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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended April 7, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission File Number 0-24395
 bebe stores, inc.
  California
    
    94-2450490(State or Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification Number)
 400 Valley Drive
Brisbane, California 94005
 Telephone: (415) 715-3900
 þ o
  o þ o
 o þ




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bebe stores, inc.
 TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONITEM 1. Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of April
7, 2007, July 1, 2006 and April 1, 2006
    
    
    3Condensed Consolidated Statements of Income for the
three and nine months ended April 7, 2007 and April
1, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for
the nine months ended April 7, 2007 and April 1, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    13ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20ITEM 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    22ITEM 1A. Risk Factors
    
    
    22ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27ITEM 3. Defaults Upon Senior Securities
    
    
    27ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 5. Other Information
    
    
    28ITEM 6. Exhibits
    
    
    28SIGNATURE
    
    
    29EXHIBIT INDEX
    
    
    30EXHBIT 31.1EXHBIT 31.2EXHBIT 32.1EXHBIT 32.2
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PART I. FINANCIAL INFORMATION
 
  bebe stores, inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data)
 (unaudited)
 As of
    
    
    As of
    
    
    As ofApril 7,
    
    
    July 1,
    
    
    April 1,2007
    
    
    2006 (a)
    
    
    2006Assets:Current assets:Cash and equivalents
    
    $
    50,600
    
    
    $
    38,656
    
    
    $
    47,411Short term marketable securities
    
    
    313,146
    
    
    
    289,015
    
    
    
    264,280Receivables (net of allowance of
$1,052, $897 and $1,141)
    
    
    8,911
    
    
    
    5,682
    
    
    
    6,080Inventories
    
    
    43,504
    
    
    
    42,151
    
    
    
    40,047Prepaid and other
    
    
    31,856
    
    
    
    13,802
    
    
    
    21,198Total current assets
    
    
    448,017
    
    
    
    389,306
    
    
    
    379,016Property and equipment, net
    
    
    107,925
    
    
    
    95,022
    
    
    
    81,576Other assets
    
    
    19,081
    
    
    
    16,581
    
    
    
    12,035Total assets
    
    $
    575,023
    
    
    $
    500,909
    
    
    $
    472,627Liabilities and Shareholders Equity:Current liabilities:Accounts payable
    
    $
    27,934
    
    
    $
    22,947
    
    
    
    26,393Accrued liabilities
    
    
    31,634
    
    
    
    35,841
    
    
    
    26,611Current portion of capital leases
    
    
    221
    
    
    
    249
    
    
    
    266Total current liabilities
    
    
    59,789
    
    
    
    59,037
    
    
    
    53,270Long term portion of capital leases
    
    
    94
    
    
    
    260
    
    
    
    311Deferred rent and other lease incentives
    
    
    38,909
    
    
    
    33,388
    
    
    
    32,681Total liabilities
    
    
    98,792
    
    
    
    92,685
    
    
    
    86,262Commitments 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 93,184,225, 91,744,090
and 91,584,334 shares
    
    
    93
    
    
    
    92
    
    
    
    92Additional paid-in capital
    
    
    120,715
    
    
    
    95,768
    
    
    
    92,081Accumulated other comprehensive
income
    
    
    1,788
    
    
    
    2,418
    
    
    
    1,552Retained earnings
    
    
    353,635
    
    
    
    309,946
    
    
    
    292,640Total shareholders equity
    
    
    476,231
    
    
    
    408,224
    
    
    
    386,365Total liabilities and shareholders equity
    
    $
    575,023
    
    
    $
    500,909
    
    
    $
    472,627
 
 (a)
    
    Derived from audited financial statements.  3




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bebe stores, inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except per share data)
 (unaudited)
 Three Months Ended
    
    
    Nine Months EndedApril 7,
    
    
    April 1,
    
    
    April 7,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    154,354
    
    
    $
    132,812
    
    
    $
    508,215
    
    
    $
    426,862Cost of sales, including production and occupancy
    
    
    84,502
    
    
    
    70,576
    
    
    
    264,731
    
    
    
    217,284Gross margin
    
    
    69,852
    
    
    
    62,236
    
    
    
    243,484
    
    
    
    209,578Selling, general and administrative expenses
    
    
    54,126
    
    
    
    44,721
    
    
    
    163,365
    
    
    
    133,886Operating income
    
    
    15,726
    
    
    
    17,515
    
    
    
    80,119
    
    
    
    75,692Interest and other income, net
    
    
    4,430
    
    
    
    2,814
    
    
    
    10,099
    
    
    
    7,174Income before income taxes
    
    
    20,156
    
    
    
    20,329
    
    
    
    90,218
    
    
    
    82,866Income tax provision
    
    
    7,228
    
    
    
    7,030
    
    
    
    32,591
    
    
    
    30,985Net income
    
    $
    12,928
    
    
    $
    13,299
    
    
    $
    57,627
    
    
    $
    51,881Basic earnings per share
    
    $
    0.14
    
    
    $
    0.15
    
    
    $
    0.62
    
    
    $
    0.57Diluted earnings per share
    
    $
    0.14
    
    
    $
    0.14
    
    
    $
    0.61
    
    
    $
    0.55Basic weighted average shares outstanding
    
    
    93,069
    
    
    
    91,445
    
    
    
    92,638
    
    
    
    91,274Diluted weighted average shares outstanding
    
    
    94,989
    
    
    
    93,762
    
    
    
    94,914
    
    
    
    93,769
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bebe stores, inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Nine Months EndedApril 7,
    
    
    April 1,2007
    
    
    2006Cash flows from operating income:Net income
    
    $
    57,627
    
    
    $
    51,881Adjustments to reconcile net income to net cash
provided by operating activities:Non-cash compensation expense
    
    
    7,846
    
    
    
    6,912Depreciation and amortization
    
    
    14,673
    
    
    
    11,659Net loss on disposal of property
    
    
    435
    
    
    
    149Deferred rent and other lease incentives
    
    
    5,553
    
    
    
    2,460Deferred income taxes
    
    
    (1,739
    )
    
    
    (3,564
    )Changes in operating assets and liabilities:Receivables
    
    
    (3,751
    )
    
    
    876Inventories
    
    
    (1,403
    )
    
    
    (8,224
    )Prepaid expenses and other
    
    
    (19,021
    )
    
    
    (9,026
    )Accounts payable
    
    
    4,995
    
    
    
    5,707Accrued liabilities
    
    
    (2,551
    )
    
    
    499Net cash provided by operating activities
    
    
    62,664
    
    
    
    59,329Cash flows from investing activities:Purchase of property and equipment
    
    
    (29,627
    )
    
    
    (15,733
    )Purchase of marketable securities
    
    
    (292,120
    )
    
    
    (235,748
    )Proceeds from sales of marketable securities
    
    
    267,845
    
    
    
    215,278Net cash used by investing activities
    
    
    (53,902
    )
    
    
    (36,203
    )Cash flows from financing activities:Net proceeds from issuance of common stock
    
    
    9,694
    
    
    
    3,005Excess of tax benefit from options exercised
    
    
    7,408
    
    
    
    1,674Cash dividends paid
    
    
    (13,865
    )
    
    
    (7,299
    )Other
    
    
    (195
    )
    
    
    (192
    )Net cash provided (used) by financing activities
    
    
    3,042
    
    
    
    (2,812
    )Net increase in cash and cash equivalents
    
    
    11,804
    
    
    
    20,314Effect of exchange rate changes on cash
    
    
    140
    
    
    
    25Cash and equivalents:Beginning of period
    
    
    38,656
    
    
    
    27,072End of period
    
    $
    50,600
    
    
    $
    47,411
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bebe stores, inc.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 INTERIM FINANCIAL STATEMENTS
    FISCAL YEAR
   6




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INVENTORIES
  As ofApril 7,
    
    
    July 1,
    
    
    April 1,2007
    
    
    2006
    
    
    2006(In thousands)Raw materials
    
    $
    8,106
    
    
    $
    10,417
    
    
    $
    8,920Merchandise available for sale
    
    
    35,398
    
    
    
    31,734
    
    
    
    31,127Inventories
    
    $
    43,504
    
    
    $
    42,151
    
    
    $
    40,047
 EARNINGS PER SHARE
   Three Months Ended
    
    Nine Months EndedApril 7,
    
    April 1,
    
    April 7,
    
    April 1,2007
    
    2006
    
    2007
    
    2006(In thousands)
    
    (In thousands)Basic weighted
average number of
shares outstanding
    
    
    93,069
    
    
    
    91,445
    
    
    
    92,638
    
    
    
    91,274Incremental shares
from the assumed
issuance of stock
options
    
    
    1,920
    
    
    
    2,317
    
    
    
    2,276
    
    
    
    2,495Diluted weighted
average number of
shares outstanding
    
    
    94,989
    
    
    
    93,762
    
    
    
    94,914
    
    
    
    93,769
   7




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COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Nine Months EndedApril 7,
    
    
    April 1,
    
    
    April 7,
    
    
    April 1,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)Net income
    
    $
    12,928
    
    
    $
    13,299
    
    
    $
    57,627
    
    
    $
    51,881Other comprehensive income
    
    
    258
    
    
    
    (71
    )
    
    
    (630
    )
    
    
    581Total comprehensive income
    
    $
    13,186
    
    
    $
    13,228
    
    
    $
    56,997
    
    
    $
    52,462
 CREDIT FACILITIES
   STOCK BASED COMPENSATION
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Three Months Ended
    
    Nine Months EndedApril 7,
    
    April 1,
    
    April 7,
    
    April 1,2007
    
    2006
    
    2007
    
    2006Expected dividend rate
    
    
    1.1
    %
    
    
    0.9
    %
    
    
    0.9
    %
    
    
    0.9
    %Volatility
    
    
    45.2
    %
    
    
    49.2
    %
    
    
    48.7
    %
    
    
    52.9
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.4
    %
    
    
    4.7
    %
    
    
    4.2
    %Expected lives (years)
    
    
    4.1
    
    
    
    4.4
    
    
    
    4.1
    
    
    
    4.4Fair value per option granted
    
    $
    6.98
    
    
    $
    7.37
    
    
    $
    8.68
    
    
    $
    7.90
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WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateOptions (In
    
    
    Exercise Price
    
    
    Contractual
    
    
    Intrinsic Valuethousands)
    
    
    Per Share
    
    
    Term
    
    
    (In thousands)Outstanding, July 1, 2006
    
    
    7,350
    
    
    $
    9.59Granted
    
    
    929
    
    
    
    21.12Exercised
    
    
    (1,425
    )
    
    
    6.66Cancelled
    
    
    (337
    )
    
    
    15.14Outstanding, April 7, 2007
    
    
    6,517
    
    
    $
    11.57
    
    
    
    7.15
    
    
    $
    46,592Exercisable, April 7, 2007
    
    
    3,300
    
    
    $
    8.56
    
    
    
    6.31
    
    
    $
    31,982
   WeightedAverage GrantShares (In
    
    Date Fair Valuethousands)
    
    Per ShareNonvested, July 1, 2006
    
    
    64
    
    
    $
    11.09Granted
    
    
    22
    
    
    $
    21.00Vested
    
    
    (8
    )
    
    $
    14.37Cancelled
    
    
    (22
    )
    
    $
    15.92Nonvested, April 7, 2007
    
    
    56
    
    
    $
    12.55
 LEGAL MATTERS
  10




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RECENT ACCOUNTING PRONOUNCEMENTS
  11




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.
  
  12




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  OVERVIEW
   www.bebe.com
 13




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bebe stores.
 BEBE SPORT.
 bebe outlets.
 On-line.
 bebe accessories
 COLLECTION bebe.
 CRITICAL ACCOUNTING POLICIES
   14




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Revenue recognition.
       Stock Based Compensation.
 Inventories.
 15




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Long-lived assets.
 Accrued Litigation.
 Self Insurance
 Income Taxes
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RESULTS OF OPERATIONS
   Three Months Ended
    
    Nine Months EndedApril 7,
    
    April 1,
    
    April 7,
    
    April 1,2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales, including production
and occupancy (1)
    
    
    54.7
    
    
    
    53.1
    
    
    
    52.1
    
    
    
    50.9Gross margin
    
    
    45.3
    
    
    
    46.9
    
    
    
    47.9
    
    
    
    49.1Selling, general and administrative
expenses (2)
    
    
    35.1
    
    
    
    33.7
    
    
    
    32.1
    
    
    
    31.4Operating income
    
    
    10.2
    
    
    
    13.2
    
    
    
    15.8
    
    
    
    17.7Interest and other income, net
    
    
    2.9
    
    
    
    2.1
    
    
    
    2.0
    
    
    
    1.7Income before income taxes
    
    
    13.1
    
    
    
    15.3
    
    
    
    17.8
    
    
    
    19.4Provision for income taxes
    
    
    4.7
    
    
    
    5.3
    
    
    
    6.5
    
    
    
    7.2Net income
    
    
    8.4
    %
    
    
    10.0
    %
    
    
    11.3
    %
    
    
    12.2
    %
 
 (1)
    
    Cost of sales includes the cost of merchandise, occupancy costs, distribution center and
production costs.(2)
    
    Selling, general and administrative expenses primarily consist of non-occupancy store costs,
corporate overhead and advertising costs. Net Sales.
  17




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Three Months Ended
    
    Nine Months EndedApril 7,
    
    April 1,
    
    April 7,
    
    April 1,2007
    
    2006
    
    2007
    
    2006Net sales (In thousands)
    
    $
    154,354
    
    
    $
    132,812
    
    
    $
    508,215
    
    
    $
    426,862Total net sales increase percentage
    
    
    16.3
    %
    
    
    13.6
    %
    
    
    19.0
    %
    
    
    14.6
    %Comparable store sales increase (decrease) percentage
    
    
    (0.4
    )%
    
    
    4.7
    %
    
    
    5.9
    %
    
    
    7.1
    %Net sales per average square foot (1)
    
    $
    162
    
    
    $
    158
    
    
    $
    545
    
    
    $
    528Square footage at end of period (In thousands)
    
    
    942
    
    
    
    829
    
    
    
    942
    
    
    
    829Number of store locations:Beginning of period
    
    
    258
    
    
    
    228
    
    
    
    242
    
    
    
    214New store locations
    
    
    6
    
    
    
    0
    
    
    
    22
    
    
    
    16Closed store locations
    
    
    5
    
    
    
    0
    
    
    
    5
    
    
    
    2Number of stores open at end of period
    
    
    259
    
    
    
    228
    
    
    
    259
    
    
    
    228
 
 (1)
    
    We calculate net sales per average square foot using net store sales and a monthly
average store square footage. Gross Margin.
 Selling, General and Administrative Expenses.
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Interest and Other Income, Net.
  Provision for Income Taxes.
 Seasonality of Business and Quarterly Results
  LIQUIDITY AND CAPITAL RESOURCES
    19




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Inflation
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest Rate Risk
   20




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Book Value
    
    Fair Value(Dollars in thousands)Cash equivalents
    
    $
    39,043
    
    
    $
    39,043Weighted average interest rate (1)
    
    
    2.07
    %Short-term marketable securities
    
    
    313,146
    
    
    
    313,146Weighted average interest rate (1)
    
    
    4.24
    %Total
    
    $
    352,189
    
    
    $
    352,189
 
 (1)
    
    Represents the weighted average interest rate for tax exempt municipal bonds, municipal
preferreds, corporate preferreds and taxable and tax exempt institutional money market instruments.  Foreign Currency Risks
  
 ITEM 4. CONTROLS AND PROCEDURES
   21




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PART II OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
    1. The success of our business depends in large part on our ability to identify fashion trends as
well as to react to changing customer demand in a timely manner.
 2. If we are unable to obtain raw materials, or unable to find manufacturing facilities or if our
manufacturers perform unacceptably, our sales may be negatively affected and our financial
condition may be harmed
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3. Our success depends on our ability to attract and retain qualified employees in order to support
our existing business and future expansion.
  4. If we are not able to successfully develop new concepts, including BEBE SPORT, our revenue base
and earnings may be impaired
 5. We cannot assure you that future store openings will be successful, and new store openings may
impact existing stores.
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6. We are subject to risks associated with our online sales. www.bebe.com
 7. Any serious disruption at our major facilities could have a harmful effect on our business.
 8. We rely on information technology, the disruption of which could adversely impact our business.
 9. We face significant competition in the retail and apparel industry, which could harm our sales
and profitability.
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10. Purchases of the merchandise we sell are generally discretionary and are therefore particularly
susceptible to economic conditions.
 11. Our business could be adversely impacted by unfavorable international political conditions.
 12. If we are not able to successfully protect our intellectual property our ability to capitalize
on the value of our brand name may be impaired
  13. If an independent manufacturer violates labor or other laws, or is accused of violating any
such laws, or if their labor practices diverge from those generally accepted as ethical, it could
harm our business and brand image
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1. Our stock price may fluctuate because of the relatively low number of shares that can be
publicly traded.
 2. Because Manny Mashouf and Neda Mashouf beneficially own 72% of the outstanding shares, other
shareholders may not be able to influence the direction the company takes.
  3. Our sales, margins and operating results are subject to seasonal and quarterly fluctuations.
  26




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4. Failure to comply with Section 404 of the Sarbanes-Oxley Act of 2002 could negatively impact
investor confidence.
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  27




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ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  Exhibit
    
    Description31.1
    
    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.
 28




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SIGNATURE
  Dated May 17, 2007bebe stores, inc./s/ Walter ParksWalter Parks, Chief Operating Officer and Chief Financial Officer
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Exhibit Number
    
    Description31.1
    
    Section 302 Certification of Chief Executive Officer31.2
    
    Section 302 Certification of Chief Financial Officer32.1
    
    Section 906 Certification of Chief Executive Officer32.2
    
    Section 906 Certification of Chief Financial Officer
 30