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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 0-24395
 bebe stores, inc.
 (Exact name of registrant as specified in its charter)
 California
    
    94-2450490(State or Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification Number)
 400 Valley Drive
Brisbane, California 94005   Telephone: (415) 715-3900
 þ o
 
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bebe stores, inc.
 TABLE OF CONTENTS
 PAGE NO.PART I. FINANCIAL INFORMATIONITEM 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2006, July 1, 2006 and October 1, 2005
    
    
    3Condensed Consolidated Statements of Income for the quarters ended
September 30, 2006 and October 1, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the quarters ended
September 30, 2006 and October 1, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    16ITEM 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    17ITEM 1A. Risk Factors
    
    
    17ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21ITEM 3. Defaults Upon Senior Securities
    
    
    21ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    21ITEM 5. Other Information
    
    
    21ITEM 6. Exhibits
    
    
    22SIGNATURE
    
    
    23EXHIBIT INDEX
    
    
    24EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I. FINANCIAL INFORMATION
 
  bebe stores, inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data)
 (unaudited)
 As of
    
    
    As of
    
    
    As ofSeptember 30,
    
    
    July 1,
    
    
    October 1,2006
    
    
    2006
    
    
    2005Assets:Current assets:Cash and equivalents
    
    $
    50,391
    
    
    $
    38,656
    
    
    $
    31,479Short-term marketable securities
    
    
    292,414
    
    
    
    289,015
    
    
    
    253,632Receivables
(net of allowance of $935, $897 and $912)
    
    
    8,704
    
    
    
    5,682
    
    
    
    8,029Inventories
    
    
    53,427
    
    
    
    42,151
    
    
    
    39,638Prepaid and other
    
    
    11,211
    
    
    
    13,802
    
    
    
    13,170Total current assets
    
    
    416,147
    
    
    
    389,306
    
    
    
    345,948Property and equipment, net
    
    
    96,643
    
    
    
    95,022
    
    
    
    78,349Other assets
    
    
    17,210
    
    
    
    16,581
    
    
    
    8,899Total assets
    
    $
    530,000
    
    
    $
    500,909
    
    
    $
    433,196Liabilities and Shareholders Equity:Current liabilities:Accounts payable
    
    $
    28,821
    
    
    $
    22,947
    
    
    $
    25,575Accrued liabilities
    
    
    26,672
    
    
    
    35,841
    
    
    
    27,369Current portion of capital leases
    
    
    237
    
    
    
    249
    
    
    
    168Total current liabilities
    
    
    55,730
    
    
    
    59,037
    
    
    
    53,112Long term portion of capital leases
    
    
    205
    
    
    
    260
    
    
    
    184Deferred rent and other lease incentives
    
    
    37,293
    
    
    
    33,388
    
    
    
    32,912Total liabilities
    
    
    93,228
    
    
    
    92,685
    
    
    
    86,208Commitments and contingencies
    
    
    
    
    
    
    
    
    
    
    Shareholders equity:Preferred
stock-authorized 1,000,000 shares at $0.001 par
value per share; no shares issued
and outstanding
    
    
    
    
    
    
    
    
    
    
    Common
stock-authorized 135,000,000 shares at $0.001 par
value per share; issued and
outstanding 92,621,101, 91,744,090
and 91,206,371 shares
    
    
    93
    
    
    
    92
    
    
    
    91Additional paid-in capital
    
    
    108,523
    
    
    
    95,768
    
    
    
    83,606Accumulated
other comprehensive income
    
    
    2,411
    
    
    
    2,418
    
    
    
    1,676Retained earnings
    
    
    325,745
    
    
    
    309,946
    
    
    
    261,615Total shareholders equity
    
    
    436,772
    
    
    
    408,224
    
    
    
    346,988Total liabilities and shareholders equity
    
    $
    530,000
    
    
    $
    500,909
    
    
    $
    433,196
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bebe stores, inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share data)
 (unaudited)
 Quarters EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005Net sales
    
    $
    157,059
    
    
    $
    126,155Cost of sales, including production and
occupancy
    
    
    77,773
    
    
    
    63,952Gross margin
    
    
    79,286
    
    
    
    62,203Selling, general and administrative expenses
    
    
    50,290
    
    
    
    42,249Income from operations
    
    
    28,996
    
    
    
    19,954Interest and other income, net
    
    
    3,173
    
    
    
    2,115Income before income taxes
    
    
    32,169
    
    
    
    22,069Provision for income taxes
    
    
    11,742
    
    
    
    8,496Net income
    
    $
    20,427
    
    
    $
    13,573Basic earnings per share
    
    $
    0.22
    
    
    $
    0.15Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.14Basic weighted average shares outstanding
    
    
    91,980
    
    
    
    91,147Diluted weighted average shares outstanding
    
    
    94,398
    
    
    
    94,159
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bebe stores, inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Quarters EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005Cash flows from operating activities:Net income
    
    $
    20,427
    
    
    $
    13,573Adjustments to reconcile net income to cash provided by operating activities:Non-cash compensation expense
    
    
    2,364
    
    
    
    2,309Depreciation and amortization
    
    
    4,271
    
    
    
    3,769Net loss on disposal of property
    
    
    
    
    
    
    1Deferred rent and other lease incentives
    
    
    3,910
    
    
    
    2,687Deferred income taxes
    
    
    (621
    )
    
    
    (504
    )Changes in operating assets and liabilities:Receivables
    
    
    (1,675
    )
    
    
    (915
    )Inventories
    
    
    (11,273
    )
    
    
    (8,053
    )Prepaid expenses and other assets
    
    
    2,516
    
    
    
    (803
    )Accounts payable
    
    
    5,874
    
    
    
    4,889Accrued liabilities
    
    
    (2,754
    )
    
    
    4,628Net cash provided by operating activities
    
    
    23,039
    
    
    
    21,581Cash flows from investing activities:Purchase of property and equipment
    
    
    (7,664
    )
    
    
    (4,950
    )Purchase of marketable securities
    
    
    (69,375
    )
    
    
    (82,702
    )Proceeds from sales of marketable securities
    
    
    65,975
    
    
    
    72,901Net cash used by investing activities
    
    
    (11,064
    )
    
    
    (14,751
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    5,853
    
    
    
    551Excess tax benefit on options exercised
    
    
    4,538
    
    
    
    256Cash dividends paid
    
    
    (9,216
    )
    
    
    (3,648
    )Other
    
    
    (67
    )
    
    
    (41
    )Net cash provided (used) by financing activities
    
    
    1,108
    
    
    
    (2,882
    )Net increase in cash and equivalents
    
    
    13,083
    
    
    
    3,948Effect of exchange rate changes on cash
    
    
    (1,348
    )
    
    
    459Cash and equivalents:Beginning of period
    
    
    38,656
    
    
    
    27,072End of period
    
    $
    50,391
    
    
    $
    31,479
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bebe stores, inc.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 INTERIM FINANCIAL STATEMENTS
    FISCAL YEAR
  INVENTORIES
  As ofSeptember 30,
    
    
    July 1,
    
    
    October 1,2006
    
    
    2006
    
    
    2005(In thousands)Raw materials
    
    $
    11,442
    
    
    $
    10,417
    
    
    $
    6,417Merchandise available for sale
    
    
    41,985
    
    
    
    31,734
    
    
    
    33,221Inventories
    
    $
    53,427
    
    
    $
    42,151
    
    
    $
    39,638
 EARNINGS PER SHARE
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Quarters EndedSeptember 30,
    
    October 1,2006
    
    2005(In thousands)Basic weighted average number of shares outstanding
    
    
    91,980
    
    
    
    91,147Incremental shares from the assumed issuance of stock options
    
    
    2,418
    
    
    
    3,012Diluted weighted average number of shares outstanding
    
    
    94,398
    
    
    
    94,159
   COMPREHENSIVE INCOME
  Quarters EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(In thousands)Net income
    
    $
    20,427
    
    
    $
    13,573Other comprehensive income (loss)
    
    
    (7
    )
    
    
    705Total comprehensive income
    
    $
    20,420
    
    
    $
    14,278
 CREDIT FACILITIES
   STOCK BASED COMPENSATION
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Quarters EndedSeptember 30,
    
    October 1,2006
    
    2005Expected dividend rate
    
    
    0.8
    %
    
    
    0.9
    %Volatility
    
    
    49.5
    %
    
    
    54.5
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.0
    %Expected lives (years)
    
    
    4.1
    
    
    
    4.4Fair value per option granted
    
    $
    8.85
    
    
    $
    8.35
  WeightedWeighted
    
    AverageAverage
    
    Remaining
    
    AggregateOptions (In
    
    Exercise Price
    
    Contractual
    
    Intrinsic Valuethousands)
    
    Per Share
    
    Term
    
    (In thousands)Outstanding, July 1, 2006
    
    
    7,350
    
    
    $
    9.59Granted
    
    
    617
    
    
    
    21.18Exercised
    
    
    (873
    )
    
    
    6.66Cancelled
    
    
    (112
    )
    
    
    14.13Outstanding, September 30, 2006
    
    
    6,982
    
    
    $
    10.90
    
    
    
    7.43
    
    
    $
    97,036Exercisable, September 30, 2006
    
    
    2,855
    
    
    $
    7.94
    
    
    
    6.38
    
    
    $
    48,114
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WeightedAverage GrantShares (In
    
    Date Fair Valuethousands)
    
    Per ShareNonvested, July 1, 2006
    
    
    31
    
    
    $
    15.24Granted
    
    
    17
    
    
    $
    20.60Vested
    
    
    (2
    )
    
    $
    17.58Nonvested, September 30, 2006
    
    
    46
    
    
    $
    17.15
 LEGAL MATTERS
 .
     RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Income Taxes.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
   www.bebe.com
 bebe.
 BEBE SPORT.
 bebe outlets.
 On-line.
 Neda by bebe
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COLLECTION bebe.
 CRITICAL ACCOUNTING POLICIES
    Revenue recognition.
      Stock Based Compensation.
 Inventories.
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Long-lived assets.
 Accrued Litigation.
 Self-Insurance
 Income Taxes
 RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting for Income Taxes.
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RESULTS OF OPERATIONS
   Quarters EndedSeptember 30,
    
    October 1,2006
    
    2005Statements of Operations Data:Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales, including production and
occupancy (1)
    
    
    49.5
    
    
    
    50.7Gross margin
    
    
    50.5
    
    
    
    49.3Selling, general and administrative expenses
(2)
    
    
    32.0
    
    
    
    33.5Income from operations
    
    
    18.5
    
    
    
    15.8Interest and other income, net
    
    
    2.0
    
    
    
    1.7Income before income taxes
    
    
    20.5
    
    
    
    17.5Provision for income taxes
    
    
    7.5
    
    
    
    6.7Net income
    
    
    13.0
    %
    
    
    10.8
    %
 
 (1)
    
    Cost of sales includes the cost of merchandise, occupancy costs, distribution center and
production costs.(2)
    
    Selling, general and administrative expenses primarily consist of non-occupancy store costs,
corporate overhead and advertising costs. Net Sales.
 Quarter EndedSeptember 30,
    
    October 1,2006
    
    2005Net sales (In thousands)
    
    $
    157,059
    
    
    $
    126,155Total net sales increase percentage
    
    
    24.5
    %
    
    
    22.4
    %Comparable store sales increase percentage
    
    
    12.8
    %
    
    
    17.3
    %Net sales per average square foot (1)
    
    $
    176
    
    
    $
    162Square footage at end of period (In thousands)
    
    
    898
    
    
    
    784Number of store locations:Beginning of period
    
    
    242
    
    
    
    214New store locations
    
    
    6
    
    
    
    7Closed store locations
    
    
    0
    
    
    
    1Number of stores open at end of period
    
    
    248
    
    
    
    220
 
 (1)
    
    Net sales per average square foot is calculated using net store sales and a monthly
average store square footage. 14




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Gross Margin.
 Selling, General and Administrative Expenses.
 Interest and Other Income, Net.
 Provision for Income Taxes.
 Seasonality of Business and Quarterly Results
  LIQUIDITY AND CAPITAL RESOURCES
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Inflation
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
    BookValue
    
    Fair Value(Dollars in thousands)Cash equivalents
    
    $
    30,490
    
    
    $
    30,490Weighted average interest rate (1)
    
    
    2.38
    %Short-term marketable securities
    
    
    292,414
    
    
    
    292,414Weighted average interest rate (1)
    
    
    3.69
    %Total
    
    $
    322,904
    
    
    $
    322,904
 
 (1)
    
    Represents the weighted average interest rates for tax exempt municipal bonds, municipal
preferreds, corporate preferreds and taxable and tax exempt institutional money market instruments.  Foreign Currency Risks
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ITEM 4. CONTROLS AND PROCEDURES
   
 PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 .
     
 ITEM 1A. RISK FACTORS
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1. The success of our business depends in large part on our ability to identify fashion trends as
well as to react to changing customer demand in a timely manner.
 2. If we are unable to obtain raw materials, unable to find manufacturing facilities or our
manufacturers perform unacceptably, our sales may be negatively affected and our financial
condition may be harmed
 3. Our success depends on our ability to attract and retain key employees in order to support our
existing business and future expansion.
  4. If we are not able to successfully develop new concepts, including BEBE SPORT, our revenue base
and earnings may be impaired
 5. There can be no assurance that future store openings will be successful and new store openings
may impact existing stores.
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6. We are subject to risks associated with our online sales. www.bebe.com
 7. Any serious disruption at our major facilities could have a harmful effect on our business.
 8. We rely on information technology, the disruption of which could adversely impact our business.
 9. We face significant competition in the retail and apparel industry, which could harm our sales
and profitability.
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10. Purchases of the merchandise we sell are generally discretionary and are therefore
particularly susceptible to economic conditions.
 11. Our business could be adversely impacted by unfavorable international political conditions.
 12. If we are not able to successfully protect our intellectual property our ability to capitalize
on the value of our brand name may be impaired
   13. If an independent manufacturer violates labor or other laws, or is accused of violating any
such laws, or if their labor practices diverge from those generally accepted as ethical, it could
harm our business and brand image
  1. Our
stock price may fluctuate because of the relatively low number of shares that can be publicly traded.
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2. Our sales, margins and operating results are subject to seasonal and quarterly fluctuations.
   3. Because Manny Mashouf and Neda Mashouf beneficially own 72% of the outstanding shares, other
shareholders may not be able to influence the direction the company takes.
 4. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact
investor confidence.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
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ITEM 6. EXHIBITS
   Exhibit Number
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Section 906 Certification of Chief Executive Officer.32.2
    
    Section 906 Certification of Chief Financial Officer.
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SIGNATURE
  Dated November 9, 2006bebe stores, inc./s/ Walter ParksWalter Parks, Chief Financial Officer
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EXHIBIT INDEX


ExhibitNumber
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer32.2
    
    Section 906 Certification of Chief Financial Officer


24