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Wet Seal Posts Loss on Lower Sales

AEO GPS

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Wet Seal Inc. reported third quarter fiscal 2012 adjusted loss of 11 cents per share compared to adjusted earnings of 5 cents per share in the year-ago quarter. The loss resulted from a decline in sales and margins.

The loss was, however, narrower than the Zacks Consensus Estimate of a loss of 13 cents per share due to better-than-expected sales results. It was also narrower than management’s guidance range of a loss between13 cents and 16 cents.

Consolidated Revenue and Margins

Wet Seal’s net sales in the reported quarter came down 10.9% to $135.5 million from $152.1 million in the prior-year period. Lower sales at both Arden B as well as Wet Seal stores led to this decline. Sales, however, exceeded the Zacks Consensus Estimate of $133.0 million.

During the third quarter, comparable store sales declined 13.5% compared to a decline of just 0.9% in the prior-year quarter. The comparable store sales decline was slightly better than management's expectation of a decline in the range of 14% to 18%.

The significant decline in total sales and comparable sales from the previous year period could be due to the slower pace of economic recovery and lower spending by domestic customers.

After opening five Wet Seal stores and closing one store each of Wet Seal and Arden B during the third quarter, the company has 553 stores in 47 states and Puerto Rico. These include 81 Arden B stores and 472 Wet Seal stores as of October 27, 2012.

Gross margin declined to 19.2% from 30.5% in the prior-year quarter, due to increased spending on improving merchandise. Excluding one-time charges, operating loss was $16.2 million in the quarter compared to operating income of $6.8 million in the prior-year quarter. However, the company’s loss was narrower than the management’s operating loss guidance range of $18.7 million – $22.5 million.

Segment Details

The company operates through two nationwide, primarily mall-based chains of retail stores -“Wet Seal” and “Arden B.”

Wet Seal Stores: These stores offer apparel for girls aged between 13 to 19 years. The products in these stores are trendy and competitively priced. Net sales at Wet Seal Stores declined 10.1% to $117.9 million from $131.2 million in the year-ago quarter. Same-store sales declined 13.5% compared with a decline of 0.1% in the prior-year quarter.

Arden B Stores: These stores offer apparel 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 at the Arden B stores also came down 15.7% to $15.7 million compared with $20.9 million in the year-ago quarter. Same-store sales declined 13.8% year over year compared with a decline of 6.3% in the year-ago quarter.

Other Financial Updates

The company had cash and cash equivalents of $126.3 million as of October 27, 2012 compared with $146.5 million as of July 28, 2012.

The company used $13.7 million cash from operations at the end of the quarter compared with $1.1 million in the last quarter. Capital expenditure amounted to $5.2 million, out of which the company spent $4.0 million on new stores and remodeling of existing stores.

Guidance

Following the sluggish third quarter results, Wet Seal estimates its fourth-quarter 2012 loss per share to be in the range of 3 cents to 6 cents. The Zacks Consensus Estimate is currently pegged at a loss of 3 cents for the fourth quarter of fiscal 2012.

For the fourth quarter, net sales are expected to be between $163 million and $168 million and comparable store sales are expected to decline in mid-single digits.

Gross margin is expected to be between 23.4% and 25.7% of net sales and operating loss is expected to be between $5.0 million and $9.4 million.

The company expects to close four Wet Seal stores and fifteen Arden B stores at the end of the fourth quarter.

For fiscal 2012, the company tightened its capital expenditure plan to a range of $20 million to $21 million from previously announced guidance range of $20 million to $22 million. The company expects to have four net Wet Seal store closings and twenty net Arden B store closings at the end of fiscal 2012.

Our Recommendation

Management is geared up to make its tops for women trendy and increase the variety available in its stores in the coming holiday season. We are also encouraged by the company’s efforts to increase its penetration in the e-commerce business.

However, declining operating income in the recent quarters due to higher selling, general and administrative (SG&A) expenses and promotion activities, limited infrastructure, highly competitive nature of the women’s apparel industry and seasonal nature of the same are matters of concern.

Currently, Wet Seal, which faces stiff competition from American Eagle Outfitters Inc. (AEO - Analyst Report) and Gap Inc. (GPS - Analyst Report), carries a Zacks #2 Rank (short-term Buy rating). Over a long-term, we provide a Neutral recommendation on the stock.

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