| BEBE STORES INC ITEM 1A RISK FACTORS Our past performance may not be a reliable indicator of future performance because actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed below |
| In addition, historical trends should not be used to anticipate results or trends in future periods |
| Factors that might cause our actual results to differ materially from the forward looking statements discussed elsewhere in this report, as well as affect our ability to achieve our financial and other goals, include, but are not limited to, the following: RISKS RELATING TO OUR BUSINESS: 1 |
| The success of our business depends in large part on our ability to identify fashion trends as well as to react to changing customer demand in a timely manner |
| Consequently, we depend in part upon the customer response to the creative efforts of our merchandising, design and marketing teams and their ability to anticipate trends and fashions that will appeal to our consumer base |
| If we miscalculate our customers’ product preferences or the demand for our products, we may be faced with excess inventory |
| Historically, this type of occurrence has resulted in excess fabric for some products and markdowns and/or write-offs, which has impaired our profitability, and may do so in the future |
| Similarly, any failure on our part to anticipate, identify and respond effectively to changing consumer demands and fashion trends will adversely affect our sales |
| If we are unable to obtain raw materials, unable to find manufacturing facilities or our manufacturers perform unacceptably, our sales may be negatively affected and our financial condition may be harmed |
| We do not own any manufacturing facilities and therefore depend on contractors and third parties to manufacture our products |
| We place all of our orders for production of merchandise and raw materials by purchase order and do not have any long-term contracts with any manufacturer or supplier |
| If we fail to maintain favorable relationships with our manufacturers and suppliers or are unable to obtain sufficient quantities of quality raw materials on commercially reasonable terms, it could harm our business and results of operations |
| We cannot assure you that contractors and third party manufacturers (1) will not supply similar products to our competitors, (2) will not stop supplying products to us completely, or (3) will supply products in a timely manner |
| Untimely receipt of products may result in lower than anticipated sales and markdowns which would have a negative impact on earnings |
| Furthermore, we have received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to our quality control standards |
| In such event, unless we are able to obtain replacement products in a timely manner, we may lose sales |
| Certain of our third party manufacturers store our raw materials |
| In the event our inventory was damaged or destroyed and we were unable to obtain replacement raw materials, our earnings may be negatively impacted |
| Our success depends on our ability to attract and retain key employees in order to support our existing business and future expansion |
| From time to time we actively recruit qualified candidates to fill key executive positions from within the Company |
| There is substantial competition for experienced personnel, which we expect will continue |
| We compete for experienced personnel with companies who have greater financial resources than we do |
| In the past, we have experienced significant turnover of our executive management team and retail store personnel |
| We are also exposed to employment practice litigation due to the large number of employees and high turnover of our sales associates |
| If we fail to attract, motivate, and retain qualified personnel, it could harm our business and limit our ability to expand |
| In addition, we depend upon the expertise and execution of our key employees, particularly Manny Mashouf, the founder, Chairman of the Board, and majority shareholder, Gregory Scott, our Chief Executive Officer and member of the Board of Directors, and Neda Mashouf, Vice Chairman of the Board |
| Mashouf, Mr |
| Mashouf, or any key officers or employees, it could harm our business and results of operations |
| If we are not able to successfully develop new concepts, including BEBE SPORT and Neda by bebe, our revenue base and earnings may be impaired |
| We believe that there is opportunity to expand the number of BEBE SPORT stores in new and existing markets |
| We will open the first Neda by bebe store in the first quarter of fiscal 2007 |
| If these stores are not successful, our financial condition may be harmed |
| There can be no assurance that future store openings will be successful and new store openings may impact existing stores |
| We expect to open approximately 50 stores in fiscal 2007, of which approximately 28 will be bebe stores, approximately 21 will be BEBE SPORT stores and one will be a Neda by bebe store |
| In the past, we have closed stores as a result of poor performance, and there can be no assurance that the stores that we plan to open in fiscal 2007, or any other stores that we might open in the future, will be successful or that our overall operating profit will increase as a result of opening these stores |
| During fiscal 2006 we closed three stores and during fiscal 2007, we anticipate closing three stores |
| For fiscal 2007, we plan to grow our operations primarily through the opening of new stores |
| These openings may affect the existing stores’ net sales and profitability |
| Our failure to predict accurately the demographic or retail environment at any future store location could have a material adverse effect on our business, financial condition and results of operations |
| Our ability to effectively obtain real estate to open new stores depends upon the availability of real estate that meets our criteria, including traffic, square footage, co-tenancies, average sales per square foot, lease economics, demographics, and other factors, and our ability to negotiate terms that meet our financial targets |
| In addition, we must be able to effectively renew our existing store leases |
| Failure to secure real estate locations adequate to meet annual targets as well as effectively managing the profitability of our existing fleet of stores could have a material adverse effect on our results of operations |
| We are subject to risks associated with our on-line sales |
| We operate an on-line store at www |
| com to sell our merchandise, which we migrated to a third platform in February 2006 |
| Although our on-line sales encompass a relatively small percentage of our total sales, our on-line operations are subject to numerous risks, including unanticipated operating problems, reliance on third-party computer hardware and software providers, system failures and the need to invest in additional computer systems |
| The on-line operations also involve other risks that could have an impact on our results of operations including but not limited to diversion of sales from our other stores, rapid technological change, liability for online content, credit card fraud, risks related to the failure of the computer systems that operate the website and its related support systems |
| In addition, with the migration to a third party we no longer have direct control of certain aspects of our on-line business |
| There can be no assurance that our on-line store will continue to achieve sales and profitability growth or even remain at its current level |
| Any serious disruption at our major facilities could have a harmful effect on our business |
| We currently operate a corporate office in Brisbane, California, a distribution facility in Benicia, California, and a design studio and production facility in Los Angeles, California |
| Any serious disruption at these facilities whether due to construction, relocation, fire, earthquake, terrorist acts or otherwise would harm our operations and could have a harmful effect on our business and results of operations |
| Furthermore, we have little experience operating essential functions away from our main corporate offices and are uncertain what effect operating such satellite facilities might have on business, personnel and results of operations |
| We rely on information technology, the disruption of which could adversely impact our business |
| We rely on various information systems to manage our operations and regularly make investments to upgrade, enhance or replace such systems |
| To support our growth we initiated a three year IS&T strategic plan and we are currently entering year two of this plan |
| In year one we completed the upgrade of our infrastructure, began the implementation of our new production management system, implemented Arthur planning, completed the conversion of our web site to a third party platform and the roll out of clubbebe |
| 11 ______________________________________________________________________ We plan to go live with the first phase of our production management system later in the fall of 2006 and be fully operational in 12 months |
| In addition to improving the preproduction and design processes, we should significantly improve our ability to manage the flow of paper and streamline the process |
| For years two and three, we have begun the process of identifying partners to replace our current point of sale system and implement a new human resources system |
| After both of these systems have been chosen and the implementation process has begun we will begin to evaluate our merchandising system needs |
| Any delays or difficulties in transitioning to new systems, or in integrating them with our current systems, or any other disruptions affecting any of our information systems, could have a material adverse impact on our business, financial condition and results of operations |
| We face significant competition in the retail and apparel industry, which could harm our sales and profitability |
| The retail and apparel industries are highly competitive and are characterized by low barriers to entry |
| We expect competition in our markets to increase |
| The primary competitive factors in our markets are: brand name recognition, sourcing, product styling, quality, presentation and pricing, timeliness of product development and delivery, store ambiance, customer service and convenience |
| We compete with traditional department stores, specialty store retailers, business to consumer websites, off-price retailers and direct marketers for, among other things, raw materials, market share, retail space, finished goods, sourcing and personnel |
| Because many of these competitors are larger and have substantially greater financial, distribution and marketing resources than we do, we may lack the resources to adequately compete with them |
| If we fail to remain competitive in any way, it could harm our business, financial condition, and results of operations |
| Purchases of the merchandise we sell are generally discretionary and are therefore particularly susceptible to economic conditions |
| The outlook for the United States economy is uncertain and is directly affected by global factors that are beyond our control |
| Such factors include disposable consumer income, oil prices, recession and fears of recession, war and fears of war, terrorist attacks, inclement weather, consumer debt, interest rates, sales tax rates, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security |
| Consumers are generally more willing to make discretionary purchases, including purchases of fashion products, during periods in which favorable economic conditions prevail |
| If economic conditions change, our business, financial condition and results of operations could be adversely affected |
| We cannot predict the indirect effects such as rising oil and freight prices, consumer spending or other economic factors that natural disasters will have on our results of operations |
| Our business could be adversely impacted by unfavorable international political conditions |
| Due to our international operations, our sales and operating results are, and will continue to be, affected by international social, political, legal and economic conditions |
| In particular, our business could be adversely impacted by instability or changes resulting in the disruption of trade with the countries in which our contractors, suppliers or customers are located, significant fluctuations in the value of the dollar against foreign currencies or restrictions on the transfer of funds, or additional trade restrictions imposed by the United States and other foreign governments |
| Trade restrictions, including increased tariffs or quotas, embargoes, and customs restrictions could increase the cost or reduce the supply of merchandise available to the company and adversely affect its financial condition and results of operations |
| In addition, we purchase a substantial amount of our raw materials from China and our business and operating results may be affected by changes in the political, social or economic environment in China |
| If we are not able to successfully protect our intellectual property our ability to capitalize on the value of our brand name may be impaired |
| Even though we take actions to establish, register and protect our trademarks and other proprietary rights, we cannot assure you that we will be successful or that others will not imitate our products or infringe upon our intellectual property rights |
| In addition, there is no assurance that others will not resist or seek to block the sale of our products as infringements of their trademark and proprietary rights |
| 12 ______________________________________________________________________ We are seeking to register our trademarks domestically and internationally |
| Obstacles may exist that may prevent us from obtaining a trademark for the bebe name or related names |
| We may not be able to register certain trademarks, purchase the right or obtain a license to use the bebe name or related names on commercially reasonable terms |
| If we fail to obtain trademark, ownership or license the requisite rights, it would limit our ability to expand |
| In some jurisdictions, despite successful registration of our trademarks, third parties may allege infringement and bring actions against us |
| In addition, if our licensees fail to use our intellectual property correctly, the reputation and value associated with our trademarks may be diluted |
| Furthermore, if we do not demonstrate use of our trademarks, our trademark rights may lapse over time |
| If an independent manufacturer violates labor or other laws, or is accused of violating any such laws, or if their labor practices diverge from those generally accepted as ethical, it could harm our business and brand image |
| While we maintain a policy to monitor the operations of our independent manufacturers by having an independent firm inspect these manufacturing sites, and all manufacturers are contractually required to comply with such labor practices, we cannot control the actions or the public’s perceptions of such manufacturers, nor can we assure that these manufacturers will conduct their businesses using ethical or legal labor practices |
| Apparel companies can be held jointly liable for the wrongdoings of the manufacturers of their products |
| While we do not control their employees’ employment conditions or the manufacturers’ business practices, and the manufacturers act in their own interest, they may act in a manner that results in negative public perceptions of us and/or employee allegations or court determinations that we are jointly liable |
| RISKS RELATING TO OUR COMMON STOCK: 1 |
| Our stock price may fluctuate because of the small number of shares that can be publicly traded and the low average daily trading volumes |
| The vast majority of our outstanding shares of our common stock are subject to trading restrictions |
| As of July 1, 2006, approximately 25cmam000cmam000 shares of our common stock were available to be publicly traded, and as a result, our average daily trading volumes are relatively low, and our stock price is vulnerable to market swings due to large purchases, sales and short sales of our common stock |
| Our sales, margins and operating results are subject to seasonal and quarterly fluctuations |
| Our business varies with general seasonal trends that are characteristic of the retail and apparel industries, such as the timing of seasonal wholesale shipments and other events affecting retail sales |
| As a result, our stores typically generate a higher percentage of our annual net sales and profitability in the second quarter of our fiscal year (which includes the holiday selling season) compared to other quarters |
| In addition, our comparable store sales have fluctuated significantly in the past, and we expect that they will continue to fluctuate in the future |
| A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions |
| Our ability to deliver strong comparable store sales results and margins depends in large part on accurately forecasting demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our customer base, managing inventory effectively, and optimizing store performance by closing under performing stores |
| Such fluctuations may adversely affect the market price of our common stock |
| Because Manny Mashouf and Neda Mashouf beneficially own 73prca of the outstanding shares, other shareholders may not be able to influence the direction the company takes |
| As of September 8, 2006, Manny Mashouf, the Chairman of the Board, and Neda Mashouf, Vice Chairman of the Board, 13 ______________________________________________________________________ beneficially owned approximately 73prca of the outstanding shares of our common stock |
| As a result, they can control the election of directors and the outcome of all issues submitted to the shareholders |
| This may make it more difficult for a third party to acquire shares, may discourage acquisition bids, and could limit the price that certain investors might be willing to pay for shares of common stock |
| This concentration of stock ownership may have the effect of delaying, deferring or preventing a change in control of our company |
| Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact investor confidence |
| In order to meet the requirements of the Sarbanes-Oxley Act of 2002 in future periods, we must continuously document, test, monitor and enhance our internal control over financial reporting |
| There can be no assurance that the periodic evaluation of our internal controls required by Section 404 of the Sarbanes-Oxley Act will not result in the identification of significant control deficiencies and/or material weaknesses or that our auditors will be able to attest to the effectiveness of our internal control over financial reporting |
| Failure to maintain the effectiveness of our internal control over financial reporting or to comply with the requirements of this Act could have a material adverse effect on our reputation, financial condition and market price of our common stock |