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Article by DailyStocks_admin    (06-16-08 06:07 AM)

The Daily Magic Formula Stock for 06/16/2008 is bebe stores Inc. According to the Magic Formula Investing Web Site, the ebit yield is 16% and the EBIT ROIC is 50-75 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

General

We design, develop and produce a distinctive line of contemporary women’s apparel and accessories. While we attract a broad audience, our target customer is a 21 to 35-year-old woman who seeks current fashion trends to suit her lifestyle. The “bebe look” appeals to a hip, sexy, sophisticated, body-conscious woman who takes pride in her appearance. The bebe customer expects value in the form of current fashion and high quality at a competitive price.

Our distinctive product offering includes a full range of separates, tops, dresses, active wear and accessories in the following lifestyle categories: career, evening, casual and active. We design and develop the majority of our merchandise in-house, which is manufactured to our specifications or is sourced directly from third party manufacturers.

As of July 7, 2007, we marketed our products under the bebe, COLLECTION bebe, BEBE SPORT, bbsp and bebe O brand names through our 273 retail stores, our on-line store at www.bebe.com, and our 14 international licensee operated stores.

bebe. We were founded by Manny Mashouf, Chairman of the Board. We opened our first store in San Francisco, California in 1976, which was also the year we incorporated in California. As of July 7, 2007, we operated 198 bebe stores in 34 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and Canada.

BEBE SPORT. We launched BEBE SPORT during fiscal 2003 to address the performance and active lifestyle needs of the bebe customer and offers a selection of sportswear and footwear under the BEBE SPORT and bbsp brand names. As of July 7, 2007, we operated 54 BEBE SPORT stores in 16 states, Puerto Rico and Canada.

bebe outlets. The Company utilizes the outlets as a clearance vehicle for merchandise from retail stores. In addition, the inventory includes a strong presentation of bebe logo merchandise and special cuts produced under the bebe O label exclusively for the outlet stores. As of July 7, 2007, the Company operated 20 bebe outlet stores in 11 states and Canada.

On-line. bebe.com is an extension of the bebe store experience and provides a complete assortment of bebe and BEBE SPORT merchandise. We also use it as a vehicle to communicate with our clients.

bebe accessories. In September 2006, we opened a new accessory concept featuring shoes and a unique selection of fine leather goods, bebe logo merchandise, outerwear and gift items. This boutique concept features shoes imported from Italy, Brazil and China.

Operating Strategy

Our objective is to satisfy the fashion needs of the modern, sexy and sophisticated woman. The principal elements of our operating strategy to achieve this objective are as follows:

1. Provide distinctive fashion throughout a broad product line. Our designers and merchandisers are inspired by global fashion trends. They interpret contemporary designs, colors and fabrications into our products to address the lifestyle needs of our customer. Our in-house design team allows us to quickly react to fashion trends, bringing newness into the merchandise mix to complement our core assortment.

2. Vertically integrate design, production, merchandising and retail functions. Our vertical integration enables us to respond quickly to changing fashion trends, reduce risk of excess inventory and produce distinctive quality merchandise.

3. Manage merchandise mix. Our approach to merchandising and proactive inventory management is critical to our success. By actively monitoring sell-through rates and the mix of categories and products in our stores, we are able to respond to emerging trends in a timely manner, better maximizing sales opportunities and minimizing liabilities.

4. Control distribution of merchandise. We distribute our merchandise, other than licensed eyewear and international licensing, through Company owned retail stores and an on-line store. This distribution strategy enables us to control pricing, flow of goods, visual presentation and customer experience. We seek to ensure brand equity through this exclusive distribution.

5. Enhance brand image. We attract customers through edgy, high-impact, visual advertising campaigns using print, outdoor, in-store, electronic and direct mail and e-mail communication vehicles. We also offer a line of merchandise branded with the distinctive bebe logo to increase brand awareness.

Stores and Expansion Opportunities

We believe that there is opportunity to expand the number of bebe, BEBE SPORT and bebe outlet stores in new and existing markets. In selecting a specific site, we look for high traffic locations primarily in regional shopping centers and in freestanding street locations. We evaluate proposed sites based on the traffic pattern, co-tenancies, average sales per square foot achieved by neighboring stores, lease economics, demographic characteristics and other factors considered important regarding the specific location. For fiscal 2008, we plan to grow our operations primarily through the opening of new stores and expansion of existing stores with high sales per square foot.

Our stores typically have achieved profitability within the first full year of operation; however, we cannot guarantee that our stores will do so in the future. Actual store growth and future store profitability and rates of return will depend on a number of factors that include, but are not limited to, individual store economics and suitability of available sites.

In fiscal 2008, we plan to open 40 new stores, relocate or expand 6 existing stores and renovate 2 existing stores. We also plan to close up to 4 stores, resulting in net square footage growth of approximately 14%.

bebe stores. During fiscal 2007, we opened 20 bebe stores, closed 5 stores and expanded or relocated 9 existing bebe stores to larger spaces. Our bebe stores average 3,900 square feet and are primarily located in regional shopping malls and freestanding street locations. In fiscal 2008, we plan to open 25 to 27 bebe stores with an average square footage of approximately 3,900.

From time to time, we will open larger stores, such as our 7,600 square foot bebe flagship store on Rodeo Drive in Beverly Hills, California to further position bebe as an attainable luxury brand. In fiscal 2008, we plan to open two new stores similar to our location on Rodeo Drive, one on Oak Street in Chicago and the other in the Royal Hawaiian shopping mall in Honolulu. In addition, we intend to expand our bebe store in Newport Beach, California by approximately 2,000 square feet to a total square footage of approximately 7,200.

BEBE SPORT stores. During fiscal 2007, we opened 15 new BEBE SPORT stores. Our BEBE SPORT stores average approximately 2,400 square feet and are primarily located in regional shopping malls. BEBE SPORT offers a selection of sportswear and footwear under the BEBE SPORT and bbsp brand names. We have been conservative in our growth plans while we continue to update the BEBE SPORT concept. In fiscal 2008, we plan to open 8 to 10 BEBE SPORT stores with an average square footage of approximately 2,600.

bebe outlet stores. During fiscal 2007, we did not open any new bebe outlet stores but expanded one store. Our bebe outlet stores average 4,200 square feet and are primarily located in outlet malls. In the last quarter of 2008, we plan to open 3 to 5 new or expanded outlet stores under the new name 2b bebe and will continue to offer a selection of bebe logo product, bebe sale consolidations and an expanded assortment of product made exclusively for our Outlet stores under the new name 2b bebe.

bebe accessories. We opened our first bebe accessories store in the first quarter of fiscal 2007. This location is approximately 2,300 square feet. We currently do not plan to open any accessories stores in fiscal 2008.

Store Closures. We monitor the financial performance of our stores and have closed and will continue to close stores that we do not consider to be viable. Many of the store leases contain early termination options that allow us to close the stores in specified years if minimum sales levels are not achieved. During fiscal year 2007, we closed 5 stores. In fiscal 2008, we plan to close up to 4 stores.

On-line store. In February 2006, we migrated to a third-party platform which has and continues to provide improved functionality. We recently implemented several enhancements that have improved the marketing and promotional engines to drive client acquisition and conversion. The bebe.com website is a source of testing new concepts, building a community with our clients as well as providing a comprehensive product offer. We also plan to expand our ship to capabilities to include Canadian customers in fiscal 2008.

International. As of July 7, 2007, we had 14 international stores operated by licensees in South East Asia, United Arab Emirates, and Israel. Our international licensees purchase product from us to include in their licensed bebe stores, the stores are excluded from comparable store sales. As of July 7, 2007, wholesale revenue represented approximately one percent of total sales. In fiscal 2008, we plan to expand from 14 to 22 licensee operated stores. We expect this to include expansions in Israel, Mexico, the United Arab Emirates, Indonesia and Malaysia and strengthening our position in the Singapore and Thailand locations.

Merchandising

Our merchandising strategy is to provide current, timely fashions in a broad selection of categories to suit the lifestyle needs of our customers. We market all of our merchandise under the bebe, COLLECTION bebe, BEBE SPORT, bbsp and bebe O brand names. In some cases, we select merchandise directly from third-party manufacturers. We do not have long-term contracts with any third party-manufacturers, and we purchase all of the merchandise from manufacturers by purchase order.

Product Categories. Our distinctive product offering includes a full range of fashion separates, tops, dresses, active wear and accessories in the following lifestyle categories: career, evening, casual and active. While each category’s contribution as a percentage of total net sales varies seasonally, certain of the product classifications are represented throughout the year. We regularly evaluate existing categories for potential expansion opportunities. We will also introduce watches, sunglasses and an expanded shoe and handbag assortment. We signed an agreement in August 2007 with Sketchers Footwear to produce our entire BEBE SPORT and bbsp footwear products and distribute to our BEBE SPORT stores as well as other stores worldwide. We anticipate that we will begin seeing product in our stores beginning the fourth quarter of fiscal 2008. Also, in the last quarter of fiscal 2008, we plan to launch a new assortment of product for our outlet division under the new name 2b bebe.

In August 2007, we signed an amendment to our licensed rights for optical eyewear which represented less than 1% of our business in fiscal 2007. The amendment extends the eyewear license to June 30, 2010. Under the terms of this agreement, the licensee manufactures and distributes products branded with the bebe logo to be sold at bebe stores and selected retailers. In fiscal 2007, we signed a new agreement with Safilo eyewear to develop, market and sell sunglasses in our bebe stores and Solstice owned stores. The first assortment will be featured in our bebe stores in November 2007.

Product Development. Our product development process enables our merchants to make informed and timely decisions prior to making fabric or merchandise purchase commitments. Our speed to market strategy allows us to quickly react to emerging fashion trends and customer demand. An established timeline ensures an adequate flow of inventory into the stores. We make monthly commitments based on current sales and fashion trends. A detailed merchandising classification plan supports the product development process and includes sales, inventory and profitability targets. We regularly adjust the plan to meet inventory and sales targets.

Marketing

We have developed our advertising and direct marketing initiatives to elevate brand awareness, increase customer acquisition and retention and support key growth strategies.

During fiscal 2007, our marketing expenditures, as a percentage of net sales, were consistent with fiscal 2006. This supported the growth of our direct to consumer business, including national and regional print advertising and outdoor advertising, catalog circulation and the clubbebe loyalty program. In fiscal 2008, we currently anticipate that advertising expenditures as a percent of net sales will be similar to fiscal 2007.

Direct to Consumer

In fiscal 2007, we increased the number of bebe catalogs mailed from fiscal 2006 and produced an additional bebe holiday catalog. In fiscal 2008, we are increasing our catalog circulation and maintaining the number of catalogs produced.

Clubbebe, our customer loyalty program, was launched in fiscal 2006 and as of July 7, 2007, had over 1.8 million members. Our improved client database, which has increased approximately 75% over the same time last year, has significantly contributed to increased direct mail performance.

Advertising

We continue to build brand awareness through targeted advertising campaigns that maintain a focus on core customers while adding new image building media strategies to further elevate the brand to ‘attainable luxury’ status.

An outside advertising agency works to create edgy, high-impact, provocative ads which are produced quarterly and are featured in leading fashion and lifestyle magazines. The images are also used for outdoor advertising, catalog, in-store visual presentation and on our website, bebe.com. To further our brand exposure, we signed actresses Rebecca Romijn as the face of bebe from Spring 2007 through Spring 2008 and Eva Longoria as the face of BEBE SPORT from Spring 2007 through Spring 2009. In the future, we plan to continue to pursue partnerships with models and celebrities who best represent the bebe brand image.

Events

Our semi annual collection preview events, where clients are invited to preview the latest collections, have become strategically important events in our stores. Additionally, we schedule major events throughout the year in partnership with national and regional magazines to benefit non-profit organizations.

Store Operations

As of September 2007, store operations was organized into six regions and 42 districts. Each region is managed by a zone or regional director, and each district is managed by a district manager. Each zone director is responsible for typically two regions, each regional director is typically responsible for five to eight districts, and each district manager is typically responsible for four to twelve stores. Each store is typically staffed with three to five managers in addition to sales associates.

We seek to instill enthusiasm and dedication in our store management personnel and our sales associates through incentive programs and regular communication with the stores. Sales associates, excluding associates in outlet stores, receive commissions on sales with a guaranteed minimum hourly compensation. Store managers receive base compensation plus incentive compensation based on sales and inventory control. Our district managers receive base compensation plus incentive compensation based on meeting sales and profitability benchmarks. Our regional managers and zone director participate in our management incentive program.

Sourcing, Quality Control and Distribution

All of our merchandise is marketed under the bebe, COLLECTION bebe, BEBE SPORT, bbsp and bebe O brand names. We design and develop the majority of our merchandise in-house, which is manufactured to our specifications or is sourced directly from third-party manufacturers. When we contract for merchandise production, the contractors produce garments based on designs, patterns and detailed specifications provided by us.

We use computer aided design systems to develop patterns and production markers as part of our product development process. We fit test sample garments before production to make sure patterns are accurate. We adhere to a strict formalized quality control program. Garments that do not pass inspection are returned to the manufacturer for rework or accepted at reduced prices for sale in our outlet stores.

The majority of our merchandise is received, inspected, processed, warehoused and distributed through our distribution center. Details about each receipt are supplied to merchandise planners who determine how the product should be distributed among the stores based on current inventory levels, sales trends and specific product characteristics. Advance shipping notices are electronically communicated to the stores and any goods not shipped are stored for replenishment purposes. Merchandise typically is shipped to the stores three times per week using common carriers.

CEO BACKGROUND

Manny Mashouf founded bebe stores, inc. and has served as Chairman of the Board since our incorporation in 1976. Mr. Mashouf served as our Chief Executive Officer from 1976 to February 2004. Mr. Mashouf is the father of Paul Mashouf, Vice President of Manufacturing and Sourcing—BEBE SPORT, and uncle of Hamid Mashouf, Vice President of Information Systems and Technology.

Barbara Bass has served as a director since February 1997. Since 1993, Ms. Bass has served as the President of the Gerson Bakar Foundation. From 1989 to 1992, Ms. Bass served as President and Chief Executive Officer of the Emporium Weinstock Division of Carter Hawley Hale Stores, Inc., a department store chain. Ms. Bass also serves on the Board of Directors of Starbucks Corporation and DFS Group Limited.

Cynthia R. Cohen has served as a director since December 2003. Ms. Cohen is founder and President of Strategic Mindshare, a strategic management consulting firm. She also serves on the Board of Directors of Hot Topic, Steiner Leisure Ltd and Equity One, Inc., as well as several privately held companies. Prior to founding Strategic Mindshare in 1990, she was a Partner in Management Consulting with Deloitte & Touche. Ms. Cohen serves on the Executive Advisory Board for the Center for Retailing Education and Research at the University of Florida and is Chairman of the Strategic Mindshare Foundation, a philanthropic organization.

Corrado Federico has served as a director since November 1996. Mr. Federico is President of Solaris Properties and has served as the President of Corado, Inc., a land development firm, since 1991. He is also an active retail consultant. From 1986 to 1991, Mr. Federico held the position of President and Chief Executive Officer of Esprit de Corp, Inc., a wholesaler and retailer of junior and children’s apparel, footwear and accessories (“Esprit”). Mr. Federico also serves on the Board of Directors of Hot Topic, Inc.

Caden Wang has served as a director since October 2003. From 1999 to 2001, Mr. Wang served as Executive Vice President and Chief Financial Officer of LVMH Selective Retailing Group, which included international retail holdings such as DFS, Sephora and Miami Cruiseline Services. Mr. Wang has also served as the Chief Financial Officer for DFS, Gumps and Cost Plus. Mr. Wang is a Certified Public Accountant. Mr. Wang also serves on the Board of Directors of Leapfrog Enterprises, Inc.

Gregory Scott has served as the Chief Executive Officer since February 2004 and as director since August 2004. From 2000 to 2004, Mr. Scott was the President of the Arden B. division of The Wet Seal, Inc. From February 2000 to April 2000, Mr. Scott was President of Laundry, a division of Liz Claiborne. From 1996 to 2000, Mr. Scott was Vice President of Merchandising with bebe stores, inc.

Walter Parks has served as Chief Operating Officer since September 2006 and Chief Financial Officer since December 2003. From 2001 to 2003, Mr. Parks served as Executive Vice President and Chief Administrative Officer of Wet Seal, Inc. From 1999 to 2001, Mr. Parks served as the Executive Vice President and Chief Administrative Officer of Restoration Hardware, Inc. From 1997 to 1999, Mr. Parks served as Chief Financial Officer and Treasurer for Ann Taylor Stores Corporation, and in various other positions since joining that company in 1988.

Barbara Wambach has served as Chief Administrative Officer since August 2004. From February to August 2004, Ms. Wambach served as President and Chief Operating Officer of BEBE SPORT. From 2002 to 2004, Ms. Wambach served as Executive Vice President of Gap Body, a division of Gap, Inc. From 1999 to 2002, Ms. Wambach served as the Chief Executive Officer and President of eLUXURY.

Susan Powers has served as Senior Vice President of Stores since April 2007. From 2005 to 2007, Ms. Powers served as Vice President of Store Operations for Chico’s FAS, Inc. From 2002 to 2005, Ms. Powers served as Vice President of Stores for The Wet Seal, Inc. From 1999 to 2002, Ms. Powers served as Vice President of Stores for BCBG Max Azria.

Lawrence Smith has served as Vice President, General Counsel since October 2004. Prior to joining bebe stores, inc., Mr. Smith served as Vice President, General Counsel for The Wet Seal, Inc. from January 2002 to October 2004. From January 1996 to January 2002, Mr. Smith served as Vice President, General Counsel for BCBG Max Azria.

Erin Stern joined bebe in August 2007 and currently serves as President—BEBE SPORT. Prior to joining bebe stores, inc., Ms. Stern was Vice President and General Merchandising Manager for GAP Inc. as the head of the Old Navy Outlet Division. Prior to that she was Old Navy’s Vice President and General Merchandising Manager of Baby. Ms. Stern launched her career in the Macy’s executive training program.

MANAGEMENT DISCUSSION FROM LATEST 10K

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.

The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to our financial statements included in this report.

We have identified certain critical accounting policies, which are described below.

Revenue recognition. We recognize revenue at the time the products are received by the customers in accordance with the provisions of Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements” as amended by SAB No. 104, “Revenue Recognition”. We recognize revenue for store sales at the point at which the customer receives and pays for the merchandise at the register. For on-line sales, we recognize revenue at the time the customer receives the product. We estimate and defer revenue and the related product costs for shipments that are in transit to the customer. Customers typically receive goods within one week of shipment. We reflect amounts related to shipping billed to customers in net sales and the related costs in cost of goods sold. Sales tax collected from customers on retail sales are recorded net of retail sales at the time of the transaction.

We record a reserve for estimated product returns based on historical return trends. If actual returns are greater than those projected, we may include additional sales returns in the future.

Discounts offered to customers consist primarily of point of sale markdowns and are recorded at the time of the related sale as a reduction of revenue.

We include the value of points and rewards earned by our loyalty program members as a liability and a reduction of revenue at the time the points and rewards are earned based on historical conversion and redemption rates. The associated revenue is recognized when the rewards are redeemed or expire.

We carry gift certificates sold as a liability and recognize revenue when the gift certificate is redeemed. Similarly, customers may receive a store credit in exchange for returned goods. We carry store credits as a liability until redeemed. We recognize unredeemed store credits and gift certificates as revenue three and four years, respectively, after issuance.

We record royalty revenue from product licensees as earned.

We recognize wholesale licensee revenue from sale of product to international licensee operated bebe stores as earned, the stores are excluded from comparable store sales.

Stock Based Compensation. We account for stock options and awards issued to employees in accordance with the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123(R) (“SFAS No. 123(R)”), “Share-Based Payment,” using the modified prospective transition method. Under SFAS No. 123(R), stock-based awards to employees are required to be recognized as compensation expense, based on the calculated fair value on the date of grant. We determine the fair value using the Black Scholes option pricing model. This model requires subjective assumptions, including future stock price volatility and expected term, which affect the calculated values.

Inventories. We state inventories at the lower of weighted average cost or market. We determine market based on the estimated net realizable value, which is generally the merchandise selling price. To ensure that our raw material is properly valued we age the fabric inventory and record a reserve in accordance with our established policy, which is based on historical experience. To ensure our finished goods inventory is properly valued, we review the age and turnover of our inventory and record a reserve if the selling price is marked down below cost. These assumptions can have an impact on current and future operating results and financial position. We estimate shrinkage for the period between the last physical count and balance sheet date based on historic shrinkage trends.

Long-lived assets. We review long-lived assets for impairment whenever events or changes in circumstances, such as store closures or poor performing stores, indicate that the carrying value of an asset may not be recoverable. If the undiscounted cash flows from the long-lived assets are less than the carrying value we record an impairment charge equal to the difference between the carrying value and the asset’s estimated fair value. In addition, at the time a decision is made to close a store, we record an impairment charge, if appropriate, or accelerate depreciation over the revised useful life of the asset. Historically, our impairment charges have been immaterial. During fiscal 2007, we did not record a charge for the impairment of store assets. During fiscal 2006 and 2005, we recorded charges for the impairment of store assets of $73,000 and $112,000, respectively. We believe at this time that the long-lived assets’ carrying values and useful lives continue to be appropriate.

Accrued Litigation. We accrue estimates of probable liabilities associated with lawsuits and claims. The results of any litigation are inherently uncertain. As information becomes available, we assess the potential liabilities related to pending litigation and may revise our estimates as necessary. Such revisions of estimates could materially impact the results of operations and financial position.

Self-Insurance. We use a combination of insurance and self-insurance for employee related health care benefits. We record self-insurance liabilities based on claims filed and an estimate of those claims incurred but not reported. Any projection of losses concerning our liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different amount of claims occur compared to what was estimated or costs of the claims increase or decrease beyond what was anticipated, we may need to adjust reserves in the future.

Income Taxes. We accrue liabilities for estimates of probable settlements of domestic and foreign tax audits. At any one time, many tax years may be subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. Our effective tax rate in a given financial statement period may be materially impacted by changes in the mix and level of earnings. We record a valuation allowance against our deferred tax assets arising from foreign tax credit carryforwards as the utilization of some of these credits is not assured.

Recent Accounting Pronouncements

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes ”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are in the process of determining the impact that the adoption of FIN 48 will have on our financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements ” . SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly does not require any new fair value measurements. The provisions of SFAS No. 157 are to be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. We are in the process of determining the impact that the adoption of SFAS No. 157 will have on our financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently in the process of assessing the impact the adoption of SFAS No. 159 will have on our financial position and results of operations.

Results of Operations

Our fiscal year ends on the first Saturday after June 30. Fiscal 2007, 2006 and 2005 included 53, 52 and 52 weeks, respectively.

Fiscal years Ended July 7, 2007 and July 1, 2006

Net Sales. Net sales increased to $670.9 million during the year ended July 7, 2007 from $579.1 million in fiscal 2006, an increase of $91.8 million, or 15.9%. An increase in comparable store sales of 2.9% versus the prior year contributed $14.9 million to the increase in sales. The remaining increase in sales of $76.9 million was generated by stores not included in the comparable store sales base and year over year increases in on-line sales of $6.6 million, wholesale sales to international licensees of $3.9 million and one additional week in fiscal January 2007 which totaled $8.6 million. The increase in comparable store sales performance was largely due to customer acceptance of our product offering in the first two quarters of the fiscal year. Comparable store sales for the year exclude the additional week in fiscal January 2007. Net sales included a reduction of $1.8 million associated with the customer loyalty program in the current year compared to $2.4 million for the comparable period of the prior year.

Gross Margin. Gross margin increased to $321.8 million for the year ended July 7, 2007 from $286.5 million in fiscal 2006, an increase of $35.3 million, or 12.3%. As a percentage of net sales, gross margin of 48.0% was lower than prior year at 49.5% primarily due to higher markdowns and unfavorable occupancy leverage, partially offset by higher initial markups.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, which primarily consist of non-occupancy store costs, corporate overhead and advertising costs, increased to $216.6 million during fiscal 2007 from $182.0 million in fiscal 2006, an increase of $34.6 million, or 19.0%. As a percentage of net sales, these expenses increased to 32.3% during fiscal 2007 from 31.4% in fiscal 2006. This increase as a percentage of net sales was primarily due to store compensation and depreciation.

Interest and Other Income, Net. We generated $13.1 million of interest and other income, net of other expenses, during fiscal 2007 as compared to $10.4 million in fiscal 2006. The increase in interest and other income resulted from the continued increase of average cash and equivalents and marketable securities balances due to positive operating results and increased interest rates.

Provision for Income Taxes. Our effective tax rate was 34.7% for fiscal 2007 as compared to 35.8% for fiscal 2006. The lower effective tax rate for 2007 was primarily attributable to an increase in tax exempt interest

Fiscal years Ended July 1, 2006 and July 2, 2005

Net Sales. Net sales increased to $579.1 million during the year ended July 1, 2006 from $509.5 million in fiscal 2005, an increase of $69.6 million, or 13.7%. An increase in comparable store sales of 6.1% versus the prior year contributed $27.3 million to the increase in sales. The remaining increase in sales of $42.3 million was generated by stores not included in the comparable store sales base and year over year increases in on-line sales and wholesale sales to international licensees. The increase in comparable store sales performance was largely due to customer acceptance of our product offering. Net sales include a reduction of $2.4 million associated with the customer loyalty program in the current year compared to $0 for the comparable period of the prior year. The Loyalty Program started in August 2005.

Gross Margin. Gross margin increased to $286.5 million for the year ended July 1, 2006 from $253.0 million in fiscal 2005, an increase of $33.5 million, or 13.2%. As a percentage of net sales, gross margin of 49.5% was consistent with 49.6% in the prior year, due to a lower merchandise margin offset by favorable occupancy leverage. In the prior year we recorded lease accounting adjustments of $3.2 million which had a 0.7% impact on gross margin.

Selling, General and Administrative Expenses. Selling, general and administrative expenses, which primarily consist of non-occupancy store costs, corporate overhead and advertising costs, increased to $182.0 million during fiscal 2006 from $151.1 million in fiscal 2005, an increase of $30.9 million, or 20.5%. As a percentage of net sales, these expenses increased to 31.4% during fiscal 2006 from 29.6% in fiscal 2005. This increase as a percentage of net sales was primarily due to stock based compensation and a negotiated legal settlement, together representing 1.7% of sales, as well as increased advertising expenses offset by lower compensation and variable expenses.

Interest and Other Income, Net. We generated $10.4 million of interest and other income, net of other expenses, during fiscal 2006 as compared to $5.0 million in fiscal 2005. The increase in interest and other income resulted from the continued increase of average cash and equivalents and marketable securities balances due to positive operating results and increased interest rates.

Provision for Income Taxes. Our effective tax rate was 35.8% for fiscal 2006 as compared to 38.0% for fiscal 2005. The lower effective tax rate for 2006 was primarily attributable to an increase in tax exempt interest.

Seasonality of Business and Quarterly Results

Our business varies with general seasonal trends that are characteristic of the retail and apparel industries. As a result, our typical store generates 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 of our fiscal year. If for any reason our sales were below seasonal norms during the second quarter of our fiscal year, our annual operating results would be negatively impacted. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.

Liquidity and Capital Resources

Our working capital requirements vary widely throughout the year and generally peak in the first and second fiscal quarters. At July 7, 2007, we had approximately $392.7 million of cash and equivalents and short-term marketable securities on hand. In addition, we had a revolving line of credit, under which we could borrow or issue letters of credit up to a combined total of $25.0 million, which expires March 31, 2009. As of July 7, 2007, there were no cash borrowings outstanding,and there were $0.9 million of letters of credit outstanding.

Net cash provided by operating activities in fiscal 2007, 2006 and 2005 was $100.5 million, $92.6 million and $91.7 million, respectively. The increase of $7.9 million for fiscal 2007 over fiscal 2006 was primarily due to increases in net earnings of $3.5 million, non-cash compensation expense of $1.6 million, depreciation and amortization expense of $4.1 million and deferred rent of $3.6 million, offset by changes in working capital of $5.0 million.

Net cash used by investing activities was $80.1 million, $76.1 million and $98.7 million in fiscal 2007, 2006 and 2005, respectively. The increase in cash used by investing activities in 2007 was primarily a result of an increase in the purchase of property, plant and equipment of $11.8 million, offset by a decrease in net purchases of marketable securities of $7.5 million and proceeds from sales of equipment of .3 million.

Capital expenditures of $43.5 million in 2007 comprise $26.4 million related to the opening of new stores, $10.6 million related to the relocation and expansion of existing stores, $2.5 million related to investments in management information systems and $4 million on other projects. Capital expenditures of $31.4 million in 2006 comprise $19.0 million related to the opening of new stores, $6.8 million related to the relocation and expansion of existing stores and $5.6 million related to investments in management information systems, improvements to our facilities and other projects.

We opened 36, 31 and 21 new stores in fiscal 2007, 2006 and 2005, respectively, and we expect to open 40 stores in fiscal 2008. In fiscal year 2008, we expect capital expenditures of approximately $26.3 million for new stores and relocation and expansion of existing stores and approximately $18.7 million for investments in information systems and other capital expenditures.

During fiscal 2007, the average bebe and BEBE SPORT new store construction costs before tenant allowances were $682,000, and the average gross inventory investment per store was $91,000.

Net cash provided by financing activities was $1.4 million in fiscal 2007 compared to net cash used by financing activities of $5.1 million in fiscal 2006. In fiscal 2007, the proceeds from stock options exercised and the related tax benefits exceeded the payment of dividends. Net cash used by financing activities of $5.1 million in fiscal 2006 compared to net cash provided by financing activities of $7.5 million in fiscal 2005. In fiscal 2006, the payment of dividends exceeded the proceeds from stock options exercised and the related tax benefits.

We believe that our cash on hand, together with our cash flow from operations, will be sufficient to meet our capital and operating requirements through fiscal 2008. Our future capital requirements, however, will depend on numerous factors, including without limitation, the size and number of new and expanded stores, investment costs for management information systems, potential acquisitions and/or joint ventures, repurchase of stock and future results of operations.

On September 13, 2007, we entered into an agreement with our former Vice Chairperson, Neda Mashouf, to repurchase 5 million shares of our common stock beneficially owned by Ms. Mashouf at a price per share of $13.39, an aggregate purchase price of $66,950,000. We expect the transaction to close prior to September 21, 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS



Our fiscal year is a 52 or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2008 and 2007 include 52 weeks and 53 weeks, respectively. The three months ended April 5, 2008 and April 7, 2007 include 13 weeks and 14 weeks, respectively. The nine months ended April 5, 2008 and April 7, 2007 include 39 weeks and 40 weeks, respectively.

Net Sales. Net sales decreased to $151.7 million during the three months ended April 5, 2008 from $154.4 million for the comparable period of the prior year, a decrease of $2.7 million, or 1.7%. The decrease in sales is primarily due to an additional $10 million in sales in fiscal 2007 due to the extra week in fiscal January 2007. Net sales excluding the additional week in fiscal 2007 increased by $7.3 million or 5.1%. The increase in sales is primarily due to a $17.4 million increase in stores not included in the comparable store sales, an increase in on-line sales and an increase in wholesale sales to international licensees partially offset by a 7.6% decrease in comparable store sales totaling $9.6 million. Same store sales exclude the additional week from January 2007.



For the nine months ended April 5, 2008, net sales increased to $516.1 million from $508.2 million for the comparable period of the prior year, an increase of $7.9 million, or 1.6%. Net sales excluding the additional week in fiscal 2007 increased by $17.9 million or 3.6%. The increase in sales is primarily due to a $54.2 million increase in sales for stores not included in the comparable store sales base, an increase in on-line sales and an increase in wholesale sales to international licensees, partially offset by an 8.3% decrease in comparable store sales totaling $36.8 million during the nine months ended April 5, 2008 as compared to the same period in the prior. Same store sales exclude the additional week from January 2007.

Gross Margin. Gross margin decreased to $66.3 million during the three months ended April 5, 2008 from $69.9 million for the comparable period of the prior year, a decrease of $3.6 million, or 5.2%. As a percentage of net sales, gross margin decreased to 43.8% for the three months ended April 5, 2008 from 45.3% in the comparable period of the prior year. The decrease in gross margin as a percentage of net sales resulted primarily due to unfavorable occupancy leverage partially offset by higher merchandise margin as a result of lower markdowns. In addition, gross margin in the third quarter of fiscal 2007 included substantial raw material reserves reversals.



For the nine months ended April 5, 2008, gross margin decreased to $236.9 million from $243.5 million for the comparable period of the prior year, a decrease of $6.6 million, or 2.7%. As a percentage of net sales, gross margin decreased to 45.9% for the nine months ended April 5, 2008 from 47.9% in the comparable period of the prior year. The decrease in gross margin as a percentage of net sales resulted primarily due to higher markdowns and unfavorable occupancy leverage, partially offset by a decrease in inventory reserves.



Selling, General and Administrative Expenses. Selling, general and administrative expenses, which primarily consist of non-occupancy store costs, corporate overhead and advertising costs, increased to $59.0 million during the three months ended April 5, 2008 from $54.1 million for the comparable period of the prior year, an increase of $4.9 million, or 9.1 %. As a percentage of net sales, selling, general and administrative expenses increased to 38.9% during the three months ended April 5, 2008 from 35.1% in the comparable period of the prior year. The increase in selling, general and administrative expenses as a percentage of net sales from the prior year of 3.8% was primarily due to higher total compensation expense, advertising expense and the recording of an impairment charge for three underperforming store locations.

Selling, general and administrative expenses increased to $177.9 million during the nine months ended April 5, 2008 from $163.4 million for the comparable period of the prior year, an increase of $14.5 million, or 8.9 %. As a percentage of net sales, these expenses increased to 34.5% during the nine months ended April 5, 2008 from 32.1% in the comparable period of the prior year. The increase as a percentage of net sales from the prior year of 2.4% was primarily due to an increase in total compensation expense, including stock based compensation, advertising expense and depreciation expense.



Interest and Other Income, Net. We generated approximately $5.2 million of interest and other income (net of other expenses) during the three months ended April 5, 2008 compared to approximately $4.4 million in the comparable period of the prior year. The increase was primarily the result of higher interest rates on our tax-exempt investments and $0.6 million in foreign currency gains related to settling intercompany inventory accounts due from Canada.



For the nine months ended April 5, 2008, we generated approximately $13.0 million of interest and other income (net of other expenses), compared to $10.1 million in the comparable period of the prior year. The increase was primarily the result of higher interest rates on our tax-exempt investments and $0.6 million in foreign currency gains related to settling intercompany inventory accounts due from Canada.



Provision for Income Taxes. Our effective tax rate decreased to 33.6% for the three months ended April 5, 2008 from 35.9% for the comparable period in the prior year primarily due to an increase in tax-exempt interest income as a percent of total pretax income and an increase in our allowable domestic manufacturing deduction.



For the nine months ended April 5, 2008, our effective tax rate decreased to 34.5% from 36.1% for the comparable period in the prior year primarily due to an increase in tax-exempt interest income as a percentage of total pretax income and an increase in our allowable domestic manufacturing deduction.



Seasonality of Business and Quarterly Results



Our business varies with general seasonal trends that are characteristic of the retail and apparel industries. As a result, our typical store generates 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 the other quarters of our fiscal year. If for any reason our sales were below seasonal norms during the second quarter of our fiscal year, our annual operating results would be negatively impacted. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.

LIQUIDITY AND CAPITAL RESOURCES



Our working capital requirements vary widely throughout the year and generally peak during the first and second fiscal quarters. At April 5, 2008, we had approximately $347.4 million of cash and equivalents and investments on hand of which approximately, $264 million, net of a temporary impairment charge of $7.2 million, were invested in auction rate securities (“ARS”). Due to the recent failures of these auctions we have classified $251 million of these investments as long term investments. We do not anticipate the lack of liquidity in the ARS to impact our liquidity and believe we have sufficient cash and equivalents to fund ongoing operations. In addition, we had a revolving line of credit, under which we could borrow or issue letters of credit up to a combined total of $25 million. As of April 5, 2008, there were no cash borrowings outstanding under the line of credit, and letters of credit outstanding totaled $1.9 million.



Net cash provided by operating activities for the nine months ended April 5, 2008 was $64.7 million versus $62.7 million for the nine months ended April 7, 2007. Cash provided by operating activities for the period was primarily generated by net income of $47.1 million adjusted for stock compensation of $8.5 million, depreciation of $16.9 million, deferred rent of $5.3 million, deferred income taxes of $2.4 million and net loss on disposal of property of $0.8 million, as well as changes in working capital. The changes in working capital were primarily due to an increase in prepaid expenses and other assets of $6.0 million, an increase in receivables of $5.1 million, a decrease in accounts payable of $1.9 million and an increase in inventory of $0.5 million, partially offset by an increase in accrued liabilities of $2.0 million.



Net cash provided by investing activities for the nine months ended April 5, 2008 was $28.5 million versus net cash used by investing activities of $53.9 million for the nine months ended April 7, 2007. Cash provided by investing activities for the period was primarily due to the sales of marketable securities of $393.0 million, partially offset by purchases of marketable securities of $337.0 million and capital expenditures of $28.0 million related to the opening of new stores. We opened 21 new stores in the nine months ended April 5, 2008 and expect to open approximately 35 stores during fiscal 2008. We estimate that total capital expenditures will be approximately $45 million in fiscal 2008.



Net cash used by financing activities was $78.0 million for the nine months ended April 5, 2008 versus net cash provided by financing activities of $3.0 million for the nine months ended April 7, 2007. Cash used by financing activities for the period was primarily due to the purchase of 5 million shares of our outstanding common stock totaling $66.9 million and payments of quarterly dividends for the fourth quarter of fiscal 2007 and the first and second quarters of fiscal 2008 totaling $13.8 million, partially offset by proceeds received from stock option exercises of $2.2 million and the related tax benefit of $0.6 million.

As of April 5, 2008, we had a balance of approximately $264 million in investments in ARS, of which $251 million were classified as long term investments and $13 million were classified as short term marketable securities because either the ARS was sold in a successful auction or was called by issuer. Our ARS portfolio includes approximately 83% federally insured student loan backed securities and 17% municipal authority bonds. Our ARS portfolio is comprised of approximately 85% AAA rated investments, 4% AA rated investments and 11% A rated investments. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The recent uncertainties in the credit markets have affected our holdings in ARS investments and auctions for the majority of our investments in these securities have failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid and we will not be able to access these funds until a future auction of these investments is successful. Maturity dates for these ARS investments range from 2010 to 2045 with principal distributions occurring on certain securities prior to maturity. We currently have the ability and intent to hold these ARS investments until a recovery of the auction process or until maturity.



During our first quarter of fiscal 2008, we entered into an agreement with our former Vice Chairperson Neda Mashouf to purchase 5 million shares of our common stock beneficially owned by Ms. Mashouf at a price per share of $13.39, an aggregate purchase price of $66,950,000. We may purchase additional shares from Ms. Mashouf or other shareholders in the future.



We believe that our cash on hand, together with our cash flows from operations, will be sufficient to meet our capital and operating requirements for at least the next twelve months. Our future capital requirements, however, will depend on numerous factors, including without limitation, liquidity of our auction rate securities, the size and number of new and expanded stores and/or store concepts, investment costs for management information systems, potential acquisitions and/or joint ventures, repurchase of stock and future results of operations.



Inflation



We do not believe that inflation has had a material effect on the results of operations in the recent past. However, we cannot assure you that our business will not be affected by inflation in the future.

CONF CALL

Walter Parks

Hello. I am Walter Parks, bebe’s Chief Operating Officer. Thank you for joining Greg Scott and me for bebe’s second quarter fiscal 2008 earnings release update. Our call will be limited in time to one hour. After our prepared comments, we will take questions for as long as time permits.

Let me start with our disclaimer. During the course of this call, we will make projections or other forward-looking statements regarding future events and the future financial performance of the company. We wish to caution you that such statements are just predictions, and that actual events or results may differ materially. We refer you to the company’s Forms 10-K, 10-Q, and other filings made with the SEC for additional information on risk factors that could cause actual results to differ materially from our current expectations.

I will now turn it over to Greg.

Greg Scott

Thanks, Walter, and good afternoon, everyone. Let me start by saying that I continue to be disappointed with our comp store sales performance. However, I am satisfied that we delivered earnings within our guidance given the difficult retail environment.

This speaks to our ability to control our fixed expenses, inventory including both finished goods and raw materials, and our store payroll during the quarter. Our earnings also benefited from a favorable tax rate. For the quarter, net earnings were 23.4 million versus 24.3 million in the prior year, down 3.7%.

Earnings per share were $0.26 versus $0.26 in the prior year. Overall, our transactions decreased 3%, average dollar sale decreased 5%, and our units per transaction decreased 3%, resulting in a 7.9% comp store sales decrease compared to 5.5 comp store sales increase in the prior year. Net sales for the quarter were $203 million, and increased 3% compared to the same period of the prior year through new store growth and higher licensee and international sales and strong bebe.com sales.

Walter will take you through the details of the second quarter. I will then review some of the highlights of our business. We will then discuss our plans for the upcoming quarter. After that we will be happy to take your questions.

Walter Parks

Thank you, Greg. Net sales for the second quarter increased 3% to 203 million compared to sales of 197 million in the second quarter a year ago. Same store sales for the second quarter decreased 7.9% compared to an increase to 5.5% in the prior year.

Gross margin as a percentage of sales decreased to 46.2% from 47.9% in the prior year. This decrease of 1.7% was primarily due to higher markdowns and unfavorable occupancy leverage partially offset by a reduction in raw material reserves. SG&A expenses were 30.9% of net sales for the quarter compared to 30% in the same period in the prior year. The increase in SG&A expenses as a percent of sales is primarily due to higher total compensation expense as a result of timing differences associated with stock-based compensation and the recording of a small provision for bonuses in the current year versus a reversal of the bonus accrual in the prior year, partially offset by lower advertising.

The effective tax rate for the second quarter of fiscal 2008 decreased to 33.8% from 35.9%, primarily due to an increase in tax free interest income as a percent of total pre-tax income, and an increase in our allowable domestic manufacturing deduction during the current year.

Net earnings for the second quarter were 23.4 million compared to 24.3 million in the prior year. Diluted earnings per share for the second quarter of fiscal 2008 was flat at $0.26 on 90 million diluted weighted average shares outstanding compared to $0.26 per share on 95 million diluted weighted average shares outstanding for the second quarter of fiscal 2007.

Net sales for the year-to-date period ended January 5th, 2008 were 364 million compared to 354 million in the prior year, an increase of 3%. For the – for fiscal 2008, year-to-date period comparable store sales decreased 8.5% compared to an increase of 8.6% in the prior year. Gross margin for the year-to-date period ended January 5th, 2008 decreased to 46.8% compared to 49.1% in the prior year.

This decrease is primarily the result of higher markdowns and unfavorable occupancy leverage offset by lower raw material reserves. SG&A expenses for the year-to-date period ended January 5th, 2008 increased to 32.6% of sales compared to 30.9% of sales in the prior year, primarily as a result of higher compensation including stock-based. Net earnings for the year-to-date period ended January 5th, 2008 was 39 million compared to 45 million in the prior year.

Diluted earnings per share for the year-to-date period ended January 5th, 2008 is $0.42 on 92 million diluted weighted average shares outstanding compared to $0.47 on 95 million diluted weighted average sales outstanding for the prior year. Our total cash and investment at January 5th, 2008 were 365 million versus 382 million at December 30th, 2006.

Inventories at January 5th, 2008 were 46 million compared to 46 million at December 30th, 2006. At the end of the second quarter, finished goods inventory per square foot was approximately 6% less than the prior year. Capital expenditures for the fiscal year-to-date were approximately 18 million and depreciation expense was approximately 10.8 million. We ended the second quarter with 290 stores, which represent 1,051,000 square feet.

Now I will turn it back over to Greg.

Greg Scott

Thanks, Walter. Results for the second quarter 2008 speak to the challenges we've faced in our core bebe brand and the larger macroeconomic environment. As stated earlier, for the quarter we experienced a decrease in transactions, average dollar sale, and units per transaction compared to the prior year. During the month of December, our week-over-week sales build for the first three weeks was below the historical level when adjusted for the shift in the Christmas holiday. This was offset by better than historical sales builds in week four and five. In our 80 stores with traffic counters both this year and last year, traffic was down in four of the five weeks, with re-aligned weeks five being positive.

This weakness in traffic was offset by higher conversion when compared to the prior year. In response to the reduced traffic, markdowns were higher than anticipated as we were forced to clear inventory in December due to lower than anticipated sales on weeks one, two and three, and our desire to have a clean conversion in January. Our strategy of driving sale with key products offered at great values was not as successful as planned. We continue to see that price does not drive sales, but great and unique fashion do. As we go forward, we will focus on offering unique and sexy fashion, while managing inventory levels to reduce markdown risk. Consistent with the current quarter, we will continue to take markdowns aggressively on slow moving products to assure a clean conversion in future periods as we did in January.

On our last call, we reviewed our plans for the second quarter, and today, I would like to give you the highlights. One, the apparel business in our core bebe division struggled in the quarter as the gains that we saw on dresses, denim and sweaters could not offset the decreases we saw on sportswear including suiting, outerwear and logo.

As previously reported, November was the only month in the quarter that had positive comp store sales. This can be attributed to a strong Black Friday performance. So on what would – what we would consider a successful November, we were disappointed by December’s result. We believed that we were well positioned going into December in our apparel business, and planned key promotional events to drive the business in December.

This strategy and these events were not successful. We saw that price did not drive our business even during a tough macroeconomic environment. During weeks one, two and three of December both traffic and sales were challenging. In weeks four and five, we saw an improvement in both, but not enough to offset the shortfalls in the first three weeks. Our sportswear and suiting business were particularly challenged in the quarter, as we saw clients focused on dresses including sweater dresses as opposed to suiting and separates.

On a brighter note, the bebe accessory business was slightly positive for the quarter with a lower markdown rate, higher average unit retail and faster weeks of supply than the prior year.

Our shoe business continues to perform with a strong double-digit comp in the quarter. We ended the quarter with our new sunglass fixture in a 106 stores, and we are pleased with the category performance. Comp store sales increased double-digits in the quarter.

Our handbag business showed strong performance driven by our signature logo handbags. We saw double-digit comps in handbags during the quarter. The jewelry business also performed well, driven by signature bracelets and necklaces. Hosiery was also successful with strong triple digit comp performance in the quarter. While we saw sequential improvement in belts, we did not see the improvement we anticipated and we are still running below last year in this category.

Two, in BEBE SPORT, we saw slight improvement in our comp store sales and while SPORT continued to run negative, we were pleased with the improved margin performance in the quarter. We saw improvements in both our IMU and markdown rate, while turning the product slightly faster than prior year.

The business was driven by bbsp in sweaters, offset by the street side of the business, which continues to under-perform. During the quarter, we mailed 122,000 direct mail pieces focusing on the bbsp side of the business versus 245,000 last year. We mailed to the top 50% of our SPORT clients and delivered positive incremental revenue and coupon conversion. Three, the outlet business achieved a flat comp performance that was slightly below our incoming expectations for the quarter driven in part by a reduction in transfers of markdown inventory from our full price locations. We continue to be pleased with the bebe logo and bebe O business in the outlet stores, and remain on track to open our first "to be bebe" stores this spring.

Number four, our international business continues to exceed expectations. Comp store sales for the first half of fiscal year ‘08 increased 43% and total international sales grew 163%. In the first half of fiscal year ‘08, we opened three new stores bringing our total store count to 17 excluding shop and shop. These three new stores are located in Indonesia, Israel and Malaysia. We are excited to announce we recently signed new agreements for the territories in Mexico and Egypt, and are close to finalizing plans for Eastern Europe.

We currently have freestanding stores in the UAE, Israel, Thailand, Singapore, Malaysia and Indonesia. We continue to make the growth of our international business our priority for the company. Five, in the quarter we opened six bebe stores and five BEBE SPORT stores, and expanded one bebe store. We continue to believe that new store growth as well as the expansion of strong performing existing stores with high sales per square foot will be part of the growth story as we go forward.

We also believe that this growth will consist of expansion in the "to be bebe" business. In fiscal 2008, we remain on track to grow square footage 14%. This growth will include 19 new bebe stores, 9 new BEBE SPORT stores, 7 "to be bebe" stores, and expansion of 7 existing bebe stores. Six, for the quarter we spend 4.3% of sales on total advertising versus 4.7 in the prior year.

This reduction is the result of our decision to not anniversary (inaudible) TV in the prior year, offset by BEBE SPORT national advertising including the cast of Eva Longoria. Seven, in the November-December period, we mailed 2 bebe catalogs and 1 BEBE SPORT catalog with a total circulation of 2.1 million versus last year's 1.4 million, a 50% increase.

While the direct mail marginally exceeded last year’s direct mail sales, we did not get the lift that we anticipated from the increased circulation. We attribute this to a lower average dollar sale across all customer segments, and less than expected conversion from our expanded circulation. While our sales were disappointing, we changed the format of our November book, and managed other cost components of production which enabled us to mail 50% more catalogs at a lower cost than last year.

We also leveraged our increasing BEBE SPORT client base to improve the profitability of the BEBE SPORT catalog, which we mailed during the first week of December. Eight, bebe.com sales increased 23% over last year, driven by a 21% increase in traffic and improved conversion. We implemented several new launches during the first half of the year including shipping to Canada, several user experience enhancements such as multiple product views, and simplified navigation in addition to exclusive product launches of lingerie and swim. bebe.com continues to prove to be an important channel to test new products, engage with our clients, and enhance the communication of our brand, merchandise and marketing strategies.

Moving on to our plans for the third quarter, based on the current business trends and the larger macroeconomic conditions, we believe that a return to a regular price business needs to be our number one priority. To accomplish this, we will reduce the depth of our buy of non-proven fashion items, and invest in items that we believe will drive our sales based on previous sell-throughs with limited markdown risk. Inventory management and creating urgency with our client is our number one focus.

Based on the non-historical nature of the weekly sales builds in the business, and the current negative macroeconomic conditions, we are making a conservative yet realistic outlook on the upcoming quarter. As our release stated, we believe comp store sales will be in the negative mid-single digit range versus flat comps in the prior year.

We are currently not anticipating a benefit from the shift of Easter, which falls on week four versus week one of April last year. We are not anticipating a benefit in March this year when compared to the prior year, because both years include the build historically associated with the Easter holiday. We anticipate this historical build will be offset by Easter Sunday taking place in March versus April in the prior year.

Furthermore, this year our third quarter will have 13 weeks versus 14 weeks in the prior year, due to the calendar shift. We are taking the following steps to improve our comp store trend in the quarter, and to improve our merchandise margins.

One, as previously mentioned we will be reducing our depth in fashion buys in our core bebe brand to help offset the current economic uncertainty, and we will continue to support proven key items to drive the business. We understand the need to return to less depth with more fashion, more frequently.

Two, in bebe retail, the apparel division will continue to invest in dresses, denims and sweaters, including sweater dresses. We still believe that we will struggle with anniversarying our successful sportswear and suiting business as this business continues to perform below our expectations.

Three, we have re-organized our bebe merchandising department to be focused on lifestyle. We have separated our wear to work and going out business from our underdeveloped causal business including denim and logo. We believe this move will help us in merchandising our merchandise by lifestyle. Four, we have launched the bebe design lab which is under the direction of Manny Mashouf, our Chairman. This design initiative will replace our COLLECTION bebe runway effort which we discontinued last spring. To clarify, Manny’s role has not changed as was incorrectly reported in an analyst report. Currently he will be focusing on the design lab rather than the COLLECTION bebe effort, and he continues to be involved in the business on a daily basis. The bebe design team continues to report to our Vice President of Design, Susan Peterson.

The first product offering from the design lab is a collaboration between bebe and actress/designer, Tara Subkoff. Ms. Subkoff was one of the original founders of Imitation of Christ, and will be offering a collection of designs for the fashion for bebe client. This collection will launch in all of our stores during the first week of February, next week under the label Tara Subkoff for bebe.

There has been much buzz about the launch in today’s media. Five, for the quarter, we continue to believe that we’ll see strength in our bebe accessories business. We have seen continued improvement in the trends during January. We also launched our first accessory catalog last week to 500,000 customers.

We believe that we will see continued strength in handbag including signature handbags and shoes. In addition, we will rollout sunglasses to 40 additional locations this spring. Six, BEBE SPORT will be investing in bbsp logo and shoes. Our street business will be supported by (inaudible) in our fashion offerings.

The bbsp business will be supported by the investment in our iconic essentials, which will consist of three core bottoms, and an increased penetration of fashion offerings. Seven, on the international front, we will be opening two additional stores during the quarter.

Over the next 12 months, we plan to expand to seven new countries: Saudi Arabia, Egypt, Kuwait, Russia, Ukraine, Romania and Mexico. We are very excited about the opening of our first store in Mexico City this April, and look forward to continued international growth as a priority for the company. Eight, during the fiscal third quarter, Rebecca Romijn will be featured in the bebe advertising through the beginning of March. Beginning in the middle of March, we’ll return to be featuring a model in our bebe advertising as Rebecca’s contract has ended.

We have been very pleased with the results of our marketing featuring in Rebecca Romijn, and our core client has responded favorably. We thank Rebecca for everything she has done for the brand. Eva Longoria will continue to be featured in BEBE SPORT advertising through next spring.

For the quarter, we currently anticipate spending to be approximately 5% of sales on total advertising versus 3.9% in the prior year, as a result of the BEBE SPORT campaign with Eva, and doubling our circulation in bebe direct to 1.5 million from 550,000 last year. This increase is driven by our first accessory catalog in January, and an increase in circulation of our March book.

Our full year advertising spend will be 4.5% of sales versus 4.1% last year. This increase is driven by our investment in BEBE SPORT advertising, including Eva Longoria. bebe will be featured in Elle, Vogue, Cosmo, and InStyle; and BEBE SPORT will be featured in Elle, Glamour, InStyle and Shape. On January 24th, we launched our double point shopping event, and today in BEBE SPORT, we are hosting our be fit, be better, be you in store in an in-store event.

Last week, we mailed 500,000 of our first accessory catalogs featuring a Valentine's gift giving offer. In March, we have increased our bebe catalog from 550,000 last year to 1 million this year. We will hold our semi-annual collection preview event in March in both bebe and BEBE SPORT during week two of March versus week three last year.

This change is a result of the Easter holiday this year. Nine, during the quarter we will open three bebe stores including the signature store at Oak Street in Chicago with a newly designed logo areas. This store will have many features similar to our store on Rodeo Drive and Columbus Circle in New York City. We’ll expand one bebe store at Roosevelt Field on Long Island, and open one new SPORT store. The seven "to be bebe" stores are planned to open in our fiscal fourth quarter.

Thank you, and I would like to turn the call over to Walter.

Walter Parks

Thank you, Greg. We believe we will see an improvement in trend this quarter. As a result, we currently anticipate comparable store sales for the third quarter to be in the negative mid single digit range.

Diluted earnings per share should be in the range of $0.08 to $0.12 per share based on 91 million weighted average shares outstanding in the third quarter versus $0.14 per share based on 95 million weighted average shares outstanding in the third quarter of fiscal 2007. The company is currently anticipating an effective tax rate of 35% for the third quarter of fiscal 2008.

Inventory at the end of the quarter will be down versus the prior year per square foot in the low to mid single digits. Capital expenditures for fiscal 2008 are planned at approximately 45 million for new and expanded stores, IS&T and office improvements. Depreciation expense for the year will be approximately 23 million.

Total square footage at the end of fiscal 2008 is anticipated to be approximately 14% higher than fiscal year 2007. Advertising for the third quarter of fiscal 2008 will be approximately 5% versus 3.9% in the prior year as a percentage of sales.

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