BEBE’s Taking an Axe to Costs

Although there have been a few hiccups along the way, like the voluntary delisting from NASDAQ to OTC in December and the sale of its headquarters falling through, BEBE is largely living up to expectations.

As I have discussed previously, the company is moving to a licensing-only model. Since it will no longer need designers, warehouses, and distribution centers, costs should become immaterial. There’s been some debate around how low costs can go, since the company is not great around providing detailed information. Now, it appears we finally have a rough idea, and it’s better than I expected.

BEBE Delisting Saves $30k Annually

When BEBE voluntarily delisted from the NASDAQ, it lowered annual listing fee from $40k to $10k, resulting in net savings of $30k. $30k isn’t really meaningful, even for a small company like BEBE, but it does highlight the company’s focus on cost reduction.

CEO No Longer Taking Salary

In its most recent 8-K filing, the company announced further plans to reduce costs. BEBE announced the departure of its CFO. He will be leaving with a $500k retention bonus. In the 8-K, it also announced the appointment of a new principal financial and accounting officer, who will be paid $150k per year, plus reasonable expenses.

Along with the departure of the CFO, BEBE founder and CEO Manny Mashouf will no longer take a salary or a housing allowance. Previously, his salary was $900k/year and the housing allowance was $100k, resulting in net savings of $1mn per year.

I think this would be a great picture for BEBE’s ad campaign.

Previously, I assumed the company could have $2mn in annual costs. Clearly, I was way too conservative. I think a more reasonable estimate now would be <$500k, since they only need a few people to ensure the royalty payments are accurate. I still stand by my estimate of $10-12mn in equity annual income flowing directly to shareholders, driven by licensing deals around the world. Let’s be conservative and assume $1mn in total costs, implying net income of $9-11mn.

Using a conservative 10x multiple for this stable income stream, that would imply a business valued at $90-110mn. Including $20mn in net cash, once it sells its LA design studio, that means the stock should be worth $110-130mn. With 8mn shares outstanding, that implies a valuation of $14-16/share, $1 above my previous estimate $13-15/share. BEBE is currently trading around $4/share, which implies 275% upside!

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!

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