Wet Seal’s Woes Are Far From Over

by Alyssa Oursler | July 24, 2012 7:55 am

Momentum investors got a blast from the past Monday, when retailer Wet Seal (NASDAQ:WTSLA[1]) made big-move headlines.

Unfortunately, that move was down.

On Monday, Wet Seal — which operates about 450 Wet Seal stores and about 80 Arden B locations — fell 13% on the news that it fired its CEO[2] and lowered its outlook.

Wet Seal has gone out of style just as fast as the celebrity trends it imitates and sells to mall-roaming teens. Whereas WTSLA once was the toast of the early aughts, trading for almost $25 per share in its 2002 heyday, it now can be found on the bargain bin for about two bucks and change — a roughly 90% discount. In the past year alone, shares have been cut nearly in half.

And despite its severely depressed price, it’s still not worth picking up. Here’s why:

To start, going into its next earnings report (due out Aug. 13), things are only looking worse. The company announced that same-store sales are expected to fall even more than originally predicted: A drop of 10% to 11% is now anticipated, down from a previously expected range in the single digits. That wilting will come amid six consecutive months of declines, including drops of 8.8% in May, 9% in June[3] and 13% so far in July. WTSLA has been forced to open fewer Wet Seal stores and close some Arden B locations as a result of its sales woes.

Wet Seal also lowered its second-quarter earnings outlook[4] to a loss of 6 to 7 cents per share, vs. initial guidance of a 3-to-6-cent loss and less than the 5-cent loss expected by Zacks Equity Research[5]-polled analysts. Those new estimates do not even figure in non-cash asset impairment and CEO severance costs, which will increase the loss.

Wet Seal attempted to turn things around of late by selling full-priced products online and making some changes to its product line. The first one paid off at least a bit, as e-commerce slowed its decline, only falling 5% in June as opposed to a 17% decrease a year before.

Still, analyst Brian Sozzi of NBG Productions thinks the lack of online promotions hurt the company[6], while its product line remains as mismatched as ever.

Wet Seal has tried to set itself apart from other retailers by following celebrity and runway trends. Unfortunately, this strategy has made it so the first word that comes to mind upon arrival to a Wet Seal store is “scattered.” And not just scattered styles, but scattered piles and racks — just about every store I’ve walked into has been messy and difficult to shop.

Click to EnlargeFunny, that. “Scattered” also is a great way to describe Wet Seal’s stock.

As you can see in the accompanying chart, WTSLA hasn’t been able to sit still in the past five years.

Of course, in the late ‘90s and early aughts, it was worse. In 1997, for example, WTSLA doubled its value of $6 over the course of the year. Two years later, it jumped from $14 to $20, before dropping all the way down to $6. In 2001, it reached a peak of $25 following a stock split, then oscillated here and there before falling below $1 in 2004. It made its way back to around $7 after that, but then the financial crisis hit and the stock crashed to around $2.

You get the point.

Wet Seal does boast cheap prices, which in theory could have helped the store attract the many penny-pinching customers helping fuel dollar stores and other retail discounters through the slow economic recovery. Its cheap prices, however, seems to come as a result of cheap quality and (if you ask me) cheap taste (Jezebel agrees[7] that it is “American Eagle Outfitters’ tacky, wannabe-sexy[8] little sister”).

However, higher-quality (and better-organized) retailers like American Eagle (NYSE:AEO[9]) — where newly ousted CEO Susan McGalla was once president — and Aeropostale (NYSE:ARO[10]) have hardly struggled, showing year-to-date gains of at least 30% each vs. Wet Seal’s 20% losses.

Also weighing on Wet Seal is a racial discrimination lawsuit[11] for alleged high-level policy of bias against its black workers.

The one thing Wet Seal might have going for it would be the huge pile of cash it’s sitting on: nearly $150 million, which is more than half of its market cap. The company has used its cash to authorize more than $56 million in stock buybacks[12] within the past few years; however, WTSLA currently doesn’t offer a dividend.

The bottom line: There’s little evidence in the short term that shows Wet Seal can right its rocky ship, unless its unknown soon-to-be CEO — who will be the company’s fifth in five years — is able to pull a rabbit out of a hat.

Any investors who do decide to jump on for the ride should buckle up — volatility is part and parcel of the Wet Seal experience.

As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/07/wet-seal-woes-are-far-from-over-wtsla/

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