As a value investor I look for companies that have experienced steep declines in stock prices and still have excellent fundamentals such as excellent growth in free cash flow, low debt to equity ratios, and high return on equity. Sometimes a company can fall for a good reason such as threats to the underlying business -- new competitors, declining demand for a product or obsolescence. This is called a value trap. The saying goes if it's too good to be true then it generally is. If I see a stock price that has fallen then there is a decent possibility that there is a reason for it.

Take Body Central (NASDAQ: BODY) for instance. Its stock is trading nearly 66% off its 52-week high. This company is a women's apparel retailer that mainly operates in the South, mid-Atlantic and Midwestern regions of the United States and currently has a market cap of $172 million as of July 7. This company has experienced a 54% compounded annual growth rate in its free cash flow from 2009-2011, and its total debt to equity ratio is 48% (mrq) and declining. It only has a P/E ratio of 8.55. At first glance it would seem that this company is a value investor's dream. So, it sounds too good to be true and it probably is.

Weighing the Risks

Risks of any investments have to be weighed against each other. With Body Central trading at such a low valuation the market price risk is minimal. The company doesn't operate overseas so the political risk is nonexistent. The fundamentals of the company are excellent until we reach the first quarter of 2012 when the store experienced a 1.4% decline in its same store sales. The company issued negative guidance for its second and third quarters. They are not expecting things to improve until the holiday season. It would seem the company is experiencing difficulty in its older stores. The only way for Body Central to obtain growth for the time being is to open new stores.

According to the June guidance report they have to take Aggressive markdowns on slow moving items.This tells me their customer base does not like the current lineups. The fundamentals situation is a coin toss until we see how the holiday season pans out. If the holiday line up performs well, then the stock will go back toward its 52-week high of $30.93 per share. If it doesn't then it will collapse even further.

Company (Ticker)

Comparable Store Sales (mrq)

P/E Ratios

Free Cash Flow Margins (End of 2011)

Total Debt to Equity (mrq)

Body Central (NASDAQ: BODY)










rue21 (NASDAQ: RUE)





*Figures accurate as of 07/07/12

There is some possible information risk, that is conjecture on my part, but you can't be too careful when dealing with information risk. On July 5, 2012 Martin P. Doolan retired as Chairman of the Board due to health concerns. John K. Haley replaced him as Chairman. He serves as Chairman of the audit committee, which leads me to wonder if there is something going with its auditing procedures. There was also a large disposal of shares by two of the company's largest shareholders, Beth Angelo and Jerrold Rosenbaum, the day before the release of the press release announcing the decline in same store sales, which implies that they knew the company was going to be in trouble at least for a while. Management turnover in general can disrupt a company whatever the reason may be.


The company lists four competitors, two of which are publicly traded: Wet Seal (NASDAQ: WTSLA) and rue21 (NASDAQ: RUE). Wet Seal, which is most similar to Body Central in that it caters to mostly women, also had a decline of 7.7% in its comparable store sales as well and a 11.4% decline in its Arden B division. Wet Seal also turned a negative cash flow in its most recent quarter. So, Wet Seal is in worse shape than Body Central fundamentally. This could be indicative of a more frugal market place and quick shifts in fashion trends.

The only publicly traded company that competes with Body Central that turned positive comparable store sales results was rue21, which increased sales at older stores by 1.7%. Comparing rue21 with Body Central is like comparing apples and oranges in that rue 21 sells trendy apparel for young men as well as women so they have a wider demographic then the other two companies. Rue21 has the highest total debt to equity ratio, but it is declining and stands at 131% as of the most recent quarter.

Final Word: Value Trap?

It is really too early to tell whether or not Body Central is a value trap for the long term, but it is definitely a value trap for the next couple of quarters until we get into the holiday season to see if the new line ups improve company performance. Keep an eye on insider stock transactions to see if they are buying or selling and for further management turnover. Right now I am putting a 6 month underperform on the Motley Fool Caps until I see improvement in its fundamentals.

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