Lower Profits to Cut Growth for Wet Seal
Wet Seal Inc., reeling from misjudging the fickle fashion tastes of its young customers, posted lower profits for the second quarter and said it will sharply curtail next year’s expansion plans.
In a particularly gloomy sign, the Foothill Ranch-based specialty retailer also said sales at stores open at least a year--a key industry indicator--dropped 8.5% in the quarter ended July 31, compared with an increase of 4.3% during the same period last year. And sales in some divisions have slipped even further in the current quarter.
“We have not seen any improvement in our sales since the end of the second quarter,” Chief Executive Kathy Bronstein said in a statement. “Comparable store sales for our core Wet Seal and Contempo Casuals divisions are down in the mid-teens as of the end of the third week of [the] third quarter. We have been taking steps to address the issues, which we believe relate to the current mix of the inventory.”
She did not say specifically how the company plans to change its apparel mix, and executives did not return calls.
The company, which had planned to open 75 stores next year, instead will open 40 to 50 to “focus management’s attention” on existing stores, Bronstein said in the statement.
On Tuesday, Wet Seal reported quarterly earnings of $3.7 million, or 29 cents a share, down 24% from $4.9 million, or 35 cents a share, for the same period last year. Overall sales rose 12% to $126.9 million from $113 million.
Analysts have said the company did not accurately judge what items would sell well through the second quarter. It did not invest heavily enough in jeans, which sold well, while overstocking seasonal merchandise that had to be sold at marked-down prices, one analyst said.
Analysts also noted, however, that Wet Seal is skilled at rebounding from such mistakes and already has added more denim to the mix.
Wet Seal, which also operates Limbo Lounge and Arden B. stores, issued two warnings that earnings would fall below expectations during the quarter.
In June, the company said second-quarter profits would be flat because of a dip in sales, causing analysts to lower earnings predictions from about $4.8 million, or 44 cents a share, to $3.9 million, or 36 cents a share.
Earlier this month, Wet Seal said its earnings probably would range between 28 cents and 30 cents a share.
The company also said a delay in mailing catalogs could have contributed to weaker sales. The catalog, which was redesigned, was not mailed out until the third quarter this year. In the previous year, the catalogs were shipped in the first and second quarters.
Wet Seal launched its Web site Aug. 1 to coincide with the new catalog’s first mailing.
“To date, we are pleased with the traffic on the site as well as the percent of catalog customers who are ordering through the Web site,” Bronstein said in the statement. “We believe that both the Web site and the catalog will serve to build brand awareness of our leading private brand, Blue Asphalt.”
Wet Seal’s stock has taken a beating, losing 63% of its value since hitting $45.31 a share May 7. The shares closed Tuesday at $16.94, down 19 cents.
The company announced the quarterly financial results after the market closed.
