Body Central: A New Hope

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

Apparel retailer Body Central (NASDAQ: BODY) struggled throughout 2012. Same store sales and net income fell 8.1% and 40% respectively. Operating margins declined 44 basis points to 6.2% during the year. February 2013 saw the beginnings of new hope with the appointment of a new CEO, the ousting of merchandising Vice President Beth Angelo, and the installation of a new merchandising team. Body Central may serve as an interesting turn around play.

On an interesting note, the stock compensation of Body Central’s new CEO, 40 year retail veteran Brian Woolf, incentivizes stock price expansion. The exercise price equals the closing price on the day of his hiring (Feb. 5) and will vest at 25% per year over a four year period starting on Feb. 5, 2014. If his new strategies succeed and the stock price expands it will enhance his compensation while at the same time keeping him committed for the long term. Brian Woolf comes equipped with experience and skills to pull off a turnaround; he recently served as group president of Lane Bryant where he was in charge of merchandising, supply chain, and store operations.

Body Central acted proactively compared to its competition Wet Seal (NASDAQ: WTSL). Outside investing company, Clinton Group intervened and forced the resignation of a large number of Wet Seal’s senior management and board of directors after reporting month after month of declining store sales in 2012. Wet Seal increased revenue and operating cash flow 11% and 53% respectively in the three years leading up to 2012 and then everything fell apart. Its stock price declined 16% in 2012 though not as much as Body Central’s 58% (see chart below).

<img src="http://media.ycharts.com/charts/3e0c8f6072a512effab6ff9d1f16853d.png" />

BODY Total Return Price data by YCharts

Rue21’s (NASDAQ: RUE) 32% return in 2012 stems from successful merchandising, successful store layouts and staying on top of fashion trends. This company also caters to a wider demographic than Body Central and Wet Seal: men and women. Body Central’s new CEO realizes the key to success resides in an effective merchandising strategy.

On that note, Body Central finally appointed a new merchandising team ready to focus and execute on new ideas most notably, Debbie Martin, the new Senior Vice President of Trend and Design. She also came from Lane Bryant with experience in trends and fashion. Mrs. Martin will work out of New York where she will advise Body Central on the latest fashion trends. Body Central desperately needs someone with a finger on changes in the fashion dynamic. A person with an office in New York City, a place that sets the stage for fashion, will contribute greatly to Body Central’s merchandising strategy.

Moreover, in Body Central’s latest earnings call, the CEO talked about how too many stock-keeping units or SKUs made it difficult for Body Central to make a fashion statement to its customers. Body Central plans to reduce SKUs and focus on products that will move and increase sales at a profitable level.

Body Central also plans to revisit its store layout and build a new store prototype. In this new store format, consistent with the lower SKU strategy, it intends on making the store less cluttered and install new lighter and brighter fixtures.

In a move I totally agree with, Brian Woolf plans to slow the expansion of stores until the company can get better situated on its merchandising strategy and store layout with the opening of 25 stores in 2013 due to lease commitments. In addition, he wants consistency across all channels. He realizes that in order to build a strong brand, the consumer needs to identify with the company in a positive way.

Looking forward, clearance of old inventory will continue as the new management team identifies and executes its new strategy. Body Central expects things to start turning around in the 4th quarter of 2013 and to continue its momentum in 2014. With this potential turnaround comes a great deal of uncertainty and risk but also the highest potential reward. A properly incentivized CEO, a merchandising executive watching trends firsthand in New York City, and a new reinvigorated senior marketing and merchandising team add up to a recipe for excellent shareholder returns over the long term. I was bearish on the company due to its inept predecessor team. With new management blood, I am now bullish and made an outperform Motley Fool Caps call for 2-4 years which coincides with Mr. Woolf’s incentive plan.


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