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BODY > SEC Filings for BODY > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for BODY CENTRAL CORP

Form 10-Q for BODY CENTRAL CORP


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of our Company as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the SEC, and our unaudited consolidated financial statements and the related notes included herein. This discussion contains forward-looking statements that are based on the beliefs of our management, as well as


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assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors. See "Forward-Looking Statements."

Overview

Founded in 1972, Body Central Corp. is a multi-channel specialty retailer offering on-trend, quality apparel and accessories at value prices. The company operates specialty apparel stores under the Body Central and Body Shop banners, as well as a direct business comprised of our Body Central catalog and our e-commerce website at www.bodyc.com. The Company targets women in their late teens and twenties from diverse cultural backgrounds, who seek the latest fashions and a flattering fit. Our stores feature an assortment of tops, dresses, bottoms, jewelry, accessories and shoes sold primarily under our exclusive Body Central® and Lipstick® labels. The Company continually updates our merchandise and floor sets with an emphasis on coordinated outfits presented by lifestyle to give our customers a reason to shop our stores frequently. The Company believes our multi-channel strategy supports our brand building efforts and provides us with synergistic growth opportunities across all of our sales channels. Our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 provides additional information about our business, operations and financial condition.

As of September 29, 2012, the Company had 263 stores with an average size of approximately 4,262 square feet. Our stores are located in fashion retail venues in the South, Southwest, Mid-Atlantic and Midwest. In the thirty-nine weeks ended September 29, 2012, the Company opened twenty-six stores and closed four.

How the Company Assesses the Performance of Our Business

In assessing the performance of our business, the Company considers a variety of operational and financial measures. The key measures for determining how our business is performing are net revenues, comparable store and non-comparable store sales, direct sales through our catalog and e-commerce channels, gross profit margin, store contribution, selling, general and administrative expenses, earnings before interest taxes depreciation and amortization and net income.

Net Revenues

Net revenues consist of sales of our merchandise from comparable stores and non-comparable stores and direct sales through our catalog and e-commerce channels, including shipping and handling fees charged to our customers. Net revenues from our stores and direct business reflect sales of our merchandise less estimated returns and merchandise discounts.

Store Sales

There may be variation in the way in which other retailers calculate "comparable" or "same store" sales. The Company includes a store in comparable store sales on the first day of the fourteenth month after a store opens. Non-comparable store sales include sales not included in comparable store sales (for example, the first two months of a new store's sales) and sales from closed stores. Measuring the change in year-over-year comparable store sales allows us to evaluate how our store base is performing. Various factors affect comparable store sales, including:

† consumer preferences, buying trends and overall economic trends;

† our ability to identify and respond effectively to fashion trends and customer preferences;

† changes in competition;


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† changes in our merchandise mix;

† changes in pricing levels and average unit price;

† the timing of our releases of new merchandise;

† the level of customer service that the Company provides in our stores;

† our ability to source and distribute products efficiently; and

† the number of stores the Company opens and closes in any period.

Opening new stores is an important part of our growth strategy. The Company expects a significant percentage of our net revenues to come from non-comparable store sales. Accordingly, comparable store sales is only one element the Company uses to assess the success of our growth strategy. Purchases of apparel and accessories are sensitive to a number of factors that influence the levels of consumer spending, including economic conditions and the level of disposable consumer income, consumer debt, interest rates and consumer confidence. Our business is seasonal and as a result, our revenues fluctuate. In addition, our revenues in any given quarter can be affected by the timing of holidays, the weather and other factors beyond our control.

Direct Sales

The Company offers direct sales through our catalogs and through our e-commerce website, www.bodyc.com, which accepts orders directly from our customers. The Company believes the circulation of our catalogs and access to our website increases our reputation and brand recognition with our target customers and helps support the strength of our store operations. Direct sales are not included in our comparable store sales.

Gross Profit

Gross profit is equal to our net revenues minus our cost of goods sold. Gross profit margin measures gross profit as a percentage of our net revenues. Cost of goods sold includes the direct cost of purchased merchandise, distribution costs, all freight costs incurred to ship merchandise to our stores and our direct customers, costs incurred to produce and distribute our catalogs, store occupancy costs, buying costs and inventory shrinkage. The components of our cost of goods sold may not be comparable to those of other retailers.

Our cost of goods sold is greater in higher volume periods because cost of goods sold generally increases as net revenues increase. The Company reviews our inventory levels on an ongoing basis in order to identify slow-moving merchandise and take appropriate markdowns to clear these goods. The timing and level of markdowns are normally not seasonal in nature, but are driven by customer acceptance of our merchandise. If the Company misjudges sales levels and/or trends, the Company may be faced with excess inventories and be required to mark down our prices for those products in order to sell them. The Company records a markdown reserve based on estimates of future markdowns related to current inventory.

Selling, General and Administrative Expenses

Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses include payroll and other expenses related to operations at our corporate headquarters. These expenses generally do not vary proportionally with net revenues. As a result,


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selling, general and administrative expenses as a percentage of net revenues are usually higher in lower volume periods and usually lower in higher volume periods. The components of our selling, general and administrative expenses may not be comparable to those of other retailers. The Company expects that our selling, general and administrative expenses will increase in future periods due to our continued store growth and growth in our direct business.

Results of Operations



The following tables summarize key components of our results of operations for
the periods indicated as a percentage of net revenues as well as selected
non-financial operating data:



                                                Thirteen Weeks Ended             Thirty-Nine Weeks Ended
                                            September 29,     October 1,     September 29,       October 1,
                                                2012             2011             2012              2011

Percentage of Net Revenues:
Net revenues                                         100.0 %        100.0 %           100.0 %           100.0 %
Cost of goods sold                                    68.3           66.4              67.2              65.1
Gross profit                                          31.7           33.6              32.8              34.9
Selling, general and administrative
expenses                                              29.0           24.7              24.3              23.2
Depreciation and amortization                          2.5            2.0               1.8               1.8
Income from operations                                 0.2            6.9               6.7              10.0
Interest income, net of interest
expense                                                0.0            0.0               0.0               0.0
Other income, net of other expense                     0.1            0.1               0.0               0.1
Income before income taxes                             0.3            7.0               6.7              10.1
Provision for income taxes                             0.1            2.8               2.5               3.8
Net income                                             0.2 %          4.2 %             4.2 %             6.3 %

Operating Data (unaudited):
Stores:
Comparable store sales change                        -11.9 %          8.2 %            -6.7 %            13.0 %
Number of stores open at end of period                 263            226               263               226
Sales per gross square foot (in whole
dollars)                                   $            55    $        63    $          179     $         194
Average square feet per store                        4,262          4,311             4,262             4,311
Total gross square feet at end of
period (in thousands)                                1,121            974             1,121               974
Direct:
Number of catalogs circulated (in
thousands)                                           4,200          3,999            19,825            18,944
Revenue per catalog (in whole dollars)     $          1.41    $      1.53    $         1.45     $        1.42

The Company has determined our operating segments on the same basis that the Company uses internally to evaluate performance. Our operating segments are our stores and our direct business. These have been aggregated into one reportable segment. The Company aggregates our operating segments because they have a similar type of customer, nature of products, nature of production process and distribution methods as well as similar economic characteristics.

The following table summarizes the number of stores open at the beginning of the period and at the end of the period:


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                                            Thirteen Weeks Ended          Thirty-Nine Weeks Ended
                                         September 29,    October 1,    September 29,    October 1,
                                             2012            2011           2012            2011

Stores at beginning of period                      257           221              241           209
Stores opened during period                          7             5               26            17
Stores closed during period                         (1 )           -               (4 )           -
Stores at end of period                            263           226              263           226

Thirteen Weeks Ended September 29, 2012 Compared to the Thirteen Weeks Ended
October 1, 2011



                                            Thirteen Weeks Ended
                                  September 29,                October 1,
                                       2012                       2011
                                        Percentage of              Percentage of          Variance
                              Amount    Net Revenues     Amount    Net Revenues    Dollars    Percentages
                                                 (Unaudited)
                                           (Dollars in thousands)
Net revenues                 $ 67,920           100.0 % $ 67,110           100.0 % $    810           1.2 %
Cost of goods sold             46,399            68.3     44,531            66.4      1,868           4.2
Gross profit                   21,521            31.7     22,579            33.6     (1,058 )        (4.7 )
Selling, general and
administrative
expenses                       19,718            29.0     16,577            24.7      3,141          18.9
Depreciation and
amortization                    1,607             2.5      1,342             2.0        265          19.7
Income from operations            196             0.2      4,660             6.9     (4,464 )       (95.8 )
Interest income, net of
interest expense                    3               -          2               -          1          50.0
Other income, net of other
expense                            45             0.1         39             0.1          6          15.4
Income before income taxes        244             0.3      4,701             7.0     (4,457 )       (30.4 )
Provision for income taxes         91             0.1      1,853             2.8     (1,762 )       (95.1 )
Net income                   $    153             0.2 % $  2,848             4.2 % $ (2,695 )       (94.6 )%

Operating Data:
Revenues:
Stores                       $ 62,006            91.3 % $ 60,997            90.9 % $  1,009           1.7 %
Direct                          5,914             8.7      6,113             9.1       (199 )        (3.3 )
Net revenues                 $ 67,920           100.0 % $ 67,110           100.0 % $    810           1.2 %

Net Revenues

Net revenues increased by $810,000, or 1.2%, for the thirteen weeks ended September 29, 2012, as compared to the thirteen weeks ended October 1, 2011.

Store sales increased $1.0 million, or 1.7%, for the thirteen weeks ended September 29, 2012, as compared to the thirteen weeks ended October 1, 2011. The increase in store sales resulted from the 37 net store additions since October 1, 2011, partially offset by a decrease in comparable store sales. Comparable store sales decreased $6.9 million, or 11.9%, for the thirteen weeks ended September 29, 2012, compared to an increase of 8.2% for the thirteen weeks ended October 1, 2011. The


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decrease in our comparable store sales was primarily the result of fewer transactions on a per store basis when compared to the same period last year. Non-comparable store sales increased $7.9 million for the thirteen weeks ended September 29, 2012, compared to the thirteen weeks ended October 1, 2011. There were 213 comparable stores and 50 non-comparable stores open during the thirteen weeks ended September 29, 2012.

Direct sales, including shipping and handling fees, decreased $199,000, or 3.3%, for the thirteen weeks ended September 29, 2012, from the thirteen weeks ended October 1, 2011. This decrease was due primarily to the decrease in revenue per book, partially offset by an increase in the number of books circulated.

Gross Profit

Gross profit decreased $1.1 million, or 4.7%, for the thirteen weeks ended September 29, 2012 as compared to the thirteen weeks ended October 1, 2011. As a percentage of net revenues, gross profit margin decreased by 190 basis points for the thirteen weeks ended September 29, 2012 as compared to the thirteen weeks ended October 1, 2011. This decrease was attributable to an 80 basis point decrease in merchandise margin from markdowns taken to clear slow-moving inventory and a 110 basis point increase in freight costs, store occupancy, distribution and buying costs as a percentage of net revenues.

Selling, General and Administrative Expense

Selling, general and administrative expenses increased by $3.1 million, or 18.9%, for the thirteen weeks ended September 29, 2012 as compared to the thirteen weeks ended October 1, 2011. This increase resulted in part from an $865,000 increase in store operating expenses due primarily to the 37 net store additions since October 1, 2011. As a percentage of net revenues, store operating expenses increased to 18.0% for the thirteen weeks ended September 29, 2012 as compared to 16.9% for the thirteen weeks ended October 1, 2011. General and administrative expenses increased $2.3 million for the thirteen weeks ended September 29, 2012 as compared to the thirteen weeks ended October 1, 2011. As a percentage of net revenues, general and administrative expenses increased to 11.0% for the thirteen weeks ended September 29, 2012 from 7.8% for the thirteen weeks ended October 1, 2011. The increase as a percent of net revenues was primarily due to an increase in professional fees related to recruiting expenses for newly hired and open executive positions, an increase in corporate payroll related to new positions, consulting fees related to strategic planning and new systems development, severance benefits to former employees and legal fees related to the class action lawsuit. The aforementioned items, excluding the increase in corporate payroll related to new positions, equated to a net increase of approximately $1.2 million from the third quarter of 2011. As a percentage of net revenues, selling, general and administrative expenses were 29.0% for the thirteen weeks ended September 29, 2012 and 24.7% for the thirteen weeks ended October 1, 2011 due to reasons discussed above.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $265,000, or 19.7%, for the thirteen weeks ended September 29, 2012 as compared to the thirteen weeks ended October 1, 2011. This increase was primarily due to capital expenditures related to new store construction and upgrades to our information technology systems. As a percentage of net revenues, depreciation and amortization expense increased 50 basis points to 2.5% for the thirteen week period ended September 29, 2012 from 2.0% for the thirteen week period ended October 1, 2011.

Interest Income, Net of Interest Expense

Interest income, net of interest expense was $3,000 for the thirteen weeks ended September 29, 2012 and $2,000 for the thirteen weeks ended October 1, 2011.


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Provision for Income Taxes

Provision for income taxes decreased $1.8 million for the thirteen weeks ended September 29, 2012 as compared to the thirteen weeks ended October 1, 2011, which was attributable to a $4.5 million decrease in income before income taxes, and a 210 basis point decrease in the effective tax rate to 37.3% in the thirteen weeks ended September 29, 2012 from 39.4% in the thirteen weeks ended October 1, 2011. This decrease in the effective tax rate was primarily due to a permanent true up to the 2011 federal and state income tax payments, compared to the estimated tax provision.

Net Income

Net income decreased $2.7 million for the thirteen weeks ended September 29, 2012 as compared to the thirteen weeks ended October 1, 2011 due to the factors discussed above.

Thirty-nine weeks Ended September 29, 2012 Compared to the Thirty-nine weeks
Ended October 1, 2011



                                        Thirty-Nine Weeks Ended
                               September 29,                October 1,
                                   2012                        2011
                                     Percentage of               Percentage of          Variance
                          Amount     Net Revenues     Amount     Net Revenues    Dollars    Percentages
                                              (Unaudited)
                                        (Dollars in thousands)
Net revenues             $ 229,956           100.0 % $ 215,764           100.0 % $ 14,192           6.6 %
Cost of goods sold         154,440            67.2     140,401            65.1     14,039          10.0
Gross profit                75,516            32.8      75,363            34.9        153           0.2
Selling, general and
administrative
expenses                    55,820            24.3      49,974            23.2      5,846          11.7
Depreciation and
amortization                 4,469             1.8       3,815             1.8        654          17.1
Income from operations      15,227             6.7      21,574            10.0     (6,347 )       (29.4 )
Interest income, net
of interest expense             10             0.0          14             0.0         (4 )       (28.6 )
Other income, net of
other expense                  104               -         206             0.1       (102 )       (49.5 )
Income before income
taxes                       15,341             6.7      21,794            10.1     (6,453 )       (29.6 )
Provision for income
taxes                        5,800             2.5       8,213             3.8     (2,413 )       (29.4 )
Net income               $   9,541             4.2 % $  13,581             6.3 % $ (4,040 )       (29.7 )%

Operating Data:
Revenues:
Stores                   $ 201,289            87.5 % $ 188,876            87.5 % $ 12,413           6.6 %
Direct                      28,667            12.5      26,888            12.5      1,779           6.6
Net revenues             $ 229,956           100.0 % $ 215,764           100.0 % $ 14,192           6.6 %

Net Revenues

Net revenues increased by $14.2 million, or 6.6%, for the thirty-nine weeks ended September 29, 2012, as compared to the thirty-nine weeks ended October 1, 2011.

Store sales increased $12.4 million, or 6.6%, for the thirty-nine weeks ended September 29, 2012, as compared to the thirty-nine weeks ended October 1, 2011. The increase in store sales resulted from the 37 net store additions since October 1, 2011, partially offset by a decrease in comparable store sales. Comparable store sales decreased $12.0 million, or 6.7%, for the thirty-nine weeks ended


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September 29, 2012, compared to an increase of 13.0% for the thirty-nine weeks ended October 1, 2011. The decrease in our comparable store sales was primarily the result of fewer transactions on a per store basis when compared to the same period last year. Non-comparable store sales increased $24.4 million for the thirty-nine weeks ended September 29, 2012, compared to the thirty-nine weeks ended October 1, 2011. There were 204 comparable stores and 59 non-comparable stores open during the thirty-nine weeks ended September 29, 2012.

Direct sales, including shipping and handling fees, increased $1.8 million, or 6.6%, for the thirty-nine weeks ended September 29, 2012, as compared to the thirty-nine weeks ended October 1, 2011. This increase was due to an increase in the number of books circulated and a higher average revenue per catalog.

Gross Profit

Gross profit increased $153,000, or 20 basis points, for the thirty-nine weeks ended September 29, 2012 as compared to the thirty-nine weeks ended October 1, 2011. As a percentage of net revenues, gross profit margin decreased by 210 basis points for the thirty-nine weeks ended September 29, 2012 as compared to the thirty-nine weeks ended October 1, 2011. This decrease was attributable to a 140 basis point decrease in merchandise margin from markdowns taken to clear slow-moving inventory and a 70 basis point increase in freight costs, store occupancy, distribution and buying costs as a percentage of net revenues.

Selling, General and Administrative Expense

Selling, general and administrative expenses increased by $5.8 million, or 11.7%, for the thirty-nine weeks ended September 29, 2012 as compared to the thirty-nine weeks ended October 1, 2011. This increase resulted in part from a $3.4 million increase in store operating expenses due primarily to the 37 net store additions since October 1, 2011. As a percentage of net revenues, store operating expenses increased to 15.9% for the thirty-nine weeks ended September 29, 2012 as compared to 15.3% for the thirty-nine weeks ended October 1, 2011, primarily due to the leveraging of store payroll as a percentage of net revenues.

General and administrative expenses increased $2.4 million for the thirty-nine weeks ended September 29, 2012 as compared to the thirty-nine weeks ended October 1, 2011. As a percentage of net revenues, general and administrative expenses increased to 8.4% for the thirty-nine weeks ended September 29, 2012 from 7.8% for the thirty-nine weeks ended October 1, 2011. The increase as a percent of net revenues was primarily due to an increase in professional fees related to recruiting expenses for newly hired and open executive positions, an increase in corporate payroll related to new positions, consulting fees related to strategic planning and new systems development, severance benefits to former employees and legal fees related to the class action lawsuit.

As a percentage of net revenues, selling, general and administrative expenses were 24.3% for the thirty-nine weeks ended September 29, 2012 and 23.2% for the thirty-nine weeks ended October 1, 2011 due to reasons discussed above.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $654,000, or 17.1%, for the thirty-nine weeks ended September 29, 2012 as compared to the thirty-nine weeks ended October 1, 2011. This increase was primarily due to capital expenditures from new store construction and upgrades to our information technology systems. Depreciation and amortization expense remained constant at 1.8% as a percentage of net revenues for the thirty-nine week period ended September 29, 2012 and for the thirty-nine week period ended October 1, 2011.


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Interest Income, Net of Interest Expense

Interest income, net of interest expense, was $10,000 for the thirty-nine weeks ended September 29, 2012 and $14,000 for the thirty-nine weeks ended October 1, 2011.

Provision for Income Taxes

Provision for income taxes decreased $2.4 million for the thirty-nine weeks ended September 29, 2012 as compared to the thirty-nine weeks ended October 1, 2011, which was attributable to a $6.5 million decrease in income before income taxes. The effective tax rate was 37.8% for the thirty-nine week period ended September 29, 2012 compared to 37.7% for the thirty-nine week period ended October 1, 2011.

Net Income

Net income decreased $4.0 million for the thirty-nine weeks ended September 29, 2012 as compared to the thirty-nine weeks ended October 1, 2011 due to the factors discussed above.

Liquidity and Capital Resources

. . .

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