Wet Seal to Sell or Shut Down Its Zutopia Stores

Beleaguered retailer Wet Seal Inc. said Wednesday that it intended to sell or close its “tween”-oriented Zutopia chain and turn its full attention to the teen and young women’s market.

The Foothill Ranch-based company also announced the resignation of Greg Scott, president of Arden B., another one of its four apparel chains, which analysts say lately has been its best-performing division. The company declined to comment on Scott’s departure, and he could not be reached for comment. Jennifer Pritchard, head of the Zutopia chain, was named president of the 105-store Arden B. chain.

Analysts said that snipping itself free of the 31-store Zutopia chain could be a plus for the company, which has posted five consecutive quarters of losses. But the departure of Scott was considered by some to be a blow.

“To me, the loss of Greg is probably more significant” than divesting itself of Zutopia, said Jeffrey Van Sinderen, an analyst with B. Riley & Co., who has a neutral rating on the stock. “This isn’t something that will make me jump to a “buy” rating.”

Scott is credited with turning Arden B. into a trend-setting player in the young women’s contemporary apparel niche since taking the reins almost five years ago. Former Chief Executive Kathy Bronstein, who hired Scott to run the division named after her daughter, called his departure “a huge loss” for the company.

“I can’t think of anything bigger for the Wet Seal corporation than the loss of Greg Scott as president of Arden B.,” said Bronstein, who was fired last February as the company continued to struggle. “Now, we’re going to really see what’s going on at Wet Seal.”

The parent of 621 Wet Seal, Arden B., Contempo Casuals and Zutopia stores has been trying for well over a year to reconnect with the teenage girls who shop at its namesake chain. Wet Seal’s loss tripled in the third quarter ended Nov. 1, while sales fell nearly 6%.

The company has forecast a loss for its fiscal fourth quarter ending Jan. 31 , largely because of a continuing decline in same-store sales -- an important financial gauge for retailers. Wet Seal has been logging negative same-store sales since July 2002, and today will report December results.

Wet Seal does not break out sales for its divisions. Still, analysts say Arden B. struggled in late 2002 and through the first half of last year but managed to turn itself around in the second half of 2003 and lately has been posting positive same-store sales.

“That was a piece of the business that was doing exceptionally well,” said Adrienne Tennant, an analyst with Wedbush Morgan Securities.

But Arden B. represents only about 20% of the company’s sales.

“The turnaround in Wet Seal was not going to happen simply because Arden B. was on fire,” Tennant said.

Regarding the demise of Zutopia, Chief Executive Peter Whitford said that, with the chain struggling in the highly competitive preteen market, the company’s board decided to sharpen its focus on the teen and young women’s markets.

Wet Seal bought Zutopia from children’s retailer Gymboree Corp. three years ago, hoping to capitalize on the growing fashion savvy of young girls. . Since then, however, companies such as Wal-Mart, Target, Kohl’s and Mervyn’s have become craftier at catering to that young customer, Tennant said.

Wet Seal said it expected to record a pretax noncash charge of about $5.5 million in the current quarter for the Zutopia write-down. If a buyer isn’t found, the stores will be closed.

Wet Seal fell 58 cents to $9.02 on Nasdaq. The announcement was made after markets closed.