bebe stores ($BEBE) — FY21 Update (10/10/2021)

Price: $8.70

Market Cap: $112m

Valuation: 7x earnings

Category: Core

$BEBE released Q4 and full-year 2021 results on October 1st. Plenty happened during the past year but at a glance, GAAP earnings were $0.56/share in FY21 vs. $0.64/share last year.

Quick reminder for new readers — BEBE owns a collection of brands via joint venture investments; those brands send regular cash dividends back to BEBE for deployment into other opportunities. More recently, they acquired 47 franchise locations of Buddy’s Home Furnishings, a rent-to-own retailer; now they’re adding another 5 Buddy’s locations to the business. They’re now owners of an operating business; but all assets are good cash generators.

The business is split between the joint ventures and Buddy’s; so I’ll take a closer look at each individually.

Joint ventures…

There are 2 main joint ventures:

  1. A 50% interest in BB Brand which owns the women’s fashion brand, bebe
  2. A 28.5% interest in BKST which owns Brookstone
  3. GAEBB was a small investment that was wound down and kicked in $1m during FY20

Unfortunately, we only get detailed information on BB Brand (bebe) so we can only infer performance for Brookstone via the cash distributions from BKST.

JV performance 2017-2021

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The chart above includes quarterly performance from 1Q21 (September 2020) to 4Q21 (June 2021) to see the COVID recovery for the bebe brand. Also, there was a one-time $12m influx to BB Brand in FY19 which skews that year… BEBE received their 50% share of that for $6m — meaning FY19 was really $7.15m in true cash distributions from BB Brand.

A few quick comments on the chart above:

  • All brands look to be recovering from COVID
  • BB Brand sales were up 5.6% in FY21 and the last quarter was up nearly 50% (though still a few points below 2019 Q4 level)
  • BB Brand cash distributions look stable in the ~$7m range — no distributions were made in 1Q21 and were down to $750k in 4Q20
  • BKST (Brookstone) distributions continue to climb — up to $3.1m in FY21

I expect BB Brand (bebe) to chip in $7-8m cash distributions per year and BKST (Brookstone) to contribute $2-3m per year for a total of $9-10m cash distributions from joint ventures. This is $0.70-0.78/share.

Buddy’s Home Furnishings…

We don’t get segment financials so we have to do some back-of-the-envelope math to evaluate this new business’ performance so far. The deal closed in November 2020 so Q2 didn’t really give us any insight. This means Q3 and Q4 were full quarters including the 47 Buddy’s locations.

Starting with Q3…

We have GAAP EBIT of $1.37m and EBITA of $1.78m

Q3 revenue, gross profit, SG&A

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In Q4 / full-year picture, we have to back out the 9-month numbers to get Q4 gross profit. I get $8.2m gross profit and GAAP EBIT of $1.43m in Q4. (Note this includes corporate costs in SG&A as well.)

Full year 2021 revenue, gross profit, SG&A

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Of course they don’t break out intangible amortization in this quarter so pulling it from the cash flow statement adds another $355k to EBIT for $1.78m in Q4 EBITA.

That means both Q3 and Q4 produced $1.78m EBITA = $7.12m annualized for the Buddy’s operations and corporate costs.

Subsequent to yearend, BEBE acquired another 8 locations for $5.5m. If we assume $7m EBITA on 47 locations = $148k EBITA per location. That could add another $1.1m to the total.

To be safe, I’m going to call it $8m in EBITA for the Buddy’s segment on 55 locations going into FY22.

Debt refinancing…

There’s one more notable piece to cover here and it’s the debt refinancing. When they moved quickly to acquire the 47 Buddy’s locations, BEBE was forced (perhaps) to take on expensive debt to get the deal done. Now that the deal has closed and seasoned a bit, they’ve refinanced on much more attractive terms. The old debt was $22m with a short maturity of one year and interest at LIBOR + 15% (!!).

Old Secured Notes

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The new debt structure is a 5-year term loan at LIBOR + 5.5% (with a 1% LIBOR floor). And that drops down to L+5.25% after one year. The term loan was $25m with another $10m available.

New debt structure

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I’m assuming they only took $25m to refinance the $21.7m existing debt and used the excess + cash on hand to acquire the additional 8 locations for $5.5m. That would leave interest expense at $1.63m per year vs. the $1.2m recorded in Q3 and $1.05m in Q4.

Updated valuation…

Pretty simple exercise adding the pieces together.

Take the $9-10m from joint venture earnings, $8m EBITA from the 55 Buddy’s locations, and $1.63m for interest expense and we get $15.9m annual earnings or $1.23 per share.

I’ve left depreciation in there for Buddy’s to account for capex (assuming 1:1 depreciation to capex ratio) and there shouldn’t be any/much cash taxes given the $300m in NOLs available.

At $8.70, the stock is trading at 7x estimated earnings. Unfortunately, comps don’t help the cause all that much with Rent-A-Center and Aaron’s (major rent-to-own competitors) trading at 9x earnings and ~6x EBITDA. The publicly traded brand licensors aren’t much better with high levels of debts and miniscule equity values. One bright spot was the Iconix Brand acquisition at $585m (including debt) which valued the company at ~10-11x EV/unlevered FCF.

I’m using a 12x multiple on $1.20/share in earnings for a $14 target price (60% upside). Free cash flow should roughly equal earnings given minimal taxes, capex, and working capital. It seems that management is back on the dividend train with an announcement of a $0.15/share quarterly dividend for a 7% yield at current prices. That would cost the company almost $8m pear year leaving maybe $7-8m for alternative uses. Leverage is pretty low with net debt at ~$18m after the $5.5m acquisition of 8 additional locations. That’s close to 1x earnings. I hope to see BEBE continue to diversify the cash flow stream to utilize NOLs while distributing a good portion of earnings back to shareholders. The B Riley relationship (controlling shareholder) should come in handy with sourcing solid, cash-generating deals.