In my recent article highlighting home furnishings retailer Bed Bath & Beyond (BBBY), I mentioned that as a value and growth investor, I don't often find companies offering both significant share price value and strong growth potential. Due to softening second-quarter retail sales expectations, many nervous investors are focusing on disappointing short-term sales trends and losing sight of the longer-term growth and value opportunity that many retail stocks are offering the patient investor.
Body Central (BODY) is a specialty retailer of teen girl and women's apparel. The company operates 246 store in 23 states under the Body Central and Body Shop brands. The company was founded in 1972 and is based in Jacksonville, FL. Shares of Body Central have been pummeled over the last few months, having dropped 66% since late April, when the company announced a 1.4% decline in same-store sales. The company also recently lowered its outlook for second- and third-quarter earnings, stating:
Our second quarter comparable sales remain soft and have not improved since April. We continue to diligently manage inventory and to take aggressive markdowns on slow moving items. As a result, we now expect second quarter sales and gross margin to be lower than contemplated in our May 3rd release. We now believe the recent sales trends will continue into the third quarter with some impact to gross margin. We expect sales to improve in the fourth quarter as we receive new Fall and holiday assortments.
Declining sales and aggressive markdowns are certainly reasons to be concerned, and are deserving of very close scrutiny. But with consumer sentiment on the decline and nervous shoppers scaling back spending, many of Body Central's competitors are in the same position, such as Wet Seal (WTSLA), whose same-store sales fell 7.7% in the same period. Given Body Central's very strong fundamentals, including a history of significant earnings growth, continued expansion plans and a solid balance sheet, I believe shares of Body Central are dramatically oversold and represent a tremendous value if the company can get back on track for the fourth-quarter holiday season as it is predicting.
Strong Historical Performance And Aggressive Expansion
Despite the recent negative guidance, Body Central has managed to deliver exceptional top and bottom line growth over the last few years, having grown revenue from $198 million in 2009 to $296 million in 2011 and net earnings from $2.7 million to $19.7 million during that time, despite operating in a very difficult economic environment.
BODY data by YCharts
The company also continues to execute its aggressive expansion program, with plans to open at least 35 new stores in 2012, and the company expects to continue opening stores at an annual unit rate of 15% over the next several years. Most impressive is the fact that the company's strong balance sheet allows it to finance its expansion plan without incurring debt. As of the end of the first quarter, the company had over $24 million in cash on hand and zero debt.
Shares of Body Central are trading at $10.34 with a P/E of 8.33 as of July 30th, having traded between a 52-week low of $8.07 and a 52-week high of $30.93. The company has a market cap of $167 million, and does not pay a dividend. There has been some recent significant insider selling just prior to the announcement of revised guidance, so that bears consideration. I believe however, that the recent sell-off is vastly overdone, and shares at their current level represent a significant value opportunity. If the company is able to turn things around in time for the fourth-quarter holiday season, I believe the stock will quickly return much closer to its recent highs.
As with other retailers like Bed Bath & Beyond and JC Penney (JCP), Body Central could face significant headwinds over the next year or so from a slowing economy and slowing consumer spending, and investors should do their own research before making an investment decision. But with a history of sales and earnings growth, continued expansion plans and a strong balance sheet, Body Central is a compelling story that bears watching closely. I may start a small position if the stock pulls back below $10.
Disclaimer: I am not a registered investment advisor and do not provide specific investment advice. The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. It is up to investors to make the correct decision after necessary research. Investing includes risks, including loss of principal.