Wet Seal Shares Plunge on 2Q Loss, Bankruptcy Concerns
By James Covert
Dow Jones Newswires
NEW YORK -- Shares of Wet Seal Inc. (WTSLA) plunged Friday after the company reported a wider-than-expected loss and said it has created a special board committee to consider options for its struggling Wet Seal retail chain.
The news fueled mounting concerns that the teen apparel retailer's recent turnaround efforts may have failed and that a bankruptcy filing may be imminent.
At about 11:15 a.m. EDT on the Nasdaq Stock Market, shares of Wet Seal were down $1.17, or 56%, at 93 cents.
Wet Seal, Foothill Ranch, Calif., reported a fiscal second-quarter net loss of $102.8 million, or $3.20 a share, compared with a year-earlier net loss of $13.4 million, or 45 cents a share. The latest results included a charge of $75.5 million, or $2.35 a share, from a tax issue and an impairment of certain long- lived assets.
The latest results, excluding the charge, missed the mean estimate of analysts surveyed by Thomson First Call for a loss of 55 cents.
Net sales fell 14% to $105.6 million. Sales at stores open at least a year -- or same-store sales, a key measure of a retailer's performance -- fell 10.9%.
Some of Wet Seal's new merchandise has been well-received by the fickle teenage girls the company caters to, Chairman and Chief Executive Peter Whitford told analysts on a Thursday conference call. Some trendy jeans, jackets and novelty tops have been so popular that the company has even marked up prices on a few items. But overall, the customers who have deserted the stores over the past two years simply haven't been coming back quickly enough, Mr. Whitford said.
"The people who are coming in are spending more," Mr. Whitford said. "If we had more of them coming in, I think we'd be doing better."
Based on recent sales trends, the company anticipates third-quarter same-store sales in the negative mid-teens and an operating loss of about 69 cents a share. A survey of nine analysts predicted a loss of 22 cents.
Wet Seal expects its cash balance to shrink to $11 million by the end of the third quarter, down from $36 million at the close of the second quarter, Chief Financial Officer Doug Felderman told analysts on a Thursday conference call.
Mr. Felderman noted that the company's cash position hasn't been helped by demands for upfront cash payments from apparel vendors and demands for letters of credit from the "factoring" companies that extend credit for deliveries to Wet Seal.
Based on the company's current sales expectations, Wet Seal doesn't expect to use cash during the fourth quarter, Mr. Felderman said. But Marc Bettinger, an analyst at Whitaker Securities LLC in New York, said dwindling cash and tightened credit "is going to make it very difficult for Wet Seal to continue operating without a large cash infusion" or a Chapter 11 bankruptcy filing.
"We believe that Wet Seal as we now know it will be likely forced to change its structure in some form of reorganization," Mr. Bettinger wrote in a Friday research note.
A Chapter 11 filing is the most likely restructuring scenario for Wet Seal, said Jeffrey Van Sinderen, an analyst at B. Riley & Co. in Los Angeles. More than likely, the company would shutter all of its Wet Seal stores and preserve its smaller Arden B. chain, whose success with its relatively sophisticated and upscale clientele contrasts sharply with Wet Seal's recent fortunes.
Other, less likely alternatives include selling the company, selling Arden B., or converting some Wet Seal stores to Arden B., Mr. Van Sinderen said in a Friday research note. He adds that in a Chapter 11 reorganization creditors could get most of the value of Arden B.
"We recognize the value in Arden, but whether current shareholders will ultimately own that asset it is highly uncertain," Mr. Van Sinderen said.
Asked by analysts about the potential of a Chapter 11 filing on Thursday's conference call, Wet Seal CEO Mr. Whitford said the company's board committee met on Wednesday to discuss the company's alternatives. "At this stage, they haven't had an opportunity to come back to the board, seeing that it's only 24 hours old," Mr. Whitford said. "It would be too early for me to make any of those comments."
-By James Covert, Dow Jones Newswires; 201-938-5360; james.covert@dowjones.com
Dow Jones Newswires
08-20-041207ET
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