bebe stores ($BEBE) — 4Q20 Update (3/5/2021)

This is a large position for me so I’ve been eagerly awaiting the latest results following the closing of the Buddy’s acquisition

Quick recap of the Buddy’s deal:

  • BEBE acquired 47 stores (and rights to build 20 more) for $35m
  • EBITDA ~$6m per year = 5.8x purchase multiple
  • Funded with $22m debt, $7.5m new equity from B Riley (!!), and cash on hand

Brand portfolio…

Owned brands consist of bebe (50% interest) and Brookstone (28.5% interest). These are held inside joint ventures partnered with Bluestar — a close associate of B Riley.

The 28.5% interest in Brookstone was acquired for $20.6m and it looks like cash flow is finally starting to ramp up with 2 consecutive quarters of $856k in distributions received.

BEBE received $2.2m in cash from Brookstone over the past 12 months, $1.3m in FY2020, and $1.1m in FY2019.

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The bebe brand generates $6-7m in equity earnings / cash flow per year and looks to be pretty stable. Even with the COVID impact this has held up well.

Buddy’s…

Here’s a little back-of-the-napkin math on Buddy’s — Q2 ended on 1/2/21 and the deal closed on 11/10/20 which means 53 days of ownership this quarter (~59% of the Q). With $6.3m in revenue and $4.2m in gross profit = $43m annualized revenue and $28.5m annualized gross profit.

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Buddy’s also brought in ~$3.3m in SG&A — the remainder of the $4.2m in the Q was related to pre-existing bebe, intangible amortization, and deal costs…

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That works out to ~$22.4m annualized SG&A for Buddy’s…

$28.5m in GP less $22.4m SG&A = ~$6m in EBITDA!

Valuation update…

We have a new share count and a new balance sheet here…

12.9m sharesx $5.70 closing price= $73.5m market cap

Net debt is $19m but they have a lopsided working capital situation too with some accruals. Call it a $92.5m enterprise value.

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Cash flow has been steady… with cash distributions from JVs averaging $7.5-8m per year (even with COVID impact)… That’s ~$0.60/share on the new share count.

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So we have 3 components to the valuation here:

  1. bebe
  2. Brookstone
  3. Buddy’s

I’ll lump 1 & 2 together — call it $6-7m for bebe and ~$3m for Brookstone less the $1.2m run-rate SG&A prior to the Buddy’s deal = $8-9m in earnings or $0.62-0.70 per share.

Buddy’s looks to be on pace for the $6m anticipated EBITDA. They need to refinance the bridge loan before the November 2021 maturity, let’s say they make that happen at a very expensive 10% interest rate = $2.2m annual interest expense. Rent-a-center seems to be paying ~2% of sales in true capex which would be $850k for these Buddy’s locations. No cash taxes here with the massive NOL position. This works out to $3m in net earnings for the Buddy’s locations = $0.23 per share.

Altogether that’s $0.85-0.93 per share in net earnings. Not bad for a $5.70 stock. A ~6.5x earnings multiple or so. They’re currently paying $0.24/share each year in dividends for a 4% yield.

With the acquisition opportunities presenting a chance to utilize the NOLs, my guess is they’ll avoid going back to the large payout and instead focusing on maximizing cash flow. There’s a risk here that B Riley acquires remaining shares for a song but they don’t have complete control in this situation…