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Wet Seal Inc. (WTSL - Analyst Report) reported fourth quarter fiscal 2012 adjusted loss of 6 cents per share compared to adjusted earnings of 3 cents per share in the year-ago quarter. The loss resulted from a decline in sales and margins.

The loss was in line with the Zacks Consensus Estimate and the most recent guidance provided by the company.

Consolidated Revenue and Margins

Wet Seal’s net sales in the reported quarter slipped nearly 1% to $161.7 million from $163.2 million in the prior-year period.  Lower sales at both Arden B and Wet Seal stores led to this decline. Sales, however, exceeded the Zacks Consensus Estimate of $159.0 million.

E-Commerce sales improved 19.5% during the quarter backed by ongoing refinements and new strategic initiatives.

During the fourth quarter, comparable store sales declined 8.3% compared to a decline of 5.5% in the prior-year quarter.  The comparable store sales decline was in line with management’s expectation provided during the third quarter earnings conference call.

The significant decline in total sales and comparable sales from the year-ago period is due to the slower pace of economic recovery and lower spending by domestic customers.  Transactions per store declined although traffic was on the rise implying that window shoppers increased. Since ecommerce sales increased significantly, this could also be an indication of showrooming by customers.

After opening four Wet Seal stores and closing eight and nineteen Wet Seal and Arden B stores respectively, during the fourth quarter, the company has 530 stores in 47 states and Puerto Rico. These include 468 Arden B stores and 62 Wet Seal stores as of February 2, 2013.

The gross margin shrank 560 basis points to 24.8% from 30.4% in the prior-year quarter, due to increased spending on improving merchandise and occupancy deleverage. Operating loss was $25.5 million in the quarter compared to operating income of $2.2 million in the prior-year quarter.

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 1.1% to $137.2 million from $138.8 million in the year-ago quarter. Same-store sales declined 9.1% compared with a decline of 4.6% in the prior-year quarter.

ArdenB 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 of $24.4 million at the Arden B stores were almost flat with the year-ago quarter. Same-store sales declined 3.1% year over year compared with a decline of 11.0% in the year-ago quarter.

Full Year Results

For fiscal 2012, the company reported adjusted loss of 22 cents per share compared to adjusted earnings of 19 cents per share in the year-ago quarter.  The loss was, was in line with Zacks Consensus Estimate and the most recent guidance provided by the company.

Consolidated Revenue and Margins

Wet Seal’s net sales in the reported quarter slipped 6.4% to $580.4 million from $620.1 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 $578.0 million.

Other Financial Updates

The company had cash and cash equivalents of $110.0 million as of February 2, 2013 compared with $126.3 million as of October 27, 2012.

The company used $12.4 million of cash in operations during the quarter compared with $14.9 million in the last quarter. Capital expenditure amounted to $20.4 million, out of which the company spent $15.0 million on new stores and remodeling of existing stores.

Guidance

Following the sluggish fourth quarter results, Wet Seal estimates its first-quarter 2013 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 1 cent for the first quarter of fiscal 2013.

For the first quarter, net sales are expected to be between $139.0 million and $147.9 million and comparable store sales are expected to decline in mid-single digits.

Gross margin is expected to be between 26.2% and 27.7% of net sales and operating loss is expected to be between $2.7 million and $5.4 million.

The company expects to open 19 new Wet Seal stores and close nine Arden B stores at the end of the first quarter.

Conclusion

Wet Seal posted a loss in the fourth quarter compared to an income earned a year ago due to lower revenues and higher merchandise expense. Revenues also declined due to low comparable store sales and macroeconomic headwinds.

Wet Seal currently carries a Zacks Rank #3 (Hold). Other stocks like Hanesbrands Inc. ( HBI ), Gildan Activewear (GIL - Snapshot Report) and PVH Corp (PVH - Analyst Report) both with a Zacks Rank #2 (Buy), are worth considering.

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