Avoid This Retailing Value Trap

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On Jan. 15, Body Central (NASDAQ: BODY), a specialty apparel retailer catering to young women,  announced 4th quarter 2012 sales results and issued another downward revision in guidance. Net revenue increased a microscopic 0.4% with comparable sales (stores open longer than a year) declining 12%. Full year EPS guidance now hovers in the $0.68 to $0.70 per share range representing a 44% to 43% decline from the $1.22 reported in 2011. Body Central’s stock declined 65% since the beginning of 2012 (see chart below) and currently trades with a P/E of roughly 9. With that said, Body Central is a value trap to be avoided.

<img src="http://media.ycharts.com/charts/6bbaa67870d53bea2a1017dc1def7dda.png" />

data by YCharts

Riding the roller coaster

After ending 2011 on a high note, Body Central began 2012 with insiders dumping the stock on a regular basis. Two of its largest shareholders, Beth Angelo and Jerrold Rosenbaum, sold stock just a couple of days before the 1st Quarter 2012 announcement in May.

The 1st quarter 2012 numbers gave indication to the start of a downtrend; revenue and net income increased 12% and 9% respectively with a comparable stores sales decrease of 1.4%. The then CEO Allen Weinstein cautioned investors about sales weakness and slow moving merchandise.

Fundamentals degraded further in the 2nd quarter of 2012 with net income declining 36%. Same stores sales slid 5% versus the same time the previous year.

Management turnover increased as heads rolled due to slow moving merchandise. On Aug. 17 Allen Weinstein stepped down as CEO. Chief financial officer, Thomas Stoltz took over as interim CEO and chief of operations. With evident problems in inventory markdowns the company embarked on a search for a merchandising executive to assist the chief merchandising officer, Beth Angelo. The board of directors also named Robert Glass, an individual with retail experience, to its board of directors.

The need for executives with merchandising and retail experience highlights the lack of talent necessary to move things forward. Also, can a financial officer such as Thomas Stoltz effectively lead the company for any length of time?

In September, false hope set in. Insiders began buying and an analyst at Oppenheimer chimed in with an upgrade. The stock price increased 20%+ in September topping out at around $11.50 per share. Back to school hopes also stirred positive feelings in the stock market.

In November, another bad earnings announcement caused the stock price to do an about face. Same stores sales clocked in at negative 12%. Troubles with its merchandise offering resulted in high levels of markdowns hammering in stone Body Central’s inability to sell desirable products.

Despite fundamental issues with merchandise inventory Thomas Stoltz persists in expansion plans. While it’s great that Body Central wants to expand, if it doesn’t come up with a viable selection of merchandise the whole company will remain in jeopardy.

Competition

While Body Central struggled with same store sales and profitability, competitor rue 21 (NASDAQ: RUE), which caters to men and women, experienced positive same store sales, revenue and net income. Its stock price increased 39% since the start of 2012 (see chart above). The CEO Bob Fisch generally credits favorable merchandise assortments and flexible real estate strategies for its success. Its dual gender marketplace gives it a wider market.

Another specialty retailer, Wet Seal (NASDAQ: WTSL) also struggles. Same store sales declined during every month in 2012. Pressures to change its strategy from investment company Clinton Group forced the resignation of a number of senior executives and board members including its merchandising leader. Wet Seal’s stock declined 15% (see above chart) since the beginning of 2012 (not even as bad as Body Central). On Jan. 7, a new CEO, John Goodman an executive with apparel industry experience in companies such as Gap, Levi Strauss, and Bloomingdale’s was appointed to lead the company.

The takeaway

In summary, as we begin 2013, Body Central still faces the same three problems. First, problems selling merchandise at full prices still persist. Second, gaps in management persist. Thomas Stoltz remains the interim CEO and Chief of Operations.  A talented merchandise team with the ability to put together a viable merchandising arrangement remains unannounced. Third, unnecessary expansion continues. The company plans on using local government incentives to expand its distribution center. In addition, the company opened 13 stores in the 4th quarter.

Finally, a Wet Seal scenario may lie on the horizon. Wasatch, Inc. now owns more than 5% of Body Central. Body Central doesn’t expect things to get better until later in 2013. Consequently, if Wasatch starts exerting pressure on Body Central to make changes sooner, the resulting publicity fallout will result in an even lower share price from this point. In any event, avoid this massive value trap.


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