Wet Seal Shares Fall 11% on Sluggish Sales Forecast

Shares of trendy apparel retailer Wet Seal Inc. tumbled almost 11% on Thursday after the Orange County company said it expects sales at established stores to be flat in the third quarter and perhaps sluggish for the rest of the year.

Wet Seal, which in addition to its signature stores operates Arden B., Contempo Casual and Zutopia stores, also said it came close to meeting analysts’ earnings expectations for the second quarter ended Aug. 3 despite disappointing sales in July.

Profit was almost $3.7 million, or 12 cents a share, compared with nearly $3.6 million, or 12 cents, in the comparable period last year. The numbers are adjusted for a 3-for-2 stock split in May. A consensus of analysts from Thomson First Call expected earnings of 13 cents.

Revenue increased 8% to $146.2 million compared with the same quarter last year. Sales at stores open at least a year, a key industry indicator because it excludes new and closed stores, rose 1.6% for the 13-week period.

Based on current trends, these comparable store sales could drop 10% to 15% this month, said the Foothill Ranch-based company.

In a conference call with analysts, Chief Executive Kathy Bronstein said lean inventory probably hurt sales in July. Wet Seal stores, for example, ran short of some clothing categories, such as skirts, shorts and capris, she said.

“We were down enough that I think we missed sales,” Bronstein said.

Retailers generally are struggling to balance how much clothing to stock as consumers seem to be more careful about spending. Too much inventory can prompt huge markdowns to clear shelves, which hurts profits.

Wet Seal’s stock closed Thursday at $11.01, down $1.31, on Nasdaq. Some of the selling may have been the result of institutional investors’ disappointment that the company did not announce plans to repurchase shares of its stock, which has lost 30% of its value this year, said Christopher Krueger, an analyst with Dougherty & Co.

Investors probably also were turned off by the company’s less than gung-ho projections for the rest of the year, he said. Wet Seal said it expects flat comparable store sales for the third quarter, given the current business trend. If that happens, earnings in the last quarter would be 49 cents to 53 cents a share, compared with 49 cents in the fourth quarter of fiscal 2001, the company said.

As a result of Thursday’s news, Krueger said he has lowered his per-share earnings expectations to $1.11 from $1.21 for the year.

“It’s just simply another teen retailer having a tough time,” he said.

Wet Seal also announced that it is promoting Susan O’Toole to president of the Wet Seal division. O’Toole, who was instrumental in building the Limited Too clothing chain for girls, was hired earlier this year to head Wet Seal’s smaller Zutopia division, which sells to younger girls.