Body Central Corp. seemed unable to do wrong after its initial public offering in October 2010.
After selling its stock for $13 a share, the stock began rising sharply in the months after the IPO amid a series of very strong sales reports. It reached a high of $30.93 at the beginning of May.
However, a couple of days later, a disappointing sales forecast for the second quarter caused the stock to lose almost half of its value in one day. Remarkably enough, it happened again last week as Body Central lowered its sales forecast for the second time in less than two months.
Body Central’s stock fell from $28.92 to $14.88 on May 4 after the first forecast and when it lowered projections again last Monday, the stock dropped from $15.99 to $8.22.
From what analysts said last week, it will be a long time before Body Central’s stock gets all of that back.
“The big EPS reductions and thus far lack of clarity on what exactly has gone wrong has reduced guidance credibility to minimal levels. It has also crushed valuation,” Avondale Partners analyst Mark Montagna said in a research note.
“We do not believe the business model is broken considering 13 consecutive quarters of positive comps while adding 83 new stores across a widening geography. Credibility will not begin rebuilding until the fourth quarter achieves expectations,” he said.
By coincidence, CEO Allen Weinstein was scheduled to speak at an investor conference Tuesday in Nantucket, Mass., which was broadcast on the Internet.
Weinstein said Body Central, which operates 254 fashion stores for young women in 23 states, may have been overconfident after increases in comparable-store sales for quarter after quarter.
“Thirteen quarters and 39 months is a long time to not make many mistakes,” Weinstein said.
“I don’t want to use the word infallible but I think we thought if we buy it, she’s buying it,” he said.
Sales began to slump in April, before the company first lowered its forecast. By the second week of June, Weinstein realized that the company needed to revise the forecasts again after his “overoptimistic view that we would clear things in the second quarter.”
“It just wasn’t right and we needed to make a change,” he said, so company officials spent last weekend working on new estimates. The company then announced them on Monday morning before the stock market opened.
Body Central is now projecting comparable-store sales — sales at stores open more than one year — will be down 4 percent to 6 percent for the full year. It estimates earnings per share for the year to be between $1.07 and $1.11, which would be down from $1.22 last year.
Before the company issued its projections in May, the average forecast from analysts for this year had been $1.52 a share, according to Thomson Financial.
“While full-year guidance is more realistic, we are less confident that they can meaningfully exceed estimates and believe the stock will remain range bound until the comps and margin resume a positive trajectory (likely not until 2013),” Robert W. Baird analyst Erika Maschmeyer said in a research note as she downgraded the stock from “outperform” to “neutral.”
“Before becoming more constructive, we would look for a return to sustainable full-price selling, driven by resonating merchandise across categories,” she said.
Piper Jaffray & Co. analyst Jeffrey Klinefelter said in his note that “we lack conviction in the prospects of a near-term turnaround” as he reiterated a “neutral” rating on the stock.
“We remain concerned about the company’s ability to navigate through this current fashion cycle and believe that top-line trends could remain challenged for several quarters,” he said.
Stein has seen many ups and downs
One person who can certainly relate to Body Central’s problems is Jay Stein, chairman and interim CEO of the other publicly traded Jacksonville-based fashion retailer, Stein Mart Inc.
Stein took his company public 20 years ago and has seen a number of ups and downs in the stock.
Like Body Central, Stein Mart was an immediate Wall Street darling when it went public, but the stock dropped a couple of years later when sales slumped.
The pattern keeps repeating itself. By my count, Stein Mart’s stock has gone through five cycles of peaks and troughs in the past two decades. No matter what people think of the company long-term, any short-term sales slump will send the stock down.
With the company holding its annual meeting Tuesday, a day after Body Central’s latest big drop, I asked Stein if he could offer any lessons to Body Central and other firms that go through these cycles.
“The retail business has so many moving parts that this happens to a great deal of retailers,” Stein said.
That’s something you can’t always control, but Stein did talk about something the company can control.
“The lesson is to choose the right person the first time because leadership is everything,” he said.
Stein has been interim CEO of Stein Mart since David Stovall retired in September, after not agreeing with Stein on the company’s sales strategy.
Stein said last week the company has identified a possible new CEO who he thinks will be the right person for Stein Mart. The company is still negotiating with that candidate.
Interline talked to two other suitors before buyout deal
Before Interline Brands Inc. agreed to a buyout last month by P2 Capital Partners LLC and an affiliate of Goldman Sachs, the company was talking to two other “well-known private equity firms” about a possible deal, according to an initial proxy statement filed by Interline last week.
The initial proposals from those firms were not solicited by the company, according to the proxy filed with the Securities and Exchange Commission.
Jacksonville-based Interline, which markets and distributes maintenance, repair and operations products nationwide, agreed May 29 to the buyout by Goldman Sachs and P2 for $25.50 a share.
The proxy statement, which will be sent to shareholders so they can vote on the buyout, tells the story of how the deal came together.
Interline began looking at buyout proposals in September when the first unidentified private equity firm indicated an interest to Barclays Capital, which had an investment banking relationship with Interline.
A second private equity firm made an inquiry to an Interline board member in October. That firm in November told Interline that it was interested in buying the company, which was then priced below $15 a share, for $19 to $20 per share.
In December, P2 came along and told Interline CEO Michael Grebe that it was interested in a possible deal “with the assistance of another financial sponsor,” which it didn’t name. P2, which already owned 7.9 percent of Interline’s stock, did not give a specific price for a possible buyout at that time.
In February, P2 identified Goldman Sachs affiliate GS Capital Partners as its financial sponsor partner in the deal and said it was considering an offer 30 percent higher than Interline’s then-current stock price of $20.56.
In March, P2 and Goldman Sachs indicated a willingness to pay $25.50 to $28 per share, and the two firms then spent much of April and May conducting their due diligence review of Interline.
After Interline’s annual shareholders meeting May 8, a transaction committee consisting of three independent directors was formed to evaluate potential offers and Goldman Sachs was asked to submit its “best and final offer.”
On May 11, Goldman Sachs made an offer of $25 a share. “GS Capital Partners cited general concerns in the equity and financing markets and noted the company’s declining stock price since March 23, 2012, when GS Capital Partners had indicated its proposed offer in the range of $25.50 to $28 per share,” the proxy said. Interline’s stock had fallen to about $18 at the time.
The transaction committee, through Barclays, told Goldman Sachs that it would not proceed with an offer of less than $25.50. On May 14, Goldman Sachs agreed to proceed with the deal at that price.
Barclays contacted three other firms in May to see if they had an interest in buying Interline, but no other offers were made. The agreement with P2 and Goldman Sachs allows Interline to solicit higher bids until Thursday but the proxy does not say if any other parties have been contacted this month.
Interline hopes to complete the buyout during the third quarter.
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