2 Retailers Report Disappointing Profits
Two Southland retailers that target fickle teenage consumers apparently have committed some fashion “don’ts.”
Shares of Pacific Sunwear of California Inc. (ticker symbol: PSUN) fell 26% Tuesday after the company said April sales rose less than expected. And Wet Seal Inc. (WTSLA), still struggling to rebound after misjudging teens’ apparel desires last year, warned that its first-quarter earnings will fall short of analysts’ expectations.
Pacific Sunwear’s stock dropped $9.31 to $26.50 in heavy Nasdaq trading. The company said sales at stores open a year or more rose 1.6% in April, while analysts were expecting an increase of up to 8%. The company attributed the results to slower-than-expected sales of summer goods and men’s clothes.
Meanwhile, Foothill Ranch-based Wet Seal announced after the market closed that its earnings will be 16 cents to 18 cents a share for the quarter ended Saturday, down from analysts’ consensus estimate of 23 cents a share and below the year-ago earnings of 34 cents a share.
April was a rough month for apparel retailers as customers in cooler climates shunned warm weather offerings, said Elizabeth Pierce, an analyst with Wedbush Morgan Securities.
In addition, some observers are concerned that rising interest rates may curb consumer spending.
“It’s a choppy time for retailers in general, so any disappointment gets magnified,” Scott Swanson, an analyst at Roger Engemann & Associates, told Bloomberg News. Engemann & Associates sold its Pacific Sunwear shares during the last six months.
Despite the April sales performance, Pacific Sunwear said it expects to meet analysts’ profit forecasts for its first quarter. The company has surpassed expectations for the last 19 quarters, according to First Call/Thomson Financial.
While both Orange County companies woo teens and young adults, analysts said their situations are markedly different.
Wet Seal has been struggling since last summer, when it had trouble finding the right mix of merchandise. Analysts said Wet Seal’s back-to-school outfits were too dressy and its holiday clothes were too casual.
Some have also questioned what they said was Wet Seal’s shift away from its jazzier “club wear” toward more casual clothing. Analysts have warned that the company needs to think carefully about its direction.
They said Chief Executive Kathy Bronstein had been distracted by the company’s newest chain, Arden B., which targets slightly older customers. Most of the retailer’s earnings and opportunities center on its Wet Seal and Contempo Casuals stores, they said.
“It took her eye off the ball at Wet Seal,” said Richard Jaffe, an analyst with PaineWebber.
Bronstein has since refocused on the Wet Seal stores. The retailer last month hired a new executive to oversee Arden B.
“My outlook remains guarded [but] I’m clearly encouraged by the new hire, Greg Scott,” Jaffe said.
Foot traffic has picked up in Wet Seal stores, said Wedbush Morgan’s Pierce.
While Wet Seal has repeatedly issued warnings in recent quarters that it would miss analysts’ expectations, some analysts said Tuesday that they think the company is moving in the right direction.
Analysts have generally been positive about Pacific Sunwear, which had a strong 1999 and has stepped up its advertising to coincide with aggressive expansion plans. Pierce said she is maintaining a “strong buy” rating on the company despite its April performance.
“It’s all about expectations. And that’s why the stock got penalized, in my mind,” she said. “I don’t think it in any way shape or form says there’s something wrong with the PacSun concept.”
Pacific Sunwear Chief Financial Officer Carl Womack had no comment Tuesday on the drop in the company’s stock price. Wet Seal executives could not be reached for comment.
Wet Seal’s stock closed at $18.25, down 13 cents in Nasdaq trading.
Other stores with a focus on Generation Y customers have reported dimming results for the quarter and have seen their stocks slump, Reuters reported.
Clothing and accessories company Guess Inc. (GES) saw its stock beaten down nearly 20% on Tuesday because the youth-oriented retailer’s higher-than-expected first quarter inventory levels could indicate a sales slowdown, analysts said. Shares slipped $5.56 to $22.25 on the New York Stock Exchange.
On Monday, Los Angeles-based Guess reported quarterly earnings of 35 cents per diluted share, beating Wall Street estimates. But results failed to please investors, who have become extremely sensitive to any report of high inventory levels--usually a sign of declining sales, analysts said.
The rise in inventory levels is not company-specific but an ailment of the Gen-Y retail sector, focusing on youth ages 10 to 24, according to analysts.
“Generation Y stocks have been one of the most compelling sectors for companies to focus on and exploit,” said Todd Slater of Lazard Freres. “Over the last five years, numerous competitors have been created and they have expanded. The supply may be starting to outstrip the demand,” Slater added.
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Fickle Fashion Stocks
Pacific Sunwear shares were pummeled Tuesday after the retailer warned of disappointing sales. Meanwhile, retailer Wet Seal issued an earnings warning after trading ended. Monthly closes and latest for each on Nasdaq:
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Pacific Sunwear
Tuesday: $26.50, down $9.31
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Wet Seal
Tuesday: $18.25, down 13 cents
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Source: Bloomberg News
