Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended April 4,2009**

 

**OR**

 

| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**Commission File Number 0-24395**

 

**bebestores, inc.**

(Exact name of registrant as specified in itscharter)

 

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

 

**400 Valley Drive****Brisbane, California 94005**

(Address of principal executive offices)

 

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o  No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

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

 

The number of shares of the registrant’s common stock, par value $0.001per share, outstanding as of April 30, 2009 was 86,636,832.

 

 

** **

----

Table of Contents

 

**bebe stores, inc.**

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                                     | **Page No.** |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------|-------------------|
|              |                                                                                                                           |              |
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                      |              |
|              |                                                                                                                           |              |
| ITEM 1.           | Condensed Consolidated Financial Statements                                                                                    |              |
|              |                                                                                                                           |              |
|              | Condensed Consolidated Balance Sheets as of April 4, 2009, July 5,  2008 and April 5, 2008                      | 3                 |
|              |                                                                                                                           |              |
|              | Condensed Consolidated Statements of Operations for the three and  nine months ended April 4, 2009 and April 5, 2008 | 4                 |
|              |                                                                                                                           |              |
|              | Condensed Consolidated Statements of Cash Flows for the nine months  ended April 4, 2009 and April 5, 2008           | 5                 |
|              |                                                                                                                           |              |
|              | Notes to  Condensed Consolidated Financial Statements                                                                          | 6                 |
|              |                                                                                                                           |              |
| ITEM 2.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                    | 11                |
|              |                                                                                                                           |              |
| ITEM 3.           | Quantitative and Qualitative Disclosures about  Market Risk                                                                    | 17                |
|              |                                                                                                                           |              |
| ITEM 4.           | Controls and Procedures                                                                                                        | 18                |
|              |                                                                                                                           |              |
| **PART II.** | **OTHER INFORMATION**                                                                                                          |              |
|              |                                                                                                                           |              |
| ITEM 1.           | Legal Proceedings                                                                                                              | 19                |
|              |                                                                                                                           |              |
| ITEM 1A.          | Risk Factors                                                                                                                   | 19                |
|              |                                                                                                                           |              |
| ITEM 2.           | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                   | 23                |
|              |                                                                                                                           |              |
| ITEM 3.           | Defaults Upon Senior Securities                                                                                                | 23                |
|              |                                                                                                                           |              |
| ITEM 4.           | Submission of Matters to a Vote of Security  Holders                                                                           | 23                |
|              |                                                                                                                           |              |
| ITEM 5.           | Other Information                                                                                                              | 23                |
|              |                                                                                                                           |              |
| ITEM 6.           | Exhibits                                                                                                                       | 23                |
|              |                                                                                                                           |              |
| **SIGNATURE**     | 24                                                                                                                             |
|              |                                                                                                                           |
| **EXHIBIT INDEX** | 25                                                                                                                             |

 

2

----

Tableof Contents

 

**PART I.        FINANCIALINFORMATION**

 

ITEM 1.**        **CondensedConsolidated Financial Statements

 

**bebe stores, inc.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
| ** **                                                                                                                                      | ** ** | **As of  April 4,  2009** | ** ** | **As of  July 5,  2008** | ** ** | **As of  April 5,  2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** **                          | ** ** |
| **Assets:**                                                                                                                                     | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** **                          | ** ** |
| Current assets:                                                                                                                                 |       |                                |       |                               |       |                                |       |
| Cash and equivalents                                                                                                                            |       | $                                   | 123,059    |                               | $          | 123,344                             |       | $ | 83,458 |   |
| Short term marketable securities                                                                                                                |       | —                              |       | —                             |       | 13,400                              |       |
| Receivables (net of allowance of $1,256,  $1,197 and $1,168)                                                                                    |       | 6,406                               |       | 7,953                              |       | 11,304                              |       |
| Inventories, net                                                                                                                                |       | 37,433                              |       | 42,827                             |       | 44,624                              |       |
| Deferred income taxes, net                                                                                                                      |       | 9,272                               |       | 9,290                              |       | 9,070                               |       |
| Prepaid and other                                                                                                                               |       | 29,752                              |       | 16,215                             |       | 18,968                              |       |
| Total current assets                                                                                                                            |       | 205,922                             |       | 199,629                            |       | 180,824                             |       |
| Trading securities                                                                                                                              |       | 70,033                              |       | —                             |       | —                              |       |
| Available for sale securities                                                                                                                   |       | 122,928                             |       | 235,751                            |       | 250,503                             |       |
| Auction rate securities written put option                                                                                                      |       | 12,298                              |       | —                             |       | —                              |       |
| Property and equipment, net                                                                                                                     |       | 132,029                             |       | 133,128                            |       | 126,243                             |       |
| Deferred income taxes, net                                                                                                                      |       | 24,935                              |       | 24,686                             |       | 24,131                              |       |
| Other assets                                                                                                                                    |       | 4,981                               |       | 4,569                              |       | 4,297                               |       |
| Total assets                                                                                                                                    |       | $                                   | 573,126    |                               | $          | 597,763                             |       | $ | 585,998 |   |
|                                                                                                                                            |       |                                |       |                               |       |                                |       |
| **Liabilities  and Shareholders’ Equity:**                                                                                                 | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** **                          | ** ** |
| Current liabilities:                                                                                                                            |       |                                |       |                               |       |                                |       |
| Accounts payable                                                                                                                                |       | $                                   | 23,217     |                               | $          | 23,252                              |       | $ | 26,448 |   |
| Accrued liabilities                                                                                                                             |       | 35,384                              |       | 38,958                             |       | 36,373                              |       |
| Current portion of capital leases                                                                                                               |       | —                              |       | 38                                 |       | 94                                  |       |
| Total current liabilities                                                                                                                       |       | 58,601                              |       | 62,248                             |       | 62,915                              |       |
| Deferred rent and other lease incentives                                                                                                        |       | 46,760                              |       | 46,229                             |       | 45,475                              |       |
| Uncertain tax positions                                                                                                                         |       | 3,401                               |       | 3,401                              |       | 2,907                               |       |
| Total liabilities                                                                                                                               |       | 108,762                             |       | 111,878                            |       | 111,297                             |       |
|                                                                                                                                            |       |                                |       |                               |       |                                |       |
| Commitments and contingencies                                                                                                                   |       |                                |       |                               |       |                                |       |
|                                                                                                                                            |       |                                |       |                               |       |                                |       |
| Shareholders’ equity:                                                                                                                      |       |                                |       |                               |       |                                |       |
| Preferred stock-authorized 1,000,000 shares  at $0.001 par value per share; no shares issued and outstanding                                    |       | —                              |       | —                             |       | —                              |       |
| Common stock-authorized 135,000,000 shares  at $0.001 par value per share; issued and outstanding 86,634,369, 88,939,720  and 88,850,749 shares |       | 87                                  |       | 89                                 |       | 89                                  |       |
| Additional paid-in capital                                                                                                                      |       | 140,763                             |       | 139,795                            |       | 137,922                             |       |
| Accumulated other comprehensive income  (loss)                                                                                                  |       | (13,378                             | )          | (261                               | )          | 1,800                               |       |
| Retained earnings                                                                                                                               |       | 336,892                             |       | 346,262                            |       | 334,890                             |       |
| Total shareholders’ equity                                                                                                                 |       | 464,364                             |       | 485,885                            |       | 474,701                             |       |
| Total liabilities and shareholders’ equity                                                                                                 |       | $                                   | 573,126    |                               | $          | 597,763                             |       | $ | 585,998 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

3

----

Tableof Contents

 

**bebe stores, inc.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **April 4,**                | ** ** | **April 5,**               | ** ** | **April 4,** | ** ** | **April 5,** | ** ** |
| ** **                                         | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                          |       | $                                | 127,657    |                            | $          | 151,729 |   | $ | 472,819 |   | $ | 516,140 |   |
| Cost of sales, including production and  occupancy |       | 79,351                           |       | 85,385                          |       | 281,084 |   | 279,282 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Gross margin                                       |       | 48,306                           |       | 66,344                          |       | 191,735 |   | 236,858 |   |
| Selling, general and administrative  expenses      |       | 56,761                           |       | 59,002                          |       | 177,380 |   | 177,937 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Operating income (loss)                            |       | (8,455                           | )          | 7,342                           |       | 14,355 |   | 58,921 |   |
| Interest and other income, net                     |       | 663                              |       | 5,225                           |       | 5,553 |   | 12,979 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Income (loss) before income taxes                  |       | (7,792                           | )          | 12,567                          |       | 19,908 |   | 71,900 |   |
| Income tax provision (benefit)                     |       | (2,747                           | )          | 4,219                           |       | 6,951 |   | 24,805 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                  |       | $                                | (5,045     | )                               | $          | 8,348 |   | $ | 12,957 |   | $ | 47,095 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Basic earnings (loss) per share                    |       | $                                | (0.06      | )                               | $          | 0.09 |   | $ | 0.15 |   | $ | 0.52 |   |
| Diluted earnings (loss) per share                  |       | $                                | (0.06      | )                               | $          | 0.09 |   | $ | 0.15 |   | $ | 0.51 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Basic weighted average shares outstanding          |       | 87,387                           |       | 88,833                          |       | 88,366 |   | 90,077 |   |
| Diluted weighted average shares outstanding        |       | 87,387                           |       | 90,115                          |       | 88,561 |   | 91,473 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

----

Tableof Contents

 

**bebe stores, inc.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands)**

**(unaudited)**

 
| ** **                                                                    | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                    | ** ** | **April 4,  2009**         | ** ** | **April 5,  2008** | ** ** |
|                                                                          |       |                            |       |   |   |
| Cash flows from operating income:                                             |       |                            |       |   |   |
| Net income                                                                    |       | $                               | 12,957     |   | $ | 47,095 |   |
| Adjustments to reconcile net income to cash  provided by operating activities |       |                            |       |   |   |
| Non-cash compensation expense                                                 |       | 4,300                           |       | 8,482 |   |
| Depreciation and amortization                                                 |       | 19,714                          |       | 16,865 |   |
| Net loss on disposal of property                                              |       | 3,930                           |       | 820 |   |
| Loss on trading securities                                                    |       | 12,893                          |       | — |   |
| Gain on auction rate securities written put  option                           |       | (12,298                         | )          | — |   |
| Deferred rent and other lease incentives                                      |       | 771                             |       | 5,285 |   |
| Deferred income taxes                                                         |       | (783                            | )          | (2,363 | ) |
| Changes in operating assets and  liabilities:                                 |       |                            |       |   |   |
| Receivables                                                                   |       | (423                            | )     | (5,114 | ) |
| Inventories                                                                   |       | 5,110                           |       | (504 | ) |
| Prepaid expenses and other                                                    |       | (14,788                         | )          | (5,997 | ) |
| Accounts payable                                                              |       | (18                             | )     | (1,866 | ) |
| Accrued liabilities                                                           |       | (3,625                          | )          | 2,046 |   |
| Net cash provided by operating activities                                     |       | 27,740                          |       | 64,749 |   |
|                                                                          |       |                            |       |   |   |
| Cash flows from investing activities:                                         |       |                            |       |   |   |
| Purchase of property and equipment                                            |       | (23,709                         | )          | (27,546 | ) |
| Purchase of marketable securities                                             |       | —                          |       | (336,950 | ) |
| Proceeds from sales of investment  securities                                 |       | 22,700                          |       | 392,975 |   |
| Net cash provided (used) by investing  activities                             |       | (1,009                          | )     | 28,479 |   |
|                                                                          |       |                            |       |   |   |
| Cash flows from financing activities:                                         |       |                            |       |   |   |
| Net proceeds from issuance of common stock                                    |       | 431                             |       | 2,232 |   |
| Purchase of common stock                                                      |       | (13,328                         | )          | (66,950 | ) |
| Excess of tax benefit from options  exercised                                 |       | 79                              |       | 632 |   |
| Cash dividends paid                                                           |       | (13,074                         | )          | (13,795 | ) |
| Other                                                                         |       | (38                             | )          | (167 | ) |
| Net cash used by financing activities                                         |       | (25,930                         | )          | (78,048 | ) |
|                                                                          |       |                            |       |   |   |
| Net increase in cash and cash equivalents                                     |       | 801                             |       | 15,180 |   |
| Effect of exchange rate changes on cash                                       |       | (1,086                          | )     | 2,675 |   |
| Cash and equivalents:                                                         |       |                            |       |   |   |
| Beginning of period                                                           |       | 123,344                         |       | 65,603 |   |
| End of period                                                                 |       | $                               | 123,059    |   | $ | 83,458 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

5

----

Table of Contents

 

**bebe stores, inc.**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**INTERIM FINANCIAL STATEMENTS**

 

The accompanying condensed consolidated balance sheets of bebe stores,inc. (the “Company”) as of April 4, 2009, July 5, 2008 and April 5,2008, the condensed consolidated statements of operations for the three andnine months ended April 4, 2009 and April 5, 2008 and the condensedconsolidated statements of cash flows for the nine months ended April 4,2009 and April 5, 2008 have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X, without audit. Accordingly, they do not include all of theinformation required by accounting principles generally accepted in the UnitedStates of America for annual financial statements. Therefore, these condensedconsolidated financial statements should be read in conjunction with theCompany’s Annual Report on Form 10-K for the fiscal year ended July 5,2008.

 

In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary to present fairly the financialposition at the balance sheet dates and the results of operations for theperiods presented have been included. The condensed consolidated balance sheetat July 5, 2008, presented herein, was derived from the audited balancesheet included in the Company’s Annual Report on Form 10-K for the fiscalyear ended July 5, 2008.

 

The Company’s business is affected by the pattern of seasonality commonto most retail apparel businesses. The results for the periods presented arenot necessarily indicative of future financial results.

 

**FISCAL YEAR**

 

The Company’s fiscal year is a 52 or 53 week period, each period endingon the first Saturday after June 30.  Fiscal years 2009 and 2008 eachinclude 52 weeks.

 

The three month periods ended April 4, 2009 and April 5, 2008each include 13 weeks.  The nine monthperiods ended April 4, 2009 and April 5, 2008 both include 39 weeks.

 

**INVENTORIES**

 

As of the specified dates, the Company’s inventories consisted of:

 
| ** **                     | ** ** | **As of**          | ** ** |
|--------------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **April 4,  2009** | ** ** | **July 5,  2008** | ** ** | **April 5,  2008** | ** ** |
| ** **                     | ** ** | **(In thousands)** | ** ** |
| Raw materials                  |       | $                       | 2,966      |   | $ | 5,340 |   | $ | 5,903 |   |
| Merchandise available for sale |       | 34,467                  |       | 37,487 |   | 38,721 |   |
| Inventories                    |       | $                       | 37,433     |   | $ | 42,827 |   | $ | 44,624 |   |

 

**EARNINGS PER SHARE**

 

Basic earnings per share is computed as net earnings divided by theweighted average number of common shares outstanding for the period. Dilutedearnings per share reflects the potential dilution that could occur from commonshares issuable through the exercise of dilutive stock options.

 

The following is a reconciliation of the number of shares used in thebasic and diluted earnings per share computations:

 
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **April 4,  2009**          | ** ** | **April 5,  2008**         | ** ** | **April 4,  2009** | ** ** | **April 5,  2008** | ** ** |
| ** **                                                     | ** ** | **(In thousands)**          | ** ** | **(In thousands)**         | ** ** |
| Basic weighted average number of shares  outstanding           |       | 87,387                           |       | 88,833                          |       | 88,366 |   | 90,077 |   |
| Incremental shares from the assumed  issuance of stock options |       | —                           |       | 1,282                           |       | 195 |   | 1,396 |   |
|                                                           |       |                             |       |                            |       |   |   |   |   |
| Diluted weighted average number of shares  outstanding         |       | 87,387                           |       | 90,115                          |       | 88,561 |   | 91,473 |   |

 

6

----

Tableof Contents

 

The number of incremental shares from the assumed issuance of stockoptions is calculated applying the treasury stock method.

 

Excluded from the computation of the number of diluted weighted averageshares outstanding were options of 3,143,000 for the three months ended April 5,2008, and 6,731,000 and 2,793,000 for the nine months ended April 4, 2009and April 5, 2008, respectively, which in each case would have beenanti-dilutive.  For the three monthsended April 4, 2009, there were no diluted shares outstanding.

 

**COMMON STOCK PURCHASES**

 

Share repurchases were as follows:

 
| ** **                                    | ** ** | **Three Months Ended**                                   | ** ** | **Nine Months Ended**                                    | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **April 4,  2009**                                            | ** ** | **April 5,  2008**                                            | ** ** | **April 4,  2009** | ** ** | **April 5,  2008** | ** ** |
| ** **                                    | ** ** | **(In thousands, except per share data)** | ** ** | **(In thousands, except per share data)** | ** ** |
| Number of shares repurchased                  |       | 1,851                                                              |       | —                                                             |       | 2,389 |   | 5,000 |   |
| Total cost                                    |       | $                                                                  | 10,127     |                                                               | —     |   | $ | 13,328 |   | $ | 66,950 |   |
| Average per share cost including  commissions |       | $                                                                  | 5.47       |                                                               | —     |   | $ | 5.58 |   | $ | 13.39 |   |

 

In October 2008, the board of directors authorized a program torepurchase up to $30 million of the Company’s common stock.  The Company intends, from time to time, asbusiness conditions warrant, to purchase stock in the open market or throughprivate transactions.  Purchases may beincreased, decreased or discontinued at any time without prior notice.  The plan does not obligate the Company torepurchase any specific number of shares and may be suspended at any time atmanagement’s discretion.

 

On September 13, 2007, the Company entered into an agreement withthe Company’s former Vice Chairperson Neda Mashouf to purchase 5 million sharesof the Company’s outstanding common stock beneficially owned by Ms. Mashoufat a price per share of $13.39, an aggregate purchase price of$66,950,000. The Company completed the purchase and retired the sharesduring the first quarter of fiscal 2008.

 

**COMPREHENSIVE INCOME (LOSS)**

 

Comprehensive income (loss) consists of net income and othercomprehensive income (income, expenses, gains and losses that bypass the incomestatement and are reported directly as a separate component of equity). The Company’s comprehensive income (loss) consists of net income (loss), losson available for sale securities and foreign currency translation adjustmentsfor all periods presented.

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **April 4,  2009**          | ** ** | **April 5,  2008**         | ** ** | **April 4,  2009** | ** ** | **April 5,  2008** | ** ** |
| ** **                            | ** ** | **(In thousands)**          | ** ** |
| Net income (loss)                     |       | $                                | (5,045     | )                          | $          | 8,348 |   | $ | 12,957 |   | $ | 47,095 |   |
| Loss on available for sale securities |       | (2,317                           | )     | (7,173                          | )          | (7,197 | ) | (7,173 | ) |
| Accumulated translation adjustments   |       | (472                             | )          | (2,509                          | )          | (5,920 | ) | (166 | ) |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Total comprehensive income (loss)     |       | $                                | (7,834     | )                          | $          | (1,334 | ) | $ | (160 | )  | $ | 39,756 |   |

 

7

----

Tableof Contents

 

**INVESTMENTS**

 

The Company holds a variety of interest bearing auction rate securities(“ARS”) consisting of federally insured student loan backed securities andinsured municipal authority bonds. As of April 4, 2009, the Company’s ARSportfolio totaled approximately $193 million, $70 million (net of an impairmentcharge of $12.9 million, of which $0.8 million has been recognized in thecurrent quarter) classified as trading securities and $123 million (net of atemporary impairment charge of $15 million, of which $2.3 million has beenrecognized in the current quarter) classified as available for sale securities.The Company’s ARS portfolio includes approximately 98% federally insuredstudent loan backed securities and 2% municipal authority bonds. The Company’sARS portfolio consists of approximately 51% AAA rated investments, 15% AA ratedinvestments, 24% A rated investments and 10% BBB rated investments.  TheseARS investments are intended to provide liquidity via an auction process thatresets the applicable interest rate at predetermined calendar intervals,allowing investors to either roll over their holdings or gain immediateliquidity by selling such interests at par. The uncertainties in the creditmarkets that began in February 2008 have affected the Company’s holdingsin ARS investments and auctions for the Company’s investments in thesesecurities have failed to settle on their respective settlement dates.Typically the fair value of ARS investments approximates par value due to thefrequent resets through the auction process. While the Company continues toearn interest on its ARS investments at the maximum contractual rate, theseinvestments are not currently trading and therefore do not currently have areadily determinable market value. Accordingly, the estimated fair value of ARSno longer approximates par value. Consequently, the investments are not currently liquid, and the Companywill not be able to access these funds until a future auction of theseinvestments is successful, the issuer redeems the securities, or at maturity.Maturity dates for these ARS investments range from 2010 to 2044 with principaldistributions occurring on certain securities prior to maturity. The Companycurrently has the ability and intent to hold these ARS investments until arecovery of the par value or until maturity.

 

In November 2008, the Company entered into a settlement agreementrelated to its ARS held with UBS Financial Services, Inc. (“UBS”) thatgrants the Company certain rights related to these ARS (the “Right”).  Beginning June 30, 2010, at the Company’srequest, UBS has agreed to purchase all of the Company’s ARS currently heldwith them at par value.  Conversely, UBShas the right, in its discretion, to purchase or sell the Company’s ARS at anytime until July 2, 2012, so long as the Company receives payment at parvalue upon any sale or disposition.  Theenforceability of the Right results in a put option which should be recognizedas a free standing asset separate from the ARS. Upon acceptance of the offer from UBS, the Company recorded the put optionat fair value of $11.6 million, with a corresponding credit to interestincome.  The put option does not meet thedefinition of a derivative instrument under SFAS No. 133.  Therefore, the Company has elected to measurethe put option at fair value under SFAS No. 159, which permits an entityto elect the fair value option for recognized financial assets.  As a result, unrealized gains and losses areincluded in earnings.  The increase in thefair value of the put option of $0.7 million in the current quarter has beenrecorded with a corresponding credit to interest and other income, net, in thecondensed consolidated statements of operations.

 

Prior to accepting the UBS offer, the Company recorded its ARS heldwith UBS as investments available for sale, with an associated unrealized lossincluded in other comprehensive income. In connection with our acceptance of the UBS offer in November 2008,the Company transferred approximately $84.4 million in ARS subject to the UBSsettlement from investments available for sale to trading securities inaccordance with SFAS No. 115 and recorded a loss on investments ofapproximately $12.1 million.  As aresult, changes in fair value of the ARS have been recorded as a component ofnet income.

 

The remainder of the Company’s ARS investment portfolio of $123million, net of a temporary impairment charge of $15 million, remains availablefor sale on our balance sheet.  Therelated temporary impairment charge remains as a loss in other comprehensiveincome.

 

The Company reviews its impairments in accordance with SFAS No. 115,*Accounting for Certain Investments in Debt andEquity Securities*, and related guidance issued by the FASB and SECin order to determine the classification of the impairment as “temporary” or “other-than-temporary”.A temporary impairment charge results in an unrealized loss being recorded inthe other comprehensive income component of shareholders’ equity. Such anunrealized loss does not affect net income for the applicable accountingperiod. An other-than-temporary impairment charge is recorded as a loss in thecondensed consolidated statement of income and reduces net income for theapplicable accounting period. The differentiating factors between temporary andother-than-temporary impairment are primarily the length of the time and theextent to which the market value has been less than cost, the financialcondition and near-term prospects of the issuer and our current intent andability to retain our investment in the issuer for a period of time sufficientto allow for any anticipated recovery in market value.

 

The valuation of the Company’s investment portfolio is subject touncertainties that are difficult to predict. Factors that may impact itsvaluation include changes to credit ratings of the securities as well as to theunderlying assets supporting those securities, rates of default of theunderlying assets, underlying collateral value, discount rates and ongoingstrength and quality of market credit and liquidity.

 

8

----

Tableof Contents

 

**CREDIT FACILITIES**

 

The Company has an unsecured commercial line of credit agreement withBank of America, which provides for borrowings and issuance of letters ofcredit up to a combined total of $25 million and expires on March 31,2010. The outstanding balance bears interest at either the bank’s referencerate (which was 3.25% as of April 4, 2009) or the LIBOR rate plus 1.75percentage points. As of April 4, 2009, there were no outstandingborrowings, and there was $2.9 million outstanding in letters of credit.

 

This credit facility requires the Company to comply with certainfinancial covenants, including amounts for minimum tangible net worth,unencumbered liquid assets and profitability, and certain restrictions onmaking loans and investments.  At April 4,2009, the Company was not in compliance with one covenant requiring positivequarterly net income, but the Company has obtained a waiver from Bank ofAmerica with respect to such non-compliance.

 

**STOCK BASED COMPENSATION**

 

The following table summarizes the stock based compensation expenserecognized under the Company’s stock plan during the three months and the ninemonths ended April 4, 2009 and April 5, 2008:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **April 4,  2009**          | ** ** | **April 5,  2008**         | ** ** | **April 4,  2009** | ** ** | **April 5,  2008** | ** ** |
| ** **                             | ** ** | **(In thousands)**          | ** ** |
| Stock Options                          |       | $                                | 982        |                            | $          | 2,174 |   | $ | 3,961 |   | $ | 8,325 |   |
| Nonvested stock awards/units           |       | 79                               |       | 71                              |       | 339 |   | 157 |   |
| Total stock based compensation expense |       | $                                | 1,061      |                            | $          | 2,245 |   | $ | 4,300 |   | $ | 8,482 |   |

 

Unrecognized compensation cost related to nonvested stock options andnonvested stock awards/units totaled approximately $6.4 million and $0.3million, respectively, as of April 4, 2009.  This cost is expected tobe recognized over a weighted average period of 3.2 years.  The weightedaverage fair values of stock options at their grant date during the threemonths ended April 4, 2009 and April 5, 2008 were $2.43 and $4.56,respectively.  For the nine month periodended April 4, 2009 and April 5, 2008, the weighted average fairvalues of stock options at their grant date were $3.26 and $5.32, respectively.

 

**RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements*”*.  SFAS No. 157defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles and expandsdisclosures about fair value measurements.  In February 2008, theFASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASBStatement No. 157,” which delayed the effective date of SFAS 157 fornon-financial assets and liabilities, except for certain items that arerecognized or disclosed at fair value at least annually.  The Companyelected to partially adopt the provisions of SFAS No. 157 as of July 6,2008 for financial instruments, as permitted by FSP 157-2. Although the partialadoption of SFAS No. 157 did not materially impact the Company’s financialcondition, results of operations or cash flow, the Company is now required toprovide additional disclosures as part of its financial statements.  TheCompany does not expect the adoption of the remaining provisions of SFAS 157(delayed by FSP 157-2) to have a material impact on the Company’s consolidatedfinancial position, statement of operations or cash flows.

 

In February 2007, the FASB issued SFAS No. 159, “The FairValue Option for Financial Assets and Financial Liabilities-Including anamendment of FASB Statement No. 115”.  SFAS No. 159 permitsentities to choose to measure eligible items at fair value at specifiedelection dates and report unrealized gains and losses on items for which thefair value option has been elected in earnings at each subsequent reportingdate. The Company adopted SFAS No. 159 as of July 6, 2008.  Since the adoption of SFAS No. 159, theCompany elected the fair value option for our ARS written put right related toour ARS held with UBS. The Company will recognize any change in the ARS writtenput right related to our ARS investments held with UBS as a gain or loss in thestatement of operations.

 

In April 2009, the FASB issued SFAS No. 107-1 and APB No. 28-1,“Interim Disclosures about Fair Value of Financial Instruments”, which amendsSFAS No. 107, “Disclosures about Fair Values of Financial Instruments”, torequire disclosures about fair value of financial instruments in interimfinancial statements as well as in annual financial statements.  SFAS No. 107-1 also amends APB No. 28,“Interim Financial Reporting”, to require those disclosures in summarizedfinancial information at interim reporting periods.  SFAS No. 107-1 is effective for interimperiods ending after June 15, 2009, with early adoption permitted forperiods ending after March 15, 2009. The Company does not expect the adoption of SFAS No. 107-1 to havea material impact on the Company’s consolidated financial position, statementof operations, or cash flows.

 

9

----

Table of Contents

 

In April 2009, the FASB issued SFAS No. 115-2 and SFAS No. 124-2,“Recognition and Presentation of Other-Than-Temporary Impairments”, whichamends the other-than-temporary guidance in U.S. GAAP for debt securities tomake the guidance more operational and to improve the presentation anddisclosure of other-than-temporary impairments on debt and equity securities inthe financial statements.  SFAS No. 115-2and SFAS No.  124-2 is effective for interim periods ending after June 15,2009, with early adoption permitted for periods ending after March 15,2009.  The Company does not expect theadoption of SFAS No. 115-2 and SFAS No. 124-2 to have a materialimpact on the Company’s consolidated financial position, statement ofoperations or cash flows.

 

In April 2009, the FASB issued SFAS No. 157-4, “DeterminingFair Value when the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly”,which provides additional guidance in estimating fair value in accordance withSFAS No. 157 when the volume and level of activity for both financial andnon-financial assets or liabilities have significantly decreased.  SFAS No. 157-4 is effective for fiscalyears and interim periods beginning after July 1, 2009 and shall beapplied prospectively.  Early adoptionfor periods ending before March 15, 2009 is not permitted.  The Company does not expect the adoption ofSFAS No. 157-4 to have a material impact on the Company’s consolidatedfinancial position, statement of operations or cash flows.

 

**FAIR VALUE MEASUREMENTS**

 

SFAS No. 157 establishes a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value. These tiers include: Level1, defined as observable inputs such as quoted prices in active markets; Level2, defined as inputs other than quoted prices in active markets that are eitherdirectly or indirectly observable; and Level 3, defined as observable inputs inwhich little or no market data exists, therefore requiring an entity to developits own assumptions.

 

As of April 4, 2009, the Company held financial instruments thatare measured at fair value on a recurring basis. These included cashequivalents, trading securities, a written put option related to a UBSsettlement and available for sale securities. Cash equivalents consist of moneymarket funds.  Trading securities consistof auction rate securities (“ARS”) held with UBS.  Available for sale securities consist of ARSheld with another broker.  Thesesecurities consist of federally insured student loan backed securities andinsured municipal authority bonds.

 

The Company determined the estimated fair value of its investment inARS as of April 4, 2009 using a discounted cash flow model. Theassumptions used in preparing the discounted cash flow model include estimatesfor interest rates, timing and amount of cash flows and expected holdingperiods of the ARS. The ARS written put option is a free-standing assetseparate from the ARS and represents the Company’s contractual right to requireUBS to purchase its ARS at par value during the two-year period beginning June 20,2010.  In order to value the ARS writtenput right, the Company considered intrinsic value, time value of money and itsassessment of the credit worthiness of UBS.

 

The following items are measured at fair value on a recurring basissubject to the disclosure requirements of SFAS No. 157 at April 4,2009:

 
| **Description**               | ** ** | **April 4, 2009** | ** ** | **Using Quoted Prices  in Active Markets for  Identical Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable Inputs** | ** ** |
|-------------------------------|------------|-----------------------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                    | ** ** | ** **                  | ** ** | **(Level 1)**                                                                             | ** ** | **(Level 2)**                         | ** ** | **(Level 3)**                        | ** ** |
| ** **                    | ** ** | ** **                  | ** ** | **Fair value measurements at reporting date**                         | ** ** | ** **                                 | ** ** |
| ** **                    | ** ** | ** **                  | ** ** | **(In thousands)**                                                                        | ** ** | ** **                                 | ** ** |
| Cash equivalents              |       | $                           | 97,705     |                                                                                           | $          | 97,705                                     |       | $                                         | —     |   | $ | — |   |
| Trading securities            |       | 70,033                      |       | —                                                                                         |       | —                                     |       | 70,033                                    |       |
| Available for sale securities |       | 122,928                     |       | —                                                                                         |       | —                                     |       | 122,928                                   |       |
| ARS written put option        |       | 12,298                      |       | —                                                                                         |       | —                                     |       | 12,298                                    |       |
| Total                         |       | $                           | 302,964    |                                                                                           | $          | 97,705                                     |       | $                                         | —     |   | $ | 205,259 |   |

 

10

----

Table of Contents

 

The following table presents the Company’s activity for assets measuredat fair value on a recurring basis using significant unobservable inputs (Level3) as defined in SFAS No. 157 for the nine months ended April 4,2009:

 
| ** **                                        | ** ** | **Long Term  Investments** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **(In thousands)**         | ** ** |
| Balance at July 5, 2008                      |       | $                               | 235,751    |   |
| Total gains or (losses) (realized or  unrealized) |       |                            |       |
| Included in earnings                              |       | (595                            | )          |
| Included in other comprehensive income            |       | (7,197                          | )          |
| Settlements                                       |       | (22,700                         | )          |
| Total                                             |       | $                               | 205,259    |   |
|                                                   |            |                                 |            |  |  |

 

**LEGAL MATTERS**

 

As of the date of this filing, the Company was involved in ongoinglegal proceedings as described below.

 

A former employee sued bebe in a complaint filed on April 28, 2005in the United States District Court for the Northern District of California(case No. C050177) alleging violations under the Fair Labor Standards Act,specifically that it obligated her to buy and wear its brand clothing as auniform, without reimbursement or credit, and the net effect of deducting thevalue of such required purchases from her wages would often result in her notbeing paid minimum wages. The plaintiff purports to bring the action also on behalfof a class of hourly, non-managerial employees who are similarly situated. Thelawsuit seeks compensatory, statutory and injunctive relief. The partiesnegotiated and signed a confidential settlement in this case which remainssubject to court approval. The Company has accrued an amount that it believesreasonably estimates the potential liability, which did not have a materialimpact on our financial position or results of operations.

 

A former employee sued bebe in a complaint filed July 27, 2006 inthe Superior Court of California, San Mateo County (case No. CIV 456550)alleging a failure to pay all wages, failure to pay overtime wages, failure topay minimum wages, failure to provide meal periods, violation of LaborCode §450, violation of Labor Code §2802 and California Code ofRegulations §11040(9)(A), statutory wage violations (late payment of wages),unlawful business practices under Business and Professions Code §16720 and§17200, conversion of wages and violation of Civil Code §52.1. The plaintiffpurports to bring the action also on behalf of current and former Californiabebe employees who are similarly situated. The lawsuit seeks compensatory,statutory, punitive, restitution and injunctive relief. In September 2008,the court rejected Plaintiff’s motion to certify a class relating to Plaintiff’sclaim that it required employees to purchase and wear its product.  The court recently put this case on holduntil the previously named case (Case No. C050177) is resolved.

 

A former employee sued bebe in a complaint filed September 20,2007 in the United States District Court for the District of New Jersey (caseno. 07-cv-4514 (D.N.J.)) alleging various state and federal statutorybreaches based on a failure to pay all wages, including overtime wages andbonus, failure to provide and/or pay for meal and rest break periods, failureto credit vacation time and other benefits and retaliation, wrongfultermination, breach of contract, breach of covenant of good faith and fairdealing, and unjust enrichment. Plaintiff purported to bring the action onbehalf of current and former store management employees who are or weresimilarly situated. The parties have negotiated, signed and submitted to thecourt for approval, a confidential settlement agreement.

 

The Company is also involved in various other legal proceedings arisingin the normal course of business. None of these matters, nor the matters listedabove, are expected, individually or in the aggregate, to have a materialadverse effect on its business, financial condition or results of operations.

 

The Company intends to defend ourselves vigorously against each ofthese claims. However, the results of any litigation are inherently uncertain.The Company cannot assure you that it will be able to successfully defenditself in these lawsuits. Where required, and/or otherwise appropriate, theCompany has recorded an estimate of potential liabilities that it believes isreasonable. Any estimates are revised as further information becomes available.

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following Management’s Discussion and Analysis of FinancialCondition and Results of Operations contains forward-looking statements, whichinvolve risks and uncertainties. Our actual results may differ materially fromthose anticipated in these forward-looking statements.  Statements thatare predictive in nature, that depend upon or refer to future events orconditions or that include words such as “expects,” “anticipates,” “intends,” “plans,”“believes,” “estimates,” “thinks,” and similar expressions are forward-lookingstatements.   Forward-looking statements include statements about ourexpected results of operations, capital expenditures and store openings. Although we believe that these statements are based upon reasonableassumptions, we cannot assure you that our goals will be achieved. Theseforward-looking statements are made as of the date of this Form 10-Q, andwe assume no obligation to update or revise them or provide reasons why actualresults may differ. Factors that might cause such a difference include, but arenot limited to, our ability to respond to changing fashion trends,miscalculation of the demand for our products, 

 

11

----

Table of Contents

 

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 “RiskFactors” and elsewhere in this Form 10-Q.

 

**OVERVIEW**

 

We design, develop and produce a distinctive line of contemporary women’sapparel and accessories. While we attract a broad audience, our target customeris a 18 to 34-year-old woman who seeks current fashion trends to suit herlifestyle. The “bebe look” appeals to a hip, sexy, sophisticated,body-conscious woman who takes pride in her appearance. The bebe customerexpects value in the form of current fashion and high quality at a competitiveprice.

 

Our distinctive 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 develop themajority of our merchandise in-house, which is manufactured to ourspecifications. The remainder of our merchandise is sourced directly fromthird-party manufacturers.

 

We market our products under the bebe, BEBE SPORT, bbsp and 2b bebebrand names through our 308 retail stores, of which 212 are bebe stores, 62 areBEBE SPORT stores, 15 are 2b bebe stores, 18 are bebe outlet stores and 1 is abebe accessories store as of April 4, 2009. These stores are located in 35states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands andCanada. In addition, we have an on-line store at www.bebe.com and our licenseesoperate 30 international stores as of April 4, 2009. During the ninemonths ended April 4, 2009, we opened 12 stores, including 6 bebe stores,1 BEBE SPORT store and 5 2b bebe stores and closed 5 bebe stores and 2 BEBESPORT stores.  We expect to open approximately 14 stores, includingapproximately 6 bebe stores, 1 BEBE SPORT store and 7 2b bebe stores and toconvert all of our existing bebe outlet stores to 2b bebe stores during ourfiscal 2009. We also plan to renovate 4 existing stores and relocate or expand3 existing stores, resulting in square footage growth of approximately 2.9%.

 

*bebe stores.* We were founded by Manny Mashouf, our Chief Executive Officer and Chairman ofthe Board. We opened our first store in San Francisco, California in 1976,which was also the year we incorporated. We also operate one bebe accessorystore that features a limited assortment of bebe merchandise, includingouterwear, shoes and accessories.

 

*BEBE SPORT.* Welaunched BEBE SPORT during fiscal 2003 to address the performance and activelifestyle needs of the bebe customer.  We offer a selection of sportswearand footwear under the BEBE SPORT and bbsp brand names.

 

*bebe outlets.* We utilize the outlets as a clearance vehicle for merchandise from our retailstores. In addition, the inventory includes a strong presentation of bebe logomerchandise and special cuts produced under the 2b bebe label exclusively forthe outlet stores.  In fiscal 2009, we plan to convert all our existingbebe outlet stores to 2b bebe stores.

 

*2b bebe stores*. During fiscal 2009, we plan to open 7 new 2b bebe stores in outlet centerswhich offer a strong presentation of bebe logo merchandise similar to ouroutlet stores and special cuts produced under the 2b bebe label.  We willalso use these stores as a clearance vehicle for retail but on a much smallerscale than we do currently.

 

*On-line.* bebe.com isan extension of the bebe store experience and provides a complete assortment ofbebe and BEBE SPORT merchandise. It is also used as an advertising vehicle tocommunicate with our customers.  We are currently able to ship tocustomers in the United States, Canada, Puerto Rico and U.S. Protectorates.

 

**Critical Accounting Policies**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations are based upon our consolidated financial statements, which havebeen prepared in conformity with accounting principles generally accepted inthe United States of America.

 

The preparation of these financial statements requires the appropriateapplication of certain accounting policies, many of which require us to makeestimates and assumptions about future events and their impact on amountsreported in our financial statements and related notes. Since future events andtheir impact cannot be determined with certainty, the actual results willinevitably differ from our estimates. Such differences could be material to thefinancial statements. We believe our application of accounting policies, andthe estimates inherently required therein, are reasonable. Our most criticalaccounting policies are those related to revenue recognition, stock basedcompensation, inventories, marketable securities, impairment of long livedassets, uncertain tax positions and liabilities for self-insurance. Wecontinually evaluate these accounting policies and estimates and we makeadjustments when facts and circumstances dictate a change. Our accountingpolicies are described in Note 1 to the consolidated financial statementsin our annual report on Form 10-K for the fiscal year ended July 5,2008. This discussion and analysis should be read in conjunction with suchdiscussion and with our condensed consolidated financials statements andrelated notes included in Part 1, Item 1 of this quarterly report.

 

12

----

Table of Contents

 

**RESULTS OF OPERATIONS**

 

Our fiscal year is a 52 or 53 week period, each period ending on thefirst Saturday after June 30.  Fiscal years 2009 and 2008 eachinclude 52 weeks.  The three months ended April 4, 2009 and April 5,2008 each included 13 weeks.  The ninemonths ended April 4, 2009 and April 5, 2008 both included 39 weeks.

 

The following table sets forth certain financial data as a percentageof net sales for the periods indicated:

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **April 4,**                | ** ** | **April 5,**               | ** ** | **April 4,** | ** ** | **April 5,** | ** ** |
| ** **                                             | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Net sales                                              |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of sales, including production and occupancy  (1) |       | 62.2                             |       | 56.2                            |       | 59.4 |   | 54.1 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Gross margin                                           |       | 37.8                             |       | 43.8                            |       | 40.6 |   | 45.9 |   |
| Selling, general and administrative expenses (2)       |       | 44.5                             |       | 38.9                            |       | 37.6 |   | 34.5 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Operating income (loss)                                |       | (6.7                             | )     | 4.9                             |       | 3.0 |   | 11.4 |   |
| Interest and other income, net                         |       | 0.5                              |       | 3.4                             |       | 1.2 |   | 2.5 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Income (loss) before income taxes                      |       | (6.2                             | )     | 8.3                             |       | 4.2 |   | 13.9 |   |
| Provision (benefit) for income taxes                   |       | (2.2                             | )     | 2.8                             |       | 1.5 |   | 4.8 |   |
|                                                   |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                      |       | (4.0                             | )%         | 5.5                             | %          | 2.7 | % | 9.1 | % |

 

----

| (1)    | Cost of sales includes the cost of merchandise, occupancy costs,  distribution center and production costs.                             |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                    |
| (2)    | Selling, general and administrative expenses primarily consist of  non-occupancy store costs, corporate overhead and advertising costs. |

 

*Net Sales.* Net salesdecreased to $127.7 million during the three months ended April 4, 2009from $151.7 million for the comparable period of the prior year, a decrease of$24 million, or 15.8%. The decrease in sales was primarily due to a 23.5%decrease in comparable store sales and a 10.4% decrease in our on-linesales.  These decreases were partiallyoffset by an increase in stores not included in the comparable store sales andan increase in wholesale sales to international licensees.  Contributing to our performance weremerchandising opportunities in bebe and BEBE SPORT as well as a difficult macroeconomic environment which negatively impacted mall traffic and forced us todrive sales with increased promotions.

 

For the nine months ended April 4, 2009, net sales decreased to$472.8 million from $516.1 million for the comparable period of the prior year,a decrease of $43.3 million, or 8.4%. The decrease in sales was primarily due to a 18.2% decrease incomparable store sales and a 2.0% decrease in our on-line sales.  This decrease was partially offset by anincrease in stores not included in the comparable store sales, an increase inwholesale sales to international licensees and other revenue increasesincluding royalty revenue and reversal of deferred expense related toexpiration of loyalty points. Contributing to our performance were merchandising opportunities in bebeand BEBE SPORT as well as a difficult macro economic environment whichnegatively impacted mall traffic and forced us to drive sales with increased promotions.

 

13

----

Table of Contents

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **April 4,**                | ** ** | **April 5,**               | ** ** | **April 4,** | ** ** | **April 5,** | ** ** |
| ** **                                     | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Net sales (In thousands)                       |       | $                                | 127,657    |                            | $          | 151,729 |   | $ | 472,819 |   | $ | 516,140 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Total net sales increase (decrease) percentage |       | (15.8                            | )%         | (1.7                            | )%         | (8.4 | )% | 1.6 | % |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Comparable store sales decrease percentage     |       | (23.5                            | )%         | (7.6                            | )%         | (18.2 | )% | (8.3 | )% |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Net sales per average square foot (1)          |       | $                                | 106        |                            | $          | 141 |   | $ | 396 |   | $ | 495 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Square footage at end of period (In thousands) |       | 1,157                            |       | 1,060                           |       | 1,157 |   | 1,060 |   |
|                                           |       |                             |       |                            |       |   |   |   |   |
| Number of store locations:                     |       |                             |       |                            |       |   |   |   |   |
| Beginning of period                            |       | 312                              |       | 290                             |       | 303 |   | 273 |   |
| New store locations                            |       | 1                                |       | 4                               |       | 12 |   | 21 |   |
| Closed store locations                         |       | 5                                |       | 4                               |       | 7 |   | 4 |   |
| Number of stores open at end of period         |       | 308                              |       | 290                             |       | 308 |   | 290 |   |

 

----

| (1) | We calculate net sales per average square foot using net store sales  and a monthly average store square footage. |
|-----|-------------------------------------------------------------------------------------------------------------------|

 

*Gross Margin.* Grossmargin decreased to $48.3 million during the three months ended April 4,2009 from $66.3 million for the comparable period of the prior year, a decreaseof $18 million, or 27.1%. As a percentage of net sales, gross margin decreasedto 37.8% for the three months ended April 4, 2009 from 43.8% in thecomparable period of the prior year.  The decrease in gross margin as apercentage of net sales was primarily due to higher markdowns and unfavorableoccupancy leverage.

 

For the nine months ended April 4, 2009, gross margin decreased to$191.7 million from $236.9 million for the comparable period of the prior year,a decrease of $45.2 million, or 19.1%. As a percentage of net sales, gross margin decreased to 40.6% for thenine months ended April 4, 2009 from 45.9% in the comparable period of theprior year.  The decrease in gross marginas a percentage of net sales was primarily due to higher markdowns and unfavorableoccupancy leverage.

 

*Selling, General and Administrative Expenses.*Selling, general and administrative expenses, which primarily consist ofnon-occupancy store costs, corporate overhead and advertising costs, decreasedto $56.8 million during the three months ended April 4, 2009 from $59.0million for the comparable period of the prior year, a decrease of $2.2million, or 3.7 %. As a percentage of net sales, selling, general andadministrative expenses increased to 44.5% during the three months ended April 4,2009 from 38.9% in the comparable period of the prior year.  The decreasein selling, general and administrative expenses was primarily due to lowertotal compensation expense offset by an increase in depreciation expense andapproximately $2.5 million in impairment charges and fixed asset write-offsrelated to underperforming stores and store closures.

 

For the nine months ended April 4, 2009, selling, general andadministrative expenses decreased to $177.4 million from $177.9 for thecomparable period of the prior year, a decrease of $0.5 million, or 0.3%.  As a percentage of net sales, selling,general and administrative expenses increased to 37.6% from 34.5% in thecomparable period of the prior year.  Thedecrease in selling, general and administrative expenses was primarily due tolower total compensation expense offset by an increase in depreciation expenseand approximately $3.9 million in impairment charges and fixed asset write-offsrelated to underperforming stores and store closures.

 

*Interest and Other Income, Net.*We generated approximately $0.7 million of interest and other income (net ofother expenses) during the three months ended April 4, 2009 compared toapproximately $5.2 million in the comparable period of the prior year. The decreasewas primarily the result of lower investment in higher yielding tax-exemptinvestments, more investments in low yielding money market funds and anapproximately $0.1 million impairment charge on our trading securities.

 

For the nine month period ending April 4, 2009, we generatedapproximately $5.6 million of interest and other income (net of otherexpenses), compared to $13.0 million in the comparable period of the prioryear.  The decrease was primarily theresult of lower investment in higher yielding tax-exempt investments, moreinvestments in low yielding money market funds and an approximately $0.6million impairment charge on our trading securities.

 

*Provision for Income Taxes.*Our effective tax rate increased to 35.3% for the three months ended April 4,2009 from 33.6% for the comparable period in the prior year primarily due todeleveraging of permanent items, including stock based compensation expense,and lower tax-exempt interest income as a percent of taxable income.

 

For the nine months ended April 4, 2009, our effective tax rateincreased to 34.9% from 34.5% for the comparable period in the prior yearprimarily due to deleveraging of permanent items, including stock basedcompensation expense, and lower tax-exempt interest income as a percent oftaxable income.

 

14

----

Table of Contents

 

**Seasonality of Business and Quarterly Results**

 

Our business varies with general seasonal trends that arecharacteristic of the retail and apparel industries. As a result, our typicalstore generates a higher percentage of our annual net sales and profitabilityin the second quarter of our fiscal year, which includes the holiday sellingseason, compared to the other quarters of our fiscal year. If for any reasonour sales were below seasonal norms during the second quarter of our fiscalyear, our annual operating results would be negatively impacted. Because of theseasonality of our business, results for any quarter are not necessarilyindicative of results that may be achieved for a full fiscal year.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our working capital requirements vary widely throughout the year andgenerally peak during the first and second fiscal quarters. At April 4,2009, we had approximately $316.0 million of cash and equivalents and long terminvestments on hand of which approximately $193.0 million, net of impairmentcharges of $27.9 million, were invested in auction rate securities (“ARS”). Wedo not anticipate the lack of liquidity in the ARS to impact our ability tofund our operations in the foreseeable future and believe we have sufficientcash and equivalents to fund ongoing operations. In addition, we have arevolving line of credit, under which we may borrow or issue letters of creditup to a combined total of $25 million. As of April 4, 2009, there were nocash borrowings outstanding under the line of credit, and letters of creditoutstanding totaled $2.9 million.  As of April 4,2009, we were not in compliance with one covenant of this agreement requiringnet quarterly income.  We obtained awaiver with respect to this matter and do not anticipate to breach thiscovenant in future quarters.

 

At April 4, 2009, we had cash and equivalents of $123.1 millionheld in accounts managed by third-party financial institutions consisting ofinvested cash and cash in our operating accounts.  The invested cash isinvested in interest bearing funds managed by third party financial institutions. These funds invest in direct obligations of the government of the UnitedStates.  To date, we have experienced no loss or lack of access to ourinvested cash or equivalents; however, we can provide no assurances that accessto our invested cash and equivalents will not be impacted by adverse conditionsin the financial markets.

 

At any point in time we also have approximately $100 to $140 million ofinvested cash and cash in operating accounts that are with third partyfinancial institutions.  These balances exceed the Federal DepositInsurance Corporation insurance limits.  While we monitor daily the cashbalances in our operating accounts and adjust the cash balances as appropriate,these cash balances could be impacted if the underlying financial institutionsfail or could be subject to other adverse conditions in the financialmarkets.  To date, we have experienced no loss or lack of access toinvested cash or cash in our operating accounts.

 

Net cash provided by operating activities for the nine months ended April 4,2009 was $27.7 million versus $64.7 million for the nine months ended April 5,2008. Cash provided by operating activities for the period was primarilygenerated by net income of $13 million adjusted for stock compensation of $4.3million, depreciation of $19.7 million, deferred rent of $0.8 million, impairmentof trading securities of $0.6 million and net loss on disposal of property of$3.9 million related to impairment charges and fixed asset write-offs, storeclosures and store remodels, as well as changes in working capital. The changesin working capital were primarily due to a decrease in inventory of $5.1million, offset by an increase in prepaid expenses and other assets of $14.8million and a decrease in accrued liabilities of $3.6 million.

 

Net cash used by investing activities for the nine months ended April 4,2009 was $1.0 million versus net cash provided by investing activities of $28.5million for the nine months ended April 5, 2008.  Cash used byinvesting activities for the period was primarily due to capital expendituresof $23.7 million related to the opening of new stores, investments in informationsystems and technology and office equipment, partially offset by proceeds onour sales of ARS of $22.7 million.  We opened 12 new stores in the ninemonths ended April 4, 2009 and expect to open a total of approximately 14stores during fiscal 2009.  We estimate that total capital expenditureswill be below $30 million in fiscal 2009.

 

Net cash used by financing activities was $25.9 million for the ninemonths ended April 4, 2009 versus $78.0 million for the nine months ended April 5,2008.  Cash used by financing activities for the period was primarily dueto payments of quarterly dividends for the fourth quarter of fiscal 2008 andthe first two quarters of fiscal 2009 totaling $13.1 million and stockrepurchases of $13.3 million.  TheCompany declared a quarterly dividend at the end of the quarter totaling $4.3million which was accrued at the end of the current quarter and paid in thefollowing quarter.

 

We hold a variety of interest bearing ARS consisting of federallyinsured student loan backed securities and insured municipal authority bonds.As of April 4, 2009, our ARS portfolio totaled approximately $193 million,$70 million (net of an impairment charge of $12.9 million) classified astrading securities and $123 million (net of temporary impairment charge of $15million) classified as available for sale securities. Our ARS portfolioincludes approximately 98% federally insured student loan backed securities and2% municipal authority bonds. Our ARS portfolio consists of approximately 51%AAA rated investments, 15% 

 

15

----

Table of Contents

 

AA rated investments, 24% A rated investments and 10% BBB ratedinvestments.  These ARS investments are intended to provide liquidity viaan auction process that resets the applicable interest rate at predeterminedcalendar intervals, allowing investors to either roll over their holdings orgain immediate liquidity by selling such interests at par. The uncertainties inthe credit markets that began in February 2008 have affected our holdingsin ARS investments and auctions for our investments in these securities havefailed to settle on their respective settlement dates. Typically the fair valueof ARS investments approximates par value due to the frequent resets throughthe auction process. While we continue to earn interest on our ARS investmentsat the maximum contractual rate, these investments are not currently tradingand therefore do not currently have a readily determinable market value.Accordingly, the estimated fair value of ARS no longer approximates par value.  Consequently, the investments are notcurrently liquid, and we will not be able to access these funds until a futureauction of these investments is successful, the issuer redeems the securities,or at maturity. Maturity dates for these ARS investments range from 2010 to2044 with principal distributions occurring on certain securities prior tomaturity. We currently have the ability and intent to hold these ARSinvestments until a recovery of the par value or until maturity.

 

In November 2008, we entered into a settlement agreement relatedto our ARS held with UBS Financial Services, Inc. (“UBS”) that grants uscertain rights related to these ARS (the “Right”).  Beginning June 30, 2010, at our request,UBS has agreed to purchase all of our ARS currently held with them at parvalue.  Conversely, UBS has the right, inits discretion, to purchase or sell our ARS at any time until July 2,2012, so long as we receive payment at par value upon any sale ordisposition.  The enforceability of theRight results in a put option which should be recognized as a free standingasset separate from the ARS.  Uponacceptance of the offer from UBS, we recorded the put option at fair value of$11.6 million, with a corresponding credit to interest income.  The put option does not meet the definitionof a derivative instrument under SFAS No. 133.  Therefore, we have elected to measure the putoption at fair value under SFAS NO. 159, which permits an entity to elect thefair value option for recognized financial assets.  As a result, unrealized gains and losses areincluded in earnings.  The increase inthe fair value of the put option of $0.7 million has been recorded with acorresponding credit to interest and other income, net, in the condensedconsolidated statements of operations.

 

Prior to accepting the UBS offer, we recorded our ARS held with UBS asinvestments available for sale, with an associated unrealized loss included inother comprehensive income.  Inconnection with our acceptance of the UBS offer in November 2008, we transferredapproximately $84.4 million in ARS subject to the UBS settlement frominvestments available for sale to trading securities in accordance with SFAS No. 115and recorded a loss on investments of approximately $12.1 million.  As a result, changes in fair value of the ARShave been recorded as a component of net income.

 

In October 2008, our board of directors authorized a program torepurchase up to $30 million of our common stock.  We may, from time to time, as businessconditions warrant, purchase stock in the open market or through privatetransactions.  Purchases may beincreased, decreased or discontinued at any time without prior notice.  The plan does not obligate us to repurchaseany specific number of shares and may be suspended at any time at management’sdiscretion.   During the third quarter offiscal 2009, we repurchased 1,851,000 shares at an average price per share of$5.47 for an aggregate purchase price of approximately $10 million.

 

During our first quarter of fiscal 2008, we entered into an agreementwith our former Vice Chairperson Neda Mashouf to purchase 5 million shares ofour common stock beneficially owned by Ms. Mashouf at a price per share of$13.39, an aggregate purchase price of $66,950,000.  We may purchaseadditional shares from Ms. Mashouf or other shareholders in the future.

 

We believe that our cash on hand, together with our cash flows fromoperations, will be sufficient to meet our capital and operating requirementsfor at least the next twelve months. Our future capital requirements, however,will depend on numerous factors, including without limitation, liquidity of ourauction rate securities, the size and number of new and expanded stores and/orstore concepts, investment costs for management information systems, potentialacquisitions and/or joint ventures, repurchase of stock and future results ofoperations.

 

16

----

Table of Contents

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risks, which include changes in U.S. interestrates and, to a lesser extent, foreign exchange rates. We do not engage infinancial transactions for trading or speculative purposes.

 

*Interest Rate Risk*

 

We currently maintain a portfolio of variable interest rate investmentsconsisting of cash equivalents and long term investments consisting ofARS.   According to our investmentpolicy, we may invest in taxable and tax-exempt instruments.  In addition,the policy establishes limits on credit quality, maturity, issuer and type ofinstrument. Marketable securities are classified as “trading” or “available forsale”.  We do not use derivative financial instruments in our investmentportfolio.

 

All highly liquid investments with a maturity of three months or lessat the date of purchase are considered to be cash equivalents. Investments are considered short term marketable securities if the originalmaturity is between three months and twelve months, or long term investments ifthe original maturity is greater than twelve months. Typically the fair valueof ARS investments approximates par value due to the frequent resets throughthe auction process. While we continue to earn interest on our ARS investmentsat the maximum contractual rate, these investments are not currently tradingand therefore do not currently have a readily determinable market value.Accordingly, the estimated fair value of ARS no longer approximates par value.We determined the estimated fair value of our investment in ARS as of April 4,2009 using a discounted cash flow model to estimate the fair value of ourinvestments in ARS. The assumptions used in preparing the discounted cash flowmodel include estimates for interest rates, timing and amount of cash flows andexpected holding periods of the ARS. The ARS written put right is a freestanding asset separate from the ARS, and represents our contractual right torequire UBS to purchase our ARS at par value during the two year periodbeginning June 20, 2010.  In orderto value the ARS written put right, we considered intrinsic value, time valueof money and our assessment of the credit worthiness of UBS.  We have modified our investment strategy andincreased our investments in more liquid money market investments.  Animmediate and uniform increase in market interest rate of 100 basis points fromlevels at April 4, 2009 would cause an additional decline of approximately0.9%, or $1.7 million, in the fair market value of our investments in ARS.

 

The following table lists our cash equivalents and investments at April 4,2009:

 
| ** **                         | ** ** | **Book Value**                  | ** ** | **Fair Value** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Cash equivalents                   |       | $                                    | 97,705     |                | 97,705     |   |
| Weighted average interest rate (1) |       | 0.16                                 | %          |                |       |
| Trading securities                 |       | $                                    | 70,033     |                | 70,033     |   |
| Weighted average interest rate (1) |       | 1.10                                 | %          |                |       |
| Available for sale securities      |       | $                                    | 122,928    |                | 122,928    |   |
| Weighted average interest rate (1) |       | 1.05                                 | %          |                |       |
| Total                              |       | $                                    | 290,666    |                | 290,666    |   |

 

----

(1)  Represents the weighted average interest rate for tax-exempt student loan andmunicipal bonds, and taxable and tax-exempt institutional money marketinstruments.

 

The interest payable on outstanding cash borrowings under our bank lineof credit is based on variable interest rates and  is therefore affected by changes in marketinterest rates. As we have no outstanding cash borrowings, if interest ratesrose significantly, our results from operations and cash flows would not beaffected.

 

17

----

Table of Contents

 

*Foreign Currency Risks*

 

We enter into a significant amount of purchase obligations outside ofthe United States, substantially all of which are negotiated and settled inU.S. Dollars and, therefore, have only minimal exposure to foreign currencyexchange risks. We also operate a subsidiary for which the functional currencyis the Canadian Dollar. In accordance with SFAS No. 52, “Foreign CurrencyTranslation”, assets and liabilities of Canada’s operations are translated intoU.S. dollars at month-end rates, while income and expenses are translated atthe weighted average exchange rates for the month. We record the relatedtranslation adjustments in accumulated other comprehensive income as a separatecomponent of shareholders’ equity. Fluctuations in exchange rates thereforeimpact our financial condition and results of operations, as reported in U.S.Dollars.   We do not hedge against foreign currency risks and believethat foreign currency exchange risk is immaterial.

 

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

 

Under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, we evaluatedthe effectiveness of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under the Securities Exchange Actof 1934, as amended. Based upon that evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this quarterlyreport at the reasonable assurance level.

 

There has been no change in our internal control over financialreporting during the quarter ended April 4, 2009 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

18

----

Tableof Contents

 

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

 

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

 

See the Legal Matters section of the Notes to the CondensedConsolidated Financial Statements for a discussion of legal proceedings.

 

**ITEM 1A.****              RISK FACTORS**

 

Our past performance may not be a reliable indicator of futureperformance because actual future results and trends may differ materiallydepending on a variety of factors, including, but not limited to, the risks anduncertainties discussed below. In addition, historical trends should not beused to anticipate results or trends in future periods.

 

Factors that might cause our actual results to differ materially fromthe forward looking statements discussed elsewhere in this report, as well asaffect our ability to achieve our financial and other goals, include, but arenot limited to, those set forth below.  Except for changes to the generaleconomic conditions risk factor, there have been no material changes in ourrisk factors from those disclosed in Part I, Item 1A of our AnnualReport on Form 10-K for the fiscal year ended July 5, 2008.

 

RISKS RELATING TO OUR BUSINESS:

 

**1. The success of our business depends inlarge part on our ability to identify fashion trends as well as to react tochanging customer demand in a timely manner.**  Consequently, we depend in part upon the customer response to the creativeefforts of our merchandising, design and marketing teams and their ability toanticipate trends and fashions that will appeal to our consumer base. If wemiscalculate our customers’ product preferences or the demand for our products,we may be faced with excess inventory. Historically, this type of occurrence hasresulted in excess fabric for some products and markdowns and/or write-offs,which has impaired our profitability, and may do so in the future. Similarly,any failure on our part to anticipate, identify and respond effectively tochanging consumer demands and fashion trends will adversely affect our sales.

 

**2. If we are unable to obtain raw materials,or unable to find manufacturing facilities or if our manufacturers performunacceptably, our sales may be negatively affected and our financial conditionmay be harmed****.** We do not ownany manufacturing facilities and therefore depend on contractors and thirdparties to manufacture our products. We place all of our orders for productionof merchandise and raw materials by purchase order and do not have 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 lower than anticipated sales and markdownswhich would have a negative impact on earnings. Furthermore, we have receivedin the past, and may receive in the future, shipments of products frommanufacturers that fail to conform to our quality control standards. In suchevent, unless we are able to obtain replacement products in a timely manner, wemay lose sales. Certain of our third-party manufacturers store our rawmaterials. In the event our inventory is damaged or destroyed while in storageand we are unable to obtain replacement raw materials, our earnings may benegatively impacted.

 

**3. Our success depends on our ability toattract and retain qualified employees in order to support our existing businessand 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 to thelarge number of employees and high turnover of our sales associates. If we failto attract, motivate, and retain qualified personnel, it could harm ourbusiness and limit our ability to expand.

 

In addition, we depend on the expertise and execution of our keyemployees, particularly Manny Mashouf, our founder, Chief Executive Officer andChariman of the Board of Directors. If we lose the services of Mr. Mashouf,or any key officers or employees, it could harm our business and results ofoperations.

 

**4. If we are not able to successfully developnew concepts, including BEBE SPORT and 2b bebe, our revenue base and earningsmay be impaired****.** From time totime, we may pursue new concepts.  If the BEBE SPORT and 2b bebe or othernew concepts are not successful, our financial condition may be harmed.

 

19

----

Table of Contents

 

**5. General economic conditions, including increases in energy and commodityprices, that are largely out of our control may adversely affect our financialcondition and results of operations.**  We aresensitive to changes in general economic conditions, both nationally andlocally.  Recessionary economic cycles, higher interest rates, higher fueland other energy costs, inflation, deflation, increases in commodity prices,higher levels of unemployment, higher consumer debt levels, higher tax ratesand other changes in tax laws or other economic factors that may affect consumerspending or buying habits could adversely affect the demand for products wesell in our stores. In addition, the recent turmoil in the financial marketsmay have an adverse effect on the U.S. and world economy, which couldnegatively impact consumer spending patterns. We cannot assure you that government responses to the disruptions in thefinancial markets will restore consumer confidence.

 

Furthermore, we could experience reduced traffic in our stores orlimitations on the prices we can charge for our products, either of which couldreduce our sales and profit margins and have a material adverse affect on ourfinancial condition and results of operations. Also, economic factors such asthose listed above and increased transportation costs, inflation, higher costsof labor, insurance and healthcare, and changes in other laws and regulationsmay increase our cost of sales and our operating, selling, general andadministrative expenses, and otherwise adversely affect our financial conditionand results of operations.

 

**6. We cannot assure you that future storeopenings will be successful, and new store openings may impact existing stores.**We expect to open approximately 14 stores in fiscal 2009, of which 6 will bebebe stores, 1 will be a BEBE SPORT store and 7 will be 2b bebe stores. Wecannot assure you that the stores that we plan to open in fiscal 2009, or anyother stores that we might open in the future, will be successful or that ouroverall operating profit will increase as a result of opening these stores.During fiscal 2009 we closed 7 bebe stores and anticipate closing 1 additionalstore during the remainder of the fiscal year. Most of our new store openingsin fiscal 2009 will be in existing markets. These openings may affect theexisting stores’ net sales and profitability. Our failure to predict accuratelythe demographic or retail environment at any future store location could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

Our ability to effectively obtain real estate to open new storesdepends upon the availability of real estate that meets our criteria, includingtraffic, square footage, co-tenancies, average sales per square foot, leaseeconomics, demographics, and other factors, and our ability to negotiate termsthat meet our financial targets. In addition, we must be able to effectivelyrenew our existing store leases. Failure to secure real estate locationsadequate to meet annual targets as well as effectively managing theprofitability of our existing fleet of stores could have a material adverseeffect on our results of operations.

 

**7. We are subject to risks associated withour on-line sales.** We operate an on-line store atwww.bebe.com to sell our merchandise. Although our on-line sales encompass arelatively small percentage of our total sales, our on-line operations aresubject to numerous risks, including unanticipated operating problems, relianceon third-party computer hardware and software providers. The on-line operationsalso involve other risks that could have an impact on our results of operationsincluding but not limited to diversion of sales from our stores, rapidtechnological change, liability for on-line content, security breaches,consumer privacy concerns, credit card fraud, and risks related to the failureof the computer systems that operate the website and its related supportsystems. In addition, given our use of a third party platform, we do not havedirect control of certain aspects of our on-line business. We cannot assure youthat our on-line store will continue to achieve sales and profitability growthor even remain at its current level.

 

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

 

**9. We rely on information technology, thedisruption of which could adversely impact our business.**We rely on various information systems to manage our operations and regularlymake investments to upgrade, enhance or replace such systems. To support ourgrowth we initiated a three year Infomation Systems and Technology strategicplan and we are currently in year three of this plan. If we fail tosuccessfully implement the plan, our business could be adversely affected.

 

**10. We face significant competition in theretail and apparel industry, which could harm our sales and profitability.**The retail and apparel industries are highly competitive and are characterizedby low barriers to entry. We expect competition in our markets to increase. Theprimary competitive factors in our markets are: brand name recognition,sourcing, product styling, quality, presentation and pricing, timeliness ofproduct development and delivery, store ambiance, customer service andconvenience.  We compete with traditional department stores, specialtystore retailers, business to consumer websites, off-price retailers and directmarketers for, among other things, raw materials, market share, retail space,finished goods, sourcing and personnel. Because many of these 

 

20

----

Table of Contents

 

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 remain competitive in any way, itcould harm our business, financial condition and results of operations.

 

**11. Our business could be adversely impactedby unfavorable international political conditions.** Dueto our international operations, our sales and operating results are, and willcontinue to be, affected by international social, political, legal and economicconditions. In particular, our business could be adversely impacted byinstability or changes resulting in the disruption of trade with the countriesin which our contractors, suppliers or customers are located, significantfluctuations in the value of the dollar against foreign currencies orrestrictions on the transfer of funds, or additional trade restrictions imposedby the United States and other foreign governments. Trade restrictions,including increased tariffs or quotas, embargoes, and customs restrictionscould increase the cost or reduce the supply of merchandise available to thecompany and adversely affect its financial condition and results of operations.In addition, we purchase a substantial amount of our raw materials from Chinaand our business and operating results may be affected by changes in thepolitical, social or economic environment in China.

 

**12. If we are not able to successfullyprotect our intellectual property our ability to capitalize on the value of ourbrand name may be impaired****.**Even though we take actions to establish, register and protect our trademarksand other proprietary rights, we cannot assure you that we will be successfulor that others will not imitate our products or infringe upon our intellectualproperty rights. In addition, we cannot assure that others will not resist orseek to block the sale of our products as infringements of their trademark andproprietary rights.

 

We are seeking to register our trademarks domestically andinternationally. Obstacles may exist that may prevent us from obtaining atrademark for the bebe name or related names. We may not be able to registercertain trademarks, purchase the right or obtain a license to use the bebe nameor related names on commercially reasonable terms. If we fail to obtaintrademark, ownership or license the requisite rights, it would limit ourability to expand. In some jurisdictions, despite successful registration ofour trademarks, third parties may allege infringement and bring actions againstus. In addition, if our licensees fail to use our intellectual propertycorrectly, the reputation and value associated with our trademarks may bediluted.  Furthermore, if we do not demonstrate use of our trademarks, ourtrademark rights may lapse over time.

 

**13. We may be required to record losses infuture quarters as a result of the decline in value of our investments inauction rate securities or as a result of a change in our ability to hold ourinvestment in auction rate securities.**  We hold a variety of interest bearing ARScomprised of federally insured student loan backed securities and insuredmunicipal authority bonds. These ARS investments are intended to provideliquidity via an auction process that resets the applicable interest rate atpredetermined calendar intervals, allowing investors to either roll over theirholdings or gain immediate liquidity by selling such interests at par. Therecent uncertainties in the credit markets that began in February 2008have affected our holdings in ARS investments and the majority of auctions forour investments in these securities have failed to settle on their respectivesettlement dates. Consequently, $193 million of our ARS are not currentlyliquid and we will not be able to access these funds until a future auction ofthese investments is successful or a buyer is found outside of the auctionprocess. Maturity dates for these ARS investments range from 2010 to 2044 withprincipal distributions occurring on certain securities prior to maturity.

 

The valuation of our investment portfolio is subject to uncertaintiesthat are difficult to predict. Factors that may impact its valuation includechanges to credit ratings of the securities as well as to the underlying assetssupporting those securities, rates of default of the underlying assets,underlying collateral value, discount rates and ongoing strength and quality ofmarket credit and liquidity.

 

Although we currently have the ability and intent to hold these ARSinvestments until a recovery of the par value or until maturity, if the currentmarket conditions deteriorate further, or the anticipated recovery in marketvalues does not occur, we may be required to record additional losses in othercomprehensive income or losses in net income in future quarters.

 

**14. If an independent manufacturer violateslabor or other laws, or is accused of violating any such laws, or if theirlabor practices diverge from those generally accepted as ethical, it could harmour business and brand image****.**While we maintain a policy to monitor the operations of our independentmanufacturers by having an independent firm inspect these manufacturing sites,and all manufacturers are contractually required to comply with such laborpractices, we cannot control the actions or the public’s perceptions of suchmanufacturers, nor can we assure that these manufacturers will conduct theirbusinesses using ethical or legal labor practices. Apparel companies can beheld jointly liable for the wrongdoings of the manufacturers of their products.While we do not control their employees’ employment conditions or themanufacturers’ business practices, and the manufacturers act in their owninterest, they may act in a manner that result in negative public perceptionsof us and/or employee allegations or court determinations that we are jointlyliable.

 

21

----

Tableof Contents

 

RISKS RELATING TO OUR COMMON STOCK:

 

**1. Our stock price may fluctuate because ofthe relatively low number of shares that can be publicly traded.**The vast majority of our outstanding shares of our common stock are subject totrading restrictions. As of April 30, 2009, of the approximately86,600,000 shares of our common stock then outstanding, approximately34,300,000 shares were available to be publicly traded, and as a result, ourstock price is vulnerable to market swings due to large purchases, sales andshort sales of our common stock.

 

**2. Because Manny Mashouf beneficially owns asubstantial portion of the outstanding shares, other shareholders may not beable to influence the direction the company takes.**  As of April 30, 2009, Manny Mashouf, our Chief Executive Officerand Chairman of the Board, beneficially owned approximately 54% of theoutstanding shares of our common stock. As a result, he can control theelection of directors and the outcome of all issues submitted to theshareholders. This may make it more difficult for a third party to acquireshares, may discourage acquisition bids, and could limit the price that certaininvestors might be willing to pay for shares of common stock. Thisconcentration of stock ownership may have the effect of delaying, deferring orpreventing a change in control of our company.

 

**3. Our sales, margins and operating resultsare subject to seasonal and quarterly fluctuations.**Our business varies with general seasonal trends that are characteristic of theretail and apparel industries, such as the timing of seasonal wholesaleshipments and other events affecting retail sales. As a result, our storestypically generate a higher percentage of our annual net sales andprofitability in the second quarter of our fiscal year, which includes the holidayselling season, compared to other quarters.

 

In addition, our comparable store sales have fluctuated significantlyin the past, and we expect that they will continue to fluctuate in the future.A variety of factors affect comparable store sales, including fashion trends,competition, current economic conditions, the timing of release of newmerchandise and promotional events, changes in our merchandise mix, the successof marketing programs and weather conditions. Our ability to deliver strongcomparable store sales results and margins depends in large part on accuratelyforecasting demand and fashion trends, selecting effective marketingtechniques, providing an appropriate mix of merchandise for our customer base,managing inventory effectively, and optimizing store performance by closingunderperforming stores. Such fluctuations may adversely affect the market priceof our common stock.

 

**4. Failure to comply with Section 404 ofthe Sarbanes-Oxley Act of 2002 could negatively impact investor confidence.**In order to meet the requirements of the Sarbanes-Oxley Act of 2002 in futureperiods, we must continuously document, test, monitor and enhance our internalcontrol over financial reporting.  We cannot assure you that the periodicevaluation of our internal controls required by Section 404 of theSarbanes-Oxley Act will not result in the identification of significant controldeficiencies and/or material weaknesses or that our auditors will be able toattest to the effectiveness of our internal control over financial reporting.

 

Failure to maintain the effectiveness of our internal control overfinancial reporting or to comply with the requirements of this Act could have amaterial adverse effect on our reputation, financial condition and market priceof our common stock.

 

22

----

Tableof Contents

 

**ITEM 2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

The following table presents information with respect to purchases ofour common stock made during the quarter ended April 4, 2009 by bebeStores, Inc. or any affiliated purchaser, as defined in Rule 10b-18(a)(3) underthe Exchange Act.

 
| ** **                                         | ** ** | **Total  Number  of  Shares  Purchased**                          | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number  of Shares**

**Purchased as  Part of  Publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Number (or  approximate  dollar amount) of  Shares that May  Yet be Purchased  Under the Plans  or Programs (1)** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **(in thousands,  except per share amounts)** | ** ** |
| Month #1 (January 4 – January 31)   |       | 709                                                               |       | $                                            | 5.64       |                                                                                                                     | 709        |                                                                                                                                                                                | $          | 22,784 |   |
|                                               |       |                                                              |       |                                         |       |                                                                                                                     |       |                                                                                                                                                                                |       |
| Month #2 (February 1 – February 28) |       | 796                                                               |       | $                                            | 5.55       |                                                                                                                     | 796        |                                                                                                                                                                                | $          | 18,349 |   |
|                                               |       |                                                              |       |                                         |       |                                                                                                                     |       |                                                                                                                                                                                |       |
| Month #3 (March 1 – April 4)        |       | 346                                                               |       | $                                            | 4.83       |                                                                                                                     | 346        |                                                                                                                                                                                | $          | 16,672 |   |
|                                               |       |                                                              |       |                                         |       |                                                                                                                     |       |                                                                                                                                                                                |       |
| Total                                              |       | 1,851                                                             |       | $                                            | 5.47       |                                                                                                                     | 1,851      |                                                                                                                                                                                |       |   |

 

----

| (1) | In October 2008,  our Board of Directors approved $30 million for share repurchases, which we  announced on October 21, 2008. This authorization has no expiration  date. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

Not applicable.

 

**ITEM 5.  OTHER INFORMATION**

 

Not applicable.

 

**ITEM 6.  EXHIBITS**

 

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

 
| **Exhibit** | ** ** | **Description**                                            |
|-------------|------------|------------------------------------------------------------|
|        |       |                                                       |
| 31.1        |       | Section 302 Certification of Chief Executive Officer. |
| 31.2        |       | Section 302 Certification of Chief Financial Officer. |
| 32.1        |       | Section 906 Certification of Chief Executive Officer. |
| 32.2        |       | Section 906 Certification of Chief Financial Officer. |

 

23

----

Table of Contents

 

**SIGNATURE**

 

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

 

 
|   | Dated May 11, 2009                                           |
|--------|-------------------------------------------------------------------|
|   |                                                              |
|   | bebe stores, inc.                                                 |
|   |                                                              |
|   | /s/ Walter Parks                                                  |
|   | Walter Parks, Chief Operating Officer and Chief Financial Officer |

 

24

----

Table of Contents

 

EXHIBIT INDEX

 
| **Exhibit Number** | ** ** | **Description**                                           |
|-------------------------|------------|-----------------------------------------------------------|
|                    |       |                                                      |
| 31.1                    |       | Section 302 Certification of Chief Executive Officer |
| 31.2                    |       | Section 302 Certification of Chief Financial Officer |
| 32.1                    |       | Section 906 Certification of Chief Executive Officer |
| 32.2                    |       | Section 906 Certification of Chief Financial Officer |

 

25

----