Earnings Scorecard: Wet Seal

On March 25, 2011, specialty retailer Wet Seal Inc. (WTSLA - Analyst Report) announced its financial results for the fourth-quarter and year-end 2010.

Street analysts had more than a week to ponder on the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.

Earnings Review

The company reported earnings of 7 cents a share which surpassed the Zacks Consensus Estimate of 4 cents by 75%.Earnings also outpaced the prior year’s profit of 6 cents a share.

Net sales for the quarter grew 9.6% year over year to $165.5 million. Consolidated comparable store sales increased 2.3% during the quarter.

Net sales of the Wet Seal segment surged 9.5% to $138.7 million for the quarter, while comparable sales increased 1.9%. For the Arden B segment, net sales grew 10.0% to $26.8 million, while comparable same-store sales increased 4.8%.

(Read our full coverage on this earnings report: Wet Seal Outpaces Ests

Agreement of Estimate Revisions

The strong performance of the company during the fourth-quarter 2010 has made one analyst move his estimates up for the first and second quarters of fiscal 2011. The analyst has also moved his estimate upward for fiscal 2012 in the past 7 days.

Magnitude of Estimate Revisions

However, with not many analysts moving their estimates upward in the past one week, the Zacks Consensus Estimates, for the first and second quarters of fiscal 2011 has remained at 6 and 3 cents, respectively. For fiscal 2012, the estimates have moved up marginally to 22 cents from 21 cents earlier.

Our Recommendation

Our long-term recommendation on Wet Sealis Neutral as we anticipate it to perform in line with the broader market. Wet Seal focuses on improving its current stores which should lead to more profitable results in the coming quarters.

These improvements include a better product mix at the store level to reflect local demographics; moving stores to off-mall locations; being more aggressive with its markdowns when its fashion choices aren’t popular; and upgrading store designs and fixtures.

However, intense competition from other discounters and department stores and seasonal nature of the company’s business severely undermine the company’s future growth prospects and sustainability.  This leaves limited space for above-market performance of the company. 

The company faces stiff competition from BEBE Stores Inc. (BEBE - Snapshot Report). It currently holds a Zacks #3 Rank. On a long-term basis, we maintain a Neutral rating on the stock, with a short-term Hold rating.

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

Read the full analyst report on WTSLA

Read the full analyst report on BEBE