Body Central: Abandon All Hope Ye Who Enter Here

Mar.24.14 | About: Body Central (BODY)


BODY's short and long term plans to become competitive have failed.

BODY's cash levels are dwindling and I believe they have no access to the capital markets.

BODY has passed the point of no return and bankruptcy looms over the next 18 months.

Let me start by saying that I wrote an article in favor of taking a chance on Body Central in early August and that the stock immediately and consistently has tanked since the article was published. I was once willing to risk capital on the Body Central strategy to turn the company around but I am now convinced that they have sealed their fate and that bankruptcy is an inevitability at this point. If you would like to read that article and compare what has changed since then, although that will be explained in the contents of this article, you can click here.

Who is Body Central?

Body Central Corp. (BODY) operates as a specialty retailer of young women’s apparel and accessories in the South, Mid-Atlantic, and Midwest regions of the United States. It operates stores under the Body Central and Body Shop banners, as well as a direct business comprising its Body Central catalog and e-commerce Website at

Two years ago (7 quarters) Body Central began the ambitious task of evolving their then successful business. They felt it necessary to begin implementing the starting of what would become fundamental changes to their business because although the current model was still producing acceptable numbers, the industry and their own customer was changing. At its most successful point, late 2011, Body Central was a store that targeted an existing customer base of catalogue using, semi-conservative, affluent, early to mid-twenty year old female shoppers. At their peak, they shipped their catalogue to 24 million consumers annually. As I just said, this strategy was and had shown to be effective in their particular niche but growth of sales, revenues, transactions, and engagement was also beginning to confirm that a sequential slowing was taking place. Smartly, the company understood that as their customer base aged out of their niche they would have a hard time converting the next tranche of shoppers into their funnel of sales based on not only changing demographics of their targeted market but also based on a mobile shopping revolution and how that would effect their paper based model. A strategy had to be developed and implemented as soon as possible. Even if the strategy meant short term, expected, significant losses in sales momentum and deserting their existing customer.

The plan that was to save the company

The plan developed was risky and would take some time to see results, but it was well thought out and fairly guided to the market. The plan consisted of several key initiatives:

1. Aggressively open new stores in markets that tested well in their research, gather emails/phone numbers from "new" targeted customer traffic, hope that total sales volume would help buoy cash reserves until both new and old stores could become profitable

2. Close stores, even currently successful stores (unless wildly profitable), where they felt the momentum was unsustainable based on the other steps of their strategy change

3. Significantly cut distribution of their catalogue - remember this was their primary driver of "traffic"

4. Significantly cut inventory targeted at their existing customer base, cut floor space targeted at existing customer, and run long term pricing promotions (and continue to do so) on existing customer targeted merchandise to clear inventory

and most importantly

5. Completely overhaul and redesign the existing website and mobile shopping experience to create an Omni-channel experience that focused on the Direct-to-Consumer channel (DTC).

I think it's important to have some context into why this was the final plan set into motion. First, the one thing the company had been good at, even in the slowing business environment, was opening enough stores to sell just enough to keep their cash on hand steady. So cash was the one asset they had just enough of to act as the base of this strategy. The plan was going to be to continue using net store growth to increase overall transaction volume and sales, all the while knowing that this wasn't the organic growth they were looking for, transition the existing stores (taking the comp store sales hit and margin compression along the way) to the "new" customer model, and hope that just as the NEW stores were beginning to see the positive effects of the strategy that they would be turning the corner at the existing stores. Got all that? They were banking on the idea that if they did this just right, executed just right, that the timing of the turn around would perfectly correlate with new and old stores. Risky? Yes. But it was the only strategy that made sense at the time with what they had to use for tools.

The other piece to this equation was the DTC channel. At the time, keep in mind this was in 2011, the DTC channel was just beginning to take shape as the new preferred way for consumers (especially BODY's targeted market) to shop. BODY's competitors that had noticed the trend and implemented DTC strategies earlier were beginning to see the massive positive effects of this mobile shopping bull run and BODY noticed. They understood that this had to be the central focus and they made a serious effort from a CAPEX standpoint to get this right. They figured, and guided so, that by Q3/13 that they would be back to profitability or at the very least seeing a sharp reversing in the growth and margin curve. I think, and this is complete speculation but these are smart people we're talking about here, that they also realized they had to get aggressive with their planning because based on their worst case projections (which have now come true) they would only have enough cash to get to this point before deciding how desperate to get if the strategy failed (it has).

The case for bankruptcy

I'm going to make my main case for the bankruptcy of this company based on the table below which contains the most important financial information for Body Central tracked back for the last four quarters, on a year over year basis, done quarter by quarter (meaning Q4/12 percentage changes are based on Q4/11 numbers). The ONLY numbers listed that aren't listed as a percentage change on a Q/Q Y/Y basis is CASH. That figure is listed as the current amount of cash on hand at the time of reporting. I've also included some notes based on the table and particular numbers that I find especially important as benchmarks for the health of the company and its chances going forward. It's important to understand that the percentage figures given are based on a Y/Y basis because the percentages are indicative of and giving a comparison, I believe a fair comparison, of when the company first began to implement the strategy change (Q4/2011).

I also want to say before we break down the numbers that the strategy didn't fail because of poor execution by management. The actual strategy was executed about as well as could have been expected. The strategy, and the fate of this company, failed because the company had too much to overcome. The challenge was just too ambitious based on what the company had to work with. Management didn't have a full tool box or and the tools that they did have were imperfect. The strategy was either going to work or it wasn't, but it gave the company a realistic chance. That's why I was bullish the turn around story in late August, at least bullish enough to risk capital, and that's why I am now convinced the opposite. The numbers show the plan has gained zero traction since inception and has actually had the opposite effect, it has accelerated what would have been the slow eventual death of this company. The team executing the plan knew this was a possibility but again, had no choice. They have continued to extend projected timelines for benchmarks to be met (from Q3/13 originally to currently not giving a timeline) and very recently announced that they wouldn't be filing their annual report on time. Now, the table:


















































Click to enlarge

1. First instance of negative store sales: At this point this number could be looked at, on its own, as a slight positive based on the expectation of transactions and sales taking a hit. The fact that it took this long in the process to turn negative is positive. This is how the plan was intended to work.

2. First instance of negative net revenues: this is extremely concerning. It only took three Q's in the interim, as the plan was being set into motion and run at full speed, for the net revenues to turn negative. That shows extreme margin compression and greater than expected markdowns being used to move "old customer" inventory. Looking back, the company probably stayed the course (while I'm sure extreme worry was setting in) based on the fact that store sales were still slightly in the positive and this was the expected result. Outpace rev, margin, and comp losses with total volume of sales from net new stores.

3. SG&A uptick reaching levels of madness: SG&A +28.4% Y/Y on a quarterly basis to a total of 30.5% of sales is absurd.

4.Operating margins doubling their losses on percentage basis Y/Y from 2 quarters prior: the company new margins would be compressed and expected to run the long duration promotions. This was expected. What this number tells me and conference calls at the time made clear was that the plan was beginning to show the signs of failure and that they had to continue to momentum of giving deeper markdowns. The margins accelerating percentage based losses on such a short time frame really speaks to the over strategy not gaining traction. To me, this particular number is one of the most damning because moving the old inventory to make room for the "new" customer was a pillar of the recovery effort.

5. Net revenues now showing a pattern of doubling losses each quarter on a Y/Y percentage basis: this is being fueled by #4. Contagion of the massive failure.

6. Significant acceleration in store sales decrease Y/Y, especially on a Q/Q basis: last quarter showed us that now that cash is becoming a concern (more on this later) the store sales are finding it impossible to outpace the margins and total transactions falling. The single most important piece of the puzzle is beginning to look like a poor fit. This is incredibly hard to stop at this point.

7. Gross profit is down 50% from the last quarter of the "old model" business: Expected? Sure. This large a fall? Definitely not, but neither was the above stated markdown level or transaction slowing.

8. Significant drop in gross profit as a percentage of sales: what I'm looking at here is the acceleration of the drop. It's the large swing to the downside that is another point of clear evidence that the plan is past the point of fixing.

9. Cash levels being halved on a Q/Q SEQUENTIAL basis from Q1/13 to Q3/13: the company has expressed that cash burn is now a major concern and a primary concern. They have cancelled their plans to open any stores in 2014 (at this point) and believe they have 12 months cash on hand. They are in the process of negotiating an increase in their line of credit and will not proceed with any major CAPEX projects, including finishing their new DC offices that were to become a huge part of the "new" company. This is the single most important number going forward and again I believe the fate of the company is determined.

Where's the trade?

Body Central said recently it wouldn't be filing its annual report on time as they need more time for the year-end report because they have to finalize year-end adjustments and complete their year-end audit. They also came out warning of another quarter of terrible numbers. The stock reacted to the news by dropping 25% and settling in to the levels where it currently trades (pinned at $2.00). Even with this big move, and the marked downward move it's experienced over the last few quarters, I think there is plenty of gains to be had shorting this stock if you can find the shares. At the very least BODY is a hard sell and should not be owned. Any increases in the price per share, which may happen in the short term if they can secure a larger line of credit or find a short term solution for their cash problem, will be short lived as the actual company cannot make money. They don't have the ability, outside of a one time possible influx of what I believe will not be a significant amount of cash, to continue on with this strategy and the brand has lost all ability to sell. I am expecting the Q4/13 numbers, as the company has indicated, to show linear, sequential accelerated losses in momentum. I expect all numbers on a percentage basis to get significantly worse. The company has shown that they cannot meet the endpoints needed for the recovery strategy to move forward successfully. I think it is a certainty at this point that BODY will end in failure. The plan has failed to gain traction, the company is out of cash, and there isn't any obvious solution for any of the issues they're experiencing that can help the situation improve. It is my opinion that BODY will be bankrupt, in a best case scenario, in 18 months or less.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a short position in BODY over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.