Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****  QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Forthe quarterly period ended April 3, 2010**

 

**OR**

 

**o****  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission File Number 0-24395**

 

**bebestores, inc.**

(Exact name ofregistrant as specified in its charter)

 

| **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**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x  No o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).  Yes o  No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated  filer o                |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b—2of the Exchange Act).   Yes o No  x

 

Thenumber of shares of the registrant’s common stock, par value $0.001 per share,outstanding as of April 30, 2010 was 86,089,177.

 

 

 

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Table of Contents

 

**bebestores, inc.**

 

**TABLE OF CONTENTS**

 
| ** **         | ** **                                                                                                                      | **Page No.** |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------|-------------------|
| ** **         | ** **                                                                                                                      |              |
| **PART I.**   | **FINANCIAL INFORMATION**                                                                                                       |              |
|               |                                                                                                                            |              |
| ITEM 1.            | Condensed Consolidated  Financial Statements                                                                                    |              |
|               |                                                                                                                            |              |
|               | Condensed  Consolidated Balance Sheets as of April 3, 2010, July 4, 2009 and  April 4, 2009                      | 3                 |
|               |                                                                                                                            |              |
|               | Condensed  Consolidated Statements of Operations for the three and nine months ended  April 3, 2010 and April 4, 2009 | 4                 |
|               |                                                                                                                            |              |
|               | Condensed  Consolidated Statements of Cash Flows for the nine months ended April 3,  2010 and April 4, 2009           | 5                 |
|               |                                                                                                                            |              |
|               | Notes to Condensed Consolidated Financial Statements                                                                            | 6                 |
|               |                                                                                                                            |              |
| ITEM 2.            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                     | 14                |
|               |                                                                                                                            |              |
| ITEM 3.            | Quantitative  and Qualitative Disclosures about Market Risk                                                                     | 19                |
|               |                                                                                                                            |              |
| ITEM 4.            | Controls and  Procedures                                                                                                        | 20                |
|               |                                                                                                                            |              |
| **PART II.**  | **OTHER INFORMATION**                                                                                                           |              |
|               |                                                                                                                            |              |
| ITEM 1.            | Legal Proceedings                                                                                                               | 21                |
|               |                                                                                                                            |              |
| ITEM 1A.           | Risk Factors                                                                                                                    | 21                |
|               |                                                                                                                            |              |
| ITEM 2.            | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                    | 25                |
|               |                                                                                                                            |              |
| ITEM 3.            | Defaults  Upon Senior Securities                                                                                                | 25                |
|               |                                                                                                                            |              |
| ITEM 4.            | Submission  of Matters to a Vote of Security Holders                                                                            | 25                |
|               |                                                                                                                            |              |
| ITEM 5.            | Other Information                                                                                                               | 25                |
|               |                                                                                                                            |              |
| ITEM 6.            | Exhibits                                                                                                                        | 26                |
|               |                                                                                                                            |              |
| **SIGNATURE**      |                                                                                                                            | 27                |
|               |                                                                                                                            |              |
| **EXHIBIT  INDEX** |                                                                                                                            | 28                |

 

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**PART I.        FINANCIALINFORMATION**

 

ITEM 1.**        **CondensedConsolidated Financial Statements

 

**bebestores, inc.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                      | ** ** | **As of********April 3, 2010** | ** ** | **As of  July 4,********2009** | ** ** | **As of  April 4, 2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** **                         | ** ** |
| **Assets:**                                                                                                                                     | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** **                         | ** ** |
| Current  assets:                                                                                                                                |       |                                     |       |                                     |       |                               |       |
| Cash  and equivalents                                                                                                                           |       | $                                        | 100,740    |                                     | $          | 91,390                             |       | $ | 123,059 |   |
| Available  for sale securities                                                                                                                  |       | 58,990                                   |       | 40,018                                   |       | —                             |       |
| Trading  securities                                                                                                                             |       | 58,315                                   |       | 69,504                                   |       | —                             |       |
| Auction  rate securities written put option                                                                                                     |       | 8,822                                    |       | 12,740                                   |       | —                             |       |
| Receivables  (net of allowance of $1,221, $1,277 and $1,256)                                                                                    |       | 5,538                                    |       | 5,134                                    |       | 6,406                              |       |
| Inventories,  net                                                                                                                               |       | 32,284                                   |       | 39,194                                   |       | 37,433                             |       |
| Deferred  income taxes, net                                                                                                                     |       | 7,829                                    |       | 8,549                                    |       | 9,272                              |       |
| Prepaid  and other                                                                                                                              |       | 20,068                                   |       | 30,947                                   |       | 29,752                             |       |
| Total  current assets                                                                                                                           |       | 292,586                                  |       | 297,476                                  |       | 205,922                            |       |
| Trading  securities                                                                                                                             |       | —                                   |       | —                                   |       | 70,033                             |       |
| Available  for sale securities                                                                                                                  |       | 112,354                                  |       | 118,187                                  |       | 122,928                            |       |
| Auction  rate securities written put option                                                                                                     |       | —                                   |       | —                                   |       | 12,298                             |       |
| Property  and equipment, net                                                                                                                    |       | 110,458                                  |       | 126,301                                  |       | 132,029                            |       |
| Deferred  income taxes, net                                                                                                                     |       | 26,292                                   |       | 24,272                                   |       | 24,935                             |       |
| Other  assets                                                                                                                                   |       | 5,585                                    |       | 5,219                                    |       | 4,981                              |       |
| Total  assets                                                                                                                                   |       | $                                        | 547,275    |                                     | $          | 571,455                            |       | $ | 573,126 |   |
|                                                                                                                                            |       |                                     |       |                                     |       |                               |       |
| **Liabilities and Shareholders’ Equity:**                                                                                                  | ** ** | ** **                               | ** ** | ** **                               | ** ** | ** **                         | ** ** |
| Current  liabilities:                                                                                                                           |       |                                     |       |                                     |       |                               |       |
| Accounts  payable                                                                                                                               |       | $                                        | 18,789     |                                     | $          | 26,621                             |       | $ | 23,217 |   |
| Accrued  liabilities                                                                                                                            |       | 28,419                                   |       | 36,671                                   |       | 35,384                             |       |
| Total  current liabilities                                                                                                                      |       | 47,208                                   |       | 63,292                                   |       | 58,601                             |       |
| Deferred  rent and other lease incentives                                                                                                       |       | 43,028                                   |       | 45,448                                   |       | 46,760                             |       |
| Uncertain  tax positions                                                                                                                        |       | 3,602                                    |       | 3,220                                    |       | 3,401                              |       |
| Total  liabilities                                                                                                                              |       | 93,838                                   |       | 111,960                                  |       | 108,762                            |       |
|                                                                                                                                            |       |                                     |       |                                     |       |                               |       |
| 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 86,086,896, 86,758,973 and 86,634,369 shares |       | 86                                       |       | 87                                       |       | 87                                 |       |
| Additional  paid-in capital                                                                                                                     |       | 143,261                                  |       | 139,437                                  |       | 140,763                            |       |
| Accumulated  other comprehensive loss                                                                                                           |       | (5,389                                   | )          | (12,261                                  | )          | (13,378                            | )          |
| Retained  earnings                                                                                                                              |       | 315,479                                  |       | 332,232                                  |       | 336,892                            |       |
| Total  shareholders’ equity                                                                                                                |       | 453,437                                  |       | 459,495                                  |       | 464,364                            |       |
| Total  liabilities and shareholders’ equity                                                                                                |       | $                                        | 547,275    |                                     | $          | 571,455                            |       | $ | 573,126 |   |

 

See accompanying notes to condensed consolidated financialstatements.

 

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**bebestores, inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(Inthousands, except per share data)**

**(unaudited)**

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **April 3,**                | ** ** | **April 4,**               | ** ** | **April 3,** | ** ** | **April 4,** | ** ** |
| ** **                                         | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                         |       | $                                | 114,398    |                            | $          | 127,657 |   | $ | 381,551 |   | $ | 472,819 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Cost  of sales, including production and occupancy |       | 70,057                           |       | 79,351                          |       | 235,639 |   | 281,084 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Gross  margin                                      |       | 44,341                           |       | 48,306                          |       | 145,912 |   | 191,735 |   |
| Selling,  general and administrative expenses      |       | 52,129                           |       | 56,761                          |       | 156,448 |   | 177,380 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Operating  income (loss)                           |       | (7,788                           | )          | (8,455                          | )          | (10,536 | ) | 14,355 |   |
| Interest  and other income, net                    |       | 376                              |       | 663                             |       | 2,259 |   | 5,553 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Income  (loss) before income taxes                 |       | (7,412                           | )          | (7,792                          | )          | (8,277 | ) | 19,908 |   |
| Income  tax provision (benefit)                    |       | (1,941                           | )          | (2,747                          | )          | (1,064 | ) | 6,951 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Net  income (loss)                                 |       | $                                | (5,471     | )                               | $          | (5,045 | ) | $ | (7,213 | ) | $ | 12,957 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Basic  earnings (loss) per share                   |       | $                                | (0.06      | )                               | $          | (0.06 | ) | $ | (0.08 | ) | $ | 0.15 |   |
| Diluted  earnings (loss) per share                 |       | $                                | (0.06      | )                               | $          | (0.06 | ) | $ | (0.08 | ) | $ | 0.15 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Basic  weighted average shares outstanding         |       | 86,104                           |       | 87,387                          |       | 86,511 |   | 88,366 |   |
| Diluted  weighted average shares outstanding       |       | 86,104                           |       | 87,387                          |       | 86,511 |   | 88,561 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**bebestores, inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                                                           | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **April 3,********2010**   | ** ** | **April 4,********2009** | ** ** |
| ** **                                                                           | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                               |       |                            |       |   |   |
| Net  income (loss)                                                                   |       | $                               | (7,213     | ) | $ | 12,957 |   |
| Adjustments  to reconcile net income (loss) to cash provided by operating activities |       |                            |       |   |   |
| Non-cash  compensation expense                                                       |       | 4,958                           |       | 4,300 |   |
| Depreciation  and amortization                                                       |       | 19,870                          |       | 19,714 |   |
| Non-cash  charge for asset impairment                                                |       | 4,753                           |       | 2,877 |   |
| Net  loss on disposal of property                                                    |       | 521                             |       | 1,053 |   |
| Loss  (gain) on trading securities                                                   |       | (3,353                          | )          | 12,893 |   |
| Loss  (gain) on auction rate securities written put option                           |       | 3,234                           |       | (12,298 | ) |
| Tax  benefit from exercise of stock options and awards                               |       | 75                              |       | 80 |   |
| Excess  tax benefit from exercise of stock options and awards                        |       | (10                             | )          | (30 | ) |
| Deferred  rent and other lease incentives                                            |       | (1,441                          | )          | 771 |   |
| Deferred  income taxes                                                               |       | (1,136                          | )          | (783 | ) |
| Long  term income taxes payable                                                      |       | 382                             |       | — |   |
| Changes  in operating assets and liabilities:                                        |       |                            |       |   |   |
| Receivables                                                                          |       | (965                            | )          | (423 | ) |
| Inventories                                                                          |       | 7,125                           |       | 5,110 |   |
| Prepaid  expenses and other                                                          |       | 10,101                          |       | (14,788 | ) |
| Accounts  payable                                                                    |       | (7,834                          | )          | (18 | ) |
| Accrued  liabilities                                                                 |       | (8,312                          | )          | (3,625 | ) |
| Net  cash provided by operating activities                                           |       | 20,755                          |       | 27,790 |   |
|                                                                                 |       |                            |       |   |   |
| Cash  flows from investing activities:                                               |       |                            |       |   |   |
| Purchase  of property and equipment                                                  |       | (9,998                          | )          | (23,709 | ) |
| Purchase  of investment securities                                                   |       | (87,935                         | )          | — |   |
| Proceeds  from sales of investment securities                                        |       | 93,293                          |       | 22,700 |   |
| Net  cash used by investing activities                                               |       | (4,640                          | )          | (1,009 | ) |
|                                                                                 |       |                            |       |   |   |
| Cash  flows from financing activities:                                               |       |                            |       |   |   |
| Net  proceeds from issuance of common stock                                          |       | 210                             |       | 431 |   |
| Purchase  of common stock                                                            |       | (4,227                          | )          | (13,328 | ) |
| Excess  tax benefit from exercise of stock options and awards                        |       | 10                              |       | 30 |   |
| Cash  dividends paid                                                                 |       | (8,677                          | )          | (13,074 | ) |
| Other                                                                                |       | —                          |       | (38 | ) |
| Net  cash used by financing activities                                               |       | (12,684                         | )          | (25,979 | ) |
|                                                                                 |       |                            |       |   |   |
| Net  increase in cash and equivalents                                                |       | 3,431                           |       | 801 |   |
| Effect  of exchange rate changes on cash                                             |       | 5,919                           |       | (1,086 | ) |
| Cash  and equivalents:                                                               |       |                            |       |   |   |
| Beginning  of period                                                                 |       | 91,390                          |       | 123,344 |   |
| End  of period                                                                       |       | $                               | 100,740    |   | $ | 123,059 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

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**bebestores, inc.**

 

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**INTERIMFINANCIAL STATEMENTS**

 

The accompanyingcondensed consolidated balance sheets of bebe stores, inc. (the “Company”) asof April 3, 2010, July 4, 2009 and April 4, 2009, the condensedconsolidated statements of operations for the three and nine months ended April 3,2010 and April 4, 2009 and the condensed consolidated statements of cash flowsfor the nine months ended April 3, 2010 and April 4, 2009 have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X, withoutaudit. Accordingly, they do not include all of the information required byaccounting principles generally accepted in the United States of America forannual financial statements. Therefore, these condensed consolidated financialstatements should be read in conjunction with the Company’s Annual Report on Form 10-Kfor the fiscal year ended July 4, 2009.

 

In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary to present fairly the financial position at the balancesheet dates and the results of operations for the periods presented have beenincluded. The condensed consolidated balance sheet at July 4, 2009,presented herein, was derived from the audited balance sheet included in theCompany’s Annual Report on Form 10-K for the fiscal year ended July 4,2009.

 

The Company’s business isaffected by the pattern of seasonality common to most retail apparelbusinesses. The results for the periods presented are not necessarily indicativeof future financial results.

 

The Company revised cashflows from operating activities for the nine months ended April 4, 2009 onits statements of cash flows to separately present the tax benefit and excesstax benefit from exercise of stock options and awards.  Net cash provided(used) by operating and financing activities for the prior year period changedby immaterial amounts.  Certain prior year amounts have been reclassifiedto conform to current year presentation.

 

The Company has evaluatedall subsequent events that occurred after the balance sheet date through thedate the condensed consolidated financial statements were issued.

 

**FISCALYEAR**

 

The Company’s fiscal yearis a 52 or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2010 and 2009 each include 52 weeks.

 

The three month periodsended April 3, 2010 and April 4, 2009 each include 13 weeks. The nine month periods ended April 3, 2010 and April 4, 2009 eachinclude 39 weeks.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

*Codification*

 

Effective July 1,2009, the Financial Accounting Standards Board’s (“FASB”) Accounting StandardsCodification (“ASC”) became the single official source of authoritative,nongovernmental generally accepted accounting principles (“GAAP”) in the UnitedStates.  The historical GAAP hierarchy was eliminated, and the ASCbecame the only level of authoritative GAAP, other than guidance issued by theSecurities and Exchange Commission.  The Company’s accountingpolicies were not affected by the conversion to ASC.  However,references to specific accounting standards in the footnotes to the Company’scondensed consolidated financial statements have been changed to refer to theappropriate section of ASC.

 

*FairValue*

 

In September 2006,the FASB issued guidance which defines fair value, establishes a framework formeasuring fair value in accordance with generally accepted accountingprinciples and expands disclosures about fair value measurements.  Thisguidance is contained in ASC 820, “Fair Value Measurements and Disclosures”. In February 2008, the FASB deferred the effective date for non-financialassets and liabilities, except for certain items that are recognized ordisclosed at fair value at least annually.  The Company elected to partiallyadopt the provisions ASC 820 as of July 6, 2008 for financial instruments.Although the partial adoption did not materially impact the Company’s financialcondition, results of operations or cash flow, the Company is now required toprovide additional disclosures as part of its financial statements.  TheCompany’s adoption of the remaining provisions of ASC 820, pertaining to fairvalue disclosures related to non-financial assets and liabilities, on July 5,2009 has not had a material impact on the Company’s consolidated financialposition, statements of operations or cash flows.

 

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In April 2009, theFASB issued additional guidance in accordance with ASC 825, “FinancialInstruments”.  The additional guidance adds required disclosures aboutfair value of financial instruments in interim financial statements as well asin annual financial statements.  The guidance also requires thosedisclosures in summarized financial information at interim reportingperiods.  This guidance is effective forinterim periods ending after June 15, 2009, with early adoption permittedfor periods ending after March 15, 2009.  The Company’s adoption ofthis requirement has not had a material impact on the Company’s consolidatedfinancial position, statements of operations or cash flows, as it relates todisclosure only.

 

In January 2010, theFASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures(Topic 820): Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06amends ASC 820 and clarifies and provides additional disclosure requirementsrelated to recurring and non-recurring fair value measurements and employers’disclosures about postretirement benefit plan assets. This ASU is effective forthe Company on January 3, 2010. The Company’s adoption of this requirementhas not had a material impact on the Company’s consolidated financial position,statements of operations or cash flows, as it relates to disclosure only.

 

**INVENTORIES**

 

The Company’s inventoriesconsisted of:

 
| ** **                      | ** ** | ** **                          | ** **   | **As of**               | ** ** | ** **                    | ** ** |
|---------------------------------|------------|-------------------------------------|--------------|------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **April 3,******** 2010** | ** **   | **July 4,********2009** | ** ** | **April 4,********2009** | ** ** |
| ** **                      | ** ** | **(In thousands)**             | ** **   |
| Merchandise  available for sale |       | $                                   |  31,295 |                         | $          |  37,043                  |       | $ |  34,467 |   |
| Raw  materials                  |       | 989                                 |         | 2,151                        |       | 2,966                         |       |
| Inventories,  net               |       | $                                   |  32,284 |                         | $          |  39,194                  |       | $ |  37,433 |   |

 

**EARNINGSPER SHARE**

 

Basic earnings per shareis computed as net earnings divided by the weighted average number of commonshares outstanding for the period. Diluted earnings per share reflects thepotential dilution that could occur from common shares issuable through theexercise of dilutive stock options.

 

The following is areconciliation of the number of shares used in the basic and diluted earningsper share computations:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **April 3,********2010**    | ** ** | **April 4,********2009**   | ** ** | **April 3,********2010** | ** ** | **April 4,********2009** | ** ** |
| ** **                                                     | ** ** | **(In thousands)**          | ** ** | **(In thousands)**         | ** ** |
|                                                           |       |                             |       |                            |       |   |   |   |   |
| Basic  weighted average number of shares outstanding           |       | 86,104                           |       | 87,387                          |       | 86,511 |   | 88,366 |   |
| Incremental  shares from the assumed issuance of stock options |       | —                           |       | —                          |       | — |   | 195 |   |
|                                                           |       |                             |       |                            |       |   |   |   |   |
| Diluted  weighted average number of shares outstanding         |       | 86,104                           |       | 87,387                          |       | 86,511 |   | 88,561 |   |

 

The number of incrementalshares from the assumed issuance of stock options is calculated by applying thetreasury stock method.

 

Excluded from thecomputation of the number of diluted weighted average shares outstanding wereoptions to purchase 3,872,000 and 7,018,000 shares of common stock for thethree months ended April 3, 2010 and April 4, 2009, respectively, and4,723,000 and 6,731,000 shares of common stock for the nine months ended April 3,2010 and April 4, 2009, respectively, which would have been anti-dilutive.

 

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**COMMONSTOCK PURCHASES**

 

Share repurchases were asfollows:

 
| ** **                                    | ** ** | **Three Months Ended**                                   | ** ** | **Nine Months Ended**                                    | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **April 3,********2010**                                      | ** ** | **April 4,********2009**                                      | ** ** | **April 3,********2010** | ** ** | **April 4,********2009** | ** ** |
| ** **                                    | ** ** | **(In thousands, except per share data)** | ** ** | **(In thousands, except per share data)** | ** ** |
| Number  of shares repurchased                 |       | 85                                                                 |       | 1,851                                                              |       | 729 |   | 2,389 |   |
| Total  cost                                   |       | $                                                                  | 510        |                                                               | $          | 10,127 |   | $ | 4,227 |   | $ | 13,328 |   |
| Average  per share cost including commissions |       | $                                                                  | 6.00       |                                                               | $          | 5.47 |   | $ | 5.80 |   | $ | 5.58 |   |

 

In October 2008, theboard of directors authorized a program to repurchase up to $30 million of theCompany’s common stock.  The Company intends, from time to time, asbusiness conditions warrant, to purchase stock in the open market or throughprivate transactions.  Purchases may be increased, decreased ordiscontinued at any time without prior notice.  The plan does not obligatethe Company to repurchase any specific number of shares and may be suspended atany time at management’s discretion.  As of April 3, 2010, therewas approximately $12.5 million available for repurchase under the program.

 

**COMPREHENSIVELOSS**

 

Comprehensive incomeconsists of net income (loss) 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 incomeconsists of net income (loss), gain (loss) on available for sale securities andforeign currency translation adjustments for all periods presented.

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **April 3,********2010**    | ** ** | **April 4,********2009**   | ** ** | **April 3,********2010** | ** ** | **April 4,********2009** | ** ** |
| ** **                                    | ** ** | **(In thousands)**          | ** ** |
| Net  income (loss)                            |       | $                                | (5,471     | )                               | $          | (5,045 | ) | $ | (7,213 | ) | $ | 12,957 |   |
| Gain  (loss) on available for sale securities |       | (174                             | )          | (2,317                          | )          | 2,216 |   | (7,197 | ) |
| Accumulated  translation adjustments          |       | 1,307                            |       | (472                            | )          | 4,656 |   | (5,920 | ) |
|                                          |       |                             |       |                            |       |   |   |   |   |
| Total  comprehensive loss                     |       | $                                | (4,338     | )                               | $          | (7,834 | ) | $ | (341 | ) | $ | (160 | ) |

 

**INVESTMENTS**

 

The Company’s investmentportfolio consists of treasury bills, certificates of deposit and auction ratesecurities. The Company holds a variety of interest bearing auction ratesecurities (“ARS”) consisting of federally insured student loan backedsecurities and insured municipal authority bonds. As of April 3, 2010, theCompany’s ARS portfolio totaled approximately $170.7 million,$58.3 million classified as trading securities (net of impairment chargesof $9.3 million, of which a $3.4 million gain has been recognized in thecurrent year) and $112.4 million (net of a temporary impairment charge of $14.6million, of which a $2.2 million unrealized gain has been recorded in thecurrent year) classified as available for sale securities. The Company’s ARSportfolio includes approximately 98% federally insured student loan backedsecurities and 2% municipal authority bonds. The Company’s ARS portfolioconsists of approximately 42% AAA rated investments, 3% AA rated investments,35% A rated investments, 14% BBB rated investments and 6% CCC ratedinvestments. This is a change from the portfolio as of July 4, 2009, whichconsisted of 46% AAA rated investments, 14% AA rated investments, 30% A ratedinvestments and 10% BBB rated investments. These ARS investments are intendedto provide liquidity via an auction process that resets the applicable interestrate at predetermined calendar intervals, allowing investors to either rollover their holdings or gain immediate liquidity by selling such investments atpar. The uncertainties in the credit markets that began in February 2008have affected the Company’s holdings in ARS investments and auctions for theCompany’s investments in these securities have failed to settle on theirrespective settlement dates. Historically the fair value of ARS investments hadapproximated par value due to the frequent resets through the auction process.While the Company continues to earn interest on its ARS investments at themaximum contractual rate, these investments are not currently trading andtherefore do not currently have a readily determinable market value.Accordingly, the estimated fair value of ARS no longer approximates par value.Consequently, the investments are not currently liquid, and the Company willnot be able to access these funds until a future auction of these investmentsis successful, the issuer redeems the securities, or at maturity. Maturitydates for these ARS investments range from 2010 to 2044 with principaldistributions occurring on certain securities prior to maturity.

 

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In November 2008,the Company entered into a settlement agreement related to its ARS held withUBS Financial Services, Inc. (“UBS”) that grants the Company certainrights related to these ARS (the “Right”). Beginning June 30, 2010, at theCompany’s request, UBS has agreed to purchase all of the Company’s ARScurrently held with them at par value. Conversely, UBS has the right, in itsdiscretion, to purchase or sell the Company’s ARS at any time until July 2,2012, so long as the Company receives payment at par value upon any sale ordisposition. The enforceability of the Right results in a put option whichshould be recognized as a free standing asset separate from the ARS. Uponacceptance of the offer from UBS in November 2008, the Company recordedthe put option at fair value of $11.6 million, with a corresponding creditto interest and other income, net. Although it is a financial instrument, theput option does not meet the FASB’s definition of a derivative instrument;therefore the Company has elected to measure the put option at fair value. As aresult, unrealized gains and losses are included in earnings.  At April 3,2010, the fair value of the put option is $8.8 million, net of a reserve of$0.5 million, of which a gain of $0.1 million has been recognized in thecurrent year.

 

Prior to accepting theUBS offer, the Company recorded its ARS held with UBS as investments availablefor sale, with an associated unrealized loss included in other comprehensiveincome. In connection with our acceptance of the UBS offer in November 2008,the Company transferred approximately $84.4 million in ARS subject to theUBS settlement from investments available for sale to trading securities andrecorded a loss on investments of approximately $12.1 million. As aresult, subsequent changes in fair value of the ARS have been recorded as acomponent of net income. The Company intends to exercise the Right when itbecomes available, and as such the associated investments of $58.8 million, netof impairment charges of $9.3 million, at April 3, 2010, have been classifiedas short term on the balance sheet.

 

The remainder of theCompany’s ARS investment portfolio of $112.4 million, net of a temporaryimpairment charge of $14.6 million, remains available for sale on the Company’sbalance sheet. The related temporary impairment charge remains as a loss inaccumulated other comprehensive income.

 

The Company also holdsshort term available for sale securities totaling $59.0 million as of April 3,2010, that consist of $40.0 million in treasury bills and $19.0 million incertificates of deposit which are classified as available for sale securitieson the Company’s balance sheet at cost which approximates fair value.

 

The Company reviews itsimpairments in accordance with guidance issued by the FASB and SEC in order todetermine the classification of the impairment as “temporary” or “other-than-temporary”.A temporary impairment charge results in an unrealized loss being recorded inthe accumulated other comprehensive income component of shareholders’ equity.Such an unrealized loss does not affect net income for the applicableaccounting period. An other-than-temporary impairment charge is recorded as aloss in the condensed consolidated statements of operations for the applicableaccounting period. When evaluating the investments for other-than-temporaryimpairment, the Company estimates the expected cash flows of the underlyingcollateral by reviewing factors such as the length of time and extent to whichfair value has been below cost basis, the financial condition of the issuer andany changes thereto, and the Company’s intent to sell, or whether it is morelikely than not it will be required to sell, the investment before recovery ofthe investment’s amortized cost basis. The Company has not recorded anyimpairment loss from its available for sale investments as other-than-temporarybased on such analysis.

 

The valuation of theCompany’s investment portfolio is subject to uncertainties that are difficultto predict. Factors that may impact its valuation include changes to creditratings of the securities as well as to the underlying assets supporting thosesecurities, rates of default of the underlying assets, underlying collateralvalue, discount rates and ongoing strength and quality of market credit andliquidity.

 

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The following is a summaryof the Company’s available for sale securities:

 
| ** **                          | ** ** | **As  of April 3, 2010** | ** ** |
|-------------------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **Cost**                      | ** ** | **Unrealized********Losses********Less Than********12 Months** | ** ** | **Unrealized  Losses  12 Months  or Greater** | ** ** | **Estimated  Fair Value** | ** ** |
| ** **                          | ** ** | **(In  thousands)**           | ** ** |
| Short  term treasury bills          |       | $                             | 40,000     |   | $ | — |   | $ | — |   | $ | 40,000 |   |
| Short  term certificates of deposit |       | 18,990                        |       | — |   | — |   | 18,990 |   |
| Long  term auction rate securities  |       | 126,975                       |       | — |   | (14,621 | ) | 112,354 |   |
| Total                               |       | $                             | 185,965    |   | $ | — |   | $ | (14,621 | ) | $ | 171,344 |   |

 
| ** **                         | ** ** | **As  of April 4, 2009** | ** ** |
|------------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **Cost**                      | ** ** | **Unrealized********Losses********Less Than********12 Months** | ** ** | **Unrealized********Losses********12 Months********or Greater** | ** ** | **Estimated********Fair Value** | ** ** |
| ** **                         | ** ** | **(In  thousands)**           | ** ** |
| Long  term auction rate securities |       | $                             | 137,925    |   | $ | (14,997 | ) | $ | — |   | $ | 122,928 |   |
|                                    |            |                               |            |  |  |  |  |  |  |  |  |  |  |

 

**CREDITFACILITIES**

 

The Company has anunsecured commercial line of credit agreement which provides for borrowings andissuance of letters of credit of up to a combined total of $25.0 millionand expires on March 31, 2012. The outstanding balance bears interest ateither the bank’s reference rate (which was 3.25% as of April 3, 2010) orthe LIBOR rate (which was 0.25% as of April 3, 2010) plus 1.75 percentagepoints. As of April 3, 2010, there were no outstanding cash borrowings andthere was $1.8 million of letters of credit outstanding.

 

This credit facilityrequires the Company to maintain a $2.5 million compensating balance and tocomply with certain financial covenants, including amounts for minimum tangiblenet worth, unencumbered liquid assets and profitability, and certainrestrictions on making loans and investments. As of April 3, 2010, the Companywas in compliance with all financial covenants.

 

**UNREDEEMEDGIFT CARDS**

 

The Company sells giftcards with no expiration dates to customers in its retail store locations,through its online stores, and through third parties.  Income fromgift cards is recognized when they are redeemed by the customer.  Inaddition, the Company recognizes income on unredeemed gift cards when it candetermine that the likelihood of the gift card being redeemed is remote andthere is no legal obligation to remit the unredeemed gift cards to relevantjurisdictions (gift card breakage).  The Company determines the gift cardbreakage income based on historical redemption patterns.  The Companyaccumulated sufficient historical data to determine elapsed time for recordingbreakage income during the second quarter of fiscal 2010, which the Companyestimates is five years.  Gift card breakage is included as other incomewithin selling, general and administrative expenses.  The Companyrecognized $1.1 million in pre-tax income related to the initial recognition ofgift card breakage.

 

**STOCKBASED COMPENSATION**

 

The following tablesummarizes the stock based compensation expense recognized under the Company’sstock plan during the three months and the nine months ended April 3, 2010and April 4, 2009:

 
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **April 3,  2010**          | ** ** | **April 4,********2009**   | ** ** | **April 3,********2010** | ** ** | **April 4,********2009** | ** ** |
| ** **                              | ** ** | **(In thousands)**          | ** ** |
| Stock  options                          |       | $                                | 2,574      |                            | $          | 982 |   | $ | 4,748 |   | $ | 3,961 |   |
| Unvested  stock awards/units            |       | 161                              |       | 79                              |       | 210 |   | 339 |   |
| Total  stock based compensation expense |       | $                                | 2,735      |                            | $          | 1,061 |   | $ | 4,958 |   | $ | 4,300 |   |

 

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Unrecognized compensationcost related to nonvested stock options and unvested stock awards/units totaledapproximately $4.5 million and $0.1 million, respectively, as of April 3,2010.  This cost is expected to be recognized over a weighted averageperiod of 2.8 years.  The weighted average fair value of stock options attheir grant date during the three months ended April 3, 2010 and April 4,2009 was $3.41 and $2.43, respectively.  For the nine month periods ended April 3,2010 and April 4, 2009, the weighted average fair values of stock optionsat their grant date were $2.90 and $3.26, respectively.

 

*Adjustments During the Three and Nine Months EndedApril 3, 2010:*

 

Since fiscal 2006, theCompany has licensed software from a third party provider to automate theadministration of its employee equity programs and calculate its stock-basedcompensation expense (the “Software”).  Subsequent to the issuance of theCompany’s June 2009 annual financial statements the Company was notifiedof errors in the calculation of stock based compensation expense for fiscalyears 2009, 2008, 2007 and 2006 and for the three months ended October 3,2009 and the three and six months ended January 2, 2010. The errors wereidentified after the Company’s third-party software provider notified itsclients that it made a change to how its software program calculates stockbased compensation expense. Specifically, the prior version of this softwarecalculated stock based compensation expense by incorrectly applying a weightedaverage forfeiture rate to the vested portion of stock option awards until thegrant’s final vest date, rather than calculating stock based compensationexpense based upon the actual vested portion of the grant date fair value,resulting in an understatement of stock based compensation expense in certainperiods prior to the grant’s final vest date. Thus, this error affected thetiming of stock-based compensation expense recognition.

 

The Company determinedthat the cumulative error from the understatement of stock based compensationexpense related to the periods discussed above totaled $2.5 million, net of taxeffects through April 3, 2010. The impact of the errors on fiscal years2009, 2008, 2007 and 2006, is to increase (decrease) net income by $0.1million, $0.7 million, ($0.8) million and ($2.3) million, respectively and forthree months ended October 3, 2009 and three months ended January 2,2010 to increase (decrease) net loss by $0.3 million and ($0.1) million,respectively.

 

The Company hasdetermined that the impact of this error is not material to the previouslyissued annual and interim unaudited consolidated financial statements using theguidance of SEC Staff Accounting Bulletin No. 99 (“SAB 99”) and SAB 108.Accordingly, the interim unaudited consolidated financial statements for thethree and nine months ended April 3, 2010 include the cumulativeadjustment to increase stock-based compensation expense by $1.8 million net oftax effect, (or $0.02 per share) and $2.5 million net of tax effect, (or $0.03per share), respectively to correct these errors. The Company does not believethe correction of these errors is material to the consolidated financialstatements for the three and nine months ended April 3, 2010 and does notbelieve that it will be material to the 2010 annual consolidated financial statements.

 

*Offer to Exchange Certain Outstanding Options:*

 

During the first quarterof 2010, the Company filed a Tender Offer Statement on Schedule TO with the SECpursuant to which the Company extended an offer to employees and non-employeedirectors to exchange up to an aggregate of 2,058,475 options to purchaseshares of our common stock, whether vested or unvested. Options with anexercise price greater than $10.74 per share and an expiration date after September 29,2009 were eligible to be tendered pursuant to the offer. The closing marketprice on September 29, 2009 was $7.64. In accordance with the Tender Offer(the “TO”), the number of new options issued was based on exchange ratios asset forth in the table below:

 
| **Exercise  Price Range** | ** ** | **Shares  Subject to Option********Surrendered** | ** ** | **Shares  Subject to********Replacement Option To********Be Granted** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| $ 10.75-$14.99       |       | 1.14                                             |       | 1                                                                     |       |
| $ 15.00-$19.99       |       | 1.84                                             |       | 1                                                                     |       |
| $ 20.00 and above    |       | 2.06                                             |       | 1                                                                     |       |

 

A total of 1,710,735options were tendered and cancelled, and a total of 1,126,267 replacementoptions were granted on September 29, 2009 with an exercise price of $7.64per share.  Replacement options granted in exchange for fully or partiallyunvested surrendered options at the time they were surrendered for cancellationwill vest as follows: (A) vested shares subject to eligible options andunvested shares subject to eligible options scheduled to vest prior to theone-year anniversary of the replacement grant date shall vest on the one-yearanniversary of the replacement grant date and (B) unvested shares subjectto eligible options scheduled to vest after the one-year anniversary of thereplacement grant date shall vest according to the original vest dates of theeligible option. The TO was subject to modification accounting pursuantto FASB ASC 718-20-35-3 whereby the total compensation cost measured atthe date of modification was the incremental cost resulting from themodification. The incremental cost resulting from the modification ismeasured as the excess of the fair value of the modified award over the fairvalue of the original award immediately before its terms are modified. Theincremental fair value of $0.3 million for the new awards was computed using anexpected life of 4.07 years, a risk-free interest rate of 1.94% and a volatilityof 54%. The incremental fair value of the unvested awards is beingamortized over the remaining service period.

 

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**FAIRVALUE MEASUREMENTS**

 

The FASB has establisheda three-tier fair value hierarchy, which prioritizes the inputs used inmeasuring fair value. These tiers include: Level 1, defined as observableinputs such as quoted prices in active markets; Level 2, defined as inputsother than quoted prices in active markets that are either directly orindirectly observable; and Level 3, defined as unobservable inputs inwhich little or no market data exists, therefore requiring an entity to developits own assumptions.

 

*Assetsand Liabilities Measured at Fair Value on a Recurring Basis:*

 

As of April 3, 2010,the Company held financial instruments that are measured at fair value on arecurring basis. These included cash equivalents, trading securities, a writtenput option related to a UBS settlement and available for sale securities. Cashequivalents consist of money market funds. Short term available for salesecurities consist of government treasury bills and certificates of deposit.Trading securities consist of auction rate securities (“ARS”) held with UBS.Long term available for sale securities consist of ARS held with another brokerand a certificate of deposit. The ARS securities consist of federally insuredstudent loan backed securities and insured municipal authority bonds.

 

The Company determinedthe estimated fair value of its investment in ARS as of April 3, 2010using a discounted cash flow model. The assumptions used in preparing thediscounted cash flow model include estimates for interest rates, timing, creditratings, credit wrap and amount of cash flows and expected holding periods ofthe ARS. The ARS written put right is a free-standing asset separate from the ARSand represents the Company’s contractual right to require UBS to purchase itsARS at par value during the two-year period beginning June 30, 2010. Inorder to value the ARS written put right, the Company considered intrinsicvalue, time value of money and its assessment of the credit worthiness of UBS.

 

The following items aremeasured at fair value on a recurring basis as of April 3, 2010:

 
| ** **                                 | ** ** | ** **                                                             | ** ** | **Using Quoted Prices********in Active Markets for********Identical Assets** | ** ** | **Significant********Other********Observable********Inputs** | ** ** | **Significant********Unobservable Inputs** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | **April 3,  2010**                                                | ** ** | **(Level 1)**                                                                                         | ** ** | **(Level 2)**                                           | ** ** | **(Level 3)**                              | ** ** |
| **Description**                            | ** ** | **Fair value measurements at reporting date** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                                                | ** ** |
| Cash  equivalents                          |       | $                                                                      | 49,007     |                                                                                                       | $          | 49,007                                                       |       | $                                               | —     |   | $ | — |   |
| Current  available for sale securities     |       | 58,990                                                                 |       | 58,990                                                                                                     |       | —                                                       |       | —                                          |       |
| Trading  securities                        |       | 58,315                                                                 |       | —                                                                                                     |       | —                                                       |       | 58,315                                          |       |
| ARS  written put option                    |       | 8,822                                                                  |       | —                                                                                                     |       | —                                                       |       | 8,822                                           |       |
|                                       |       |                                                                   |       |                                                                                                       |       |                                                         |       |                                            |       |
| Non-current  available for sale securities |       | 112,354                                                                |       | —                                                                                                     |       | —                                                       |       | 112,354                                         |       |
| Total                                      |       | $                                                                      | 287,488    |                                                                                                       | $          | 107,997                                                      |       | $                                               | —     |   | $ | 179,491 |   |

 

During the nine monthsended April 3, 2010 there were no transfers of assets and liabilitiesbetween Level 1 (quoted prices in active markets for identical assets) andLevel 2 (significant other observable inputs) of the fair value measurementhierarchy.  The following table presentsthe Company’s activity for assets measured at fair value on a recurring basisusing significant unobservable inputs (Level 3) for the nine months ended April 3,2010:

 
| **Description**                                   | ** ** | **Investments  in Level 3  Securities** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                        | ** ** | **(In thousands)**                 | ** ** |
| Balance  as of July 4, 2009                  |       | $                                       | 200,431    |   |
| Total  gains (realized or unrealized)             |       |                                    |       |
| Included  in net loss                             |       | 119                                     |       |
| Included  in accumulated other comprehensive loss |       | 2,216                                   |       |
|                                              |       |                                    |       |
| Settlements                                       |       | (23,275                                 | )          |
| Balance  as of April 3, 2010                 |       | $                                       | 179,491    |   |

 

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*Assetsand Liabilities Measured at Fair Value on a Non-Recurring Basis*:

 

The Company measurescertain non-financial assets and liabilities, including long-lived assets, atfair value on a non-recurring basis.  During the three and nine monthsended April 3, 2010, the Company recorded a charge of approximately $0.5million and $4.7 million, respectively, related to the impairment of assetsrelated to under-performing stores.  The fair market value of these assetswas determined using the income approach and Level 3 inputs, which requiredmanagement to make significant estimates about future cash flows. Management estimates the amount and timing of future cash flows based on itsexperience and knowledge of the retail market in which each storeoperates.  This impairment charge is included in selling, general andadministrative expenses (“SG&A”) in the accompanying condensed consolidatedstatements of operations.  The Company was not required to measure anyother significant non-financial assets and liabilities at fair value.

 

**LEGALMATTERS**

 

As of the date of thisfiling, the Company was involved in ongoing legal proceedings as describedbelow.

 

A former employee suedthe Company in a complaint filed July 27, 2006 in the Superior Court ofCalifornia, San Mateo County (Case No. CIV 456550) alleging a failure topay all wages, failure to pay overtime wages, failure to pay minimum wages,failure to provide meal periods, violation of Labor Code §450, violation ofLabor Code §2802 and California Code of Regulations §11040(9)(A), statutorywage violations (late payment of wages), unlawful business practices underBusiness and Professions Code §16720 and §17200, conversion of wages andviolation of Civil Code §52.1. The plaintiff purported to bring the action alsoon behalf of current and former California bebe employees who were similarlysituated. The lawsuit seeks compensatory, statutory, punitive, restitution andinjunctive relief.  The court formally denied class certificationregarding certain claims Plaintiff purportedly brought on behalf ofnon-managers.  The Court allowed thenamed plaintiff to be replaced by two managers who will now try to certify amanager based class on the original claims brought in the complaint.  Discovery is ongoing and the court has notset a date for hearing on class certification.

 

A former employee suedthe Company in a complaint filed in the Superior Court of California, LosAngeles County (BC 429230) and served on us February 4, 2010, alleging afailure to pay all wages, failure to provide meal periods and rest breaks,violation of Labor Code §450, §2802 and California Code of Regulations§11070(9)(A), statutory wage violations (late payment of wages), unlawfulbusiness practices under Business and Professions Code §16720 and §17200, andother associated claims.  The plaintiff purported to bring the action alsoon behalf of current and former California bebe employees who are similarly situated. The plaintiff has since dismissed the matter with prejudice.

 

The Company suedSkechers, U.S.A., Inc. in a complaint filed October 8, 2009 in theSuperior Court for the State of California, County of San Mateo (Case No. CIV488671), alleging breach of contract, among other claims.  The case hasbeen moved to the County of San Francisco. The defendant has yet to file an answer.

 

A customer sued theCompany in a complaint filed October 14, 2009 in the Superior Court forthe State of California, County of Los Angeles (BC 423835) alleging the Companyviolated the Song-Beverly Credit Card Act, Civil Code §1747.08.  Theplaintiff purported to bring the action also on behalf of other California bebecustomers who are similarly situated.  The parties have since resolved thecase with no liability to the Company.

 

Four former employeessued the Company in a complaint filed December 14, 2009 in the UnitedStates District Court, Southern District of Texas (C.A. NO. 4:09-CV-039777)alleging discrimination and retaliation under Title VII of the Civil Rights Actof 1964 and 42 U.S.C. §1981, defamation, negligent hiring, supervision,retention and training, among other claims. The Company has answered thecomplaint and discovery is underway.

 

The Company is also involvedin various other legal proceedings arising in the normal course ofbusiness.  None of these matters, nor the matters listed above areexpected, individually or in the aggregate, to have a material adverse effecton the Company’s business, financial condition or results of operations.

 

The Company will defenditself vigorously against each of these claims. However, the results of anylitigation are inherently uncertain, and thus the Company cannot assure youthat it will be able to successfully defend in these lawsuits. Where required,and/or otherwise appropriate, the Company has recorded an estimate of potentialliabilities that the Company believes is reasonable. Any estimates are revisedas further information becomes available.

 

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

 

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward-looking statements, which involve risks and uncertainties. Ouractual results may differ materially from those anticipated in theseforward-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-looking statements include statementsabout our expected results of operations, capital expenditures and storeopenings.  Although we believe that these statements are based uponreasonable assumptions, we cannot assure you that our goals will be achieved.These forward-looking statements are made as of the date of this quarterlyreport, and we assume no obligation to update or revise them or provide reasonswhy actual results may differ. Factors that might cause such a differenceinclude, but are not limited to, our ability to respond to changing fashiontrends, obtain raw materials and find manufacturing facilities, attract andretain key management personnel, develop new concepts, successfully open futurestores, successfully manage our online business, maintain and protectinformation technology, respond effectively to competitive pressures in theapparel industry and adverse economic conditions and protect our intellectualproperty as well as declines in comparable store sales performance, changes inthe level of consumer spending or preferences in apparel and/or other factorsdiscussed in “Risk Factors” and elsewhere in this quarterly report.

 

**OVERVIEW**

 

We design, develop andproduce a distinctive line of contemporary women’s apparel and accessories.While we attract a broad audience, our target customer is a 18 to 34-year-oldwoman who seeks current fashion trends to suit her lifestyle. The “bebe look”appeals to a hip, sexy, sophisticated, body-conscious woman who takes pride inher appearance. The bebe customer expects value in the form of current fashionand high quality at a competitive price.

 

Our distinctive productoffering includes a full range of separates, tops, sweaters, dresses, activewear and accessories in the following lifestyle categories:  career,evening, casual and active. We design and develop the majority of ourmerchandise in-house, which is manufactured to our specifications. Theremainder of our merchandise is sourced directly from third-partymanufacturers.

 

We market our productsunder the bebe, BEBE SPORT, bbsp, 2b bebe and PH8 brand names through our 300retail stores, of which 214 are bebe stores, 52 are PH8 stores, 33 are 2b bebestores and 1 is a bebe accessories store as of April 3, 2010. These storesare located in 36 states, the District of Columbia, Puerto Rico, the U.S.Virgin Islands and Canada. In addition, we have an on-line store atwww.bebe.com, and our licensees operate 45 international stores as of April 3,2010. During the nine months ended April 3, 2010, we opened 4 bebe storesand a PH8 store and closed a bebe store, 11 PH8 stores and a 2b bebestore.  We expect to open a total of approximately 5 bebe stores, a PH8store as a pop-up location and 2 2b bebe stores during fiscal 2010. We alsoplan to expand an existing bebe store.  The number of anticipatedstore closures includes 3 bebe stores, 1 2b bebe store and up to 16 PH8 stores,including the pop-up location opened last fall.

 

*bebestores.*  Wewere founded by Manny Mashouf, our Chief Executive Officer and Chairman of theBoard. We opened our first store in San Francisco, California in 1976, whichwas also the year we incorporated. We also operate one bebe accessory storethat features a limited assortment of bebe merchandise, including outerwear,shoes and accessories. bebe stores offer a limited selection of BEBE SPORT andPH8 merchandise.

 

*PH8.* We launched BEBE SPORT during fiscal2003 to address the performance and active lifestyle needs of the bebecustomer.  In November 2009, we converted all of our BEBE SPORTstorefronts to PH8 and began to offer BEBE SPORT product in bebe and 2b bebestores in the 2009 holiday season.  In addition, we changed our productoffering to offer a selection of casual weekend apparel, work-out attire andaccessories such as bags, shoes and various seasonal items under the new PH8label.  Due to the change in store fronts and product offering, we haveexcluded the new PH8 stores from comparable store sales as of November 2009. During fiscal 2010, we recorded asset impairment charges of $4.1 million towrite-off underperforming PH8 stores.  Management will continue to assessthe performance of the PH8 concept, which may result in an evaluation ofstrategic alternatives for our PH8 stores.

 

*2b bebestores*.  Wecurrently operate 15 2b bebe stores and 18 stores operating in the outlet storedesign under the 2b bebe name.  The stores operating in the 2b bebe designsell bebe logo, 2b bebe merchandise and a small percentage of bebe retailmarkdowns.  The stores operating in the outlet design sell bebe logo, 2bbebe merchandise and a large percentage of bebe retail markdowns, includingPH8.

 

*On-line.* bebe.com is an extension of the bebestore experience and provides a complete assortment of bebe merchandise and alimited selection of BEBE SPORT and 2b bebe merchandise. It is also used as avehicle to communicate with our customers.

 

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**CRITICALACCOUNTING POLICIES**

 

Management’s Discussionand Analysis of Financial Condition and Results of Operations are based uponour consolidated financial statements, which have been prepared in conformitywith accounting principles generally accepted in the United States of America.

 

The preparation of thesefinancial statements requires the appropriate application of certain accountingpolicies, many of which require us to make estimates and assumptions aboutfuture events and their impact on amounts reported in our financial statementsand related notes. Since future events and their impact cannot be determinedwith certainty, the actual results will inevitably differ from our estimates.Such differences could be material to our financial statements. We believe ourapplication of accounting policies, and the estimates inherently requiredtherein, are reasonable. Our most critical accounting policies are thoserelated to revenue recognition, stock based compensation, inventories,investments, impairment of long lived assets, uncertain tax positions andliabilities for self-insurance. We continually evaluate these accountingpolicies and estimates, and we make adjustments when facts and circumstancesdictate a change. Our accounting policies are described in Note 1 to theconsolidated financial statements in our annual report on Form 10-K forthe fiscal year ended July 4, 2009. This discussion and analysis should beread in conjunction with such discussion and with our condensed consolidatedfinancials statements and related notes included in Part 1, Item 1 ofthis quarterly report.

 

**RESULTSOF OPERATIONS**

 

Our fiscal year is a 52or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2010 and 2009 each include 52 weeks.  The three months ended April 3,2010 and April 4, 2009 each include 13 weeks.  The nine months ended April 3,2010 and April 4, 2009 each include 39 weeks.

 

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

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **April 3,**                | ** ** | **April 4,**               | ** ** | **April 3,** | ** ** | **April 4,** | ** ** |
| ** **                                             | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Net  sales                                             |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost  of sales, including production and occupancy (1) |       | 61.2                             |       | 62.2                            |       | 61.8 |   | 59.4 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Gross  margin                                          |       | 38.8                             |       | 37.8                            |       | 38.2 |   | 40.6 |   |
| Selling,  general and administrative expenses (2)      |       | 45.6                             |       | 44.5                            |       | 41.0 |   | 37.6 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Operating  income (loss)                               |       | (6.8                             | )          | (6.7                            | )          | (2.8 | ) | 3.0 |   |
| Interest  and other income, net                        |       | 0.3                              |       | 0.5                             |       | 0.6 |   | 1.2 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Income  (loss) before income taxes                     |       | (6.5                             | )          | (6.2                            | )          | (2.2 | ) | 4.2 |   |
| Provision  (benefit) for income taxes                  |       | (1.7                             | )          | (2.2                            | )          | (0.3 | ) | 1.5 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Net  income (loss)                                     |       | (4.8                             | )%         | (4.0                            | )%         | (1.9 | )% | 2.7 | % |

 

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(1)           Cost of sales includes the cost ofmerchandise, occupancy costs, distribution center costs and production costs.

 

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

 

*NetSales.* Net salesdecreased to $114.4 million during the three months ended April 3, 2010from $127.7 million for the comparable period of the prior year, a decrease of$13.3 million, or 10.4%. The decrease in net sales was primarily due to an11.2% decrease in comparable store sales resulting primarily from lower trafficin stores, a reduced customer acceptance of the merchandise offering and a 7.0%decrease in our on-line sales.  These decreases were partially offset byhigher conversion in stores, an increase in wholesale sales to internationallicensees and an increase in royalty revenue.

 

For the nine months endedApril 3, 2010, net sales decreased to $381.6 million from $472.8 millionfor the comparable period of the prior year, a decrease of $91.2 million, or19.3%.  The decrease in net sales was primarily due to a 20.8% decrease incomparable store sales resulting primarily from lower traffic in stores, areduced customer acceptance of the merchandise offering and a 12.1% decrease inour on-line sales.  These decreases were partially offset by higherconversion in stores, stores not included in the comparable store sales, anincrease in wholesale sales to international licensees and an increase inroyalty revenue.

 

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| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **April 3,**                | ** ** | **April 4,**               | ** ** | **April 3,** | ** ** | **April 4,** | ** ** |
| ** **                                      | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Net  sales (In thousands)                       |       | $                                | 114,398    |                            | $          | 127,657 |   | $ | 381,551 |   | $ | 472,819 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Total  net sales decrease percentage            |       | (10.4                            | )%         | (15.8                           | )%         | (19.3 | )% | (8.4 | )% |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Comparable  store decrease percentage (1)       |       | (11.2                            | )%         | (23.5                           | )%         | (20.8 | )% | (18.2 | )% |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Net  sales per average square foot (2)          |       | $                                | 100        |                            | $          | 106 |   | $ | 331 |   | $ | 396 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Square  footage at end of period (In thousands) |       | 1,135                            |       | 1,157                           |       | 1,135 |   | 1,157 |   |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Number  of store locations:                     |       |                             |       |                            |       |   |   |   |   |
| Beginning  of period                            |       | 309                              |       | 312                             |       | 308 |   | 303 |   |
| New  store locations                            |       | 1                                |       | 1                               |       | 5 |   | 12 |   |
| Closed  store locations                         |       | 10                               |       | 5                               |       | 13 |   | 7 |   |
| Number  of stores open at end of period         |       | 300                              |       | 308                             |       | 300 |   | 308 |   |

 

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(1)                                                           Beginning in November 2009,comparable store sales excludes PH8 stores.

(2)                                                           We calculate net sales per average squarefoot using net store sales and monthly average store square footage.

 

*GrossMargin.* Grossmargin decreased to $44.3 million during the three months ended April 3,2010 from $48.3 million for the comparable period of the prior year, a decreaseof $4.0 million, or 8.3%. As a percentage of net sales, gross margin increasedto 38.8% for the three months ended April 3, 2010 from 37.8% in thecomparable period of the prior year.  The increase in gross margin as apercentage of net sales was primarily due to lower markdowns and lower othercosts including inventory shrink and damages as well as $1.2 million of incomerelated to the expiration of loyalty points partially offset by lower initialmarkup, unfavorable occupancy leverage and expense related to our change inreturn policy from 14 days to 21 days.

 

For the nine months endedApril 3, 2010, gross margin decreased to $145.9 million from $191.7million for the comparable period of the prior year, a decrease of $45.8million, or 23.9%.  As a percentage of net sales, gross margin decreasedto 38.2% for the nine months ended April 3, 2010 from 40.6% in thecomparable period of the prior year.  The decrease in gross margin as apercentage of net sales was primarily due to lower initial markup, expenserelated to our change in return policy from 14 days to 21 days and deleveragingof occupancy costs partially offset by lower other costs including inventoryshrink and damages as well as $1.2 million of income related to expiration ofloyalty points.

 

*Selling,General and Administrative Expenses.* Selling, general and administrative expenses, whichprimarily consist of non-occupancy store costs, corporate overhead andadvertising costs, decreased to $52.1 million during the three months ended April 3,2010 from $56.8 million for the comparable period of the prior year, a decreaseof $4.7 million, or 8.3 %. As a percentage of net sales, selling, general andadministrative expenses increased to 45.6% during the three months ended April 3,2010 from 44.5% in the comparable period of the prior year as a result of lowersales.  The decrease in dollars over the prior year was primarily due tolower compensation, advertising, depreciation and a reduction in impairmentcharges in the quarter for underperforming stores partially offset by a $2.1million non-cash stock based compensation adjustment primarily related to prioryears that was a result of errors caused by flaws in third party software. We determined that the impact of this error is not material to the previouslyissued annual and interim unaudited consolidated financial statements using theguidance of SEC Staff Accounting Bulletin No. 99 (“SAB 99”) and SAB108.  We do not believe that the correction of this error is material tothe consolidated financial statements for the three months ended April 3,2010 and do not believe that it will be material to the 2010 annual financialstatements.

 

For the nine months endedApril 3, 2010, selling, general and administrative expenses decreased to$156.4 million from $177.4 million for the comparable period of the prior year,a decrease of $21.0 million, or 11.8%.  As a percentage of net sales,selling, general and administrative expenses increased to 41.0% from 37.6% inthe comparable period of the prior year as a result of lower sales.  Thedecrease in dollars over the prior year was primarily due to lowercompensation, advertising and gift card breakage income recorded for the firsttime in the second quarter of fiscal 2010 offset by a $4.7 million impairmentcharge related to under-performing stores, of which $4.0 million related to PH8and BEBE SPORT stores and $0.7 million related to bebe stores versus $2.9million in the comparable period of fiscal 2009 and a $3.0 million non-cashstock based compensation adjustment primarily related to prior years that was aresult of errors caused by flaws in third party software.  We determinedthat the impact of this error is not material to the previously issued annualand interim unaudited consolidated financial statements using the guidance ofSEC Staff Accounting Bulletin No. 99 (“SAB 99”) and SAB 108.  We donot believe that the correction of this error is material to the consolidatedfinancial statements for the nine months ended April 3, 2010 and do not believethat it will be material to the 2010 annual financial statements.

 

*Interestand Other Income, Net.* We generated approximately $0.4 million of interest and other income,net of other expenses during the three months ended April 3, 2010 comparedto approximately $0.7 million in the comparable period of the prior year. Thedecrease in interest and other income resulted from an increase in investmentsin lower-yielding tax-exempt investments and money market funds.

 

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For the nine month periodended April 3, 2010, we recorded approximately $2.3 million of interestand other income (net of other expenses), compared to $5.6 million in thecomparable period of the prior year.  The decrease in interest and otherincome resulted from an increase in investments in lower-yielding tax-exemptinvestments and money market funds.

 

*Provisionfor Income Taxes.*Our effective tax rate decreased to 26.2% for the three months ended April 3,2010 from 35.3% for the comparable period in the prior year.  The lowereffective tax rate was primarily due to incentive stock option compensationexpense offset by higher tax exempt interest income as a percent of taxableincome.

 

For the nine months endedApril 3, 2010, our effective tax rate decreased to 12.9% from 34.9% for thecomparable period in the prior year primarily due to incentive stock optioncompensation expense offset by higher tax exempt interest income as a percentof taxable income.

 

**SEASONALITYOF BUSINESS AND QUARTERLY RESULTS**

 

Our business varies withgeneral seasonal trends that are characteristic of the retail and apparelindustries. As a result, our typical store generates a higher percentage of ourannual net sales and profitability in the second quarter of our fiscal year,which includes the holiday selling season, compared to the other quarters ofour fiscal year. If for any reason our sales were below seasonal norms duringthe second quarter of our fiscal year, our annual operating results would benegatively impacted. Because of the seasonality of our business, results forany quarter are not necessarily indicative of results that may be achieved fora full fiscal year.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our working capitalrequirements vary widely throughout the year and generally peak during thefirst and second fiscal quarters. As of April 3, 2010, we hadapproximately $330.4 million of cash and equivalents and investments on hand ofwhich approximately $40.0 million were invested in government treasury bills,approximately $19.0 million were invested in certificates of deposit, andapproximately $170.7 million, net of impairment charges of $23.9 million, wereinvested in auction rate securities (“ARS”). We do not anticipate the lack ofliquidity in the ARS to impact our ability to fund our operations in theforeseeable future and believe we have sufficient cash and equivalents to fundongoing operations. In addition, we have a revolving line of credit, underwhich we may borrow or issue letters of credit up to a combined total of $25million. As of April 3, 2010, there were no cash borrowings outstandingunder the line of credit, and letters of credit outstanding totaled $1.8million.  This credit facility requires us to maintain a $2.5 millioncompensating balance and to comply with certain financial covenants, includingamounts for minimum tangible net worth, unencumbered liquid assets andprofitability, and certain restrictions on making loans and investments. As of April 3, 2010, we were in compliance with all covenants under thecredit facility.

 

As of April 3, 2010,we had cash and equivalents of $100.7 million held in accounts managed by thirdparty financial institutions consisting of invested cash and cash in ouroperating accounts.  The invested cash is invested in interest bearingfunds managed by third party financial institutions.  These funds investin direct obligations of the government of the United States.  To date, wehave experienced no loss or lack of access to our invested cash or equivalents;however, we can provide no assurances that access to our invested cash andequivalents will not be impacted by adverse conditions in the financialmarkets.

 

At any point in time wealso have approximately $75 to $105 million of invested cash and cash inoperating accounts that are with third party financial institutions. These balances exceed the Federal Deposit Insurance Corporation insurancelimits.  While we monitor daily the cash balances in our operatingaccounts and adjust the cash balances as appropriate, these cash balances couldbe impacted if the underlying financial institutions fail or could be subjectto other adverse conditions in the financial markets.  To date, we haveexperienced no loss or lack of access to invested cash or cash in our operatingaccounts.

 

Net cash provided by operatingactivities for the nine months ended April 3, 2010 was $20.8 millionversus cash provided by operating activities of $27.8 million for the ninemonths ended April 4, 2009. The decrease of $7.0 million from thecomparable period was primarily due to a decrease in net earnings of $20.2million and lower accounts payable related to lower inventory balances offsetby other changes in working capital primarily related to lower prepaid taxes asa result of a federal tax refund received during the second quarter and lowerestimated tax payments made this year versus the prior due to an anticipateddecrease in projected income.

 

Net cash used byinvesting activities for the nine months ended April 3, 2010 was $4.6million versus $1.0 million used for the nine months ended April 4,2009.  The increase of $3.6 million versus the prior year comparableperiod was primarily due to lower net proceeds on investment securities offsetby lower capital expenditures.  We expect that total capital expenditureswill be below $17 million in fiscal 2010.

 

Net cash used byfinancing activities was $12.7 million for the nine months ended April 3,2010 versus $26.0 million for the nine months ended April 4, 2009. The decrease in cash used of $13.3 million from the prior year comparableperiod was primarily due to a reduction in purchases of our common stockthrough our stock buyback program and lower dividends paid related to a lowerrate declared for the first, second and third quarters of fiscal 2010 ($0.025per share versus $0.05 per share in the prior year).

 

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We hold a variety ofinterest bearing ARS consisting of federally insured student loan backedsecurities and insured municipal authority bonds. As of April 3, 2010, ourARS portfolio totaled approximately $170.7 million, $58.3 million (net of animpairment charge of $9.3 million) classified as trading securities and $112.4million (net of temporary impairment charge of $14.6 million) classified aslong term available for sale securities. Our ARS portfolio includesapproximately 98% federally insured student loan backed securities and 2%municipal authority bonds. Our ARS portfolio consists of approximately 42% AAArated investments, 3% AA rated investments, 35% A rated investments, 14% BBBrated investments and 6% CCC rated investments.  This is a change from ourfiscal 2009 portfolio, which consisted of 46% AAA rates investments, 14% AArated investments, 30% A rated investments and 10% BBB related investments. These ARS investments are intended to provide liquidity via an auction processthat resets the applicable interest rate at predetermined calendar intervals,allowing investors to either roll over their holdings or gain immediateliquidity by selling such interests at par. The uncertainties in the creditmarkets that began in February 2008 have affected our holdings in ARSinvestments and auctions for our investments in these securities have failed tosettle on their respective settlement dates. Historically the fair value of ARSinvestments had approximated par value due to the frequent resets through theauction process. While we continue to earn interest on our ARS investments atthe maximum contractual rate, these investments are not currently trading and thereforedo not currently have a readily determinable market value. Accordingly, theestimated fair value of ARS no longer approximates par value. Consequently, the investments are not currently liquid, and we will not be ableto access these funds until a future auction of these investments issuccessful, the issuer redeems the securities or at maturity. Maturity datesfor these ARS investments range from 2010 to 2044 with principal distributionsoccurring on certain securities prior to maturity.

 

In November 2008, weentered into a settlement agreement related to our ARS held with UBS FinancialServices, Inc. (“UBS”) that grants us certain rights related to these ARS(the “Right”).  Beginning June 30, 2010, at our request, UBS hasagreed to purchase all of our ARS currently held with them at par value. Conversely, UBS has the right, in its discretion, to purchase or sell our ARSat any time until July 2, 2012, so long as we receive payment at par valueupon any sale or disposition.  The enforceability of the Right results ina put option which should be recognized as a free standing asset separate fromthe ARS.  Upon acceptance of the offer from UBS, we recorded the putoption at fair value of $11.6 million, with a corresponding credit to interestincome.  Although it is a financial instrument, the put option does notmeet the FASB’s definition of a derivative instrument, therefore we haveelected to measure the put option at fair value.  As a result, unrealizedgains and losses are included in earnings.  At April 3, 2010, thefair value of the put option is $8.8 million, net of a reserve of $0.5 million,of which a gain of $0.1 million has been recognized in the current year.

 

Prior to accepting theUBS offer, we recorded our ARS held with UBS as investments available for sale,with an associated unrealized loss included in other comprehensiveincome.  In connection with our acceptance of the UBS offer in November 2008,we transferred approximately $84.4 million in ARS subject to the UBS settlementfrom investments available for sale to trading securities and recorded a losson investments of approximately $12.1 million.  As a result, changes infair value of the ARS are recorded as a component of net income.  Weintend to exercise the Right when it becomes available, and as such theassociated investments have been classified as short-term on our balance sheet.

 

In October 2008, ourboard of directors authorized a program to repurchase up to $30 million of ourcommon stock.  We may, from time to time, as business conditions warrant,purchase stock in the open market or through private transactions. Purchases may be increased, decreased or discontinued at any time without priornotice.  The plan does not obligate us to repurchase any specific numberof shares and may be suspended at any time at management’sdiscretion.  During the third quarter of fiscal 2010 we purchased 0.1million shares at an average price of $6.00 per share.  As of April 3,2010, there was approximately $12.5 million available for additional purchasesunder the program.

 

We believe that our cashand cash equivalents on hand, will be sufficient to meet our capital andoperating requirements for at least the next twelve months. Our future capitalrequirements, however, will depend on numerous factors, including withoutlimitation, liquidity of our auction rate securities, the size and number ofnew and expanded stores and/or store concepts, investment costs for managementinformation systems, potential acquisitions and/or joint ventures, purchases ofour stock and future results of operations.

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to marketrisks, which include changes in U.S. interest rates and, to a lesser extent,foreign exchange rates. We do not engage in financial transactions for tradingor speculative purposes.

 

*InterestRate Risk*

 

We currently maintain aportfolio of variable interest rate investments consisting of cash equivalents,government treasury bills, certificates of deposit and both short-term andlong-term investments consisting of ARS.  According to our investmentpolicy, we may invest in taxable and tax-exempt instruments.  In addition,the policy establishes limits on credit quality, maturity, issuer and type ofinstrument. Investments are classified as “trading” or “available for sale”. We do not use derivative financial instruments in our investment portfolio.

 

All highly liquidinvestments with a maturity of three months or less at the date of purchase areconsidered to be cash equivalents.  Investments are considered short-termavailable for sale securities if the original maturity is between three monthsand twelve months, short-term trading securities if they are ARS related to theRight with UBS, or long term investments if the original maturity is greaterthan twelve months. Historically the fair value of ARS investments had approximatedpar value due to the frequent resets through the auction process. While wecontinue to earn interest on our ARS investments at the maximum contractualrate, these investments are not currently trading and therefore do notcurrently have a readily determinable market value. Accordingly, the estimatedfair value of ARS no longer approximates par value. We determined the estimatedfair value of our investment in ARS as of April 3, 2010 using a discountedcash flow model to estimate the fair value of our investments in ARS. Theassumptions used in preparing the discounted cash flow model include estimatesfor interest rates, timing and amount of cash flows and expected holdingperiods of the ARS. The ARS written put right is a free standing asset separatefrom the ARS, and represents our contractual right to require UBS to purchaseour ARS at par value during the two year period beginning June 30,2010.  In order to value the ARS written put right, we consideredintrinsic value, time value of money and our assessment of the creditworthiness of UBS.  We have modified our investment strategy and increasedour investments in more liquid money market investments.

 

The following table listsour cash, cash equivalents and investments as of April 3, 2010:

 
| ** **                                 | ** ** | **Fair Value**                  | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Cash                                       |       | $                                    | 51,734     |   |
| Weighted  average interest rate            |       | 0.00                                 | %          |
| Cash  equivalents                          |       | $                                    | 49,006     |   |
| Weighted  average interest rate            |       | 0.11                                 | %          |
| Current  available for sale securities     |       | $                                    | 58,990     |   |
| Weighted  average interest rate            |       | 0.36                                 | %          |
| Trading  securities                        |       | $                                    | 58,315     |   |
| Weighted  average interest rate            |       | 0.65                                 | %          |
| Non-current  available for sale securities |       | $                                    | 112,354    |   |
| Weighted  average interest rate            |       | 0.56                                 | %          |
| Total                                      |       | $                                    | 330,399    |   |

 

The interest payable onoutstanding cash borrowings under our bank line of credit is based on variableinterest rates and is therefore affected by changes in market interestrates. If interest rates rose significantly, our results from operations andcash flows would not be materially affected since we have no outstanding borrowings.

 

*ForeignCurrency Risks*

 

We enter into asignificant amount of purchase obligations outside of the United States,substantially all of which are negotiated and settled in U.S. Dollars and,therefore, have only minimal exposure to foreign currency exchange risks. Wealso operate a subsidiary for which the functional currency is the CanadianDollar. In accordance with FASB ASC 830, “Foreign Currency Matters”, wetranslate assets and liabilities of Canada’s operations into U.S. dollars atmonth-end rates, while we translate income and expenses at the weighted averageexchange rates for the month. We record the related translation adjustments inaccumulated other comprehensive income as a separate component of shareholders’equity. Fluctuations in exchange rates therefore impact our financial conditionand results of operations, as reported in U.S. Dollars.  We do nothedge against foreign currency risks and believe that foreign currency exchangerisk is immaterial.

 

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**ITEM4.               CONTROLSAND PROCEDURES**

 

Under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer, we evaluated the effectiveness of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report at the reasonable assurance level.

 

There has been no changein our internal control over financial reporting during the quarter ended April 3,2010 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II                OTHER INFORMATION**

 

**ITEM1.                 LEGAL PROCEEDINGS**

 

See the Legal Matterssection of the Notes to the Condensed Consolidated Financial Statements for adiscussion of legal proceedings.

 

**ITEM1A.              RISK FACTORS**

 

Our past performance maynot be a reliable indicator of future performance because actual future resultsand trends may differ materially depending on a variety of factors, including,but not limited to, the risks and uncertainties discussed below. In addition,historical trends should not be used to anticipate results or trends in futureperiods.

 

Factors that might causeour actual results to differ materially from the forward looking statementsdiscussed elsewhere in this report, as well as affect our ability to achieveour financial and other goals, include, but are not limited to, those set forthbelow.  Except for changes to the general economic conditions risk factor,there have been no material changes in our risk factors from those disclosed inPart I, Item 1A of our Annual Report on Form 10-K for the fiscalyear ended July 4, 2009.

 

RISKS RELATING TO OURBUSINESS:

 

**1. Thesuccess of our business depends in large part on our ability to identifyfashion trends as well as to react to changing customer demand in a timelymanner.**  Consequently, we depend in part upon thecustomer response to the creative efforts of our merchandising, design andmarketing teams and their ability to anticipate trends and fashions that willappeal to our consumer base. If we miscalculate our customers’ productpreferences or the demand for our products, we may be faced with excessinventory. Historically, this type of occurrence has resulted in excess fabricfor some products and markdowns and/or write-offs, which has impaired ourprofitability, and may do so in the future. Similarly, any failure on our partto anticipate, identify and respond effectively to changing customer demandsand fashion trends will adversely affect our sales.

 

**2. If weare unable to obtain raw materials, or unable to find manufacturing facilitiesor if our manufacturers perform unacceptably, our sales may be negativelyaffected and our financial condition may be harmed.** We do not own any manufacturing facilities and therefore depend oncontractors and third parties to manufacture our products. We place all of ourorders for production of merchandise and raw materials by purchase order and donot have any long-term contracts with any manufacturer or supplier. If we failto maintain favorable relationships with our manufacturers and suppliers or areunable to obtain 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 lower thananticipated sales and markdowns which would have a negative impact on earnings.Furthermore, we have received in the past, and may receive in the future,shipments of products from manufacturers that fail to conform to our qualitycontrol standards. In such event, unless we are able to obtain replacementproducts in a timely manner, we may lose sales. Certain of our third-partymanufacturers store our raw materials. In the event our inventory was damagedor destroyed and we were unable to obtain replacement raw materials, ourearnings could be negatively impacted.

 

**3. Oursuccess depends on our ability to attract and retain qualified employees inorder to support our existing business and future expansion.** From time to time we actively recruit qualified candidates to fill keyexecutive positions from within our company. There is substantial competitionfor experienced 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 are also exposed to employmentpractice litigation due to the large number of employees and high turnover ofour sales associates. If we fail to attract, motivate and retain qualifiedpersonnel, it could harm our business and limit our ability to expand.

 

In addition, we depend onthe expertise and execution of our key employees, particularly Manny Mashouf,our founder, Chief Executive Officer and Chairman of the Board of Directors,and Kathy Lee, Chief Merchandising Officer. If we lose the services of Mr. Mashouf,Ms. Lee, or any key officers or employees, it could harm our business and resultsof operations.

 

**4. If weare not able to successfully develop new concepts, including 2b bebe and PH8,our revenue base and earnings may be impaired.**  From time totime, we may pursue new concepts.  If the 2b bebe, PH8 or other newconcepts are not successful we may incur additional charges related to closedstores or store impairment and as such, our results from operations andfinancial condition may be harmed.  During fiscal 2010 we recorded assetimpairment charges of $4.0 million to write-off underperforming PH8stores.  Management will continue to assess the performance of the PH8concept, which may result in an evaluation of strategic alternatives.

 

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**5.General economic conditions, including increases in energy and commodityprices, that are largely out of our control may adversely affect our financialcondition and results of operations.**  We are sensitive to changes in general economicconditions, both nationally and locally. Recessionary economic cycles, higherinterest rates, higher fuel and other energy costs, inflation, deflation,increases in commodity prices, higher levels of unemployment, higher consumerdebt levels, higher tax rates and other changes in tax laws or other economicfactors that may affect consumer spending or buying habits could adverselyaffect the demand for products we sell in our stores. In addition, the recentturmoil in the financial markets may have an adverse effect on the U.S. andworld economy, which could negatively impact consumer spending patterns. Wecannot assure you that government responses to the disruptions in the financialmarkets will restore consumer confidence.

 

Furthermore, we couldexperience reduced traffic in our stores or limitations on the prices we cancharge for our products, either of which could reduce our sales and profitmargins and have a material adverse effect on our financial condition and resultsof operations. Also, economic factors such as those listed above and increasedtransportation costs, inflation, higher costs of labor, insurance andhealthcare, and changes in other laws and regulations may increase our cost ofsales and our operating, selling, general and administrative expenses, andotherwise adversely affect our financial condition and results of operations.

 

**6. Wecannot assure you that future store openings will be successful, and new storeopenings may impact existing stores.** We expect to open approximately 5 bebe stores, expanda bebe store, open 2 2b bebe stores and open a PH8 pop-up location in fiscal2010.  In the past, we have closed stores as a result of poor performance,and we cannot assure you that the stores that we plan to open in fiscal 2010,or any other stores that we might open in the future, will be successful orthat our overall operating profit will increase as a result of opening thesestores. During fiscal 2010 we closed 13 stores and anticipate closing up to 7 additionalstores during the remainder of the fiscal year. Most of our new store openingsin fiscal 2010 will be in existing markets. These openings may affect theexisting stores’ net sales and profitability. Our failure to predict accuratelythe demographic or retail environment at any future store location could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

Our ability toeffectively obtain real estate to open new stores depends upon the availabilityof real estate that meets our criteria, including traffic, square footage,co-tenancies, average sales per square foot, lease economics, demographics, andother factors, and our ability to negotiate terms that meet our financialtargets. In addition, we must be able to effectively renew our existing storeleases. Failure to secure real estate locations adequate to meet annual targetsas well as effectively managing the profitability of our existing fleet ofstores could have a material adverse effect on our business, financialcondition and results of operations.

 

**7. Weare subject to risks associated with our on-line sales. **We operate an on-line store at*www.bebe.com* to sell our merchandise,which we migrated to a third-party platform in February 2006. Although ouron-line sales encompass a relatively small percentage of our total sales, ouron-line operations are subject to numerous risks, including unanticipatedoperating problems, reliance on third-party computer hardware and softwareproviders, system failures and the need to invest in additional computersystems. The on-line operations also involve other risks that could have animpact on our results of operations including but not limited to diversion ofsales from our other stores, rapid technological change, liability for on-linecontent, credit card fraud and risks related to the failure of the computersystems that operate the website and its related support systems. In addition,with the use of a third-party platform, we do not have direct control of certainaspects of our on-line business. We cannot assure that our on-line store willcontinue to achieve sales and profitability growth or even remain at itscurrent level.

 

**8. Anyserious disruption at our major facilities could have a harmful effect on our business.** We currently operate a corporate officein Brisbane, California, a distribution facility in Benicia, California, and adesign studio and production facility in Los Angeles, California. Any seriousdisruption at these facilities whether due to construction, relocation, fire,earthquake, terrorist acts or otherwise could harm our operations and couldhave a harmful effect on our business and results of operations. Furthermore,we have little experience operating essential functions away from our maincorporate offices and are uncertain what effect operating such satellitefacilities might have on business, personnel and results of operations.

 

**9. Werely on information technology, the disruption of which could adversely impactour business.** Werely on various information systems to manage our operations and regularly makeinvestments to upgrade, enhance or replace such systems. Any delays ordifficulties in transitioning to these or other new systems, or in integratingthese systems with our current systems, or any other disruptions affecting ourinformation systems, could have a material adverse impact on our business andresults of operations. Any failure to maintain adequate system securitycontrols to protect our computer assets and sensitive data, including customerdata, from unauthorized access, disclosure or use could also damage ourreputation with our customers.

 

**10. Weface significant competition in the retail and apparel industry, which couldharm our sales and profitability.** The retail and apparel industries are highlycompetitive and are characterized by low barriers to entry. We expectcompetition in our markets to increase. The primary competitive factors in ourmarkets are: brand name recognition, sourcing, product styling, quality, presentationand pricing, timeliness of product development and delivery, store ambiance,customer service and convenience. We compete with traditional departmentstores, specialty store retailers, business to consumer websites, off-priceretailers and direct marketers for, among other things, raw materials, marketshare, retail space, finished goods, sourcing and personnel. Because many ofthese

 

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competitors are largerand have substantially greater financial, distribution and marketing resourcesthan we do, we may lack the resources to adequately compete with them. If wefail to remain competitive in any way, it could harm our business, financialcondition and results of operations.

 

**11. Ourbusiness could be adversely impacted by unfavorable international politicalconditions.** Dueto our international operations, our sales and operating results are, and willcontinue to be, affected by international social, political, legal and economicconditions. In particular, our business could be adversely impacted byinstability or changes resulting in the disruption of trade with the countriesin which our contractors, suppliers or customers are located, significantfluctuations in the value of the United States dollar against foreigncurrencies or restrictions on the transfer of funds, or additional traderestrictions imposed by the United States and other foreign governments. Traderestrictions, including increased tariffs or quotas, embargoes and customsrestrictions could increase the cost or reduce the supply of merchandiseavailable to us and adversely affect our financial condition and results ofoperations. In addition, we purchase a substantial amount of our raw materialsfrom China and our business and operating results may be affected by changes inthe political, social or economic environment in China.

 

**12. Ifwe are not able to successfully protect our intellectual property our abilityto capitalize on the value of our brand name may be impaired.** Even though we take actions to establish, register and protect ourtrademarks and other proprietary rights, we cannot assure you that we will besuccessful or that others will not imitate our products or infringe upon ourintellectual property rights. In addition, we cannot assure that others willnot resist or seek to block the sale of our products as infringements of theirtrademark and proprietary rights.

 

We are seeking toregister our trademarks domestically and internationally. Obstacles may existthat may prevent us from obtaining a trademark for the bebe, BEBE SPORT, bbsp,2b bebe and PH8 names or related names. We may not be able to register certaintrademarks, purchase the right or obtain a license to use these names orrelated names on commercially reasonable terms. If we fail to obtain trademark,ownership or license the requisite rights, it would limit our ability toexpand. In some jurisdictions, despite successful registration of ourtrademarks, third parties may allege infringement and bring actions against us.In addition, if our licensees fail to use our intellectual property correctly,the reputation and value associated with our trademarks may be diluted. Furthermore,if we do not demonstrate use of our trademarks, our trademark rights may lapseover time.

 

**13. Wemay be required to record losses in future quarters as a result of the declinein value of our investments in auction rate securities or as a result of achange in our ability to hold our investment in auction rate securities.**  We hold a variety of interestbearing ARS comprised of federally insured student loan backed securities andinsured municipal authority bonds. These ARS investments are intended toprovide liquidity via an auction process that resets the applicable interestrate at predetermined calendar intervals, allowing investors to either rollover their holdings or gain immediate liquidity by selling such interests atpar. The recent uncertainties in the credit markets that began in February 2008have affected our holdings in ARS investments and the majority of auctions forour investments in these securities have failed to settle on their respectivesettlement dates. Consequently, $170.7 million of our ARS are notcurrently liquid and we will not be able to access these funds until a futureauction of these investments is successful or securities are purchased orredeemed outside of the auction process. Maturity dates for these ARS investmentsrange from 2010 to 2044, with principal distributions occurring on certainsecurities prior to maturity.

 

We entered into asettlement agreement related to our ARS held with UBS Financial Services, Inc.(“UBS”) that grants us certain rights related to these ARS (the “Right”).Beginning June 30, 2010, at our request, UBS has agreed to purchase all ofour ARS currently held with them at par value. Conversely, UBS has the right,in its discretion, to purchase or sell our ARS at any time until July 2,2012, so long as we receive payment at par value upon any sale or disposition.We expect to sell our ARS under our agreement with UBS. However, if the Rightis not exercised before July 2, 2012, they will expire, and UBS will haveno further right or obligation to buy our ARS. So long as we hold our ARS, theywill continue to accrue interest as determined by the auction process or theterms of the ARS if the auction process fails. In addition, UBS’s obligationunder the Right is not secured by its assets and does not require UBS to obtainany financing to support its performance obligation under the Right. UBS hasdisclaimed any assurance that it will have sufficient financial resources tosatisfy its obligation under the Right. If UBS has insufficient funding to buyback the ARS and the auction process continues to fail, then we may incurfurther losses on the carrying value of the ARS.

 

The valuation of ourinvestment portfolio is subject to uncertainties that are difficult to predict.Factors that may impact its valuation include changes to credit ratings of thesecurities as well as to the underlying assets supporting those securities,rates of default of the underlying assets, underlying collateral value,discount rates and ongoing strength and quality of market credit and liquidity.If the current market conditions deteriorate further, or the anticipatedrecovery in market values does not occur, we may be required to recordadditional losses in other comprehensive income or losses in net income infuture quarters.

 

**14. Ifan independent manufacturer violates labor or other laws, or is accused ofviolating any such laws, or if their labor practices diverge from thosegenerally accepted as ethical, it could harm our business and brand image.** While we maintain a policy to monitor the operations of our independentmanufacturers by having an independent firm inspect these manufacturing sites,and all manufacturers are contractually required to comply with such laborpractices, 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. Apparel companies can beheld jointly liable for the wrongdoings of the manufacturers of their products.While we do not control their employees’ employment conditions or themanufacturers’ business practices, and the manufacturers act in their owninterest, they may act in a manner that results in negative public perceptionsof us and/or employee allegations or court determinations that we are jointlyliable.

 

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RISKS RELATING TO OURCOMMON STOCK:

 

**1.Because Manny Mashouf beneficially owns a substantial portion of theoutstanding shares, other shareholders may not be able to influence thedirection the company takes.**     As of April 30, 2010, Manny Mashouf, our Chief Executive Officer andChairman of the Board, beneficially owned approximately 54% of the outstandingshares of our common stock. As a result, he can control the election ofdirectors and the outcome of all issues submitted to the shareholders. This maymake it more difficult for a third party to acquire shares, may discourageacquisition bids, and could limit the price that certain investors might bewilling to pay for shares of common stock. This concentration of stockownership may have the effect of delaying, deferring or preventing a change incontrol of our company.

 

**2. Oursales, margins and operating results are subject to seasonal and quarterlyfluctuations.** Ourbusiness varies with general seasonal trends that are characteristic of theretail and apparel industries, such as the timing of seasonal wholesaleshipments and other events affecting retail sales. As a result, our storestypically generate a higher percentage of our annual net sales andprofitability in the second quarter of our fiscal year, which includes theholiday selling season, compared to other quarters.

 

In addition, ourcomparable store sales have fluctuated significantly in the past, and we expectthat they will continue to fluctuate in the future. For example, we incurred anet loss for the first quarter of fiscal 2010 and cannot assure you of futureprofitability.  A variety of factors affect comparable store sales,including fashion trends, competition, current economic conditions, the timingof release of new merchandise and promotional events, changes in ourmerchandise mix, the success of marketing programs and weather conditions. Ourability to deliver strong comparable store sales results and margins depends inlarge part on accurately forecasting demand and fashion trends, selectingeffective marketing techniques, providing an appropriate mix of merchandise forour customer base, managing inventory effectively, and optimizing storeperformance by closing underperforming stores.  Such fluctuations mayadversely affect the market price of our common stock.

 

**3.Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 couldnegatively impact investor confidence.** In order to meet the requirements of theSarbanes-Oxley Act of 2002 in future periods, we must continuously document,test, monitor and enhance our internal control over financial reporting. We cannot assure you that the periodic evaluation of our internal controlsrequired by Section 404 of the Sarbanes-Oxley Act will not result in theidentification of significant control deficiencies and/or material weaknesses inour internal control over financial reporting. Failure to maintain theeffectiveness of our internal control over financial reporting or to complywith the requirements of this Act could have a material adverse effect on ourreputation, financial condition and market price of our common stock.

 

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

 

The following tablepresents information with respect to purchases of our common stock made duringthe three months ended April 3, 2010 by bebe stores, inc. or anyaffiliated purchaser, as defined in Rule 10b-18(a)(3) under theExchange Act.

 
| ** **                                          | ** ** | **Total********Number********of********Shares********Purchased**  | ** ** | **Average********Price Paid********per Share** | ** ** | **Total Number********of Shares********Purchased as********Part of********Publicly********Announced********Plans or********Programs** | ** ** | **Maximum********Number (or********approximate********dollar amount) of********Shares that May********Yet be Purchased********Under the Plans********or Programs (1)** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                          | ** ** | **(in thousands,  except per share amounts)** | ** ** |
| Month  #1 (January 3 — January 30)   |       | 85                                                                |       | $                                                        | 6.00       |                                                                                                                                                           | 85         |                                                                                                                                                                                                                          | $          | 12,473 |   |
|                                                |       |                                                                   |       |                                                     |       |                                                                                                                                                           |       |                                                                                                                                                                                                                          |       |
| Month  #2 (January 31 — February 27) |       | —                                                            |       | $                                                        | —     |                                                                                                                                                           | —     |                                                                                                                                                                                                                          | $          | 12,473 |   |
|                                                |       |                                                                   |       |                                                     |       |                                                                                                                                                           |       |                                                                                                                                                                                                                          |       |
| Month  #3 (February 28 — April 3)    |       | —                                                            |       | $                                                        | —     |                                                                                                                                                           | —     |                                                                                                                                                                                                                          | $          | 12,473 |   |
|                                                |       |                                                                   |       |                                                     |       |                                                                                                                                                           |       |                                                                                                                                                                                                                          |       |
| Total                                               |       | 85                                                                |       | $                                                        | 6.00       |                                                                                                                                                           | 85         |                                                                                                                                                                                                                          |       |   |

 

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(1)     InOctober 2008, our Board of Directors approved $30 million for sharerepurchases, which we announced on October 21, 2008. This authorizationhas no expiration date.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

Notapplicable.

 

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

 

Not applicable.

 

**ITEM5.  OTHER INFORMATION**

 

Notapplicable.

 

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**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**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | Dated May 13, 2010                                            |
|--------|--------------------------------------------------------------------|
|   |                                                               |
|   | bebe stores, inc.                                                  |
|   |                                                               |
|   | /s/ Walter Parks                                                   |
|   | Walter Parks, Chief  Operating Officer and 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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