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Wet Seal Inc.(WTSL - Analyst Report) reported second-quarter fiscal 2013 adjusted earnings of a penny per share, which was in line with the Zacks Consensus Estimate. Results were much better than the loss of 7 cents per share suffered in the year-ago quarter. Profits improved on the back of strong comps, higher merchandise margins and tight expense control during the quarter. Earnings were within management’s expectation of a break-even to a profit of 2 cents during the quarter.

Consolidated Revenues and Margins

Wet Seal's net sales in the reported quarter rose nearly 1.5% to $137.3 million from $135.3 million in the prior-year period. Sales rose on the back of higher sales in the Wet Seal stores. E-Commerce sales remained flat during the quarter.

Categories like leggings, graphic tees, dresses and accessories posted decent sales during the quarter. Online Junior Plus business also performed well during the quarter.

During the second quarter, comparable store sales rose 3.7%, much better than a decline of 11.1% in the comparable prior-year quarter. Comps were strong on the back of improved performance of both the Wet Seal and Arden B stores and higher transactions. Aggressive promotions, marketing and strong sales team helped Wet Seal gain in comps during the quarter.

In the second quarter, the company opened one and closed one Wet Seal store bringing the total store count in 47 states and in Puerto Rico to 525 as of Aug 3, 2013. These include 464 Wet Seal stores and 61 Arden B stores.

The gross margin inflated 680 basis points (bps) to 29.6% versus 22.8% a year ago due to an improvement of 470 bps in merchandise margin as well as a 210 bps increase in occupancy leverage. Operating income stood at $1.0 million for the quarter improving from an operating loss of $19.5 million in the prior-year quarter.

Segment Details

Wet Seal 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 went up 6.0% to $120.6 million. Same-store sales gained 3.9% backed by higher transactions and higher unit per transactions.

ArdenB 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 $16.7 million at the Arden B stores declined 18.9% from the year-ago quarter. Same-store sales climbed 2.0%.

Other Financial Updates

The company had cash and cash equivalents of $27.8 million as of Aug 3, 2013 compared with $50.3 million as of May 4, 2013. Inventory stood at $40.9 million, up from $36.3 million recorded at the end of  the prior quarter.

During the quarter, Wet Seal bought back 4.3 million shares worth $21.4 million at an average cost of $4.89 per share.

Guidance

Wet Seal expects to report net loss in the range of 2 cents to 3 cents in the third quarter of 2013 compared to a net loss of 17 cents recorded in the year-ago period. The Zacks Consensus Estimate is currently pegged at break-even point for the third quarter of fiscal 2013.

For the third quarter, net sales are expected between $135.0 million and $138.0 million and comparable store sales are expected to climb in mid single-digits.

Gross margin is expected between 26.9% and 27.9% and operating loss is expected in the range of $0.1 million to $2.1 million.

Management expects to open 22 Wet Seal outlets between late-Oct and mid-Nov. Most of these shops are expected to be in the outlet centers, where Wet Seal brand is under penetrated.

Conclusion

Wet Seal's earnings improved compared to the year-ago quarter due to better top-line results and margin expansion. Revenues improved backed by higher comparable store sales and higher transaction.

Wet Seal currently carries a Zacks Rank #3 (Hold). Other stocks like Express Inc. (EXPR - Snapshot Report), Buckle Inc. (BKE - Snapshot Report) and Citi Trends Inc. (CTRN - Analyst Report) all carrying a Zacks Rank #2 (Buy), are worth considering.

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