Table of Contents

 

 

 

**UNITED STATES**

**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 January 2, 2010** |
|                                                     |       |                                                                                                    |
| **OR**                                                   |
|                                                     |       |                                                                                                    |
| **o**                                                    | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**CommissionFile Number 0-24395**

 

**bebestores, inc.**

(Exact name ofregistrant as specified in its charter)

 

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

 

**400Valley Drive**

**Brisbane,California 94005**

(Address ofprincipal executive offices)

 

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

 

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

 

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

 

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

 

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

 

Indicate by check markwhether the registrant is a shell company (asdefinedinRule12b—2oftheExchangeAct).   Yeso No x

 

The number of shares ofthe registrant’s common stock, par value $0.001 per share, outstanding as of January 31,2010 was 86,167,393.

 

 

 

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Tableof Contents

 

**bebestores, inc.**

 

**TABLE OF CONTENTS**

 
| ** **        | ** **                                                                                                                         | **Page No.** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------|-------------------|
|              |                                                                                                                               |              |
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                          |              |
|              |                                                                                                                               |              |
| ITEM 1.           | Condensed Consolidated  Financial Statements                                                                                       |              |
|              |                                                                                                                               |              |
|              | Condensed  Consolidated Balance Sheets as of January 2, 2010, July 4, 2009 and  January 3, 2009                     | 3                 |
|              |                                                                                                                               |              |
|              | Condensed  Consolidated Statements of Operations for the three and six months ended  January 2, 2010 and January 3, 2009 | 4                 |
|              |                                                                                                                               |              |
|              | Condensed  Consolidated Statements of Cash Flows for the six months ended  January 2, 2010 and January 3, 2009           | 5                 |
|              |                                                                                                                               |              |
|              | Notes to Condensed Consolidated Financial Statements                                                                               | 6                 |
|              |                                                                                                                               |              |
| ITEM 2.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        | 14                |
|              |                                                                                                                               |              |
| ITEM 3.           | Quantitative  and Qualitative Disclosures about Market Risk                                                                        | 19                |
|              |                                                                                                                               |              |
| ITEM 4.           | Controls and  Procedures                                                                                                           | 20                |
|              |                                                                                                                               |              |
| **PART II.** | **OTHER INFORMATION**                                                                                                              |              |
|              |                                                                                                                               |              |
| ITEM 1.           | Legal Proceedings                                                                                                                  | 21                |
|              |                                                                                                                               |              |
| ITEM 1A.          | Risk Factors                                                                                                                       | 21                |
|              |                                                                                                                               |              |
| ITEM 2.           | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                       | 26                |
|              |                                                                                                                               |              |
| ITEM 3.           | Defaults Upon  Senior Securities                                                                                                   | 26                |
|              |                                                                                                                               |              |
| ITEM 4.           | Submission of  Matters to a Vote of Security Holders                                                                               | 26                |
|              |                                                                                                                               |              |
| ITEM 5.           | Other Information                                                                                                                  | 26                |
|              |                                                                                                                               |              |
| ITEM 6.           | Exhibits                                                                                                                           | 27                |
|              |                                                                                                                               |              |
| **SIGNATURE**     |                                                                                                                               | 28                |
|              |                                                                                                                               |              |
| **EXHIBIT INDEX** |                                                                                                                               | 29                |

 

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**PART I.        FINANCIALINFORMATION**

 

ITEM 1.**        **CondensedConsolidated Financial Statements

 

**bebestores, inc.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                      | ** ** | **As of******** January 2, 2010** | ** ** | **As of******** July 4,******** 2009** | ** ** | **As of******** January 3, 2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | ** **                                       | ** ** | ** **                                                 | ** ** | ** **                                       | ** ** |
| **Assets:**                                                                                                                                     | ** ** | ** **                                       | ** ** | ** **                                                 | ** ** | ** **                                       | ** ** |
| Current  assets:                                                                                                                                |       |                                             |       |                                                       |       |                                             |       |
| Cash  and equivalents                                                                                                                           |       | $                                                | 102,874    |                                                       | $          | 91,390                                           |       | $ | 143,975 |   |
| Available  for sale securities                                                                                                                  |       | 49,738                                           |       | 40,018                                                     |       | —                                           |       |
| Trading  securities                                                                                                                             |       | 72,182                                           |       | 69,504                                                     |       | —                                           |       |
| Auction  rate securities written put option                                                                                                     |       | 9,168                                            |       | 12,740                                                     |       | —                                           |       |
| Receivables  (net of allowance of $1,283, $1,277 and $1,252)                                                                                    |       | 6,075                                            |       | 5,134                                                      |       | 6,979                                            |       |
| Inventories,  net                                                                                                                               |       | 30,381                                           |       | 39,194                                                     |       | 37,499                                           |       |
| Deferred  income taxes, net                                                                                                                     |       | 7,825                                            |       | 8,549                                                      |       | 9,273                                            |       |
| Prepaid  and other                                                                                                                              |       | 18,364                                           |       | 30,947                                                     |       | 27,615                                           |       |
| Total  current assets                                                                                                                           |       | 296,607                                          |       | 297,476                                                    |       | 225,341                                          |       |
| Trading  securities                                                                                                                             |       | —                                           |       | —                                                     |       | 72,375                                           |       |
| Available  for sale securities                                                                                                                  |       | 114,382                                          |       | 118,187                                                    |       | 125,245                                          |       |
| Auction  rate securities written put option                                                                                                     |       | —                                           |       | —                                                     |       | 11,586                                           |       |
| Property  and equipment, net                                                                                                                    |       | 114,899                                          |       | 126,301                                                    |       | 136,563                                          |       |
| Deferred  income taxes, net                                                                                                                     |       | 25,578                                           |       | 24,272                                                     |       | 24,827                                           |       |
| Other  assets                                                                                                                                   |       | 5,603                                            |       | 5,219                                                      |       | 5,013                                            |       |
| Total  assets                                                                                                                                   |       | $                                                | 557,069    |                                                       | $          | 571,455                                          |       | $ | 600,950 |   |
|                                                                                                                                            |       |                                             |       |                                                       |       |                                             |       |
| **Liabilities and Shareholders’ Equity:**                                                                                                  | ** ** | ** **                                       | ** ** | ** **                                                 | ** ** | ** **                                       | ** ** |
| Current  liabilities:                                                                                                                           |       |                                             |       |                                                       |       |                                             |       |
| Accounts  payable                                                                                                                               |       | $                                                | 19,039     |                                                       | $          | 26,621                                           |       | $ | 30,068 |   |
| Accrued  liabilities                                                                                                                            |       | 32,388                                           |       | 36,671                                                     |       | 35,130                                           |       |
| Total  current liabilities                                                                                                                      |       | 51,427                                           |       | 63,292                                                     |       | 65,198                                           |       |
| Deferred  rent and other lease incentives                                                                                                       |       | 44,383                                           |       | 45,448                                                     |       | 46,790                                           |       |
| Uncertain  tax positions                                                                                                                        |       | 3,565                                            |       | 3,220                                                      |       | 3,401                                            |       |
| Total  liabilities                                                                                                                              |       | 99,375                                           |       | 111,960                                                    |       | 115,389                                          |       |
|                                                                                                                                            |       |                                             |       |                                                       |       |                                             |       |
| 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 86,164,650, 86,758,973 and 88,478,634 shares |       | 86                                               |       | 87                                                         |       | 88                                               |       |
| Additional  paid-in capital                                                                                                                     |       | 140,657                                          |       | 139,437                                                    |       | 142,652                                          |       |
| Accumulated  other comprehensive loss                                                                                                           |       | (6,522                                           | )          | (12,261                                                    | )          | (10,588                                          | )          |
| Retained  earnings                                                                                                                              |       | 323,473                                          |       | 332,232                                                    |       | 353,409                                          |       |
| Total  shareholders’ equity                                                                                                                |       | 457,694                                          |       | 459,495                                                    |       | 485,561                                          |       |
| Total  liabilities and shareholders’ equity                                                                                                |       | $                                                | 557,069    |                                                       | $          | 571,455                                          |       | $ | 600,950 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**bebestores, inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(unaudited)**

 
| ** **                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **January 2,**              | ** ** | **January 3,**            | ** ** | **January 2,** | ** ** | **January 3,** | ** ** |
| ** **                                         | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                         | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales                                         |       | $                                | 141,494    |                           | $          | 181,902 |   | $ | 267,152 |   | $ | 345,162 |   |
| Cost  of sales, including production and occupancy |       | 86,084                           |       | 111,775                        |       | 165,582 |   | 201,734 |   |
|                                               |       |                                  |       |                           |       |   |   |   |   |
| Gross  margin                                      |       | 55,410                           |       | 70,127                         |       | 101,570 |   | 143,428 |   |
| Selling,  general and administrative expenses      |       | 51,296                           |       | 61,463                         |       | 104,318 |   | 120,618 |   |
|                                               |       |                                  |       |                           |       |   |   |   |   |
| Operating  income (loss)                           |       | 4,114                            |       | 8,664                          |       | (2,748 | ) | 22,810 |   |
| Interest  and other income, net                    |       | 840                              |       | 1,861                          |       | 1,883 |   | 4,891 |   |
|                                               |       |                                  |       |                           |       |   |   |   |   |
| Income  (loss) before income taxes                 |       | 4,954                            |       | 10,525                         |       | (865 | ) | 27,701 |   |
| Income  tax provision                              |       | 2,514                            |       | 3,727                          |       | 877 |   | 9,699 |   |
|                                               |       |                                  |       |                           |       |   |   |   |   |
| Net  income (loss)                                 |       | $                                | 2,440      |                           | $          | 6,798 |   | $ | (1,742 | ) | $ | 18,002 |   |
|                                               |       |                                  |       |                           |       |   |   |   |   |
| Basic  earnings (loss) per share                   |       | $                                | 0.03       |                           | $          | 0.08 |   | $ | (0.02 | ) | $ | 0.20 |   |
| Diluted  earnings (loss) per share                 |       | $                                | 0.03       |                           | $          | 0.08 |   | $ | (0.02 | ) | $ | 0.20 |   |
|                                               |       |                                  |       |                           |       |   |   |   |   |
| Basic  weighted average shares outstanding         |       | 86,663                           |       | 88,881                         |       | 86,715 |   | 88,857 |   |
| Diluted  weighted average shares outstanding       |       | 86,760                           |       | 89,052                         |       | 86,715 |   | 89,161 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**bebestores, inc.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Inthousands)**

**(unaudited)**

 
| ** **                                                                           | ** ** | **Six Months Ended**        | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                           | ** ** | **January 2,******** 2010** | ** ** | **January 3,******** 2009** | ** ** |
| ** **                                                                           | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Cash  flows from operating activities:                                               |       |                                  |       |   |   |
| Net  income (loss)                                                                   |       | $                                     | (1,742     | ) | $ | 18,002 |   |
| Adjustments  to reconcile net income (loss) to cash provided by operating activities |       |                                  |       |   |   |
| Non-cash  compensation expense                                                       |       | 2,223                                 |       | 3,238 |   |
| Depreciation  and amortization                                                       |       | 13,429                                |       | 12,803 |   |
| Non-cash  charge for asset impairment                                                |       | 4,246                                 |       | 964 |   |
| Net  loss on disposal of property                                                    |       | 932                                   |       | 428 |   |
| Loss  (gain) on trading securities                                                   |       | (2,995                                | )          | 12,050 |   |
| Loss  (gain) on auction rate securities written put option                           |       | 2,889                                 |       | (11,586 | ) |
| Tax  benefit from exercise of stock options and awards                               |       | 63                                    |       | 76 |   |
| Excess  tax benefit from exercise of stock options and awards                        |       | (7                                    | )          | (28 | ) |
| Deferred  rent and other lease incentives                                            |       | (1,188                                | )          | 777 |   |
| Deferred  income taxes                                                               |       | (407                                  | )          | (676 | ) |
| Long  term income taxes payable                                                      |       | 345                                   |       | — |   |
| Changes  in operating assets and liabilities:                                        |       |                                  |       |   |   |
| Receivables                                                                          |       | (1,374                                | )          | 95 |   |
| Inventories                                                                          |       | 8,958                                 |       | 5,080 |   |
| Prepaid  expenses and other                                                          |       | 12,547                                |       | (12,591 | ) |
| Accounts  payable                                                                    |       | (7,583                                | )          | 6,815 |   |
| Accrued  liabilities                                                                 |       | (4,379                                | )          | (2,978 | ) |
| Net  cash provided by operating activities                                           |       | 25,957                                |       | 32,469 |   |
|                                                                                 |       |                                       |       |   |   |
| Cash  flows from investing activities:                                               |       |                                  |       |   |   |
| Purchase  of property and equipment                                                  |       | (6,987                                | )          | (17,713 | ) |
| Purchase  of investment securities                                                   |       | (50,373                               | )          | — |   |
| Proceeds  from sales of investment securities                                        |       | 48,168                                |       | 21,200 |   |
| Net  cash provided (used) by investing activities                                    |       | (9,192                                | )          | 3,487 |   |
|                                                                                 |       |                                       |       |   |   |
| Cash  flows from financing activities:                                               |       |                                  |       |   |   |
| Net  proceeds from issuance of common stock                                          |       | 180                                   |       | 399 |   |
| Purchase  of common stock                                                            |       | (3,717                                | )          | (3,201 | ) |
| Excess  tax benefit from exercise of stock options and awards                        |       | 7                                     |       | 28 |   |
| Cash  dividends paid                                                                 |       | (8,677                                | )          | (13,074 | ) |
| Other                                                                                |       | —                                |       | (38 | ) |
| Net  cash used by financing activities                                               |       | (12,207                               | )          | (15,886 | ) |
|                                                                                 |       |                                       |       |   |   |
| Net increase  in cash and equivalents                                                |       | 4,558                                 |       | 20,070 |   |
| Effect  of exchange rate changes on cash                                             |       | 6,926                                 |       | 561 |   |
| Cash  and equivalents:                                                               |       |                                  |       |   |   |
| Beginning  of period                                                                 |       | 91,390                                |       | 123,344 |   |
| End  of period                                                                       |       | $                                     | 102,874    |   | $ | 143,975 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

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**bebestores, inc.**

 

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**INTERIMFINANCIAL STATEMENTS**

 

The accompanyingcondensed consolidated balance sheets of bebe stores, inc. (the “Company”) asof January 2, 2010, July 4, 2009 and January 3, 2009, thecondensed consolidated statements of operations for the three and six monthsended January 2, 2010 and January 3, 2009 and the condensedconsolidated statements of cash flows for the six months ended January 2,2010 and January 3, 2009 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 4,2009.

 

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

 

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

 

The Company revised cashflows from operating activities for the six months ended January 3, 2009on its statements of cash flows to separately present the tax benefit andexcess tax benefit from exercise of stock options and awards.  Net cashprovided (used) by operating and financing activities for the prior year periodchanged by immaterial amounts.  Certainprior year amounts have been reclassified to conform to current yearpresentation.

 

The Company has evaluatedall subsequent events that occurred after the balance sheet date through February 11,2010, the date the condensed consolidated financial statements were issued.

 

**FISCALYEAR**

 

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

 

The three month periodsended January 2, 2010 and January 3, 2009 each include 13 weeks.  The six month periods ended January 2,2010 and January 3, 2009 each include 26 weeks.

 

**RECENTACCOUNTING PRONOUNCEMENTS**

 

*Codification*

 

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

 

*FairValue*

 

In September 2006,the FASB issued guidance which defines fair value, establishes a framework formeasuring fair value in accordance with generally accepted accountingprinciples and expands disclosures about fair value measurements.  This guidanceis contained in ASC 820, “Fair Value Measurements and Disclosures”.  In February 2008,the FASB deferred the effective date for non-financial assets and liabilities,except for certain items that are recognized or disclosed at fair value atleast annually.  The Company elected to partially adopt the provisions ASC820 as of July 6, 2008 for financial instruments. Although the partialadoption did not materially impact the Company’s financial condition, resultsof operations or cash flow, the Company is now required to provide additionaldisclosures as part of its financial statements.  The Company’s adoptionof the remaining provisions of ASC 820, pertaining to fair value disclosuresrelated to non-financial assets and liabilities, on July 5, 2009 has nothad a material impact on the Company’s consolidated financial position,statements of operations or cash flows.

 

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In April 2009, theFASB issued additional guidance in accordance with ASC 825, “FinancialInstruments”.  The additional guidance adds required disclosures aboutfair value of financial instruments in interim financial statements as well asin annual financial statements.  The guidance also requires thosedisclosures in summarized financial information at interim reporting periods.

 

This guidance iseffective for interim periods ending after June 15, 2009, with earlyadoption permitted for periods ending after March 15, 2009.  TheCompany’s adoption of this requirement has not had a material impact on theCompany’s consolidated financial position, statements of operations or cashflows, as it relates to disclosure only.

 

In January 2010, theFASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures(Topic 820): Improving Disclosures about Fair Value Measurements.” ASU No. 2010-06amends ASC 820 and clarifies and provides additional disclosure requirementsrelated to recurring and non-recurring fair value measurements and employers’disclosures about postretirement benefit plan assets. This ASU is effective forthe Company on January 3, 2010. The Company does not currently anticipatethat this ASU will have a material impact on its consolidated financialstatements upon adoption.

 

**INVENTORIES**

 

The Company’s inventoriesconsisted of:

 
| ** **                      | ** ** | **As of**                  | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **January 2,********2010** | ** ** | **July 4,********2009** | ** ** | **January 3,********2009** | ** ** |
| ** **                      | ** ** | **(In thousands)**         | ** ** |
| Merchandise  available for sale |       | $                               | 29,349     |   | $ | 37,043 |   | $ | 33,602 |   |
| Raw  materials                  |       | 1,032                           |       | 2,151 |   | 3,897 |   |
| Inventories,  net               |       | $                               | 30,381     |   | $ | 39,194 |   | $ | 37,499 |   |

 

**EARNINGSPER SHARE**

 

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

 

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

 

 
| ** **                                                     | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **January 2,******** 2010** | ** ** | **January 3,******** 2009** | ** ** | **January 2,******** 2010** | ** ** | **January 3,******** 2009** | ** ** |
| ** **                                                     | ** ** | **(In thousands)**               | ** ** | **(In thousands)**               | ** ** |
| Basic  weighted average number of shares outstanding           |       | 86,663                                |       | 88,881                                |       | 86,715 |   | 88,857 |   |
| Incremental  shares from the assumed issuance of stock options |       | 97                                    |       | 171                                   |       | — |   | 304 |   |
|                                                           |       |                                  |       |                                  |       |   |   |   |   |
| Diluted  weighted average number of shares outstanding         |       | 86,760                                |       | 89,052                                |       | 86,715 |   | 89,161 |   |

 

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

 

Excluded from thecomputation of the number of diluted weighted average shares outstanding wereoptions to purchase 4,733,000 and 7,072,000 shares of common stock for thethree months ended January 2, 2010 and January 3, 2009, respectively,and 4,850,000 and 6,303,000 for the six months ended January 2, 2010 and January 3,2009, respectively, which would have been anti-dilutive.

 

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**COMMONSTOCK PURCHASES**

 

Share repurchases were asfollows:

 
| ** **                                    | ** ** | **Three Months Ended**                                   | ** ** | **Six Months Ended**                                     | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **January 2,******** 2010**                              | ** ** | **January 3,******** 2009**                              | ** ** | **January 2,******** 2010** | ** ** | **January 3,******** 2009** | ** ** |
| ** **                                    | ** ** | **(In thousands, except per share data)** | ** ** | **(In thousands, except per share data)** | ** ** |
| Number  of shares repurchased                 |       | 644                                                                |       | 537                                                                |       | 644 |   | 537 |   |
| Total  cost                                   |       | $                                                                  | 3,717      |                                                               | $          | 3,201 |   | $ | 3,717 |   | $ | 3,201 |   |
| Average  per share cost including commissions |       | $                                                                  | 5.77       |                                                               | $          | 5.96 |   | $ | 5.77 |   | $ | 5.96 |   |

 

In October 2008, theboard of directors authorized a program to repurchase up to $30 million of theCompany’s common stock.  The Company intends, from time to time, asbusiness conditions warrant, to purchase stock in the open market or throughprivate transactions.  Purchases may be increased, decreased ordiscontinued at any time without prior notice.  The plan does not obligatethe Company to repurchase any specific number of shares and may be suspended atany time at management’s discretion.  As of January 2, 2010,there was approximately $13.0 million available for repurchase under theprogram.

 

**COMPREHENSIVEINCOME**

 

Comprehensive incomeconsists of net income (loss) and other comprehensive income (income, expenses,gains and losses that bypass the income statement and are reported directly asa separate component of equity).  The Company’s comprehensive incomeconsists of net income (loss), gain (loss) on available for sale securities andforeign currency translation adjustments for all periods presented.

 
| ** **                                    | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **January 2,******** 2010** | ** ** | **January 3,******** 2009** | ** ** | **January 2,******** 2010** | ** ** | **January 3,******** 2009** | ** ** |
| ** **                                    | ** ** | **(In thousands)**               | ** ** |
| Net  income (loss)                            |       | $                                     | 2,440      |                                  | $          | 6,798 |   | $ | (1,742 | ) | $ | 18,002 |   |
| Gain  (loss) on available for sale securities |       | 147                                   |       | 516                                   |       | 2,390 |   | (4,881 | ) |
| Accumulated  translation adjustments          |       | 1,084                                 |       | (3,364                                | )          | 3,349 |   | (5,446 | ) |
|                                          |       |                                       |       |                                  |       |   |   |   |   |
| Total  comprehensive income                   |       | $                                     | 3,671      |                                  | $          | 3,950 |   | $ | 3,997 |   | $ | 7,675 |   |

 

**INVESTMENTS**

 

The Company’s investmentportfolio consists of treasury bills, certificates of deposit and auction ratesecurities. The Company holds a variety of interest bearing auction ratesecurities (“ARS”) consisting of federally insured student loan backedsecurities and insured municipal authority bonds. As of January 2, 2010,the Company’s ARS portfolio totaled approximately $185.6 million,$72.2 million classified as trading securities (net of impairment chargesof $9.6 million, of which a $3.0 million gain has been recognized in thecurrent year) and $113.4 million (net of a temporary impairment charge of $14.4million, of which a $2.4 million unrealized gain has been recorded in thecurrent year) classified as available for sale securities. The Company’s ARSportfolio includes approximately 98% federally insured student loan backedsecurities and 2% municipal authority bonds. The Company’s ARS portfolioconsists of approximately 39% AAA rated investments, 7% AA rated investments,35% A rated investments and 19% BBB rated investments. This is a change fromthe portfolio as of July 4, 2009, which consisted of 46% AAA ratedinvestments, 14% AA rated investments, 30% A rated investments and 10% BBBrated investments. 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 investments at par. The uncertaintiesin the credit markets that began in February 2008 have affected theCompany’s holdings in ARS investments and auctions for the Company’sinvestments in these securities have failed to settle on their respectivesettlement dates. Historically the fair value of ARS investments hadapproximated par value due to the frequent resets through the auction process.While the Company continues to earn interest on its ARS investments at themaximum contractual rate, these investments are not currently trading andtherefore do not currently have a readily determinable market value.Accordingly, the estimated fair value of ARS no longer approximates par value.Consequently, the investments are not currently liquid, and the Company willnot be able to access these funds until a future auction of these investmentsis successful, the issuer redeems the securities, or at maturity. Maturitydates for these ARS investments range from 2010 to 2044 with principaldistributions occurring on certain securities prior to maturity.

 

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In November 2008,the Company entered into a settlement agreement related to its ARS held withUBS Financial Services, Inc. (“UBS”) that grants the Company certainrights related to these ARS (the “Right”). Beginning June 30, 2010, at theCompany’s request, UBS has agreed to purchase all of the Company’s ARScurrently held with them at par value. Conversely, UBS has the right, in itsdiscretion, to purchase or sell the Company’s ARS at any time until July 2,2012, so long as the Company receives payment at par value upon any sale ordisposition. The enforceability of the Right results in a put option whichshould be recognized as a free standing asset separate from the ARS. Upon acceptanceof the offer from UBS in November 2008, the Company recorded the putoption at fair value of $11.6 million, with a corresponding credit tointerest and other income, net. Although it is a financial instrument, the putoption does not meet the FASB’s definition of a derivative instrument,therefore the Company has elected to measure the put option at fair value. As aresult, unrealized gains and losses are included in earnings.  At January 2,2010, the fair value of the put option is $9.2 million, net of a reserve of$0.5 million, of which a gain of $0.1 million has been recognized in thecurrent year.

 

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

 

The remainder of theCompany’s ARS investment portfolio of $113.4 million, net of a temporaryimpairment charge of $14.4 million, remains available for sale on our balancesheet. The related temporary impairment charge remains as a loss in accumulatedother comprehensive income.

 

The Company also holdsshort term available for sale securities totaling $49.7 million as of January 2,2010, that consist of $40.0 million in treasury bills and $9.7 million incertificates of deposit which are classified as available for sale securitieson its balance sheet at cost which approximates fair value.

 

In addition to the ARSinvestments discussed above, the Company holds $1.0 million in certificates ofdeposit which are classified as long term available for sale securities at costwhich approximates fair value.

 

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

 

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

 

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The following is asummary of the Company’s available for sale securities:

 

 
| ** **                          | ** ** | **As  of January 2, 2010** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **Cost**                        | ** ** | **Unrealized******** Losses******** Less Than******** 12 Months** | ** ** | **Unrealized******** Losses******** 12 Months******** or Greater** | ** ** | **Estimated******** Fair Value** | ** ** |
| ** **                          | ** ** | **(in  thousands)**             | ** ** |
| Short  term treasury bills          |       | $                               | 40,000     |   | $ | — |   | $ | — |   | $ | 40,000 |   |
| Short  term certificates of deposit |       | 9,738                           |       | — |   | — |   | 9,738 |   |
| Long  term certificates of deposit  |       | 954                             |       | — |   | — |   | 954 |   |
| Long  term auction rate securities  |       | 127,876                         |       | — |   | (14,448 | ) | 113,428 |   |
| Total                               |       | $                               | 178,568    |   | $ | — |   | $ | (14,448 | ) | $ | 164,120 |   |

 
| ** **                         | ** ** | **As  of January 3, 2009** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Cost**                        | ** ** | **Unrealized******** Losses******** Less Than******** 12 Months** | ** ** | **Unrealized******** Losses******** 12 Months******** or Greater** | ** ** | **Estimated******** Fair Value** | ** ** |
| ** **                         | ** ** | **(in  thousands)**             | ** ** |
| Long  term auction rate securities |       | $                               | 137,925    |   | $ | (12,680 | ) | $ | — |   | $ | 125,245 |   |
|                                    |            |                                 |            |  |  |  |  |  |  |  |  |  |  |

 

**CREDITFACILITIES**

 

The Company has anunsecured commercial line of credit agreement which provides for borrowings andissuance of letters of credit of up to a combined total of $25.0 millionand expires on March 31, 2012. The outstanding balance bears interest ateither the bank’s reference rate (which was 3.25% as of January 2, 2010)or the LIBOR rate (which was 0.23% as of January 2, 2010) plus 1.75 percentagepoints. As of January 2, 2010, there were no outstanding cash borrowingsand there was $1.7 million of letters of credit outstanding.

 

This credit facilityrequires the Company to maintain a $2.5 million compensating balance and tocomply with certain financial covenants, including amounts for minimum tangiblenet worth, unencumbered liquid assets and profitability, and certainrestrictions on making loans and investments. As of January 2, 2010, theCompany was in compliance with all financial covenants.

 

**UNREDEEMEDGIFT CARDS**

 

TheCompany sells gift cards with no expiration dates to customers in its retailstore locations, through its online stores, and through third parties.   Income from gift cards is recognized whenthey are redeemed by the customer.  Inaddition, the Company recognizes income on unredeemed gift cards when it candetermine that the likelihood of the gift card being redeemed is remote andthere is no legal obligation to remit the unredeemed gift cards to relevantjurisdictions (gift card breakage).  TheCompany determines the gift card breakage income based on historical redemptionpatterns.  The Company accumulatedsufficient historical data to determine elapsed time for recording breakageincome during the second quarter of fiscal 2010, which the Company estimates isfive years.  Gift card breakage isincluded as other income within selling, general and administrativeexpenses.  During the three and sixmonths ended January 2, 2010, the Company recognized $1.1 million inpre-tax income related to the initial recognition of gift card breakage.

 

**STOCKBASED COMPENSATION**

 

The following tablesummarizes the stock based compensation expense recognized under the Company’sstock plan during the three months and the six months ended January 2,2010 and January 3, 2009:

 
| ** **                              | ** ** | **Three Months Ended**      | ** ** | **Six Months Ended**        | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                              | ** ** | **January 2,******** 2010** | ** ** | **January 3,******** 2009** | ** ** | **January 2,******** 2010** | ** ** | **January 3,******** 2009** | ** ** |
| ** **                              | ** ** | **(In thousands)**               | ** ** |
| Stock  options                          |       | $                                     | 1,475      |                                  | $          | 1,384 |   | $ | 2,174 |   | $ | 2,979 |   |
| Unvested  stock awards/units            |       | 117                                   |       | 115                                   |       | 49 |   | 259 |   |
| Total  stock based compensation expense |       | $                                     | 1,592      |                                  | $          | 1,499 |   | $ | 2,223 |   | $ | 3,238 |   |

 

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Unrecognized compensationcost related to nonvested stock options and unvested stock awards/units totaledapproximately $6.0 million and $0.3 million, respectively, as of January 2,2010.  This cost is expected to be recognized over a weighted averageperiod of 2.8 years.  The weighted average fair value of stock options attheir grant date during the three months ended January 2, 2010 and January 3,2009 was $2.76 and $3.06, respectively. For the six month periods ended January 2, 2010 and January 3,2009, the weighted average fair values of stock options at their grant datewere $2.82 and $3.79, respectively.

 

Since fiscal 2006, theCompany has licensed software from a third party provider to automate theadministration of its employee equity programs and calculate its stock-basedcompensation expense (the “Software”). In the second quarter of 2010, the Company learned that the Softwarecontained an error in how it calculated stock-based compensation expense.  To correct this error, the Company recordedadditional stock-based compensation expense of $0.9 million in the secondquarter of fiscal 2010.  As stock-basedcompensation is a non-cash item, there is no impact to net cash provided byoperations in any period.

 

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

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

 

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

 

**FAIRVALUE MEASUREMENTS**

 

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

 

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

 

As of January 2,2010, the Company held financial instruments that are measured at fair value ona recurring basis. These included cash equivalents, trading securities, awritten put option related to a UBS settlement and available for salesecurities. Cash equivalents consist of money market funds. Short termavailable for sale securities consist of government treasury bills andcertificates of deposit. Trading securities consist of auction rate securities(“ARS”) held with UBS. Long term available for sale securities consist of ARSheld with another broker and a certificate of deposit. The ARS securitiesconsist of federally insured student loan backed securities and insuredmunicipal authority bonds.

 

The Company determinedthe estimated fair value of its investment in ARS as of January 2, 2010using a discounted cash flow model. The assumptions used in preparing thediscounted cash flow model include estimates for interest rates, timing, creditratings, credit wrap and amount of cash flows and expected holding periods ofthe ARS. The ARS written put right is a free-standing asset separate from theARS and represents the Company’s contractual right to require UBS to purchaseits ARS at par value during 

 

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the two-year periodbeginning June 30, 2010. In order to value the ARS written put right, theCompany considered intrinsic value, time value of money and its assessment ofthe credit worthiness of UBS.

 

The following items aremeasured at fair value on a recurring basis as of January 2, 2010:

 
| **Description**                            | ** ** | **January 2,  2010**                                              | ** ** | **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                          |       | $                                                                      | 52,912     |                                                                                                                   | $          | 52,912                                                                         |       | $                                                     | —     |   | $ | — |   |
| Current  available for sale securities     |       | 49,738                                                                 |       | 49,738                                                                                                                 |       | —                                                                         |       | —                                                |       |
| Trading  securities                        |       | 72,182                                                                 |       | —                                                                                                                 |       | —                                                                         |       | 72,182                                                |       |
| ARS  written put option                    |       | 9,168                                                                  |       | —                                                                                                                 |       | —                                                                         |       | 9,168                                                 |       |
| Non-current  available for sale securities |       | 114,382                                                                |       | 954                                                                                                                    |       | —                                                                         |       | 113,428                                               |       |
| Total                                      |       | $                                                                      | 298,382    |                                                                                                                   | $          | 103,604                                                                        |       | $                                                     | —     |   | $ | 194,778 |   |

 

The following tablepresents the Company’s activity for assets measured at fair value on arecurring basis using significant unobservable inputs (Level 3) for the sixmonths ended January 2, 2010:

 
| ** **                                        | ** ** | **Investments  in Level 3  Securities** | ** ** |
|---------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                        | ** ** | **(In thousands)**                 | ** ** |
| Balance  as of July 4, 2009                  |       | $                                       | 200,431    |   |
| Total  gains or (losses) (realized or unrealized) |       |                                    |       |
| Included  in net loss                             |       | 107                                     |       |
| Included  in accumulated other comprehensive loss |       | 2,390                                   |       |
| Settlements                                       |       | (8,150                                  | )          |
| Balance  as of January 2, 2010               |       | $                                       | 194,778    |   |

 

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

 

The Company measurescertain non-financial assets and liabilities, including long-lived assets, atfair value on a non-recurring basis.  During the three and six monthsended January 2, 2010, the Company recorded a charge of approximately $2.5and $4.2 million, respectively, related to the impairment of assets related tounder-performing stores.  The fair market value of these assets wasdetermined using the income approach and level 3 inputs, which requiredmanagement to make significant estimates about future cash flows. Management estimates the amount and timing of future cash flows based on itsexperience and knowledge of the retail market in which each store operates. This impairment charge is included in selling, general and administrativeexpenses (“SG&A”) in the accompanying condensed consolidated statements ofoperations.  The Company was not required to measure any other significantnon-financial assets and liabilities at fair value.

 

**LEGALMATTERS**

 

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

 

A former employee suedthe Company in a complaint filed July 27, 2006 in the Superior Court ofCalifornia, San Mateo County (Case No. CIV 456550) alleging a failure topay all wages, failure to pay overtime wages, failure to pay minimum wages,failure to provide meal periods, violation of Labor Code §450, violation ofLabor Code §2802 and California Code of Regulations §11040(9)(A), statutorywage violations (late payment of wages), unlawful business practices underBusiness and Professions Code §16720 and §17200, conversion of wages andviolation of Civil Code §52.1. The plaintiff purports to bring the action alsoon behalf of current and former California bebe employees who are similarlysituated. The lawsuit seeks compensatory, statutory, punitive, restitution andinjunctive relief.  The court hasformally denied class certification regarding certain claims Plaintiff hasmoved to be certified.  Plaintiff hassince moved to substitute in a new purported class representative and a hearingon the matter has been set for February 22, 2010.

 

A former employee suedthe Company in a complaint filed in the Superior Court of California, LosAngeles County (BC 429230) and served on us February 4, 2010, alleging afailure to pay all wages, failure to provide meal periods and rest breaks,violation of Labor Code §450, §2802 and California Code of Regulations§11070(9)(A), statutory wage violations (late payment of wages), unlawfulbusiness practices under Business and Professions Code §16720 and §17200, andother associated claims.  The 

 

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plaintiff purports tobring the action also on behalf of current and former California bebe employeeswho are similarly situated.  The lawsuitseeks compensatory, statutory, punitive, restitution and injunctiverelief.  The case has been filed by thesame law firm who filed the previously listed case (Case no. CIV 456550).

 

The Company suedSkechers, U.S.A., Inc. in a complaint filed October 8, 2009 in theSuperior Court for the State of California, County of San Mateo (Case No. CIV488671) alleging breach of contract, among other claims.   Defendant has yet to file an answer.  Plaintiff and Defendant have agreed to movethe lawsuit into the County of San Francisco.

 

A customer sued theCompany in a complaint filed October 14, 2009 in the Superior Court forthe State of California, County of Los Angeles (BC 423835) alleging the companyviolated the Song-Beverly Credit Card Act, Civil Code §1747.08.  The plaintiff purports to bring the actionalso on behalf of other California bebe customers who are similarlysituated.  The Company has filed itsanswer, is investigating the claims and formal discovery has commenced.

 

Four former employeessued the Company in a complaint filed December 14, 2009 in the UnitedStates District Court, Southern District of Texas (C.A. NO. 4:09-CV-039777)alleging discrimination and retaliation under Title VII of the Civil Rights Actof 1964 and 42 U.S.C. §1981, defamation, negligent hiring, supervision,retention and training, among other claims. The Company is investigating theseallegations and its answer is due February 2010.

 

The Company is alsoinvolved in various other legal proceedings arising in the normal course ofbusiness.  None of these matters nor thematters listed above are expected, individually or in the aggregate, to have amaterial adverse effect on the Company’s business, financial condition orresults of operations.

 

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

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

The following Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains forward-looking statements, which involve risks and uncertainties. Ouractual results may differ materially from those anticipated in theseforward-looking statements.  Statements that are predictive in nature, thatdepend upon or refer to future events or conditions or that include words suchas “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “thinks,”and similar expressions are forward-looking statements.  Forward-looking statements include statements about our expectedresults of operations, capital expenditures and store openings.  Althoughwe believe that these statements are based upon reasonable assumptions, wecannot assure you that our goals will be achieved. These forward-looking statementsare made as of the date of this quarterly report, and we assume no obligationto update or revise them or provide reasons why actual results may differ.Factors that might cause such a difference include, but are not limited to, ourability to respond to changing fashion trends, obtain raw materials and findmanufacturing facilities, attract and retain key management personnel, developnew concepts, successfully open future stores, successfully manage our onlinebusiness, maintain and protect information technology, respond effectively tocompetitive pressures in the apparel industry and adverse economic conditionsand protect our intellectual property as well as declines in comparable storesales performance, changes in the level of consumer spending or preferences inapparel and/or other factors discussed in “Risk Factors” and elsewhere in thisquarterly report.

 

**OVERVIEW**

 

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

 

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

 

We market our productsunder the bebe, BEBE SPORT, bbsp, 2b bebe and PH8 brand names through our 309retail stores, of which 213 are bebe stores, 62 are PH8 stores, 33 are 2b bebestores and 1 is a bebe accessories store as of January 2, 2010. Thesestores are located in 35 states, the District of Columbia, Puerto Rico, theU.S. Virgin Islands and Canada. In addition, we have an on-line store atwww.bebe.com, and our licensees operate 42 international stores as of January 2,2010. During the six months ended January 2, 2010, we opened 3 bebe storesand a PH8 store and closed a bebe store, a PH8 store and a 2b bebe store. We expect to open a total of approximately 5 bebe stores and a PH8 store duringfiscal 2010. We also plan to expand an existing bebe store.   The number of anticipated store closures includes2 bebe stores, 1 2b bebe store and up to 11 PH8 stores.

 

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

 

*PH8.* We launched BEBE SPORT during fiscal2003 to address the performance and active lifestyle needs of the bebecustomer.  In November 2009 we converted all of our BEBE SPORTstorefronts to PH8, and began to offer BEBE SPORT product in bebe and 2b bebestores in the 2009 holiday season.  In addition, we changed our productoffering to offer a selection of casual weekend apparel, work-out attire andaccessories such as bags, shoes and various seasonal items under the new PH8label.  Due to the change in store frontsand product offering we have excluded the new PH8 stores from comparable storesales as of November 2009.  In thesecond quarter 2010 we recorded asset impairment charges of $1.9 million towrite-off underperforming PH8 stores. Management will continue to assess the performance of the PH8 concept,which may result in an evaluation of strategic alternatives.

 

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

 

*On-line.* bebe.com is an extension of the bebestore experience and provides a complete assortment of bebe merchandise. It isalso used as a vehicle to communicate with our customers.

 

**CRITICALACCOUNTING POLICIES**

 

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

 

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

 

**RESULTSOF OPERATIONS**

 

Our fiscal year is a 52or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2010 and 2009 each include 52 weeks.  The three months ended January 2,2010 and January 3, 2009 each include 13 weeks.  The six months ended January 2, 2010 andJanuary 3, 2009 each include 26 weeks.

 

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

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **January 2,**              | ** ** | **January 3,**            | ** ** | **January 2,** | ** ** | **January 3,** | ** ** |
| ** **                                             | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net  sales                                             |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost  of sales, including production and occupancy (1) |       | 60.8                             |       | 61.4                           |       | 62.0 |   | 58.4 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Gross  margin                                          |       | 39.2                             |       | 38.6                           |       | 38.0 |   | 41.6 |   |
| Selling,  general and administrative expenses (2)      |       | 36.3                             |       | 33.8                           |       | 39.0 |   | 34.9 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Operating  income (loss)                               |       | 2.9                              |       | 4.8                            |       | (1.0 | ) | 6.7 |   |
| Interest  and other income, net                        |       | 0.6                              |       | 1.0                            |       | 0.7 |   | 1.4 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Income  (loss) before income taxes                     |       | 3.5                              |       | 5.8                            |       | (0.3 | ) | 8.1 |   |
| Provision  for income taxes                            |       | 1.8                              |       | 2.0                            |       | 0.3 |   | 2.8 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net  income (loss)                                     |       | 1.7                              | %          | 3.8                            | %          | (0.6 | )% | 5.3 | % |

 

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

 

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

 

*NetSales.* Net salesdecreased to $141.5 million during the three months ended January 2, 2010from $181.9 million for the comparable period of the prior year, a decrease of$40.4 million, or 22.2%. The decrease in sales was primarily due to a 22.5%decrease in comparable store sales resulting primarily from the overallmacroeconomic environment, in which we saw lower traffic in stores and a 12.1%decrease in our on-line sales.  These decreases were partially offset byhigher conversion in stores, an increase in wholesale sales to internationallicensees and an increase in royalty revenue.

 

For the six months ended January 2,2010, net sales decreased to $267.2 million from $345.2 million for thecomparable period of the prior year, a decrease of $78.0 million, or22.6%.  The decrease in sales was primarily due to a 24.1% decrease incomparable store sales resulting primarily from the overall macroeconomicenvironment, in which we saw lower traffic in stores, a reduced customeracceptance of the merchandise offering and a 14.2% decrease in our on-linesales.  These decreases were partially offset by higher conversion in stores,stores not included in the comparable store sales, an increase in wholesalesales to international licensees and an increase in royalty revenue.

 

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| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **January 2,**              | ** ** | **January 3,**            | ** ** | **January 2,** | ** ** | **January 3,** | ** ** |
| ** **                                      | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Net  sales (In thousands)                       |       | $                                | 141,494    |                           | $          | 181,902 |   | $ | 267,152 |   | $ | 345,162 |   |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Total  net sales decrease percentage            |       | (22.2                            | )%         | (10.5                          | )%         | (22.6 | )% | (5.3 | )% |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Comparable  store decrease percentage (1)       |       | (22.5                            | )%         | (20.1                          | )%         | (24.1 | )% | (16.0 | )% |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Net  sales per average square foot (2)          |       | $                                | 122        |                           | $          | 152 |   | $ | 231 |   | $ | 291 |   |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Square  footage at end of period (In thousands) |       | 1,157                            |       | 1,164                          |       | 1,157 |   | 1,164 |   |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Number  of store locations:                     |       |                             |       |                           |       |   |   |   |   |
| Beginning  of period                            |       | 307                              |       | 307                            |       | 308 |   | 303 |   |
| New  store locations                            |       | 2                                |       | 6                              |       | 4 |   | 11 |   |
| Closed  store locations                         |       | —                           |       | 1                              |       | 3 |   | 2 |   |
| Number  of stores open at end of period         |       | 309                              |       | 312                            |       | 309 |   | 312 |   |

 

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

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

 

*GrossMargin.* Gross margindecreased to $55.4 million during the three months ended January 2, 2010from $70.1 million for the comparable period of the prior year, a decrease of$14.7 million, or 21.0%. As a percentage of net sales, gross margin increasedto 39.2% for the three months ended January 2, 2010 from 38.6% in thecomparable period of the prior year.  The increase in gross margin as apercentage of net sales was primarily due to lower markdowns, inventory shrinkand damages partially offset by lower initial markup and unfavorable occupancyleverage.

 

For the six months ended January 2,2010, gross margin decreased to $101.6 million from $143.4 million for thecomparable period of the prior year, a decrease of $41.8 million, or29.1%.  As a percentage of net sales, gross margin decreased to 38.0% forthe six months ended January 2, 2010 from 41.6% in the comparable periodof the prior year.  The decrease in gross margin as a percentage of netsales was primarily due to unfavorable occupancy leverage partially offset by lowerinventory shrink and damages.

 

*Selling,General and Administrative Expenses.* Selling, general and administrative expenses, whichprimarily consist of non-occupancy store costs, corporate overhead andadvertising costs, decreased to $51.3 million during the three months ended January 2,2010 from $61.5 million for the comparable period of the prior year, a decreaseof $10.2 million, or 16.6 %. As a percentage of net sales, selling, general andadministrative expenses increased to 36.3% during the three months ended January 2,2010 from 33.8% in the comparable period of the prior year.  The decreasein dollars over the prior year was primarily due to a reduction in spendingacross all categories and a $1.1 million reduction of expense related to theinitial recognition of gift card breakage income offset by a $2.5 millionimpairment charge related to under-performing stores, comprised of $1.9 millionrelated to PH8 stores and $0.6 million related to bebe stores versus $1.0million in the second quarter of fiscal 2009.

 

For the six months ended January 2,2010, selling, general and administrative expenses decreased to $104.3 millionfrom $120.6 million for the comparable period of the prior year, a decrease of$16.3 million, or 13.5%.  As a percentage of net sales, selling, generaland administrative expenses increased to 39.0% from 34.9% in the comparableperiod of the prior year.  The decrease in dollars over the prior year wasprimarily due to a reduction in spending across all categories and a $1.1million reduction of expense related to the initial recognition of gift cardbreakage income offset by a $4.2 million impairment charge related tounder-performing stores, of which $3.6 million related to PH8 and BEBE SPORTstores and $0.6 million related to bebe stores versus $1.0 million in thecomparable period of fiscal 2009.

 

*Interestand Other Income, Net.* We generated approximately $0.8 million of interest and other income,net of other expenses during the three months ended January 2, 2010compared to approximately $1.9 million in the comparable period of the prioryear. The decrease in interest and other income resulted from an increase ininvestments in lower-yielding tax-exempt investments and money market funds.

 

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For the six month periodended January 2, 2010, we recorded approximately $1.9 million of interestand other income (net of other expenses), compared to $4.9 million in thecomparable period of the prior year.  The decrease in interest and otherincome resulted from an increase in investments in lower-yielding tax-exemptinvestments and money market funds.

 

*Provisionfor Income Taxes.*Our effective tax rate increased to 50.7% for the three months ended January 2,2010 from 35.0% for the comparable period in the prior year.  The highereffective tax rate was primarily due to deleveraging of incentive stock optioncompensation expense offset by higher tax exempt interest income as a percentof taxable income.  We also recorded anadditional $0.4 million of discrete items during the quarter primarily relatedto fixed asset depreciation.

 

For the six months ended January 2,2010, our effective tax rate increased to 101.3% from 35.0% for the comparableperiod in the prior year primarily due to discrete adjustments of $1.3 millionrecorded during the period as well as the deleveraging of stock compensationexpense offset by higher tax exempt interest income as a percent of taxableincome.

 

**SEASONALITYOF BUSINESS AND QUARTERLY RESULTS**

 

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

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Our working capitalrequirements vary widely throughout the year and generally peak during thefirst and second fiscal quarters. As of January 2, 2010, we hadapproximately $339.2 million of cash and equivalents and investments on hand ofwhich approximately $40.0 million were invested in government treasury bills,approximately $10.7 million were invested in certificates of deposit, andapproximately $185.6 million, net of impairment charges of $24.1 million, wereinvested in auction rate securities (“ARS”). We do not anticipate the lack ofliquidity in the ARS to impact our ability to fund our operations in theforeseeable future and believe we have sufficient cash and equivalents to fundongoing operations. In addition, we have a revolving line of credit, underwhich we may borrow or issue letters of credit up to a combined total of $25million. As of January 2, 2010, there were no cash borrowings outstandingunder the line of credit, and letters of credit outstanding totaled $1.7million.  This credit facility requires us to maintain a $2.5 millioncompensating balance and to comply with certain financial covenants, includingamounts for minimum tangible net worth, unencumbered liquid assets andprofitability, and certain restrictions on making loans and investments. As of January 2, 2010, we were in compliance with all covenants under thecredit facility.

 

As of January 2,2010, we had cash and equivalents of $102.9 million held in accounts managed bythird party financial institutions consisting of invested cash and cash in ouroperating accounts.  The invested cash is invested in interest bearingfunds managed by third party financial institutions.  These funds investin direct obligations of the government of the United States.  To date, wehave experienced no loss or lack of access to our invested cash or equivalents;however, we can provide no assurances that access to our invested cash andequivalents will not be impacted by adverse conditions in the financialmarkets.

 

At any point in time we alsohave approximately $75 to $105 million of invested cash and cash in operatingaccounts that are with third party financial institutions.  These balancesexceed the Federal Deposit Insurance Corporation insurance limits.  Whilewe monitor daily the cash balances in our operating accounts and adjust thecash balances as appropriate, these cash balances could be impacted if theunderlying financial institutions fail or could be subject to other adverseconditions in the financial markets.  To date, we have experienced no lossor lack of access to invested cash or cash in our operating accounts.

 

Net cash provided byoperating activities for the six months ended January 2, 2010 was $26.0million versus cash provided by operating activities of $32.5 million for thesix months ended January 3, 2009. The decrease of $6.5 million from thecomparable period was primarily due to a decrease in net earnings of $19.7million offset by increased changes in working capital of $12.1 millionprimarily related to lower prepaid taxes as a result of a federal tax refundreceived during the second quarter and lower estimated tax payments made thisyear versus the prior due to an anticipated decrease in projected income aswell as lower accounts payable related to lower inventory balances.

 

Net cash used byinvesting activities for the six months ended January 2, 2010 was $9.2million versus $3.5 million provided for the six months ended January 3,2009.  The decrease of $12.7 million versus the prior year comparableperiod was primarily due to lower proceeds on the sale of investment securitiescombined with higher purchases of investment securities offset by lower capitalexpenditures.  We expect that total capital expenditures will be below $20million in fiscal 2010.

 

Net cash used byfinancing activities was $12.2 million for the six months ended January 2,2010 versus $15.9 million for the six months ended January 3, 2009. The decrease in cash used of $3.7 million from the prior year comparable periodwas primarily due to lower dividends paid related to a lower rate declared forthe first and second quarters of fiscal 2010 ($0.025 per share versus $0.05 pershare in the prior year).

 

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We hold a variety ofinterest bearing ARS consisting of federally insured student loan backedsecurities and insured municipal authority bonds. As of January 2, 2010,our ARS portfolio totaled approximately $185.6 million, $72.2 million (net ofan impairment charge of $9.6 million) classified as trading securities and$113.4 million (net of temporary impairment charge of $14.4 million) classifiedas long term available for sale securities. Our ARS portfolio includesapproximately 98% federally insured student loan backed securities and 2%municipal authority bonds. Our ARS portfolio consists of approximately 39% AAArated investments, 7% AA rated investments, 35% A rated investments and 19% BBBrated investments.  This is a change from our fiscal 2009 portfolio, whichconsisted of 46% AAA rates investments, 14% AA rated investments, 30% A ratedinvestments and 10% BBB related investments.  These ARS investments areintended to provide liquidity via an auction process that resets the applicableinterest rate at predetermined calendar intervals, allowing investors to eitherroll over their holdings or gain immediate liquidity by selling such interestsat par. The uncertainties in the credit markets that began in February 2008have affected our holdings in ARS investments and auctions for our investmentsin these securities have failed to settle on their respective settlement dates.Historically the fair value of ARS investments had approximated par value dueto the frequent resets through the auction process. While we continue to earninterest on our 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 notcurrently liquid, and we will not be able to access these funds until a futureauction of these investments is successful, the issuer redeems the securitiesor at maturity. Maturity dates for these ARS investments range from 2010 to2044 with principal distributions occurring on certain securities prior tomaturity.

 

In November 2008, weentered into a settlement agreement related to our ARS held with UBS FinancialServices, Inc. (“UBS”) that grants us certain rights related to these ARS(the “Right”).  Beginning June 30, 2010, at our request, UBS hasagreed to purchase all of our ARS currently held with them at par value. Conversely, UBS has the right, in its discretion, to purchase or sell our ARSat any time until July 2, 2012, so long as we receive payment at par valueupon any sale or disposition.  The enforceability of the Right results ina put option which should be recognized as a free standing asset separate fromthe ARS.  Upon acceptance of the offer from UBS, we recorded the putoption at fair value of $11.6 million, with a corresponding credit to interestincome.  Although it is a financial instrument, the put option does not meetthe FASB’s definition of a derivative instrument, therefore we have elected tomeasure the put option at fair value.  As a result, unrealized gains andlosses are included in earnings.  At January 2, 2010, the fair valueof the put option is $9.2 million, net of a reserve of $0.5 million, of which again of $0.1 million has been recognized in the current year.

 

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

 

In October 2008, ourboard of directors authorized a program to repurchase up to $30 million of ourcommon stock.  We may, from time to time, as business conditions warrant,purchase stock in the open market or through private transactions. Purchases may be increased, decreased or discontinued at any time without priornotice.  The plan does not obligate us to repurchase any specific numberof shares and may be suspended at any time at management’sdiscretion.   During the second quarter of fiscal 2010 we purchased0.6 million shares at an average price of $5.77 per share.  As of January 2, 2010, there wasapproximately $13.0 million available for additional purchases under theprogram.

 

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

 

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

 

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

 

*InterestRate Risk*

 

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

 

All highly liquidinvestments with a maturity of three months or less at the date of purchase areconsidered to be cash equivalents.  Investments are considered short-termavailable for sale securities if the original maturity is between three monthsand twelve months, short-term trading securities if they are ARS related to theRight with UBS, or long term investments if the original maturity is greaterthan twelve months. Historically the fair value of ARS investments hadapproximated par value due to the frequent resets through the auction process.While we continue to earn interest on our ARS investments at the maximumcontractual rate, these investments are not currently trading and therefore donot currently have a readily determinable market value. Accordingly, theestimated fair value of ARS no longer approximates par value. We determined theestimated fair value of our investment in ARS as of January 2, 2010 usinga discounted cash flow model to estimate the fair value of our investments inARS. The assumptions used in preparing the discounted cash flow model includeestimates for interest rates, timing and amount of cash flows and expectedholding periods of the ARS. The ARS written put right is a free standing assetseparate from the ARS, and represents our contractual right to require UBS topurchase our ARS at par value during the two year period beginning June 30,2010.  In order to value the ARS written put right, we consideredintrinsic value, time value of money and our assessment of the creditworthiness of UBS.  We have modified our investment strategy and increasedour investments in more liquid money market investments.

 

The following table listsour cash, cash equivalents and investments as of January 2, 2010:

 
| ** **                                 | ** ** | **Fair Value**                  | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Cash                                       |       | $                                    | 49,962     |   |
| Weighted  average interest rate            |       | 0.00                                 | %          |
| Cash  equivalents                          |       | $                                    | 52,912     |   |
| Weighted  average interest rate            |       | 0.11                                 | %          |
| Current  available for sale securities     |       | $                                    | 49,738     |   |
| Weighted  average interest rate            |       | 0.24                                 | %          |
| Trading  securities                        |       | $                                    | 72,182     |   |
| Weighted  average interest rate            |       | 0.73                                 | %          |
| Non-current  available for sale securities |       | $                                    | 114,382    |   |
| Weighted  average interest rate            |       | 0.58                                 | %          |
| Total                                      |       | $                                    | 339,176    |   |

 

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

 

*ForeignCurrency Risks*

 

We enter into a significantamount of purchase obligations outside of the United States, substantially allof which are negotiated and settled in U.S. Dollars and, therefore, have onlyminimal exposure to foreign currency exchange risks. We also operate asubsidiary for which the functional currency is the Canadian Dollar. Inaccordance with FASB ASC 830, “Foreign Currency Matters”, we translate assetsand liabilities of Canada’s operations into U.S. dollars at month-end rates,while we translate income and expenses at the weighted average exchange ratesfor the month. We record the related translation adjustments in accumulatedother comprehensive income as a separate component of shareholders’ equity.Fluctuations in exchange rates therefore impact our financial condition and resultsof operations, as reported in U.S. Dollars.   We do not hedge againstforeign currency risks and believe that foreign currency exchange risk isimmaterial.

 

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**ITEM4.               CONTROLSAND PROCEDURES**

 

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

 

There has been no changein our internal control over financial reporting during the quarter ended January 2,2010 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II                OTHER INFORMATION**

 

**ITEM1.                 LEGAL PROCEEDINGS**

 

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

 

**ITEM1A.              RISK FACTORS**

 

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

 

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

 

RISKS RELATING TO OURBUSINESS:

 

**1. Thesuccess of our business depends in large part on our ability to identifyfashion trends as well as to react to changing customer demand in a timelymanner.**    Consequently, we depend in part upon the customer response to thecreative efforts of our merchandising, design and marketing teams and theirability to anticipate trends and fashions that will appeal to our consumerbase. If we miscalculate our customers’ product preferences or the demand forour products, we may be faced with excess inventory. Historically, this type ofoccurrence has resulted in excess fabric for some products and markdowns and/orwrite-offs, which has impaired our profitability, and may do so in the future.Similarly, any failure on our part to anticipate, identify and respondeffectively to changing customer demands and fashion trends will adverselyaffect our sales.

 

**2. If weare unable to obtain raw materials, or unable to find manufacturing facilitiesor if our manufacturers perform unacceptably, our sales may be negativelyaffected and our financial condition may be harmed.**   We do not own any manufacturingfacilities and therefore depend on contractors and third parties to manufactureour products. We place all of our orders for production of merchandise and rawmaterials by purchase order and do not have any long-term contracts with anymanufacturer or supplier. If we fail to maintain favorable relationships withour manufacturers and suppliers or are unable to obtain sufficient quantitiesof quality raw materials on commercially reasonable terms, it could harm ourbusiness and results of operations. We cannot assure you that contractors andthird-party manufacturers (1) will not supply similar products to ourcompetitors, (2) will not stop supplying products to us completely or (3) willsupply products in a timely manner. Untimely receipt of products may result inlower than anticipated sales and markdowns which would have a negative impacton earnings. Furthermore, we have received in the past, and may receive in thefuture, shipments of products from manufacturers that fail to conform to ourquality control standards. In such event, unless we are able to obtainreplacement products in a timely manner, we may lose sales. Certain of ourthird-party manufacturers store our raw materials. In the event our inventorywas damaged or destroyed and we were unable to obtain replacement rawmaterials, our earnings could be negatively impacted.

 

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

 

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

 

**4. If weare not able to successfully develop new concepts, including 2b bebe and PH8,our revenue base and earnings may be impaired.**   From time to time, we may pursue newconcepts.  If the 2b bebe, PH8 or other new concepts are not successful wemay incur additional charges related to closed stores or store impairment andas such, our results from operations and financial condition may beharmed.  In the second quarter 2010 werecorded asset impairment charges of $1.9 million to write-off underperformingPH8 stores.  Management will continue toassess the performance of the PH8 concept, which may result in an evaluation ofstrategic alternatives.

 

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**5.General economic conditions, including increases in energy and commodityprices, that are largely out of our control may adversely affect our financialcondition and results of operations.**    Weare sensitive to changes in general economic conditions, both nationally andlocally. Recessionary economic cycles, higher interest rates, higher fuel andother energy costs, inflation, deflation, increases in commodity prices, higherlevels of unemployment, higher consumer debt levels, higher tax rates and otherchanges in tax laws or other economic factors that may affect consumer spendingor buying habits could adversely affect the demand for products we sell in ourstores. In addition, the recent turmoil in the financial markets may have anadverse effect on the U.S. and world economy, which could negatively impactconsumer spending patterns. We cannot assure you that government responses tothe disruptions in the financial markets will restore consumer confidence.

 

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

 

**6. Wecannot assure you that future store openings will be successful, and new storeopenings may impact existing stores.** We expect to open approximately 5 bebe stores, expanda bebe store and open a PH8 pop-up location in fiscal 2010.  In the past,we have closed stores as a result of poor performance, and we cannot assure youthat the stores that we plan to open in fiscal 2010, or any other stores thatwe might open in the future, will be successful or that our overall operatingprofit will increase as a result of opening these stores. During fiscal 2010 weclosed 3 stores and anticipate closing up to 11 additional stores during theremainder of the fiscal year. Most of our new store openings in fiscal 2010will be in existing markets. These openings may affect the existing stores’ netsales and profitability. Our failure to predict accurately the demographic orretail environment at any future store location could have a material adverseeffect on our business, financial condition and results of operations.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**12. Ifwe are not able to successfully protect our intellectual property our abilityto capitalize on the value of our brand name may be impaired.**   Even though we take actions toestablish, register and protect our trademarks and other proprietary rights, wecannot assure you that we will be successful or that others will not imitateour products or infringe upon our intellectual property rights. In addition, wecannot assure that others will not resist or seek to block the sale of ourproducts as infringements of their trademark and proprietary rights.

 

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

 

**13. Wemay be required to record losses in future quarters as a result of the declinein value of our investments in auction rate securities or as a result of achange in our ability to hold our investment in auction rate securities.**   We hold a variety of interest bearing ARS comprised of federallyinsured student loan backed securities and insured municipal authority bonds.These ARS investments are intended to provide liquidity via an auction processthat resets the applicable interest rate at predetermined calendar intervals,allowing investors to either roll over their holdings or gain immediateliquidity by selling such interests at par. The recent uncertainties in thecredit markets that began in February 2008 have affected our holdings inARS investments and the majority of auctions for our investments in thesesecurities have failed to settle on their respective settlement dates.Consequently, $185.6 million of our ARS are not currently liquid and wewill not be able to access these funds until a future auction of theseinvestments is successful or securities are purchased or redeemed outside ofthe auction process. Maturity dates for these ARS investments range from 2010to 2044, with principal distributions occurring on certain securities prior tomaturity.

 

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

 

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

 

**14. Ifan independent manufacturer violates labor or other laws, or is accused ofviolating any such laws, or if their labor practices diverge from thosegenerally accepted as ethical, it could harm our business and brand image.**   While we maintain a policy tomonitor the operations of our independent manufacturers by having anindependent firm inspect these manufacturing sites, and all manufacturers arecontractually required to comply with such labor practices, we cannot controlthe actions or the public’s perceptions of such manufacturers, nor can weassure that these manufacturers will conduct their businesses using ethical orlegal labor practices. Apparel companies can be held jointly liable for thewrongdoings of the manufacturers of their products. While we do 

 

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not control theiremployees’ employment conditions or the manufacturers’ business practices, andthe manufacturers act in their own interest, they may act in a manner thatresults in negative public perceptions of us and/or employee allegations orcourt determinations that we are jointly liable.

 

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RISKS RELATING TO OURCOMMON STOCK:

 

**1.Because Manny Mashouf beneficially owns a substantial portion of theoutstanding shares, other shareholders may not be able to influence thedirection the company takes.**     As of January 31, 2010, MannyMashouf, our Chief Executive Officer and Chairman of the Board, beneficiallyowned approximately 54% of the outstanding shares of our common stock. As aresult, he can control the election of directors and the outcome of all issuessubmitted to the shareholders. This may make it more difficult for a thirdparty to acquire shares, may discourage acquisition bids, and could limit theprice that certain investors might be willing to pay for shares of commonstock. This concentration of stock ownership may have the effect of delaying,deferring or preventing a change in control of our company.

 

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

 

In addition, ourcomparable store sales have fluctuated significantly in the past, and we expectthat they will continue to fluctuate in the future. For example, we incurred anet loss for the first quarter of fiscal 2010 and cannot assure you of futureprofitability.  A variety of factors affect comparable store sales, includingfashion trends, competition, current economic conditions, the timing of releaseof new merchandise and promotional events, changes in our merchandise mix, thesuccess of marketing programs and weather conditions. Our ability to deliverstrong comparable store sales results and margins depends in large part onaccurately forecasting 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.  Suchfluctuations may adversely affect the market price of our common stock.

 

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

 

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

 

The following table presentsinformation with respect to purchases of our common stock made during the threemonths ended January 2, 2010 by bebe stores, inc. or any affiliatedpurchaser, as defined in Rule 10b-18(a)(3) under the 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 (October 4 – October 31)   |       | —                                                            |       | $                                                        | —     |                                                                                                                                                           | —     |                                                                                                                                                                                                                          | $          | 16,700 |   |
|                                                |       |                                                                   |       |                                                     |       |                                                                                                                                                           |       |                                                                                                                                                                                                                          |       |
| Month  #2 (November 1 – November 28) |       | —                                                            |       | $                                                        | —     |                                                                                                                                                           | —     |                                                                                                                                                                                                                          | $          | 16,700 |   |
|                                                |       |                                                              |       |                                                     |       |                                                                                                                                                           |       |                                                                                                                                                                                                                          |       |
| Month  #3 (November 29 – January 2)  |       | 644                                                               |       | $                                                        | 5.77       |                                                                                                                                                           | 644        |                                                                                                                                                                                                                          | $          | 12,982 |   |
|                                                |       |                                                                   |       |                                                     |       |                                                                                                                                                           |       |                                                                                                                                                                                                                          |       |
| Total                                               |       | 644                                                               |       | $                                                        | 5.77       |                                                                                                                                                           | 644        |                                                                                                                                                                                                                          |       |   |

 

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

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

Not applicable.

 

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

 

a) On November 3,2009, our Annual Meeting of Stockholders was held in Brisbane, California.  There were 86,780,971 shares of our commonstock outstanding and entitled to vote at the meeting, and of such shares,there were 77,638,992 shares present in person or represented by proxy at themeeting.

 

b) The followingdirectors were elected:

 
| ** **        | ** ** | **Vote  For** | ** ** | **Vote  Withheld** | ** ** |
|-------------------|------------|---------------|------------|--------------------|------------|
| ** **        | ** ** | ** **    | ** ** | ** **         | ** ** |
| Barbara  Bass     |       | 58,899,513    |       | 18,739,479         |       |
| Cynthia  Cohen    |       | 58,907,576    |       | 18,731,416         |       |
| Corrado  Federico |       | 58,916,187    |       | 18,722,805         |       |
| Manny  Mashouf    |       | 59,926,864    |       | 17,712,128         |       |
| Caden  Wang       |       | 60,016,103    |       | 17,622,889         |       |

 

There were noabstentions.

 

c) The ratification ofthe appointment of Deloitte & Touche LLP as our independent registeredpublic accounting firm for the fiscal year ending July 3, 2010, wasratified with 75,686,199 votes in favor and 1,623,845 votes against.  There were 328,948 abstentions.

 

**ITEM5.  OTHER INFORMATION**

 

Not applicable.

 

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**ITEM6.  EXHIBITS**

 

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

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

 

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**SIGNATURE**

 

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

 

 
|   | Dated February 11,  2010                                      |
|--------|--------------------------------------------------------------------|
|   |                                                               |
|   | bebe stores, inc.                                                  |
|   |                                                               |
|   | /s/ Walter Parks                                                   |
|   | Walter Parks, Chief  Operating Officer and Chief Financial Officer |

 

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EXHIBIT INDEX

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

 

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