BEBE is an interesting stock because it’s not widely followed and it’s currently undergoing a major transformation. Stocks like these are great potential alpha generators because all the uncertainty and lack of information keeps most investors away. But if you do the work, you may uncover something that others have missed. And having done the work, I believe BEBE is a hidden gem of a stock.
BEBE Moving to Online-Only Model
In April, BEBE announced that it was closing all of its stores and moving to an online-only distribution model. In May, BEBE closed all of its brick and mortar stores. It will pay $65mn to exit all of its leases. Last year, BEBE announced a joint venture with Bluestar Alliance to license the BEBE brand. Going forward, all sales made will be through the licensing model.
What’s BEBE’s Book Value?
As of April 2017, BEBE had the following assets:
- $27mn in cash
- $8mn in receivables
- $28mn in inventory
- $26mn in assets held for sale
- $8mn in prepaid and other
Included in the $26mn of assets held for sale are the two properties BEBE just sold for $57mn, so instead of using the $26mn of assets when assessing book value, I’m going to use the $57mn. Inventory was likely sold at a discount when they were clearing stores, so I’m giving it a haircut of 50%, or $14mn. This puts total assets at $114mn.
BEBE reported total current liabilities of $32mn and deferred rent and other lease incentives of $14mn. In May, BEBE announced that it would close all of its stores and take a $65mn charge. I’m assuming most of the $14mn is included in the $65mn because BEBE closed all of its stores at the end of May and that will cover the deferred rent and other leases. This puts total liabilities at $97mn.
Netting assets with liabilities leaves a net book value $17mn.
Value of Tax Assets
As of July 2016, BEBE had $169mn in Federal NOLs, $122mn in State NOLs, and $6mn in Foreign NOLs. This number has likely grown since then and this is why I’m assuming BEBE doesn’t pay any taxes on the gain from the property sold. Assuming a conservative cost basis of $0 for the properties since they were purchased a long time ago, BEBE should still have Federal NOLs in excess of $100mn, which it can use to reduce its taxable income going forward.
BEBE is a Hidden Gem of a Stock
BEBE currently has a market cap of $42mn and I estimate book value to be $17mn, so doesn’t this mean BEBE stock is overvalued? Don’t forget, BEBE is now a licensing business, and that has value.
In FY16, BEBE had $393mn in revenue. This year, consensus is expecting closer to $350mn, due to store closures and negative sales comps. Because BEBE is closing all its stores, revenue will come in much lower than this going forward. But by how much?
According to this analysis by NPD, 19% of all apparel was purchased online in 2016, up from 11% in 2011. In 2017, it should grow to at least 20%. Because BEBE skews towards a younger demographic and there will no longer be any retail stores, I’m estimating 35% of FY17 sales will come over to the online-only model. This implies FY18 revenue of $120mn.
Average apparel royalties is around 5%. So this implies BEBE will generate royalty revenue of $6mn. Because it has no costs and a ton of NOLs, this $6mn will flow directly to the bottom line. However, BEBE has a 50/50 JV with Bluestar, so it’ll only get half of this, or $3mn.
What’s The Multiple?
BEBE’s new business model is low risk because it has very little fixed costs and it only collects royalties. Apparel manufacturers trade in a wide range of multiples, like VFC, which trades at 19x forward earnings, or PERY, which trades at 8x. Using a small group as a comp, I get an average multiple of 14x.
I believe BEBE should trade at a higher multiple because licensing is a much less volatile business vs. actually manufacturing clothes, but there’s a reason why BEBE decided to close all of its stores, so I’m using just the average to be conservative.
Applying a 14x multiple to $3mn of earnings results in a valuation of $42mn. Combined with a net cash position of $17mn, I get to a total valuation of $59mn, or 40% upside from current levels.
A Takeout Candidate?
Remember when I mentioned Bluestar and BEBE formed a JV last year to license BEBE’s brand? Bluestar paid $35mn for a 50% stake while BEBE contributed its IP. Now that BEBE is only licensing brand, Bluestar could potentially own the brand outright.
To buy out the remaining 50% stake, Bluestar would need to pay a premium to its current valuation. On average, takeout premiums are around 20-30%.
Even if Bluestar isn’t interested in buying out the outstanding stake right now, they’d consider it for the right price. Bluestar paid $35mn for a 50% stake in the JV last year. Unless the business has gotten materially worse, it’s reasonable to assume that they’d pay at least another $35mn to own the whole company. If anything, they’d likely pay more since they would get control of the business.
Conservatively assuming my estimates are incorrect and that there’s actually no cash remaining after paying liabilities, a $35mn valuation on the equity implies 17% downside from here. With 40% upside in my valuation and a floor of 17% downside, the risk/reward is favorable. This is why I believe BEBE is a hidden gem of a stock.
A Garbage Stock Play
BEBE is not a high quality stock, which is why its market cap has sunk from $500mn a few years ago to under $50mn today. But just because a stock is garbage doesn’t mean that you can’t make money off it. In fact, my highest returners in my portfolio have been garbage stocks. To learn more about garbage investing, click here.
Since this post, BEBE has reported annual results. For my take, please click here.
Disclosure: I own BEBE stock. The opinions expressed are my own. Investing is risky, especially stocks with less than $100mn market cap. Please do your own research before making your own investments!