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Wet Seal Inc. (WTSL - Analyst Report) reported its first-quarter fiscal 2013 adjusted earnings of 1 cent per share compared to adjusted earnings of 2 cents per share in the year-ago quarter. Profits declined due to lower sales during the quarter. Earnings, however, beat the Zacks Consensus Estimate of a break even result.

Consolidated Revenue and Margins

Wet Seal’s net sales in the reported quarter slipped nearly 5.1% to $140.4 million from $147.9 million in the prior-year period. Lower sales at both Arden B and Wet Seal stores led to this decline. E-Commerce sales, however, increased 6.8% to $6.5 million.

During the fourth quarter, comparable store sales declined 2.9%, which is lower than the decline of 7.7% recorded in the prior-year quarter. The comparable store sales’ decline was due to lower transaction per store. Same-store sales at Wet Seal stores declined 3.4% during the quarter, while at Arden B stores comparable store sales went down by 0.9%.

The significant decline in total sales and comparable sales from the year-ago period was due to the slower pace of economic recovery and lower spending by domestic customers. Unfavorable climate during the earlier months were also responsible for the lower same-store sales during the quarter.

In the first quarter, the company opened two stores and closed six stores. As of May 4, 2013, the company had 526 stores in 47 states and in Puerto Rico. These include 464 Wet Seal stores and 62 Arden B stores.

The gross margin inflated 60 basis points (bps) to 30.1% versus 29.5% a year ago due to an improvement of 10 bps in merchandise margin as well as a 60 bps increase in occupancy leverage. Operating income stood at $3.2 million for the quarter compared to an operating loss of $4.0 million in the prior-year quarter.

Segment Details

The company operates through two nationwide, primarily mall-based, chains of retail stores - Wet Seal and Arden B.

Wet Seal Stores: These stores offer apparels for girls aged between 13 to 19 years. The products in these stores are trendy and competitively priced. Net sales at Wet Seal Stores declined 2.7% to $122.8 million from $126.2 million in the year-ago quarter. Same-store sales declined 3.4% compared with a decline of 7.7% in the prior-year quarter.

Arden B Stores: These stores offer apparels for women aged between 25 to 39 years. The products usually featured in these stores include dresses of contemporary fashion, sportswear and accessories suitable for any occasion. Net sales of $17.6 million at the Arden B stores declined 18.9% from the year-ago quarter. Same-store sales climbed 0.9% year over year compared with a decline of 11.4% in the year-ago quarter.

Other Financial Updates

The company had cash and cash equivalents of $50.3 million as of May 4, 2013 compared with $42.3 million as of Feb 2, 2013. Inventory stood at $36.3 million, down from $40.1 million a year ago.

During the quarter, Wet Seal bought back 1,206,649 shares worth $3.6 million at a average cost of $3.00.

Guidance

Following the sluggish fourth-quarter results, Wet Seal expects to break even or generate a profit of 2 cents per share in the second quarter of 2013. The Zacks Consensus Estimate is currently pegged at a loss of 1 cent per share for the second quarter of fiscal 2013.

For the first quarter, net sales are expected between $138.0 million and $141.0 million and comparable store sales are expected to climb in mid single-digits.

Gross margin is expected between 29.0% and 30.2% and operating loss is expected in the range of $0.1 million to $2.1 million.

Conclusion

Wet Seal’s earnings declined compared to the year-ago quarter due to lower revenues and higher merchandise expenses. Revenues declined due to lower comparable store sales and the macroeconomic headwinds.

Wet Seal currently carries a Zacks Rank #2 (Buy). Other stocks like New York & Company Inc. (NWY - Snapshot Report) with a Zacks Rank #1 (Strong Buy), Gap Inc. (GPS - Analyst Report) and The Stein Mart Inc. both with a Zacks Rank #2 (Buy), are worth considering.

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