bebe stores ($BEBE) — Initiation (12/28/2019)

Ticker: BEBE

Price / Cap: $6.00 / $68.5m

Valuation: 8x PE / 11% dividend

Category: Core

This is my largest holding as of right now. I’ve trimmed it back just a tad lately as majority owner B Riley has invested in some (larger) rival businesses and the bebe brand (which makes up most of the value so far) has questionable growth prospects.

There is tremendous value here. The market is not yet seeing the potential for recently acquired Brookstone brand and the earnings it could contribute. Dividend was recently increased by 36% from $0.125 per quarter to $0.17. Company still sits on a decent amount of cash and no debt… meaning it’s likely they’ll add another 1-2 sources of earnings over time.

Below is a write-up I did for Value Investors Club a while back, I’ve re-purposed it for today’s setup:

bebe is a post-reorg retail brand licensor. There is a good chance the current asset base is capable of generating $1+ per share in annual dividends which makes the $6 stock price attractive. Beyond that, solid profitability and a net cash position give them some ammunition to add a few more streams of licensing income.

Overview / Timeline

bebe stores was a growing women’s fashion retailer from the time of its IPO in 1998 until the business hit the skids during the 2008-2009 financial crisis, after which it never recovered. With sales in decline and losses mounting, bebe hired B Riley to explore “strategic alternatives” in early 2017.

A brief timeline of recent events:

  • FY2014-2016: Stores open fell from 242 to 186, revenue fell 15%, cumulative losses were $204m, tangible book value fell from $260m to $128m, and market cap fell from $450m to $40m.
  • June 2016: Company made pivotal move to contribute its intellectual property into a 50/50 joint venture with Bluestar Alliance LLC in exchange for $35m.
  • December 2016: Despite a reasonable cash position of $66m and no debt at 12/31/16, bebe was losing money, equity was bleeding (from $360m in FY12 to $112m), and operating leases amounted to $200m.
  • March 2017: Company hired B Riley to explore strategic alternatives.
  • FY2017: Lost $138m and book value fell from $128m to negative $11m.
  • June 2017: Underwent restructuring (no formal bankruptcy filing); terminated all leases for $65m, sold its California distribution center for $22m, and borrowed $35m from B Riley to complete wind down of retail business.
  • January 2018: B Riley converted remaining $17m loan into equity at $6 per share and purchased an additional 500k shares at $6 for a 29% overall stake in bebe.

What did B Riley see in bebe at the time? A debt free / lease free balance sheet, California real estate they estimated was worth $30m, $340m in net operating losses, and a JV with TTM net income of $7-8m. Now we have B Riley firmly in the driver seat with 29% ownership (and bebe founder Manny Mashouf serving as CEO with ~38% ownership) and a complete change in direction for the business.

Let’s pick up the timeline:

  • February 2018: bebe delists to save costs.
  • April 2018: Corporate HQ sold for $28.5m, announces $0.50 per share special dividend, and intention to distribute JV earnings (net of corporate expenses) to shareholders on a quarterly basis.
  • September 2018: Announces $0.25 per share dividend (this was 2 Q’s worth of earnings distributed).
  • October 2018: bebe invests $21m for 28.5% interest in a new JV with Bluestar Alliance to acquire assets of Brookstone out of bankruptcy.
  • November 2018: bebe invests $1.4m for 50% interest in new JV with Great American Group to acquire Hungary, Austria, and Slovenia operations of Charles Vogele out of bankruptcy.
  • February 2019: Announces $0.125 per share dividend.
  • May 2019: Announces $0.125 per share dividend.
  • August 2019: Raises dividend to $0.17 per share (+36%)

After the B Riley debt-to-equity conversion, there are 11.4m shares outstanding. At $6 per share, this is a $68.5m market cap. Though a few legacy accruals from the wind down remain, the balance sheet has no debt and ~$2.5m in cash net of all liabilities.

Today, bebe stores, inc. is essentially a holding company with ownership interests in 3 joint ventures:

  1. BB Brand Holdings – 50% interest with Bluestar Alliance, original bebe brand
  2. GAEBB Group B.V. – 50% interest with Great American Group, Charles Vogele brand
  3. BKST Brand Management – 28.5% interest with Bluestar Alliance, Brookstone brand

Why Own It?

bebe is a “NOL shell” operated by B Riley with a portfolio of 3 retail-based joint ventures generating high-yield licensing income.

Let’s start with BB Brand Holdings (the original bebe brand) which has been in place since June 2016. Here is the rundown of quarterly equity earnings since the origin of the JV:

1Q17 -- $450k2Q17 -- $1.03m3Q17 -- $983k4Q17 -- $1.37m1Q18 -- $1.03m (+128%)2Q18 -- $2.14m (+108%)3Q18 -- $1.93m (+96%)4Q18 -- $2.3m (+67%)1Q19 -- $1.52m (+48%)2Q19 -- $2.03m (-5%)3Q19 -- $1.91m (-1%)4Q19 -- $2.34 (+2%)1Q20 -- $1.1m (-35%)

At the initiation of this JV, bebe was still committed to operating the retail concept and it likely took several quarters for the licensing income to ramp up. It’s unlikely there is a massive growth opportunity from here. BB Brand Holdings probably levels out in the $7-7.5m equity earnings level.

The next 2 joint ventures, Brookstone and Charles Vogele, were the result of a net ~$23m investment by bebe.

Charles Vogele

The CEE segment of Charles Vogele (Austria, Slovenia, and Hungary operations) generated EUR81m in sales during 1H16 (the last publicly available report) and EUR164m in FY15 sales. Assuming 2018 results were half of the 164m performance in 2015 would be ~80m in revenue ($88m in USD). Assuming a 4% royalty rate would mean $1.5m in equity earnings at an 80% margin (comparable to bebe).

As of October 2019, this equity investment is fully reserved on the BEBE balance sheet and management intends to wind down the operations and liquidate all assets. We’ll see what happens with this but for now I’ve ascribed no value to it.

Brookstone

Lastly is the Brookstone JV. Bluestar Alliance and bebe acquired Brookstone out of bankruptcy in October 2018 for ~$80m. None of the 102 mall stores were included in the purchase. The 34 airport stores are being licensed to a third-party operator. The remaining product categories are starting to see some licensing deals through the efforts of Bluestar. Announcements (no details) have been made covering massage chairs, home environment, speakers, headphones, mobile & computer accessories, kitchen electronics, floor care, BBQ grills, etc.

Brookstone generated $264m in FY2017 sales and $74m in 1H18. Over 50% of 2017 revenue came from mall locations. Sharper Image went through bankruptcy process in 2008 and was acquired by a group that included Bluestar Alliance for ~$40m. At the time Iconix Brands acquired Sharper Image in 2011, they estimated $12-13m in licensing income.

Given Bluestar has the playbook from Sharper Image and the flurry of licensing deals already announced (albeit without details), it seems likely that bebe could realize its desired 20%+ IRR on this investment which would net ~$4m in equity earnings. Conservatively, if Brookstone sales were $150m per year at a 7% royalty rate and 80% margins = $2.4m equity earnings to bebe.

Brookstone generated quarterly equity earnings of:

3Q19 -- $0.5m (first full quarter of operation)4Q19 -- $1.9m1Q20 -- $0.7m

From the first quarter of the bebe JV to the most recent quarter, JV net income rose 2-4x as the licensing plan was implemented. This would put Brookstone on a path to surpass $2.4m in equity earnings to bebe.

Corporate Costs

There are likely to be some ongoing corporate costs although they should be minimal (no corporate HQ, no employees, etc.). Corporate costs of $1.5m per year seem reasonable given the past few Q’s of SG&A ranging from $240k to $800k (past 3 quarters averaged $350k).

Earnings Estimate

$7m BB Brand Holdings (bebe)$0m GAEBB Group (Charles Vogele)$3m BKST Brand Management (Brookstone)($1.5m) Corporate Costs= $8.5m net income

This equates to $0.75 per share in earnings on a $6 stock today (8x PE multiple). It is possible that most/all of these earnings could be distributed to shareholders as dividends per management’s intentions.

This still leaves $2.5m in net cash on the balance sheet and a few other avenues for raising capital (bank debt, rights offering, etc.) to bite off another 1-3 brands over the next few years. With my understanding of B Riley and their objectives, I think it likely that bebe will be a mostly opportunistic acquirer of cash flowing assets with a goal to keep overhead low and distribute cash back to shareholders (Riley will want these cash dividends to help fund their own goals).

Management

It’s no secret I love B Riley and everything they are doing (more on that stock in another post…).

B Riley seems to have a very rational approach to the bebe NOL shell. Bryant Riley made the following comment on the B Riley 3Q18 earnings call:

“So we were absolutely not utilizing a commercial real estate strategy. I can tell you that. bebe has an unimpaired tax asset that is, and things like licensing where you do not have a ton of overhead and you have kind of almost like a high-yield type of return and may be enhanced by different things and hopefully when we do these types of investments we will do them opportunistically. Those types of assets lend themselves to vehicles with large NOLs.

So I would say that between the bebe license, the Brookstone license deal with Charles Vögele that they've done it's becoming a more meaningful business but I think the goal there is to do whatever they can to enhance value through taking advantage of that NOL. That is the asset that they have is the ability to not have to pay taxes. Does that answer your question?”

I take some comfort in B Riley being involved in this situation and, to an extent, it is a bet on their management abilities. Unlike other NOL shells which have suffered from a lack of “pulling the trigger” or taking on way too much debt; my impression is that bebe could be more or less a yieldco for B Riley to extract some tax-free cash and have some optionality to do a few interesting things.

Final Thought

Peers Iconix (ICON) and Cherokee (CHKE) paint a less than stellar picture for bebe and the brand licensing industry. Both of these businesses have significant debt issues and trade at 6.5-9x EV/EBITDA and 2.3-4.2x EV/Sales.

The comparison is somewhat difficult since the entire bebe brand portfolio is held inside joint ventures while peers own most of their brands outright.

Given the much cleaner balance sheet at bebe, I take a slight premium to ICON’s EBITDA multiple of 8.5x and apply to bebe equity earnings net of corporate expenses (essentially net income). At 10x net income bebe is worth $7.50 per share (+25% from today’s price). This allows no credit to upside in the Brookstone numbers and further deployment of the balance sheet.

This situation closely resembles that of The Stephan Company (SPCO) which announced in 2015 it would sell its real estate holdings to give the company a solid net cash position and pay out all/most earnings as dividends while soaking up its remaining NOL balance. At the time, SPCO was a $1 stock paying a $0.15 annual dividend. Since then shares have floated around $2 while the company has paid $0.60 in cumulative dividends. This would not be a bad outcome if BEBE followed a similar path.