bebe stores ($BEBE) — 3Q21 Update (5/19/2021)

Probably my favorite earnings release each quarter. Here are my takeaways…

Overall, the bet has changed (slightly) from my original investment. At the time, it was a post-bankruptcy stake in the bebe retail brand that generated all of earnings. Today, bebe holds passive ownership stakes in 2 brands: bebe and Brookestone; and operates 47 Buddy’s rent-to-own locations. All in an attempt to soak up $300m+ in net operating losses — there won’t be taxes here for quite a while.

They issued some stock to acquire Buddy’s for $35m so the share count is now 12.9m and the stock price is still lingering at $5.50 per share for a $71m market cap. Net debt is ~$16m for a $87m enterprise value.

The past 2 years have been profitable at >$7m or $0.60 per share…

image

And with the addition of the profitable Buddy’s locations, 2021 looks no different…

image

Plain and simple — looks like Buddy’s is generating $6-7m annualized EBITDA when including all SG&A costs.

They need to refinance the debt by November 2021 from the very high 15% PIK setup. With $4.5m in cash generated after the dividend in the last quarter alone, my guess is this will get refinanced favorably by November. Call it 7.5% with a 7-year amortization on a $20m note = $4m per year in P&I.

So Buddy’s at $6.5m EBITDA less $4m P&I = $2.5m operating cash flow.

As for the JVs — they are generating $10-11m per year in cash distributions to BEBE. The bebe brand has produced a consistent $7-8m per year (2019 included a one-time payment of $6m) and Brookstone has steadied at $856k per quarter / $3.4m per year. Note that distributions were lower during Q4 and Q1 from COVID.

image
Altogether, I get pro-forma cash flow of $12-14m with virtually no capex… Maybe $1.5m for the Buddy’s locations since depreciation of PP&E is running at that level. That’s roughly $0.90 to $1 per share in yearly free cash flow with leverage running 1x FCF.

The biggest risk remains the possibility of a B Riley takeunder at an unfair price to minority shareholders. This very situation played out with National Holdings ($NHLD) earlier in 2021 — where B Riley initially took a stake at $3.25 and then later acquired all remaining shares at the same price, leaving no premium to minority owners. There’s potentially a chance they struggle to refinance the bridge loan from the Buddy’s acquisition but I see that as remote given the cash generation. Net debt by November could be less than $10m in total.

B Riley now owns ~50% of outstanding shares and CEO Manny Mashouf (founder / former CEO of bebe) owns 30%.

Unless B Riley does something extremely disadvantageous to minority shareholders (still a possibility), I don’t see how this stock is worth less than $9-10 per share at a still undemanding valuation.