The Trip to the Bottom Continues…..
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Nov. 1, specialty apparel retailer Body Central (NASDAQ: BODY) came out with its earnings announcement and had its conference call. This announcement confirms that Body Central’s trip to the fundamental bottom continues. Its comparable store sales declined 12%. Net revenue edged ahead a mere 1.2% due to unjustified store expansion. Net income declined to $153,000 versus $2.8 million this time last year. After four months of observing Body Central I came up with four issues that this company can’t seem to resolve. It’s “curtains” for this company unless they can come up with some viable solutions for these problems.
1.) Management Issues - Since July Body Central lost two key members of management. On July 3 Martin Doolan retired due to health reasons. B. Allen Weinstein stepped down following a disappointing earnings announcement on Aug. 2. Chief Financial Officer Thomas Stoltz is currently filling in as interim CEO. As of Nov. 1, the board has yet to find a viable permanent CEO.
According to the conference call, Body Central still needs a General Merchandise manager that will report to Mrs. Angelo. Body Central did find a candidate that will run its e-commerce division. Body Central can use all the help it can get in order to market an assortment of merchandise that people will pay a decent price for.
2.) Inventory - Body Central has trouble selling its inventory at full price. Paraphrasing Stoltz, with clearance inventory at more normal levels the company can test new styles and trends. In other words they are playing catch up.
Other seemingly reactionary measures include the implementations of inventory systems enhancements such as handheld scanners and uniformity of store appearance. Mr. Stoltz said handheld scanners would cut back on man hours as it would streamline the process of pricing and markdowns. I always assumed that handheld scanners and uniformity of store appearance was a given for any chain of stores.
3.) Unnecessary Expansion - An analyst in the conference call expressed concerns about inventory enhancements, implementation of a new human resources system, and a new distribution center serving as a distraction to the merchandise team. There were other concerns about hiring additional people to make all this happen and related selling, general and administrative costs.
I agree with these concerns. Given the difficulties of Body Central, management has no business pursuing an aggressive expansion strategy. Stoltz couldn’t give specifics about the location of the new distribution center which didn’t instill confidence.
4.) Falling Behind - Body Central ranks in the center among its listed competitors.
One of Body Central’s listed competitors rue21 (NASDAQ: RUE) seems to fare the best with a double digit increase of 17% in revenue and a 0.5% increase in comparable store sales according to its most recent earnings announcement. This retailer appeals to a wider demographic including males and females.
Body Central’s second listed competitor Wet Seal (NASDAQ: WTSL) has had troubles that make Body Central’s look like a cakewalk. Investor groups have been taking measures to install new management for Wet Seal, but fundamentals continue to nosedive. For the month of October, comparable store sales declined nearly 8% and revenue declined 5% versus October of 2011.
While Body Central’s comparable store sales and miniscule increase in revenue is shadowed by rue21, it still compares favorably to Wet Seal. However, if Body Central’s fundamentals degradation continues; it could wind up in the same boat as Wet Seal.
Body Central suffers from many problems. Management vacancies don’t bode well for a company looking to expand. It really needs to get its act together on inventory and start selling something that people want. Expansion plans need to be halted while it cleans up its act. No point in adding on rooms to a collapsing house. The way I see it Body Central’s trip to the bottom continues.
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