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<DAILY TROUBLE>
Friday, August 27, 1999
The Wet Seal Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WTSLA)") else Response.Write("(Nasdaq: WTSLA)") end if %>
Phone: 949-583-9029
Website: www.wetseal.com
Price (8/26/99): $15 1/2
HOW DID IT FIND TROUBLE?
What do teens, fashion, and Wall Street have in common? They are all impatiently fickle. Last year mall fixture The Wet Seal and its sister stores owned all three. The stores were packed. The garb was racked. Investors were lip-smacked.
On a roll, the company decided to ramp up expansion plans. Leases were signed and the chain was on a ribbon-cutting pace that was averaging one new store every three days. When Wet Seal had the opportunity to pick up dozens of shuttered Britches locations, it dove right in. What could go wrong? Popularity is permanent, right?
Unfortunately, Wet Seal's pride was too big for its Britches. After record results in fiscal 1998 and a strong first quarter in fiscal 1999, the wear and tear of this fast grower came undone at the seams.
In May, just as the company's second quarter got under way, the shares were trading in the mid-$40s. Same-store sales, the lifeline of retail, began to decline. With fixed overhead in rent, maintenance, and labor, any kind of revenue shortfall weighs heavy on the fundamentals. In June the company announced that earnings estimates for the quarter ending August 1 were too high at $0.44 a share. With comps falling in the "mid-single digits," Wet Seal was looking for earnings to equal fiscal 1998's showing of $0.35 a share for the second quarter.
Momentum cuts both ways, and this time the downward trend continued. Earlier this month the company disclosed that the average sales per store fell 8.5% for the quarter. In the process earnings came in at $0.29 a share -- well below initial and revised projections.
BUSINESS DESCRIPTION
California-based Wet Seal owns and operates 539 stores specializing in contemporary apparel and accessories geared towards young female shoppers, with 198 of the units sharing the flagship moniker. Contempo Casuals makes up the largest of four concepts with 245 stores. Rounding out the company's portfolio is the 78 store Arden B. chain and 18 unisex Limbo Lounge outlets.
Earlier this year the company rolled out its online magalog (part magazine, part catalog) -- BlueAsphalt.
FINANCIAL FACTS
Income Statement
12-month sales: $517.2 million
12-month income: $25.7 million
12-month EPS: $1.99
Profit Margin: 5.0%
Market Cap: $200 million
Balance Sheet (as of May 1, 1999):
Cash: $39.3 million
Current Assets: $91.2 million
Current Liabilities: $75.8 million
Long-term Debt: $1.3 million
Ratios
Price-to-earnings: 7.8
Price-to-sales: 0.4
HOW COULD YOU HAVE SEEN IT COMING?
Adding 126 new stores over the past year was aggressive 31% unit growth for a store chain that had 413 units a year ago. For a company that teetered on debt-ridden obsolescence earlier this decade, growing as a cash-rich retailer this year was not lump-free.
Between the concept conversions and new openings, focus proved to be tough. For investors, the telltale sign came in mid-June. The negative same-store sales were in sharp contrast to the positive same-store sales figures reported over the past few quarters. The company faulted the California and Florida markets for the bulk of the malaise, but other hip retailers, like Limited Too <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TOO)") else Response.Write("(NYSE: TOO)") end if %>, wound up with positive comps for the quarter.
Fashion experts and Wall Street mavens -- and, okay, even some rebellious teens -- can pick up on a trend before the rest of their peers catch on. Two weeks after the bleak outlook the stock still traded as high as $28 7/8. It was an easy out for those who figured the weak comps would continue the same way the positive comps had run perpetually in the past. They were right. Things got worse.
WHERE TO FROM HERE?
That's right, and things have gotten even worse. Three weeks into August the comps are now down in the mid-teens -- or maybe it's the mid-teens who are down on Wet Seal. The company faults the merchandise mix, and that usually means an inventory shakeup full of clearance sales, which will appease thrifty patrons while making shareholders cringe.
It's almost unavoidable now that third quarter expectations of $0.50 a share and season-strong fourth quarter hopes for $1.10 a share will buckle under. Wet Seal is already scaling back new store openings to just 40-50 next year. Conservatively, it should be leaning on the brake pedal even harder until it rights its inventory wrongs, but at least the company realizes that its focus should be on operations rather than grand opening celebrations.
So, throw away the earnings projections for $2.21 a share this year and $2.70 next year like last year's party dress, and wait for the comps to reverse course -- a savvy strategy for those who got out back in June.
If you want immediate optimism check out BlueAsphalt.com. Wet Seal's edgy website is full of clever content and E-commerce potential. Contests, message boards and chatrooms, and the interactively impressive Phoebe's room -- not too shabby. Wet Seal may be taking a page from dELiA*s <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DLIA)") else Response.Write("(Nasdaq: DLIA)") end if %> playbook, rolling out its own iTurf <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TURF)") else Response.Write("(Nasdaq: TURF)") end if %> style domain, but it looks like a promising gateway for a company with 539 living billboards -- and growing, unfortunately.
-Rick Aristotle Munarriz
([email protected])
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