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Wet Seal Q1 Loss Widens

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Wet Seal Inc.’s first-quarter fiscal 2014 adjusted loss of 18 cents per share was in line with the Zacks Consensus Estimate and within the management’s guidance range of a loss 16 to 19 cents. However, it was wider than loss of 1 cent incurred in the year-ago quarter due to weak top line.

Consolidated Revenues and Margins

Wet Seal's net sales in the reported quarter slipped 16.9% to $116.7 million from $140.4 million in the prior-year period due to lower comparable store sales (comps) during the quarter. Net sales marginally missed the Zacks Consensus Estimate of $117.0 million.

During the first quarter, comps declined 16.9% due to a 16.5% decline in comps at Wet Seal and 19.4% decline at Arden B. Comps compared unfavorably with 16.5% decline in the previous quarter and were poorer than a decline of 2.9% in the previous year.

Gross profit dipped 45.3% to $23.1 million compared with $42.2 million a year ago. The gross margin shrank 1130 basis points (bps) to 19.8% versus 30.1% a year ago due to soft sales. Wet Seal suffered operating loss of $14.6 million which compared unfavorably with an income of $1.3 million in the prior-year quarter due to lower sales.

Segment Details

Wet Seal operates through two nationwide, primarily mall-based, chains of retail stores — Wet Seal and Arden B.

Wet Seal Stores: These stores offer trendy and competitively priced apparel for girls aged 13 to 19 years. Net sales at Wet Seal Stores slipped 18.7% to $103.3 million. Same-store sales slipped 16.5% compared with a decline of 3.4% in the previous year due to lower traffic in the stores.

Arden B Stores: These stores offer apparels for women aged between 25 to 39 years which include dresses of contemporary fashion, sportswear and accessories suitable for any occasion. Net sales of $13.3 million at the Arden B stores declined 31.3% from the year-ago quarter. Same-store sales slipped 19.4% compared to a gain of 0.9% in the prior year due to lower traffic.

Financial Updates

The company had cash and cash equivalents of $46.0 million as of May 3, 2014, up from $38.8 million as of Feb 1, 2014. Inventory came in at $31.2 million, down from $38.8 million recorded at the end of the prior quarter.

Second Quarter Fiscal 2014 Guidance

Wet Seal expects to report net loss per share in the 9 to 12 cents range in the second quarter of 2014, wider than the Zacks Consensus Estimate of a loss of 6 cents. It expects comparable store sales to decline in the range of 8% to 11%.

In fiscal 2014, Wet Seal expects to open 10 stores primarily in outlet centers and off-mall locations. It also expects to close 23 Wet Seal stores upon lease expiration.

Following a comprehensive review of the Arden B business carried out by Wet Seal, last month, it announced its plan to wrap up the business to reduce the cost of operation.

Wet Seal expects to record pre-tax cost savings of about $1.3 million, starting July quarter, while also booking charges for severance.

Wet Seal plans to shutter all the 54 Arden B stores by the back-to-school season in second-quarter fiscal 2014. The retailer of women apparels plans to convert 31 Arden B locations to Wet Seal Plus (stores aimed for plus size women) merchandise and the remaining 23 to regular Wet Seal merchandise outlets. 

Wet Seal currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the retail sector that are worth considering include American Apparel Inc. , Foot Locker Inc. (FL - Free Report) and Genesco Inc. (GCO - Free Report) . All these stocks have a Zacks Rank #2 (Buy).

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