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bebe stores Down to Strong Sell

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On Jul 9, 2014, Zacks Investment Research downgraded women’s fashion retailer, bebe stores inc. to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Fiscal 2015 loss estimates for bebe stores have widened significantly over the last 30 days based on the company’s recently announced strategic plans that focus on exiting the loss making 2b business and cutting jobs across some departments. Meanwhile, the estimated loss for fiscal 2014 widened slightly as the company retained its guidance for the fiscal year.

Moreover, the stock which has been trading close to its 52-week low for quite some time steeped further to reach a new low of $2.99 yesterday. The primary reason behind this is the women’s clothing and accessories designer’s disappointing performance for the past seven quarters. Of late, the company has been reporting loss due to weak top-line performance and higher operating expenses.

Under its strategic initiatives announced last month, bebe stores revealed that it intends to fully exit from its 2b business by the end of fourth-quarter fiscal 2014 which will include closure of 16 mall-based and e-commerce services. The company anticipates recording a charge of nearly $5–$6 million in relation to asset write-offs, inventory liquidation, lease termination and employee lay off costs in fiscal 2014. Moreover, BEBE expects to book a pre-tax loss of $5–$6 million associated with the 2b business in fiscal 2014.

Additionally, bebe announced that it would lay off nearly 1% of its store employees and approximately 9% of non-store employees in the fiscal year ending on Jul 5, 2014. In connection with the job cuts, the company anticipates recording a pre-tax severance cost of approximately $3 million in fiscal 2014. However, this will benefit BEBE by saving costs of about $4 million in fiscal 2015.

Further, looking at the current business trend, the company has lowered its comparable-store sales (comps) guidance for the fourth quarter of fiscal 2014. The company now expects comps to come in the negative low single digit range as against the earlier forecast of flat. Despite this, BEBE has reiterated its bottom-line outlook of loss in the range of mid-teens.

Though the company has taken some bold steps to turnaround its operating performance, we believe that they are still in their early stages and will take time to fetch lucrative results for the company. This keeps us on the sidelines about the stock’s future performance.

Other Stocks That Warrant a Look

Not all apparel stocks are performing as disappointingly as bebe stores. Better-ranked stocks in the sector include Christopher & Banks Corp. (CBK - Free Report) , Citi Trends Inc. and The Men’s Wearhouse Inc. , all carrying a Zacks Rank #1 (Strong Buy).

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