Wet Seal Beats Estimates

Wet Seal Inc. ( ) registered decent third quarter 2011 earnings of 5 cents per share that climbed 25.0% from the year-ago period. Earnings also exceeded the Zacks Consensus Estimate of 4 cents by a penny.

The upswing came on the back of increased shopping during the back-to-school shopping period through August and into early September.

Based on the third quarter results and the prior-year quarter’s performance, Wet Seal estimates its fourth quarter 2011 earnings per share to be in the range of 3 cents to 5 cents.

The current Zacks Consensus Estimate for earnings is pegged at 5 cents per share for the fourth quarter of 2011. The estimate for full year 2011 is 21 cents.

Consolidated Revenue and Margins

Wet Seal’s quarterly net sales climbed 3.9% to $152.1 million compared with $146.4 million in the prior-year period. The increase was driven by a strong ‘back to school’ sales season. Additionally, sales were also ahead of the Zacks Consensus Estimate of $148 million.

During the third quarter, the company opened six stores and closed two stores at Wet Seal and it opened four stores while closed none at Arden B. As of October 29, 2011, the Company operated 550 stores in 47 states and Puerto Rico, including 464 Wet Seal stores and 86 Arden B stores.

The Wet Seal segment formed 86% of total sales at $131.21 million. Same store sales shrunk 0.1% year over year during the quarter. Sales of $20.9 million at Arden B stores formed 14% of total sales, with same store sales going down 6.3% year over year.

Wet Seal forecasts net sales during the third quarter to be in the range of $166 million to $168 million.

Operating income rose 19.6% to $6.1 million year over year, while operating margin inflated 500 basis points in the quarter. Gross margin was $46.35 compared with $44.51 in the previous year.

Selling, General and Administrative expenses went up by 4.33% compared with 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 $106.2 million as of October 29, 2011, down from $115.6 millionas on October 30, 2010.

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

The company generated $3.4 million cash from operations and incurred capital expenditure of $7.7 million.

Under the $56.7 million stock repurchase program, approved by its board of directors, during the third quarter the company repurchased 2,314,957 shares of its ClassA common stock at a total cost of $10.6 million. Till now, the company has purchased a total of 12,975,782 shares of its Class A common stock.

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 keep us concerned.

Currently, we prefer to rate the stock as Neutral. Further, Wet Seal holds the Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.