Bebe Q2 2010 Earnings Call Transcript

123jump.com Staff
09 Feb, 2010
New York City

Sales fell 22% to $141.5 million and net income fell 65% to $2.4 million or 3 cents per diluted share. Same store-sales for the second quarter decreased 22.5% compared to a decrease of 20.1% in the prior year. Gross margin as a percentage of sales increased to 39.2% from 38.6% in the prior year.

Bebe Stores, Inc. ((BEBE))
Q2 2010 Earnings Call Transcript
February 4, 2010 4:30 p.m. ET

Executive

Walter J. Parks - Chief Financial Officer and Chief Operating Officer
Manny Mashouf - Chairman and Chief Executive Officer
Kathleen Fong-Lee - Chief Merchandising Officer

Analysts

Christine Chen – Needham & Company
Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.
Jennifer Black – Black & Associates
Jeff Van Sinderen – B. Riley & Co.
Sam Panella – Raymond James & Associates
Elizabeth Pierce – Roth Capital Partners
Eric Beder – Brean Murray, Carret & Co.
Holly Guthrie – Boenning & Scattergood Inc
Janet Kloppenburg - JJK Research
Stacy Pak - SP Research

Presentation

Operator

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

Walter J. Parks

Hello. And thank you for joining Manny Mashouf, Chairman and CEO, Kathy Lee, Chief Merchandising Officer and me today for bebe second quarter fiscal 2010 earnings release update. Our call will be limited in time to one hour. After our prepared remarks, Manny, Kathy and me will take questions and answers for as long as time permits.

Let me start with our disclaimer. 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 then actual events or results may differ materially. We refer you to the company''s form 10-K, 10-Q and other filings made with the SEC for additional information on risk factors that could cause actual results to differ material from our current expectations for the quarter.

Net sales decreased 22% to 141 million compared to sales of 182 million in the second quarter a year ago. Same store-sales for the second quarter decreased 22.5% compared to a decrease of 20.1% in the prior year. Gross margin as a percentage of sales increased to 39.2% from 38.6% in the prior year. The increase in gross margin has a percentage of net sales from the prior year of 0.6% was primarily due to lower markdowns and lower other costs including inventory shrink and damages partially offset by lower initial markup and unfavorable occupancy leverage.

SG&A expenses for the second quarter of fiscal 2010 were 51.3 million or 36.3% of net sales compared to 61.5 million or 33.8% of net sales for the same period of the prior year. The decrease in SG&A expense was primarily due to the reduction in spending across all categories and we recorded 1.1 million as a reduction of SG&A related to the initial recognition of gift card breakage income, offset by a 2.5 million impairment charge relating to underperforming stores comprised of 1.9 million related to PH8 stores and 0.6 million related to bebe stores versus 1 million in the second quarter of fiscal 2009.

The effective tax rate of fiscal 2010 increased to 51% from 35% in the second quarter of fiscal 2009 primarily due to deleveraging of incentive stock option compensation expense offset by higher tax exempt interest income as a percent of taxable income. We also recorded an additional of 400,000 in discrete items during the quarter primarily related to fixed asset depreciation.

Net income for the second quarter was 2.4 million compared to net income of 6.8 million in the prior year. Diluted income per share for the second quarter was $0.03 on 86.8 million diluted weighted average shares outstanding compared to diluted income per share of $0.08 on 89.1 million diluted weighted average shares outstanding in the prior year.

Our total cash and investments at January 2, 2010 were 348 million versus 353 million on January 3, 2009. Inventory at January 2, 2010 were 30 million compared to 37 million at January 3, 2009. At the end of the second quarter, finished goods inventory per square foot was approximately 16% lower than the prior year.

Capital expenditures for the fiscal year-to-date period were approximately 7 million and depreciation expense approximately 13 million. We ended the second quarter with 309 stores representing 1,157,000 square feet. I will now turn the call over to Manny.

Manny Mashouf

Thank you, Walter. And I would like to thank everyone joining us today on the call. I''m delighted to have Kathy back with bebe. And while our business has been challenging, I''m pleased with the progress we are making both in the changes we are making to merchandising and design and as well as to the product in our stores.

As discussed in our sales release, we began to see improvement in December and that trend has continued into January, which have comparable store-sales of negative 15%. I believe this assortment will continue to improve this spring and as a result comparable store-sales would improve also.

In our 83 stores, we counted both this year and last, we were negatively impacted by mall traffic, units per transaction and average unit retail, which for the quarter was down 13%, 1.5% and 9% respectively offset by slightly higher conversion for the second consecutive quarter.

We are pleased that the conversion continues to improve sequentially and believe that this is a strong indicator that can be attributed to the improvements in the products breakdown.

Our objective this quarter was to see an improvement in gross margin and I''m pleased with the results. We managed inventory well, saw improvement in transitional merchandise and had a successful after Christmas sale.

Outerwear driven by strong assortment of trenches, which outperformed the company, Knit tops did very well and accessories driven by shoes were very strong. This was offset by the lack of logo sweaters and knitted dresses. Consistent with the incoming trend our shoe collection was fashion light and the client continued to respond positively to the offering.

As announced last week, we signed a three year strategic licensing agreement with Accessory Network to design, manufacture and distribute a full lifestyle offering of handbags and small leather goods to select department and specialty stores worldwide including bebe retail stores, bebe.com and our international licensing locations.

The collection debuted this week during accessory market week for fall 2010. We have also signed an agreement with the Kardashian sisters with an exclusive right to design, manufacture and sell in bebe stores in their store in Miami next week.

A total of five deliveries are slated over the next 12 months. Priced competitively with a retail range of 59 to 129, the collection is perfect for the on point trend driven Fashionistas. The bebe Kardashian collection will make its runway debut on Tuesday, February 16 during New York fashion week at Star 360.

We are opening a new location at 488 Broadway in Soho that will feature a new design that I believe will take bebe to the new level of fashion awareness and contemporary design and will carry the full bebe Kardashian collection.

To me bebe comparable store-sales results for the quarter are consistent with the total business and were the result of an increase in markdown inventory from the bebe retail stores, reductions in global inventory and sales offset by strong to bebe merchandise consisting of denim dresses, tops and non-apparel including shoes and jewelry.

PH8 total store-sales results were below our expectations with the total sales decline greater than the company''s comparable store-sales decrease as a result of reduced traffic, lower conversion, lower average unit retail and units per transaction combined with the merchandise offering that was not consistent with the vision of the brand. This concept is a work in progress that I have begun to manage in January and believe will not have meaningful improvements if at all until later this spring season.

During the quarter, our bebe.com business experienced the effects of the difficulty and environments with negative 12% sales. Traffic was up 6% higher there, it was offset by lower conversion, which was down 2% and average order down 18% impacted by lower average price point and retail.

During the quarter the international licensing stores comparable store-sales were negative 13%. The licensing opened five new international stores, three in Mexico, one in Turkey and one in Lebanon and now we have 42 international license stores in 14 countries.

Based on the increase in new stores, the wholesale revenues increased 20% from the same period in the prior year. For fiscal 2010, we currently anticipate opening 20 new international license stores.

For the quarter, we spent approximately 4.3% of sales on advertising versus 4.8% of sales in the prior year or 6.1 million compared to 8.8 million in the prior year. As for the fiscal third quarter, I am pleased with the performance in certain departments while I''m disappointed in the performance in others. However, I''m convinced we can positively affect our underperforming departments.

For the current quarter, we are improving the quality of fabrics in sportswear and denim to bring back our perceived value proposition. Rejuvenating our efforts on our logo assortment for the spring season, which has been missing since June. We are introducing Citizen 60 woven top styles that have been missing from the assortment this year.

Continuing our focus to localize inventory to take advantage of seasonal transformations including localized, assortments in resort doors as well as cold doors in the Northeast, Midwest and Canada and to build on our success in New York.

For the spring season period, we will mail 850,000 accessory mailers compared to 400,000 last year. 400,000 collection preview mailers compared to 600,000 last year and 1 million March catalogs this year compared to 725,000 last year.

As our guidance indicated, we believe we will see comparable store-sales improvements in this quarter. I believe the changes we have instituted to both merchandising and design should provide long-term benefits and allow us to return bebe to the contemporary fashion leader with improved profitability. And now, I will now turn the call over to Walter.

Walter J. Parks

Thank you, Manny. Let me review current quarter expectations and items that relate to fiscal year. For third quarter of fiscal 2010, the company currently anticipates comparable store-sales decrease will be less than the previous quarters and depending on actual sales and markdowns the net loss will be in the range of flat to a nickel per share based on 87 million diluted weighted average shares outstanding versus net loss of $0.06 per share based on 87 million diluted weighted average shares outstanding in the third quarter of fiscal 2009.

The company is currently anticipating an effective tax rate of 45% for fiscal 2010. Inventory at the end of the quarter will be down versus the prior year per square foot and mid to high teens.

For fiscal 2010, the company anticipates opening five bebe stores, expanding one bebe store, opening one PH8 popup location and closing a total of up to 14 stores resulting in a 1% decrease in square footage. The number of planned store closures include two bebe stores, one 2b bebe store and up to 11 PH8 locations.

Total capital expenditures for the year are planned at approximately 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 26 million. Now, we will be happy to answer your questions.

Question-and-Answer Session

Operator

At this time, I would like to remind everyone and order to ask a question please press, star then the number one on your telephone keypad. Your first question comes from the line of Christine Chen with Needham & Company.

Christine Chen – Needham & Company

Thank you. I''m wondering if you could talk a little bit about categories that have outperformed so far in the month of January. We have seen -- certainly seen a lot of improvement in the product particularly on the top side in the dresses. And wondering what categories you feel at this point still need the most work? Thank you.

Walter J. Parks

I don''t think at this juncture we are prepared to talk about January at that level of detail. I think what Kathy will share with you is where we made investments and what our expectations are as we go forward.

Kathleen Fong-Lee

So Christine, the January start has been a positive direction that we see. I''m happy with the overall assortment that we have. Although, we still have improvements to make in several categories. The improvements I''m seeing currently, there are some top trends in the top category that is trending in a very positive way. Dresses as we all know is a category with many other retailers as demonstrating some strain and so in general we have some highlights and we have some things we also are focusing on to improve.

Christine Chen – Needham & Company

Okay. Thank you for the detail.

Operator

Your next question comes from the line of Adrienne Tennant with Friedman, Billings, Ramsey.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

My question is on PH8. Manny, can you talk about -- you touched on it a little bit but it was disappointing. What are you kind of doing in terms of changing the strategy, what is the actual strategy and target markets if you can understand that? And then Walter, can you give us any color on how much it''s losing? If it is how much of a drag it is and then how many stores would be four wall negative or cash flow negative. However, you want to characterize it? Thank you.

Manny Mashouf

Milano [Ph]. This is he?

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Adrienne. It''s Adrienne.

Manny Mashouf

Adrienne, I''m sorry. Adrienne, all right.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Yeah. That''s okay.

Manny Mashouf

In terms of the vision for PH8, as I had explained last year, it''s pretty much like what BEBE SPORT was before but improved substantially when it came to the street wear. So in terms of where -- what we ended up with last year and where it''s going is that we did execute a great collection of street wear. But it was not in my opinion the right vision for this brand that we are creating, this lifestyle.

So it lacked the active inspiration and lifestyle, active lifestyle that needed to be present in subtle and unsubtle way throughout the merchandise mix when it came to the street wear. So having said that, we are focusing on correcting all of those attributes that constitute a differentiated lifestyle and collection of clothing that would differentiate from everybody else in that area of the business.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Okay. So how -- so I guess why did you change the name plate then if it''s sort of similar with some more kind of categories of lifestyle? I guess that''s kind of…?

Manny Mashouf

Well, the name I don''t know if you know the history for that ever since we decided at BEBE SPORT as we were growing and expanding the store base a lot of shopping malls would not have us in the same mall with both names and they say they would be confusing and they didn''t want two different brands in the same mall kind of thing. And we also recognize the fact and it was confusing because some of the products that belong in bebe stores was both in bebe and BEBE SPORT and it was creating a cannibalistic kind of effect on our own business.

So the name change was the result of a long-term strategy that. Number one, it would not conflict with bebe and BEBE SPORT label belongs to bebe stores and as a result they are pursuing the introduction of the BEBE SPORT label in bebe and just doing the business that would be constituting an active lifestyle and all the related sports wear pieces that belongs to that active lifestyle. That is different than bebe and it would not have any kind of conflict.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Okay. That''s very helpful. And then Walter on the financials on that?

Walter J. Parks

It probably at the current trend, we would probably lose about $0.02 a quarter after tax.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

$0.02 a quarter after tax?

Walter J. Parks

Yes.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Okay. So about $0.08 a year?

Walter J. Parks

That works.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Okay. Great. And then how many of them are -- however you want to characterize it, four wall negative or it can be cash flow negative?

Walter J. Parks

Again, right now the performance has been very bad. It was a very tough quarter. A large majority of them are upside down now where as two years ago, the large majority were very successful.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Okay. So right now, you''re still trying to nurse them back to health as opposed to, is there any decision? At what point would you make a decision to maybe close that division perhaps or is that not on the table?

Walter J. Parks

Well, I don''t think the decision will be made today.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Right.

Walter J. Parks

I think that now, that Manny is intimately involved for the first time since I''ve been here back with that business, we are trying to make a go of it. Whether we will be successful or not, time will tell but we certainly won''t make the decision today.

Adrienne Tennant – Friedman, Billings, Ramsey Group, Inc.

Okay. Fair enough. Thank you very much and good luck.

Walter J. Parks

You''re welcome.

Operator

Your next question comes from the line of Jennifer Black with Jennifer Black & Associates.

Jennifer Black – Black & Associates

Good afternoon and congratulations on some success. I wondered if you could talk about what kind of market techniques you''ll be using to promote the Kardashian line. I wondered if they would be making any personal appearances at bebe stores? I think I''ll stop right there for right now.

Manny Mashouf

Well, good question, Jennifer. Kardashians are like self marketing machines themselves. They run their lives as you probably have noticed on a perpetual marketing from when they wake up until when they go to bed. So through all the electronic social media''s and social networks, it''s constantly being touted, she is constantly tweeting, she is constantly putting herself wearing bebe for Kardashian outfits and talking about the collection is coming in soon into the stores. She has a tremendous follower and I think there is like 2.7 million fans that they continuously follow her on a daily basis. And then there is another huge percentage of women in that age group that they just know about what''s going on with her constantly.

She is also making appearances. The first one is going to be New York, the bebe runway show with Star 360. And she is going to be hosting that. She is going to be attending that. She''s also going to be attending some of the in-store events at bebe. And she is actually, we are very pleased. She is doing a lot more than she was obligated to do according to our understanding and agreements. So there is a lot of emails from bebe initiated by bebe and emails and text messaging and tweeting and all the social networks that are being used by both us and her to let everybody know what''s going on.

Jennifer Black – Black & Associates

I''m one of the 2.7 million followers.

Manny Mashouf

You are?

Jennifer Black – Black & Associates

So I''m pretty familiar. And I was curious to know will they be wearing the clothes on their show?

Manny Mashouf

All right. Well, I would say yes because, number one, she loves everything we''ve done for her even before we entered into this relationship, she was wearing bebe all the time and she was being photographed by Paparazzi and being shown in us magazine and okay, magazine constantly. So she loves everything we have done together, they have great sense of both her and the sisters they have a great sense of fashion. And they can''t wait to wear this stuff as it''s coming into the stores. So I would probably say by far the chances are that they will be wearing everything because anything that they did not love, they did not go into production.

Jennifer Black – Black & Associates

Okay. Great. And then I have just one last question. I was curious to know are you happy with the fit -- of the bottoms at the bebe division?

Kathleen Fong-Lee

Now, are you referring to bottoms such as in pants, skirts?

Jennifer Black – Black & Associates

Sorry, pants.

Kathleen Fong-Lee

Pants. And are you excluding denim from that question? Is it about for the both bottom?

Jennifer Black – Black & Associates

How about both?

Kathleen Fong-Lee

Well, in terms of a fit, I know that we are constantly making improvements because as we all know the pant fit or denim fit is probably one of the most challenge things to accomplish to be -- to have the right fit that represents your brand, right?

Jennifer Black – Black & Associates

Right.

Kathleen Fong-Lee

As well as fitting the types of different bodies out there, hips, hips, et cetera and staying true to the fashion statement that you''re making. So I would say that, we are still tweaking and trying to improve.

Jennifer Black – Black & Associates

Okay. All right. Well, thank you. Good luck.

Kathleen Fong-Lee

Thank you.

Operator

Your next question is from Jeff Van Sinderen at B. Riley & Company.

Walter J. Parks

Jeff.

Jeff Van Sinderen – B. Riley & Co.

Hi, actually, just want to if -- Did you say comps in January were running down minus 15%?

Walter J. Parks

13.

Jeff Van Sinderen – B. Riley & Co.

13, okay. And can you give us a sense it, what''s driving the sequential improvement? Are you seeing an up tick in transactions? Is it up tick in units or?

Walter J. Parks

Conversion, high conversion.

Jeff Van Sinderen – B. Riley & Co.

It is just conversion. Okay. Good and any areas where you are seeing some improvement in your business do you feel that you have enough inventory in those key areas? I guess I''m trying to get a sense of how you feel your position in terms of key categories that are improving.

Kathleen Fong-Lee

The way that we are examining the inventory is the areas that are improving we are in some cases right on target to maximize the business and in other cases we are doing a little bit of chasing, which is a positive thing.

Jeff Van Sinderen – B. Riley & Co.

Okay. And then maybe you can just answer, in terms of the merchant team where do you feel like you stand at this point? Are there areas you still need to fill in or do you feel you are where you want to be?

Kathleen Fong-Lee

We still have a few positions that we are attempting to fill.

Jeff Van Sinderen – B. Riley & Co.

Okay. But for the large part it sounds like you''re in pretty good shape where you feel at this point?

Kathleen Fong-Lee

Yeah. We are in the better shape.

Jeff Van Sinderen – B. Riley & Co.

Okay. And then Manny, maybe you can just speak to this. I''m trying to get a sense obviously the company is in transition you are going for one sort of merchandising to a little bit different merchandising. Its -- I''m wondering strategically or how you''re thinking about the evolution of the positioning of the bebe brand at this point in terms of style, price point, demographic target et cetera. And then also if you think that your demographics have started to shift as you changed the assortment? Is there a difference in ethnicity and any color you could give us there that would be helpful?

Manny Mashouf

All right, Jeff. We have noted recently that we are appealing to younger customers now. And we are beginning to see some younger that we used to have and they are coming returning back and they are buying repeatedly and then they''re come back. And I''ve heard a few in the store visits that I''ve heard them saying that bebe is contagious. Once you get in and you buy things, you want to come back and buy again and again.

Obviously, that is our strategy that we need to have that 18 year old and up age group that is more fashion forward and spends almost all their money on what they have to buy them and they don''t have a lot, they spend everything on their clothing. There are Fashionistas and there are great model, role model for the brand. So we are definitely in our strategy to take bebe back to where we were in the 90s. And we are making huge strides toward that goal.

Jeff Van Sinderen – B. Riley & Co.

Okay. Good to hear. And obviously you still have a strong brand. I know you''re extending licensing. I wonder if you can just talk a little bit more about your licensing strategy and plans going forward on that front?

Manny Mashouf

Our licensing strategy is pretty much consistent with the categories that we have felt for sometime that we needed to have in the stores to create a total lifestyle collection for our customers. So we''ve been doing in bags for several years and doing inside design and going to the markets to have it produced. And we felt like -- we also need to expand the brand and build it internationally so we found after years of research we feel the right, we feel the right company to be the license for the bag, handbag and small leather goods, same thing with the shoes. And we feel that they''re both extremely important part essential part of building a big brand and growing it internationally. As well as doing some wholesale and again by wholesale you also expose the brand to many department stores, that normally otherwise, we would not be able to have any exposure in.

Jeff Van Sinderen – B. Riley & Co.

Exactly. Yeah. That seems like a great extension. Can you guys update us on the 2b bebe?

Walter J. Parks

Well. Currently we have the 32 stores, 33, more than half or were built as 2b, the remainder were converted from bebe outlet. We still have the one test in regional mall or local mall, Sarah Monte and have no further plans at this juncture. It doesn''t mean we won''t look to go into additional regional malls next year. We just don''t have any current plans to do that.

Jeff Van Sinderen – B. Riley & Co.

Okay. Great. Thanks very much and good luck this quarter.

Manny Mashouf

Thank you, Jeff.

Operator

Your next question comes from Sam Panella at Raymond James.

Sam Panella – Raymond James & Associates

Good afternoon. Walter, could give us some little bit more detail with respect to gross margin, perhaps the components with respect to deleverage of occupancy and also how merchandise margins fared?

Walter J. Parks

Again, the external margin was only up a couple basis points but the improvement across the margin was significant given the negative 22 comp and the deleverage that would generate.

Sam Panella – Raymond James & Associates

I guess I was just trying to wrap my mind around that a little bit more. And did you mention that shrink was an issue last year? Was that part of it? How much did that impact maybe last year''s gross margin?

Walter J. Parks

A couple basis points.

Sam Panella – Raymond James & Associates

Okay.

Walter J. Parks

Not a lot. The real improvement was the reduction in mark downs which was the first time that we were able to execute that even with a tough October, November, we had skinny inventory down and we saw improvements in go forward products, which I think is why we saw a little bit of improvement in January. We are not dragging a bunch of old goods any more. We have cleaned up our past indiscretion and we really saw good margin improvement in the December quarter.

Sam Panella – Raymond James & Associates

Okay. And then with respect to accessories, how much does that business comprise of your sales mix in this second quarter versus last year?

Walter J. Parks

We won''t talk about the penetrations today. But the accessory business has been good for a while.

Sam Panella - Raymond James & Associates

Okay. And then in terms of the current product, how much of that reflects Kathy''s influence? Where we are in that process?

Kathleen Fong-Lee

She would say that she owns a good portion of all of the go forward.

Manny Mashouf

Yes, if not all.

Sam Panella – Raymond James & Associates

Okay. And then also, Walter, with respect to SG&A for the back half of the year, what are the opportunities there in continuing to push that number down?

Walter J. Parks

I think the last quarter was very successful. I actually think the fall was very successful. We took more out of the system than I envisioned we could have. I think that we will continue to run the business conservatively and dependent upon sales I believe we will run below. I don''t think forward run is below as we just did.

Sam Panella – Raymond James & Associates

Okay. Thanks. That''s helpful. Good luck, everyone.

Manny Mashouf

Thank you.

Operator

Your next question comes from Elizabeth Pierce with Roth Capital Partners.

Elizabeth Pierce – Roth Capital Partners

Thanks. Good afternoon, Manny and Walter.

Manny Mashouf

Good afternoon.

Elizabeth Pierce – Roth Capital Partners

Walter, a couple things I wanted to…what did you say the tax rate would be for their?

Walter J. Parks

45.

Elizabeth Pierce – Roth Capital Partners

45. Did you say something? Okay. 45. That''s what it said on first rate. All right. And then, Manny, you kind of ran through some metrics in the very beginning on the conversion. Would you mind just repeating those again?

Manny Mashouf

Okay. Anything in specific?

Elizabeth Pierce – Roth Capital Partners

Oh yes, you said the 83 stores with counters and then you said I think it was transactions, UPT and AUR?

Manny Mashouf

Okay. All right. So, mall traffic. We were negatively impacted by mall traffic and units per transaction and average unit retail sales. So for the quarter we were down 14% mall traffic, 1.5% unit per transaction and 9% for average unit retail sales.

Elizabeth Pierce – Roth Capital Partners

Got it. Okay. Thanks.

Manny Mashouf

And then this was slightly offset by conversion of higher conversion values.

Elizabeth Pierce – Roth Capital Partners

Okay. Great. And I really wanted to go back and talk a little bit more about PH8. Make sure I understand the vision that you are talking about. So if you break apart PH8 right now, it has got an active component and street wear component. Is it my understanding that the true active performance, are you okay with that, do you like that side of a business and did that perform in line with expectations?

Manny Mashouf

Yes. I like that part of the business. It is always done well. And unfortunately it is a smaller portion of the overall business percentage wise.

Elizabeth Pierce – Roth Capital Partners

So would it be worth increasing that, if that is something she is voting with, so to speak?

Manny Mashouf

Well. We have, in the past few years we have tested the percentage of contribution of the active wear in relation to the total business and we have come to the seasonal maximum of what the percentage should have and what it should not have in terms of overall contribution. And what we have come up with are the percentages that we finally have been executing for a long time and it continues to perform well.

Elizabeth Pierce – Roth Capital Partners

Got it.

Manny Mashouf

The problem we have was in the street wear portion of that. That what happened last year, we came up with a much more sophisticated less active and active inspired and exciting merchandise that did not really speak as much to the other part of the business which is the performance and did not speak to the whole vision of this concept.

Elizabeth Pierce – Roth Capital Partners

One of the things that occurred to me is, it has occurred to me over the past couple months when I think about some of the core attributes of the bebe brand and I recognize this isn''t a bebe brand, but it seemed very dark color wise.

Manny Mashouf

You''re right. And that was one of the problems. So everything looked like grey and black and grey and black.

Elizabeth Pierce – Roth Capital Partners

Right.

Manny Mashouf

And your observations are right on, absolutely. And this is not about grey and black collection.

Elizabeth Pierce – Roth Capital Partners

Okay. So maybe that''s what you mean is we are trying to envision your definition of sophistication. Is it the biggest issue you have is silhouettes in items or is it just the aesthetic thing?

Manny Mashouf

The Aesthetic, mostly the aesthetics. Some of the silhouettes were great. They were just not executed in the proper way.

Elizabeth Pierce – Roth Capital Partners

Okay.

Manny Mashouf

The right fabrication mixes and the core fabrics were not incorporated as much as they should have been and then the colors were not right. And the trends were not appropriate to reflect this lifestyle.

Elizabeth Pierce – Roth Capital Partners

And where are you, all of this product is being sourced domestically?

Manny Mashouf

No. Primarily they are being sourced in China.

Elizabeth Pierce – Roth Capital Partners

Okay. So is that why, when you talk about not having the visibility for the work in progress that we should be thinking more of the second half of calendar ''10?

Manny Mashouf

Most likely.

Elizabeth Pierce – Roth Capital Partners

Okay. And then Kathy, just a couple questions for you. I really think that you''re seeing some great traction there. The blouses look great, your woven tops. I was curious on what you guys were talking about a second ago. The product that we are seeing now in the stores in January, looks hot ended December, January. That half is meant for Kathy or you are talking about go forward? Because you mentioned go forward.

Manny Mashouf

Both.

Kathleen Fong-Lee

Both.

Elizabeth Pierce – Roth Capital Partners

Do you care to elaborate any, like it is more now? I mean obviously it is more now, right? On a relative basis.

Kathleen Fong-Lee

In terms of what you''re seeing now I would say there is much of my influence but not a 100%.

Elizabeth Pierce – Roth Capital Partners

Okay, okay. And then when you talk about the team, I didn''t know if you were referring to the design team or the merchandising team or both? Are there spots still in the design area?

Kathleen Fong-Lee

Yes. It is applicable to both. Both groups are not fully staffed with the organization that we are looking to achieve.

Elizabeth Pierce – Roth Capital Partners

Is it just finding the right, just having a harder time finding the right person with the right vision that kind of matches up?

Manny Mashouf

Yeah, yeah. It is both. Actually, we also have as a company decided to increase the size of our merchandising and design team substantially. So if we were going by two years ago or a year ago measurements, we do have enough merchants and designers. However, according to our own new standards that would give us the competitive edge, an ability to have the products every month in and ongoing, we came out with a decision and Kathy was a major decision maker in this area that we needed substantially more designers and merchants. So as a result we have been recruiting a lot but in relation to what we need we still have a few positions open.

Elizabeth Pierce – Roth Capital Partners

And are there two teams, one for PH8, actually three teams, 2b bebe and how are the teams divided?

Manny Mashouf

There is a design team that is dedicated for PH8. There is a design team that is dedicated to 2b and the design, the main design team, substantial design team and merchants that is dedicated to bebe.

Elizabeth Pierce – Roth Capital Partners

Okay. And actually one other thing I forgot to ask about PH8. Can you talk to us about the pop-up store?

Walter J. Parks

Well. It is on a very short term lease. It has been open now for about two months. And probably won''t be open through the whole spring.

Elizabeth Pierce – Roth Capital Partners

And what was the point of that?

Walter J. Parks

Just to have one near the office.

Manny Mashouf

And it is in a great location in Beverly Center.

Walter J. Parks

Great mall. It was cheap rent.

Elizabeth Pierce – Roth Capital Partners

Okay, okay. And then what are you seeing on the club bebe members, you talked about many customers coming back. Are you seeing that in the club bebe kind of transactions?

Walter J. Parks

I think the challenge that we have seen with the club bebe over the last year is the, members that have historically performed well continue to perform well but what hasn''t happened over the last year is new members. So our challenge is to get new members and hopefully get them to perform in the upper decile and that hasn''t happened.

Elizabeth Pierce – Roth Capital Partners

And I presume that''s maybe why you stepped up the marketing a little?

Walter J. Parks

A little.

Manny Mashouf

Yes.

Elizabeth Pierce – Roth Capital Partners
Okay. And then one final one and I promise, fragrance, how did that perform?

Walter J. Parks

Through December very well, above our expectations.

Elizabeth Pierce – Roth Capital Partners

Great. Thank you, guys and best of luck.

Walter J. Parks

Thank you.

Operator

Your next question comes from Eric Beder with Brean Murray.

Walter J. Parks

Hello, Eric.

Eric Beder – Brean Murray, Carret & Co.

Hi. Could you talk a little, okay? The quotation pieces, that is going to be all stores, all bebe stores wherever found?

Kathleen Fong-Lee

Yes. It''s in all stores.

Eric Beder – Brean Murray, Carret & Co.

Okay. How did the Nicole Richie substitute did or the accessories do?

Walter J. Parks

It performed well initially, but didn''t end up having great sell throughs and the pricing was probably above the perceived value.

Eric Beder – Brean Murray, Carret & Co.

Is that now out of the stores?

Walter J. Parks

You might still find some but not a lot.

Manny Mashouf

Yeah. We sold through most of it, almost all of it.

Eric Beder – Brean Murray, Carret & Co.

Okay. How do you look at the lingerie piece of your business? I know you''ve experimented with it Pussycat Dolls other pieces, where is that kind of go, where does that fit in the bebe spectrum?

Walter J. Parks

I think at this juncture we still have it online but given the merchandise challenges in the last year to 18 months, I think right now we are just focusing on ready to wear and accessories.

Eric Beder – Brean Murray, Carret & Co.

Okay. And if you look at, obviously you have a lot of opportunities with, but where is the biggest change, game changer in the store that you can do, when we look at this, I don''t know, six months to a year from now, the categories that you think really takes you out from where you got in?

Kathleen Fong-Lee

I can talk about that. Okay. Where I see some of the things going to make some bigger impact in changes is there are certain categories of product that we are recognizing as a huge opportunity for us. And so we are going to focus on maximizing those categories. Okay. We are going to improve the quality. We are continuing to look at the fit overall of all products across every category. We are also looking at where we can, as we know that it is a trend about Fashionistas. We are all about fashion. Where it is appropriate we will go and have opportunities to be a little faster in some categories, for instance. So I think that there is overall, this business is a really fun business for me and I enjoy the product very much. So, as we see the opportunities and where the pluses are and where we can minimize and maximize, we are going to pursue down that path.

Eric Beder – Brean Murray, Carret & Co.

Okay. Tell me little bit on PH8, are basically all of those lease expirations?

Walter J. Parks

Say that again.

Eric Beder – Brean Murray, Carret & Co.

The PH8 closures this year, the 11 stores, are those basically lease expirations?

Walter J. Parks

Expirations or kickouts.

Eric Beder – Brean Murray, Carret & Co.

In the next three years, what do you have left in terms of those going forward?

Walter J. Parks

Well, there''s only four stores that don''t have protection of the remaining 57.

Eric Beder – Brean Murray, Carret & Co.

In terms of kick outs you''re talking about.

Walter J. Parks

Lease expirations or kick outs.

Eric Beder – Brean Murray, Carret & Co.

Okay. So if I look at, are all those due within the next four-five years?

Walter J. Parks

Say that again.

Eric Beder – Brean Murray, Carret & Co.

All those leases due within the next four-five years, account?

Walter J. Parks

Well. No, what I would say is over the next, I don''t know, 18 months, 12 months, all but four can be terminated with no lease exposure.

Eric Beder – Brean Murray, Carret & Co.

Okay. Great. Thank you.

Walter J. Parks

Excellent.

Operator

Your next question comes from Holly Guthrie with Boenning and Scattergood.

Holly Guthrie – Boenning & Scattergood Inc.

Holly Guthrie from Boenning & Scattergood. Good try. Thanks. Good afternoon everybody. Walter, could you go through those 14 stores by brand that you were closing. I think you said up to 14, but I think you said there were a certain number of bebe and certain number of PH8. Could you go through those again for me?

Walter J. Parks

3, 1, 11.

Holly Guthrie – Boenning & Scattergood Inc.

PH8 and then bebe was 3 and 2b bebe was 1?

Walter J. Parks

2b bebe was 1, yes. It is in the release.

Holly Guthrie – Boenning & Scattergood Inc.

Okay. I''m sorry. I have been kind of busy today. I apologize for that. Sorry. Kathy, I wanted to ask you a question about some of your better selling trends you mentioned some things were selling really well. Was there any correlation between planogram changes, things that were put in the window, some of the new styles and those that sold well?

Kathleen Fong-Lee

Yes. From a visual point of view, we have a new mannequins in windows that gives a different attitude, a more modern attitude. I think a more contemporary attitude. Therefore I think the reflection of that alone projects the clothing, the fashion in a more modern and contemporary. It could reflect to be even a bit younger. We have had comments such as that. And in general the store lay out is, we tend to move things quite a bit. So we have things that when we do walk throughs we will look at it and say, okay, maybe we can move this here, move that there, et cetera and have a little different presentation of what the focus than we want the focus to be to the customer.

Holly Guthrie – Boenning & Scattergood Inc.

You''re color is definitely a lot better and your assortments seem to be a lot broader than they have been which I think should be helping.

Manny Mashouf

Are you based in New York, Manhattan?

Holly Guthrie – Boenning & Scattergood Inc

No. Philadelphia.

Manny Mashouf

All right. Philadelphia. If you happen to go to New York next week, you''re going to notice a major change in our visual merchandising in three of the stores in New York, in Manhattan.

Holly Guthrie – Boenning & Scattergood Inc.

Okay.

Manny Mashouf

So on 34th and then the new store opening on the 10th and the one at the Time Warner center.

Holly Guthrie – Boenning & Scattergood Inc.

Yeah. Columbus circle.

Manny Mashouf

The Columbus Circe. Right.

Holly Guthrie – Boenning & Scattergood Inc.

And 34th street. Great. That''s a good store. I will have to get up there to see that. Thank you.

Manny Mashouf

You''re welcome.

Holly Guthrie – Boenning & Scattergood Inc.

Manny, when you said the younger customer, I''m sorry, this was several questions ago so I''m probably drawing on your memory but when you said that you were focused on a younger customer did you mean, were you talking about bebe or PH8 when you were speaking about it?

Manny Mashouf

We were talking about bebe.

Holly Guthrie – Boenning & Scattergood Inc.

Okay. And is the PH8 customer is your goal to have a focus on even a younger customer than the bebe store or is it a similar age range?

Manny Mashouf

It is not younger for sure. I would say probably it is a few years starting age for PH8 customer we see it a few years older than the younger, the bottom age of the bebe customer.

Holly Guthrie – Boenning & Scattergood Inc.

Does PH8 product then the product in the bebe store I think has gone through a dramatic transition over the past two months and of course I think it looks pretty good. Is the transition --

Manny Mashouf

I''m glad you noticed.

Holly Guthrie – Boenning & Scattergood Inc.

I love the colors. Great to see the color again. Anyway is the transition at PH8 going to be as noticeable as what we have seen in the transition at the bebe stores?

Manny Mashouf

Yes. Absolutely. Yes. Huge noticeable transition.

Holly Guthrie – Boenning & Scattergood Inc.

Is there timing for that transition?

Manny Mashouf

Well. It would start coming in starting in February but the full impact of the new merchandise with all the lights treatment and everything else I would say by March or April you''re going to see a substantial amount of changes.

Holly Guthrie – Boenning & Scattergood Inc.

Right. And then a question on the new denim business. I think there is, I don''t know may be four or five SKUs in the store now or styles in the store now. Are those the ones that have rolled over the past few weeks? Are those the ones that have come from your new denim licensee? And how are they performing?

Kathleen Fong-Lee

I think the new denim you are seeing is most likely from the licensee. And our denim is doing well.

Manny Mashouf

Depending on which one you''re talking about. It is a blend of several stars that were some initiated at bebe design team here and some of the licensees.

Holly Guthrie – Boenning & Scattergood Inc.

Okay.

Kathleen Fong-Lee

There is a combination.

Holly Guthrie – Boenning & Scattergood Inc.

I didn’t know that. I thought the new denim would be coming strictly from the licensee. It is a combination of internal bebe and the licensee?

Manny Mashouf

Right. With the licensee we have a portion that we contribute with in-house designers and merchants and we have that in all our license agreements.

Holly Guthrie – Boenning & Scattergood Inc.

Then one other question on merchandise. You said tops were trending well and sounds like you''re pretty happen with denim. How about other bottoms? Trousers and skirts? Are you happy with that performance and if not what do you think you can change?

Kathleen Fong-Lee

The categories that is performing the best is I think pretty consistent across the fashion world in bottoms. Anything that is skinny, leggings, skinny jeans, it is all about that. Those are the things that are performing the best.

Holly Guthrie – Boenning & Scattergood Inc.

Okay. So your dress trousers haven''t really picked up performance yet or your skirts?

Kathleen Fong-Lee

You have to remember our customers are, she is a fashion girl. And trousers is not so much a fashion statement so she is wanting the newest and latest. So she is going towards those categories. The skinny bottom.

Holly Guthrie – Boenning & Scattergood Inc.

Great. Okay. Thank you. Good luck this fall.

Kathleen Fong-Lee

All right.

Holly Guthrie – Boenning & Scattergood Inc.

Spring, sorry.

Operator

Your next question comes from Janet Kloppenburg with JJ Research.

Janet Kloppenburg - JJK Research

Hi. Everybody.

Manny Mashouf

Hi. Janet.

Janet Kloppenburg - JJK Research

Nice progress being made. Believe it or not I have more questions. First of all Manny, it is nice to have you on the call. We would love you to join us all the time.

Manny Mashouf

Thank you.

Janet Kloppenburg - JJK Research

First price and income. I think IMU might have been down in the quarter. I''m wondering what the outlook is for IMU going forward and in the same breath as far as pricing goes I know that you have taken some prices down and been more aggressive in some categories. I''m wondering if we should expect more of that or if that process has been completed?

Walter J. Parks

I think that our expectations would be Janet, we will continue to see improvement in MMU and not so much focus on the IMU but the actual sell through based on the initial pricing. I think we saw some inflation in the IMU that probably contributed to the increase in the markdowns. I think if you go in the store today the initial mark is a better initial price and as a result we are seeing a reduction in markdowns and a better sell through.

Janet Kloppenburg - JJK Research

Okay. Great. What about the pricing? What''s happening there?

Walter J. Parks

Again, I think it depends on the actual item. One of the most successful items back through holiday was the $59 jean. That was a price point we hadn''t had in my previous six years. I think that we can continue to offer that but that would be the entry level. I think that there is opportunity that Kathy has taken advantage of in tops as well. So there are some entry price points but the whole, the average unit retail hasn''t come down significantly.

Janet Kloppenburg - JJK Research

Right. And Manny may be you could talk a little bit about the new product that''s coming in? The logo product. Will it be the same logo we have seen in the past? The sort of active look with the bebe logo or will you be interpreting logo a different way this time?

Manny Mashouf

Actually I would like Kathy to answer that. She would be able to answer better than me.

Kathleen Fong-Lee

Okay. So Janet, In terms of the logo product what is classic with the crystals and classic bebe you will see. You will continue to see that on product. But as we spoke earlier we have invested in a creative team to elevate the fashion piece of that business. And we will continue to look at the, take advantage of the trends in the logo area and make them modern and elevate the styling with a continuous bebe logo that you currently see.

Janet Kloppenburg - JJK Research

I think we’ll back (inaudible) the store.

Kathleen Fong-Lee

Okay. You''re breaking up.

Janet Kloppenburg - JJK Research

I said when do you expect we will see that full selection in the stores?

Kathleen Fong-Lee

You''ll start to see it probably starting in February.

Janet Kloppenburg - JJK Research

Okay. And will it be part of the marketing that you will be doing for the March period?

Kathleen Fong-Lee

Well, we currently if you, I don''t know where you live but we currently have an ad campaign with the bebe logo T-shirt. She is wearing a pair of jeans and a black blazer, jacket.

Walter J. Parks

Best ad in 18 months.

Kathleen Fong-Lee

It has been a great response.

Janet Kloppenburg - JJK Research

Okay. I have seen the ad. Okay. good. Then can you comment on the ad budget? Was it down in the second quarter? And will it be up in the third and fourth quarters?

Walter J. Parks

No. We anticipate it will be below the prior year in both the third and fourth and was below in the second.

Janet Kloppenburg - JJK Research

Okay. Can you give me an idea how much it was below and how much it will be below going forward?

Walter J. Parks

I''m not prepared to talk about going forward but last quarter it was down about $1.5 million.

Janet Kloppenburg - JJK Research

Well. You said you expected SG&A to be down, Walter in the third quarter.

Walter J. Parks

No. We didn''t say that.

Janet Kloppenburg - JJK Research

I thought you said you would expect some improvement maybe not as much as in the second.

Walter J. Parks

Yes. We said that.

Janet Kloppenburg - JJK Research

So that to me means.

Walter J. Parks

But I don’t. I''m not prepared to talk to that today, the dollar value of that statement.

Janet Kloppenburg - JJK Research

Okay. My only question to you then is what would be the difference between what you were able to achieve in the second and what you were able to achieve in the third?

Walter J. Parks

Well. If you think back to the fall of 2008 it is when the bottom fell out. And we didn''t know the business was going to be as difficult as it was. So we started reducing expenses in November, December and carried that through all of calendar 2009.

Janet Kloppenburg - JJK Research

So it is just that the comparison is. You had started cutting expenses in the third quarter of ''09?

Walter J. Parks

The fiscal second quarter.

Janet Kloppenburg - JJK Research

The fiscal. Yeah. I understand. Well. That''s a little confusing to me but I''ll come back to you on that. And Bob [ph] or Manny I was just wondering, are you thinking about introducing any new categories or investing in a heavier way in some categories than we have seen in the past?

Manny Mashouf

Janet, we will continue to invest in any category that is giving us the turn around and the results that we need to achieve, of course and we are set up for a quick turn around in terms of reorders. We can respond very quickly now.

Janet Kloppenburg - JJK Research

Right. Okay. And so given what you know right now, Walter, should we be using the January comp trend for the quarter or should we be using something even lower as far as a negative goes?

Walter J. Parks

Well. Again I don''t know that it will be lower. I think it will be better than the last. At this juncture January is as good a proxy as we have.

Janet Kloppenburg - JJK Research

I mean, there wouldn''t be any reason it would get worse, right the product is only supposed to get better and aren''t the comparisons easier as we go through the quarter?

Walter J. Parks

Not so much. They get much easier next quarter.

Janet Kloppenburg - JJK Research

They get much easier in the June quarter.

Walter J. Parks

Yes.

Janet Kloppenburg - JJK Research

Pretty consistent in January, February and March?

Walter J. Parks

Well. Again you have movements of holidays this year affected but generally speaking the January, February, March time period last year was consistent and deteriorated further in April, May, June.

Janet Kloppenburg - JJK Research

Okay. Great. All right. So just the last question is the advertising expense will be lower in the third quarter than it was last year but my sense is you feel much better about the campaign than maybe last year. Maybe you could talk a little bit about that please?

Manny Mashouf

Our marketing efforts is consistent with the reduced cost in advertising in general including the creative as well as the advertising pages as well as our more directed effort to advertising through Internet.

Janet Kloppenburg - JJK Research

Okay.

Manny Mashouf

So yes. Our budget is lower but it is not that much lower this year. It is probably when we see opportunities of great product shots and campaigns that are compelling we would definitely spend the money to maximize the marketing impact of these images as we shoot them every month or so.

Janet Kloppenburg - JJK Research

But what I''m just trying to ask is should we expect a big directional change in the ads or should we expect just a continuation, progress but something along the same lines as we are seeing?

Manny Mashouf

You are going to see some differences actually. I''m thinking about you probably haven''t seen our newest insert, four-page insert that was just sent out yesterday and it is in Cosmo March issue.

Janet Kloppenburg - JJK Research

Okay.

Manny Mashouf

It already came out. I don''t know if it has been mailed or is on the stands yet. I got an advance issue. And you''re going to see some substantial differences in what we have been doing in this campaign that you''re going to notice, the four page that is very much consistent with the all-time bebe campaign that has warmed the hearts of American women and men as well a.

Janet Kloppenburg - JJK Research

Okay. Great. Lots of luck to you, guys. We will talk to you soon.

Manny Mashouf

Thank you. Hello? This is the last call.

Operator

Our last question comes from Stacy Pak at SP Research.

Stacy Pak - SP Research

Yeah. I guess, just one follow-up on the logo. How big should it be as a percent of the mix and not necessarily numbers but when you''re looking at bebe for instance, do you expect logo to get back to kind of where it used to be when I''m looking at the stores? That''s one question. Kathy, I was hoping if you could just say the three key things that are going to be different in spring in your assortments. And then Walter, if you said inventory plans I missed that. Could you update us on inventory plans and the occupancy and SG&A leverage points?

Walter J. Parks

We will work backwards.

Stacy Pak - SP Research

Okay.

Walter J. Parks

So the inventory will be consistent with the past quarter. Down mid to high double digits. And to get leverage you would have to have positive three, four, five comp.

Stacy Pak - SP Research

And that''s for both occupancy and SG&A?

Walter J. Parks

Yes.

Manny Mashouf

As far as logo is concerned it is a very sensitive subject for us, the Company because if we don''t control the rules of the logo it would eat up and cannibalize the entire business.

Stacy Pak - SP Research

Right.

Manny Mashouf

So as a result of our experience over the last nine, ten years logo we have come to conclusions that even though logo can make bigger contribution than it would according to our control and restrictions we want to maintain a level of logo that does not impact the rest of the merchandise within the stores in a negative way. And make it look like a T-shirt shop.

Stacy Pak - SP Research

Right.

Manny Mashouf

So while we are focusing on key silhouette for logo and a faster turn around like we used to, we are not going to contribute more space, real estate space and square footage for the reason that I just explained.

Stacy Pak - SP Research

Okay.

Walter J. Parks

Stacy, Kathy has to jump. She is catching a plane to London that she is 30 minutes late for.

Stacy Pak - SP Research

Okay. Then Manny may be you can address it. If you are going to say just the Key, the key three things that I should look for from Kathy''s impact spring versus where we are coming from in terms of the look of the product? What would you say that is?

Manny Mashouf

I would say the three things are better products, better mix of fabrics, more fashion lights.

Stacy Pak - SP Research

I guess I was hoping for something a little more specific than better product. Is there anything like what is better product should I notice?

Manny Mashouf

I would say across the board in dresses, in tops, in denim, in items. Across the Board whatever this season demands have without being too specific.

Stacy Pak - SP Research

Okay. Good luck to you, guys.

Walter J. Parks

Thank you.

Manny Mashouf

Thanks a lot.

Operator

At this time, there are no further questions. This will conclude the second quarter earnings conference call for bebe. Thank you for joining us.