Wet Seal Sales Dip, Affirms Outlook - Analyst Blog

Wet Seal Inc. (WTSLA) has re-entered negative territory, with the leading specialty retailer reporting negative same-store sales of 4.3% for the four-week period ended July 31, 2010. The company had suffered a same-store sales decline of 12.1% in the comparable year-ago period.

Net sales in July dipped 3.9% year over year to $41.1 million. Wet Seal affirmed its fiscal second quarter earnings per share (EPS) expectation of 2 cents, at the low end of its initial guidance range of 2 to 4 cents.

Net sales of the Wet Seal segment dipped 2.8% to $34.6 million for the month, while comparable sales slid 4.7% versus a 12.3% slump in the comparable prior-year period. For the Arden B segment, net sales fell 9.1% to $6.5 million, while comparable same-store sales decreased 1.9% compared with a drop of 11.2% in July 2009.

In fiscal 2010 so far, the company has witnessed positive same store sales of 4.7% and 6.3% in February and March, respectively, due to improved inventory mix. This came after a long gap as the company had last witnessed positive same store sales growth in December 2007. Since then, the company’s same store sales were affected by the challenging economic conditions in fiscal years 2008 and 2009.

The recovery in February and March was short-lived, as same-store sales reverted to negative 6.1% in April, 5.3% in May and 3.6% in June. With Easter occurring one week earlier in 2010 compared with 2009, March comparable store sales results benefited at the expense of April. May suffered due to unfavorable weather conditions, and June results were affected by inconsistent traffic patterns.

In its first quarter of fiscal 2010, Wet Seal doubled its EPS year over year to 6 cents, which was on par with the company’s guidance and the Zacks Consensus Estimate. Sales increased 4.4% year over year to $137.8 million in the quarter. Consolidated comparable-store sales increased 2.0% in the quarter due to the positive same-store sales in February and March.

During its first quarter fiscal earnings call, the company provided the EPS guidance range of 2 to 4 cents. While announcing its June results, the company stated that it expects EPS to be at the lower end of its guidance range. The company still maintained its stand after the declaration of the July sales results.

Wet Seal, however, added that it is in the process of evaluating some of its store assets for evidence of impairment. The guidance does not include any estimate for potential non-cash long-lived asset impairment charges, which could result in a decrease in earnings. The Zacks Consensus Estimate for Wet Seal came in at 2 cents, in line with the company’s estimate.

Wet Seal’s competitors however have fared better in July, with same-store sales at Gap Inc. (GPS) and American Eagle Outfitters Inc. (AEO) increasing 1% each.

Wet Seal plans to improve comparable store sales with the implementation of strategic initiatives -- improve merchandise margin, store operations, marketing and information systems. The company intends to focus on key trends, increase efficiencies in planning and allocation functions from markdown and size optimization systems, improve promotional planning, ensure sufficient levels of inventory to maximize business, and implement-enhanced merchandising and point-of-sale systems.

We expect the initiatives to bear fruit and the company return to positive same-store sales. Further, the back-to-school season -- which began in the last week of July and ends early September -- and Christmas season will reap benefits for the company in the back half of fiscal 2010. However, the current trend of negative same-store sales, the company’s expectations at the lower end of the guidance and intense competition facing the company in the women’s retail apparel industry make us reiterate the Zacks #4 Rank (Sell) and Neutral rating on Wet Seal.

Foothill Ranch, California-based Wet Seal is a leading specialty retailer of fashionable and contemporary apparel and accessory items. The company primarily operates through two nationwide, mall-based chains of retail stores: Wet Seal and Arden B. As of July 31, 2010, the company operated a total of 508 stores in 47 states, the District of Columbia and Puerto Rico, including 432 Wet Seal stores and 76 Arden B stores.
 
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