Body Central Continues to Struggle

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In Is Body Central a Value Trap?, I talked about how Body Central’s (NASDAQ: BODY) 66% decline from its 52-week high to the price of $10.56 on July 9 was a value trap because of a decline in same store sales of 1.4%. It had a total debt to equity ratio of 48% as of the first quarter and growth in free cash flow of 54% between fiscal years 2009-2011. While that's excellent, I saw the decline in same store sales as the beginning of a worrisome trend.

I also discussed how management didn’t expect any improvement until the holiday season. The earnings announcement that came out on Aug. 2 is not doing anything to change my mind about the continuation of the worrisome trend. The stock price has dropped another 23% as of close on Aug. 6.

Net revenue did increase 9% for the first half of 2012 to $162 million versus $148.7 million last year. This was due to an increase in the number of stores. Comparable same store sales fell 4.5% for the entire first half of 2012.

Income from operations fell to $15 million or 9.3% of revenue for the first half of 2012 versus $16.9 million or 11.4% for the same period in 2011. Net Income was $9.4 million in the first half of 2012 versus $10.7 million in the first half of 2011. Operating cash flow declined to $5.9 million for 26 weeks ending versus $14.1 million this time last year.

Some bright spots include direct sales through the internet and catalogs, which had a higher percentage increase than store sales. These direct sales rose by 9.5% versus an 8.9% increase in store sales in 2012. Management said they came out with a catalog that was well received by the customer base, according to the Aug. 2 conference call. Body Central also optimized technologies on their website. Body Central’s total to debt to equity ratio is now 38%. Cash and short term investment to stockholder’s equity is high at 43%.

Lower Guidance

Body Central has lowered its guidance on revenue, net income, and comparable sales for the second time since May (see tables below). Revenue at the high end of Aug. 2 guidance is only going to be 7% above 2011, and net income is going to be 29% lower compared to 2011 on the high end. Management now believes that comparable store sales are going to be 8 to 10% lower than last year.

<table> <tbody> <tr> <td> <p><strong>Date</strong></p> </td> <td> <p><strong>Revenue Guidance</strong></p> </td> <td> <p><strong>2011 Revenue</strong></p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=670230">05/03/12</a></p> </td> <td> <p>$333 Million to $337 Million</p> </td> <td> <p>$296.5 Million</p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=683749">06/18/12</a></p> </td> <td> <p>$323 Million to $328 Million</p> </td> <td> <p>$296.5 Million</p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=697780">08/02/12</a></p> </td> <td> <p>$314 Million to $317 Million</p> </td> <td> <p>$296.5 Million</p> </td> </tr> </tbody> </table>

 

<table> <tbody> <tr> <td> <p><strong>Date</strong></p> </td> <td> <p><strong>Net Income Guidance*</strong></p> </td> <td> <p><strong>2011 Net Income</strong></p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=670230">05/03/12</a></p> </td> <td> <p>$22 Million to $23 Million</p> </td> <td> <p>$19.7 Million</p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=683749">06/18/12</a></p> </td> <td> <p>$17 Million to $18 Million</p> </td> <td> <p>$19.7 Million<strong></strong></p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=697780">08/02/12</a></p> </td> <td> <p>$13 Million to $14 Million</p> </td> <td> <p>$19.7 Million<strong></strong></p> </td> </tr> </tbody> </table>

*Estimated earnings per share times 16.4 million shares.

<table> <tbody> <tr> <td> <p><strong>Date</strong></p> </td> <td> <p><strong>Comparable Sales Guidance</strong></p> </td> <td> <p><strong>2011 Comparable Sales</strong></p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=670230">05/03/12</a></p> </td> <td> <p>-1% to -3%</p> </td> <td> <p>11.3%</p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=683749">06/18/12</a></p> </td> <td> <p>-4% to -6%</p> </td> <td> <p>11.3%</p> </td> </tr> <tr> <td> <p><a href="http://investor.bodyc.com/releasedetail.cfm?ReleaseID=697780">08/02/12</a></p> </td> <td> <p>-8% to -10%</p> </td> <td> <p>11.3%</p> </td> </tr> </tbody> </table>

Reasons for Struggle

I could discern several reasons from the conference call for Body Central’s struggles. They have had to mark down items due to slow moving inventory. The management remarked having more spring items in July of 2012 than in July of 2011. While the management is assuming responsibility for internal misjudgments they acknowledge some macro elements at play that they were unable to quantify in the call. Apparently the customer base is continuing to be less willing to pay full price for their products.

Plans of Action

As I stated above, management is taking responsibility for internal missteps. This intellectual acknowledgement is, in my opinion, the first step toward future action. The senior management is also looking for a Senior Vice President of merchandising who will be working with the Chief Merchandising Officer, Beth Angelo, on things like planning, allocation and fashion trends. To me this demonstrates an acknowledged weakness in timing and keeping up with fashion trends.  Body Central is getting ready for the back-to-school season and is still placing a lot of hope on the holiday season to help bring them out of the slump.

Competition

Body Central is in good shape compared to Wet Seal (NASDAQ: WTSL) whose comparable sales were down 11.1% for the second quarter of 2012. This compares to the 7.6% decline for Body Central’s second quarter comparable sales. This could be further affirmation of macroeconomic factors affecting women’s apparel retailing.

On July 23, Wet Seal’s board ousted their CEO Susan McGalla. An investment company called The Clinton Group is calling for Wet Seal to improve shareholder value by taking the company private or returning some of the cash on its balance sheet to shareholders.

Rue21 (NASDAQ: RUE) has no new news as of late, but its stock price is holding steady between $24 and $25 per share roughly. Rue21 was the only company that displayed positive comparable sales results in its latest quarter. It will be interesting to see how they fare at their next earnings announcement.

Conclusion

Body Central continues a downward trend in its comparable store sales. The company continues to struggle with out of season excess inventory, which results in lower profitability and cash flows. Until this issue can be addressed by someone in the current management or by hiring someone to assist them, I am afraid this company will continue to be a value trap. I am continuing my underperform rating on Motley Fool Caps.


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