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Splash into the Wet Seal (WTSL) Trade

Try on this trendy trade for 15%-20% upside by yearend


It’s often said that fashion is a fickle handmaiden. But when it comes to teen girl fashion trends, “fickle” is more like frenetic schizophrenia. For clothing retailers, trying to get a read on what teen girls are going to buy is almost always hit or miss. For traders, playing the often big swings in teen retailer shares also is hit or miss. Yet for both retailers and traders, when you do get it right, it usually means big-time profits.

One teen retailer that fits this hit-or-miss profile is Wet Seal, Inc. (WTSL).

The company’s mix of teen girl fashions has been a hit with shoppers of late, so much so that in May the company raised its second-quarter earnings guidance to somewhere between break-even and a two-cent per share profit on estimated revenue of $138 million to $141 million.

On Tuesday, we got the official Q2 results from Wet Seal, which also operates the more upscale Arden B chain. The company’s bottom line came in at a profit of a penny per share on revenue of $137.2 million. That’s far better than last year’s 14 cent per share loss on revenue of $135.3 million. The results were basically in-line with consensus forecasts, but of course, those forecasts had been adjusted based on the company’s May pre-announcement.

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Technically speaking, we see that the stock took off well before the May upward guidance. Part of the reason why was a shakeup at the highest levels of the company that included the appointment John D. Goodman as the company’s CEO. Goodman brings Wet Seal a history of successful retail turnaround experience, including stints at the Gap, Inc. (GPS) and Sears Holdings (SHLD).

The optimism over Goodman translated into a bid higher in the shares; however, a “sell the news” mindset, along with the broader market selloff in August, has taken much of the luster off WTSL shares.

I suspect that Wet Seal now has a very good read on the hard-to-peg teen girl fashion market, and the company is putting that suspicion to the test. With plans to open 22 new Wet Seal stores between October and November, the company hopes to capitalize on its newfound success.

Traders willing to test the Wet Seal turnaround waters may also be able to capitalize on that success by getting long the shares at a discount courtesy of the latest summer selloff. Buying in now could, I suspect, give you a 15%-20% gain by the end of the year.

Finally, just remember that because of the fickle nature of the teen retail sector, you’ll want to protect yourself on the downside if you get it wrong. A good way to do that is by placing a stop-loss order in around 8%-10% below your buy price.

At the time of publication, Jim Woods had no positions in any of the securities mentioned.

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