** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

**ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended December 31, 2005**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Commission File Number 0-24395**

 

**bebe stores, inc.**

(Exactname of registrant as specified in its charter)

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

 

**400 Valley Drive**

**Brisbane, California 94005**

(Address of principal executive offices)

 

Telephone:**(415) 715-3900**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. ý  Yes    o  No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of theSecurities Exchange Act).  o Largeaccelerated filer  ý Acceleratedfiler  o Non-accelerated filer

 

Indicate bycheck mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). o  Yes    ý  No

 

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

 

COMMON STOCK, PAR VALUE OF $0.001 PER SHARE, 91,283,492 SHARES OUTSTANDING AS OF JANUARY 31, 2006

 

 

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**bebe stores, inc.**

 

**TABLE OF CONTENTS**

 
| **PART I.**             | **FINANCIAL INFORMATION** |                                                                                                                     |
|-------------------------|---------------------------|--------------------------------------------------------------------------------------------------------------------------|
| ** **              |                      |
|                    | ITEM 1.                   | Condensed Consolidated Financial Statements                                                                              |   |
|                    |                      |                                                                                                                     |   |
|                    |                      | Condensed Consolidated Balance Sheets as of  December 31, 2005, July 2, 2005 and January 1, 2005                         |   |
|                    |                      |                                                                                                                     |   |
|                    |                      | Condensed Consolidated Statements of  Earnings for the three and six months ended December 31, 2005 and January 1,  2005 |   |
|                    |                      |                                                                                                                     |   |
|                    |                      | Condensed Consolidated Statements of  Cash Flows for the six months ended December 31, 2005 and January 1, 2005          |   |
|                    |                      |                                                                                                                     |   |
|                    |                      | Notes  to Condensed Consolidated Financial Statements                                                                    |   |
|                    |                      |                                                                                                                     |   |
|                    | ITEM 2.                   | Management’s Discussion and Analysis of Financial Condition and  Results of Operations                              |   |
|                    |                      |                                                                                                                     |   |
|                    | ITEM 3.                   | Quantitative and Qualitative Disclosures  about Market Risk                                                              |   |
|                    |                      |                                                                                                                     |   |
|                    | ITEM 4.                   | Controls and Procedures.                                                                                                 |   |
|                    |                      |                                                                                                                     |   |
| **PART  II.**           | **OTHER  INFORMATION**    |                                                                                                                     |
| ** **              |                      |
|                    | ITEM 1.                   | Legal Proceedings                                                                                                        |   |
|                    |                      |                                                                                                                     |   |
|                    | ITEM 2.                   | Unregistered Sales of Equity Securities and  Use of Proceeds                                                             |   |
|                    |                      |                                                                                                                     |   |
|                    | ITEM 3.                   | Defaults Upon Senior Securities                                                                                          |   |
|                    |                      |                                                                                                                     |   |
|                    | ITEM 4.                   | Submission of Matters to a Vote of Security  Holders                                                                     |   |
|                    |                      |                                                                                                                     |   |
|                    | ITEM 5.                   | Other Information                                                                                                        |   |
|                    |                      |                                                                                                                     |   |
|                    | ITEM 6.                   | Exhibits                                                                                                                 |   |
|                    |                      |                                                                                                                     |   |
| **SIGNATURE**           |                      |
|                    |                      |                                                                                                                     |   |
| **EXHIBIT INDEX ** |                      |
|                         |                           |                                                                                                                          |  |  |

 

2

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**PART I.         FINANCIALINFORMATION**

ITEM 1.          CondensedConsolidated Financial Statements

**bebe stores, inc.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
| ** **                                                                                                                                      | ** ** | **As of  December 31,  2005** | ** ** | **As of  July 2,  2005** | ** ** | **As of  January 1,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets:**                                                                                                                                     | ** ** | ** **                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  assets:                                                                                                                                |       |                          |       |                     |       |                        |       |
| Cash and equivalents                                                                                                                            |       | $                             | 51,324     |                     | $          | 27,072                      |       | $ | 45,294 |   |
| Short-term marketable securities                                                                                                                |       | 274,136                       |       | 241,604                  |       | 188,225                     |       |
| Receivables (net of allowance of $1,100,  $843 and $758)                                                                                        |       | 5,823                         |       | 6,547                    |       | 4,522                       |       |
| Inventories                                                                                                                                     |       | 35,492                        |       | 31,785                   |       | 28,938                      |       |
| Prepaid and other                                                                                                                               |       | 13,239                        |       | 12,599                   |       | 14,279                      |       |
| Total current assets                                                                                                                            |       | 380,014                       |       | 319,607                  |       | 281,258                     |       |
| Property and  equipment, net                                                                                                                    |       | 80,078                        |       | 77,753                   |       | 65,072                      |       |
| Long-term  marketable securities                                                                                                                |       | —                        |       | 2,000                    |       | 7,875                       |       |
| Other assets                                                                                                                                    |       | 9,491                         |       | 8,186                    |       | 4,424                       |       |
| Total assets                                                                                                                                    |       | $                             | 469,583    |                     | $          | 407,546                     |       | $ | 358,629 |   |
|                                                                                                                                            |       |                          |       |                     |       |                        |       |
| **Liabilities  and Shareholders’ Equity:**                                                                                                 | ** ** | ** **                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                           |       |                          |       |                     |       |                        |       |
| Accounts payable                                                                                                                                |       | $                             | 34,491     |                     | $          | 20,682                      |       | $ | 23,120 |   |
| Accrued liabilities                                                                                                                             |       | 30,603                        |       | 23,041                   |       | 23,235                      |       |
| Current portion of capital leases                                                                                                               |       | 269                           |       | 167                      |       | —                      |       |
| Total current liabilities                                                                                                                       |       | 65,363                        |       | 43,890                   |       | 46,355                      |       |
| Long-term  portion of capital leases                                                                                                            |       | 384                           |       | 226                      |       | —                      |       |
| Deferred  rent and other lease incentives                                                                                                       |       | 32,433                        |       | 30,187                   |       | 19,734                      |       |
| Total  liabilities                                                                                                                              |       | 98,180                        |       | 74,303                   |       | 66,089                      |       |
|                                                                                                                                            |       |                          |       |                     |       |                        |       |
| Commitments  and contingencies                                                                                                                  |       | —                        |       | —                   |       | —                      |       |
| Shareholders’  equity:                                                                                                                     |       |                          |       |                     |       |                        |       |
| Preferred stock-authorized 1,000,000 shares  at $0.001 par value per share; no shares issued and outstanding                                    |       | —                        |       | —                   |       | —                      |       |
| Common stock-authorized 135,000,000 shares  at $0.001 par value per share; issued and outstanding 91,279,283, 91,127,616  and 89,898,110 shares |       | 91                            |       | 91                       |       | 90                          |       |
| Additional paid-in capital                                                                                                                      |       | 86,716                        |       | 80,526                   |       | 64,724                      |       |
| Deferred compensation                                                                                                                           |       | —                        |       | (35                      | )          | (88                         | )          |
| Accumulated other comprehensive income                                                                                                          |       | 1,623                         |       | 971                      |       | 1,126                       |       |
| Retained earnings                                                                                                                               |       | 282,973                       |       | 251,690                  |       | 226,688                     |       |
| Total shareholders’ equity                                                                                                                 |       | 371,403                       |       | 333,243                  |       | 292,540                     |       |
| Total  liabilities and shareholders’ equity                                                                                                |       | $                             | 469,583    |                     | $          | 407,546                     |       | $ | 358,629 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

3

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

 
| ** **                                         | ** **             | **Three Months Ended** | ** **           | **Six Months Ended** | ** **             |
|----------------------------------------------------|------------------------|------------------------|----------------------|----------------------|------------------------|
| ** **                                         | **December 31,  2005** | ** **             | **January 1,  2005** | ** **           | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
| ** **                                         | ** **             | ** **             | ** **           | ** **           | ** **             | ** ** | ** ** | ** ** | ** ** |
| Net sales                                          |                   | $                      | 167,895              |                 | $                      | 152,581 |   | $ | 294,050 |   | $ | 255,728 |   |
| Cost of  sales, including production and occupancy |                   | 82,756                 |                 | 74,232               |                   | 146,708 |   | 127,280 |   |
|                                               |                   |                   |                 |                 |                   |   |   |   |   |
| Gross profit                                       |                   | 85,139                 |                 | 78,349               |                   | 147,342 |   | 128,448 |   |
| Selling,  general and administrative expenses      |                   | 46,916                 |                 | 40,275               |                   | 89,165 |   | 72,813 |   |
|                                               |                   |                   |                 |                 |                   |   |   |   |   |
| Income from  operations                            |                   | 38,223                 |                 | 38,074               |                   | 58,177 |   | 55,635 |   |
| Interest and  other income, net                    |                   | 2,245                  |                 | 1,055                |                   | 4,360 |   | 1,910 |   |
|                                               |                   |                   |                 |                 |                   |   |   |   |   |
| Earnings  before income taxes                      |                   | 40,468                 |                 | 39,129               |                   | 62,537 |   | 57,545 |   |
| Provision  for income taxes                        |                   | 15,459                 |                 | 14,869               |                   | 23,955 |   | 21,867 |   |
|                                               |                   |                   |                 |                 |                   |   |   |   |   |
| Net earnings                                       |                   | $                      | 25,009               |                 | $                      | 24,260 |   | $ | 38,582 |   | $ | 35,678 |   |
|                                               |                   |                   |                 |                 |                   |   |   |   |   |
| Basic  earnings per share                          |                   | $                      | 0.27                 |                 | $                      | 0.27 |   | $ | 0.42 |   | $ | 0.40 |   |
| Diluted  earnings per share                        |                   | $                      | 0.27                 |                 | $                      | 0.26 |   | $ | 0.41 |   | $ | 0.39 |   |
|                                               |                   |                   |                 |                 |                   |   |   |   |   |
| Basic  weighted average shares outstanding         |                   | 91,230                 |                 | 89,177               |                   | 91,188 |   | 88,723 |   |
| Diluted  weighted average shares outstanding       |                   | 92,979                 |                 | 92,964               |                   | 93,637 |   | 91,848 |   |

 

See accompanying notes to condensed consolidated financial statements.

 

4

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

 
| ** **                                                                           | ** **             | **Six Months Ended** | ** **           |
|--------------------------------------------------------------------------------------|------------------------|----------------------|----------------------|
| ** **                                                                           | **December 31,  2005** | ** **           | **January 1,  2005** | ** ** |
| ** **                                                                           | ** **             | ** **           | ** **           | ** ** | ** ** |
| Cash flows  from operating activities:                                               |                   |                 |                 |   |   |
| Net earnings                                                                         |                   | $                    | 38,582               |   | 35,678 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities: |                   |                 |                 |   |   |
| Non cash compensation expense                                                        |                   | 4,777                |                 | 86 |   |
| Depreciation and amortization                                                        |                   | 7,815                |                 | 6,582 |   |
| Net loss on disposal of property                                                     |                   | 137                  |                 | 240 |   |
| Deferred rent and other lease incentives                                             |                   | 2,215                |                 | 1,536 |   |
| Deferred income taxes                                                                |                   | (1,097               | )                    | — |   |
| Changes in operating assets and  liabilities:                                        |                   |                 |                 |   |   |
| Receivables                                                                          |                   | 960                  |                 | (1,562 | ) |
| Inventories                                                                          |                   | (3,669               | )                    | (3,351 | ) |
| Prepaid expenses and other assets                                                    |                   | (933                 | )                    | (5,098 | ) |
| Accounts payable                                                                     |                   | 13,806               |                 | 8,651 |   |
| Accrued liabilities                                                                  |                   | 8,093                |                 | 8,733 |   |
| Net cash provided  by operating activities                                           |                   | 70,686               |                 | 51,495 |   |
|                                                                                 |                   |                 |                 |   |   |
| Cash flows  from investing activities:                                               |                   |                 |                 |   |   |
| Purchase of property and equipment                                                   |                   | (10,440              | )                    | (9,686 | ) |
| Purchase of marketable securities                                                    |                   | (171,628             | )                    | (122,650 | ) |
| Proceeds from sales of marketable securities                                         |                   | 141,305              |                 | 94,625 |   |
| Net cash  used by investing activities                                               |                   | (40,763              | )                    | (37,711 | ) |
|                                                                                 |                   |                 |                 |   |   |
| Cash flows  from financing activities:                                               |                   |                 |                 |   |   |
| Net proceeds from issuance of common stock                                           |                   | 1,050                |                 | 8,637 |   |
| Tax benefit on options exercised                                                     |                   | 401                  |                 | — |   |
| Cash dividends paid                                                                  |                   | (7,299               | )                    | (3,967 | ) |
| Other                                                                                |                   | (117                 | )                    | — |   |
| Net cash  provided (used) by financing activities                                    |                   | (5,965               | )                    | 4,670 |   |
|                                                                                 |                   |                 |                 |   |   |
| Net increase  in cash and equivalents                                                |                   | 23,958               |                 | 18,454 |   |
| Effect of  exchange rates on cash                                                    |                   | 294                  |                 | 785 |   |
| Cash and  equivalents:                                                               |                   |                 |                 |   |   |
| Beginning of  period                                                                 |                   | 27,072               |                 | 26,055 |   |
| End of  period                                                                       |                   | $                    | 51,324               |   | $ | 45,294 |   |
|                                                                                      |                        |                      |                      |  |  |  |  |

 

See accompanying notes to condensed consolidated financial statements.

 

5

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##### **bebestores, inc.**

 

##### **NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

##### **INTERIMFINANCIAL STATEMENTS**

 

Theaccompanying condensed consolidated balance sheets of bebe stores, inc. as ofDecember 31, 2005 and January 1, 2005, the condensed consolidated statements ofearnings for the three and six months ended December 31, 2005 and January 1,2005 and the condensed consolidated statements of cash flows for the six monthsended December 31, 2005 and January 1, 2005 have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X, without audit. Accordingly, they do not includeall of the information required by accounting principles generally accepted in theUnited States of America for annual financial statements. Therefore, thesecondensed consolidated financial statements should be read in conjunction withour Annual Report on Form 10-K for the year ended July 2, 2005.

 

Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary to present fairly the financial position at thebalance sheet dates and the results of earnings for the three and six monthsthen ended have been included. The condensed consolidated balance sheet at July2, 2005, presented herein, was derived from the audited balance sheet includedin the Form 10-K for the fiscal year ended July 2, 2005.

 

Ourbusiness is affected by the pattern of seasonality common to most retailapparel businesses. The results for the periods presented are not necessarilyindicative of future financial results.

 

**FISCALYEAR**

 

Beginning onJuly 1, 2004, the Company changed their fiscal year to a 52/53 week year,each period ending on the first Saturday after June 30.  The three-monthperiods ended December 31, 2005 and January 1, 2005 both included 91 days. Thesix-month period ended December 31, 2005 began on July 3, 2005 andincluded 182 days.  The six-month period ended January 1, 2005 began onJuly 1, 2004 and included 185 days.

 

**RECLASSIFICATIONS**

 

Certain prioryear amounts have been reclassified to conform to the current yearpresentation.

 

**EARNINGSPER SHARE**

 

Basic earningsper share is computed as net earnings divided by the weighted average number ofcommon shares outstanding for the period. Diluted earnings per share reflectsthe potential dilution that could occur from common shares issuable through theexercise of dilutive stock options.

 

The followingis a reconciliation of the number of shares used in the basic and dilutedearnings per share computations:

 
| ** **                                                     | ** **              | **Three Months Ended** | ** **            | **Six Months Ended** | ** **              |
|----------------------------------------------------------------|-------------------------|------------------------|-----------------------|----------------------|-------------------------|
| ** **                                                     | **December 31,   2005** | ** **             | **January 1,   2005** | ** **           | **December 31,   2005** | ** ** | **January 1,   2005** |   |
| ** **                                                     | **(In thousands)**      |                   | **(In thousands)**    |                 |
| Basic weighted average number of shares  outstanding           |                    | 91,230                 |                  | 89,177               |                    | 91,188 |   | 88,723 |   |
| Incremental shares from the assumed  issuance of stock options |                    | 1,749                  |                  | 3,787                |                    | 2,449 |   | 3,125 |   |
|                                                           |                    |                   |                  |                 |                    |   |   |   |   |
| Diluted weighted average number of shares  outstanding         |                    | 92,979                 |                  | 92,964               |                    | 93,637 |   | 91,848 |   |

 

6

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The number ofincremental shares from the assumed issuance of stock options is calculatedapplying the treasury stock method.

 

Excluded fromthe computation of the number of diluted weighted average shares outstandingwere antidilutive options of 1,373,000 and 171,000 for the three months endedDecember 31, 2005 and January 1, 2005, respectively, and 1,097,000 and 86,000for the six months ended December 31, 2005 and January 1, 2005, respectively.

 

**COMPREHENSIVEINCOME**

 

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

 
| ** **                 | ** **                 | **Three Months Ended** | ** **            | **Six Months Ended** | ** **              |
|----------------------------|----------------------------|------------------------|-----------------------|----------------------|-------------------------|
| ** **                 | **December 31,   2005**    | ** **             | **January 1,   2005** | ** **           | **December 31,   2005** | ** ** | **January 1,   2005** |   |
|                       | **(Dollars in thousands)** |                   |
| Net income                 |                       | $                      | 25,009                |                 | $                       | 24,260 |   | $ | 38,582 |   | $ | 35,678 |   |
| Other comprehensive income |                       | (53                    | )                     | 407                  |                    | 652 |   | 830 |   |
|                       |                       |                   |                  |                 |                    |   |   |   |   |
| Total comprehensive income |                       | $                      | 24,956                |                 | $                       | 24,667 |   | $ | 39,234 |   | $ | 36,508 |   |

 

**CREDITFACILITIES**

 

**TheCompany has an unsecured commercial line of credit agreement with a bank, whichprovides for borrowings and issuance of letters of credit of up to $25.0million and expires on March 31, 2009. The outstanding balance bears interestat either the bank’s reference rate (which was 7.25% as of December 31, 2005)or the LIBOR rate plus 1.75 percentage points. As of December 31, 2005, therewere no outstanding borrowings, and there was $7.9 million outstanding inletters of credit.**

 

**Thiscredit facility requires the Company to comply with certain financialcovenants, including amounts for minimum tangible net worth, unencumberedliquid assets and profitability, and certain restrictions on making loans andinvestments.**

 

**STOCKBASED COMPENSATION**

 

The 1997 StockPlan as amended (the “Stock Plan”) provides for the grant of incentive stockoptions, non-qualified stock options, stock purchase rights, stock awards andrestricted stock units. Although the Stock Plan allows for stock options andrelated awards to be granted at prices below fair market value, the Company hashistorically granted such options at the fair market value of the stock on thedate of grant.  Stock options and related awards have a maximum term often years.  Options and restricted stock units granted to employeesgenerally vest over four years with 20% of the award vested in each of thefirst and second years, and 30% vested in each of the remaining two years. Options granted to Directors generally vest over four years with 20% of theaward vested in each of the first and second years and 30% vested in each ofthe remaining two years.  Restricted stock units awarded to Directorsgenerally vest over a period of one year from the date of grant.  As ofDecember 31, 2005, the Company has reserved 19,613,750 shares of common stockfor issuance under the Stock Plan and there were 1,528,059 shares available forfuture grant.

 

Prior toJuly 3, 2005, the Company accounted for stock-based awards granted toemployees and non-employee Directors under the Stock Plan in accordance withthe measurement and recognition provisions of Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations, Financial Accounting Standards Board (“FASB”) StatementNo. 123 “Accounting for Stock-Based Compensation,” and complied with thedisclosure provisions of FASB Statement No. 148, “Accounting for StockBased Compensation Transition and Disclosure, an Amendment of FASB StatementNo. 123.”

 

EffectiveJuly 3, 2005, the Company adopted the fair value recognition provisions ofFASB Statement No. 123(R), “Share-Based Payment”, using the modifiedprospective transition method.  Under this transition method, compensationcost 

 

7

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in 2006 includes the portionvesting in the period for (1) all share-based payments granted prior to,but not vested as of July 2, 2005, based on the grant date fair valueestimated in accordance with the original provisions of FASB StatementNo. 123 and (2) all share-based payments granted subsequent to July 2,2005, based on the grant date fair value estimated in accordance with theprovisions of FASB Statement No. 123(R). Results for prior periods havenot been restated.

 

The Companyrecognized share-based compensation expense of $2.5 million ($0.02 per dilutedshare, after related tax benefit of $0.9 million) in the three months endedDecember 31, 2005 as a component of selling, general and administrativeexpenses.  The Company recognized share-based compensation expense of $4.8million ($0.03 per diluted share, after related tax benefit of $1.8 million) inthe six months ended December 31, 2005 as a component of selling, general andadministrative expenses. As of December 31, 2005, there was $23.6 million(before any related tax benefit) of total unrecognized compensation costrelated to nonvested share-based compensation that is expected to be recognizedover a weighted-average period of 1.8 years.

 

Prior to theadoption of FASB Statement No. 123(R), the Company presented all benefitsof tax deductions resulting from the exercise of share-based compensation asoperating cash flows in the Statements of Cash Flows. FASB StatementNo. 123(R) requires the benefits of tax deductions in excess of thecompensation cost recognized for those options (excess tax benefits) to be classifiedas financing cash flows. For the six months ended December 31, 2005, theCompany reported $0.4 million of excess tax benefits as a financing cashinflow.

 

The fair value of each option grant was estimated on the date of thegrant using the Black-Scholes valuation model.  The expected life of theoptions represents the period of time the options are expected to beoutstanding and is based on historical trends. For the three and six monthsended December 31, 2005, expected stock price volatility is based on an averageof the historical volatility of the Company’s stock for a period approximatingthe expected life and the implied volatility based on traded options of theCompany’s stock.  For the three and six months ended January 1, 2005,expected stock volatility was based on historical volatility only.  Theexpected dividend yield is based on the Company’s most recent annual dividendpayout. The risk-free interest rate is based on the U.S. Treasury yield curvein effect at the time of grant and has a term that approximates the expectedlife.

 

The following table presents the weighted average assumptions used inthe option pricing model for the stock options granted in the three and sixmonths ended December 31, 2005 and January 1, 2005:

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
| ** **                     | ** ** | ** **             | ** ** | **(Pro forma)**      | ** ** | ** ** | ** ** | **(Pro forma)** | ** ** |
| Expected  dividend rate        | ** ** | 1.1                    | %          | 0.5                  | %          | 1.0 | % | 0.7 | % |
| Volatility                     | ** ** | 53.3                   | %          | 74.1                 | %          | 54.2 | % | 73.4 | % |
| Risk-free  interest rate       | ** ** | 4.4                    | %          | 3.5                  | %          | 4.1 | % | 3.5 | % |
| Expected  lives (years)        | ** ** | 4.4                    |       | 5.8                  |       | 4.4 |   | 5.9 |   |
| Fair value  per option granted | ** ** | $                      | 6.44       |                 | $          | 10.81 |   | $ | 7.88 |   | $ | 8.48 |   |
|                                |            |                        |            |                      |            |  |  |  |  |  |  |  |  |

 

8

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Had stockbased employee compensation expense been determined based upon the fair valuesat the grant dates for awards under the Company’s stock plan in accordance withFASB Statement No. 123 in the three and six months ended January 1, 2005,the Company’s pro forma net earnings, basic and diluted earnings per commonshare would have been as follows:

 
| ** **                                                                                           | ** **                                   | **Three Months Ended  January 1, 2005** | ** ** | **Six Months Ended  January 1, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------|----------------------------------------------|-----------------------------------------|------------|---------------------------------------|------------|
|                                                                                                 | **(In thousands, except per share amounts)** |                                    |
| ** **                                                                                           | ** **                                   | ** **                              | ** ** | ** **                            | ** ** |
| Net income,  as reported                                                                             |                                         | $                                       | 24,260     |                                  | $          | 35,678 |   |
| Add: Stock-based employee compensation  expense included in reported net income, net of income tax   |                                         | 37                                      |       | 54                                    |       |
| Deduct: Stock based employee compensation  determined under the fair value method, net of income tax |                                         | (1,614                                  | )          | (3,243                                | )          |
| Net income,  pro forma                                                                               |                                         | $                                       | 22,683     |                                  | $          | 32,489 |   |
|                                                                                                 |                                         |                                    |       |                                  |       |
| Basic EPS,  as reported                                                                              |                                         | $                                       | 0.27       |                                  | $          | 0.40 |   |
| Basic EPS,  pro forma                                                                                |                                         | $                                       | 0.25       |                                  | $          | 0.37 |   |
|                                                                                                 |                                         |                                    |       |                                  |       |
| Diluted EPS,  as reported                                                                            |                                         | $                                       | 0.26       |                                  | $          | 0.39 |   |
| Diluted EPS,  pro forma                                                                              |                                         | $                                       | 0.24       |                                  | $          | 0.35 |   |

 

The followingtable summarizes stock option activity during the six months ended December 31,2005:

 
| ** **                      | ** ** | **Options (In   thousands)** | ** ** | **Weighted   Average   Exercise Price   Per Share** | ** ** | **Weighted   Average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic Value   (In thousands)** | ** ** |
|---------------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| Outstanding,  July 2, 2005      |       | 7,663                        |       | $                                                   | 8.48       |                                                    |       |                                             |       |   |
| Granted                         |       | 542                          |       | 17.59                                               |       |                                                    |       |                                             |       |
| Exercised                       |       | (146                         | )          | 6.49                                                |       |                                                    |       |                                             |       |
| Cancelled                       |       | (176                         | )          | 6.02                                                |       |                                                    |       |                                             |       |
|                            |       |                         |       |                                                |       |                                                    |       |                                             |       |
| Outstanding,  December 31, 2005 |       | 7,883                        |       | $                                                   | 9.20       |                                                    | 7.69       |                                             | $          | 38,075 |   |
|                            |       |                         |       |                                                |       |                                                    |       |                                             |       |
| Exercisable,  December 31, 2005 |       | 2,492                        |       | $                                                   | 6.33       |                                                    | 6.31       |                                             | $          | 19,188 |   |

 

**Intrinsicvalue for stock options is defined as the difference between the current marketvalue and the grant price. For the six months ended December 31, 2005, thetotal intrinsic value of stock options exercised was $1.5 million. Cashreceived from stock options exercised during the six months ended December 31,2005 was $0.9 million and the actual tax benefit realized for tax deductionsfrom stock options exercised totaled $0.5 million.**

 

9

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The followingtable summarizes RSU activity during the six months ended December 31, 2005:

 
| ** **                    | ** ** | **Shares (In   thousands)** | ** ** | **Weighted   Average Grant   Date Fair Value   Per Share** | ** ** |
|-------------------------------|------------|-----------------------------|------------|------------------------------------------------------------|------------|
| Nonvested,  July 2, 2005      |       | 6                           |       | $                                                          | 16.06      |   |
|                          |       |                        |       |                                                       |       |   |
| Vested                        |       | (6                          | )          | $                                                          | 16.06      |   |
| Granted                       |       | 15                          |       | $                                                          | 16.51      |   |
|                          |       |                        |       |                                                       |       |   |
| Nonvested,  December 31, 2005 |       | 15                          |       | $                                                          | 16.48      |   |

 

**LEGALMATTERS**

 

**Asof the date of this filing, the Company is involved in several ongoing legalproceedings as described below.**

 

A former candidate for an executive position sued the Company and twoother named defendants in a First Amended Complaint, filed November 9,2004 in the Superior Court of the State of California, County of San Francisco(case No. CGC-04-435517), seeking unspecified monetary damages and otherequitable relief. The claims against bebe allege intentional and negligentinterference with prospective economic advantage and contractual relations,breach of contract, breach of implied covenant of good faith and fair dealing,fraud, promissory estoppel, negligence, intentional and negligent infliction ofemotional distress, and violation of Labor Code Section 970. The Companybelieves that the claims against the Company are without merit, therefore hasnot recorded an estimate of potential liabilities, and will continue tovigorously defend this matter.

 

A former employee sued the Company in a complaint filed onApril 28, 2005 in the United States District Court for the NorthernDistrict of California (case No. C05-0177-MHP) alleging violations underthe Fair Labor Standards Act, specifically that the Company obligated her tobuy and wear its brand clothing as a uniform, without reimbursement or credit,and the net effect of deducting the value of such required purchases from herwages would often result in her not being paid minimum wages. The plaintiffpurports to bring the action also on behalf of a class of hourly,non-managerial employees who are similarly situated. The lawsuit seekscompensatory, statutory and injunctive relief. The Company believes that theplaintiff’s claims are without merit, therefore has not recorded an estimate ofpotential liabilities, and will continue to vigorously defend this matter.

 

The Company was a named defendant in four separate California SuperiorCourt cases, (case No. CIV435794 in San Mateo County, caseNo. GIC824505 in San Diego County, case No. 04AS03109 in SacramentoCounty and case No. CIV 447421 in San Mateo County) each alleging LaborCode violations due to misclassification of employees as exempt underCalifornia state law.  All of these cases have been resolved anddismissals have been filed.  The resolution of these cases did not have amaterial adverse effect on the Company’s business, financial condition, orresults of operations.

 

The Company intends to defend itself vigorously against these claims.However, the results of any litigation are inherently uncertain. The Companycannot assure you that it will be able to successfully defend itself in theselawsuits. Where required, and/or otherwise appropriate, the Company makes anestimate of potential liabilities that management believes are reasonable. Anyestimates are revised as further information becomes available. Management doesnot believe the ultimate resolution will have a material adverse effect on theCompany’s business, financial condition or results of operations.

 

In addition to the above, the Company is also involved in various otherlegal proceedings arising in the normal course of business. None of thesematters are expected, individually or in the aggregate, to have a materialadverse effect on the Company’s business, financial condition or results ofoperations.

 

10

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**RECENTACCOUNTING PRONOUNCEMENT**

 

InMarch 2005, the FASB issued FASB Interpretation (“FIN”) 47, “Accounting forConditional Asset Retirement Obligations.” FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in FASB Statement No. 143, “Accounting forAsset Retirement Obligations,” refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. Accordingly, an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated. FIN 47 is effective for fiscal yearsending on or after December 31, 2005. The Company does not believe that theadoption of FIN 47 will have a material impact on its financial position orresults of operations.

 

11

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**ITEM 2.              MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingManagement’s Discussion 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.   Forwardlooking statements include statements about our expected results of operations,capital expenditures and store openings.  Although we believe that thesestatements are based upon reasonable assumptions, we cannot assure you that ourgoals will be achieved. These forward-looking statements are made as of thedate of this Form 10-Q, and we assume no obligation to update or revisethem or provide reasons why actual results may differ. Factors that might causesuch a difference include, but are not limited to, our ability to respond tochanging fashion trends, miscalculation of the demand for our products,effective management of our growth, decline in comparable store salesperformance, ongoing competitive pressures in the apparel industry, changes inthe level of consumer spending or preferences in apparel, our ability toattract and retain key management personnel and/or other factors discussed in “RisksThat May Affect Results” and elsewhere in this Form 10-Q.

 

##### **OVERVIEW**

 

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

 

Ourdistinctive product offering includes a full range of separates, tops,sweaters, dresses, active wear and accessories in the following lifestylecategories:  career, evening, casual, and active. We design and developthe majority of our merchandise in-house, which is manufactured to ourspecifications. The remainder of our merchandise is sourced directly from thirdparty manufacturers.

 

We market ourproducts under the bebe, BEBE SPORT and bebe O brand names through our 228retail stores, of which 173 are bebe stores, 35 are BEBE SPORT stores, and 20are bebe outlet stores.  These stores are located in 32 states, theDistrict of Columbia, Puerto Rico and Canada. In addition, we have an on-linestore at www.bebe.com and our licensees operate 14 international stores. During the three months ended December 31, 2005, we opened 9 stores, including4 bebe stores, 2 BEBE SPORT stores and 3 bebe outlet stores, and closed 1 BEBESPORT store.  During the six months ended December 31, 2005, we opened 16stores, including 8 bebe stores, 5 BEBE SPORT stores and 3 bebe outlet stores. Wealso closed 1 bebe store and 1 BEBE SPORT store. We expect to open 35 stores,including 20 bebe stores, 12 BEBE SPORT stores and 3 bebe outlet stores, duringthe year.  We also plan to renovate, relocate or expand approximately 16existing stores and close 3 stores, resulting in square footage growth ofapproximately 16%.

 

*bebe stores.*  The Company was founded byManny Mashouf, Chairman of the Board. We opened our first store in SanFrancisco, California in 1976, which was also the year we incorporated.

 

*BEBE SPORT stores.* The Company launched BEBESPORT during fiscal 2003 to address the active lifestyle needs of the bebecustomer. The BEBE SPORT collection includes sportswear, tops, sweaters,outerwear and accessories.

 

*bebe outlet stores.*  The Company utilizesthe outlets as a clearance vehicle for merchandise from our retail stores. Inaddition, the inventory includes a strong presentation of bebe logo merchandiseand special cuts produced under the bebe O label exclusively for the outletstores.

 

*On-line store.* bebe.com is an extension of thebebe store experience and provides a complete assortment of bebe and BEBE SPORTmerchandise. It is also used as an advertising vehicle to communicate with ourcustomers.

 

*Direct to consumer.  *The Companylaunched a direct mail marketing program in fiscal 2005 and plans to increasethe circulation and frequency of mailings during fiscal 2006. We effectivelycommunicate our brand strategy to our best customers through direct to consumermarketing.

 

12

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##### **CRITICAL ACCOUNTINGPOLICIES**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations arebased upon our consolidated financial statements, which have been prepared inconformity with accounting principles generally accepted in the United Statesof America.

 

The preparationof these financial statements requires the appropriate application of certainaccounting policies, many of which require us to make estimates and assumptionsabout future events and their impact on amounts reported in our financialstatements and related notes. Since future events and their impact cannot bedetermined with certainty, the actual results will inevitably differ from ourestimates. Such differences could be material to the financial statements. Webelieve our application of accounting policies, and the estimates inherentlyrequired therein, are reasonable. These accounting policies and estimates areconstantly reevaluated, and adjustments are made when facts and circumstancesdictate a change. Our accounting policies are more fully described in Note 1 tothe consolidated financial statements in our annual report on Form 10-Kfor the year ended July 2, 2005.

 

We haveidentified certain critical accounting policies, which are described below:

 

*Revenue recognition.  *We recognizerevenue at the time the products are received by the customers in accordancewith the provisions of Staff Accounting Bulletin (“SAB”) No. 101, “RevenueRecognition in Financial Statements” as amended by SAB No. 104, “RevenueRecognition”. Revenue is recognized for store sales at the point at which thecustomer receives and pays for the merchandise at the register with either cashor credit card. For on-line sales, revenue is recognized at the time thecustomer receives the product. We estimate and defer revenue and the relatedproduct costs for shipments that are in transit to the customer. Customerstypically receive goods within a few days of shipment. Amounts related toshipping billed to customers are reflected in net sales and the related costsare reflected in cost of goods sold.

 

Discounts offered to customers consist primarily of point of salemarkdowns and are recorded at the time of the related sale as a reduction ofrevenue.

 

The value of points and rewards earned by our loyalty program membersare included as a liability and a reduction of revenue at the time the pointsand rewards are earned. The associated revenue is recognized when the rewardsare redeemed or expire.

 

Gift certificates sold are carried as a liability and revenue isrecognized when the gift certificate is redeemed. Similarly, customers mayreceive a store credit in exchange for returned goods. Store credits arecarried as a liability until redeemed.

 

Royalty revenue from product licensees is recorded as earned.

 

*Inventories.* Our inventories are stated at thelower of weighted average cost or market. Market is determined based on theestimated net realizable value, which is generally the merchandise sellingprice. To ensure that our raw material is properly valued we age the fabricinventory and record a reserve in accordance with our established policy, whichis based on historical experience. To ensure our finished goods inventory isproperly valued we review the age and turnover of our inventory and record areserve if the selling price is marked down below cost. These assumptions canhave an impact on current and future operating results and financial position.We estimate shrinkage for the period between the last physical count andbalance sheet date based on historic shrinkage trends.

 

*Long-lived assets.* We review long-lived assetsfor impairment whenever events or changes in circumstances, such as storeclosures or poor performing stores, indicate that the carrying value of anasset may not be recoverable. If the undiscounted cash flows from thelong-lived assets are less than the carrying value we record an impairmentcharge equal to the difference between the carrying value and the asset’s fairvalue. In addition, at the time a decision is made to close a store, we recordan impairment charge, if appropriate, or accelerate depreciation over therevised useful life of the asset. Historically, our impairment charges havebeen immaterial.  During the six months ended December 31, 2005 andJanuary 1, 2005 we recorded $73,000 and $0, respectively, of impairmentcharges.  We believe at this time that the long-lived assets’ carryingvalues and useful lives continue to be appropriate.

 

13

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*Sales Return Reserve.* We record a reserve forestimated product returns based on historical return trends.  As ofDecember 31, 2005 and January 1, 2005, the reserve was $1,562,000 and$1,151,000, respectively.  If actual returns are greater than thoseprojected, additional sales returns may be recorded in the future.

 

*Accrued Litigation.*  We accrue estimates of probable liabilities associated withlawsuits and claims. The results of any litigation are inherently uncertain. Asinformation becomes available, we assess the potential liabilities related topending litigation and may revise our estimates as necessary. Such revisions ofestimates could materially impact the results of operations and financialposition.

 

*Self-Insurance*.   We use acombination of insurance and self insurance for employee related health care benefits.We record self insurance liabilities based on claims filed and an estimate ofthose claims incurred but not reported. Any projection of losses concerning ourliability is subject to a high degree of variability. Among the causes of thisvariability are unpredictable external factors such as future inflation rates,changes in severity, benefit level changes, medical costs and claim settlementpatterns. Should a different amount of claims occur compared to what wasestimated or costs of the claims increase or decrease beyond what wasanticipated, reserves may need to be adjusted in the future.

 

*Income Taxes*. We accrue liabilities forestimates of probable settlements of domestic and foreign tax audits. At anyone time, many tax years may be subject to audit by various taxingjurisdictions. The results of these audits and negotiations with taxingauthorities may affect the ultimate settlement of these issues. Our effectivetax rate in a given financial statement period may be materially impacted by changesin the mix and level of earnings. We also record a valuation allowance againstour deferred tax assets arising from foreign tax credit carryforwards as theutilization of these credits is not assured.

 

**RECENTACCOUNTING PRONOUNCEMENT**

 

InMarch 2005, the FASB issued FASB Interpretation (“FIN”) 47, “Accounting forConditional Asset Retirement Obligations.” FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in FASB Statement No. 143, “Accounting forAsset Retirement Obligations,” refers to a legal obligation to perform an assetretirement activity in which the timing and (or) method of settlement areconditional on a future event that may or may not be within the control of theentity. Accordingly, an entity is required to recognize a liability for thefair value of a conditional asset retirement obligation if the fair value ofthe liability can be reasonably estimated. FIN 47 is effective for fiscal yearsending on or after December 31, 2005. The Company does not believe that theadoption of FIN 47 will have a material impact on its financial position orresults of operations.

 

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

 

##### **Beginningon July 1, 2004, the Company changed their fiscal year to a 52/53 weekyear, each period ending on the first Saturday after June 30.  Thethree-month periods ended December 31, 2005 and January 1, 2005 both included91 days. The six-month period ended December 31, 2005 began on July 3,2005 and included 182 days.  The six-month period ended January 1, 2005began on July 1, 2004 and included 185 days**.

 

##### **Forthe three and six-month periods ended December 31, 2005, comparable store saleswere determined using comparable periods of 91 and 182 days, respectively.**

 

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The following table sets forth certainfinancial data as a percentage of net sales for the periods indicated:

 
| ** **                                                  | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**      | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                                  | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|                                                        |       |                        |       |                      |       |   |   |   |   |
| Net sales                                                   |       | 100.0                       | %          | 100.0                     | %          | 100.0 | % | 100.0 | % |
| Cost of  sales, including production  and occupancy (1)     |       | 49.3                        |       | 48.7                      |       | 49.9 |   | 49.8 |   |
|                                                        |       |                        |       |                      |       |   |   |   |   |
| Gross profit                                                |       | 50.7                        |       | 51.3                      |       | 50.1 |   | 50.2 |   |
| Selling,  general and administrative expenses  expenses (2) |       | 27.9                        |       | 26.3                      |       | 30.3 |   | 28.4 |   |
|                                                        |       |                        |       |                      |       |   |   |   |   |
| Income from  operations                                     |       | 22.8                        |       | 25.0                      |       | 19.8 |   | 21.8 |   |
| Interest and  other income, net                             |       | 1.3                         |       | 0.6                       |       | 1.5 |   | 0.7 |   |
|                                                        |       |                        |       |                      |       |   |   |   |   |
| Earnings  before income taxes                               |       | 24.1                        |       | 25.6                      |       | 21.3 |   | 22.5 |   |
| Provision  for income taxes                                 |       | 9.2                         |       | 9.7                       |       | 8.2 |   | 8.5 |   |
| Net earnings                                                |       | 14.9                        | %          | 15.9                      | %          | 13.1 | % | 14.0 | % |

 

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

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

 

*Net Sales.* Net sales increased to $167.9 million duringthe three months ended December 31, 2005 from $152.6 million for thecomparable period of the prior year, an increase of $15.3 million, or 10.0%.During the three month period, anincrease in comparable store sales of 2.2% versus the prior year contributed$3.0 million to the increase in sales.  The remaining increase in sales of$12.3 million was generated by stores not included in the comparable storesales base and increases over the same period of the prior year in on-linesales and wholesale sales to international licensees.  Net sales includereductions of $1.4 million associated with the customer loyalty program and$1.2 million associated with customer returns for the three months ended December 31,2005, compared to $0 and $0.7 million for the comparable period of the prioryear.

 

For the six months ended December 31,2005, net sales increased to $294.1 million from $255.7 million for thecomparable six-month period of the prior year, an increase of $38.4 million, or15.0%. During the six month period, an increase in comparable store sales of8.1% versus the prior year contributed $18.3 million to the increase insales.  The increase in comparable store sales performance was largely dueto customer acceptance of the product offering.  The remaining increase insales of $20.1 million was generated by stores not included in the comparablestore sales base and increases over the same period of the prior year inon-line sales and wholesale sales to international licensees.  Net sales include reductions of $1.6 millionassociated with the customer loyalty program and $1.0 million associated withcustomer returns for the six months ended December 31, 2005, compared to$0 and $1.0 million for the comparable period of the prior year.  The prior year also includes $3.9 million ofadditional sales due to the three additional days in the reporting period.

 

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| ** **                                      | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**      | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                      | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
| ** **                                      | ** ** | ** **                  | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales  (In thousands)                       |       | $                           | 167,895    |                      | $          | 152,581 |   | $ | 294,050 |   | $ | 255,728 |   |
|                                            |       |                        |       |                      |       |   |   |   |   |
| Total net  sales increase percentage            |       | 10.0                        | %          | 36.3                      | %          | 15.0 | % | 30.7 | % |
|                                            |       |                        |       |                      |       |   |   |   |   |
| Comparable  store sales increase percentage     |       | 2.2                         | %          | 27.3                      | %          | 8.1 | % | 20.8 | % |
|                                            |       |                        |       |                      |       |   |   |   |   |
| Net sales  per average square foot (1)          |       | $                           | 207        |                      | $          | 209 |   | $ | 369 |   | $ | 353 |   |
|                                            |       |                        |       |                      |       |   |   |   |   |
| Square  footage at end of period (In thousands) |       | 828                         |       | 734                       |       | 828 |   | 734 |   |
|                                            |       |                        |       |                      |       |   |   |   |   |
| Number of  store locations:                     |       |                        |       |                      |       |   |   |   |   |
| Beginning of  period                            |       | 220                         |       | 202                       |       | 214 |   | 199 |   |
| New store  locations                            |       | 9                           |       | 5                         |       | 16 |   | 8 |   |
| Closed store  locations                         |       | 1                           |       | 1                         |       | 2 |   | 1 |   |
| Number of  stores open at end of period         |       | 228                         |       | 206                       |       | 228 |   | 206 |   |

 

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(1)                                  Netsales per average square foot is calculated using net store sales and a monthlyaverage store square footage.

 

* Gross Profit.*Gross profit increased to $85.1 millionduring the three months ended December 31, 2005 from $78.3 million for thecomparable three-month period of the prior year, an increase of $6.8 million,or 8.7%. As a percentage of net sales, gross profit decreased to 50.7% for thethree-month period ended December 31, 2005 from 51.3% in the comparablethree-month period of the prior year. The decrease in gross profit as apercentage of net sales from the prior year of 0.6% resulted primarily fromlower merchandise margins.

 

Gross profit increased to$147.3 million during the six months ended December 31, 2005 from $128.4million for the comparable six-month period of the prior year, an increase of$18.9 million, or 14.7%. As a percentage of net sales, gross profit was 50.1%for the six-month period ended December 31, 2005 compared to 50.2% in thecomparable six-month period of the prior year. Gross profit as a percentage ofnet sales was flat with the prior year as a result of lower merchandise marginsoffset by favorable occupancy leverage.

 

*Selling,General and Administrative Expenses.*Selling, general and administrative expenses, which primarily consistof non-occupancy store costs, corporate overhead and advertising costs,increased to $46.9 million during the three months ended December 31, 2005from $40.3 million for the comparable period of the prior year, an increase of$6.6 million, or 16.4%. As a percentage of net sales, these expenses increasedto 27.9% during the three-month period from 26.3% in the comparable period ofthe prior year.  For the six months endedDecember 31, 2005, selling, general and administrative expenses increasedto $89.2 million from $72.8 million for the comparable six-month period of theprior year, an increase of $16.4 million, or 22.5%. As a percentage of netsales, these expenses increased to 30.3% during the six-month period from 28.4%in the comparable period of the prior year. The increase as a percentage of net sales was primarily due to a pre-taxcharge of $2.5 million (or 1.5% of net sales) and $4.8 million (or 1.6% of netsales), related to the expensing of stock based compensation, for the threemonths and six months ended December 31, 2005, respectively.  Increased advertising expenditures alsocontributed to the increase, offset by reductions in compensation.

 

*Interestand Other Income, Net.*We generated approximately $2.0 million of interest income during the threemonths ended December 31, 2005 compared to approximately $1.1 million inthe comparable three-month period of the prior year. For the six months ended December 31,2005, we generated approximately $3.8 million of interest income compared toapproximately $1.9 million in the comparable six-month period of the prioryear. The increases are the result of higher average cash balances and higherinterest rates.

 

*Provision for IncomeTaxes.*The effective tax rate increased to 38.2% and38.3% for the three and six month periods ended December 31, 2005,respectively, from 38.0% for the comparable periods in the prior due to theadoption of FASB Statement No. 123(R) which changed the requirementsregarding recognition of stock based compensation. As a result of adopting FASBStatement No. 123(R), the compensation expense associated with incentivestock options increases the Company’s effective tax rate.  Due to thetiming of when an incentive stock option is exercised and sold and the level ofearnings, the effective tax rate is expected to fluctuate from quarter toquarter under FASB Statement No. 123(R).

 

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**Seasonalityof Business and Quarterly Results**

 

* *Our business varieswith general 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 for anyquarter are not necessarily indicative of results that may be achieved for afull fiscal year.

 

### **LIQUIDITYAND CAPITAL RESOURCES**

### ** **

Our working capitalrequirements vary widely throughout the year and generally peak during thefirst and second fiscal quarters. At December 31, 2005, we hadapproximately $325.5 million of cash and equivalents and short-term marketablesecurities on hand. In addition, we had a revolving line of credit, under whichwe could borrow or issue letters of credit up to a combined total of $25.0million. As of December 31, 2005, there were no cash borrowingsoutstanding under the line of credit and letters of credit outstanding totaled$7.9 million.

 

Net cash provided byoperating activities for the six months ended December 31, 2005 was $70.7million versus $51.5 million for the six months ended January 1, 2005.Cash provided by operating activities for these periods was primarily generatedby earnings adjusted for depreciation, non-cash compensation expense, deferredrent, and an increase in accounts payable and accrued liabilities, offset by anincrease in inventories.

 

Net cash used by investingactivities for the six months ended December 31, 2005 was $40.8 million,for the net purchases of marketable securities and expenditures related to theopening of 16 new stores.  For the sixmonths ended January 1, 2005, $37.7 million was used for the net purchasesof marketable securities, expenditures related to the opening of 8 new storesand improvements made to our new design studio and production facility. Weexpect to open 35 stores during fiscal 2006 and estimate that total capitalexpenditures will be approximately $34.0 million.

 

Net cash used in financing activities for thesix months ended December 31, 2005 was $6.0 million and was due to thepayment of two cash dividends on our common stock of approximately $3.6 millioneach, partially offset by proceeds from stock option exercises.  Net cash provided by financing activities of$4.7 million for the six months ended January 1, 2005 was derived fromproceeds from stock option exercises, partially offset by the payment of twoquarterly cash dividends of approximately $2.0 million each.

 

We believe thatour cash on hand, together with our cash flows from operations, will besufficient to meet our capital and operating requirements for at least the nexttwelve months. Our future capital requirements, however, will depend onnumerous factors, including without limitation, the size and number of new andexpanded stores and/or store concepts, investment costs for managementinformation systems, potential acquisitions and/or joint ventures, repurchaseof stock and future results of operations.

 

### **Inflation**

### ** **

We do notbelieve that inflation has had a material effect on the results of operationsin the recent past. However, we cannot assure that our business will not beaffected by inflation in the future.

 

### **RISKSTHAT MAY AFFECT RESULTS**

### ** **

Factors thatmight cause our actual results to differ materially from the forward lookingstatements discussed elsewhere in this report, as well as affect our ability toachieve our financial and other goals, include, but are not limited to, thefollowing:

 

RISKS RELATING TO OUR BUSINESS:

 

**1.****         The success of ourbusiness depends in large part on our ability to identify fashion trends aswell as to react to changing customer demand in a timely manner.  **Consequently,we depend in part upon the customer response to the

 

17

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creative efforts of our merchandising, design and marketing teams andtheir ability to anticipate trends and fashions that will appeal to ourconsumer base. If we miscalculate our customers’ product preferences or thedemand for our products, we may be faced with excess inventory. Historically,this type of occurrence has resulted in excess fabric for some products andmarkdowns and/or write-offs, which has impaired our profitability, and may doso in the future. Similarly, any failure on our part to anticipate, identifyand respond effectively to changing consumer demands and fashion trends willadversely affect our sales.

 

**2.****         If we are unable toobtain raw materials, unable to find manufacturing facilities or ourmanufacturers perform unacceptably, our sales may be negatively affected andour financial condition may be harmed.  **We do not own anymanufacturing facilities and therefore depend on contractors and third partiesto manufacture our products. We place all of our orders for production ofmerchandise and raw materials by purchase order and do not have any long-termcontracts with any manufacturer or supplier. If we fail to maintain favorablerelationships with our manufacturers and suppliers or are unable to obtainsufficient quantities of quality raw materials on commercially reasonableterms, it could harm our business and results of operations. We cannot assureyou that contractors and third party manufacturers (1) will not supplysimilar products to our competitors, (2) will not stop supplying productsto us completely, or (3) will supply products in a timely manner. Untimelyreceipt of products may result in markdowns which would have a negative impacton earnings. Furthermore, we have received in the past, and may receive in thefuture, shipments of products from manufacturers that fail to conform to ourquality control standards. In such event, unless we are able to obtainreplacement products in a timely manner, we may lose sales. Certain of ourthird party manufacturers store our raw materials. In the event our inventorywas damaged or destroyed and we were unable to obtain replacement rawmaterials, our earnings may be negatively impacted.

 

**3.****         Our success depends onour ability to attract and retain key employees in order to support ourexisting business and future expansion.  **From time to time weactively recruit qualified candidates to fill key executive positions fromwithin the Company. There is substantial competition for experienced personnel,which we expect will continue. We compete for experienced personnel withcompanies who have greater financial resources than we do. In the past, we haveexperienced significant turnover of our executive management team and retailstore personnel. We are also exposed to employment practice litigation due tothe large number of employees and high turnover of our sales associates. If wefail to attract, motivate, and retain qualified personnel, it could harm ourbusiness and limit our ability to expand.

 

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

 

**4.****         If we are not able tosuccessfully expand our bebe and BEBE SPORT stores our revenue base andearnings may be impaired.  **We believe that there is opportunityto expand the number of bebe and BEBE SPORT stores in new and existing markets.For fiscal 2006, we plan to grow our operations in a controlled manner,primarily through the opening of new stores. As part of our growth strategy, wewill also open larger bebe stores and accessory “shop in shops”. If thesestores are not successful, our financial condition may be harmed.

 

**5.****         There can be no assurancethat future store openings will be successful and new store openings may impactexisting stores.  **We expect to open 35 stores in fiscal 2006, ofwhich 20 will be bebe stores, 12 will be BEBE SPORT stores and 3 will be bebeoutlet stores. In the past, we have closed stores as a result of poorperformance, and there can be no assurance that the stores that we plan to openin fiscal 2006, or any other stores that we might open in the future, will besuccessful or that our overall operating profit will increase as a result ofopening these stores. During fiscal 2005, we closed 6 stores and during fiscal2006, we anticipate closing 3 stores. Most of our new store openings in fiscal2006 will be in existing markets. These openings may affect the existing stores’net sales and profitability. Our failure to predict accurately the demographicor retail environment at any future store location could have a materialadverse effect on our business, financial condition and results of operations.

 

**6.****         We are subject to risksassociated with our on-line sales.  **We operate an on-line storeat *www.bebe.com* to sell ourmerchandise, which we migrated to a third party platform in February 2006.Although our online sales encompass a relatively small percentage of our totalsales, our on-line operations are subject to numerous risks, includingunanticipated operating problems, reliance on third-party computer hardware andsoftware providers, system failures and the need to invest in additionalcomputer systems. The on-line operations also involve other risks that couldhave an impact on our results of operations including, but not limited to,diversion of sales from our other stores, rapid technological change, liabilityfor

 

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online content, credit card fraud, risksrelated to the failure of the computer systems that operate the website and itsrelated support systems. In addition, with the migration to a third party wewill no longer have direct control of our on-line business. There can be noassurance that our on-line store will continue to achieve sales andprofitability growth or even remain at its current level.

 

**7.****         Any serious disruption atour major facilities could have a harmful effect on our business.  **Wecurrently operate a corporate office in Brisbane, California, a distributionfacility in Benicia, California, and a design studio and production facility inLos Angeles, California. Any serious disruption at these facilities whether dueto construction, relocation, fire, earthquake, terrorist acts or otherwisewould harm our operations and could have a harmful effect on our business andresults of operations. Furthermore, we have little experience operatingessential functions away from our main corporate offices and are uncertain whateffect operating such satellite facilities might have on business, personneland results of operations.

 

**8.****         We rely on informationtechnology, the disruption of which could adversely impact ourbusiness.  **We rely on various management information systems tomanage our operations and regularly make investments to upgrade, enhance orreplace such systems. For example, in the first and second quarters of fiscalyear 2006, we launched and rolled out a customer loyalty program to be used inconjunction with our direct marketing initiatives.  In addition, in fiscalyear 2006 we plan to implement an enhanced production system supporting ourdesign, manufacturing and merchandising needs. We cannot assure you that wewill be successful with the implementation of these and other new systems. Anydelays or difficulties in transitioning to new systems, or in integrating themwith our current systems, or any other disruptions affecting any of ourmanagement information systems, could have a material adverse impact on ourbusiness, financial condition and results of operations.

 

**9.****         We face significantcompetition in the retail and apparel industry, which could harm our sales andprofitability.  **The retail and apparel industries are highlycompetitive and are characterized by low barriers to entry. Key competitorsinclude, but are not limited to Arden B, BCBG, Express, Guess, and the t.b.d.and Savvy Departments within Nordstrom. We expect competition in our markets toincrease. The primary competitive factors in our markets are: brand namerecognition, sourcing, product styling, quality, presentation and pricing,timeliness of product development and delivery, store ambiance, customerservice 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 competitors are larger and have substantially greater financial,distribution and marketing resources than we do, we may lack the resources toadequately compete with them. If we fail to compete in any way, it could harmour business, financial condition, and results of operations.

 

**10.****          Purchases of themerchandise we sell are generally discretionary and are therefore particularlysusceptible to economic conditions.  **The outlook for the UnitedStates economy is uncertain and is directly affected by factors that are beyondour control. Such factors include disposable consumer income, oil prices,recession and fears of recession, war and fears of war, inclement weather,consumer debt, interest rates, sales tax rates, consumer confidence in futureeconomic conditions and political conditions, and consumer perceptions ofpersonal well-being and security. Consumers are generally more willing to makediscretionary purchases, including purchases of fashion products, duringperiods in which favorable economic conditions prevail. If economic conditionschange, our business, financial condition and results of operations could beadversely affected. We cannot predict the indirect effects such as rising oiland freight prices, consumer spending, or other economic factors that naturaldisasters will have on our results of operations.

 

**11.****          Our business could beadversely impacted by unfavorable international conditions.  **Oursales and operating results are, and will continue to be, affected byinternational social, political, legal and economic conditions. In particular,our business could be adversely impacted by instability or changes resulting inthe disruption of trade with the countries in which our contractors, suppliersor customers are located, significant fluctuations in the value of the dollaragainst foreign currencies or restrictions on the transfer of funds, oradditional trade restrictions imposed by the United States and other foreigngovernments. Trade restrictions, including increased tariffs or quotas,embargoes, and customs restrictions could increase the cost or reduce thesupply of merchandise available to us and adversely affect our financialcondition and results of operations.

 

**12.****          If we are not able tosuccessfully protect our intellectual property our ability to capitalize on thevalue of our brand name may be impaired.  **Even though we takeactions to establish, register and protect our trademarks and other

 

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proprietary rights, we cannot assure you thatwe will be successful or that others will not imitate our products or infringeupon our intellectual property rights. In addition, there is no assurance thatothers will not resist or seek to block the sale of our products asinfringements of their trademark and proprietary rights.

 

We are seeking to register our trademarks domestically andinternationally. Obstacles may exist that may prevent us from obtaining atrademark for the bebe name or related names in certain jurisdictions and/orclasses of use. We may not be able to register certain trademarks or purchasethe right or obtain a license to use the bebe name or related names oncommercially reasonable terms. If we fail to obtain trademark, ownership orlicense the requisite rights, it would limit our ability to expand.Furthermore, if we do not demonstrate use of our trademarks, our existingtrademark rights may lapse over time.  In some jurisdictions, despitesuccessful registration of our trademarks, third parties may allegeinfringement and bring actions against us. In addition, if our licensees failto use our intellectual property correctly, the reputation and value associatedwith our trademarks may be diluted.

 

**13.****          If an independent manufacturerviolates labor or other laws, or is accused of violating any such laws, or iftheir labor practices diverge from those generally accepted as ethical, itcould harm our business and brand image.  **While we maintain apolicy to monitor the operations of our independent manufacturers by having anindependent firm inspect these manufacturing sites, and all manufacturers arecontractually required to comply with such labor practices, we cannot controlthe actions or the public’s perceptions of such manufacturers, nor can weassure that these manufacturers will conduct their businesses using ethical orlegal labor practices. While we do not control their employees’ employmentconditions or the manufacturers’ business practices, and the manufacturers actin their own interest, they may act in a manner that results in negative publicperceptions of us and/or employee allegations, and courts may or may notdetermine that we are jointly liable in such cases.

 

RISKS RELATING TO OUR COMMON STOCK:

 

**1.****                 Our stock pricemay fluctuate because of the small number of shares that can be publicly tradedand the low average daily trading volumes.  **The vast majority ofour outstanding shares of our common stock are subject to trading restrictions.As of December 31, 2005, approximately 24,000,000 shares of our commonstock were available to be publicly traded, and as a result, our average dailytrading volumes are relatively low, and our stock price is vulnerable to marketswings due to large purchases, sales and short sales of our common stock.

 

**2.****                 Our operatingresults are subject to seasonal and quarterly fluctuations, which couldadversely affect the market price of our common stock.  **Ourbusiness varies with general seasonal trends that are characteristic of the retailand apparel industries. As a result, our stores typically generate a higherpercentage of our annual net sales and profitability in the second quarter ofour fiscal year (which includes the holiday selling season) compared to otherquarters. Such seasonal and quarterly fluctuations could adversely affect themarket price of our common stock.

 

**3.****                 Because aprincipal shareholder controls the company, other shareholders may not be ableto influence the direction the company takes.  **As of December 31,2005, Manny Mashouf, the Chairman of the Board, beneficially ownedapproximately 74% of the outstanding shares of our common stock. As a result,he alone can control the election of directors and the outcome of all issuessubmitted to the shareholders. This may make it more difficult for a thirdparty to acquire shares, may discourage acquisition bids, and could limit theprice that certain investors might be willing to pay for shares of commonstock. This concentration of stock ownership may have the effect of delaying,deferring or preventing a change in control of our company.

 

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

##### ** **

We are exposedto market risks, which include changes in U.S. interest rates and, to a lesserextent, foreign exchange rates. We do not engage in financial transactions fortrading or speculative purposes.

 

*Interest Rate Risk*

* *

We currently maintain a portfolio of variableinterest rate investments consisting of cash equivalents and short-termmarketable securities.  Marketablesecurities are comprised of closed-end variable interest rate funds that investprimarily in tax-exempt municipal bonds. Due to the variable nature of these investments, their value istypically not subject to market rate changes. According to our investment policy, we may invest in taxable and taxexempt instruments.  In addition, thepolicy establishes limits on credit quality, maturity, issuer and type ofinstrument.  Marketable securities areclassified as “available for sale”.    Wedo not use derivative financial instruments in our investment portfolio.

 

All highly liquid investments with a maturityof three months or less at the date of purchase are considered to be cashequivalents.  The remaining investmentsare considered short-term marketable securities if original maturities rangebetween four and twelve months or long-term marketable securities if originalmaturities are over twelve months.

 

The followingtable lists our cash equivalents and short-term marketable securities at December 31,2005:

 
| ** **                       | ** ** | **Book Value**             | ** ** | **Fair Value** | ** ** |
|----------------------------------|------------|----------------------------|------------|----------------|------------|
| ** **                       |       | **(Dollars in thousands)** |       |
| Cash equivalents                 |       | $                          | 27,937     |           | $          | 27,937 |   |
| Weighted  average interest rate  |       | 2.40                       | %          |           |       |
| Short-term marketable securities |       | 274,136                    |       | 274,136        |       |
| Weighted  average interest rate  |       | 3.21                       | %          |           |       |
| Total                            |       | $                          | 302,073    |           | $          | 302,073 |   |

 

Theinterest payable on our bank line of credit is based on variable interest ratesand therefore affected by changes in market interest rates. As we have no outstanding cash borrowings, ifinterest rates rose significantly, our results from operations and cash flowswould not be affected.

 

*Foreign Currency Risks*

* *

We enter into a significant amount ofpurchase obligations outside of the United States, substantially all of whichare settled in U.S. Dollars and, therefore, have only minimal exposure toforeign currency exchange risks. We also operate a subsidiary for which thefunctional currency is the Canadian Dollar. Fluctuations in exchange ratestherefore impact our financial condition and results of operations, as reportedin U.S. Dollars.   To date, we have not experienced any significantnegative impact as a result of fluctuations in foreign currency markets. We donot hedge against foreign currency risks and believe that foreign currencyexchange risk is immaterial.

 

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

##### ** **

(a)                                  Under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer and Chief Financial Officer, we evaluated the effectiveness of ourdisclosure controls 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.

 

(b)                                 There has been nochange in our internal control over financial reporting during the quarterended December 31, 2005 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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##### **PART II  OTHER INFORMATION**

##### ** **

**ITEM 1.**              **LEGAL PROCEEDINGS**

 

**As of the date of this filing, the Company isinvolved in several ongoing legal proceedings as described below.**

** **

A former candidate for an executive positionsued the Company and two other named defendants in a First Amended Complaint,filed November 9, 2004 in the Superior Court of the State of California,County of San Francisco (case No. CGC-04-435517), seeking unspecifiedmonetary damages and other equitable relief. The claims against bebe allegeintentional and negligent interference with prospective economic advantage andcontractual relations, breach of contract, breach of implied covenant of goodfaith and fair dealing, fraud, promissory estoppel, negligence, intentional andnegligent infliction of emotional distress, and violation of Labor Code Section 970.The Company believes that the claims against the Company are without merit,therefore has not recorded an estimate of potential liabilities, and willcontinue to vigorously defend this matter.

 

A former employee sued the Company in acomplaint filed on April 28, 2005 in the United States District Court forthe Northern District of California (case No. C05-0177-MHP) allegingviolations under the Fair Labor Standards Act, specifically that the Companyobligated her to buy and wear its brand clothing as a uniform, withoutreimbursement or credit, and the net effect of deducting the value of suchrequired purchases from her wages would often result in her not being paidminimum wages. The plaintiff purports to bring the action also on behalf of aclass of hourly, non-managerial employees who are similarly situated. Thelawsuit seeks compensatory, statutory and injunctive relief. The Companybelieves plaintiff’s claims are without merit, therefore has not recorded anestimate of potential liabilities, and will continue to vigorously defend thismatter.

 

The Company was a named defendant in fourseparate California Superior Court cases, (case No. CIV435794 in San MateoCounty, case No. GIC824505 in San Diego County, case No. 04AS03109 inSacramento County and case No. CIV 447421 in San Mateo County) eachalleging Labor Code violations due to misclassification of employees as exemptunder California state law.  All of these cases have been resolved anddismissals have been filed.  The resolution of these cases did not have a materialadverse effect on the Company’s business, financial condition, or results ofoperations.

 

The Company intends to defend itselfvigorously against these claims. However, the results of any litigation areinherently uncertain. The Company cannot assure you that it will be able tosuccessfully defend itself in these lawsuits. Where required, and/or otherwiseappropriate, the Company makes an estimate of potential liabilities thatmanagement believes are reasonable. Any estimates are revised as furtherinformation becomes available. Management does not believe the ultimateresolution will have a material adverse effect on the Company’s business,financial condition or results of operations.

 

In addition to the above, the Company is alsoinvolved in various other legal proceedings arising in the normal course ofbusiness. None of these matters are expected, individually or in the aggregate,to have a material adverse effect on the Company’s business, financialcondition or results of operations.

 

##### **ITEM2.              UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

##### ** **

Not applicable.

 

##### **ITEM3.              DEFAULTSUPON SENIOR SECURITIES**

##### ** **

Not applicable.

 

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

##### ** **

bebe stores, inc. held its annual meeting ofshareholders at its headquarters in Brisbane, California on November 18,2005. Of the 91,204,837 shares outstanding as of the record date, 88,358,120shares were represented by proxy at the meeting.  Proxies were solicited by bebe pursuant toRegulation 14A under the Securities Exchange Act of 1934, as amended.

 

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At the meeting, bebe’s shareholders voted on thefollowing matters:

 

(1)         Proposalto elect seven directors to hold office for a one-year term and until theirsuccessors are elected:

 
| ** **        | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------|------------|------------|------------|--------------|------------|
| Manny  Mashouf    |       | 83,292,456 |       | 5,065,664    |       |
| Neda Mashouf      |       | 83,290,646 |       | 5,067,474    |       |
| Barbara Bass      |       | 86,766,289 |       | 1,591,831    |       |
| Cynthia  Cohen    |       | 86,764,810 |       | 1,593,310    |       |
| Corrado  Federico |       | 83,177,691 |       | 5,180,429    |       |
| Caden Wang        |       | 86,766,529 |       | 1,591,591    |       |
| Gregory  Scott    |       | 83,350,794 |       | 5,007,326    |       |

 

(2)         Proposalto amend the 1997 Stock Plan to increase the maximum number of shares reservedfor issuance under the Stock Plan by 500,000 shares from 19,113,750 shares to19,613,750 shares.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Not Voted** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------|------------|
| 74,837,650 |       | 6,765,652   |       | 10,922      |       | 6,743,896     |       |

 

(3)         Proposalto ratify the appointment of Deloitte & Touche LLP as our independentauditors for the fiscal year ending July 1, 2006.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 88,176,571 |       | 167,331     |       | 14,218      |       |

 

(4)         Proposal to transact such other business asmay properly come before the meeting or adjournment therof.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 76,238,376 |       | 7,289,597   |       | 4,830,147   |       |

##### ** **

##### **ITEM5.              OTHERINFORMATION**

##### ** **

Not applicable.

 

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

##### ** **

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

 
| **Exhibit** | ** ** | **Description**                                                                         |
|-------------|------------|-----------------------------------------------------------------------------------------|
| 10.1*       |       | bebe stores, inc. 1997 Stock Plan, as  amended                                          |
| 10.20**     |       | Third Amendment to Business Loan Agreement  between Registrant and bank of America N.A. |
| 10.21***    |       | bebe stores, inc. Form of Stock Option  Agreement                                  |
| 10.22****   |       | bebe stores, inc. Form of Restricted  Stock Unit Agreement                         |
| 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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*** Incorporated by reference from exhibit 99.2 toRegistrant’s Current Report on Form 8-K filed on November 23, 2005.**

******Incorporated by reference from exhibit 99.1 to Registrant’s CurrentReport on Form 8-K filed on November 23, 2005.

*******Incorporated by reference from exhibit 99.3 to Registrant’s CurrentReport on Form 8-K filed on November 23, 2005.

********Incorporated by reference from exhibit 99.4 to Registrant’s CurrentReport on Form 8-K filed on November 23, 2005.

 

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**SIGNATURE**

** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | Dated February 9, 2006           |
|--------|---------------------------------------|
|   |                                  |
|   | bebe stores, inc.                     |
|   |                                  |
|   | /s/ Walter Parks                      |   |
|   | Walter Parks, Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Exhibit Number** | ** ** | **Description**                                                                         |
|-------------------------|------------|-----------------------------------------------------------------------------------------|
| 10.1*                   |       | bebe stores, inc. 1997 Stock Plan, as  amended                                          |
| 10.20**                 |       | Third Amendment to Business Loan Agreement  between Registrant and bank of America N.A. |
| 10.21***                |       | bebe stores, inc. Form of Stock Option  Agreement                                  |
| 10.22****               |       | bebe stores, inc. Form of Restricted  Stock Unit Agreement                         |
| 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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*** Incorporated by reference fromexhibit 99.2 to Registrant’s Current Report on Form 8-K filed on November 23,2005.**

******Incorporated by reference fromexhibit 99.1 to Registrant’s Current Report on Form 8-K filed on November 23,2005.

*******Incorporated by reference fromexhibit 99.3 to Registrant’s Current Report on Form 8-K filed on November 23,2005.

**** Incorporated****by referencefrom exhibit 99.4 to Registrant’s Current Report on Form 8-K filed on November 23,2005.

 

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