Bebe CEO: We're not just for sexy party girls

Bebe has a message for the women who left it behind: The party's over.

Well, maybe not totally over. But the specialty apparel store—which alienated shoppers when its clothes got a little too risqué—is getting back to its roots as a destination for more than short skirts and rhinestones.

A Bebe store in New York.
Victor J. Blue | Bloomberg | Getty Images
A Bebe store in New York.

But it isn't stopping there. Along with reviving the brand's original DNA—which, while still sexy, also offers women wear-to-work and dressy casual styles—Bebe's new management team is revamping its stores, cutting expenses and dialing back on discounts.

And as sales trends improve and the company moves closer to profitability, it's eyeing growth opportunities through its international and outlet businesses, with plans to launch a wholesale model.

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Still, the retailer faces headwinds on its journey back into the black, including sluggish overall apparel sales and highly promotional competitors.

Though big changes are already underway for the retailer, CEO Jim Wiggett—who officially took the helm in December after a six-month stint in the interim role—is making it clear that he's not out to completely rework the brand. Instead, he's bringing back the fundamentals that made it a standout name a decade ago.

"The good news is there was a history to go to," Wiggett said of the 40-year-old brand. "The good news is we did know our client… Where our future [lies] is to be very clear about our swim lane and then stay in it."

The merchandise comes first

After shooting to popularity in the mid-2000s for its sexy, differentiated fashions, Bebe was criticized in following years for getting too racy, and focusing on products designed for 20-something club rats. The problem with that strategy, Wiggett said, was that the party segment only represents 20 percent of the company's sales.

Though Wiggett has no plans to exit this category, his biggest task is reminding customers that the retailer has more to offer. Its business chic category, for example, also accounts for 20 percent of the company's revenues, while dressy casual contributes 40 percent of its sales.

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Wiggett is also slowing down the time it takes the team's designers to get its merchandise into its production facilities and onto the selling floor, in an effort to improve quality and design, he said. Whereas the retailer had been previously putting out 12 collections a year, it now has eight seasons. And to drum up demand, he's putting in smaller orders.

"The customer is now figuring that out," Wiggett said. "She's saying, 'Alright, it's perishable. If I don't buy it in that [season's] cycle, it's gone.' And we don't replenish."

The combination of these merchandising tactics has made it possible for Bebe to stop holding deep, store-wide discounts—and as a result, boost its margins. And despite selling its products for higher prices, it's also posted three consecutive quarters of same-store sales gains.

These increases wouldn't have been possible, Wiggett said, if the store wasn't offering differentiated product in leaner quantities.

"The apparel landscape in general has been impacted over the last few years by a lack of trends and increase in price competition," said Dana Telsey, CEO and chief research officer at Telsey Advisory Group.

To successfully be able to raise prices, she said, "It all depends on the innovation of the product."

"Product comes first, and then you can decide on price," she said.

The way Bebe presents its merchandise also underwent a big change. Whereas the stores were previously organized by color, they're now arranged by lifestyle. Wiggett said this was an important shift as he doesn't know "a woman on earth who buys in colors." It also encourages shoppers to scoop up more items.

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"Management continues to assort the stores by lifestyle to upsell entire outfits," Mizuho Securities analyst Betty Chen wrote in a recent note to investors.

After shedding 55 stores over the past three years, including all 18 of its lower-price 2b stores, Wiggett said he's comfortable keeping its fleet at around 165 full-price stores. The company has also tested a more modern store concept, which has currently been rolled out to eight of its locations.

These smaller-footprint stores have experienced an increase in both sales per square foot and margin performance. The company plans to build all of its new and relocated stores in this format.

Going against the grain with logo

Now that the company's fundamentals are on the mend, including the realization of $20 million in cost savings for 2015 and 2016, Wiggett is looking for ways to propel Bebe forward. One of those initiatives is growing its presence overseas, where through partnerships, its products are currently sold in 25 countries. Future plans include expanding in China, Brazil and Latin America.

Another of Bebe's strategies is to enter into a wholesale agreement with a yet-to-be-announced retailer. Chief Financial Officer Liyuan Woo said this strategy fits into the brand's sweet spot, as its internal research found its biggest competitors aren't fast-fashion retailers, but department stores. For Wiggett, such a partnership presents an opportunity to reintroduce the brand to former customers.

"What I want is that customer to go, 'Wow, I forgot about Bebe,'" he said. "Because I want her to then come into the boutique."

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Wiggett also plans to beef up Bebe's outlet presence, and has set a goal to open 38 new locations over the next few years. That would give it a total of about 70 outlet stores. Wiggett sees further opportunity in outlet by producing items made specifically for those stores and capitalizing on its logo business, which sells there at full price, by making it a larger part of the mix.

That strategy stands in stark contrast to tactics being used by Coach and Abercrombie & Fitch, which are dialing back on their logo merchandise. But Woo said there are unique ways to sell logo, such as making it a subtle feature on a piece of apparel, or working it into non-apparel merchandise.

Logo product currently accounts for 10 percent of Bebe's business.

"We estimate the company may have opportunity to increase penetration of the logo business by several points after minimizing it under prior leadership," Mizuho's Chen said.

Chen, who has a "neutral" rating and $2.25 price target on the retailer, said that the company's balance sheet "remains in a solid position" with about $71.5 million in cash and equivalents, and that "the company has sufficient liquidity to reach profitability."

Still, performance of the small-cap stock has been volatile over the past year, most recently dropping on news that founder and Chairman Manny Mashouf intends to sell his 59 percent ownership stake.

And although Bebe managed to eke out a profit of 2 cents per share in the second quarter, it's expected to post another—albeit smaller—loss for the fiscal year, which ends this month. It will also face tougher comparisons as it advances its sales rebound.

"The key now is to make sure that consumers overall see the messaging and the brand messaging of Bebe as appealing," Telsey said.