Wet Seal Shares Drop 20% on Glum Earnings Outlook
Wet Seal Inc.’s stock lost 20% of its value Wednesday as the specialty retailer said it expects second-quarter earnings will fall below analysts’ expectations, a problem Wall Street blamed partly on “a fashion misstep” by the company.
The Foothill Ranch-based retailer said earnings should range between $3.05 million, or 28 cents a share, and $3.27 million, or 30 cents a share, for the three months ended July 31. Analysts were predicting earnings of about $3.92 million, or 36 cents a share. A year ago, the company earned $3.81 million, or 35 cents a share.
Sales at stores open a year or more, a key industry indicator, dropped 8.5% for the quarter, compared to a 4.3% increase in the same period last year, the company said.
It was the second earnings warning Wet Seal had issued for the quarter. In June, the company said second-quarter profits could be flat because of a dip in sales. After that warning, analysts lowered their earnings predictions from about 44 cents a share, or $4.79 million.
Wet Seal’s stock closed Wednesday at $18.56, down $4.56 a share, in Nasdaq trading. The stock has lost more than 60% of its value since hitting a 52-week high of $47 on May 10.
Analysts said the company missed the mark with its merchandise in the second quarter.
“Their stuff wasn’t as attractive as anybody thought it would be. It just wasn’t good,” said Richard E. Jaffee, a PaineWebber analyst. “They turn their inventory very quickly, about 10 times a year. It’s remarkably fast. It means they’re making lots of little bets on fashion.”
Since Wet Seal targets a young buyer, it is particularly susceptible to the whims of fashion, analysts said. The company operates Wet Seal, Contempo Casuals, Limbo Lounge and Arden B. stores.
“The teenage customer is the most fickle consumer,” Jaffee added. Wet Seal “gets it right more times than they get it wrong. But when they get it wrong, it’s a bummer. It’s an earnings disappointment.
“I believe they can manage through this. You can’t sell to this customer and expect to be right every time.”
In particular, the company invested heavily in capris this year, which did very well to a point but are not strong sellers for the back-to-school season, which began in July, said Kelly B. Armstrong, an analyst with First Union Capital Markets. And Wet Seal did not invest heavily enough in denim, which buyers want, she said.
“Sometimes you’re right, sometimes you’re not,” Armstrong said. “They’re bringing in denim inventory as we speak.”
A report issued Wednesday by Wedbush Morgan Securities analyst Joan L. Bogucki said Wet Seal stocked too much seasonal merchandise, such as tank tops and sundresses, which could not be sold at full price. And the stores had too little merchandise with year-round appeal.
The “merchandise mix issues” were limited primarily to Wet Seal and Contempo Casual stores, the report said. Same-store sales of back-to-school merchandise are running about 2% below the levels of a year ago, the report said.
“Nevertheless, we continue to be cautiously optimistic about the fall line, which we previewed at the company’s fashion show in June.”
In addition, the company said it did not mail out catalogs until the third quarter. Last year, catalogs were mailed out in both the first and second quarters.
The earlier catalog was discontinued in the fourth quarter last year and revamped for a new release this summer, Jaffee said. The previous catalog had a broader focus and wider distribution.
“It was not attracting consumers,” he said. “They didn’t generate a lot of business from it.”
The new Blue Asphalt catalog focuses on Wet Seal’s denim line to coincide with back-to-school sales.
Company officials could not be reached for further comment.
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Wet Seal Dives
Wet Seal Inc.’s stock, already in a downward glide, fell 20% Wednesday on news that second-quarter earnings would not match expectations. Weekly closing prices:
May 7: $45.31
Wednesday’s close: $18.56
Source: Bloomberg News
