Financial Statements Final Project

for

Dr. Rimona Palas

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TABLE OF CONTENTS

Executive Summary Background Marketing Analysis Porter Analysis SWOT Analysis Financial Statements Overview Ratio Analysis Risk Analysis

3 5 11 11 14 18 20 28

Credit risk Analysis Bankruptcy Analysis Valuation Conclusions Appendix

28 29 30 33 35

1. EXECUTIVE SUMMARY
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Since 1976 BEBE designs, develop and produces a line of contemporary womens apparel and accessories. Nowadays operates 285 stores in United States and 9 stores overseas. In addition 1% of its sells are done to 14 international licenses. BEBE is publicly traded on the NASADAQ for a value over 1.2 billion. BEBE targets women between the ages of 21 and 35 who are concern about fashion. During the last four years BEBE has expanded its number of stores markets and product lines, particularly in 2004 with a change of management. BEBEs industry is highly competitive due to very low entry barriers, many suppliers, easy substitutable products and buying power that is diluted among a large mass of buyers. In addition there are low exit barriers which predict an industry of low and stable income. BEBEs sophisticated inventory control, high differentiation strategy and high sensitivity to fashion trend changes enable it to succeed at a domestic level however its limited size makes it difficult to compete with the largest players at a global dimension. Fashion products are highly sensitive to economic conditions therefore in case that the present forecasted crisis takes place BEBE would have a hard time striving in order to overcome it. BEBE shows a stable moderate pace of growth on revenues. BEBE sophisticated inventory management and marketing differentiation policy derives in relatively low levels of cost of revenue and inventory held. BEBE evidences extraordinary strong liquidity in an inconvenient extreme to shareholders interests. BEBE is financed purely with equity having therefore lower return on equity than its competitor while at the same time is able to yield higher return on assets than its competitor. We can appreciate how higher return on equity comes with higher risk.

We can understand watching the activity ratios that BEBE manages inventory better than its competitor and has higher account receivable turnover because BEBEs sales are almost pure retail while its competitor has a significant portion of wholesales. BEBE neither offers material credit risk nor bankruptcy risk. However there is uncertainty on how it would be handled an eventual succession crisis of its founder that still plays a protagonist role.
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After applying the P/E ration valuation method combined with the DCF valuation method I recommend to hold BEBEs stock.

2. BACKGROUND
BEBE designs, develops and produces1 a line of contemporary womens apparel and accessories. Was founded in San Francisco in 1976.Nowadays operates 285 stores in United States, Canada,
1

Has a total vertical integration with exception of manufacturing which is outsourced

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Puerto Rico, Virgin Islands and an online store. In addition it licenses 14 international stores. It went pubic on NASDAQ stock exchange on June 1998.Todays market value is over 1.2 billion

2.1 The target market

Women between the ages of 21 and 35 who are sophisticated regarding their appearance concern, who seek current fashion trends to suit their lifestyle with a hint of sensuality in their look.

2.2 The industry

The retail and apparel industries are highly competitive and are characterized by low barriers to entry. Very low minimum capital is required to entry the market. Only a minimum level of legal requirements are request to enter and operate in the market and very low responsibility for the merchandise sold for a very short period of time, therefore the exit barriers are low as well. There is a wide variety of competitors, private and public companies, about 900 of them; forty of the publicly traded ones are found in NYSE ,NASDAQ and AMEX stock exchanges, they differ in size (ranging from more than 13 billion to less than 7 million of market value) and particular nuances regarding their target market. It is problematic to estimate BEBEs market share not only because of the wide variety of competitors but also because of the complexity of the demand. Different female customers of changing characteristics and styles may buy alternatively from different kind of offer along subsequent seasons. Only for the propose of numeric comparisons we are going to relate our study to Guess inc which trades at the NYSE for a market value of 4.3 billion

2.3 The companys Strategy

Vertically integrate design, production, merchandising and retail functions enable the company to respond quickly to changing fashion trends and reduce risk of excess inventory

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The company distributes their merchandise through company owned retail stores and an on-line store. This distribution strategy enables them to build brand equity by controlling pricing, flow of goods, visual presentation and customer experience. The company enhance brand image aiming to an attainable luxury status brand, they attract customers through edgy, high-impact, visual advertising campaigns using print, outdoor, in-store, electronic and direct mail and e-mail communication vehicles. They reinforce brand awareness helped by a line of merchandise branded with the distinctive bebe logo.

2.4 Stores
The company has different stores lines. bebe, bebe sport , outlets and accessories. They also have an on-line store. For fiscal 2008, they plan to grow their operations primarily through the opening of new stores and expansion of existing stores with high sales per square foot. In selecting a specific site, they look for high traffic locations primarily in regional shopping centers and in freestanding street locations. They base their choice on the traffic pattern, co-tenancies, average sales per square foot achieved by neighboring stores, lease economics, demographic characteristics and other factors considered important regarding the specific location. 2.4.1. The bebe line stores

In fiscal 2008, they plan to open 40 new stores, relocate or expand 6 existing stores and renovate 2 existing stores. They also plan to close up to 4 stores, resulting in net square footage growth of approximately 14%. During fiscal 2007, they opened 20 stores, closed 5 stores and expanded or relocated 9 existing stores to larger spaces. Their regular stores average 3,900 square feet and are primarily located in regional shopping malls and freestanding street locations. In fiscal 2008, they plan to open 25 to 27 stores with an average square footage of approximately 3,900. From time to time, they will open larger stores, such as their 7,600 square foot bebe flagship store on Rodeo Drive in Beverly Hills, California to further position bebe as an attainable luxury brand. In fiscal 2008, they plan to open two new stores similar to their location on Rodeo Drive, one on Oak Street in
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Chicago and the other in the Royal Hawaiian shopping mall in Honolulu. In addition, they intend to expand their bebe store in Newport Beach, California by approximately 2,000 square feet to a total square footage of approximately 7,200. 2.4.2 The BEBE SPORT line. During fiscal 2007, they opened 15 new stores. Their BEBE SPORT stores average approximately 2,400 square feet and are primarily located in regional shopping malls. BEBE SPORT offers a selection of sportswear and footwear under the BEBE SPORT and bbsp brand names. They have been conservative in their growth plans while they continue to update the BEBE SPORT concept. In fiscal 2008, they plan to open 8 to 10 BEBE SPORT stores with an average square footage of approximately 2,600. 2.4.3 The outlet stores. During fiscal 2007, they did not open any new outlet stores but expanded one store. Their outlet stores average 4,200 square feet and are primarily located in outlet malls. In the last quarter of 2008, they plan to open 3 to 5 new or expanded outlet stores under the new name 2b bebe and will continue to offer a selection of bebe logo product, bebe sale consolidations and an expanded assortment of product made exclusively for their Outlet stores under the new name 2b bebe. 2.4.4 bebe accessories. They opened their first bebe accessories store in the first quarter of fiscal 2007. This location is approximately 2,300 square feet. They currently do not plan to open any accessories stores in fiscal 2008. 2.4.5 Store Closures. They monitor the financial performance of their stores and have closed and will continue to close stores that they do not consider to be viable. Many of the store leases contain early termination options that allow them to close the stores in specified years if minimum sales levels are not achieved. During fiscal year 2007, they closed 5 stores. In fiscal 2008, they plan to close up to 4 stores. 2.4.6 On-line store.

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In February 2006, they migrated to a third-party platform which has and continues to provide improved functionality. They recently implemented several enhancements that have improved the marketing and promotional engines to drive client acquisition and conversion. The bebe.com website is a source of testing new concepts, building a community with their clients as well as providing a comprehensive product offer. They also plan to expand their ship to capabilities to include Canadian customers in fiscal 2008. 2.4.7 Cross border stores One store in the Virgin Islands, two stores in Puerto Rico and six in Canada. Two of them in Vancouver, one in Toronto, one in Calgary , one in Edmonton and one in Burnaby In these foreign locations in addition to some American competitors, many locals ones dispute the market. There is also a very high competitive environment with low entry barriers making the industry highly competitive. Bebe cross border market segments are more reduced than in the US

2.4.8 International licensees As of July 7, 2007, they had 14 international stores operated by licensees in South East Asia, United Arab Emirates, and Israel. Their international licensees purchase product from them to include in their licensed bebe stores, the stores are excluded from comparable store sales. As of July 7, 2007, wholesale revenue represented approximately one percent of total sales. In fiscal 2008, they plan to expand from 14 to 22 licensee operated stores. They expect this to include expansions in Israel, Mexico, the United Arab Emirates, Indonesia and Malaysia and strengthening their position in the Singapore and Thailand locations.

2.5 Merchandising
They do not have long-term contracts with any third partymanufacturers, and they purchase all of the merchandise from manufacturers by purchase order. In some cases, They select merchandise directly from third-party manufacturers

2.6 Product Categories

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They offer a full range of fashion separates, tops, dresses, active wear and accessories in the following lifestyle categories: career, evening, casual and active. While each categorys contribution as a percentage of total net sales varies seasonally, certain of the product classifications are represented throughout the year. They regularly evaluate existing categories for potential expansion opportunities. They will also introduce watches, sunglasses and an expanded shoe and handbag assortment. They signed an agreement in August 2007 with Sketchers Footwear to produce their entire BEBE SPORT and bbsp footwear products and distribute to their BEBE SPORT stores as well as other stores worldwide. They anticipate that they will begin seeing product in their stores beginning the fourth quarter of fiscal 2008. Also, in the last quarter of fiscal 2008, they plan to launch a new assortment of product for their outlet division under the new name 2b bebe. In August 2007, they signed an amendment to their licensed rights for optical eyewear which represented less than 1% of their business in fiscal 2007. The amendment extends the eyewear license to June 30, 2010. Under the terms of this agreement, the licensee manufactures and distributes products branded with the bebe logo to be sold at bebe stores and selected retailers. In fiscal 2007, they signed a new agreement with Safilo eyewear to develop, market and sell sunglasses in their bebe stores and Solstice owned stores. The first assortment will be featured in their bebe stores in November 2007.

2.7 Marketing
They have developed their advertising and direct marketing initiatives to elevate brand awareness, increase customer acquisition and retention and support key growth strategies. During fiscal 2007, their marketing expenditures, as a percentage of net sales, were consistent with fiscal 2006. This supported the growth of their direct to consumer business, including national and regional print advertising and outdoor advertising, catalog circulation and the clubbebe loyalty program. In fiscal 2008, they currently anticipate that advertising expenditures as a percent of net sales will be similar to fiscal 2007.

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2.7.1 Direct to Consumer In fiscal 2007, they increased the number of bebe catalogs mailed from fiscal 2006 and produced an additional bebe holiday catalog. In fiscal 2008, they are increasing their catalog circulation and maintaining the number of catalogs produced. Clubbebe, their customer loyalty program, was launched in fiscal 2006 and as of July 7, 2007, had over 1.8 million members. Their improved client database, which has increased approximately 75% over the same time last year, has significantly contributed to increased direct mail performance. 2.7.2 Advertising Lifestyle magazines, outdoor advertising catalog, in-store visual presentation and the website, bebe.com. 2.7.3 Events Semi annual in store events and major events in partnership with national and regional magazines to benefit non-profit organizations.

2.8 Profitability
Gross Profit Margin Operating Profit Margin Net Profit Margin

Industry Average Net Profit 14.33% (LFY) 47.97 (LFY) 15.69 (LFY) 11.52

3. MARKETING ANALYSIS
Before analyzing the financial statements I subject BEBEs to a marketing analysis in order to earn some understanding about the industry context in which the firm operates and the potential effects BEBEs management marketing policy may have in their financial situation.

3.1 Porter Analysis

3.1.1 The Five Forces Model Michael Porter provided a framework that models an industry as being influenced by five forces. The company express that the
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retail and apparel industry is highly competitive in accordance with what the porters analysis predicts as shown by the following analysis. 3.1.1.1 Potential Entrants Very low barriers to entry, no too high upfront capital requirements cost, easy access to inputs (raw materials and manufacturer contractors),no major cost advantages, no major legal requirements, distribution channels,shopping malls and important freestanding street locations are available to any company. The only point not easy to achieve and therefore the main source of differentiation among competitors is the brand equity, however that wide spectrum of consumer preference allows coexistence of different strong brands and the entry of new ones. 3.1.1.2 Supplier Power Raw materials and manufacturer services are the main inputs. Raw material are commodities, a single supplier is not able to control prices or other conditions, moreover in the rear case a specific raw material would be in scarcity, fashion always find competitive substitutes. Regarding manufacturers there are many contractors, the relation is only by purchase order so the company is not particularly dependent on any specific contractor.

3.1.1.3

Buyer Power

By definition the retail industry does no endow single buyers with significant power. The only limitations the company finds in this extent are consumer protection legislation and organizations. 3.1.1.4 Substitutes Clothes are cloths; however their function is not simply to dress, particularly for the female clientele. We cannot formally say that garments have substitutes (going naked is not an accepted alternative ), however the apparel industry is too wide and dynamic regarding kinds of raw material demanded according to fashion, ecologic trends, etc. Regarding the garment definition itself: pants, shirts, dresses, tunic, blouse, jeans, shorts, jackets, sweaters, underwear (lately works also as outwear ),etc; the definition of all the products I mentioned and all the ones I didnt, is changing constantly according to trends. Furthermore the use of accessories to this
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products, watches, glasses, bags, etc. also changes according to trends. In short, we may not be able to state that clothes have substitutes in the widest definition of the term but the apparel industry is so dynamic that any specific product a company launches today will probably be substituted by a totally different one in half an hour. (wont even reach tomorrow). 3.1.1.5 Competition Each of the four previous forces separately and all of them together facilitates a very competitive environment however is important to stress that since there is no high exit barrier there is still an considerable profit margin for players who are able to achieve a good performance. Unlike the electric appliance or automobile industry were companies have legal barrier to abandon business (consumer protection issues), resulting in underperforming companies who stay and distort the market in their strive to survive.Competition is evidenced in main factors like brand name recognition, product styling, product quality, product presentation, product pricing, store ambiance, customer service and convenience.

According to the Five Forces Michael Porters model prediction, BEBE is immerse in a highly competitive environment

3.1.2 Porters competitive strategy matrix The porters competitive strategy matrix predicts for this industry low and stable incomes since we have not only low entry barrier but also low exit barriers.

Exit Barriers

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3.2 The SWOT Analysis

A scan of the internal and external environment is an important part of a strategic analysis, the SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates.3 3.2.1 A previous step to SWOT analysis, the Sacred 3s of Marketing:
2 3

Dr.Ganor, IDC Herzlyia, Fall Semester, 2007 ,Principles of Marketing www.quickmba.com/strategy/swot/

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3.2.1.1 Analyze the need Women are concerned about their appearance, the image they project, regarding fashion trends. 3.2.1.2 Segmentation The company targets a segment of 18-35 year old women of a particular lifestyle, sexy sophisticated and body-conscious. 3.2.1.3 Value Proposition V= (I+Q)/ C I_ image Q_ quality C_ cost The bebe s own target definition is attainable luxury. The aim is to offer a very high image, status (I) without paying the full price (C) required by the most famous fashion designers lines. The quality (Q) in this case plays a secondary role, the company assures certain quality standard but its differentiation aim is not intended trough that channel.

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3.2.2 The SWOT: 3.2.2.1 Opportunities a. Store expansion

Both the company and the competitor express there are still good chances to expand and they are acting accordingly. In the domestic market there are still good freestanding street locations as regional shopping malls. BEBE havent significantly exploited the global market as some big competitors did. There are growing opportunities in Asia and Eastern Europe. b. Product expansion The accessories lines havent been exploited significantly by BEBE yet. Again, some big competitors already did it. c. Market expansion Almost all BEBE competitors have a much broad target audience. They target not only woman but also men, children and even babys. BEBE could eventually decide to incur those market segments. 3.2.2.2 Threats
4

en.wikipedia.org/wiki/Swot_analysis

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a. Changes in fashion trend and customer demand not identified

by the company on time could derive in significant sales failure, inventory excess and therefore significant mark downs and/or write-offs.
b. The income- elasticity of fashion products is particularly

extremely high. An economic recession or even the fear of it, a drop of consumer confidence could hardly damage retail sales of products which are particularly sensitive to income like the products BEBE sales. 3.2.2.3 Strengths
a. BEBE has a very accurate marketing positioning and

differentiation strategy. It was not easy for me to find a good competitor for BEBE. As referred before almost every company that operates in this sector have a much more wide target audience. Exclusivity, particularly on fashion products, is an unarguable competitive advantage. In order to enhance its brand equity BEBE offers a unique intangible identity value to the segment it targets. At the same time within that specific segment it provides sub brand differentiation recognizing some differences regarding lifestyle age and income nuances. Career, evening, casual and active, misses and slightly more matured ladies, a special brand only sold in outlet stores, etc are part of the sub segments clearly identified by BEBE.
b. Inventory management is critical in fashion products. BEBE

compensate its mangers according to the accuracy of their inventory control. Age of the merchandise is a critical factor in order to decide timely markdowns. The inventory valuation is highly dynamic and reflects the markets, its seasons and trends. Each store receives shipments tree times a week. This sophisticated inventory management allows BEBE to control the most sensitive cost factor implied in the nature of this kind of business, inventories. BEBE has a clear product life cycle conception (PLC) that is reflected in its inventory management. Since this practice is not widely extended among competitors, particularly among the larger ones, it means a critical competitive advantage for BEBE.

3.2.2.4 Weaknesses

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a. The size, BEBE has large competitors that are increasing

their market share globally. Emerging markets are offering opportunities and BEBE is not able to take full advantage of them because of its relatively smaller size. In addition, this larger competitors are able have an economic scale competitive advantage when competing for retail space and key employees also in the domestic market.

b. Since BEBE completely outsources the manufacture process it

is highly dependent on third parties regarding the timing and quality of the products it sells and at the same time it is responsible for the quality of the final product and eventual labor law violations that could harm the most important intangible asset in this business, the brand equity.
c. A controlling shareholder, the chairmen of the boxboard

holds 53% of the shares, in addition his sister had until recently an additional 18%. This fact may discourage acquisition bids and may limit the price investors are wiling to pay for shares.(however, some other investors may also see this issue as an important advantage since the management has personal interest in line with general shareholders one)

From the SWOT analysis we may conclude that even thou BEBE competes with significant larger players with natural economic scale advantages, its unique brand positioning and differentiation in addition to its high sensitivity to fashion trends evidenced in its sophisticates inventory control would allow it to maintain certain level of success and expand its activities. However, BEBE may find it difficult to compete at a global level.

4. FINANCIAL STATEMENTS OVERVIEW

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TRENDS IN PERCENTAGE CHANGE BEBE Revenues Operating Income Net Income GUESS Revenues Operating Income Net Income 7/7/2007 15.86% 0.73% 4.70% 12/31/06 26.61% 89.59% 109.42% 7/1/2006 13.65% 2.57% 11.27% 12/31/05 28.36% 83.50% 98.92% 7/2/2005 36.88% 93.28% 96.42% 12/31/04 14.56% 169.33% 305.79%

Trend in revenues is increasing moderately however its competitor has a significant higher peace of growth, because of its larger global expansion.

Operating income and net income have stabilized after an important increase on the first period (2004-2005)6. In contrast, its competitor kept the important increase pace during all the periods observed, the three last fiscal years. However, the competitor only reached a similar level of operating income margin than BEBE, around 16% of revenues only in the last year and was not able to reach yet BEBEs net income margin (12-13%). Its competitor was able to improve its margin by reducing its cost of revenue margin more than 900 basic points nevertheless it is still more than 400 basic points ahead from BEBEs cost of revenues margin. (Slightly over 50%).Is important to stress that BEBE is able to achieve these lower levels of cost of good sold although it has significantly lower buying power. The competitor is tree times bigger (market value) and buys more massive merchandise (in quantity and in kind of merchandise) having a larger pool of suppliers who to buy from and therefore can get more competitive prices. However it seams that BEBE manages better its inventory and/or is able to mark higher prices because of its differentiation policy. In the same way
5

The common sized financial statements of BEBE and its competitor are available in the appendix
6

In 2004 there was an important change in management that will be treated in the following sections

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BEBE holds half of the inventory level related to the revenues it obtains from it comparing it to its competitor, the competitor holds double level of inventory for a same unit of revenue.

On the other hand the competitor brings a slight decreasing trend on administrative and selling expenses when BEBE evidences the opposite trend, a slightly increasing trend on general expenses. It seams that BEBE has being lately acquiring increasing levels of durable good for its store expansion since depreciation has increased. The company states that the increase in expenses is due to stock based compensation to its employees without specify whether they are going to keep increasing in the near future. Wall Street analyst dont point any specific cause for this slight increase in expenses.

BEBE shows a stable moderate pace of growth on revenues however this increase is partially offset by a slight increase in general expenses regarding net income resulting in only a low pace of growth on profits It seams that BEBEs sophisticated inventory management and marketing differentiation policy is translated into relatively low levels of cost of revenue and inventory held.7

5. RATIO ANALYSIS
7

I mean that the good profit margin is achieved form both sides, form the good selling prices when launching the product thanks to uniqueness of the offer and avoiding mark down or write off because the good inventory management. In addition the lower levels of inventory held derive in lower financial costs.

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A tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio analysis is predominately used by proponents of fundamental analysis.8

5.1 Liquidity
The ability of the firm to repay short term obligations
BEBE RATIOS Liquidity Ratios 7/7/20 07 7.48 6.78 7/1/20 06 6.59 5.88 7/2/20 05 7.28 6.56 6/30/0 4 6.51 5.77

Current Ratio Quick Ratio Operating Cash Flow to Sales GUESS RATIOS Liquidi ty Ratios 12/31/ 06 Current Ratio Quick Ratio Operating Cash Flow to Sales 1.97 12/31/ 05 1.89

0.15

0.16

0.18

0.16

12/31/ 04 2.04

12/31/ 03 1.90

1.39

1.33

1.42

1.15

0.12

0.15

0.11

0.10

http://www.investopedia.com/terms/r/ratioanalysis.asp

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Usually retailers have high levels of liquidity. They sell cash and they buy credit. BEBEs competitor is able to pay its current liabilities twice with its current assets and more than once without having to sell any of its inventories. BEBE can pay its current liabilities more than seven times with its current assets that are most of them cash equivalents and account receivables due to its particularly low level of inventories; consequently even without selling inventory BEBE is almost able to reach a ratio of seven. BEBE keeps too high level of cash, it seams that it has an extremely conservative policy regarding cash since this levels are stable along periods. It is its own cash since it doesnt have financial debt. It has an open revolving line of credit line with banks but it does not use it9. Moreover it invests in short term municipal bonds and Marketable securities classified as available for sale which are long term financial instruments but because of their interest rate reset mechanism and a very high liquidity are considered short term assets. BEBE levels of cash flow related to sells are also higher than its competitors, this might be because BEBE does mainly retail sales while its competitor has a more important wholesale distribution channel, therefore gives more credit and BEBE sells more cash. BEBE evidence very strong liquidity, in addition to its own cushion it has a potential open source of cash. This extremely conservative policy represents a very high opportunity cost for share holders. The company is holding cash for witch is not offering the return shareholders expect from the apparel and retail industry. The company should give its shareholders the alternative of investing in more profitable investments than municipal bonds or diversify their portfolio according to their own criteria. I understand that this is only possible because the controlling share holder and his sister are able to manage the company assets as if they were their own personal assets.

Under this credit line BEBE can borrow or issue letters up to a combined total of $25 million. At the last fiscal period closing it had no cash borrowings and 0.9 million of letters outstanding. The interest rate BEBE pays is Libor + 1.75. I will consider for the purpose of this analysis BEBE as a company purely financed by equity. Those letters represent only 0.000148 % of BEBEs total assets. In addition BEBE earns only in interest more than 13milon on its financial assets.

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5.2 Profitability
The ability of firms to earn profits in the long term.
Profitability Ratios BEBE RATIO S Profit Margin Return on Equity Return on Assets Earnings per Share Price/Earnings Ratio Dividend Ratio 7/7/20 07 0.12 7/1/20 06 0.13 7/2/20 05 0.13 6/30/0 4 0.09

0.15

0.18

0.20

0.14

0.14

0.16

0.19

0.83 19.73 0.24

0.81 18.74 0.21

0.74 35.78 0.15

0.39 20.07

Profitability Ratios GUES S RATIO S Profit Margin Return on Equity Return on Assets Earnings per Share Price/Earnings Ratio 0.10 0.06 0.04 0.01

0.29

0.20

0.13

0.04

0.11

0.07

0.05

0.02

1.36

0.66

0.34

12.09

22.85

78.86

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Dividend Ratio

no div

no div

no div

According to the historic trend I described in the first section of the analysis BEBE shows ability to earn a stable profit margin (12-13%) in the near future. In addition, those profits are expected to increase in nominal value since the firm shows a moderate peace of growth. BEBE return on equity is significantly lower than its competitors because BEBE is financed mainly with equity while its competitor is leveraged with debt. Regarding assets the apparel and retail industry does not require to hold many assets in order to operate. BEBE stores are leased with flexible contracts. This strategy allows BEBE to close any store when is no longer profitable. In addition, as I expressed before BEBE does not hold much inventory. The only properties BEBE has are building for the headquarters and distribution center. They consider it is not convenient to be moving those facilities. BEBEs competitors strategy is not much different however because of its global dimension it needs to multiply those strategic facilities along different markets while those international markets dont multiply the domestic income in the same proportion. In addition it needs connection, communication between them, for example the competitor has already made payments in advance for the new corporate aircraft it is being built according to its purchase order. Therefore, BEBEs competitors return on assets ends up being diluted by multiple markets in relation to BEBEs return on assets that ends up being significantly higher than its competitors. As a side note we can notice that BEBEs return on assets is very close to return on equity because the company doesnt have debt. Regarding the price to earning ratio, in 2004, a new C.E.O. introduced significant store and product expansion. Since then earnings per share have notably increased and then remained stable. Investors had an overreaction to this change in management; in 2005 the P/E ratio almost doubled and then it dropped again to the previous level. I believe this was due to the fact that the previous C.E.O who had found and run the company for the previous 28 years, still remained as chairman of

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the board and controlling share holder. The new C.E.O. meant young and fresh new energys under very good risk control, the advice of the founder. In short this signal was read by inventors as nothing to loose and a lot to win. Regarding dividends, it seams that BEBE has a dividend policy of around a fifth of its earning. However we can observe a contrast between the year of the expansion and the fiscal year that just ended. Then, maybe because the expectations of growth were high, relatively less dividends were paid and now the expectations on growth peace has slightly slowed down, witch may have influence in the decision of paying relatively slightly more dividends in order to give share holders the chance of investing in other alternatives financial instruments. In sum, BEBE is expected to be moderately profitable in the near future

5.3 Capital Structure

The amount of liability in a firms capital structure
Capital Structure Ratios BEBE Debt to Equity Ratio GUESS Debt to Equity Ratio 0.66 0.75 0.60 0.61

0.20

0.23

0.22

0.21

As I expressed before BEBE finances its activities exclusively with equity10. Its competitors debt is more than three times higher in relation to equity. We saw before that the competitor offers higher return on equity and we confirm now that the higher return comes with a higher risk.
10

I mean it does not have financial debt, it only owes money to suppliers

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5.4 Working Capital Activity

The firms efficiency of operations

Working Capital Activity Ratios BEBE RATIOS Accounts Receivables Turnover Days Accounts Receivables Oustanding Accounts Payables Turnover Payable Vs. Receivable Days11 Accounts Payables Outstanding Inventory Turnover Days Inventory Held Assets Turnover

42.50

46.47

42.40

47.26

8.59

7.85

8.61

7.72

7.05

5.38

6.01

6.53

6.03

8.65

7.05

7.24

51.76 7.92 46.07 12.64

67.90 6.94 52.58 12.40

60.72 8.07 45.22 9.20

55.90 7.72 47.25

no interest Interest Coverage Ratio expense

11

See footnote 12

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GUESS RATIOS Working Capital Activity Ratios Accounts Receivables Turnover Days Accounts Receivables Outstanding Accounts Payables Turnover Payable Vs. Receivable Days Accounts Payables Outstanding Inventory Turnover Days Inventory Held Assets Turnover Interest Coverage Ratio

7.82

9.53

11.30

15.12

46.68

38.29

32.29

24.14

2.84

3.46

3.80

5.16

2.75

2.75

2.97

2.93

128.47

105.48

95.95

70.77

4.03

4.55

5.53

4.99

90.58 11.65 27.31

80.23 8.95 15.49

66.00 23.70 9.97

73.21 3.51 2.60

5.4.1 Accounts Receivable The receivables turnover confirms to us what we already saw watching the relation of cash flow to sells. BEBE has a very high receivables turnover because most of its sells come from the retail channel; most of its sells are cash. Therefore it has five times more receivables turnover than its competitor that depends on significant wholesale distribution channel (gives more credit) in addition to its retail stores. BEBE has a high account receivables turn over, it holds account receivables on average for no much longer than a week as it is expected from a retailer.
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5.4.2 Accounts Payable

BEBEs competitor holds account payables for almost double time than BEBE. The competitor needs more time to pay its debt in order to offset the higher time it offers to its whole sale customers. He might be able to get this longer credit from its suppliers maybe because of its larger buying power and/or maybe because it buys from a larger and therefore more competitive pool of suppliers. However in the comparison Receivable vs. Payable days12 we see that the spread achieved by BEBE between the time it pays and the time it collect its debts is far more than double(in ratio) relatively to the spread achieved by its competitor.

5.4.3 Inventory and Assets Watching the inventory turnover we confirm again something that we already knew. BEBE is more efficient managing its inventory than its competitor. It shows more than one time and a half inventory turnover than its competitor. Regarding the asset turnover we see again than BEBE is more efficient than its competitor since even thou it has comparable levels of asset turnover, it is expected from a wholesaler that is not a manufacturer to have higher levels of asset turnover. The competitor it is not a pure wholesaler but has significantly larger portion of whole sales. It is able to sale more with relatively not that much more infrastructure. However we dont see in this case a clear difference in sales related to assets. BEBE makes good use of its assets 5.4.4 Interests Coverage
12

I understand this is not a used ratio but it served me to visualize the comparison between the times a company has to pay its suppliers with the time it takes it to collect. If I get a ratio of 1 then it tells me that the time is the same if the ratio is 2 it tells me that it has double time to pay compared with the collection time. In this case since we are comparing among retailers, this kind of ratio would be expected to be larger than 1 so a simple statement both pass the test of paying vs. collecting doesnt tell me much about the comparison between themselves, that is way I was interested in quantifying the spread of breath each of them have and then compare them one another. This kind of measure may help specifically when comparing between retailers that generally have a large breath; it is an attempt to measure how large the breath is in relative terms.

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About the interest coverage ratio we dont have much to say because BEBE does not pay interest, as we saw before it is financed by equity.

6. RISK ANALYSIS 6.1 Credit Risk Analysis

The firms ability to make interest and principal payments on borrowings. We can dispense with this kind of analysis because the company does not borrow money so by definition does not have any credit risk.13 The only creditors the firm has are the suppliers and in a way the property owners of the buildings BEBE leases for its stores. The last ones do not represent a material risk since the contracts are flexible enough in order to allow BEBE to cease them in case the stores are no longer profitable. Regarding the potential credit risk that suppliers could represent BEBE doest not offer a significant material risk either. I judge the ratio analysis showed us enough. BEBE is able to pay its current liabilities (including suppliers) between 6 to 7 times without having to sell any of its inventories. That would be in the extreme case BEBE wouldnt be able to sell, but in case BEBE is able to operate normally it receives from its suppliers around two month of time to pay its debts wile it collects the cash derived from sales in almost a week. This does not mean that with the cash of one week BEBE is able to cover all its account payables but means that in case of a financial distress the nature of its retail operations allows it to recover if it would be able to go on selling. In addition, only in a rear case BEBE would need it, it has the revolving credit line with the bank that is basically untouched. It is important to stress that BEBE does not deal with any kind of financial derivatives; therefore it wouldnt have to face the liabilities that such instruments could eventually raise. BEBE does face a few minor labor and customers law suits but neither any of them separated nor all together represent a material risk because of their relatively low magnitude; even in
13

However in the appendix, in order to fulfill the academic requirements of this assignment I have subject this case to the tools we have learned in our course a.

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case the previsions that have been taken for the legal failures wouldnt cover the eventual court resolutions. The company does not embody for an eventual creditor any significant risk; the only uncertainty somehow related to this issue is the one deriving from an eventual succession crisis of its founder on whom BEBE is strategically highly dependent.

6.2 Bankruptcy risk

The likelihood that a firm will file for bankruptcy and perhaps subsequently liquidate. Altman Z-Score
7/7/20 07 Based on assets Based on revenues 12.09 11.77 7/1/20 06 12.92 12.43 7/2/2005 24.77 24.01 6/30/04 12.76 12.04

I have applied the Altman Z-Score and I obtained an extremely high score. Then, I take into account that this score was designed for manufacturing firms and BEBE outsources all the manufacturing activities to third parties so it does not hold many assets. Its ability to create revenue does not come from its assets. The most important ratio this score relies on is earnings to assets. Therefore I decide to try the same score but this time I refer it to sales instead of assets. I obtain almost the same stable results. Around 12 except for the period were investors overreaction to the new management pushed up the market value and made the score double. This result is far away superior to the one that Altman defined for low bankruptcy risk, a score above 3. The reason is that BEBE is quite profitable; it is able to distribute dividends and at the same time accumulate cash by retaining earnings what makes it extremely liquid. All this together and each element separately pushes the score up. Each of the Altmans score ratios separately is quite high in the same way the overall score is, summing up all the separated positive effects.

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According to this analysis BEBE does not offer any material bankruptcy risk

7. VALUATION
7.1 Calculations

I have applied the P/E Ratio Criteria against the benchmark data and I have obtained a share price of $18.89 I have applied the pure DCF valuation method according to the data shown below and I obtained a share price of $9.82 I have averaged the results of both methods giving a weight of one fifth to the P/E ratio criteria and four fifths to the DCF method. I obtained the second table were the central value comes straight from applying the referred data and the different variations in value come from considering a value zone for the Beta coefficient(-/+ 0.50) and a value zone for the analysts forecast on the company growths estimates (-/+2% for 2008, -/+3% for 200914)
Competitor P/E Ratio Historic Growth Average 2000-2007 WACC Growth after Forecast Horizon Risk free Interest Rate Beta Market Rate 21. 66 16.61% 16.50% 5.00% 3.83% 2.67 9.81%

14

I have considered the uncertainty in the analysts forecast to be larger two years from now than only one year from now. In addition the original forecast is a two digit number for the second year while for the first one it is only a one digit number; I tried to keep somehow proportions between the uncertainty zone and the size of the number that is being estimated. That is the reason why I have established a wider uncertainty zone for 2008 than the one I established for 2008, in 2009 we have more uncertainty and the number we are estimating is larger being at the same time larger the error the analysts can make.

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Correlation Coefficient Beta Growth Forecast 2008 2009 11.20 13.30 % % 16.30 9.20% % 19.30 7.20% % 3.17 2.67 2.17

$9.94 $10.2 2 $10.5 2

$11.2 8 $11.6 4 $12.0 0

$13.3 7 $13.8 3 $14.3 0

7.2 Assumptions and Data.

The free interest rate was taken from 10 year Treasury bill interest yield. The market interest rate was taken from the NASDAQ index on a one year period ending last December. It was the closest positive yield of the NASDAQ or any other index. In the last two month markets fell significantly because of recession fear. The Beta coefficient of the company was taken from Yahoo Finance. I assume for this application that CAPM model holds. Guess? P/E ratio was taken from the NASDAQ website

The Company growth estimate for 2008 and 2009 were made by the analysts who collaborate with the NASDAQ web site. They do another long term 5 year forecast of 16% yearly that is concordant with the historical average growth of the
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company in the last eight years, 16.61%15.However I have chosen the first one understanding that forecast about an economic recession are unanimous. The short term company forecast better applies to this extent and to the uncertainty about the subsequent crisis consequences, as I pointed in the SWOT analysis; fashion products are very sensitive to consumer confidence that is likely to be severed affected in case the forecasted recession takes place.

7.3 Recommendation BEBE shares are currently traded at $12.34 at NASDAQ stock exchange. According to the benchmark P/E valuation its price should be $18.89. According to the pure Cash Flow method valuation I get a price of $9.82 combining both methods and considering a zone were the price could rage I arrive to a value between $9.94 and $14.30 the recommendation arising from this scenario is HOLD since the current price falls right in the middle of the valuation range.

8. CONCLUSIONS
BEBE is a healthy medium- large company in a highly competitive industry where significant larger competitors have better access to global markets. However BEBE has a couple of competitive advantages, sophisticated inventory management and a unique marketing differentiation that allows it to achieve a moderate success evidenced in a considerable growth rate and respectable profit margin. In addition BEBE is financed entirely by equity with the advantages and disadvantages that such policy leads to.16BEBE is controlled by a single influencing shareholder who is aged meaning a natural uncertainty regarding an eventual succession crisis. The recommendation I give regarding this
15

I added in the appendix a table of historic revenues growth I took form the companies website 16 Advantages regarding the safety of the capital structure and disadvantages because some level of debt is always desirable regarding the tax advantages and the return optimization

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stock is HOLD however this recommendation does not take into account the unique low bankruptcy risk level that this company has. In case that and investor would be comparing this company with another company with a similar recommendation but a regular bankruptcy risk I would recommend him/her to prefer BEBE stock.

Sources of information

In addition to the sources quoted along the text and footnotes I have consulted the following ones:

Company financial reports Company s website Nasdaq analysts opinions Yahoo finance Bloomberg web site MSN Money Press articles about the company Competitors financial reports and website

Notes:

BEBE closes its fiscal year six month before than its competitor does. These companys revenues are concentrated to the end of the year, the holidays season. I have chosen to compare reports of different fiscal years because they include the same high season period. e.g. high season of 2006 is the last quarter included in GUESS? 2006 fiscal year and the same time is the second quarter of BEBEs 2007 fiscal year. In analyzing the data mainly the one coming from the companys information source I made special emphasis in
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the hard data rather than in the soft data. I mean I observed the numbers and facts rather than the companys judgment about them. I took into account companys statement only when being corroborated by the facts and numbers and third partys judgments .Only then I made their statement mine. In the cases I couldnt confirm or discard their statements I expressed the company states like for example when referring to the increase on expenses that I couldnt find much information about it. In other cases where I didnt find judgment about them I stated my own judgment based purely on an interpretation of the hard data e.g. it is not written anywhere about what I called the conservative cash policy however in my opinion it is implicit in the numeric data.

9. APPENDIX 9.1 Credit risk supplement- The Cs of Credit . Risk Analysis

Is the firm able to make interest and principal payment on borrowings? As I pointed in the body of this paper, basically the firm does not have financial debts, however lets analyze whether it would be able to take loans and repay them properly.

9.1.1 Circumstances leading to the need of a loan I suppose that BEBE could need a loan for financing its expansion activities rather than to cover the financing of its regular operating activities. In such a case BEBE wouldnt go into a new emerging business, it would rather expand its profitable ongoing business. The tendency BEBE has shown is to specialize in the segment and sub segment they master best since more than 30 years ago rather than incur in a new unknown business were they dont have experience. BEBEs expansions
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involve more intangible assets and expenses rather than tangible assets. As I pointed before the most valuable assets this company holds is intangible, the brand. Expansion leads to advertising expenses, brand building, new product line promotion, designing, etc. They are all intangible assets or directly expenses that probably wont show in a near future balance sheet but rather influence on a near future income statement. BEBE fails this traditional criteria of taking a project involving a large mass of tangible assets that a creditor could eventually grasp in case of failure. The loan wouldnt be to finance the purchase of tangible assets. BEBE seams to have clear its strategy and probably would know what to do with this imaginary loan and where would come founds back from, in order to repay it.

9.1.2 Cash flows

From the common sized balance sheet we can observe that inventories and accounts receivables kept exactly the same proportion to sales along the last four fiscal years, so the company does not evidence problems collecting or getting stuck with inventories. Current liabilities had increase a little bit relatively to sales but in the last year they decreased again. Cash flows from operating activities are positive and increasing confirming that the growth in revenues is genuine, not faked.(e.g. Reporting sells when they are actually consignment to a warehouse or when the good may end up being returned before it is effectively paid) Fixed assets have slightly increased relatively to revenues. The increase in capital expenditures as well as the increase in depreciation also confirms it. Management is clearly not avoiding capital expenditures. In addition, they are far from being even half of cash from operations, so it is not too much either. I understand that because of the expansion policy they are making new capital expenditures in order to booster the growth. Regarding cash the intention is much more impressive

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they are accumulating large amounts of cash, pushing current assets to reach almost 70% of revenues. The management expresses clearly their intention in keeping and improving the growth peace. They show concern about cash; they believe that in order to keep on expanding they will need strong cash to take advantage of new opportunities in malls and free street outstanding positions. In addition, they certainty show concern about self financing the growth. However at the same time we saw that the dividend ratio is growing so they still believe that they wont find that many growth opportunities. In each of the periods, cash flows invested in marketable securities are larger than the ones coming from their maturity or sell. If the company would have credit constraints it would have been in the opposite way. With cash the company does not seam to have any problem. However lets see what the cash ratios tell us.

9.1.3 Cash Flow Financial Ratios

C.F.Op./Average Current Liabilities C.F.Op./Average Total Liabilities C.F.Op./Cap.Exp

1.66 1.03 2.32

1.80 1.11 2.95

2.35 1.45 3.94 2.60

We see again that capital expenditures are increasing significantly in relation to operating cash flow (the problem is in the denominator). Durable goods by definition are bought in order to be spent in more than one period so they dont necessary need to keep relation with the cash flow of the same period unless they are consumed during the daily activity like buses in a transportation company, you finish running down old units and at the same time you buy new ones to start using, at certain point you may reach a stable relation between the cash you spend buying buses and the cash flows those buses help you to get.) In the particular case of a company expansion like in our case we expect to see increases in capital expenditures beyond the increase in operating cash flow. BEBE is increasing its purchases of property and equipment beyond the increase peace of operating cash flows. We can appreciate that according to the
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internal BEBE policy in regarding to compare efficiency and profitability among its stores, they dont take into account any store that was open or any store that has been expanded in more than 15% in their net square footage during the last 12 month. This is because for example all the store masonry used in a new store is finances with cash flows coming from old stores and the new one is not expected to provide right away significant cash flows. If this peace of growth would be kept till eternity, only then BEBE would have a problem but that never happens and BEBE is still not investing in capital expenditures even a half of its operating cash flows. Capital expenditures to Cash flows from operation are growing but it has a justified reason to grow. Regarding liabilities to operating cash flow, we see also an increase for similar reasons,(we should bear in mind that accounts payable turnover is not decreasing and the company does not take financial debts) not all durables goods the company pays them cash and some expenses derived from opening a new store are financed in short term (current liability). The point is that this cannot hold indefinitely, this combined higher increase pace in capital expenditures and liabilities beyond the cash flows from operation increase peace at some point will end. The peace of growth will slow down. The management will decide whether to keep a fast peace and eventually it wont be enough with owing more money to suppliers and would have to get debt that would be increasingly more expensive or they will simply have to slow down the peace of growth within its own cash flow boundaries. I understand the company is still far from that scenario, its still has a way to go. However, in the future these cash flow ratios should be watched from close by investors.

9.1.4 Collaterals 54 % of the companies assets are very liquid marketable securities 77% of the assets are current assets, ruling out inventories we still have 69% of the assets cashable in the current period. Almost the rest of the assets (19%) are property and equipment.

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I understand that the company has enough collaterals in order to take a loan.

9.1.5 Capacity for debt

The company does not have material debt so there is no sense in analyzing the interest coverage ratio. Regarding, debt to equity we saw that debts (mainly suppliers) finance only a fifth of all company assets. The company has profit enough to pay interests on debt and at the same time has a large portion of equity to protect, so I believe they wouldnt default on an eventual lender. Basically, we can say that the firm is able to take a reasonable loan.

9.1.6 Contingencies

a. Is the firm a defendant in a major lawsuit? The company is defendant in a couple of minor customers labor lawsuits and couple of labor ones; they took previsions for them. Even thou those previsions would be subject to miscalculation they state that neither separately nor all of them together would mean a significant financial damage for the company. I couldnt find, more information about this, I understand that the company doesnt have reason to hide information about this issue. They could afford lawsuits of more serious significance.

b. Has the firm served as a guarantor on a loan? They didnt express it neither articles nor analysts say anything about it. I understand that it is not likely to happen since there must be a reason why they dont even take loans for themselves.
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c. Has the firm committed itself to make payments related to derivative financial instruments that could adversely affect future cash flows? The company states they do not deal with any kind of financial derivatives

d. Is the firm dependent on one or a few key employees, contracts, license agreements, or technologies? Yes, they do depend on the controlling share holder that since 2004 left the C.E.O. position and his sister that also resign to in 2006 to the board of directors and to a key management position. The controlling share holder is still the president of the board and therefore still keeps his stake in the company but his sister sold in 2006 many of her shares to the company and resigned to a key position in the company. Nowadays the company depends on a new CEO that seams to be doing well, it is considered to be a key employee. The C.E.O says they depend very much on the founder and that they will miss very much his sisters key contribution. My believe is that as long as the controlling shareholder keeps his stake even thou the new CEO would resign It wouldnt represent a high risk. However, the situation would be uncertain in case that the founder sold his shares or passed away. I dont know how it would be the learning curve of a new player even with the support of a successful C.E.O. The founder is a man of 70 years old. Statistic risk of death increases enormously after that age. Analyzing contingencies I understand that the most significant could be the dependence on the companys founder and the uncertainty of the effects of an eventual succession crisis. 9.1.7 Character of Management

a. Previous experience of management with operating problems. In addition to his three years of experience in his current position BEBE,s C.E.O has nine years of experience in key positions in BEBE and in other company that also operates in the consumers sector.

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b. Delivery record on past projections by management. Regarding the projections of store expansion of previous years they were a little bit too optimistic, the rest was more or less as he predicted.

c. The firms reputation for honest and fair dealings with suppliers, customers, bankers and others. I didnt find any article that referred to BEBE as dishonest or not trustful. I suppose that in such case I should have found something. Regarding the customers lawsuits, I could appreciate that the reason that derived them seams to be more about taking advantage of a profitable opportunity due to BEBEs minor operating mistakes, rather than a damage coming from a dishonest commercial practice. The employeess law sue looks very traditional, one of them is about an employee that didnt leave the company in good relations and looks for some benefits. The other one looks like an opportunity that a good lawyer made up in order to profit. In sum the law suits dont evidence fraudulent or dishonest behavior of the company but they seam arising from the normal curse of business. I understand that even tough not every discontented customer or employee end up suing the company, all this is quite little for such a big company like BEBE with more than 1500 full time employees in addition to a comparable quantity of part time workers; needles to say about the thousand of customers. About suppliers I didnt find information, it is not public. Regarding banks I suppose that if BEBE has an open credit line untouched his credit score cannot be bad taking into account the relative low rate that Libor + 1.75 means on a revolving 25 million credit line. (Citibank being a highly rated huge financial institution has recently issued fixed debt at a rate relatively not that much low).

d. Managements investment in the firms equity. We could appreciate the founder has being involved and even tough he is not the CEO still the chairman of the board and holds the shares. The new CEO holds some shares very little. always highly any more he is the majority of but relatively

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9.1.8 Conditions of the Debt

As I said the company basically does not have lenders. The few references I saw about the revolving credit line does not mention any restriction to take new loans or pay dividends. I assume BEBE wouldnt need that much that credit line in order to accept that kind of conditions and the bank wouldnt need to request them either in order to assure the repayment, however this is only my supposition.

9.2 Financial statements

9.2.1 BEBEs Financial Statements

BEBE INC Common Size Financial Statement Data

Annual Balance Sheet BEBE Historic Percent age Growth on Revenu es 2007 15.9

Period Ending: Current Cash and Cash Equivalent s Short Term Investmen ts

7/7/200 7 Assets

7/1/20 06

7/2/20 05

6/30/0 4

10%

7%

5%

49%

2006

13.7

49%

50%

47% -41-

1%

2005

36.9

Net Receivable s

2%

2%

2%

2%

2004

15.1

Inventory Other Current Assets Total Current Assets

7%

7%

6%

7%

2003

2.2

2%

1%

1%

1%

2002

8.8

69%

67%

63%

60%

2000

20 Average 20002007 16.61%

A 1

Long Term Assets Long Term Investmen ts Fixed Assets Other Assets

0%

0%

0%

2%

17% 1%

16% 1%

15% 1%

17% 1%

Deferred Asset Charges Total Assets

3%

2%

1%

0%

90%

87%

80%

80%

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Current Liabilities

Accounts Payable

7%

10%

9%

9%

Short Term Debt/Curre nt Portion of Long Term Debt

0%

0%

0%

0%

Other Current Liabilities Total Current Liabilities

2%

0%

0%

0%

9%

10%

9%

9%

Long Term Debt Deferred Liability Charges Total Liabilitie s

0%

0%

0%

0%

6%

6%

6%

5%

15%

16%

15%

14%

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Stock Holders Equity Common Stocks Capital Surplus Retained Earnings Other Equity Total Equity 0% 19% 55% 1% 75% 0% 17% 54% 0% 70% 0% 16% 49% 0% 65% 0% 13% 52% 0% 66%

Annual Income Statement Period Ending: Total Revenue

7/7/2007

7/1/2006

7/2/2005

6/30/04

100%

100%

100%

100%

Cost of Revenue

52%

51%

50%

53%

0%

0%

0%

0%

Gross Profit

48%

49%

50%

47%

Operating Expenses

0%

0%

0%

0%

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Sales, General and Admin.

32%

31%

30%

33%

0% Operating Income 16%

0% 18%

0% 20%

0% 14%

Add'l income/expe nse items Earnings Before Interest and Tax Earnings Before Tax Income Tax

2%

2%

1%

1%

18%

20%

21%

15%

18% 6%

20% 7%

21% 8%

15% 6%

Net IncomeCont. Operations

12%

13%

13%

9%

0% Net Income 12%

0% 13%

0% 13%

0% 9%

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9.2.2 The Competitors Financial Statements

GUESS INC Common Size Finacial Statemnet Data

Annual Balance Sheet
Period Ending: Current Assets 12/31/200 4 12/31/200 3

12/31/2006

12/31/2005

Cash and Cash Equivalents

18.59%

18.62%

15.04%

11.26%

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Net Receivables Inventory

12.79% 13.94%

10.49% 13.04%

8.85% 11.29%

6.61% 13.12%

Other Current Assets

1.83%

1.73%

1.99%

2.10%

Total Current Assets

47.16%

43.88%

37.16%

33.09%

Long Term Assets Fixed Assets

13.86%

15.38%

15.62%

17.97%

Goodwill

2.36%

2.20%

1.59%

1.82%

Intangible Assets Other Assets Deferred Asset Charges Total Assets

1.56% 2.04%

0.00% 2.22%

0.00% 1.49%

0.33% 1.22%

3.64% 70.62%

3.98% 67.66%

2.32% 58.18%

2.55% 56.99%

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Current Liabilities Accounts Payable

21.05%

18.37%

16.37%

15.23%

Short Term Debt/Current Portion of Long Term Debt Other Current Liabilities Total Current Liabilities

2.90%

3.74%

1.84%

2.19%

0.00% 23.95%

1.10% 23.21%

0.00% 18.21%

0.00% 17.42%

Long Term Debt Other Liabilities Deferred Liability Charges Minority Interest Total Liabilities Stock Holders Equity Common Stocks Capital Surplus

1.52% 2.78% 5.59% 0.40% 34.24%

4.28% 1.68% 7.70% 0.00% 36.86%

5.68% 0.58% 3.47% 0.00% 27.94%

8.51% 2.35% 0.00% 0.00% 28.27%

0.08% 18.63%

0.02% 20.28%

0.02% 24.46%

0.02% 27.28%

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Retained Earnings Treasury Stock Other Equity Total Equity

31.62%

26.87%

26.43%

25.63%

-13.16% -16.71% -21.49% -24.66% -0.80% 36.37% 0.33% 30.80% 0.82% 30.25% 0.44% 28.71%

Annual Income Statement Period Ending: Total Revenue 12/31/ 05 100.00 %

12/31/06 100.00%

12/31/04 100.00%

12/31/03 100.00%

Cost of Revenue

56.18%

59.31%

62.43%

65.42%

Gross Profit

43.82%

40.69%

37.57%

34.58%

Operating Expenses Sales, General and Admin. NonRecurrin g Items

27.54%

29.81%

29.96%

30.97%

0.00%

0.00%

0.00%

0.38%

Operating Income

16.29%

10.88%

7.61%

3.24%

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Add'l income/expe nse items Earnings Before Interest and Tax Interest Expense Earnings Before Tax Income Tax Minority Interest

0.88%

0.28%

0.12%

0.03%

17.17% 0.63%

11.16% 0.72%

7.73% 0.78%

3.26% 1.25%

16.54% 6.14% -0.01%

10.44% 4.15% 0.00%

6.95% 2.90% 0.00%

2.01% 0.86% 0.00%

Net IncomeCont. Operations

10.39%

6.28%

4.05%

1.14%

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