StockTalk:
TMF Interview With
bebe stores CFO Blair Lambert
With Yi-Hsin Chang (TMF Puck)
and Brian Graney (TMF Panic)

August 19, 1998

Our guest today is Blair Lambert, CFO of bebe stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BEBE)") else Response.Write("(Nasdaq: BEBE)") end if %>, coming to us live from Brisbane, Calif. Founded as a boutique in San Francisco in 1976, bebe designs and sells women's fashions through its 86 stores located in 21 states. The company became public in mid-June, and recently reported earnings for fiscal 1998 of $17.4 million, up 222% from $5.4 million a year before, and sales of $146.7 million, a 54% increase from $95.1 million.

TMF: Thank you for joining us today, Mr. Lambert.

Lambert: Glad to be here.

TMF: What is your target audience? Are you aiming to attract customers who are in their 20s and 30s, or do you think your clothes appeal to women of all ages?

Lambert: You're pretty much on target there. We target an 18- to 35-year-old fashion-forward woman who's looking for current, contemporary fashion -- fashion that's happening right now in the marketplace.

TMF: Your offerings are obviously very different from another competitor, say the Gap <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %>. What type of brand or look are you trying to get with your clothing?

Lambert: We focus on more current fashion than maybe the Gap would, who's going to be showing maybe more of the basic types of items. So we're looking to spend a lot of time looking at what's happening on the runway shows and then trying to provide those current fashions to our customer. In addition to that, we do have a group of core products -- what we call bebe basics -- that would encompass a large portion of our suiting business, which is coordinated tops and bottoms for the professional woman to wear to work. And in addition to that, we have a fairly strong logo side of the business, which is more casual and probably crosses over somewhat with the Gap customer at that level.

TMF: Some people have compared bebe to Calvin Klein. Do you think that's a fair comparison, or does bebe fill a different niche?

Lambert: I think that bebe probably approaches a little bit older woman than what Calvin Klein is focusing on, that 18- to 35-year-old segment. The 25-year-old age range is really the average customer age, and there's probably even three different faces to that customer. First, a young, professional woman, as I mentioned, who's looking for a product that she can wear to work and then also wear out that evening. Maybe she wears a suit to work with a dress under, and the top can come off that evening, and she can wear it out. The second face is probably the more fashion-forward customer who's been cultivated by our advertising campaign, and that's probably someone looking for more fashion casual tops. And then a third face is really a younger customer that's really come on in the past year or so, who's looking more towards the logo items and occasion dressing maybe for school formals or college events that are happening.

"We target an 18- to 35-year-old fashion-forward woman who's looking for current, contemporary fashion -- fashion that's happening right now in the marketplace."

TMF: How would you respond to people who have the opinion that bebe's recent growth is really related to the increase in disposable income right now and to the strong economy?

Lambert: Probably a couple of responses. I'm sure that everybody in retail has seen the benefits of a very strong economy. We're living in a time for retail right now. Look at all the branded retailers that are performing very well. Nonetheless, the company's been around for 25 years and showing some pretty strong growth for the last 10 years. At this point, we have a very broad product line that addresses a lot of our customer needs for both casual and work wear. So I think that we cover a broad spectrum, and it can be strong well into the future.

TMF: What are your plans for expansion? Do you think that for the time being bebe is only suitable for larger markets, in more urban environments, or do you think they're suitable all over? And also, are you planning to open any stores outside the U.S.?

Lambert: From the market research that we've done, your comment, "Is it more of an urban-suburban kind of a market that we target," what our research has shown us is that that's true. We looked at the top 150 markets in the U.S. We're currently operating in 37 of those top 150 demographic markets or geographic markets around the U.S., and there's another 30 that we can see getting into right now.

Longer term as the brand gets known better, there may be additional opportunities to expand into some of the smaller markets, but we'll take those opportunities, [and] identify them as they appear out in the future. That still leaves us a lot of room for growth within those top 50 to 60 markets. We currently have 86 stores, and we have a specific list of where the next 80 stores go. So we've got a clear direction on that within the U.S.

The second part of your question, "Is there an international component or opportunity?" We have licensed our name in Mexico to a licensee. They opened a store in Mexico City in May of this year, and they've had a very, very strong reception. They've actually come back to us with an interest to open a store in Cancun hopefully in the spring of 1999.

In addition to that, we will be opening our own store in Canada, in Vancouver, hopefully in January of '99 -- we'll be signing the lease in the next few weeks on that -- and we're looking at potential opportunities to expand in the U.K. Those two, Canada and the U.K., will be owned stores, whereas the licensee opportunity is something that we look at in markets where we have language barriers, where we think it's important to look for people who are currently operating in those markets.

TMF: For the 80 stores that you said were planned for the U.S., what is the time frame for rolling those out?

Lambert: The current plan is to try to open 15 stores during the next year that will include both domestic and international stores, and probably 15 again in the year after that. The real estate business is a little bit of an opportunity business. Real estate doesn't always come about or become available exactly when you want it. If opportunities in excess of 15 stores pop up, we'll go after them. We've opened as many as 22 to 25 in a 12-month period in the past. If good opportunities come up, we'll take advantage of them, but we're very selective.

"When we look at the pricing of a garment, we don't think so much in terms of the flat price itself. We look at it in terms of value. If you look at the quality of the product that we put in the store, we feel that it's a very good value."

We're selective in that we want the economics to be right for us, and we're selective about where we locate within a mall. We know which malls we'd like to be in. We know which street locations we'd like to be in. It's very important to have the right geography within those specific malls, so you have the right walk-by traffic and the right adjacencies to support the business.

TMF: You mentioned the target group of age 18 through 35. Do you think that some of the prices in your store are maybe a bit higher than what, say, a college student or someone coming out of college would be willing to pay?

Lambert: When we look at the pricing of a garment, we don't think so much in terms of the flat price itself. We look at it in terms of value. If you look at the quality of the product that we put in the store, we feel that it's a very good value. We'll use fabrications, for example, that you'll find in DKNY (NSYE: DK) products, and certainly we're nowhere near the price that you would find in those products.

In addition, we emphasize our product longevity -- for example, if you bought a black-dye acetate suit two years ago from bebe, and you'd like to find a skirt that goes with it, you can go into the store right now and find that skirt, and that black will be in the same black that it was two years ago. So we create investment suiting where people can build on their wardrobe.

TMF: Do you expect your margins to stay stable right now, and how are you going to improve margins going forward?

Lambert: For the year ended June 1998, we had a 51% margin. That's probably about as strong as a margin should get in the retail industry. That had a huge benefit from a 41% comp [comparable] stores sales growth rate during the year. On a go-forward basis, we actually expect that there'll be some downward pressure on those gross margins as the comp stores sales growth rates start to moderate to more normalized levels. We'll see some increases in the markdowns, which will put some downward pressure on that margin. So we actually expect to see a little bit of contraction there.

Over the course of the next few years we may see a little bit of additional expense leverage keeping overall operating margins close to the same, but probably with a little bit of downward pressure for the long run. I'm sure that if you'd compared us to other people, our operating margin was just shy of 20% this year, which is probably one of the best in the industry. We don't expect that that's really the long-run answer, although we expect to have very strong operating margins as we go forward since we are investing into the brand and spending a fair amount on advertising to support it. We think what you get with a value-added product and branded images is better operating margin.

TMF: We know that bebe clothes can be seen in several movies and TV shows, including Ally McBeal and Friends. Is this part of your marketing strategy? If so, how can viewers tell if a dress or shirt is from bebe?

Lambert: We definitely do make an effort to make products available to the film industry, both for TV and for movies. In some cases, we'll get credit on the show for providing the apparel, but a lot of the times you don't. So what you're doing is just supporting the image by having a product out there that can be recognized. When people hit our website, maybe they'll see that in fact the Ally McBeal suit that they saw on TV the other night was a bebe product. The advantage we have there is a lot of times people [in the film and TV industry] pick up our suits, and our suits do have a fairly distinctive look. It's kind of a look that we've cultivated over the last 10 years, and we're very well known for it. As a result, it helps support our name because it's almost becoming a signature kind of look.

TMF: What are the major tenets of your advertising?

"For the year ended June 1998, we had a 51% margin. That's probably about as strong as a margin should get in the retail industry."

Lambert: Our focus is to really build a brand, and so the "image campaign," as I'll call it, consists of more than just the ads. It's everything from the way the product is presented in the store, the fact that the signage in the store is going to work in tandem with what's happening in fashion magazines, which is also going to work in tandem with what's happening in various bus shelters or bus ad images that we do. So we're really trying to build the brand.

We're not trying to advertise individual items when we show those pictures. What we're really trying to do is build an image and an awareness. We try to make sure that the images that we put out there in the market are unique and special and evoke a response from consumers because in the market today. In retail, we're up against people like the Gap who'll spend $250 million in advertising, and we're out here in 1998 spending $6.7 million. We need to do some things to make sure that they're special and that our ads are seen. I think we've been pretty successful at doing that.

TMF: Are you planning on selling your clothes through your website or in a catalog?

Lambert: We are definitely looking at Web selling. I think that's a trend that all retailers are looking at. I hope to have more to talk about on that in the next few months.

TMF: Do you see a lot of promise in that part of the business?

Lambert: In the long run, I think every retailer sees promise in Web selling, and I think that there will be an evolution that happens over the next few years. What's important from our standpoint is that we're out there and exploring that concept and making sure that we're operating on the forefront of what's happening in e-commerce and able to take advantage of opportunities as they arise. So we'll test it, we'll treat it like a store if we get into it, and we'll probably hire a store manager to run that as a regular business.

I think that in the apparel side, particularly in the fashion apparel side, there's a certain amount of wanting to hold the product, touch the product, feel the fabric that may make it difficult in an e-commerce environment. Items such as accessories or logo T-shirts, and if we were to get into an area such as footwear, then there might be additional opportunities within an e-commerce environment.

TMF: Does bebe plan to make conference calls open to all shareholders in future quarters?

Lambert: We're newly public, and frankly, that's the first time anybody's asked that question. I think it's a good one for us to look at. We haven't really landed on a specific format for how we're going to run the quarterly conference calls on a go-forward basis. I think that's something that we might have to pursue. I imagine that the cost of keeping everybody on line at the same time could be prohibitive. There might be some other alternatives in terms of playback that we could look at, and we'll do that over the next few months. We'll start to look at that.

TMF: Great. Thank you so much for joining us today.

Lambert: Sure thing. This has been a lot of fun.

TMF: Join us next week when we talk to Richard Hanlon, vice president of investor relations at America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %>.

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