Wall Street Looks Beyond Wet Seal’s Loss Warning; Shares Edge Higher
Wet Seal Inc., which sells clothes to girls and young women, said Thursday that its fiscal second-quarter loss may be much greater than expected as June’s same-store sales plunged.
But Wall Street hardly noticed.
Expectations were already so low for the Foothill Ranch-based retailer’s second quarter that many investors were focusing instead on the third.
Wet Seal shares rose 31 cents to $11.96 in Nasdaq trading after the company reported that it could lose 35 to 45 cents a share in the quarter ending Aug. 2. That would be at least quadruple the 8-cent loss that was forecast by a consensus of analysts polled by Thomson First Call.
For the five-week period ended Saturday, total revenue dropped 15% to $47 million as the company’s namesake chain, which represents the bulk of the business, continued to struggle. The retailer slashed prices on some merchandise, but comparable-store sales, a key measure of a retailer’s health, fell 22%.
“Certainly the estimate reductions were painful, not what people were expecting, but they had already written off the second quarter,” said Elizabeth Pierce, an analyst with Sanders Morris Harris. “The next quarter is what everyone is focused on.”
Company watchers may be less inclined to give the parent of the Wet Seal, Arden B and Zutopia chains a pass if it misses big in the third quarter, which includes the important back-to-school shopping season. August sales in particular will be key to whether Wet Seal has reconnected with its core customer: teenage girls.
“I think they’re looking for a potential turnaround,” said Sarika Sahni, an analyst with Dougherty & Co.
“I would like to see some execution before I get excited about it,” she said. “They’ve consistently missed sales targets and [same-store sales] targets. There isn’t anything fundamentally driving the stock right now.”
Adrienne Tennant, an analyst with Wedbush Morgan Securities, said she doubted the company could reverse its fortunes quickly.
“It’s taken a while to get this bad, and everybody expects a one-quarter turnaround,” she said. “I’m a huge skeptic of one-quarter turnarounds.”
Wet Seal’s earnings plunged 86% last year as the retailer’s fashion compass went haywire in the later part of the year, when it stocked stores with the Bohemian look of peasant blouses and flowing skirts, a nonstarter with its core buyers. Longtime Chief Executive Kathy Bronstein was dismissed in February.
Wet Seal’s woes continued in the first quarter as sales slid 21% and the company lost $8.5 million. Its stock has lost 43% of its value in the last year.
In May, the retailer announced it had hired former Walt Disney Co. executive Peter Whitford to usher in “a new era,” as Chairman Irving Teitelbaum put it. Whitford, who began work last week, declined to be interviewed Thursday.
Analysts say they expect the new chief to take a “big picture” approach instead of being closely involved with merchandise selection, as Bronstein was.
“I think one of Kathy’s downfalls was that she really liked to get into the details, maybe too much,” said Dennis Van Zelfden, an analyst with SunTrust Robinson Humphrey. “I suspect his role will be more shepherding the company toward growth over the next five to 10 years, as opposed to picking out a blue sweater over a pink sweater.”
Fall merchandise, now arriving in some Wet Seal stores, looks promising and should drive sales, Van Zelfden said.
Analyst Pierce said she checked out Wet Seal’s back-to-school styles at Fashion Island shopping center Wednesday, and reported that the clothes are “trend-right,” age-appropriate and easy to wear. She said the styles at the Newport Beach store stretched over three decades, including mod 1960s looks, geeky-retro 1970s fashions and “Flashdance” styles from the 1980s.
If the offerings strike a chord with teenage girls, sales should begin to rebound by August, because all stores are expected to have the merchandise by July 20, Van Zelfden said.
“I still think Wet Seal has a good name that the customer will come back to quickly if the merchandise is right,” he said.
The company is scheduled to report second-quarter results Aug. 21.
