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After the market closed yesterday, bebe stores inc. (BEBE - Snapshot Report) reported second-quarter fiscal 2014 results, which were ahead of the Zacks Consensus Estimate as well as its own guidance. The results cheered investors, as was evident in an 11.2% rise in the stock price in the after-hour trading session.

The company reported a loss of 7 cents per share for the quarter, much narrower than the Zacks Consensus Estimate of a loss of 15 cents. However, the quarterly loss was higher than the comparable prior-year quarter loss of 6 cents per share.

The year-over-year rise in loss was mainly due to weak top-line performance, partially offset by lower operating expenses. The loss in the said quarter was also owing to the effects of a valuation account being maintained against deferred tax assets, leading the effective tax rate to be near 0%.

Net sales of this women’s clothing and accessories designer fell 4.1% to $130.0 million from $135.5 million last year. However, it came ahead of the Zacks Consensus Estimate of $119 million.

Same store sales decreased 1.9% in the quarter, down from a 2.8% fall in the first quarter of fiscal 2014. This sequential improvement in comps came on the back of higher footfall and conversion.

The company’s gross profit fell 3.7% to $43.7 million from the comparable prior-year quarter while as a percentage of net sales, it contracted 60 basis points to 33.6%. The company’s gross margins were hit hard by increased markdowns and higher promotional activities throughout the holiday season.

Selling, general and administrative (SG&A) expenses declined 7.7% to $49.3 million. The decrease resulted from lower contractor and professional fees costs as well as benefits from a $0.5 million legal settlement. These positives were partly offset by an anticipated increase in advertising expenses. Operating loss for the quarter narrowed to $5.6 million from the year-ago comparable quarter loss of $7.5 million.

Store Update

This multinational retail clothier shuttered two bebe stores and one 2b bebe outlet in the reported quarter, thereby reducing the total store count to 228.

Financial Update

The company ended the quarter with cash and cash equivalents of $130.9 million, up 41.2% from last year. Inventories fell 14.8% to $31.9 million while average finished goods inventory per square foot declined 6.8%. Total shareholders’ equity was $244.3 million, down 29.6% from the comparable quarter last year.

During the first half of fiscal 2014, bebe spent $6.9 million toward capital expenditure. Additionally, the company declared a quarterly cash dividend of 2.5 cents payable on Mar 20, 2014 to stockholders of record on Mar 6, 2014.

Outlook

In the coming quarter, bebe forecasts same store sales to be flat. Net loss in the third quarter is expected to be in the mid-teens per share range due to the continued impact from the maintenance of valuation accounts as discussed above.

In fiscal 2014, the company still plans to spend about $25 million toward capital expenditures. Capital spends will be directed toward the opening of outlets, renovation, office enhancements, outlet expansions and the upgrade of information technology systems.

The inventory for finished goods at the end of third-quarter fiscal 2014, measured on per square foot basis, is projected to decrease in the low single-digit range.

Further, this apparel designer is likely to shut down up to six bebe stores and one 2b bebe store in the remaining period of fiscal 2014, which will decrease its total floor area by nearly 8% from fiscal 2013.

Going forward, we expect the company’s new merchandising strategy and its practice of lowering inventory to stimulate growth.

Other Stocks to Consider

At present, bebe stores carries a Zacks Rank #3 (Hold). However, some better-ranked stocks in the retail apparel and shoe sector include Christopher & Banks Corp. (CBK - Snapshot Report), Finish line Inc. (FINL - Snapshot Report) and Foot Locker, Inc. (FL - Snapshot Report). While Christopher & Bank sports a Zacks rank #1 (Strong Buy), Finish Line and Foot Locker have a Zacks Rank #2 (Buy).

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