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Wet Seal Inc.’s (WTSL - Analyst Report) third-quarter fiscal 2013 adjusted loss of 12 cents per share was in line with the Zacks Consensus Estimate. However, it was wider than a loss of 11 cents incurred in the year-ago quarter. Higher merchandise margins and tight expense control were offset by soft revenues during the quarter. The loss was significantly wider than management’s guidance of 2 cents to 3 cents per share.

Consolidated Revenues and Margins

Wet Seal's net sales in the reported quarter slipped nearly 5.8% to $127.7 million from $135.5 million in the prior-year period. Sales declined mainly due to a calendar shift compared to the year-ago quarter. Sales also lagged the Zacks Consensus Estimate of $134 million by 4.7%.

Categories like accessories, footwear, dresses and sweaters posted sales gain during the quarter.

During the third quarter, comparable store sales remained almost flat as 5% gain in transaction per store was offset by a decline of the same amount in units per transaction. Comps gain was softer than an increase of 3.6% in the prior quarter. However, comps were better than a decline of 13.7% in the previous year.

Gross profit increased 11% to $28.9 million compared with $26.0 million a year ago. The gross margin inflated 350 basis points (bps) to 22.7% versus 19.2% a year ago due to an improvement of 350 bps in merchandise margin as well as 40 bps increase in occupancy leverage. Operating loss stood at $9.8 million for the quarter narrowed from an operating loss of $16.2 million in the prior-year quarter due to lower selling, general and administrative expenses.

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 slipped 2.6% to $114.9 million. Same-store sales gained 1.7% 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 27.5% from the year-ago quarter. Same-store sales slipped 6.7%.

Other Financial Updates

The company had cash and cash equivalents of $27.8 million as of Nov 2, 2013 compared with $27.8 million as of Aug 3, 2013. Inventory stood at $42.6 million, up from $40.9 million recorded at the end of the prior quarter.

Fourth Quarter Guidance Weak

Wet Seal expects to report net loss in the range of 14 cents to 17 cents in the fourth quarter of 2013..  

For the fourth quarter, net sales are expected between $134.0 million and $137.0 million and comparable store sales are expected to decline in the high-single to low-double digits.

Management’s guidance falls short of the Zacks Consensus Estimate of a loss of 12 cents per share and a sales estimate of $159 million.

Gross margin is expected between 21.9% and 23.2%, lower than the year ago levels. Operating loss is expected in the range of $11.6 million to $14.1 million.

Conclusion

Wet Seal currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks to consider in the wholesale sector include Hanesbrands Inc. (HBI - Analyst Report), Quicksilver Inc. (ZQK - Snapshot Report) and Micheal Kors Inc. (KORS - Analyst Report). While Hanesbrands and Quicksilver carry a Zacks Rank #1 (Strong Buy), Micheal Kors has a Zacks Rank #2 (Buy).

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