Wet Seal Fires CEO as Sales, Earnings Drop

Wet Seal Inc., which lost the pulse of trend-hungry teens after the bohemian fashion fad fizzled last year, fired longtime Chief Executive Kathy Bronstein on Thursday as it announced dismal sales and earnings projections.

The Foothill Ranch-based retailer said Chairman Irv Teitelbaum would act as interim chief executive until it hires a replacement for Bronstein, who had been with Wet Seal since 1985 and was one of the few women leading a publicly held company. She became CEO in 1992.

Teitelbaum, a Canadian resident who is the company’s largest shareholder, declined to say precisely why the 51-year-old Bronstein was let go, but he acknowledged that her departure was linked at least in part to Wet Seal’s recent poor performance.

“There are times when changes are in order,” he said. “We’ve got to roll up our sleeves and get it working again.”

Bronstein, a hard-charging executive who was as confident as she was demanding, could not be reached for comment.

Analysts were surprised by the news about Bronstein, who seemed inextricably linked to the company that operates 606 Wet Seal, Arden B. and Zutopia stores. The Arden B. chain was named after her daughter.

“Her contribution and leadership at Wet Seal have been enormous,” said Richard Jaffe, an analyst with UBS Warburg. “It’s hard to imagine this business without Kathy.”

But analysts also said the board was compelled to take action of some sort because Wet Seal’s performance has been particularly disappointing, even accounting for the weak retail sales environment.

Wet Seal said Thursday that it expected to report a per-share loss of 15 to 20 cents for its fiscal fourth quarter ended Sunday. Analysts surveyed by Thomson First Call were expecting earnings of a penny.

Sales at stores open at least a year, a key indicator of a company’s performance, sank 18% during the quarter and 5.6% for the year. That contrasts with a 4.7% increase the previous fiscal year.

For the month of January, Wet Seal’s same-store sales tumbled 25% -- a drop-off that stands in sharp contrast with some of its rivals’ results.

On Thursday, for instance, Anaheim-based Pacific Sunwear of California Inc. said January same-store sales rose 20%, well above analysts’ estimates. As a result, the Anaheim-based company boosted its earnings forecast for its fiscal fourth quarter ended Friday by 1 cent to 44 cents a share.

Likewise, another teen apparel chain, City of Industry-based Hot Topic Inc., raised its forecast to 49 cents a share for the fourth quarter from 48 cents after reporting a 14% same-store sales gain in January.

Gap Inc., the largest U.S. clothing chain operator, predicted that quarterly earnings would top analysts’ expectations as its January same-store sales jumped 16%. San Francisco-based Gap said it expected to earn 23 to 29 cents a share in the fourth quarter, boosted by a lower tax rate. Analysts had expected earnings of 16 cents a share, according to Thomson First Call.

The news from Wet Seal jangled investors, who at one point in trading sent the company’s stock to a 52-week low. It closed at $7.43, down 12%, on Nasdaq. The share price has fallen 57% over the last year.

“The board and investors, of which Irv Teitelbaum was the largest, were not going to put up with these kinds of results,” said Brian Tunick, an analyst with J.P. Morgan. Still, he added, “I was surprised that it was Kathy that took the fall.”

Bronstein, who remains on Wet Seal’s board of directors, owns 212,000 shares of Wet Seal stock and has 300,000 vested stock options, the company said. She also has been among the highest-paid female executives in the Southland, with a salary and bonus of about $2.6 million in 2001, according to the most recent proxy statement filed by the company.

Teitelbaum declined to disclose Bronstein’s current salary or the value of her severance package. However, Tunick said his understanding is that the company expects to take a charge of $5 million to $6 million in the current quarter, and he estimates that $3.3 million to $4 million of that will reflect Bronstein’s severance agreement.

Bronstein’s “fall from grace,” as one analyst put it, came suddenly.

Less than a year ago, many in the industry were hailing her as a merchandising genius. That’s when the company’s stores were filled with hip-hugging jeans and the soft, gypsy-style apparel that was all the rage. But last fall the bohemian trend waned, and teens shrugged off Wet Seal’s back-to-school offerings, which analysts thought were too sophisticated.

Industry experts initially thought Wet Seal was simply struggling along with other teen-oriented retailers and would bounce back quickly, as it had in the past.

Instead, the troubles continued. Even today, retail experts say fashion trends are working against Wet Seal.

Girls and young women are gravitating toward more basic and preppy looks, which favor retailers such as Gap, and surf-inspired styles, such as those sold by Pacific Sunwear.

Teitelbaum, however, said today’s challenges are no different from fashion shifts of previous years.

“We always run into new, different fashion trends and we have to swing with the punches,” he said.

Despite being at the mercy of trend-conscious consumers, analysts say the company has a sound business strategy that involves, in part, snagging shoppers when they’re girls and keeping them as they move into adulthood. Zutopia caters to girls, Wet Seal targets teens and Arden B. sells to young women.

“All this makes sense,” Jaffe said. “It’s just a question of getting the product right.”

Wet Seal’s balance sheet is also strong, Tunick said. The company boasts $90 million in cash and no debt.

“This company can continue to run at these kinds of depressed levels of earnings and still have several years of cash to burn through before there would be a serious cash crunch,” Tunick said. “That gives them breathing room.”

That’s a good thing, some observers say, because the search for a new CEO may be arduous. Tunick said Gap had to reach outside the apparel business to find its CEO, plucking Paul Pressler from Walt Disney Co.

“Certainly there is a dearth of talent in the retail industry today,” he said.

In an earlier interview, Bronstein said that climbing the corporate ladder was never her goal.

“I always focused on doing what I enjoyed and being as good as I could be at it,” she said.

Even some of those who lauded Bronstein’s efforts thought the time had come for her to move on.

“I think new blood is sometimes a good thing,” said Elizabeth Pierce, an analyst with Wedbush Morgan Securities.

Although “Kathy did a good job of building this business,” she added, “you need someone else in there now.”