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Coverage Initiation: Body Central (BODY)
Body Central (BODY) recently made its debut in The Value Line Investment Survey. The company bills itself as a multi-channel specialty retailer offering on-trend, quality apparel and accessories at value prices. Their target market is “young women”, which largely means women in their teens and early- to mid-20s. This is a very competitive space, and one that is wildly sensitive to the target demographics’ fickle fashion tastes.
The company was founded in 1972 and completed its initial public offering in late 2010. A secondary offering took place in early 2011. As of the end of 2011, the company had more than 240 stores primarily in the South, Mid-Atlantic and the Midwest. Its store brands include both the Body Central and Body Shop banners. In addition, it operates catalog and website businesses. While the company sells products created by others, it primarily sells products under its own brands, including Body Central and Lipstick. Historically, apparel sales have made up about 75% of the company’s sales, with the remainder coming from the sale of accessories, such as shoes, necklaces, and bracelets.
Note that the company is moving away from the use of the Body Shop name, as this name is also used by a cosmetics store. There is no affiliation between the two companies, which have agreed to share the name.
In an effort to remain competitive in its fast-changing market niche, Body Central turns its inventory over rapidly and continually changes its stores’ layouts. With regard to merchandise, the company targets new products every four to 12 weeks—aggressively responding to shifts in fashion. That said, it attempts to deliver new products to its stores on a daily basis, with the goal of keeping these outfits and offerings constantly fresh. In this regard, the stores are updated with new display material and space designs every two to three weeks.
Regardless of these initiatives, sales tend to be seasonal in nature, with a material increase in the December holiday period. Moreover, economic trends can have a material impact on customer behavior. When the economy is weak, sales are likely to be soft across the entire industry.
While the efforts to keep the company fresh in the eyes of its customers are important, there are clear risks. This niche is very fickle, and presenting undesirable products to customers could result in the need to materially mark down products. However, with such a quick turnover in the company’s products, such a gaff wouldn’t likely have a material impact unless there was a prolonged period of poor product selection. Also helping to reduce the merchandise risk is the company’s ordering practice of bringing in a small batch of products to test how well they sell. Products that sell well are reordered in larger quantities, poor selling merchandise is, obviously, dropped.
The company does not own any manufacturing facilities, relying on a network of over 200 suppliers. Body Central’s top 10 suppliers accounted for about 50% of sales in 2011, with its two largest suppliers providing nearly 30%. Although this helps to reduce expenses, it leaves the company open to cost increases being passed on by its manufacturers and little control over operations at its suppliers. The competition inherent in such a broad supply network, however, should help to keep costs in check. Manufacturing difficulties, however, could be disruptive if a new supplier can’t be found quickly. Note, too, that the company uses third parties to transport merchandise between manufacturers and its stores.
The retailer currently has operations located in about half of the United States. This leaves material room for geographic expansion, as well as additional expansion in markets that it already serves. The company’s expansion plans are fairly aggressive, with a goal over the near term of adding 15% more stores each year. To date, debt has not been an issue, as equity has been used to fund growth.
This is an issue that investors should watch, however, because a shift to debt funded growth would introduce the risk of debt payments into the business model. Many retailers, and restaurants, have overextended themselves financially in striving for ill-advised growth. Note, too, that store count growth can cover up store level sales weakness at the top line for some time before over expansion begins to become obvious. This is why it is also important to keep an eye on sales at existing stores (called same store sales growth). This metric shows how well a retailer’s older stores are faring and can provide a better barometer to the health of its business. The competitive nature of the fashion niche in which the company competes makes same store sales growth a vital measure to watch.
As the company expands its store count, cost containment is also an important factor to monitor. It is relatively easy for a management team to lose sight of costs if it is focusing its efforts on expansion. This issue can be monitored by watching the trend of selling, general, and administrative expenses as a percentage of sales.
That said, Body Central has made it a specific goal to keep costs in check, using technology as a tool. This includes such things as hand held scanners for use by associates on store floors and a computer-based scheduling tool for coordinating the schedule of store employees, among others. Management hopes that it can leverage the benefits of its changes over its expanding store base to keep costs in check. Changing technology platforms, however, can cause operational difficulties if the changeover does not go smoothly. Investors should keep an eye on such changes, as lingering problems could materially affect the top and bottom lines.
In addition to growing its store count, Body Central is looking to expand its catalog and web business. At the end of 2011, these two businesses accounted for just under 12% of revenues. Although these two units are relatively small compared to the store business, management believes that they are important branding, particularly the catalog business (management believes the catalog is unique in its niche). It has a stated objective of growing both businesses.
Body Central has expanded rapidly in recent years and looks like it has material room to continue that expansion. With increased growth comes increased risk, but if management can remain focused an investment here could prove worthwhile. Interested subscribers should monitor Value Line’s quarterly coverage of the company, while keeping an eye out for Supplemental reports highlighting late-breaking news.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.