Shares of Wet Seal Drop Despite High Earnings

By GREG HERNANDEZ and LESLIE EARNEST

May 28, 1999 12 AM PT

TIMES STAFF WRITERS

Three weeks after hitting an all-time high, shares of Wet Seal Inc. have skidded 37% in part because of investor concern over slower-than-anticipated first-quarter sales.

The Foothill Ranch-based retailer of young women’s apparel reported a 26% jump in first-quarter profits May 19. The week before, its stock surged to a high of $47 and fell back to close at $46.75 that day.

For the record:

12:00 a.m. May 30, 1999 For the Record
Los Angeles Times Sunday May 30, 1999 Orange County Edition Business Part C Page 6 Financial Desk 1 inches; 21 words Type of Material: Correction
Wet Seal--Wet Seal Chief Executive Kathy Bronstein owns 467,092 Class B shares of the company’s stock. The shares were not included in a story Thursday.

But Wet Seal shares have since plunged, closing Thursday at $29.75, down $1.38 from Wednesday’s close, in Nasdaq trading.

“Basically they reported first-quarter earnings that were better than expected, yet sales fell short of our forecast,” said analyst Joan Bogucki at Wedbush Morgan Securities, who last week downgraded Wet Seal’s stock to “long-term attractive,” from “buy.”

“We think that current sales trends will pick up if the weather gets warmer, but we don’t have any visibility as to when that’s going to take place,” she said. “Longer term, we like the company.”

Because sales were not up to the company’s plan during the last two weeks of the quarter, some investors may fear that the trend will continue into the second quarter, Wet Seal President Edmond Thomas said Thursday.

He declined to comment on this month’s sales, saying it is not the company’s policy to reveal such information until the end of the quarter.

“As far as the business goes, everything’s fine,” Thomas said. “There is nothing fundamentally changed or wrong, and we feel pretty good about all of our divisions. We are continuing to roll out our growth plans for this year.”

Wet Seal expects to open a total of 108 stores in 1999, including the 85 that opened in the first quarter, he said. The company intends to open 75 stores next year.

In addition to its signature Wet Seal stores, the company also operates Contempo Casuals, Arden B. and Limbo Lounge stores. Wet Seal operates 538 stores in 42 states, Washington, D.C., and Puerto Rico.

Wall Street is expecting the company to report earnings of $4.7 million, or 44 cents a share, in the second quarter ending July 30. A year ago, Wet Seal earned $3.4 million, or 25 cents a share, in the comparable period.

In the first quarter, which ended May 1, Wet Seal’s earnings rose 26% to $4.4 million, or 34 cents a share, exceeding analysts estimates by 10%. Sales increased 17%, to $122.8 million. But sales at stores open more than a year, a key measure of growth, grew 3%, less than analysts had expected.

Bogucki said the performance of the company’s 76-store chain of Arden B. stores, which caters to women in their 20s and early 30s, has yet to be determined.

“We like their multiconcept strategy, and we think Arden B. has the potential to become a leading brand in the contemporary women’s segment,” she said.

“However, in the near term, we think there’s limited visibility about the performance of the Arden B. concept. We would be willing to get more aggressive on the stock later on as these things become less cloudy.”

Retail expert Margaret Gilliam said that Wet Seal’s lower-than-anticipated same-store sales may have “spooked some people.” But she said Wet Seal is “a great company,” and owns some of its stock.

“It has always been a very volatile stock,” she said. “And the market has not exactly been a bed of roses lately.”

On April 28, about two weeks before the first-quarter earnings report, Wet Seal Chief Executive Kathy Bronstein sold 53,000 shares--acquired by exercising options--at prices ranging from $41 to $41.88 a share, grossing at least $2.1 million. She still owns 3,923 shares.

Wet Seal Chairman Irving Teitelbaum sold 40,000 shares, also acquired by exercising options, at prices ranging from $40.63 to $40.97. Teitelbaum exercised his options at $20 a share, meaning he netted $873,250, less trading costs.

Paine Webber analyst Richard E. Jaffe, who has a “buy” recommendation on Wet Seal, said any dips in sales usually can be attributed to “fickle teen-aged fashion.” He said the company historically has managed to update its merchandise to meet the latest trends.

“They are particularly well-managed and have a strong and successful track record,” he said.

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Wet Seal Slide

Wet Seal Inc.’s stock, which hit a 52-week high just three weeks ago, has taken a drubbing since then, falling 36%. Daily closing prices:

May 3: $44.25

May 4: $43.75

May 5: $45.75

May 6: $43.38

May 7: $45.31

May 10: $46.38

May 11: $45.50

May 12: $45.25