In a swift overhaul, top officials of troubled teen clothier Wet Seal Inc. — including the chairman — were ousted and replaced by board members handpicked by an activist shareholder that directed the coup.
The Foothill Ranch retailer, which operates about 550 mall-based stores under the Wet Seal and Arden B. brands, has been under attack for months by its third largest shareholder, New York City private equity firm Clinton Group.
“The company now has a newly formed board where the majority have specialty retail experience,” Greg Taxin, managing director of Clinton Group, said in an interview. “We were able to achieve that in a way that allowed for a smooth transition.”
Clinton Group, which holds a nearly 7% stake in Wet Seal, has been calling for change at the company since June. Last month, it bypassed the company to get shareholders’ direct consent to oust most of the board and replace it with a slate proposed by Clinton.
The proxy fight spurred negotiations that abruptly broke down this week when Wet Seal offered — then rescinded a few hours later — a proposal to have four of its directors resign. But the board finally waved the white flag Thursday, Taxin said, after Clinton Group told them more than 50% of outstanding shares had voted to remove directors.
Under the agreement announced Friday, four new board members were seated Thursday night: Mindy Meads, a former co-chief executive of teen clothier Aeropostale; John Mills, a former chief operating officer of Aeropostale; Dorrit Bern, former chief executive of retailer Charming Shoppes; and Lynda Davey, chief executive of investment bank Avalon Group.
Three members of the old board remain, including Kathy Bronstein, a former Wet Seal chief executive.
Ousted were Chairman Hal Kahn and board members Jonathan Duskin, Sidney Horn and Henry Winterstern.
“This settlement will provide for a smooth and orderly transition of the board’s responsibilities, as well as a level of continuity for our employees,” Ken Seipel, Wet Seal’s president and chief operating officer, said in a statement. Wet Seal did not respond to calls for further comment.
Industry watchers say the new board’s first mission is to find a new chief executive to replace Susan McGalla, who was fired in July after months of falling sales and a racial discrimination lawsuit filed by three former store managers.
“The first and most important job is to find a good CEO, the kind of CEO who can come up with vision and can attract the people to execute the vision,” said Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates. “There is no way to stop the bleeding without it.”
The new chief executive will have a tough path to forge. Analysts say Wet Seal has been floundering in a highly competitive market crowded with rivals such as Forever 21, H&M; and Zara.
The company announced in August a strategy reboot and return to its fast-fashion roots by quickly rushing trends to shelves, abandoning efforts spearheaded by the former chief executive that called for unique designs. The company has suffered 13 straight months of falling same-store sales, including a 12.7% drop in September.
Teen retailers have been squeezed during the recession as adults snap up jobs traditionally held by teenagers, who might shop at Wet Seal, said Ron Friedman, a retail expert at advisory and accounting firm Marcum in Los Angeles.
“They suffer the most because teens have less income,” Friedman said. “The market is so competitive right now, so that is why you are seeing that the few good guys are doing well, but most are finding a difficult market right now.”
Some retail analysts predict Wet Seal could be sold once performance improves. Taxin of Clinton Group, which had encourage the retailer to find a buyer in July, said that option will be on the table after a new CEO is found and the company rallies.
“I would not expect a fast sale,” Taxin said. “A board of course has to be thinking about whether a company should remain independent or can deliver more value to shareholders by selling. But that time is once a business shows concrete signs of being turned around.”