Hedge Fund Sees Promise in Wet Seal
The hedge fund coming to the rescue of Wet Seal Inc. is one of the most active traders on Wall Street, a highflying outfit not exactly known for its expertise in selling clothes to teenage girls.
That doesn’t mean S.A.C. Capital Advisors is an unlikely savior for the Foothill Ranch retailer. Wet Seal has suffered through eight straight quarters of losses, its stock has plummeted 81% this year and it recently figured it would end 2004 with only $11 million in the bank -- all factors that no doubt attracted S.A.C. Capital.
Hedge funds often look for deals for their well-heeled investors that are very risky but can yield hefty rewards.
“They are stocks that, on the surface, you’d say, ‘You gotta be nuts,’ ” said James P. Owen, owner of Austin Capital Management, a hedge fund in Austin, Texas, that invests in other hedge funds. “This is admittedly a speculation, but the rewards can be huge if they can pull this off.”
Wet Seal said late Tuesday that it had cut a $55.9-million deal with S.A.C. Capital Associates, an investment firm managed by S.A.C. Capital, and other investors. The infusion of that much money into the retailer, which operates 559 Wet Seal and Arden B. stores, would probably keep it out of U.S. Bankruptcy Court, at least for now.
The market didn’t react much, moving the stock up 7 cents to $1.86 on Nasdaq, which gave Wet Seal a market capitalization of $62.3 million.
S.A.C. Capital is betting that there is a lot more upside to a stock that traded for more than $25 two years ago. And gambles taken by the hedge fund’s founder, Steven A. Cohen, have paid off more often than not.
The fund’s assets stand at about $4 billion. Cohen earned $350 million last year, ranking No. 5 in the hedge fund industry, according to Institutional Investor’s Alpha magazine. This year, Forbes listed him as the 106th-richest American, with $2 billion in assets.
Last month, S.A.C. Capital made headlines when it revealed that it had acquired a 7.5% stake in video rental chain Blockbuster Inc. As of Sept. 30, S.A.C. Capital owned 2.9 million of Blockbuster’s Class A shares, according to a Securities and Exchange Commission filing.
In the last two years, the fund has taken significant stakes in several small companies, including New Frontier Media Inc., Sonus Pharmaceuticals Inc. and Speedcom Wireless Corp. It didn’t make its name by buying into apparel retailers.
“This is not what they’re known for,” B. Riley & Co. analyst Jeffrey Van Sinderen said.
But Wet Seal, he said, with its high-profile woes, captured investors’ attention.
“In this case, they really are saying, ‘We’ll let you own a fairly large part of the company for a relatively small dollar amount,’ ” Van Sinderen said. “That’s the attraction, I think, to investors like S.A.C. Capital and others.”
Former Wet Seal Chief Executive Kathy Bronstein -- fired in 2003 after leading the company for 11 years -- said S.A.C. had contacted her several months ago to ask if she was interested in working with investors to try to revive the retailer.
The firm had “looked at the whole package and felt there was a lot of value” in the retailer, she said in an interview. “They wanted to know if I would be interested in running Wet Seal.... I presented a game plan to them and I never heard from them.”
Bronstein had said in September that she tried and failed to win financial backing for a plan that would have given her an opportunity to move back into the driver’s seat at Wet Seal. When she got wind that the S.A.C. deal was in the works, she said, she told the firm she would be willing to do some consulting.
As it turned out, Wet Seal hired another consultant: It said Tuesday that it had retained Michael Gold, owner of privately held YM Inc. of Toronto, to help it right the business.
YM operates about 400 clothing stores, most of them in Canada, and has been expanding. Last year, it bought the 178-store Suzy Shier chain from La Senza Inc., a Canadian company headed by Wet Seal board member Irving Teitelbaum. YM also operates the Stitches, Sirens and Urban Planet chains.
“There’s no doubt in my mind that he’s going to run” Wet Seal, Bronstein said of Gold.
Wet Seal executives wouldn’t say whether Gold would be a candidate to replace Peter Whitford, who resigned as chairman and CEO on Monday. In an SEC filing, Wet Seal said it had agreed to pay Whitford $2.1 million as part of his termination agreement; he also will get 300,000 options at an exercise price of $1.75 and 200,000 options at a $2 exercise price.
