For Immediate Release
Chicago, IL – August 12, 2010 – Zacks.com Analyst Blog features: Wet Seal Inc. (WTSLA), Gap Inc. (GAPS), American Eagle Outfitters Inc. (AEO), Brinker International Inc. (EAT) and Wells Fargo & Co. (WFC ).
Here are highlights from Wednesday’s Analyst Blog:
Wet Seal Sales Dip, Affirms Outlook
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. (GAPS), 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.
Earnings Preview: EAT Texas-based Brinker International Inc. (EAT) primarily engaged in the operation, development, and franchising of various restaurant brands under Chili’s Grill & Bar and Maggiano’s Little Italy brand names, is slated to release its fourth-quarter 2010 earnings on August 12. The current Zacks Consensus Estimate for the quarter is 46 cents per share, representing an annualized decline of 11.54%.
Over the last trailing four quarters, the company outperformed the Zacks Consensus Estimate thrice and lagged only once in the previous quarter. The average earnings surprise over the trailing four quarters was 11.51%.
Previous Quarter Performance
Brinker International posted lower-than-expected third-quarter 2010 results, which was hurt by adverse weather conditions and costs related to the roll-out of Chili’s new menu. The quarterly earnings of 37 cents per share, excluding special items and net income from On The Border Mexican Grill & Cantina, fell short of the Zacks Consensus Estimate of 41 cents and dropped 7.5% from 40 cents posted in the prior-year quarter. On a reported basis, Brinker earned 39 cents, up 14.7% from $0.34 earned in the year-earlier quarter.
Total revenue slipped 7.8% to $713.4 million, reflecting a 4.2% decline in comparable-restaurant sales and a 5.3% fall in restaurant capacity following the sale of 21 outlets to a franchisee and closure of 19 restaurants since third-quarter 2009. Adverse weather negatively affected comparable-restaurant sales by about 90 basis points.
Estimates Revisions Trend
Estimates for the coming two quarters and fiscal years have moved down in the last 30 days, implying that the analysts are pessimistic on the stock. Let’s dig into the details.
Agreement of Analysts
Over the last 30 days, out of 20 analysts covering the stock, 4 analysts lowered their fourth-quarter estimates while none went for any increment, thus providing a downward directional movement. Estimates for fiscal 2010 and 2011 were slashed by 4 and 3 analysts out of 19 and 21 analysts, respectively, while none increased the same.
The analysts reduced the estimates primarily based on the belief that Chili’s (accounts for more than 80% of sale) same-store sales will fall short of industry averages due to intense competition in the bar and grill category and less usage of promotions. Although Chili’s is aggressively reformatting its menu, it is difficult to get consumer credit for menu improvements with a more mature and saturated bar and grill sector. Hence, the segment continues to show weak pricing power. However, the segment is expected to fare better in the first quarter of 2011 with the reintroduction of Chili’s ‘2 for $20 Offer’.
The analysts expect Brinker’s efficiency derived from the cost-control initiatives as well as increased franchise revenue to be muted in the near term, due to the prolonged promotional environment prevailing in the restaurant industry.
Wells Fargo Staggers on Regulations
In a recent second quarter 2010 results filing with the Securities and Exchange Commission, Wells Fargo & Co. (WFC ) has reiterated its revenue loss projection based on the implementation of the legislative and regulatory initiatives such as Regulation E amendments and the Credit Card Accountability Responsibility and Disclosure Act (the Card Act).
The amendments to Regulation E, among other things, impact the overdraft fees charged by Wells Fargo beginning on July 1, 2010. Wells Fargo estimates the amendments to the overdraft rules and its own voluntary policy changes will lower its after-tax fee revenue in the third quarter by $225 million and in the fourth quarter by $275 million.
The enactment of the Card Act influences Wells Fargo’s ability to change interest rates and assess certain fees on card accounts. The company estimates this act to cost $30 million after-tax in the third quarter. Wells Fargo had stated these estimates earlier at the time of the second quarter 2010 earnings release.
Wells Fargo also said in the filing that the recent financial regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act involve many provisions, which would become effective later and their impact would be realized after a relatively longer period. The company believes that such regulatory changes may have a negative impact on the company’s revenue, alter its business practices, increase capital requirements and impose additional charges.
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