My last post on BEBE was how right I was. This one is on how wrong I was as well. Because of what I’ve recently learned, I’m doubling down on BEBE.
Healthy Balance Sheet
In my last post, I walked through the balance sheet. After adjusting assets for the actual market values of the properties it owns, BEBE should have $17mn in net cash. With a current market cap just under $50mn, that implies its 50% ownership of the licensing business is worth $30mn.
All About the Revenue
Nobody knows how much revenue BEBE will generate going forward through licensing. But I missed a key clue in the most recent filing. For the year, BEBE generated $3.8mn in equity income. In 1Q17, equity income was $450k, its first full quarter of international licensing revenue. It has grown since then and was just under $1mn in 3Q17. In 4Q17, equity income stepped up again to $1.4mn. If we assume all the equity income currently generated comes from international, that means the international business is a $5-6mn run-rate business that continues to grow. To show you how wrong I previously was, I estimated $3mn in net profit from licensing, and we haven’t even factored how much equity income BEBE will get from the North American business!
Is All the Equity Income International?
This is not clear. According to the 10-K, BEBE has entered into a transition services agreement with GBG to scale down the business. It also entered into a licensing agreement with GBG at the beginning of May.
The Company has agreed to provide transition services to Global Brands Group (“GBG”), an unrelated third party on a short-term basis not expected to go beyond October 31, 2017 for which it will receive a service fee that is expected to cover the Company’s costs of providing the services. GBG has entered into a license agreement with the Joint venture and beginning May 2, 2017 began to operate the website www.bebe.com as well as the international business formerly operated by the Company. In connection with this arrangement, GBG purchased the remaining finished goods inventory of from the Company on May 2, 2017.
So does this mean 4Q17 includes two months of US licensing revenue? I don’t think so. GBG is still in the process of winding down existing inventory. It shouldn’t pay a license fee for this. GBG recently hired a new designer and is creating a new collection. GBG will pay a license fee for new products, which should show up as equity income in future quarters.
How Much Money Can BEBE Make in the US?
If you look back to BEBE’s FY16 10-K, it noted that 8% of revenue came from international wholesale licensee operations. That means 92% of sales came from the US. However, wholesale revenue comes in a lot lower than retail, so if we adjust for that, maybe it would be 80% revenue from the US, 20% from international. But also take into consideration BEBE is losing all of its retail stores, so the delta between US and international won’t be as large. The US is the largest market in the world, so let’s assume US licensing is the same size as international. That means BEBE should be generating $10-12mn in equity income annually.
What About Costs?
This is my favorite quote from the 10-K.
Once this agreement ends, we will transition to a holding company for our investment in the Joint Venture and we expect to receive a quarterly cash dividend from this investment. In addition, we expect our operating costs to reduce to an insignificant amount once we have completed the transition which we expect to occur by the end of the second quarter of fiscal 2018.
Insignificant. What’s considered insignificant? Let’s assume $2mn to be conservative. That means BEBE should generate $8-10mn in net profit annually!
What’s the Multiple?
Previously, I used a 14x multiple, using the average of a few apparel manufacturers. I still believe that’s the right multiple. But let’s be conservative here, and assume a 10x multiple since many investors are skeptical around the transition. Note that JCP trades at 10x fwd and it’s 4.0x levered and has declining comps.
That means BEBE’s licensing business should be worth at least $80-100mn, using a conservative multiple and conservative estimates for costs. Add the cash and the stock is worth $100-120mn, more than double the current valuation.
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!