diluted earnings per share of $0.14 in the prior year, which includes $0.06 per share net of tax and asset write-downs and write-offs previously discussed.

In fiscal 2010, PH8 operating loss, after taking into account $6.7 million of impairment charges, was $22.2 million compared to $9.2 million in the prior year after taking into account $3.9 million of impairment charges.

During the current quarter we have purchased approximately 2.1 million of outstanding shares or $12.5 million and have completed the $30 million under the previously-announced stock purchase plan. Total cash and investments as of July 3, 2010 were $348 million versus $332 million at July 4, 2009. Inventories as of July 3, 2010 were $33 million compared to $39 million at July 4, 2009.

At the end of the fourth quarter, finished goods inventory per square foot was approximately 13% lower than the prior year compared to a 1% increase in the year-ago period. For the fiscal year, the company''s capital expenditures were approximately $15 million and depreciation expense was approximately $26 million.

We ended the fourth quarter with 297 stores, representing 1.133 million square feet under management, representing a 1% decrease in square footage over the prior year.

With that, I''ll turn the call over to Manny to review our fourth quarter business highlights and plans for the upcoming quarter.

Manny Mashouf

Thank you, Walter. Hi, everyone and thank you for joining us. In retrospect, fiscal 2010 was a year of two different hats, with the first six months primarily focused on defense and second half focused on improving our top line. We made significant progress during the year, with Q4 coming in at negative 3.4% and merchandise margins increasing 260-basis points compared to where we began the year, with Q1 comps down 25.7% and merchandise margins decreasing 390 basis points.

While it continues to be a challenging micro economic environment, I am pleased with our fashion direction through -- though remain disappointed with a negative comparable store sales. I''ve asked Emilia Fabricant to join bebe and help to improve the top-line revenues. And given that, most of the weakness over the last five months was a result of what we lacked in the assortment. We are now to focusing to correct the imbalances in tops, go-to-work and denim.

I would like to begin by expanding on a few highlights we achieved during the quarter. First, our in-store conversion rates continue to improve at double-digit comps and achieve record levels in the 76 stores where we monitor traffic and conversion. For us to consistently achieve double-digit comp increases in conversion, it speaks to the strength of our products throughout the quarter.

Second, our 2b business continues to be highly productive for us, experiencing significant margin expansion due to increased penetration of 2b merchandise and significant reductions in merchandise transferred from retail stores. This is an opportunity we look forward to expanding upon going forward, as it speaks to a different customer base than the core bebe business and offers real estate opportunities currently not available to the bebe brand.

And third, I would like to give recognition to our international license business, which represents significant growth potential given our relatively small footprint of 49 stores, with plans this year, of course, to open up 10 new stores in new and existing countries.

Finally, I would like to say that in discontinuing our PH8 division, it is our intention to offer BEBE SPORT merchandise online and at select locations at bebe as this is an assortment that speaks it to the bebe aspirational customers.

Furthermore, in discontinuing this division, our organization will be able to focus its efforts on improving bebe sales and profitability as well as continuing to develop our 2b concept and expand our international efforts. From a profitability perspective, we continue to reduce the brand''s dependence on aggressive markdowns and promotional activities, which distort our prior year''s result.

As a result, we did not anniversary several aggressive discounts in the quarter, including our highly-aggressive spring catalog offer and mid-June clearance event and a 4th of July sales weekend. We believe these events, coupled with the shift of the Easter holiday, negatively skewed our results during the quarter and impacted our top-line performance.

This is, of course, a discipline that we intend is to continue to maintain the current quarter and have not anniversaried several clearance events from the prior year as well as a highly aggressive and catalog offer, which has been scaled back in the current quarter to improve our intended profitability increase.

Turning to the select business highlights in the fourth quarter, number one, within our core bebe business, we were able to maximize sales within dresses, knit tops, sweater dresses, tubulars as well as an expanded logo assortment. Within dresses, our design team was able to capitalize on brands'' competitive advantage, end day and evening dresses by offering an assortment that balance both end users and combination of colors and prints that our customers love.

Knit tops continue to be an important part of our core business. And we''ve found success in embellish one-shoulder tops. Sweater dresses as well as tubular dresses and skirts, performed extremely well and represented categories where we were able to expand the brand''s reach to younger and more fashion-forward customers.

Our logo assortment was significantly expanded over the prior year''s limited offering, as we delivered new styling in our signature tees. While we believe an overexpansion of the logo business is detrimental to the long-term health of the brand, we believe we have achieved an appropriate penetration to the business at a healthy level.

On top of our core merchandising assortment, we continue to identify incremental merchandise initiatives through additional categories such is as our line of dresses inspired by the Kardashian''s and the introduction of bebe Addiction level. For our second Kardashian delivery in late April, we doubled our inventory investment over the prior receipt and we''re pleased to achieve similar sell-through at the first delivery.

Again, I would like to remind everyone that this is a line that was designed internally at bebe. And it speaks to the strength of creative expertise in collaboration with the Kardashian sisters.

Our bebe Addiction label represents is a new collection of high-fashion and higher price-pointed merchandise with the distributor to limited stores. This was an assortment that was well received by our customers, with products selling out within hours on bebe.com and within days within -- in the stores.

In the categories where we experienced challenges, we believe that the customer is saying more strongly than ever that she wants not everywhere, but even -- what she wants is not what is everywhere and not what is so common and definitely at a high perceived value. This would be consistent with prior quarters.

We continue to experience challenges across multiple top categories, including woven sweaters and tubular as well as weakness in our suiting, denim and shoes. We believe our woven tops assortment is not fashioned right. And we are taking the steps to correct that.

Within our suiting business, one, our suiting business experienced sequential comp improvement over prior quarters. The current fashion trend towards more casual-related separates has come at the expense of our suiting business. Historically, we have had great success with branded fashion denim and, unfortunately, missed the opportunity to expand this category.

Our trim, level of detailing, investment in white denim and price points were not well received. And while our shoe business has been our growth trajectory over the past few years, we did not deliver a successful sandal assortment in the summer. We are focused on the investment we have made in boots for fall.

Our 2b business delivered comp results that were slightly above the company''s negative 3.4% comp. More significantly, the gross margin increased by positive low-20% comps. The business was driven by strength in the 2b merchandise assortment, specifically in targeted investment in dresses, knit tops, casual bottoms and denim.

Additionally, we made significant reductions in the quantity of merchandise transferred from retail stores, which has allowed the brand to develop its own product assortment and drive top-line profitability. Finally, we converted two locations to 2b bebe concept -- Arrowhead Mall in Arizona and Wisconsin Avenue in Georgetown and are extremely pleased to report that these two conversions are operating at 130% of the previous concept''s volume.

Our total dotcom business posted a 1.6% sales increase, which reflected a 14.6% sales increase in the core bebe business offset by the removal of the BEBE SPORT business. To recapture the lost sales, we launched 2b merchandise online and plan on additional product line launches in the upcoming quarters.

Our side metrics for the fourth quarter reflected increases in traffic and conversion, indicating a positive response to the merchandise assortment from on-line customers. Our international licensee business grew by 39% during the fourth quarter and comparable store sales increased by 1%.

For fiscal year, we expanded the business 28% over the prior fiscal year, with comp decreases 25 -- 12.5%, following a similar comp performance to our North American business by the quarter. We opened four new licensee stores, two in UAE and two in Turkey and now have 49 international licensee stores compared to 34 in the -- in the prior year in 14 countries.

For the current quarter, we anticipate opening 10 international licensee stores and are projected to end the quarter with 58 stores, net of one closure, in 15 countries compared to 36 stores in 14 countries during the prior year.

For the quarter, our advertising expenses totaled $6 million or 4.7% of sales, compared to $4.5 million or 3.5% of sales in the prior year period. For the fiscal year, our advertising expenses came in at 4.7% of sales versus 4.6% for fiscal 2009. The increase in advertising spend in the fourth quarter was the result of an incremental direct mailer in April compared to the prior year.

For the quarter, we mailed 880,000 in April mailer and one million summer catalogs compared to 720,000 in prior year. In addition, we delivered our first-ever Facebook engagement campaign with a client compass [ph] in exchange for their e-mail addresses.
We are pleased to report that we were able to grow our Facebook fan base by nearly 50% to 150,000 fans as we continue our efforts at monetizing social media.

As we begin the first quarter of fiscal 2011, I''m excited to see the investments made in some of our key initiatives beginning -- that begin to drive our top-line growth. First of all, the annual fall collection preview event in store last Thursday delivered a positive comp. However, the results were below our expectation as we struggled to anniversary last year''s aggressive promotion.

Historically, we have found that this event is a highly-effective basis for our stores in building a strong relations with our clients. Last year, we modified the format to a multi-day rather than single-day event, which diluted the impact of unveiling our new fall collection. So this year, we reverted it to a single-day format and delivered the true collection preview and fall merchandise delivery with six new collection groups in store.

While the results this quarter will be challenged as we go against multiple clearance events and a highly aggressive direct mail discount in September, we are pleased that our quarter-to-date sales continue to deliver significant merchandise margin expansion and further growth in our in-store conversion and average dollar sales.

Our July mailer delivered significantly stronger productivity over the last year''s mailer, reflecting continued improvement in assortment that points to increases in product acceptance. As we have just concluded the effective period for this offer, I would like to say that the results far exceeded the prior year with a two-times increase in circulation for using a four-time increasing coupon sale over last year, serving as a reflection of a much-stronger fall assortment.

Additionally, our key priority in the quarter will be continued improvement in full-price selling, with a corresponding reduction in markdowns and further expansion in merchandise margins. The key trends we will be leveraging to our advantage in our core bebe business include, one, increasing our competitive advantage in day and evening dresses while offering an assortment that it speaks to our customers'' lifestyle needs.

Two, increasing our investment in related sportswear, recognizing that the client is responding well to more casual bottoms and jackets as an update to a traditional suiting. Three, taking advantage of current trends in knit tops in order to build our top business and offset weakness in our woven tops assortment.

Four, continuing to lower our tubular dress and skirt assortment to maintain the brand''s reach to younger clients. And five, continuing to grow lower [ph] on a comp basis through maintaining penetration to current business by offering expanded tee assortment in colors with a level of detailing that -- the elevates the overall brand.

On top of the core business, we intend to further grow top line through the following incremental categories. To launch our third Kardashian-inspired collection in September, which will build on the success of the original collection on a modest increase in receipts, further expansion of our highly-successful bebe Addiction label to more stores in September.

With that said, we recognize that our focus to eliminate misses in the assortment including sportswear for which we made targeted inventory investment for our collection preview event and were disappointed by the results, while we will introduce -- we''ll be introducing two new core fabrics that we believe very strongly we can use year round, we are cautious on the current quarter''s assortment.

Woven tops for which we have reduced the penetration of black and basic colors this year versus last year to bring back color to the assortment, denim for which we are working to elevate the quality and assortment but are not anticipating a strong rebound in the business. To this end, we have expanded our assortment of casual bottoms in denim, silhouettes, to help offset potential unrealized volume.

In the outerwear business, we are offering wool coats and trenches this year to address last year''s successful PU business. Shoes, where we have invested in fall boots to capitalize on missed sales due to lack of inventory in the prior-year period. And in handbags, where we believe we have an opportunity to increase our flow frequently of new bags to identify potential best sellers.

Regarding our 2b business, the momentum we have experienced in the fourth quarter is increasing into the first quarter of the current fiscal year due to several key merchandising initiatives that included an expanded denim table for the key back-to-school season; targeted investment in key items, such as jackets and outerwear, additional business opportunities in accessories and shoes, maximizing current trends in dresses by maintaining a dress assortment, which we successfully executed earlier in the season to very strong results and finally, strong representation of our highly sought-after profitable logo assortment.

To drive our bebe.com business, we will continue to offer select 2b and BEBE SPORT merchandise online as well as launch a select mix of merchandise for the petite customers. Specifically, the launch of the BEBE SPORT online at the end of July has exceeded our expectations.

Our direct marketing efforts in the current quarter is focused on a direct piece mail in July with the circulation of 800,000 this year to anniversary last ear 400,000 direct mailers. A fall catalog in September with the circulation of 700,000 this year to anniversary last year''s 435,000 megalogs.

We are expecting lower results because of our decision to reduce the discount. Continued leveraging of our social media outlet to further engage our clients and keep our merchandise assortment and key efforts top of mind in this highly competitive retail environment.

As our guidance indicates, we believe we will continue to see an improvement in merchandise margin offset by comparable store sales in the low to mid single-digit negative range. We are fortunate that our business model delivers a new line every four to six weeks, allowing us to quickly respond to change in the marketplace.

Over the last few quarters, we have worked hard to extend our operating model and now prepare to reap the benefit of continued leverage of the model as evidenced by the increases in merchandise margin and increase reach of our brands through expansion efforts in the 2b and international markets.

With that said, I will now turn the call to Walter.

Walter J. Parks

Thank you, Manny. Let me review the current quarter expectations and items that relate to the fiscal year. For the first quarter of fiscal 2011, the company currently anticipates comparable-store sales in the low-to-mid single digit negative range and depending on actual sales and markdowns the net earnings will be in the range of $0.02 loss per share to $0.02 income per share based on 84.3 million diluted weighted shares outstanding versus net loss of $0.05 per share based on 86.9 million diluted weighted average shares in the first quarter of fiscal 2010.

This projection excludes costs related to future lease liabilities and potential salary expenses associated with the closure or conversion of 23 PH8 stores by the end of the fiscal first quarter. The company is currently anticipated effective tax rate of 40% for fiscal 2011.

Inventories at the end of the first quarter are anticipated to be low positive double digits compared to a 19% decrease in the prior year period. For fiscal 2011, the company anticipates opening three bebe stores, five 2b bebe locations and closing 49 stores, resulting in a net 9% decrease in square footage.

The number of closures includes one bebe store and 48 PH8 stores, with 23 locations to close by the end of the fiscal first quarter and 25 locations to close by the end of the fiscal year, with up to four locations to be converted to 2b concept. Total capital expenditures for the year are anticipated to come in under $20 million, which will include capital expenditures for new stores, store expansions, information technology systems and office improvements. Depreciation expense for the year will be approximately $23 million.

Thank you and I would like to open the call to questions.

Question-and-Answer Session

Operator

For those participants, who have questions, please press star one on your touchtone phone. Make your questions as prior to your turn. Please press the pound key to remove yourself from the question queue. Please go off your speaker phone before entering the queue. And as a reminder, please limit your questions to one question per line. Our first question comes from the line of Liz Pierce at ROTH Capital Partners.

Elizabeth Pierce – Roth Capital Partners

Good afternoon, everyone and welcome, Emilia.

Emilia Fabricant

Thank you.

Elizabeth Pierce – Roth Capital Partners

Manny, it sounds to me like you gave us a lot of good information and I''m trying to get it all straight, but it sounds like in terms of the guidance. I guess I''m trying to figure out how much is product related and how much is macro related?

Walter J. Parks

I think that''s a really hard question to answer, Liz. When we look at our business, the business as we said on the sales release call is best in the northeast, still very difficult in the west. The macro environments in California, Nevada, Arizona and Florida are still very difficult. And they were historically our best markets, so that''s very difficult to quantify.

Manny Mashouf

Liz, I would like to add to Walter that I believe, in my philosophy, that even in a recessionary economy there are opportunities by improving upon your merchandise mix and what you offer to the customers to gain market share. So having said that and sharing my philosophy with you and the rest of the people, we are making every effort to achieve a superior mixes of merchandise with great value, fashion right and trend right.

So depending on our level of achievement, I would say that it''s hard to tell how much of is it going to be macroeconomics, because we don''t know if the market is going to go another -- into is another dip or not, but I would say that our merchandise mix is going to be substantially better than what we have seen in the last couple of years.

Operator

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

Jeff Van Sinderen – B. Riley & Company

Good afternoon. I guess my question really relates to the whole designer merchandising team. Great that you guys hired Emilia and I''m just wondering how you see the design and merchandising team evolve whether roles are going to change at all, how that relates to Kathy Lee and things of that nature? Anything also maybe you could give us in terms of what Emilia will be focusing on in terms of merchandise content, advertising, marketing, any other areas of the business that she''s really targeting for changes?
Emilia Fabricant

Jeff, I will speak to the design team and the process. We need to implement an end-to-end process that''s going to enable to us to execute a more accurate strategy, in addition by category and attribute. The design team as well as the merchandising team, as well as the rest of the company will benefit from that process.

As far as what I''m going to be involved with, anything and everything that I can effect in a positive nature short and long term.

Jeff Van Sinderen – B. Riley & Company

Okay. And is Kathy Lee basically staying in the same role?

Emilia Fabricant

Kathy Lee''s in the same role.

Jeff Van Sinderen – B. Riley & Company

Okay. Got it. Thanks very much.

Manny Mashouf

You’re welcome.

Operator

Your next question comes from Eric Beder with Brean Murray.

Eric Beder – Brean Murray, Carret & Co.

Good afternoon.

Walter J. Parks

Hello, Eric.

Manny Mashouf

Good afternoon.

Eric Beder – Brean Murray, Carret & Co.

So by listening to your guidance for the Q1, it''s basically higher merchandise margins and less discounting, somewhat offset by the fact that the sales aren''t going to be as aggressive because you''re getting rid of this coupon. When do you start to anniversary -- when can we really start to fully see the gain from raising higher merchandise margins, looking out, so you don''t have to -- the comparisons get much easier with that?

Walter J. Parks

Well, the good news is that the most aggressive of the catalog coupons was mailed last September. So that was the 150/50, 300/100, so those we no longer have to anniversary after this quarter.

The next big step that we took last year was the elimination of 65 off and appropriately marking the goods to the realizable retail value. So if you go back now nine months, we have not run a percentage off in our stores beginning last December, so everything''s been hard marked. There''s been no percentage off in the bebe retail stores, regardless of whether it was 30, 50 or 65.

Right now and beginning last quarter last year, we were very aggressive clearing goods at 65 off plus taking full-priced goods at discount. So as we move through this quarter and next, we''ve eliminated that and then in calendar 2010 we haven''t done it at all.

Eric Beder – Brean Murray, Carret & Co.

Okay. So really, I guess if I look at what you''re saying is basically in calendar 2010, if the product is right and the customer''s right and what you''re seeing in terms of conversion without (inaudible) then we really should start to see changes in terms of these businesses, in terms of getting back to some more premium level returns that bebe''s used to?

Walter J. Parks

Well, I think that -- okay, so when we look at the current quarter and the last quarter, so Q1 and Q4, both -- the last quarter came in slightly below our expectations. It was negative three, four and the current quarter is running similar levels today. And we gave a relatively broad range of where we thought it would end up.

So I think it''s the combination of, one, we''re significantly less aggressive, both in the coupons and in the discounting of markdowns. We still have challenges in our major markets. And as Manny reviewed throughout the script, we remain challenged by what isn''t in the assortment, specifically tops and several other items, as well as her acceptance of some offerings this quarter, specifically in suitings.

Eric Beder – Brean Murray, Carret & Co.

Okay. And if I look at that, what you just said, when do you think the tops and suitings become where you want them to be?

Emilia Fabricant

Well, having said that, realizing that I''ve only been here two-and-a-half weeks, there''s some key misses in the assortment, which we discussed earlier and in the…

Manny Mashouf

Script.

Emilia Fabricant

…in the script. Thank you. But I would like to dig into that a little more and get back to you at our next call to be more accurate and more versed.

Eric Beder – Brean Murray, Carret & Co.

I guess the final question then is inventories. Inventories are going to be up double digits. Is that pretty much what you plan them to be and does that give you any worry that you might have to be more aggressive in clearing out products?

Walter J. Parks

No. Because I think when you look at the inventories over the last three years, they were down significantly entering the fiscal second quarter and there is the simple realization that we can''t continue to run them that low. So we continue to see a better sell-through at the current levels, better turns and at a higher margin. But if you look at where they are in relationship to historic, they''re still way below.

Eric Beder – Brean Murray, Carret & Co.

Okay. Well, congratulations. Good luck.

Walter J. Parks

Thank you.

Manny Mashouf

Thank you.

Operator

Our next question comes from Paula Torch at Needham & Co.

Paula Torch – Needham & Company

Yes. Thank you and good afternoon.

Walter J. Parks

Good afternoon.

Paula Torch – Needham & Company

Was wondering if you could talk about the Kardashian line in a little bit more detail. Will it continue to be highly penetrated in dresses and what changes could we expect to see in the third drop? And also, are you seeing more of a halo effect on conversion of the core bebe assortment with the Kardashian line?

Manny Mashouf

Well, first of all your first question, we have increased the penetration of Kardashian''s based on the success we''ve had tremendously. And we see that that''s going to continue performing as we have realized in the last two, three months. And then as far as -- I''m not clear about your second question in terms of how it compares with the bebe dress department?

Paula Torch – Needham & Company

Well, no, will the assortment continue to be highly penetrated in dresses and I know you have a lot of dresses with the Kardashian line. Wondering if that''s going to be the same case going forward?

Manny Mashouf

You mean in terms of contribution of that dress department in relation to everything else?

Paula Torch – Needham & Company

Well, dresses in relation to the Kardashian line. Will it be -- will you inject a little bit more sportswear this time or it will continue to be more concentrated in dresses?

Manny Mashouf

No. We are definitely focusing on a sportswear jackets and pants.

Emilia Fabricant

Yes. The dresses will still be the majority of the line but we have expanded into some sportswear categories as well.

Paula Torch – Needham & Company

Okay. Great. And if I may, how do you feel about the penetration of print and color in your assortment? How did you ultimately feel at the end of summer? Did you have enough and what sort of changes are you going to be making for fall and holiday? I know you spoke a little bit about colors.

Manny Mashouf

We always find opportunities in terms of prints and colors. Hindsight is 20-20. We realize that in summer we could have added more prints. And we did not come out with more prints. We had thought about it. We didn''t execute more. And going forward we believe that we need prints to provide that layering piece that she needs to wear with sportswear, with pants and skirts and jackets. So we will definitely continue bringing unique prints to our brand by creating our own prints as we have been in the past.

Operator

Our next question comes from the line of Samantha Panella at James Raymond --Raymond James.

Elizabeth Hovel – Raymond James

Hi. This is actually Elizabeth Hovel [ph] calling in for Sam. Good afternoon. Can you just talk a little bit about your strategy with your tops business, what your average price point is in that category now versus last year and how you feel your price point is relative to your competition?

Manny Mashouf

So when we talk about tops, we are -- I assume you''re talking about woven and knits, as well, right?

Elizabeth Hovel – Raymond James

Right.

Manny Mashouf

So when it comes to the woven tops, I would say that we have humongous opportunity in getting more value -- offer more value to our customers than we have in the recent past. I think we realize that some of our tops in the wovens that were overpriced, even though they had a lot embellishment they were clearly too expensive and so we are addressing that.

And as far as our knits, our knitted tops are concerned, we have been missing a great assortment of sweater knits and key core sweater knit business that we are now aggressively making that happen for our November -- our October/November deliveries.

And in terms of values, I think you''re probably saying whether our tops are more expensive or not. In some categories, such as cotton sew top, we have adjusted our prices going forward to be more competitive and we are looking at our whole perceived value across the board in every category as we are sitting and talking now going forward.

So we''re going to offer better value, not always lower price, but better value in terms of better quality, better design, more fashion right, more trend right and seasoned right.

Elizabeth Hovel – Raymond James

Great. Thank you.

Manny Mashouf

You''re welcome.

Operator

Our next question comes from the line of Jennifer Black at Jennifer Black & Associates.

Carla White – Jennifer Black & Associates

Hi, thank you for taking my call. This is actually Carla White calling for Jennifer Black. My first question is, you recently added petites to your website, can you provide us some color on how that category is performing and if you plan to roll it out to any of your stores and if so when?

Walter J. Parks

Right now, it''s a very, very small percentage of the overall inventory and it''s been well received, but it''s not currently moving the needle.

Manny Mashouf

And by the way, we are not planning to expand it into stores. Our plan is at this time just to keep it online.

Carla White – Jennifer Black & Associates

Great. Thank you very much.

Manny Mashouf

You''re welcome.

Operator

Our last question comes from the line of Janet Kloppenberg with JJK Research.

Janet Kloppenberg – JJK Research

Hi, everybody and congratulations on the progress being made and welcome to Emilia.

Emilia Fabricant

Thank you, Janet.

Janet Kloppenberg – JJK Research

I want to clarify something first. Walter, could you reiterate what you expect the inventories to be at the end of the first quarter?

Walter J. Parks

They will be up low double digits per square foot.

Janet Kloppenberg – JJK Research

Okay. So does that mean that we should expect that comps are going to start to accelerate? Because I think you just said maybe comps are going to be down like single digits here, low single digits in the first quarter.

Walter J. Parks

That''s correct. Well, no, I think that what we''ve realized is the inventories are down significantly over the last three years. And we were down 19 at this time -- at the beginning of the fiscal second quarter last year and we''ve concluded internal after three years of significant reductions that we''ve gone too far.

Janet Kloppenberg – JJK Research

Okay. And where were they here at the end of this quarter, Walter?

Walter J. Parks

They were down about 13%.

Janet Kloppenberg – JJK Research

13. I think 13% is what you said.

Walter J. Parks

Yes.

Janet Kloppenberg – JJK Research

Okay. So we''ll go through a year then of you rebuilding them?

Walter J. Parks

I''m sorry, Janet, I didn''t understand the question.

Janet Kloppenberg – JJK Research

I think then what you''re saying is we''re going to go through the next four quarters of you rebuilding them back to some sort of standard base level?

Walter J. Parks

Well, no, I think that when you looked at last year, we entered the year with essentially flat. The fiscal first quarter was very tough, we were very promotional, and that continued all the way through the fiscal second quarter but when we saw business in June and July, we significantly addressed receipts. And I think as we looked at it and planned for this year, after three years of reduction in inventory at the beginning of the fiscal second quarter, we -- pardon me -- we concluded that we''d reduced inventories too much.

Janet Kloppenberg – JJK Research

Okay. I got it. And I just want a clarification on the suit separate business, Manny. It sounds like you want to keep focusing on that business but you''re also talk about the customer wanting a more casual look. So should we maybe expect that suits separate business to be a focus but to be a smaller percentage of sales going forward?

Manny Mashouf

You know, Janet, what we''re realizing is that she''s responding to bottoms and item jackets and occasionally the matchy-match. But it''s not like she''s jumping and buying at everything she sees. Of course, our assortment also needs improvement and we''re addressing that substantially. We also have come out with two core fabrics that we feel is going to be timeless and seasonless that can go on beyond this season and next season. And we feel that''s going to help a lot because the customer is -- seems to be coming back to buy matchy-match suits.

Janet Kloppenberg – JJK Research

Okay. And on the woven tops and denim a two-part question. One, when do you expect to be in stock or at levels that are appropriate for these categories? And second of all, we''re hearing a lot about weak denim business around the country. Maybe you could address what you think is going on in the denim business and why you think you''ll be well positioned in the denim category when you''re at the level of inventory you wish to be at?

Manny Mashouf

Our denim business is going to see a substantial improvement in November. We have -- several months ago we brought in a denim designer and a new denim merchant and we have products in the works that is going to come out the end of October. And it''s going improve substantially our denim business but also what we''re focusing is, as we mentioned in the call was that a substantial improvement in denim look-alike, in non-denim fabric separates.

Pants and leggings and jeggings and all that category that its denim inspired, but it''s not in denim.

Janet Kloppenberg – JJK Research

And that''s in November, too, Manny?

Manny Mashouf

That is -- yes, that is -- actually that starts earlier. That starts September.

Janet Kloppenberg – JJK Research

Okay. Got it. And what about the woven tops?

Manny Mashouf

Woven tops, we are having some limited success in some silhouettes. And so we are trying to understand the woven tops, what she''s wanting and what works with the suits. We are now beginning to understand what fabrics she responds to and how she''s buying tops to go from day to night, to be multifunctional and cross functional.

Janet Kloppenberg – JJK Research

Got it. And you feel like you have worked that through, and you feel like your woven top assortments will improve in the second quarter as well?

Manny Mashouf

Yes, absolutely. Some of the woven top business is being replaced by dress category. So we may not see the woven top business as strong as when dresses were not important and it was all separates. But as separates are coming back, we see substantial opportunity in improving the performance of that category as well as getting more expanded selections in the stores.

Janet Kloppenberg – JJK Research

Okay. And my last question is, I know you''ve eliminated a number of these clearance events and you''re driving for a higher full-priced business, but can you comment overall on your pricing strategy and if you feel like where your prices are today is a competitive place or if there''ll be any tweaks for that strategy going forward?

Manny Mashouf

Okay. Without giving all the secrets out, I can tell you that we have identified opportunities across the board in every category where we could offer better perceived value and sharper prices without compromising quality and styling.

Janet Kloppenberg – JJK Research

Okay. And is that representative in the current assortment or will we see that gradually unfold?

Manny Mashouf

That''s going to gradually unfold.

Janet Kloppenberg – JJK Research

Okay. Great. Well, best of luck to you all. Thanks so much.

Emilia Fabricant

Thank you.

Manny Mashouf

You''re welcome. Thank you.

Operator

At this time, we have no further questions.

Manny Mashouf

All right. Thank you.

Walter J. Parks

Thank you.

Operator

This will conclude the fourth quarter earnings call for bebe. Thank you for joining us.