|Shares Out. (in M):||17||P/E||0.0x||0.0x|
|Market Cap (in $M):||65||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-20||EBIT||0||0|
Body Central Corp. (“Body Central” or “BODY”) is perhaps the cheapest retailer in the US relative to the size of its business. Shares in BODY currently trade for roughly $4 per share, or approximately 0.1x EV/sales. To us, this extreme valuation implies (i) the business is broken, (ii) the market believes the business cannot be fixed, and (iii) the company faces imminent liquidity and/or bankruptcy risk.
We have a variant view. We believe the business is fixable. We believe the new management team – now ten months into its turnaround – is taking the right steps to fix it. And we believe the company has ample liquidity for management to execute its game plan. Should the turnaround be successful, we believe the potential upside is as much as 15-20x the current share price. Importantly, new management is credible and has successfully executed multiple turnarounds in women’s specialty retail prior to the current undertaking.
To the best of our knowledge, no one on the buy side or sell side has yet articulated the specifics of a long thesis in Body Central. Analysts burned by the shares - which popped when new management was brought on board and have since fully reversed and then some - appear to have given up on the details. What remains of the long thesis can be vaguely summed up as “the shares are cheap” and “maybe there is option value here" (see recent VIC comments on the thread of the BODY write-up from Sep 2012). In stark contrast, we view this as a blocking-and-tackling turnaround with an excellent probability of success.
The Fallen Angel
Body Central is a fast-fashion specialty retailer of women’s clothing and accessories based in Jacksonville, Florida. The brand targets a culturally diverse clientele of women in their 20’s and 30’s who seek the latest fashions and want to look good on a date or night out, but who are also budget-conscious. In short, BODY specializes in sexy/on-trend outfits at value prices.
BODY has annual revenues in excess of $300M from its 292 stores across the eastern and southern US. The average box is 4,300 square feet and occupies an in-line location in a “B” mall, lifestyle center, or outlet center; typical stores average about $1M in sales per year. Body Central has a presence in 26 states with more significant store concentrations in Florida, Georgia, North Carolina, Ohio, Pennsylvania, and Texas.
The company’s origins date to the early-1970’s when Jerrold and Ronnie Rosenbaum first opened a store under the Body Shop banner in Jacksonville’s Roosevelt Mall. As the company grew it adopted a second marque, Body Central, and eventually expanded to 170 locations in 20+ states (today, nearly all stores have been re-branded to “Body Central” from “Body Shop”). In 2006, the Rosenbaums sold the company to a private equity firm. Four years later, in October 2010, Body Central listed on the NASDAQ with an initial price of $13 per share.
At the time, Body Central was a high-flyer firing on all cylinders. Comparable-store sales (“comps”) were in the mid-teens, operating margins were double-digits, and the runway for new store growth seemed almost limitless. The strong results continued into 2011 and early-2012, with the stock peaking above $30 per share in April 2012.
At the beginning of May 2012, however, the company issued a profit warning as Q2 2012 sales were weaker than anticipated. The stock plummeted 50% in a day. A second profit warning came six weeks later, cutting the stock in half again to $8 per share. Comps went negative – and then severely negative – and margins promptly collapsed. Resignations by the Board Chairman and CEO followed in July and August. BODY’s CFO, Tom Stoltz, was named interim chief executive, and the Board began the search for a new CEO to resuscitate the business.
A New Team
In February 2013, Body Central named Brian Woolf to the CEO role. Brian was a 40-year industry veteran who had twice led successful retail turnarounds in the women’s apparel space, first at Cache, Inc. (2000-2008) and then at Charming Shoppes, Inc. (2008-2012) where he was President of Lane Bryant, the company’s largest division. In both cases Brian reversed negative comps and oversaw material increases in profitability. His efforts strongly rewarded shareholders: Cache Inc.’s share price more than quintupled during his tenure, and Charming Shoppes, Inc. was sold in 2012 for a substantial premium relative to the date of his arrival.
After taking the reins at BODY, Brian moved quickly to install a high-quality executive team. In February, BODY overhauled its merchandising department with the hiring of senior executives to oversee merchandise, design, and e-commerce. Eight weeks later, BODY announced additional executive hires in operations, brand presentation, and planning. More recently, BODY on-boarded a new executive in charge of supply chain.
Transforming a company is difficult in the best of circumstances; it requires not only a clear vision but also the right people to help make that vision a reality. As a result, when evaluating turnarounds we spend considerable effort getting to know the people involved. We specifically try to answer two questions: (i) whether management has successfully worked together in the past, and (ii) whether management has experience overseeing other large/successful organizations. A turnaround should be no one’s first rodeo.
In late-November, we traveled to BODY’s headquarters in Jacksonville to meet senior management. In addition to sitting down with Brian and Tom, we also toured stores with Michael Millonzi (the head of store operations) and visited BODY’s old and new distribution centers with Tom Moran (the head of supply chain).
Both Michael and Tom (Moran) were impressive – neither would be learning on-the-job. Michael was a 20-year industry veteran who had overseen store operations for LensCrafters, a 1,000-unit chain owned by Luxottica Group S.p.A. Prior to LensCrafters, Michael held a similar role at Lane Bryant. Tom had joined BODY only three weeks prior to our visit, but his qualifications were equally clear: he had managed the supply chain for 4,000 stores at Ascena Retail Group. And, like Michael, Tom had previously worked for Brian at Lane Bryant.
Michael and Tom were not only qualified, they were overqualified. Each had served in similar capacities at much larger chains than BODY, and each had previously worked for Brian with good results. In a turnaround, however, that’s exactly what is required – leaders who know what success looks like and can be trusted to execute because they’ve done it before. In our view, Michael and Tom (and the rest of the new leadership team) fit the bill.
People are one part of the equation. The other part is the business itself.
In the case of BODY, we believe the underlying business is fixable – and that management is taking the right steps to fix it. Specifically, we believe there are four elements to the turnaround: (i) merchandise, (ii) infrastructure, (iii) presentation, and (iv) brand.
The proximate cause for BODY’s mid-2012 collapse was merchandise. Body Central’s product strategy at the time was referred to as “test and reorder” – BODY’s merchandisers would select styles they liked from a few key suppliers and roll out the merchandise in a limited run. If the product worked, BODY would order more. If not, the merchandise would be discounted and BODY would move on to the next style.
“Test and reorder” is a bare-bones approach that works well so long as the product is hitting at least some of the trends. The strategy runs into issues, however, when the product completely whiffs, as there is then no feedback mechanism to instruct the merchandiser on what to do next. In such a scenario, it is critical for the merchandiser to have a range of tools at his/her disposal including detailed customer data, on-the-ground intelligence from fashion centers like Los Angeles and New York City (“NYC”), and a keen independent sense for current trends.
In 2012, BODY had none of these. The company relied almost exclusively on suppliers to identify trends, spent little money gathering or analyzing customer data, and had no on-the-ground presence in the major fashion centers. The company was flying blind – so the merchandise team started guessing.
For Body Central to resonate with customers, its product must strike a balance between “sexy” (more revealing/risqué going-out clothes) and “core” (outfits that are flattering but more wearable/less risqué). In 2012 and into 2013, BODY’s product mix swung wildly between the two as the merchandise team grasped for the next trend. The product strategy was inconsistent, lacked a basis in data, and – in short – was a disaster.
Walking into stores today, our sense is the problem has largely been fixed. BODY’s new merchandisers are more sophisticated: the team has adopted a data-driven model incorporating customer surveys, established an on-the-ground presence in NYC, and upgraded the product mix with a balanced assortment. In addition, where the previous strategy relied on separate buyers by category (tops vs. dresses vs. footwear), the new team has placed greater emphasis on outfits – in-line with BODY customers’ shopping habits. We also note BODY appears to be on top of recent trends such as sexy stretch, the flip from silver to gold, and the current “it” handbag.
The second leg to the turnaround is infrastructure. Modern retail is an omni-channel world: brands must interact with customers in a range of mediums (in-store, online, mobile, social media, etc.) and provide a fully-integrated experience. This is especially true for younger consumers such as those in BODY’s core demographic.
To-date, BODY has come up short at being an omni-channel retailer. BODY’s internal systems do not speak to each other: if a customer orders an item online and wants to return it to a store, the store can’t accept it; if a store is out of the desired size in an item, in-store systems do not allow the customer to order digitally from the store. In online reviews, customers appear to love the clothes – but to hate the shipping and returns process.
A visit to BODY’s distribution centers makes clear why this is so: the old distribution center is antiquated. Space is limited. Paper labels are still used on many items. Employees use a single-order picking process instead of batch-picking. The contrast with BODY’s new state-of-the-art distribution facility, set to go live in 2014, is stark: it can hold much more inventory, move the inventory faster/more cost-effectively, and will be a game-changer for gross margins. BODY’s internal systems will be integrated in tandem with the new facility’s launch.
The third leg is BODY’s customer-facing presentation. BODY’s website is well-designed but under-inventoried, with hundreds of SKU’s vs. 4,000+ at Charlotte Russe, BODY’s closest competitor (BODY’s new distribution center allows for 10,000+ online SKU’s). Store design, as outlined below, also leaves room for improvement.
In other areas of presentation, BODY has made strides. In the past, items featured in BODY’s catalogue differed from those on its website and in-store – almost unbelievably, stores at times didn’t carry outfits highlighted on in-store signage. Since Brian’s arrival the messaging has been made consistent across platforms.
Another positive shift has occurred in the culture of stores. Newly-installed systems allow district managers (“DM’s”) to track sales hourly by category in every store. With detailed data on foot traffic and conversions, BODY has re-emphasized the customer experience with its staff: our conversations with salespeople and store managers indicate a shift in focus from “task-based” work to “conversion-based” work and to helping customers with entire outfits. This has created a boutique feel in-store, a clear differentiator relative to the competition.
The final leg to the turnaround is brand. BODY needs to distinguish itself from competitors – Charlotte Russe, Forever21, Wet Seal, rue21 – who skew slightly younger (more teens than 20’s/30’s) and less sexy/trendy. As Body Central is not well-known, management has a blank canvas on which to create a compelling brand identity.
The New Prototype
We have visited numerous BODY locations. Our observation: BODY’s stores are straight from the 1970’s.
The signature feature on a Body Central store is a blue tile overlay on the front entrance best described as “tacky”. Neon signage lights the “Body Central” banner on storefronts and behind the check-out counter. Stores feel dark, with merchandise on black hangers resting on black fixtures that absorb light. Locations tend to be hit or miss, with some near old dying retail anchors like Sears and JC Penney. The experience generally feels cheap.
During our Jacksonville trip, we visited BODY’s new prototype store in the Orange Park Mall (a typical “B” mall) two hours before it first opened. In our opinion, the company nailed it. The tacky blue tile was gone, replaced by vibrant pastel colors inside and out. White fixtures with clear hangers made the store brighter. Wall pop-outs gave the store structure, and additional mannequins allowed BODY to highlight looks/outfits. The experience felt high-end – like walking into a Victoria’s Secret – even with identical inventory to other BODY locations.
The Jacksonville Business Journal reported after our visit that the prototype store has been the #1 location in BODY’s 292-store network since launch. BODY needs to get the cost structure right – but we think the new design can quickly be rolled out system-wide. In our conversations with DM’s and store managers, it is clear that BODY personnel have heard about the new design and can’t wait to have their stores updated.
Retail turnarounds take time. Once a new management team arrives, it must (i) assess the problem, (ii) come up with a game plan to get the concept back on track, (iii) hire the right people, (iv) implement the new strategy, and (v) eventually get people to notice that things are different. Turnarounds simply don’t happen overnight.
In this case, we believe the Body Central story is on the cusp of reaching an inflection point. Brian has been on the job for ten months. Most of his senior team has been in place more than half-a-year. Customers are only now beginning to notice the step-change improvement in BODY’s merchandise and customer experience. With the new distribution center coming online in less than twelve months – and store retrofits rolling out in early-2014 – we think there could be a compounding effect on positive sentiment around the brand.
From a stock perspective, we consider the set-up particularly attractive. In Q3 2013, BODY used back-to-back box sales over the July 4 and Labor Day weekends (plus a mid-quarter buy-one-get-one-free sale) to unload old merchandise. The “clear the decks” quarter was necessary from an operational standpoint: the strategy re-set inventory levels and allowed BODY to shift its focus to fresh product selected by the new merchandise team. The blow-out sales, however, resulted in poor Q3 2013 numbers – gross margins below 20%, comps down high-teens – and investors panicked. BODY’s share price fell 40% following Q3 2013 earnings to sub-$4 per share.
The negativity around the Q3 2013 results was made worse by a technical trading phenomenon: tax loss selling. Most investment vehicles are structured as pass-through entities for tax purposes; underlying investors pay tax on gains realized during the year. In a year of strong equity returns such as 2013, portfolios tend to have substantial realized gains to pass on to investors. To manage this liability, investment firms “sell their losers” to crystallize investment losses that can offset gains realized elsewhere in the portfolio. We believe BODY has been a prime candidate for heavy year-end tax loss selling, which we think is in the process of abating.
From a valuation perspective, BODY shares trade at an extreme level relative to the size of the business. BODY is currently valued at 0.1x enterprise-value-to-sales (“EV/sales”), ranking the company as perhaps the cheapest retailer in the US on an EV/sales basis. As the store refresh rolls out and the new distribution center ramps, we believe operating margins can return to double-digits. Should the company revert to 10% operating margins on $300M+ in sales, the stock would trade today at barely above 1x EV/EBIT. For reference, “healthy” mall-based retailers tend to trade at 5x to 10x EV/EBIT depending on the specific retailer’s brand quality and growth profile.
Should the new store design be a success, we think there is runway to 750+ stores (in our home city, for example, we think BODY can more than double its store count from a dozen to 25+) – implying nearly $1B in system-wide sales. Assuming a 10% EBIT margin on $1B in sales, BODY’s shares trade at a small fraction of potential future “blue sky” EBIT. The upside in such a scenario is as much as 15-20x the current share price.
We are not counting on everything to go perfectly. Again – there is no such thing as an easy turnaround. But we do think Body Central is moving in the right direction. Given the extreme pessimism built into the shares, not much has to go in BODY’s favor for the stock to re-price meaningfully higher.
We note three important risks to the thesis:
A Concept Reborn
When we investigate a prospective investment, it’s often the little things that resonate with us most.
During our BODY store visits, we were told by store managers how much things had changed over the last year – better merchandise, better systems, better people, greater discipline and structure and professionalism in the organization. But what stood out was the level of energy. Store managers were excited. DM’s told us they were fielding waves of inbound calls from industry contacts looking for jobs, which wasn’t the case six or twelve months ago. People see something is happening and want to be a part of it. The ship is beginning to turn.
The trade is starting to take notice. It won’t be long, we think, before the investment community does as well.
The author of this posting and related persons or entities (“Author”) currently holds a long position in this security. Author may buy additional shares, or sell some or all of Author’s shares, at any time. Author has no obligation to inform anyone of any changes to Author’s view of BODY US. Please consult your financial, legal, and/or tax advisors before making any investment decisions. While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note. The reader agrees not to invest based on this note, and to perform his or her own due diligence and research before taking a position in BODY US. READER AGREES TO HOLD AUTHOR HARMLESS AND HEREBY WAIVES ANY CAUSES OF ACTION AGAINST AUTHOR RELATED TO THE NOTE ABOVE. As with all investments, caveat emptor.
|Subject||Base Rates, Thinking, Fast and Slow, Headwinds|
|Entry||01/09/2014 11:36 AM|
Thanks for the write-up, sounds interesting.
As I was reading your pitch it really made me think about an excellent book I'm reading right now called "Thinking, Fast and Slow" by Daniel Kahneman. I'm only about half-way through it right now, but the more I read this book the more I love it. I think it should be required reading for all portfolio managers. One fascinating topic discussed is that our minds are not good at taking into account "base rates" or "a priori probabilities" when making intuitive judgements, we look instead at how *plausible* the narrative is in this particular case.
For example, you've narrated a story about Brian, Michael, and Tom, and they do indeed sound like a plausible example of a team that winds up executing a turnaround at a retail chain like BODY. But here's my key question: without considering this specific management team and/or this particular turnaround strategy, what percentage of retail businesses like this - which operate in a fiercely competitive space and face much stronger competition - successfully turn around after imploding to the degree BODY has? Have there been studies done on that question?
In other words, even if Brian, Michael, and Tom are very competent people, how strong are the headwinds against them on a statistical basis?
|Subject||RE: Base Rates, Thinking, Fast and Slow, Headwinds|
|Entry||01/09/2014 11:44 AM|
Thinking Fast and Slow is the best investment book written in recent memory.
|Subject||RE: Base Rates, Thinking, Fast and Slow, Headwinds|
|Entry||01/09/2014 11:53 AM|
Not specific to this company, but any given fallen retail business has a 29% chance of a sustained recovery according to CFSB Holt Research from February, 2004. (Taken from M.J. Mauboussin's most excellent book, "More Than You Know.")
If you use these odds and handicap the upside mentioned in this writeup (20x upside) vs a downside of a total loss then you have a value investment. Praise the Lord and pass the ammunition.
|Entry||01/09/2014 12:19 PM|
That is an awful lot of upside if this works. Look at Citi Trends, all you need is to get less worse to double your money. Stuff like this is at a minimum worth the time to research.
What was going on a couple years ago that they were "firing on all cylinders"? Did they nail a fashion trend? Indeed the "test and reorder" method seems unsustainable, but what specific changes have the new management made to merchandise? Are they emphasizing more accessories, or denim, etc? I am just trying to understand a little more of exactly what the screwed up on.
I will say the new management hires are encouraging. These people seem to have good resumes and presumably wouldn't waste their time unless they believed this was going to work.
|Subject||RE: RE: Base Rates, Thinking, Fast and Slow,...|
|Entry||01/09/2014 01:08 PM|
Thanks for the 29% number, that's quite interesting. Also thanks for the Maboussin recommendation. I've like what I've read from him in the past, so I think I'll read "More Than You Know" as well.
|Subject||RE: RE: Base Rates, Thinking, Fast and Slow..|
|Entry||01/09/2014 01:17 PM|
It's interesting that you say Kahneman does a poor job of narrating the story in TFAS. I do find it's taking me an incredibly long time to get through this book, even though as I've said I think it's brilliant and I'm liking it more and more as I read it. I was attributing that to the density and depth of the material; i.e., I find I really need to think hard to internalize the examples he's giving and fully understand them. But perhaps it's also because the text doesn't flow as well as it could, not sure.
I agree that his discussion of cognitive ease and fluency is fascinating.
I'm surprised to hear you say that "a ton of these psychology studies are crap and are impossible to replicate". I'll check out the link you referenced.
|Subject||RE: RE: Questions|
|Entry||01/09/2014 01:27 PM|
Nails, it would appear that returning to mediocrity would yield a multi-bagger return.
|Subject||RE: RE: RE: Base Rates, Thinking, Fast and Slow..|
|Entry||01/09/2014 01:29 PM|
my two cents, for what they are Worth:
Retail turnarounds catch fire when good management is in place. sustainable or not sustainable is a judgment call but I tend to be skeptical. Good thing the stock is liquid and you can sell at any time! My only point is you dont have to believe it is long term sustainable to make a lot of money. I think it is a great idea, than you FiveRocks!
|Subject||Cuyler and NdN|
|Entry||01/09/2014 01:32 PM|
aa, while the book discussion is interesting, would you mind answering Cuyler and Ndn's qestions? Thanks.
|Subject||sorry, my bad|
|Entry||01/09/2014 01:38 PM|
I saw the aagold posts for some reason thought it was his writeup and figured if he was willing to talk about a book, he had time to talk about the idea.
|Subject||RE: Cuyler and NdN|
|Entry||01/09/2014 01:39 PM|
I think you mean to address your request to fiverocks, right? I wasn't the author of this idea and know nothing about it.
|Subject||RE: RE: Cuyler and NdN|
|Entry||01/09/2014 02:08 PM|
Yep. As I said, my bad.
|Subject||RE: reply to aagold + WinBrun + surf1680 + coda516|
|Entry||01/10/2014 08:01 AM|
Ok, I apologize in advance for the level of geekiness in what follows, but if that 29% base rate surf referenced in applicable here I think it's interesting to consider this base rate issue in more detail. First of all, I'd like to review what I think is a fascinating example from TFAS and then we can apply the concept to BODY.
A cab was involved in a hit-and-run accident at night. Two cab companies, the Green and the Blue, operate in the city. You are given the following data:
* 85% of the cabs in the city are Green and 15% are Blue.
* A witness identified the cab as Blue. The court tested the reliability of the wintess under the circumstances that existed on the night of the accident and concluded that the witness correctly identified each one of the two colors 80% of the time and failed 20% of the time.
What is the probability that the cab involved in the accident was Blue rather than Green?
The correct answer is 41%. However, you can probably guess what people do when faced with this problem: they ignore the base rate and go with the witness. The most common answer is 80%.
Kahneman doesn't go through the math of how to derive the answer, but I will (using Bayes Rule):
P(Blue | WitSaysBlue) = P(WitSaysBlue | Blue)*P(Blue) /
[P(WitSaysBlue | Blue)*P(Blue) + P(WitSaysBlue | Green)*P(Green)]
P(Blue | WitSaysBlue) = (0.80)*(0.15) / [(0.80)*(0.15) + (0.20)*(0.85)] = 41%.
Isn't this situation rather similar? You're saying that based on your assessment of management, merchandise, infrastructure, presentation, and brand (MMIPB), this looks like a turnaround success to you. So you're sort of like the witness who says the cab is blue.
Now I have no way of assessing your skill in evaluating retail turnarounds, but just for the sake of argument let's assume you're qualified to do that. Even so, I'd claim there will always be complex random factors that affect whether or not any particular turnaround works, and even a highly skilled analyst cannot be 100% reliable in using his assessment of MMIPB to predict turnaround success or failure. So how much accuracy in such predictions is reasonable to assume? I have no idea - maybe someone here can provide an intelligent estimate? - but just for the heck of it let's say 75% of the time a qualified assessment of MMIPB matches what ultimately ends up happening (i.e., 75% of successful turnarounds would have received a positive qualified assessment, 25% of successful turnarounds would have received a negative qualified assessment, 75% of failed turnarounds would have received a negative qualified assessment, 25% of failed turnarounds would have received a positive qualified assessment).
Let's now use Bayes Rule to derive the probability that a turnaround is in fact successful given that a qualified analyst gives a positive assessment of MMIPB
P(TurnSuccess | PosMMIPB) = P(PosMMIPB | TurnSuccess)*P(TurnSuccess) /
[P(PosMMIPB | TurnSuccess)*P(TurnSuccess) + P(PosMMIPB | TurnFail)*P(TurnFail)]
P(TurnSuccess | PosMMIPB) = (0.75)*(0.29) / [(0.75)*(0.29) + (0.25)*(0.71)] = 55%.
So if the above numbers are reasonable, it means that even if a qualified analyst does all his due-dilligence, looks at all factors he can think of, and says everything looks good to him, the turnaround will end up being successful only a little over half the time.
Now if the rewards for turnaround success are attractive enough, which would seem to be the case here, a 45% chance of total loss may be ok. But at a minimum I think one needs to keep this in mind when sizing the position.
|Subject||RE: RE: reply to aagold + WinBrun + surf1680|
|Entry||01/10/2014 11:46 AM|
I am calculating the statistics a little differently than aagold. Does this look correct to you?
|Subject||RE: RE: RE: reply to aagold + WinBrun + surf1680|
|Entry||01/10/2014 12:11 PM|
|Subject||RE: Bayesian probabilities|
|Entry||01/10/2014 02:50 PM|
I don't see how the added layer of complexity you've added helps us understand the problem any better. It seems like all you've done is add a new factor to the list I was already using from the write-up (Management, Merchandise, Infrastructure, Presentation, Brand: MMIPB), which I guess we could call "Type", where radical redesigns and/or tech obsolescence turnarounds fall into one "Type" and the more promising ones fall into another "Type". So, taking this into account, the qualified analyst uses 6 factors to make his assessment: MMIPB and T.
But other than adding another factor to the list, nothing has changed in terms of how the problem is structured. The fundamental question is, if a qualified retail analyst looks at *all* factors MMIPBT, and uses his assessment to predict whether or not the turnaround will be successfull, there is still going to be some residual random component that remains unexplained by the identified factors. If the percentage of times wher analyst predictions accurately predict actual outcomes is 75%, just to use the same number I used before, then number which pops out of Bayes rule will remain the same as the 55% number I derived.
|Subject||RE: RE: RE: Bayesian probabilities|
|Entry||01/10/2014 03:35 PM|
I'm certainly no expert in retail or retail turnarounds, but I guess I'd be a bit surprised if a bonafide study confirmed your guess that analyst predictions (using Type as well as all other relevant factors) have greater than 90% accuracy in predicting future turnaround success/failure.
I'd be curious to hear other opinions... any other retail analysts out there in VIC land who would like to hazard a guess? Or better yet, has this study ever actually been done?
If your 90% accuracy number is correct, and we stick with the 29% base rate assumption, then Bayes Rule says the probability of turnaround success, given a positive retail analyst assessment, is
(0.9)*(0.29) / [(0.9)*(0.29) + (0.1)*(0.71)] = 79%.
|Subject||RE: RE: RE: RE: RE: Bayesian probabilities|
|Entry||01/10/2014 04:38 PM|
Katana and I aren't referring to typical sell-side analysts in this discussion, we're referring to ..... us, basically. You know, the supposedly smart buy-side guys on VIC. (I'm probably limiting my career options going forward if people figure out who I am! :-)
|Subject||RE: RE: RE: RE: RE: Bayesian probabilities|
|Entry||01/10/2014 08:14 PM|
I'd be curious if other experts in the retail space agree with Katana that nuts-and-bolts retail turnarounds like this (as opposed to ones with dramatic changes and/or technological obsolesence issues) successfully turn 50% of the time overall. Because if that's really true, then it certainly changes how I think about this investment opportunity.
P.S. By the way, I get what you mean now about this being a useful way to think about it, Katana. Looking at it this way, the "base rate" applicable to this "Type" isn't adverse at all since it's 50%. I just wish we had some real data to validate that 50% number.
|Subject||RE: Thinking Real Slow|
|Entry||01/12/2014 03:00 PM|
Roark: Troll Brother No. 1
(I mean this as a term of endearment)
The sporadic posts of hatin' always read like a 90's Dennis Miller monologue.
|Subject||RE: RE: Thinking Real Slow|
|Entry||01/13/2014 03:59 PM|
If only Dennis Miller had patented the "joke within a joke" he could sue Roark for, I dunno ... more than he ever made pitching NetZero probably
just kidding, Roark. wish you were around more often
|Entry||01/14/2014 02:40 PM|
I am long BODY and just wanted to add a few observations to the discussion.
First, it is interesting to me how much time has been spent on the discussion of Bayes formula, which to me smacks of efficient market hypothesis thinking. I realize that much of that conversation has been an amusing theoretical aside, and acknowledge that if one wanted to calculate a true expected return the input from Bayes formula would be necessary. However, I would like to get back to basics a bit and say that if potential down side is zero (which it is here), then potential upside should be somewhere between a ton and a “crap load.”
I believe that BODY fits the criteria there for an appropriately sized position.
BODY is a hated stock in a hated space. The stock is trading at just a bit above 1x EBITDA from 2 short years ago. If this was a business subject to rapid change, I might move on, but that is not the case here. Of course one can argue that “fashion” is the ultimate in rapid change, but I think that logic misses the forest for the trees.
While I don’t believe there is a real “moat” here, there is a niche. BODY’s target audience is females who think they look good and want to flaunt it. A quick review of online message boards etc shows a number of complaints from consumers that lament clothing from BODY is too small, or too tight.
While this strategy clearly limits their TAM, and I claim ZERO fashion insight, I believe that the body conscious female consumer will prove to be resilient through the difficult times that the teen/mall apparel retail industry now faces. A large part of BODY’s inventory are clothes meant for “going out.” Anecdotally I believe that clothes that make this section of the population feel sexy and attractive will be amongst the last items cut from the spending list of these cash strapped consumers who are eager to impress and attract the attention of their peers (especially their male peers). Additionally, for a fair amount of this target audience the idea of re-wearing a “club” top more than one or 2 times is anathema. The question then becomes, “Do I buy 1 top for $75, or 3 tops for $75?” I believe that the math favors BODY and their lower pricing.
The pendulum on mall based apparel etc is very far into the negative swing right now. When it swings back – and it will eventually – I believe that BODY’s segment will be among the first to benefit. Furthermore, with 8-14 week fashion cycles, BODY is positioned as a “fast fashion” retailer. If you believe the commentary from the ARO, ANF, AEO crowd in recent months, fast fashion is where the business is going.
Fiverocks mentioned the tax loss selling, but there has been another non-economic factor at work here in terms of the share holder base. 2 years ago BODY was forecasting long term store base growth of 15%/year and revenue growth of 20%/year. This of course attracted a certain type of rose colored glasses wearing investor. When new management came in, they made it very clear that they would be abandoning growth plans in order to right the ship. All the self proclaimed “growth” investors had to dump the stock.
In terms of righting the ship it is worth noting how much low hanging fruit there is in this turn around. Simply stated, before the current management team came in, BODY was a hydra. There was no coordination between print, online (which didn’t really even exist until a year ago), and in store resulting in different target customers for print and in store, which diluted any attempted branding, and required way too many SKUs.
In fact, within 6 months of new management coming on board, they reduced SKUs by 38%. There is a few quarters lag on ordering inventory etc, but this SKU reduction should in theory lead to higher gross margins (or at least lower COGS) as management is better able to make bulk purchases of a more concentrated assortment than they were able to in the past. Importantly, most of the SKU reduction has come in the area of “tops under $10,” and according to management, the higher end stuff actually sells better.
Unfortunately in the current highly promotional atmosphere it may be some time before this mix shift shows up in the numbers. However, it is important to remember that we are dealing with low priced items here. A $20 top that is 20% off costs $16, and a return to the $20 level when the promotional environment retreats is a 25% jump. Over many thousands of units this 25% jump will lead to a significant top line impact, but to the consumer on an individual basis its just a lousy $4 bucks, meaning that price increases should be relatively easy to sneak in.
Back to the SKU reduction – with print and in store offerings now coordinated (amazingly for the first time) print becomes a traffic driver for stores, and the branding effort is coordinated. Print circulation has also been cut by 25% as the online offering has been more fully developed (amazingly for the first time) which in theory will reduce SG&A.
In summary, turn arounds are never easy, but the non economic selling has created a very low entry point, and there is some very low hanging fruit that I believe will make an investment in BODY a success before a complete turn around is a success.
|Entry||01/14/2014 03:06 PM|
I keep coming back to the same question: How do you make a profit selling women's clothes (and effectively unbranded women's clothes, at that) at these price points? http://www.bodycentral.com/tops/club/
Shoot, after paying rent, payroll, electricity, audit, tax, legal, board, etc., how many of these things do you have to sell at $15 or $20 each to get into the green, esp when every other retailer is also running huge promotions?
Just seems like they are set up for a horrendous Q4 & Q1, but maybe everyone already expects that.
|Subject||RE: RE: LONG|
|Entry||01/14/2014 03:18 PM|
Well, my sister (47) and her kids (21 and 18) certainly liked the clothes and the prices. I manage my sister's money so I asked her to take a look at BODY's website and look at the merchandise because I was considering it as an investment. Well, she called back a couple of hours later and said she and my two nieces bought around $70 worth of clothes. Not sure how to enter that into the Bayes Rule formula, but just thought I'd mention it...
|Subject||RE: RE: RE: RE: LONG|
|Entry||01/15/2014 03:30 PM|
Lincott - obviously the macro situation is what it is - everyone has been discounting aggressively.
as for why 2013 has been so much worse than 2012, other than the macro situation deteriorating the answer is tied to the 38% reduction in SKUs and new management's efforts to coordinate BODY's offering across print and in store. basically they just blew out all the old inventory that didn't fit with their new branding strategy adn efforts to coordinate their offerings across multiple channels. i believe management communicated their plan well, and have executed it. it is unfortunate that this crushed margins for much of '13, but it seems like it was a necessary step to right the ship and move forward.
the new distribution center should help with the customer service issues that plagued them in the past.
|Entry||01/21/2014 11:28 AM|
I like VIC cause you get so many interesting well thought opinions and these are sometimes violently different than mine. So....in reply - and opinions only:
*Body has a niche? Have you seen the store? It is a destination store for nobody. Period. Women walk by this one as they do for many others but Body does not have the branding or presentation to bring a specific type of customer in unless that customer happens to glance up. So no niche, no moat, no nothing. Even BEBE has a bigger niche than here - but for all that Bebe has struggled for years. Go to BODY's website - it is a truly sad thing to behold.
*mall traffic may be permanently challenged. The internet isn't helping and store capacity needs to go down. I'm not predicting the end of retail but BODY can fix things all they want but that doesn't mean anybody cares. You don't fix things in a vacuum. You have to get traffic too.
*just cause the previous management sucked doesn't mean this one doesn't too. I don't know how you can knock results from the previous one when the existing group has been there for a while. They suck too. So far at least. They totally whiffed so far.
*anybody who gave these guys a credit line is an idiot. I mean, for heaven's sake, would you loan them a dime? No way! That doesn't mean it won't happen now, but...
What I don't get here is there is no sign of a turnaround PLAN. like:
*we are closing a bunch of stores
*we are spending zilch in CapEx
*we are very scared and lots of HQ staff is gone
*we are cutting salaries
*we are doing something special
ALL THIS SAID, CBK went from $1 to $9 recently so a turn is more than possible! I'm not short - just not long. And just 2c here.
|Subject||Dots goes kaput|
|Entry||01/22/2014 11:35 AM|
Dots filed for bankruptcy yesterday. Dots operates 400 stores and has about $300 million in sales. Their clothing caters to price-conscious 25-35 year old women (sound familiar?). A quick browse through their website and I would say Dots is virtually indistinguishable from Body Central in every way. The first day declaration filing sounds eerily like Body Central:
Obviously the capital structure played no small role in the filing, but I would call this a worrisome event for Body Central nonetheless. I hate to say this but you could put Body Central's name on this bankruptcy petition and even people who know Body Central well probably wouldn't realize it's a different company.
|Subject||RE: RE: fiverocks|
|Entry||03/14/2014 10:46 AM|
Fiverocks - Regarding the cash balance, what are the odds they aren't paying (unsecured) vendors on the demand of the secured lenders?
|Subject||What happens in bankruptcy?|
|Entry||03/26/2014 12:06 PM|
I haven't done distressed investing before, but what would happen if they do file? Does anyone have any thoughts on if the equity holders would get anything?
|Entry||03/26/2014 01:55 PM|
It's hard to tell what the common would recover, but I'd assume it would be...something. Realistically, I think this might make an interesting private financing investment/capital infusion for someone - probably at a high coupon and a good chunk of the equity.
|Entry||03/26/2014 02:16 PM|
The company has $35m + in direct to consumer (catalog & internet) sales alone. Most of their leases can also be terminated if sales goals are not met. I agree with others on this thread that this could be a good deal for somebody to swoop in and control the company for a nominal amount. Certainly there is a store base size where this makes sense or should exist. Expect to be diluted here, obviously, but I do not think this is a zero (yet). Then again if no white knight shows up, anything can happen.
|Subject||RE: Come on|
|Entry||03/27/2014 12:39 PM|
curious if you know - why isn't psun looking like this too? turn taking forever, BS far uglier, but it doesn't look and sound so close to BK. Admit I've spend zero time looking at debt structure maturities and that....
|Subject||RE: RE: mea culpa|
|Entry||03/27/2014 01:06 PM|
I figure anybody posting on a small cap idea like this in a mirco-cap retailer prob follows it closely....
|Subject||RE: RE: RE: RE: mea culpa|
|Entry||03/28/2014 01:09 PM|
the original post noted the possiblity of a 15-20 bagger if things went well.
but i'm not sure that a mea culpa to the group is necessary here.
I think its important to distinguish between investment mistakes and portfolio mistakes.
i hate to pour salt in the wound, but fiverocks indicated he was long this "in some size."
it seems to me that sizing was the mistake, not buying.
obviously the goal here is to avoid permanent capital loss, but if the upside down side is +20x / -1x, i'm not sure that was an investment mistake.
as a reminder, i indicated early on in this thread that i was long BODY, so perhaps i'm just protecting my own ego here and i need to think about this more deeply, but for me it was the smallest position i've ever taken so I feel comfortable with the loss. i guess my point/worry here is that even knowing what i know now, i'm not sure that i wouldn't have taken the position a few months back if i had known then what i know now.
VIC doesn't have a sizing recommendation, but perhaps it should - ie 25% 50% 75% etc of whatever a "normal" position is for you.
either way, thanks to fiverocks for what i thought was a well done writeup, and apologies if this comes across as an attempt by me to justify my own mistake. it is not my intention.
|Subject||RE: RE: RE: RE: RE: mea culpa|
|Entry||03/28/2014 01:29 PM|
Actually, I've wondered for a while what you meant by something in your initial post on this thread.
You wrote two statements that appear to be extremely contradictory:
(1) However, I would like to get back to basics a bit and say that if potential down side is zero (which it is here),then potential upside should be somewhere between a ton and a “crap load.”
(2) I believe that BODY fits the criteria there for an appropriately sized position.
So what you're saying now is consistent with (2), but what the heck did (1) mean?
I'll say one thing, if you show me an investment opportunity where the "downside is zero" and the potential upside is "somewhere between a ton and a crap load", then I'd put every penny I could scrape together into it.
|Subject||RE: RE: RE: RE: RE: RE: mea culpa|
|Entry||03/28/2014 01:32 PM|
Oh wait a minute, I get it now. When you said "downside is zero" you didn't mean zero chance of loss, you meant that if things go badly the stock is a zero. I was reading it to mean "no downside, only upside". Sorry.
|Subject||RE: RE: RE: RE: RE: RE: mea culpa|
|Entry||03/28/2014 04:36 PM|
sorry - what i should have said is if potential downside is $0... ie 100%... not 0 as in there is no down side.
i was very aware that the downside here was substantial, but i phrased it poorly.
apologies. i too often "type from the hip" when on VIC.
|Subject||RE: RE: RE: RE: RE: RE: mea culpa|
|Entry||03/29/2014 09:39 AM|
Well, I have a feeling this logic won't convince you but I'll give it a shot.
Let's say someone gives you chance to make the following bet on the flip of a fair coin: if it comes up heads you win double what you bet, if it comes up tails you lose what you bet.
I think everyone would agree it's a good investment decision to make that bet every time it's offered to you (albeit with an appropriately sized position due to the risk), but half the time you'll like a complete idiot - and perhaps do a lot of post-mortem analysis to figure out what "mistake" you made - because you'll lose everything you bet on it.
|Subject||Revisiting this one|
|Entry||04/17/2014 07:30 PM|
It seems like the consensus on this board is that BODY is going to zero. So now I want to know – who is short it at this price? ---- I didn’t think so.
At this price, the only reason to not be long BODY (admittedly only a 1 – 3% position) is that you think it’s going bankrupt and that in the bankruptcy the equity will recover nothing. I’m somewhat of a newbie to investing, only a few years investing experience and just joined VIC last August, but can someone explain to me how a company with BODY’s capital structure could even go bankrupt? Has anyone seen a company with such a low debt to assets ratio go bankrupt because of liquidity issues? Every time I read about a bankruptcy filing debt is multiples of assets.
Here are a few reasons why I don’t think they will go bankrupt –
1. Incentives – CEO Brian Woolf has no incentive to run the company into bankruptcy given his large amounts of options – it would be devastating for him personally. He has 300,000 stock options (exercisable at $7.94) and another 150,000 restricted shares.
On the business side, BODY gains nothing in a Chapter 11 (unlike airlines or some companies who benefit from a bankruptcy restructuring).
With $280 million in sales they could cut their way to improving liquidity, as they’ve already started to do and mention in their 10-K: “If we cannot meet our capital needs using cash on hand and cash from operations, we may have to take additional actions such as additional headcount reductions, modifying our business plan to close additional stores as lease terms end, seeking additional financing to the extent available, and further reducing and/or delaying capital expenditures.”
They also only have 8 million in payables and a current ratio of 1.6.
2. There is no reason for the lender to foreclose. Crystal Financial had to know the dire situation of BODY when they issued the loan and it’s not even due until 2017.
3. They don't need much of an increase in sales or gross margin to generate cash and an end to discounting will improve gross margin going forward, along with a better inventory mix which will lead to improved sales. If we assume that for 2014 they will get only a 3% increase in sales and a 400 bps increase in gross margin (to 30% which is under what they had in 2012 and 2011) then they will have no burn in cash from operating activities and any upside will make cash from operations positive.
4. I spoke with their CFO Tom Stoltz last week. His point was that in Q3 and Q4 they made a mistake in shifting their inventory more towards the back to school set which turned off the age 30+ consumer. But going forward they feel they have the right inventory mix to bring the age 30+ consumer back.
5. In women’s retail apparel, just because you turn off some customers in one or two quarters does not mean that they won’t be back since the customer checks out the store every time she goes to the mall. I’ve also been told that BODY turns it inventory faster than other retailers (though I haven’t run the numbers to prove this), so customers are used to seeing new designs when they come in.
5. Even fiverocks thinks that eventually this turnaround will work. And in his mea culpa he didn’t say he thinks it’s going to zero, he basically just said he got the timing wrong.
6. As an aside, if they do need liquidity, it seems to me to be a perfect candidate to take on some convertible debt.
7. Overall retail sales for the U.S. for Feb/Mar were very positive.
8. Finally, the upside is huge! It’s 10-15x if they can get back to $1 per share in earning and 30x if they can get back to where they were just two years ago.
So what am I missing and why am I wrong? I’m especially interested to hear anyone’s perspective on why it would make sense, or why they would have to, file for bankruptcy.
|Subject||RE: Revisiting this one|
|Entry||04/17/2014 07:57 PM|
Case studies are almost always the best solution to finding detailed answers to questions (not trying to plug a certain business school's approach, just giving you my opinion), so I'll leave you with this recommendation -- read the VIC write-up and the EDGAR filings on Gadzooks to understand how a teen / young adult retailer with no debt can torch capital faster than an Interim CFO can say, "Chapter 11 your honor." Note also how the Chairman / CEO, Chief of Merchandise, and SVP of Real Estate sunk $550k into purchases of Common four months before filing.
Retailers with fickle core customer bases are inherently turnarounds of the high-flying / acrobatic sort (the "trend-based" sales + fixed nature of their cost structures = lot of operational leverage in both directions). And listening to Management will almost assuredly lead you astray.