2 for Tuesday: This bebe Is Hot

The retailer has a good product mix and no debt, and the stock is cheap. Bargain time.
Publish date:
Image placeholder title

Everyone says to avoid retail, but I see some terrific opportunities. Like

bebe stores


, for instance.

Hold on -- I'm no masochist. As I said, I'm aware of the risks of the slowing economy and the debt-ridden consumer. But this bebe -- well, it's just too attractive to pass up.

What makes me so confident that this company, which sells trendy clothes to young, hip women, is a stock to own? Well, bebe features a strong management team and a terrific product mix. That combination means that bebe's profits are going to hold up during the downturn better than competitors' will. Plus, the company seems to have a strong grasp on inventory management, which reduces the prospect of a damaging writedown at the end of the holiday season.

During its fiscal first quarter, ended Sept. 30, bebe reported gross margins in excess of 46% -- roughly 7 points ahead of the margin posted by

Abercrombie & Fitch

(ANF) - Get Report

in its July quarter. That's partly because bebe hasn't had to mark down prices as much as competitors have. Solid prices mean demand is strong and goods are moving along pretty well. Sales and inventories are growing at essentially the same pace, suggesting the company isn't likely to have to write off obsolete inventory come year-end.

Good inventory management is a sign of good management in general. This bunch is fairly conservative through and through; with the exception of September and October, bebe has consistently underestimated and overdelivered on its same-store sales targets. Moreover, the balance sheet is strong, boasting no long-term debt and roughly $3.77 per diluted share in cash. That means recession or no, bebe should be able to fulfill its plan to expand the store base by at least 15% over the next year.

And the margin picture, already solid, could get better. In the past, the company designed less than half of its fashions. It now does about 70% of design work in-house, and in the long run this will undoubtedly boost operating margins.

Now let's look at the numbers. The stock trades at about 15 times 2002 consensus estimates of $1.19 a share, and at 13 times 2003 estimates of $1.39 a share. Even if we use the most conservative sell-side earnings estimates, bebe still trades at a discount to its anticipated 17% growth rate. And though the company is probably in the best shape it's been in in the past half decade, the stock is trading at three times book value and 5.3 times sales -- well below its previous highs.

Folks, the selloff in bebe was understandable, given the lingering economic uncertainty. But make no mistake: This is a solid company with unsung earnings potential. I think it deserves a second look.

In keeping with TSC's editorial policy, Glenn Curtis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Curtis welcomes your feedback.