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Surviving Body Central in a Wal-Mart World

NEW YORK ( TheStreet) -- If you're a current Body Central (BODY) investor Monday's press release must have felt like the button on your pants broke at the moment you started an important meeting.

Body Central has lost about 65% of its market cap from a year ago and all of it within the past six weeks. Body Central's CEO Allen Weinstein (no relation to author) announced writedowns due to slow moving inventory and an impact on earnings guidance. Today's guidance revision is only six weeks after the last earnings release. Weinstein stated:
"Our second quarter comparable sales remain soft and have not improved since April. We continue to diligently manage inventory and to take aggressive markdowns on slow moving items. As a result, we now expect second quarter sales and gross margin to be lower than contemplated in our May 3rd release"

The soft economy is allowing Wal-Mart (WMT - Get Report) and Target (TGT) to execute well; however, they are not the only ones. Ross Stores (ROST) and The Gap (GPS - Get Report) are both up with conviction from a year ago.

Based on my experience with gap downs following reductions in guidance similar to Body Central, investors may not see the short-term low until Tuesday or Wednesday. With Monday's closing price of $8.22 only 15 cents off the low of the day, more downside pressure is likely.

Bargain hunters and short sellers covering positions could push the price up about 30% to 50% in relation to the gap down price this week. Looking at the chart, I expect short-term resistance near $12.

Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $8 a share Tuesday, but also be prepared for bargain hunters to start positions under $8 as an entry. Body Central doesn't have debt and the price-to-earnings multiple is under 10.

If you are looking for Monday's drop to signal a buying opportunity, you are more likely going to find it at the end of the day Tuesday or opening on Wednesday. There is no hurry jumping on board with Body Central. Stocks dumping as a result of lowered guidance usually take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $12 as the one that "sticks."

Object Lessons

Want to see the result of a classic earnings miss a few weeks after the fact? Take a look at Pandora (P). Pandora disappointed and traded from $14 down to an intraday low under $8. Also, take close note of the next few days after earnings. This is a classic pattern that is easy to see. Simply use your software to look at charts from the past few quarters and review the ones that gapped down the next day. The high placed a couple of days after the gap down in Pandora is now resistance.

Operating margins, while already low compared to Limited and Ross stores, appear closer to Wal-Mart and Target. Without a strong holiday season, an operating margin drop below the Gap and closer to Aeropostale (ARO - Get Report) may become a reality.

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BODY $0.01 13.13%
ARO $0.04 35.59%
GPS $22.74 0.49%
WMT $67.19 0.28%
LTD $0.00 0.00%


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