Wet Seal Inc.
) reported third quarter fiscal 2012 adjusted loss of 11 cents
per share compared to adjusted earnings of 5 cents per share in
the year-ago quarter. The loss resulted from a decline in sales
The loss was, however, narrower than the Zacks Consensus
Estimate of a loss of 13 cents per share due to
better-than-expected sales results. It was also narrower than
management's guidance range of a loss between13 cents and 16
Consolidated Revenue and Margins
Wet Seal's net sales in the reported quarter came down 10.9%
to $135.5 million from $152.1 million in the prior-year period.
Lower sales at both Arden B as well as Wet Seal stores led to
this decline. Sales, however, exceeded the Zacks Consensus
Estimate of $133.0 million.
During the third quarter, comparable store sales declined
13.5% compared to a decline of just 0.9% in the prior-year
quarter. The comparable store sales decline was slightly better
than management's expectation of a decline in the range of 14% to
The significant decline in total sales and comparable sales
from the previous year period could be due to the slower pace of
economic recovery and lower spending by domestic customers.
After opening five Wet Seal stores and closing one store each
of Wet Seal and Arden B during the third quarter, the company has
553 stores in 47 states and Puerto Rico. These include 81 Arden B
stores and 472 Wet Seal stores as of October 27, 2012.
Gross margin declined to 19.2% from 30.5% in the prior-year
quarter, due to increased spending on improving merchandise.
Excluding one-time charges, operating loss was $16.2 million in
the quarter compared to operating income of $6.8 million in the
prior-year quarter. However, the company's loss was narrower than
the management's operating loss guidance range of $18.7 million -
The company operates through two nationwide, primarily
mall-based chains of retail stores -"Wet Seal" and "Arden B."
Wet Seal Stores
: These stores offer apparel for girls aged between 13 to 19
years. The products in these stores are trendy and competitively
priced. Net sales at Wet Seal Stores declined 10.1% to $117.9
million from $131.2 million in the year-ago quarter. Same-store
sales declined 13.5% compared with a decline of 0.1% in the
Arden B Stores:
These stores offer apparel for women aged between 25 to 39 years.
The products usually featured in these stores include dresses of
contemporary fashion, sportswear and accessories suitable for any
occasion. Net sales at the Arden B stores also came down 15.7% to
$15.7 million compared with $20.9 million in the year-ago
quarter. Same-store sales declined 13.8% year over year compared
with a decline of 6.3% in the year-ago quarter.
Other Financial Updates
The company had cash and cash equivalents of $126.3 million as
of October 27, 2012 compared with $146.5 million as of July 28,
The company used $13.7 million cash from operations at the end
of the quarter compared with $1.1 million in the last quarter.
Capital expenditure amounted to $5.2 million, out of which the
company spent $4.0 million on new stores and remodeling of
Following the sluggish third quarter results, Wet Seal
estimates its fourth-quarter 2012 loss per share to be in the
range of 3 cents to 6 cents. The Zacks Consensus Estimate is
currently pegged at a loss of 3 cents for the fourth quarter of
For the fourth quarter, net sales are expected to be between
$163 million and $168 million and comparable store sales are
expected to decline in mid-single digits.
Gross margin is expected to be between 23.4% and 25.7% of net
sales and operating loss is expected to be between $5.0 million
and $9.4 million.
The company expects to close four Wet Seal stores and fifteen
Arden B stores at the end of the fourth quarter.
For fiscal 2012, the company tightened its capital expenditure
plan to a range of $20 million to $21 million from previously
announced guidance range of $20 million to $22 million. The
company expects to have four net Wet Seal store closings and
twenty net Arden B store closings at the end of fiscal 2012.
Management is geared up to make its tops for women trendy and
increase the variety available in its stores in the coming
holiday season. We are also encouraged by the company's efforts
to increase its penetration in the e-commerce business.
However, declining operating income in the recent quarters due
to higher selling, general and administrative (SG&A) expenses
and promotion activities, limited infrastructure, highly
competitive nature of the women's apparel industry and seasonal
nature of the same are matters of concern.
Currently, Wet Seal, which faces stiff competition from
American Eagle Outfitters Inc.
), carries a Zacks #2 Rank (short-term Buy rating). Over a
long-term, we provide a Neutral recommendation on the stock.
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