Bad News Tugs on Wet Seal’s Stock

Wet Seal Inc.’s road to recovery grew a little bit longer Thursday.

Shares in the teen apparel retailer plunged 11.5% after the company reported that its loss tripled in the third quarter, that its fourth quarter would be gloomier than expected and that its chief financial officer was resigning.

The parent of 622 Wet Seal, Arden B., Contempo Casuals and Zutopia stores reported a net loss of $7.5 million, or 25 cents a share, compared with a loss of $2.5 million, or 8 cents, in the year-earlier quarter. Slimmer profit margins were attributed in part to lower markups on some items in Wet Seal stores and “significant markdowns” to unload back-to-school merchandise.

Sales for the period ended Nov. 1 fell nearly 6% to $136.1 million. Sales at stores open at least a year, or same-store sales -- a key indicator of a retailer’s health -- fell 10.2%, on top of a 9.6% drop in same period last year.

The retailer, based in Foothill Ranch, has been struggling for more than a year to reconnect with the teenage girls who shop in its namesake chain. In fiscal 2002, the company saw its earnings plummet 86%, while same-store sales had dropped 5.6%. For the first nine months of this year, Wet Seal lost $29.9 million, or 99 cents a share.

Though the quarterly loss was in keeping with forecasts of analysts polled by Thomson First Call, the company’s projection for the current quarter disappointed Wall Street. Wet Seal said it expected to record a fourth-quarter loss of 16 cents to 21 cents a share, assuming that same-store sales decline 5% to 7% for the quarter.

Analysts thought the company would break even, which would be an improvement over last year’s fourth-quarter loss of 19 cents a share.

“That definitely came as a surprise,” said Jeffrey Van Sinderen, an analyst with B. Riley & Co. “That was a little disappointing for people, given that they’re up against easy numbers.”

Investors promptly cut the price of the stock, and shares tumbled $1.30 to $10.05 on Nasdaq.

In a conference call with analysts and investors, Chief Executive Peter Whitford offered little information beyond the current quarter. He did say that month-to-month same-store sales trends have improved recently.

“As we enter the fourth quarter and the holiday season, we expect to see a continuation of the sequential improvement in our comparable-store sales trend,” he said in a statement.

The company, which has been cutting expenses, also said it planned to trim its store base by a total of about 10 stores next year.

Whitford, a former Walt Disney Co. executive, was brought in to replace longtime Chief Executive Kathy Bronstein, who was fired in February. That move prompted a broader management shake-up that included naming Allan Haims, another former Disney executive, president of the Wet Seal division.

Still, analysts said they were surprised at Thursday’s announcement that Chief Financial Officer William Langsdorf would leave in January to “focus on family and personal concerns.”

That news, combined with the disappointing fourth-quarter forecast, probably unnerved investors, said Adrienne Tennant, an analyst with Wedbush Morgan Securities.

“You tend not to want to see a key member of management leaving just before the critical holiday season,” she said, referring to the timing of the announcement.

Joseph Deckop, another former Disney employee who joined Wet Seal this year as executive vice president of central planning and allocation, will serve as interim chief financial officer.

Deckop has “a wealth of financial experience with specialty retail companies,” including nine years as Victoria’s Secret’s chief financial officer, Wet Seal said.

Just last month, the company announced the resignation of Walter Parks, executive vice president and chief administrative officer, saying his duties would be assumed by Langsdorf and Deckop.

Langsdorf’s departure will be a “short-term negative” for the company but ultimately will be helpful in allowing Whitford to continue hand-picking his team, said Eric Beder, an analyst with Northeast Securities.

Wet Seal needs stronger division heads now than during Bronstein’s reign, when the retailer largely was controlled from the chief executive’s office, he said.

“In many respects, the company was run by one person,” Beder said. “What Peter Whitford is trying to do is decentralize the business and give a lot more power at the divisional management level.”

“The new management team is now primarily from Disney,” Van Sinderen added. “The burden of proof, so to speak, is really on them to show they can execute a turnaround. They seem to have significant experience, but time’s going to tell.... I think it’s too early to know how it’s all going to play out.”

Tennant maintains that the company is making progress, including hiring fashion designer Victor Alfaro as Wet Seal’s senior vice president, creative director. The fruits of the new design team’s efforts should be fully evident by next fall’s important back-to-school shopping season, analysts say.

But Beder said indicators that the turnaround is gaining traction should become apparent before then.

By the second quarter, “if we’re not really seeing signs of a definitive turnaround, you have to really worry,” he said.