Wet Seal Beats by 50%

Wet Seal Inc. (WTSLA - Analyst Report) registered decent second quarter 2011 earnings of 3 cents per share that shot up by 50.0 % from year-ago period. Earnings also exceeded the Zacks Consensus Estimate of 2 cents by 50.0%.

The upswing came on the back of success in Arden B stores’ business and continued strength and balance in merchandise assortments, a clarified message of unique fashion at a value in our Wet Seal stores.

Based on the results posted in the second quarter 2011, Warnaco estimates its third quarter 2011 earnings result to be in the range of 5 cents to 6 cents.

The current Zacks Estimate is 4 cents per share for the third quarter of 2011. The estimate for full year 2011 is 22 cents.

Consolidated Revenue and Margins

Wet Seal’s quarterly net sales climbed 13.1% to $148.8 million compared with $131.5 million in the prior-year period, driven by a strong ‘back to school’ sales season. However, sales were behind the Zacks Consensus Estimate of $148 million.

During the second quarter there was no opening or closing of stores. As of July 30, 2011, the company operated 542 stores in 47 states of U.S. and Puerto Rico, including 460 Wet Seal stores and 82 Arden B stores.

The Wet Seal segment formed 84% of total sales at $125 million. Same store sales increased 6.2% year over year during the quarter. $23.7 million sales at Arden B stores formed 16% of total sales with same store sales growth coming to 5% year over year.

Wet Seal forecasts total net sales during the third quarter to be in the range of $159 million to $161 million.

Operating income rose 26.9% to $3.3 million year over year while operating margin contracted 200 basis points in the quarter. Gross margin was $46.07 compared to $38.38 in the previous year.

Selling, General and Administrative expenses went up by 20.03% compared to the corresponding quarter in the prior year, primarily due to incremental selling and distribution costs.

Other Financial Updates

The company exited the quarter with cash and cash equivalents of $109.6 million at July 30, 2011, up from $165.5 million  as on July 30, 2010.

Inventories per square foot went up 2% from the year-ago quarter. Inventory at Wet Seal was up 1% and that at Arden B stores was up by 7%.

The company generated $9.5 million cash from operations and incurred capital expenditure of $8.1 million.

Under a $56.7 million stock repurchase program approved by its board of directors, during the second quarter the company repurchased 8,778,525 shares of its Class A common stock at a total cost of $39.4 million.

Wet Seal faces stiff competition from American Eagle Outfitters Inc. (AEO - Analyst Report) and Gap Inc. (GPS - Analyst Report). We are encouraged to see that Wet Seal is primarily focusing on improving its current stores, which should generate greater profit in the coming quarters. The company’s balance sheet reveals strength. However, highly competitive nature of the women’s apparel industry and seasonal nature of the same keeps us concerned.

Currently, we prefer to rate the stock as Neutral. Further, Wet Seal holds the Zacks #2 Rank, which translates into a short-term Buy rating.

Read the full analyst report on WTSLA

Read the full analyst report on AEO

Read the full analyst report on GPS