**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**ý****QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended April 1, 2006**

 

**OR**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**CommissionFile Number 0-24395**

 

**bebe stores, inc.**

(Exact name of registrant as specified in itscharter)

 

| **California**                 | ** ** | **94-2450490**         |
|--------------------------------|------------|------------------------|
| (State or Jurisdiction of      |       | (IRS Employer          |
| Incorporation or Organization) | ** ** | Identification Number) |

 

**400 Valley Drive Brisbane, California 94005**(Address ofprincipal executive offices) **Telephone: (415) 715-3900**

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. ýYes o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 ofthe Securities Exchange Act). o Large accelerated filer  ý Accelerated filer  o Non-accelerated filer

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).o Yes ýNo

 

Indicate the number of shares outstanding of each ofthe issuers of common stock, as of the latest practicable date.

 

COMMON STOCK, PAR VALUE OF $0.001 PER SHARE, 91,595,639SHARES OUTSTANDING AS OF APRIL 27, 2006

 

 

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**bebe stores, inc.**

 

#### **TABLE OF CONTENTS**

 
| **PART I.**       | **FINANCIAL INFORMATION**                                                                                                            |   |
|------------------------|--------------------------------------------------------------------------------------------------------------------------------------|--------|
|                   |                                                                                                                                 |
| ITEM  1.               | Condensed Consolidated  Financial Statements                                                                                         |   |
|                   |                                                                                                                                 |
|                   | Condensed  Consolidated Balance Sheets as of April 1, 2006, July 2, 2005 and April 2,  2005                           |   |
|                   |                                                                                                                                 |   |
|                   | Condensed  Consolidated Statements of Earnings for the three months and nine months  ended April 1, 2006 and April 2, 2005 |   |
|                   |                                                                                                                                 |   |
|                   | Condensed  Consolidated Statements of Cash Flows for the nine months ended April 1,  2006 and April 2, 2005                |   |
|                   |                                                                                                                                 |   |
|                   | Notes  to Condensed Consolidated Financial Statements                                                                                |   |
|                   |                                                                                                                                 |
| ITEM  2.               | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                          |   |
|                   |                                                                                                                                 |
| ITEM  3.               | Quantitative and Qualitative  Disclosures about Market Risk                                                                          |   |
|                   |                                                                                                                                 |
| ITEM  4.               | Controls and Procedures                                                                                                              |   |
|                   |                                                                                                                                 |
| **PART II.**      | **OTHER INFORMATION**                                                                                                                |   |
|                   |                                                                                                                                 |
| ITEM 1.                | Legal Proceedings                                                                                                                    |   |
|                   |                                                                                                                                 |   |
| 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                                                                                                                    |   |
|                   |                                                                                                                                 |
| ITEM 6.                | Exhibits                                                                                                                             |   |
|                   |                                                                                                                                 |
| **SIGNATURE**          |                                                                                                                                 |
|                   |                                                                                                                                 |
| **EXHIBIT INDEX** |                                                                                                                                 |
|                        |                                                                                                                                      |        |  |  |

 

2

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| **PART I.** | **FINANCIAL  INFORMATION**                   |
|------------------|----------------------------------------------|
| ITEM 1.          | Condensed Consolidated  Financial Statements |

 

**bebe stores, inc.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(In thousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                      | ** ** | **As of**         | ** ** | **As of**        | ** ** | **As of**         | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                                                                                                      | ** ** | **April 1,** | ** ** | **July 2,** | ** ** | **April 2,** | ** ** |
| ** **                                                                                                                                      | ** ** | **2006**          | ** ** | **2005**         | ** ** | **2005**          | ** ** |
| ** **                                                                                                                                      | ** ** | ** **        | ** ** | ** **       | ** ** | ** **        | ** ** |
| **Assets:**                                                                                                                                     |       |              |       |             |       |              |       |
| Current assets:                                                                                                                                 |       |              |       |             |       |              |       |
| Cash and equivalents                                                                                                                            |       | $                 | 47,411     |             | $          | 27,072            |       | $ | 35,581 |   |
| Short-term marketable securities                                                                                                                |       | 264,280           |       | 241,604          |       | 220,602           |       |
| Receivables (net of allowance of $1,141, $843 and  $799)                                                                                        |       | 6,080             |       | 6,547            |       | 3,817             |       |
| Inventories                                                                                                                                     |       | 40,047            |       | 31,785           |       | 31,513            |       |
| Prepaid and other                                                                                                                               |       | 21,198            |       | 12,599           |       | 18,063            |       |
| Total current assets                                                                                                                            |       | 379,016           |       | 319,607          |       | 309,576           |       |
| Property and  equipment, net                                                                                                                    |       | 81,576            |       | 77,753           |       | 72,331            |       |
| Long-term  marketable securities                                                                                                                |       | —            |       | 2,000            |       | 2,000             |       |
| Other assets                                                                                                                                    |       | 12,035            |       | 8,186            |       | 5,670             |       |
| Total assets                                                                                                                                    |       | $                 | 472,627    |             | $          | 407,546           |       | $ | 389,577 |   |
|                                                                                                                                            |       |              |       |             |       |              |       |
| **Liabilities  and Shareholders’ Equity:**                                                                                                 |       |              |       |             |       |              |       |
| Current  liabilities:                                                                                                                           |       |              |       |             |       |              |       |
| Accounts payable                                                                                                                                |       | $                 | 26,393     |             | $          | 20,682            |       | $ | 27,067 |   |
| Accrued liabilities                                                                                                                             |       | 26,611            |       | 23,041           |       | 22,778            |       |
| Current portion of capital lease liability                                                                                                      |       | 266               |       | 167              |       | —            |       |
| Total current liabilities                                                                                                                       |       | 53,270            |       | 43,890           |       | 49,845            |       |
| Long-term  portion of capital lease liability                                                                                                   |       | 311               |       | 226              |       | —            |       |
| Deferred rent  and other lease incentives                                                                                                       |       | 32,681            |       | 30,187           |       | 28,919            |       |
| Total  liabilities                                                                                                                              |       | 86,262            |       | 74,303           |       | 78,764            |       |
|                                                                                                                                            |       |              |       |             |       |              |       |
| Commitments 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 91,584,334, 91,127,616 and  90,681,415 shares |       | 92                |       | 91               |       | 91                |       |
| Additional paid-in capital                                                                                                                      |       | 92,081            |       | 80,526           |       | 73,942            |       |
| Deferred compensation                                                                                                                           |       | —            |       | (35              | )          | (61               | )          |
| Accumulated other comprehensive income                                                                                                          |       | 1,552             |       | 971              |       | 1,030             |       |
| Retained earnings                                                                                                                               |       | 292,640           |       | 251,690          |       | 235,811           |       |
| Total shareholders’ equity                                                                                                                 |       | 386,365           |       | 333,243          |       | 310,813           |       |
| Total  liabilities and shareholders’ equity                                                                                                |       | $                 | 472,627    |             | $          | 407,546           |       | $ | 389,577 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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**bebestores, inc.CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS(In thousands, except per share data)(unaudited)**

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **April 1,**      | ** ** | **April 2,**     | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                                         | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Net sales                                          |       | $                      | 132,812    |                  | $          | 116,862 |   | $ | 426,862 |   | $ | 372,590 |   |
| Cost of sales,  including production and occupancy |       | 70,576                 |       | 62,183                |       | 217,284 |   | 189,463 |   |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Gross profit                                       |       | 62,236                 |       | 54,679                |       | 209,578 |   | 183,127 |   |
| Selling, general  and administrative expenses      |       | 44,721                 |       | 37,842                |       | 133,886 |   | 110,655 |   |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Income from  operations                            |       | 17,515                 |       | 16,837                |       | 75,692 |   | 72,472 |   |
| Interest and  other income, net                    |       | 2,814                  |       | 1,117                 |       | 7,174 |   | 3,027 |   |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Earnings before  income taxes                      |       | 20,329                 |       | 17,954                |       | 82,866 |   | 75,499 |   |
| Provision for  income taxes                        |       | 7,030                  |       | 6,823                 |       | 30,985 |   | 28,690 |   |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Net earnings                                       |       | $                      | 13,299     |                  | $          | 11,131 |   | $ | 51,881 |   | $ | 46,809 |   |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Basic earnings  per share                          |       | $                      | 0.15       |                  | $          | 0.12 |   | $ | 0.57 |   | $ | 0.52 |   |
| Diluted earnings  per share                        |       | $                      | 0.14       |                  | $          | 0.12 |   | $ | 0.55 |   | $ | 0.50 |   |
|                                               |       |                   |       |                  |       |   |   |   |   |
| Basic weighted  average shares outstanding         |       | 91,445                 |       | 90,199                |       | 91,274 |   | 89,210 |   |
| Diluted weighted  average shares outstanding       |       | 93,762                 |       | 94,048                |       | 93,769 |   | 92,790 |   |
|                                                    |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

4

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**bebestores, inc.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(unaudited)**

 
| ** **                                                                           | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                           | ** ** | **April 1,**     | ** ** | **April 2,** | ** ** |
| ** **                                                                           | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ** **                                                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                               |       |                  |       |   |   |
| Net earnings                                                                         |       | $                     | 51,881     |   | $ | 46,809 |   |
| Adjustments to reconcile net earnings to net cash provided  by operating activities: |       |                  |       |   |   |
| Non-cash compensation expense                                                        |       | 6,912                 |       | 637 |   |
| Depreciation and amortization                                                        |       | 11,659                |       | 9,912 |   |
| Net loss on disposal of property                                                     |       | 149                   |       | 304 |   |
| Deferred rent and other lease incentives                                             |       | 2,460                 |       | 6,353 |   |
| Deferred income taxes                                                                |       | (3,564                | )          | (1,217 | ) |
| Changes in operating assets and liabilities:                                         |       |                  |       |   |   |
| Receivables                                                                          |       | 876                   |       | (859 | ) |
| Inventories                                                                          |       | (8,224                | )          | (5,936 | ) |
| Prepaid expenses and other assets                                                    |       | (9,026                | )          | (6,785 | ) |
| Accounts payable                                                                     |       | 5,707                 |       | 12,590 |   |
| Accrued liabilities                                                                  |       | 499                   |       | 9,721 |   |
| Net cash  provided by operating activities                                           |       | 59,329                |       | 71,529 |   |
|                                                                                 |       |                  |       |   |   |
| Cash flows from  investing activities:                                               |       |                  |       |   |   |
| Purchase of property and equipment                                                   |       | (15,733               | )          | (15,891 | ) |
| Purchase of marketable securities                                                    |       | (235,748              | )          | (217,624 | ) |
| Proceeds from sales of marketable securities                                         |       | 215,278               |       | 163,097 |   |
| Net cash used by  investing activities                                               |       | (36,203               | )          | (70,418 | ) |
|                                                                                 |       |                  |       |   |   |
| Cash flows from  financing activities:                                               |       |                  |       |   |   |
| Net proceeds from issuance of common stock                                           |       | 3,005                 |       | 13,706 |   |
| Tax benefit on options exercised                                                     |       | 1,674                 |       | — |   |
| Cash dividends paid                                                                  |       | (7,299                | )          | (5,975 | ) |
| Other                                                                                |       | (192                  | )          | — |   |
| Net cash  provided (used) by financing activities                                    |       | (2,812                | )          | 7,731 |   |
|                                                                                 |       |                  |       |   |   |
| Net increase in  cash and equivalents                                                |       | 20,314                |       | 8,842 |   |
| Effect of  exchange rates on cash                                                    |       | 25                    |       | 684 |   |
| Cash and  equivalents:                                                               |       |                  |       |   |   |
| Beginning of  period                                                                 |       | 27,072                |       | 26,055 |   |
| End of period                                                                        |       | $                     | 47,411     |   | $ | 35,581 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

5

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##### **bebe stores, inc.**

##### ** **

##### **NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

##### **(unaudited)**

##### ** **

##### **INTERIM FINANCIALSTATEMENTS**

 

The accompanying condensed consolidated balance sheetsof bebe stores, inc. as of April 1, 2006 and April 2, 2005, thecondensed consolidated statements of earnings for the three and nine monthsended April 1, 2006 and April 2, 2005 and the condensed consolidatedstatements of cash flows for the nine months ended April 1, 2006 and April 2,2005 have been prepared in accordance with accounting principles generallyaccepted in the United States of America for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X,without audit. Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for annual financial statements. Therefore, these condensedconsolidated financial statements should be read in conjunction with our AnnualReport on Form 10-K for the year ended July 2, 2005.

 

In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary to presentfairly the financial position at the balance sheet dates and the results ofearnings for the three and nine months then ended have been included. Thecondensed consolidated balance sheet at July 2, 2005, presented herein,was derived from the audited balance sheet included in the Form 10-K forthe fiscal year ended July 2, 2005.

 

Our business is affected by the pattern of seasonalitycommon to most retail apparel businesses. The results for the periods presentedare not necessarily indicative of future financial results.

 

##### **FISCAL YEAR**

##### ** **

##### **Beginning on July 1, 2004,the Company changed their fiscal year to a 52/53 week year, each period endingon the first Saturday after June 30. Fiscal years 2005, 2006 and 2007include 52, 52 and 53 weeks, respectively.**

##### ** **

##### **The three-month periods ending April 1,2006 and April 2, 2005 both include 91 days. The nine-month period ending April 1,2006 began on July 3, 2005 and included 273 days. The nine-month periodending April 2, 2005 began on July 1, 2004 and included 276 days.**

##### ** **

##### **INVENTORIES**

##### ** **

Thecompany’s inventories consist of:

 
| ** **                      | ** ** | **As of**          | ** ** |
|---------------------------------|------------|--------------------|------------|
| ** **                      | ** ** | **April 1,**  | ** ** | **July 2,** | ** ** | **April 2,** | ** ** |
| ** **                      | ** ** | **2006**           | ** ** | **2005** | ** ** | **2005** | ** ** |
| ** **                      | ** ** | **(In thousands)** | ** ** |
| Raw materials                   |       | $                  | 8,920      |   | $ | 7,302 |   | $ | 7,204 |   |
| Merchandise  available for sale |       | 31,127             |       | 24,483 |   | 24,309 |   |
| Inventories                     |       | $                  | 40,047     |   | $ | 31,785 |   | $ | 31,513 |   |

##### ** **

##### **EARNINGS PER SHARE**

##### ** **

Basicearnings per share is computed as net earnings divided by the weighted averagenumber of common shares outstanding for the period. Diluted earnings per sharereflects the potential dilution that could occur from common shares issuablethrough the exercise of dilutive stock options.

 

Thefollowing is a reconciliation of the number of shares used in the basic anddiluted earnings per share computations:

 

6

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| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **April 1,**      | ** ** | **April 2,**     | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                                                 | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**     | ** ** |
| Basic weighted  average number of shares outstanding       |       | 91,445                 |       | 90,199                |       | 91,274 |   | 89,210 |   |
| Incremental shares from assumed issuance of stock  options |       | 2,317                  |       | 3,849                 |       | 2,495 |   | 3,580 |   |
| Diluted weighted  average number of shares outstanding     |       | 93,762                 |       | 94,048                |       | 93,769 |   | 92,790 |   |

 

Thenumber of incremental shares from the assumed issuance of stock options iscalculated applying the treasury stock method.

 

Excludedfrom the computation of the number of diluted weighted average sharesoutstanding were antidilutive options of approximately 1,458,000 and 105,000for the three months ended April 1, 2006 and April 2, 2005,respectively, and approximately 1,225,000 and 252,000 for the nine months endedApril 1, 2006 and April 2, 2005, respectively.

 

##### **COMPREHENSIVE INCOME**

##### ** **

Comprehensiveincome consists of net income and other comprehensive income (income, expenses,gains and losses that bypass the income statement and are reported directly asa separate component of equity). The Company’s comprehensive income consists ofnet income and foreign currency translation adjustments for all periodspresented.

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **April 1,**      | ** ** | **April 2,**     | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                         | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                         | ** ** | **(In thousands)**     | ** ** |
| Net income                         |       | 13,299                 |       | 11,131                |       | 51,881 |   | 46,809 |   |
| Other  comprehensive income (loss) |       | (71                    | )          | (96                   | )          | 581 |   | 734 |   |
| Total comprehensive  income        |       | 13,228                 |       | 11,035                |       | 52,462 |   | 47,543 |   |

 

##### **CREDIT FACILITIES**

##### ** **

**The Company has an unsecured commercial line ofcredit agreement with a bank, which provides for borrowings and issuance ofletters of credit up to a combined total of $25.0 million and expires on March 31,2009. The outstanding balance bears interest at either the bank’s referencerate (which was 7.75% as of April 1, 2006) or the LIBOR rate plus 1.75percentage points. As of April 1, 2006, there were no outstanding cash borrowings,and there was $3.5 million of letters of credit outstanding.**

** **

**This credit facility requires the Company to complywith certain financial covenants, including amounts for minimum tangible networth, unencumbered liquid assets and profitability, and certain restrictionson making loans and investments.**

** **

##### **STOCK-BASED COMPENSATION**

##### ** **

The 1997 Stock Plan asamended (the “Stock Plan”) provides for the grant of incentive stock options,non-qualified stock options, stock purchase rights, stock awards and restrictedstock units (“RSU”). Although the Stock Plan allows for stock options andrelated awards to be granted at prices below fair market value, the Company hashistorically granted such options at the fair market value of the stock on thedate of grant. Stock options and related awards have a maximum term of tenyears. Options and restricted stock units granted to employees generally vestover four years with 20% of the award vested in each of the first and secondyears and 30% vested in each of the remaining two years. Options granted toDirectors generally vest over four years with 20% of the award vested in eachof the first and second years and 30% vested in each of the remaining two years.Restricted stock units awarded to Directors

 

7

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generally vest over a period of one year from the dateof grant. As of April 1, 2006, the Company has reserved 19,613,750 sharesof common stock for issuance under the Stock Plan and there were 1,572,368shares available for future grant.

 

Prior to July 3,2005, the Company accounted for stock-based awards granted to employees andnon-employee Directors under the Stock Plan in accordance with the measurementand recognition provisions of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations, FinancialAccounting Standards Board (“FASB”) Statement No. 123 “Accounting forStock-Based Compensation,” and complied with the disclosure provisions of FASBStatement No. 148, “Accounting for Stock-Based Compensation Transition andDisclosure, an Amendment of FASB Statement No. 123.”

 

Effective July 3,2005, the Company adopted the fair value recognition provisions of FASBStatement No. 123(R), “Share-Based Payment,” using the modified prospectivetransition method. Under this transition method, compensation cost in 2006includes the portion vesting in the period for (1) all share-basedpayments granted prior to, but not vested as of July 2, 2005, based on thegrant date fair value estimated in accordance with the original provisions ofFASB Statement No. 123 and (2) all share-based payments grantedsubsequent to July 2, 2005, based on the grant date fair value estimatedin accordance with the provisions of FASB Statement No. 123(R). Resultsfor prior periods have not been restated.

 

The Company recognizedshare-based compensation expense of $2.1 million ($0.01 per diluted share,after related tax benefit of $0.7 million) in the three months ended April 1,2006 as a component of selling, general and administrative expenses. TheCompany recognized share-based compensation expense of $6.9 million ($0.04 perdiluted share, after related tax benefit of $2.6 million) in the nine monthsended April 1, 2006 as a component of selling, general and administrativeexpenses. As of April 1, 2006, there was $27.1 million (before any relatedtax benefit) of total unrecognized compensation cost related to nonvestedshare-based compensation that is expected to be recognized over aweighted-average period of 2.0 years.

 

Prior to the adoption ofFASB Statement No. 123(R), the Company presented all benefits of taxdeductions resulting from the exercise of share-based compensation as operatingcash flows in the Statements of Cash Flows. FASB Statement No. 123(R) requiresthe benefits of tax deductions in excess of the compensation cost recognizedfor those options (excess tax benefits) to be classified as financing cashflows. For the nine months ended April 1, 2006, the Company reported $1.7million of excess tax benefits as a financing cash inflow.

 

The fair value of eachoption grant was estimated on the date of the grant using the Black-Scholesvaluation model. The expected life of the options represents the period of timethe options are expected to be outstanding and is based on historical trends.For the three and nine months ended April 1, 2005, expected stock pricevolatility is based on an average of the historical volatility of the Company’sstock for a period approximating the expected life and the implied volatilitybased on traded options of the Company’s stock. For the three and nine monthsended April 2, 2005, expected stock price volatility was based onhistorical volatility only. The expected dividend yield is based on the Company’smost recent annual dividend payout. The risk-free interest rate is based on theU.S. Treasury yield curve in effect at the time of grant and has a term thatapproximates the expected life.

 

The following tablepresents the weighted average assumptions used in the option pricing model forthe stock options granted in the three and nine months ended April 1, 2006and April 2, 2005:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **April 1,**      | ** ** | **April 2,**     | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                     | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                     | ** ** | ** **             | ** ** | **(Pro forma)**       | ** ** | ** ** | ** ** | **(Pro forma)** | ** ** |
| Expected  dividend rate        |       | 0.9                    | %          | 0.4                   | %          | 0.9 | % | 0.6 | % |
| Volatility                     |       | 49.2                   | %          | 69.7                  | %          | 52.9 | % | 72.4 | % |
| Risk-free  interest rate       |       | 4.4                    | %          | 3.4                   | %          | 4.2 | % | 3.5 | % |
| Expected lives  (years)        |       | 4.4                    |       | 5.8                   |       | 4.4 |   | 5.9 |   |
| Fair value per  option granted |       | $                      | 7.37       |                  | $          | 12.66 |   | $ | 7.90 |   | $ | 9.67 |   |
|                                |            |                        |            |                       |            |  |  |  |  |  |  |  |  |

 

8

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Had stock-based employeecompensation expense been determined based upon the fair values at the grantdates for awards under the Company’s stock plan in accordance with FASBStatement No. 123 in the three and nine months ended April 2, 2005,the Company’s pro forma net earnings, basic and diluted earnings per commonshare would have been as follows:

 
| ** **                                                                                           | ** ** | **Three Months Ended**                        | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|
| ** **                                                                                           | ** ** | **April 2, 2005**                        | ** ** | **April 2, 2005** | ** ** |
| ** **                                                                                           | ** ** | **(In thousands, except per share  amounts)** | ** ** |
|                                                                                                 |       |                                          |       |                   |       |
| Net income, as  reported                                                                             |       | $                                             | 11,131     |                   | $          | 46,809 |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of income tax   |       | 341                                           |       | 395                    |       |
| Deduct: Stock-based employee compensation determined  under the fair value method, net of income tax |       | (2,057                                        | )          | (5,299                 | )          |
| Net income, pro forma                                                                                |       | $                                             | 9,415      |                   | $          | 41,905 |   |
|                                                                                                 |       |                                          |       |                   |       |
| Basic EPS, as reported                                                                               |       | $                                             | 0.12       |                   | $          | 0.52 |   |
| Basic EPS, pro forma                                                                                 |       | $                                             | 0.10       |                   | $          | 0.47 |   |
|                                                                                                 |       |                                          |       |                   |       |
| Diluted EPS, as reported                                                                             |       | $                                             | 0.12       |                   | $          | 0.50 |   |
| Diluted EPS, pro forma                                                                               |       | $                                             | 0.10       |                   | $          | 0.45 |   |

 

##### **The following table summarizesstock option activity during the nine months ended April 1, 2006:**

 
| ** **                       | ** ** | **Options**        | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------|------------|--------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **(In thousands)** | ** ** | ** **                                       | ** ** | ** **                                          | ** ** | **(In thousands)**             | ** ** |
| Outstanding, July 2,  2005  |       | 7,663              |       | $                                                | 8.48       |                                                |       |                           |       |   |
| Granted                          |       | 729                |       | 17.31                                            |       |                                                |       |                           |       |
| Exercised                        |       | (448               | )          | 6.40                                             |       |                                                |       |                           |       |
| Cancelled                        |       | (416               | )          | 8.18                                             |       |                                                |       |                           |       |
|                             |       |               |       |                                             |       |                                                |       |                           |       |
| Outstanding, April 1,  2006 |       | 7,528              |       | $                                                | 9.47       |                                                | 7.50       |                           | $          | 68,724 |   |
|                             |       |               |       |                                             |       |                                                |       |                           |       |
| Exercisable, April 1,  2006 |       | 2,766              |       | $                                                | 6.80       |                                                | 6.33       |                           | $          | 32,213 |   |

** **

**Intrinsic value for stock options is defined as thedifference between the current market value and the grant price. For the ninemonths ended April 1, 2006, the total intrinsic value of stock optionsexercised was $5.5 million. Cash received from stock options exercised duringthe nine months ended April 1, 2006 was $2.9 million and the actual taxbenefit realized for tax deductions from stock options exercised totaled $5.4million.**

 

9

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**The following table summarizes RSU activity during the ninemonths ended April 1, 2006:**

** **
| ** **                     | ** ** | **Shares**         | ** ** | **Weighted  Average Grant  Date Fair Value  Per Share** | ** ** |
|--------------------------------|------------|--------------------|------------|---------------------------------------------------------|------------|
| ** **                     | ** ** | **(In thousands)** | ** ** | ** **                                              | ** ** |
| Nonvested, July 2,  2005  |       | 6                  |       | $                                                       | 15.60      |   |
| Vested                         |       | (6                 | )          | $                                                       | 15.60      |   |
| Granted                        |       | 24                 |       | $                                                       | 15.17      |   |
| Nonvested, April 1,  2006 |       | 24                 |       | $                                                       | 15.15      |   |

##### ** **

##### **LEGAL MATTERS**

##### ** **

A former candidate for an executive position sued theCompany and two other named defendants in a First Amended Complaint, filed November 9,2004 in the Superior Court of the State of California, County of San Francisco(case No. CGC-04-435517), seeking unspecified monetary damages and otherequitable relief. This case was dismissed with prejudice with no liability tothe Company.

 

A former employee sued the Company in a complaintfiled on April 28, 2005 in the United States District Court for theNorthern District of California (case No. C05-0177-MHP) allegingviolations under the Fair Labor Standards Act, specifically that the Companyobligated her to buy and wear its brand clothing as a uniform, withoutreimbursement or credit, and the net effect of deducting the value of suchrequired purchases from her wages would often result in her not being paidminimum wages. The plaintiff purports to bring the action also on behalf of a class ofhourly, non-managerial employees who are similarly situated. The lawsuit seekscompensatory, statutory and injunctive relief. The Company believes that theplaintiff’s claims are without merit, and will continue to vigorously defendthis matter.

 

In addition to the above, the Company is also involvedin various other legal proceedings arising in the normal course of business. Noneof these matters, or their ultimate resolution, are expected, individually or inthe aggregate, to have a material adverse effect on the Company’s business,financial condition or results of operations.

 

The Company intends to defend itself vigorouslyagainst these claims. However, the results of any litigation are inherentlyuncertain. The Company cannot assure you that it will be able to successfullydefend itself in these lawsuits. Where required, and/or otherwise appropriate,the Company makes an estimate of potential liabilities that management believesare reasonable. Any estimates are revised as further information becomesavailable.

 

**RECENTACCOUNTING PRONOUNCEMENT**

 

In March 2005, the FASB issued FASBInterpretation (“FIN”) 47, “Accounting for Conditional Asset RetirementObligations.”  FIN 47 clarifies that theterm “conditional asset retirement obligation” as used in FASB Statement No. 143,“Accounting for Asset Retirement Obligations,” refers to a legal obligation toperform an asset retirement activity in which the timing and (or) methodof settlement are conditional on a future event that may or may notbe within the control of the entity. Accordingly, an entity is required torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated. FIN47 is effective for fiscal years ending on or after December 15, 2005. TheCompany does not believe that the adoption of FIN 47 will have a materialimpact on its financial position or results of operations.

 

10

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** **

**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

** **

Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations contains forward-looking statements, which involve risksand uncertainties. Our actual results may differ materially from those anticipatedin these forward-looking statements. Statements that are predictive in nature,that depend upon or refer to future events or conditions or that include wordssuch as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “thinks,”and similar expressions are forward-looking statements. Forward lookingstatements include statements about our expected results of operations, capitalexpenditures and store openings. Although we believe that these statements arebased upon reasonable assumptions, we cannot ensure that our goals will beachieved. These forward-looking statements are made as of the date of this Form 10-Q,and we assume no obligation to update or revise them or provide reasons whyactual results may differ. Factors that might cause such a differenceinclude, but are not limited to, our ability to respond to changing fashiontrends, miscalculation of the demand for our products, disruption in supply,difficulties in manufacturing, effective management of our growth, the successof future store openings, decline in comparable store sales performance,ongoing competitive pressures in the apparel industry, changes in the level ofconsumer spending or preferences in apparel, our ability to attract and retainkey management personnel, adverse economic conditions, and/or other factorsdiscussed in “Risks That May Affect Results” and elsewhere in this Form 10-Q.

 

##### **OVERVIEW**

##### ** **

Wedesign, develop and produce a distinctive line of contemporary women’s appareland accessories. While we attract a broad audience, our target customer is a 21to 35-year-old woman who seeks current fashion trends to suit her lifestyle.The “bebe look,” appeals to a hip, sexy, sophisticated, body-conscious womanwho takes pride in her appearance. The bebe customer expects value in the form ofcurrent fashion and high quality at a competitive price.

 

Ourdistinctive product offering includes a full range of separates, tops, dresses,active wear and accessories in the following lifestyle categories:  career, evening, casual and active. We designand develop the majority of our merchandise in-house, which is manufactured toour specifications. The remainder of our merchandise is sourced directly fromthird party manufacturers’ lines.

 

Wemarket our products under the bebe, BEBE SPORT and bebe O brand names throughour 228 retail stores, of which 173 are bebe stores, 35 are BEBE SPORT stores,and 20 are bebe outlet stores. These stores are located in 32 states, theDistrict of Columbia, Puerto Rico and Canada. In addition, we have an on-linestore at www.bebe.com and our licensees operate 15 international stores. Duringthe three-month period ended April 1, 2006, we did not open or close anystores. During the nine-month period ended April 1, 2006, we opened 16stores, including 8 bebe stores, 5 BEBE SPORT stores, and 3 bebe outlet stores.We also closed 1 bebe store and 1 BEBE SPORT store. We expect to open 34stores, including 19 bebe stores, 12 BEBE SPORT stores and 3 outlet storesduring the year. We also plan to renovate, relocate or expand approximately 11existing stores and close 3 stores, resulting in square footage growth ofapproximately 16%.

 

*bebestores.*The Company was founded by Manny Mashouf, Chairman ofthe Board. We opened our first store in San Francisco, California in 1976,which was also the year we incorporated.

 

*BEBESPORT stores.* The Company launched BEBE SPORT during fiscal2003 to address the active lifestyle needs of the bebe customer. The BEBE SPORTcollection includes sportswear, tops, sweaters, outerwear and accessories.

 

*bebeoutlet stores.*The Company utilizes the outlets as aclearance vehicle for merchandise from retail stores. In addition, theinventory includes a strong presentation of bebe logo merchandise and specialcuts, produced under the bebe O label, produced exclusively for the outletstores.

 

*On-linestore.* bebe.com is an extension of the bebe store experienceand provides a complete assortment of bebe and BEBE SPORT merchandise. It isalso used as an advertising vehicle to communicate with our customers.

 

*Direct to consumer.  *The Company launched adirect mail marketing program in fiscal 2005 and plans to increase thecirculation and frequency of mailings during fiscal 2006. We effectivelycommunicate our brand strategy to our best customers through direct to consumermarketing.

 

11

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*Neda bybebe*. The Company announced its new accessory concept, Nedaby bebe, in November 2005 and plans to open its first store in September 2006.Neda by bebe will offer distinctly designed shoes, handbags and accessories.

 

##### **CRITICAL ACCOUNTINGPOLICIES**

##### ** **

Management’s Discussion and Analysis of FinancialCondition and Results of Operations are based upon our consolidated financialstatements, which have been prepared in conformity with accounting principlesgenerally accepted in the United States of America.

 

The preparation of these financial statements requiresthe appropriate application of certain accounting policies, many of whichrequire us to make estimates and assumptions about future events and theirimpact on amounts reported in our financial statements and related notes. Sincefuture events and their impact cannot be determined with certainty, the actualresults may differ from our estimates. Such differences could be materialto the financial statements. We believe our application of accounting policies,and the estimates inherently required therein, are reasonable. These accountingpolicies and estimates are constantly reevaluated, and adjustments are madewhen facts and circumstances dictate a change. Our accounting policies are morefully described in Note 1 to the consolidated financial statements in ourannual report on Form 10-K for the year ended July 2, 2005.

 

We have identified certain critical accounting policies,which are described below:

 

*Revenue recognition.  *We recognize revenue at thetime the products are received by the customers in accordance with the provisionsof Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition inFinancial Statements” as amended by SAB No. 104, “Revenue Recognition”. Revenueis recognized for store sales at the point at which the customer receives andpays for the merchandise at the register. For on-line sales, revenue isrecognized at the time the customer receives the product. We estimate and deferrevenue and the related product costs for shipments that are in transit to thecustomer. Customers typically receive goods within a few days of shipment. Amountsrelated to shipping billed to customers are reflected in net sales and therelated costs are reflected in cost of goods sold.

 

We record a reserve for estimated product returnsbased on historical return trends. As of April 1, 2006 and April 2,2005 the reserve was $1,046,000 and $1,005,000, respectively. If actual returnsare greater than those projected, additional sales returns may be recordedin the future.

 

Discounts offered to customers consist primarily ofpoint of sale markdowns and are recorded at the time of the related sale as areduction of revenue.

 

The value of points and rewards earned by our loyaltyprogram members are included as a liability and a reduction of revenue at thetime the points and rewards are earned based on historical conversion andredemption rates. The associated revenue is recognized when the rewards areredeemed or expire.

 

Gift certificates sold are carried as a liability andrevenue is recognized when the gift certificate is redeemed. Similarly,customers may receive a store credit in exchange for returned goods. Storecredits are carried as a liability until redeemed.

 

Royalty revenue from product licensees is recorded asearned.

 

*Inventories.* Our inventories are stated at the lower of weighted average costor market. Market is determined based on the estimated net realizable value,which is generally the merchandise selling price. To ensure that our rawmaterial is properly valued we age the fabric inventory and record a reserve inaccordance with our established policy, which is based on historicalexperience. To ensure our finished goods inventory is properly valued we reviewthe age and turnover of our inventory and record a reserve if the selling priceis marked down below cost. These assumptions can have an impact on current andfuture operating results and financial position. We estimate shrinkage for theperiod between the last physical count and balance sheet date based on historicshrinkage trends.

 

*Long-lived assets.*We review long-lived assets forimpairment whenever events or changes in circumstances, such as store closuresor poor performing stores, indicate that the carrying value of an asset may notbe recoverable. If the undiscounted cash flows from the long-lived assets areless than the carrying value we record an

 

12

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impairmentcharge equal to the difference between the carrying value and the asset’s fairvalue. In addition, at the time a decision is made to close a store, we recordan impairment charge, if appropriate, or accelerate depreciation over therevised useful life of the asset. Historically, our impairment charges havebeen immaterial. During the ninemonths ended April 1, 2006 and April 2, 2005, we recorded impairmentcharges of approximately $73,000 and $112,000, respectively, for poorperforming stores for which the carrying value of the assets will not berecovered. We believe at this time that the long-lived assets’ carrying valuesand useful lives continue to be appropriate.

 

*Accrued Litigation**.*We accrue estimates of probableliabilities associated with lawsuits and claims. The results of any litigationare inherently uncertain. As information becomes available, we assess thepotential liabilities related to pending litigation and may revise ourestimates as necessary. Such revisions of estimates could materially impact theresults of operations and financial position.

 

*Self-Insurance*.  We use a combination of insurance and selfinsurance for employee related health care benefits. We record self insuranceliabilities based on claims filed and an estimate of those claims incurred butnot reported. Any projection of losses concerning our liability is subject to ahigh degree of variability. Among the causes of this variability areunpredictable external factors such as future inflation rates, changes inseverity, benefit level changes, medical costs and claim settlement patterns.Should a different amount of claims occur compared to what was estimated orcosts of the claims increase or decrease beyond what was anticipated, reserves may needto be adjusted in the future.

 

*IncomeTaxes*. Weaccrue liabilities for estimates of probable settlements of domestic andforeign tax audits. At any one time, many tax years may be subject toaudit by various taxing jurisdictions. The results of these audits andnegotiations with taxing authorities may affect the ultimate settlement ofthese issues. Our effective tax rate in a given financial statement period may bematerially impacted by changes in the mix and level of earnings. We also recorda valuation allowance against our deferred tax assets arising from foreign taxcredit carryforwards as the utilization of these credits is not assured.

 

**RECENTACCOUNTING PRONOUNCEMENT**

 

##### **In March 2005,the FASB issued FASB Interpretation (“FIN”) 47, “Accounting for ConditionalAsset Retirement Obligations.”  FIN 47clarifies that the term “conditional asset retirement obligation” as used inFASB Statement No. 143, “Accounting for Asset Retirement Obligations,”refers to a legal obligation to perform an asset retirement activity inwhich the timing and (or) method of settlement are conditional on a futureevent that may or may not be within the control of the entity. Accordingly,an entity is required to recognize a liability for the fair value of aconditional asset retirement obligation if the fair value of the liability canbe reasonably estimated. FIN 47 is effective for fiscal years ending on orafter December 15, 2005. The Company does not believe that the adoption ofFIN 47 will have a material impact on its financial position or results ofoperations.**

##### ** **

##### **RESULTS OF OPERATIONS**

##### ** **

##### **Beginning on July 1, 2004,the Company changed their fiscal year to a 52/53 week year, each period endingon the first Saturday after June 30. Fiscal years 2005, 2006 and 2007include 52, 52 and 53 weeks, respectively.**

##### ** **

##### **The three-month periods ending April 1,2006 and April 2, 2005 both include 91 days. The nine-month period ending April 1,2006 began on July 3, 2005 and included 273 days. The nine-month periodending April 2, 2005 began on July 1, 2004 and included 276 days.**

 

13

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The following table setsforth certain financial data as a percentage of net sales for the periodsindicated:

 
| ** **                                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                 | ** ** | **April 1,**      | ** ** | **April 2,**     | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                                                 | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Net sales                                                  |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
| Cost of sales,  including production and occupancy (1)     |       | 53.1                   |       | 53.2                  |       | 50.9 |   | 50.9 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Gross profit                                               |       | 46.9                   |       | 46.8                  |       | 49.1 |   | 49.1 |   |
| Selling, general  and administrative expenses expenses (2) |       | 33.7                   |       | 32.4                  |       | 31.4 |   | 29.6 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Income from  operations                                    |       | 13.2                   |       | 14.4                  |       | 17.7 |   | 19.5 |   |
| Interest and  other income, net                            |       | 2.1                    |       | 1.0                   |       | 1.7 |   | 0.8 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Earnings before  income taxes                              |       | 15.3                   |       | 15.4                  |       | 19.4 |   | 20.3 |   |
| Provision for  income taxes                                |       | 5.3                    |       | 5.9                   |       | 7.2 |   | 7.7 |   |
|                                                       |       |                   |       |                  |       |   |   |   |   |
| Net earnings                                               |       | 10.0                   | %          | 9.5                   | %          | 12.2 | % | 12.6 | % |

 

----

(1)                                  Cost of sales includes the cost of merchandise,occupancy costs and production costs.

(2)                                  Selling, general and administrative expensesprimarily consist of non-occupancy store costs, corporate overhead andadvertising costs.

 

*Net Sales.* Net sales increased to $132.8million during the three months ended April 1, 2006 from $116.9 million inthe comparable period of the prior year, an increase of $15.9 million, or 13.6%.During the three-month period, an increase in comparable store sales of 4.7%versus the prior year contributed $4.9 million to the increase in sales. Theremaining increase in sales of $11.0 million was generated by stores notincluded in the comparable store sales base and year over year increases in on-linesales and wholesale sales to international licensees.

 

Forthe nine months ended April 1, 2006, net sales increased to $426.9 millionfrom $372.6 million in the comparable period of the prior year, an increase of$54.3 million, or 14.6%. During the nine-month period, an increase incomparable store sales of 7.1% versus the prior year contributed $23.2 millionto the increase in sales. The remaining increase in sales of $31.1 million wasgenerated by stores not included in the comparable store sales base and yearover year increases in on-line sales and wholesale sales to internationallicensees. Net sales include a reduction of $1.7 million associated with thecustomer loyalty program in the current year compared to $0 for the comparableperiod of the prior year.

 

14

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| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **April 1,**      | ** ** | **April 2,**     | ** ** | **April 1,** | ** ** | **April 2,** | ** ** |
| ** **                                      | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Net sales (In  thousands)                       |       | $                      | 132,812    |                  | $          | 116,862 |   | $ | 426,862 |   | $ | 372,590 |   |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Total net sales  increase percentage            |       | 13.6                   | %          | 39.7                  | %          | 14.6 | % | 33.4 | % |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Comparable store  sales increase percentage     |       | 4.7                    | %          | 28.5                  | %          | 7.1 | % | 23.0 | % |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Net sales per  average square foot (1)          |       | $                      | 158        |                  | $          | 158 |   | $ | 528 |   | $ | 511 |   |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Square footage  at end of period (In thousands) |       | 829                    |       | 736                   |       | 829 |   | 736 |   |
|                                            |       |                   |       |                  |       |   |   |   |   |
| Number of store  locations:                     |       |                   |       |                  |       |   |   |   |   |
| Beginning of  period                            |       | 228                    |       | 206                   |       | 214 |   | 199 |   |
| New store  locations                            |       | 0                      |       | 3                     |       | 16 |   | 11 |   |
| Closed store  locations                         |       | 0                      |       | 3                     |       | 2 |   | 4 |   |
| Number of stores  open at end of period         |       | 228                    |       | 206                   |       | 228 |   | 206 |   |

 

----

(1) Net sales per average square foot is calculated using net store sales and amonthly average store square footage.

 

*Gross Profit.*Gross profit increased to $62.2 millionduring the three months ended April 1, 2006 from $54.7 million for thecomparable period of the prior year, an increase of $7.5 million, or 13.7%. Asa percentage of net sales, gross profit increased to 46.9% for the three-monthperiod ended April 1, 2006 from 46.8% in the comparable period of theprior year. The increase in gross profit as a percentage of net sales from theprior year of 0.1% resulted primarily from a cumulative, non-cash adjustment of$3.2 million related to lease accounting in the prior year, partially offset bylower merchandise margins in the current year.

Gross profit increased to $209.6 million during the ninemonths ended April 1, 2006 from $183.1 million for the comparable periodof the prior year, an increase of $26.5 million, or 14.5%. As a percentage ofnet sales, gross profit was 49.1% for both of the nine-month periods ended April 1,2006 and April 2, 2005. Gross profit as a percentage of net sales was flatwith the prior year, primarily due to a cumulative, non-cash adjustment of $3.2million related to lease accounting in the prior year, offset by lowermerchandise margins in the current year.

 

*Selling, General and AdministrativeExpenses.*Selling,general and administrative expenses, which primarily consist of non-occupancystore costs, corporate overhead and advertising costs, increased to $44.7million during the three months ended April 1, 2006 from $37.8 million inthe comparable period of the prior year, an increase of $6.9 million, or 18.3%.As a percentage of net sales, these expenses increased to 33.7% during thethree-month period from 32.4% in the comparable period of the prior year. Forthe nine months ended April 1, 2006, selling, general and administrativeexpenses increased to $133.9 million from $110.7 million in the comparableperiod of the prior year, an increase of $23.2 million, or 21.0%. As apercentage of net sales, these expenses increased to 31.4% during thenine-month period from 29.6% in the comparable period of the prior year. Thisincrease as a percentage of net sales was primarily due to a charge of $2.1million (1.6% of net sales) and $6.9 million (1.6% of net sales) related to theexpensing of stock-based compensation, due to the recent adoption of FASBStatement No. 123(R), for the three and nine month periods ended April 2,2006, respectively. Increased advertising also contributed to the increase,offset by reductions in compensation and lower variable expenses.

 

*Interest and Other Income, Net.* We generated $2.5 million of interestincome during the three months ended April 1, 2006 compared to $1.1million in the comparable period of the prior year. For the nine months ended April 1,2006, we generated $6.3 million of interest income compared to $3.0 million inthe comparable period of the prior year. The increases are the result of higheraverage cash equivalent and marketable securities balances and higher interestrates.

 

*Provision for Income Taxes.*The effectivetax rate decreased to 34.6% and 37.4% for the three and nine month periodsended April 1, 2006, respectively, from 38.0% for the comparable periodsin the prior year, primarily due to a cumulative adjustment of permanent andtemporary differences and an increase in tax exempt interest income, offset by compensationexpense associated with incentive stock options. Due to the timing of when anincentive stock option is

 

15

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exercised and sold andthe level of earnings, the effective tax rate is expected to fluctuate fromquarter to quarter under FASB Statement No. 123(R).

 

**Seasonalityof Business and Quarterly Results**

 

Ourbusiness varies with general seasonal trends that are characteristic of theretail and apparel industries. As a result, our typical store generates a higherpercentage of our annual net sales and profitability in the second quarter ofour fiscal year (which includes the holiday selling season) compared to theother quarters of our fiscal year. If for any reason our sales were belowseasonal norms during the second quarter of our fiscal year, our annualoperating results would be negatively impacted. Because of the seasonality ofour business, results for any quarter are not necessarily indicative of resultsthat may be achieved for a full fiscal year.

 

### **LIQUIDITYAND CAPITAL RESOURCES**

### ** **

Our working capital requirements vary widely throughoutthe year and generally peak during the first and second fiscal quarters. At April 1,2006, we had $311.7 million of cash and equivalents and short-term marketablesecurities on hand. In addition, we had a revolving line of credit, under whichwe could borrow or issue letters of credit up to a combined total of $25.0million. As of April 1, 2006, there were no outstanding cash borrowingsunder the line of credit, and there was $3.5 million of letters of creditoutstanding.

 

Net cash provided by operating activities for the ninemonths ended April 1, 2006 was $59.3 million versus $71.5 million for the ninemonths ended April 2, 2005. Cash provided by operating activities for theseperiods was primarily generated by earnings adjusted for depreciation, non-cashcompensation expense, deferred rent, deferred income taxes and changes inworking capital. The decrease in cash provided by operating activities in thecurrent year as compared to the prior year is primarily due to the timing ofpayments and inventory receipts. In addition, the nine months ended April 2,2005 include an increase in deferred rent of $3.8 million, resulting primarily fromlease accounting adjustments.

 

Net cash used by investing activities for the nine monthsended April 1, 2006 was $36.2 million, primarily for the purchases ofmarketable securities and expenditures related to the opening of 16 new stores,the relocation and expansion of existing stores, improvements made to our productionfacility and design studio and investments in technology. For the nine-monthperiod ended April 2, 2005, $70.4 million was used primarily for thepurchases of marketable securities and expenditures related to the opening of 11new stores, the relocation and expansion of existing stores and improvementsmade to our new production facility and design studio. The decrease in cashused by investing activities in the current year as compared to the prior yearis primarily due to a decrease in net purchases of marketable securities. Weexpect to open approximately 34 stores during fiscal 2006 and estimate thattotal capital expenditures will be approximately $33.0 million.

 

Netcash used by financing activities was $2.8 million for the nine months ended April 1,2006, resulting from the payment of two quarterly cash dividends totaling $7.3million, partially offset by proceeds from stock option exercises. Net cashprovided by financing activities was $7.7 million for the nine months ended April 2,2005, and was derived from proceeds from stock option exercises, partiallyoffset by the payment of three quarterly cash dividends totaling $6.0 million.

 

We believe that our cash on hand, together with our cashflows from operations, will be sufficient to meet our capital and operatingrequirements for at least the next twelve months. Our future capitalrequirements, however, will depend on numerous factors, including withoutlimitation, the size and number of new and expanded stores and/or storeconcepts, investment costs for management information systems, potentialacquisitions and/or joint ventures, repurchase of stock and future results ofoperations.

 

### **Inflation**

### ** **

We do not believe that inflation has had a materialeffect on the results of operations in the recent past. However, we cannotassure that our business will not be affected by inflation in the future.

 

### **RISKSTHAT MAY AFFECT RESULTS**

### ** **

Factors that might cause our actual results to differmaterially from the forward looking statements discussed elsewhere in thisreport, as well as affect our ability to achieve our financial and other goals,include, but are not limited to, the following:

 

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RISKS RELATING TO OURBUSINESS:

 

**1.  The success of our business depends in large part onour ability to identify fashion trends as well as to react to changing customerdemand in a timely manner.  **Consequently,we depend in part upon the customer response to the creative efforts ofour merchandising, design and marketing teams and their ability to anticipatetrends and fashions that will appeal to our consumer base. If we miscalculateour customers’ product preferences or the demand for our products, we may befaced with excess inventory. Historically, this type of occurrence has resultedin excess fabric for some products and markdowns and/or write-offs, which hasimpaired our profitability, and may do so in the future. Similarly, anyfailure on our part to anticipate, identify and respond effectively tochanging consumer demands and fashion trends will adversely affect our sales.

 

**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 beharmed.  **We do not ownany manufacturing facilities and therefore depend on contractors and thirdparties to manufacture our products. We place all of our orders for productionof merchandise and raw materials by purchase order and do not have anylong-term contracts with any manufacturer or supplier. If we fail to maintainfavorable relationships with our manufacturers and suppliers or are unable toobtain sufficient quantities of quality raw materials on commerciallyreasonable terms, it could harm our business and results of operations. Wecannot assure you that contractors and third party manufacturers (1) willnot supply similar products to our competitors, (2) will not stopsupplying products to us completely, or (3) will supply products in atimely manner. Untimely receipt of products may result in markdowns whichwould have a negative impact on earnings. Furthermore, we have received in thepast, and may receive in the future, shipments of products frommanufacturers that fail to conform to our quality control standards. Insuch event, unless we are able to obtain replacement products in a timelymanner, we may lose sales. Certain of our third party manufacturers storeour raw materials. In the event our inventory was damaged or destroyed and wewere unable to obtain replacement raw materials, our earnings may benegatively impacted.

 

**3.  Our success depends on our ability to attractand retain key employees in order to support our existing business and futureexpansion.  **From timeto time we actively recruit qualified candidates to fill key executivepositions from within the Company. There is substantial competition forexperienced personnel, which we expect will continue. We compete forexperienced personnel with companies who have greater financial resources thanwe do. In the past, we have experienced significant turnover of our executivemanagement team and retail store personnel. We made a strategic decision tomove our bebe merchant team from our Brisbane headquarters to our Los Angelesstudio to join our design and production teams in July 2006. We cannot assureyou that will not experience turnover as a result of this relocation. We arealso exposed to employment practice litigation due to the large number ofemployees and high turnover of our sales associates. If we fail to attract,motivate, and retain qualified personnel, it could harm our business and limitour ability to expand.

 

In addition, we depend upon the expertise andexecution of our key employees, particularly Manny Mashouf, the founder,Chairman of the Board and majority shareholder, and Gregory Scott, our ChiefExecutive Officer and member of the Board of Directors. If we lose the servicesof Mr. Mashouf, Mr. Scott, or any key officers or employees, it couldharm our business and results of operations.

 

**4.  If we are not able to successfully expand ourbebe and BEBE SPORT stores our revenue base and earnings may be impaired.  **We believe that there isopportunity to expand the number of bebe and BEBE SPORT stores in new andexisting markets. For fiscal 2006, we plan to grow our operations in acontrolled manner, primarily through the opening of new stores. As part ofour growth strategy, we will also open larger bebe stores and accessory “shopin shops.”  In addition, we have recentlyintroduced a new accessory concept, Neda by bebe, and plan to open the firstNeda by bebe store in the fall of fiscal 2007. If these stores are notsuccessful, our financial condition may be harmed.

 

**5.  There can be no assurance that future storeopenings will be successful and new store openings may impact existingstores.  **We expect toopen 34 stores in fiscal 2006, of which 19 will be bebe stores, 12 will be BEBESPORT stores and 3 will be bebe outlet stores. In the past, we have closedstores as a result of poor performance, and there can be no assurance that thestores that we plan to open in fiscal 2006, or any other stores that we mightopen in the future, will be successful or that our overall operating profitwill increase as a result of opening these stores. During fiscal 2006, we anticipateclosing 3 stores and during fiscal 2005, we closed 6 stores. Most of our newstore openings in fiscal 2006 will be in existing markets. These openings may affectthe existing stores’ net sales and profitability. Our failure to predictaccurately the demographic or retail environment at any future store locationcould have a material adverse effect on our business, financial condition andresults of operations.

 

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**6.  We are subject to risks associated with ouron-line sales.  **Weoperate an on-line store at *www.bebe.com*to sell our merchandise, which we migrated to a third party platform in February 2006.Although our online sales encompass a relatively small percentage of our totalsales, our on-line operations are subject to numerous risks, includingunanticipated operating problems, reliance on third-party computer hardware andsoftware providers, system failures and the need to invest in additionalcomputer systems. The on-line operations also involve other risks that couldhave an impact on our results of operations including, but not limited to,diversion of sales from our other stores, rapid technological change, liabilityfor online content, credit card fraud, risks related to the failure of thecomputer systems that operate the website and its related support systems. Inaddition, with the migration to a third party we no longer have direct controlof certain aspects of our on-line business. There can be no assurance that ouron-line store will continue to achieve sales and profitability growth or evenremain at its current level.

 

**7.  Any serious disruption at our major facilitiescould have a harmful effect on our business.  **We currently operate acorporate office in Brisbane, California, a distribution facility in Benicia,California, and a design studio and production facility in Los Angeles,California. Any serious disruption at these facilities whether due toconstruction, relocation, fire, earthquake, terrorist acts or otherwise wouldharm our operations and could have a harmful effect on our business and resultsof operations. Furthermore, we have little experience operating essentialfunctions away from our main corporate offices and are uncertain what effectoperating such satellite facilities might have on business, personnel andresults of operations.

 

**8.  We rely on information technology, thedisruption of which could adversely impact our business.  **We rely on variousmanagement information systems to manage our operations and regularly makeinvestments to upgrade, enhance or replace such systems. For example, in thefirst and second quarters of fiscal year 2006, we launched and rolled out acustomer loyalty program to be used in conjunction with our direct marketinginitiatives. In the fall of fiscal year 2007 we plan to implement an enhancedproduction system supporting our design, manufacturing and merchandising needs.We cannot assure you that we will be successful with the implementation ofthese and other new systems. Any delays or difficulties in transitioning to newsystems, or in integrating them with our current systems, or any otherdisruptions affecting any of our management information systems, could have amaterial adverse impact on our business, financial condition and results ofoperations.

 

**9.  We face significant competition in the retailand apparel industry, which could harm our sales and profitability.  **The retail and apparelindustries are highly competitive and are characterized by low barriers toentry. Key competitors include, but are not limited to Arden B, BCBG, Express,Guess, and the t.b.d. and Savvy Departments within Nordstrom. We expectcompetition in our markets to increase. The primary competitive factors in ourmarkets are: brand name recognition, sourcing, product styling, quality,presentation and pricing, timeliness of product development and delivery, storeambiance, customer service and convenience.

 

We compete with traditional department stores,specialty store retailers, business to consumer websites, off-price retailers anddirect marketers for, among other things, raw materials, market share, retailspace, finished goods, sourcing and personnel. Because many of thesecompetitors are larger and have substantially greater financial, distributionand marketing resourcesthan we do, we may lack the resources to adequately compete with them. Ifwe fail to compete in any way, it could harm our business, financial conditionand results of operations.

 

**10.  Purchases of the merchandise we sell aregenerally discretionary and are therefore particularly susceptible to economicconditions.  **Theoutlook for the United States economy is uncertain and is directly affected byfactors that are beyond our control. Such factors include disposable consumerincome, oil prices, recession and fears of recession, war and fears of war,inclement weather, consumer debt, interest rates, sales tax rates, consumerconfidence in future economic conditions and political conditions, and consumerperceptions of personal well-being and security. Consumers are generally morewilling to make discretionary purchases, including purchases of fashionproducts, during periods in which favorable economic conditions prevail. Ifeconomic conditions change, our business, financial condition and results ofoperations could be adversely affected. We cannot predict the indirect effectssuch as rising oil and freight prices, consumer spending or other economicfactors that natural disasters will have on our results of operations.

 

**11.  Our business could be adversely impacted byunfavorable international conditions.  **Oursales and operating results are, and will continue to be, affected byinternational social, political, legal and economic conditions. In particular,our business could be adversely impacted by instability or changes resulting inthe disruption of trade with the countries in which our contractors, suppliersor customers are located, significant fluctuations in the value of the dollaragainst foreign currencies or restrictions on the transfer of funds, or additionaltrade restrictions imposed by the United States and other

 

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foreign governments. Trade restrictions, including increased tariffs orquotas, embargoes, and customs restrictions could increase the cost or reducethe supply of merchandise available to us and adversely affect our financialcondition and results of operations.

 

**12.  If we are not able to successfully protect ourintellectual property our ability to capitalize on the value of our brand name may beimpaired.  **Even thoughwe take actions to establish, register and protect our trademarks and otherproprietary rights, we cannot assure you that we will be successful or thatothers will not imitate our products or infringe upon our intellectual propertyrights. In addition, there is no assurance that others will not resist or seekto block the sale of our products as infringements of their trademark andproprietary rights.

 

We are seeking to register our trademarks domestically andinternationally. Obstacles may exist that may prevent us fromobtaining a trademark for the bebe name or related names in certainjurisdictions and/or classes of use. We may not be able to registercertain trademarks or purchase the right or obtain a license to use the bebename or related names on commercially reasonable terms. If we fail to obtaintrademark, ownership or license the requisite rights, it would limit ourability to expand. Furthermore, if we do not demonstrate use of our trademarks,our existing trademark rights may lapse over time. In some jurisdictions,despite successful registration of our trademarks, third parties may allegeinfringement and bring actions against us. In addition, if our licensees failto use our intellectual property correctly, the reputation and value associatedwith our trademarks may be diluted.

 

**13.  If an independent manufacturer violates laboror other laws, or is accused of violating any such laws, or if their laborpractices diverge from those generally accepted as ethical, it could harm ourbusiness and brand image.  **Whilewe maintain a policy to monitor the operations of our independent manufacturersby having an independent firm inspect these manufacturing sites, and allmanufacturers are contractually required to comply with such labor practices,we cannot control the actions or the public’s perceptions of suchmanufacturers, nor can we assure that these manufacturers will conduct theirbusinesses using ethical or legal labor practices. While we do not controltheir employees’ employment conditions or the manufacturers’ businesspractices, and the manufacturers act in their own interest, they may actin a manner that results in negative public perceptions of us and/or employeeallegations, and courts may or may not determine that we are jointlyliable in such cases.

 

RISKS RELATING TO OUR COMMON STOCK:

 

**1.  Our stock price may fluctuate because ofthe small number of shares that can be publicly traded and the low averagedaily trading volumes.  **Thevast majority of our outstanding shares of our common stock are subject totrading restrictions. As of April 1, 2006, approximately 25,000,000 sharesof our common stock were available to be publicly traded, and as a result, ouraverage daily trading volumes are relatively low, and our stock price isvulnerable to market swings due to large purchases, sales and short sales ofour common stock.

 

**2.   Our operating results aresubject to seasonal and quarterly fluctuations, which could adversely affectthe market price of our common stock.  **Ourbusiness varies with general seasonal trends that are characteristic of theretail and apparel industries. As a result, our stores typically generate ahigher percentage of our annual net sales and profitability in the secondquarter of our fiscal year (which includes the holiday selling season) comparedto other quarters. Such seasonal and quarterly fluctuations could adverselyaffect the market price of our common stock.

 

**3.  Because a principal shareholder controls thecompany, other shareholders may not be able to influence the direction thecompany takes.  **As of April 1,2006, Manny Mashouf, the Chairman of the Board, beneficially ownedapproximately 74% of the outstanding shares of our common stock. As a result,he alone can control the election of directors and the outcome of all issuessubmitted to the shareholders. This may make it more difficult for a thirdparty to acquire shares, may discourage acquisition bids, and could limitthe price that certain investors might be willing to pay for shares of commonstock. This concentration of stock ownership may have the effect ofdelaying, deferring or preventing a change in control of our company.

 

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##### **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

##### ** **

We are exposed to market risks, which include changes inU.S. interest rates and, to a lesser extent, foreign exchange rates. We do notengage in financial transactions for trading or speculative purposes.

 

*Interest Rate Risk*

* *

Wecurrently maintain a portfolio of variable interest rate investments consistingof cash equivalents and short-term marketable securities. Marketable securitiesare comprised of closed-end variable interest rate funds that invest primarilyin tax-exempt municipal bonds. Due to the variable nature of these investments,their value is typically not subject to market rate changes. According to ourinvestment policy, we may invest in taxable and tax exempt instruments. Inaddition, the policy establishes limits on credit quality, maturity, issuer andtype of instrument. Marketable securities are classified as “available for sale.”    We do not use derivative financialinstruments in our investment portfolio.

 

Allhighly liquid investments with a maturity of three months or less at the dateof purchase are considered to be cash equivalents. The remaining investmentsare considered short-term marketable securities if original maturities rangebetween four and twelve months or long-term marketable securities if originalmaturities are over twelve months.

 

The following table lists our cash equivalents andshort-term marketable securities at April 1, 2006:

 
| ** **                        | ** ** | **Book Value**                       | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                        | ** ** | **(Dollars in thousands)** | ** ** |
| Cash equivalents                  |       | $                                    | 31,757     |           | $          | 31,757 |   |
| Weighted average interest rate    |       | 2.61                                 | %          |           |       |
| Short-term  marketable securities |       | 264,280                              |       | 264,280        |       |
| Weighted average interest rate    |       | 3.32                                 | %          |           |       |
| Total                             |       | $                                    | 296,037    |           | $          | 296,037 |   |

 

The interest payable on our bank line of credit is basedon variable interest rates and therefore affected by changes in market interestrates. As we have no outstanding cash borrowings, if interest rates rose significantly,our results from operations and cash flows would not be affected.

 

*Foreign Currency Risks*

* *

Weenter into a significant amount of purchase obligations outside of the UnitedStates, substantially all of which are settled in U.S. Dollars and, therefore,have only minimal exposure to foreign currency exchange risks. We also operatea subsidiary for which the functional currency is the Canadian Dollar.Fluctuations in exchange rates therefore impact our financial condition andresults of operations, as reported in U.S. Dollars.  To date, we have not experienced anysignificant negative impact as a result of fluctuations in foreign currencymarkets. We do not hedge against foreign currency risks and believe thatforeign currency exchange risk is immaterial.

 

##### **ITEM 4. CONTROLS AND PROCEDURES**

##### ** **

(a)                                  Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this quarterlyreport.

 

(b)                                 Therehas been no change in our internal control over financial reporting during thequarter ended April 1, 2006 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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##### **PART II  OTHERINFORMATION**

##### ** **

**ITEM 1. LEGALPROCEEDINGS**

 

A former candidate for an executive position sued theCompany and two other named defendants in a First Amended Complaint, filed November 9,2004 in the Superior Court of the State of California, County of San Francisco(case No. CGC-04-435517), seeking unspecified monetary damages and otherequitable relief. This case was dismissed with prejudice with no liability tothe Company.

 

A former employee sued the Company in a complaintfiled on April 28, 2005 in the United States District Court for theNorthern District of California (case No. C05-0177-MHP) allegingviolations under the Fair Labor Standards Act, specifically that the Companyobligated her to buy and wear its brand clothing as a uniform, withoutreimbursement or credit, and the net effect of deducting the value of suchrequired purchases from her wages would often result in her not being paidminimum wages. The plaintiff purports to bring the action also on behalf of a class ofhourly, non-managerial employees who are similarly situated. The lawsuit seekscompensatory, statutory and injunctive relief. The Company believes that theplaintiff’s claims are without merit, and will continue to vigorously defendthis matter.

 

In addition to the above, the Company is also involvedin various other legal proceedings arising in the normal course of business. Noneof these matters, or their ultimate resolution, are expected, individually orin the aggregate, to have a material adverse effect on the Company’s business,financial condition or results of operations.

 

The Company intends to defend itself vigorouslyagainst these claims. However, the results of any litigation are inherentlyuncertain. The Company cannot assure you that it will be able to successfullydefend itself in these lawsuits. Where required, and/or otherwise appropriate,the Company makes an estimate of potential liabilities that management believesare reasonable. Any estimates are revised as further information becomesavailable.

 

##### **ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

##### ** **

Notapplicable.

 

##### **ITEM3. DEFAULTS UPON SENIOR SECURITIES**

##### ** **

Notapplicable.

 

##### **ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

##### ** **

Notapplicable.

 

##### **ITEM5. OTHER INFORMATION**

##### ** **

Notapplicable.

 

##### **ITEM6. EXHIBITS**

##### ** **

(a)   Exhibits.The following is a list of exhibits filed as part of this Report on Form 10-Q.

 
| **Exhibit** | ** ** | **Description**                                             |
|-------------|------------|-------------------------------------------------------------|
| 31.1        |       | 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**

** **

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|   | Dated May 11,  2006               |
|--------|----------------------------------------|
|   |                                   |
|   | bebe stores, inc.                 |
|   |                                   |
|   | /s/  Walter  Parks           |   |
|   | Walter Parks,  Chief Financial Officer |

 

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** **

EXHIBIT INDEX

 
| **Exhibit Number** | ** ** | **Description**                                            |
|-------------------------|------------|------------------------------------------------------------|
| 31.1                    |       | 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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