Beleaguered teen retailer Wet Seal Inc. is still drawing interest, even if it comes in the form of some rock-bottom bidding.
Versa Capital Management LLC is looking to edge Los Angeles-based investment bank B. Riley & Co. out of a deal to take over the Foothill Ranch-based chain of stores, which has sought Chapter 11 bankruptcy protection.
Versa has until March 5 to submit a competing offer, as do other potential buyers. An auction to determine the winning bid will be held on March 10.
The Philadelphia-based private equity firm has more than $1.4 billion in assets under management and retailers such as Avenue Stores LLC and Sport Chalet in its portfolio.
It said in the court documents that it contacted Wet Seal’s management in October, expressing interest in providing financing.
B. Riley, which also owns liquidator Great American Group LLC, subsequently struck a deal to make a $20 million loan that would convert to an 80% stake in Wet Seal as part of its turnaround plan.
Versa offered $25 million for the same share of equity, with 8% interest on the loan instead of the 10.25% rate that came with B. Riley’s bid.
B. Riley last month responded to a committee of Wet Seal creditors—a group that includes mall landlords Simon Property Group Inc. and General Growth Properties Inc.—to match Versa’s terms.
B. Riley has put up $5 million in cash, with another $20 million in the form of a secured loan. Unsecured creditors would get the remaining 20% stake in the company.
Wet Seal currently operates 173 stores in 42 states and Puerto Rico. It employs about 665 full-time personnel and 1,689 part-time workers. Court documents show that the retailer had $92.8 million in total assets and $103.4 million in debt as of Nov. 1, 2014. Hudson Bay Master Fund Ltd. in New York is its largest creditor, with a claim of $28.86 million.
Wet Seal’s financial woes started several years back—its earnings before interest, taxes, depreciation and amortization “declined from positive $49 million in fiscal year 2011 to an estimated negative $33 million for fiscal year 2014,” according to the company, which has gone through three chief executives and switched out numerous board members since 2011.
Decline
The retailer had a $3.4 million market value when it announced it was seeking bankruptcy protection. That’s down from $213.6 million about a year ago.
It blamed the downfall on several industrywide factors, such as growing popularity of online-only merchants, a trend that has created “a more competitive and challenging environment for fast-fashion retailers” such as Forever 21 Inc. and H&M Hennes & Mauritz AB, both Wet Seal competitors.
A failed “expansion into the plus-size market and to a large number of outlet malls,” along with a brief shift away from the “fast-fashion” segment added to its troubles.
Wet Seal hired a new management team as part of the turnaround effort in the third quarter of 2014: Chief Executive Ed Thomas, who had served in the same role “during the profitable years” between 2007 and 2010; Chief Digital Officer Jon Kubo; and Christine Lee, who left Pacific Sunwear of California Inc. in Anaheim to become the new chief merchandising officer.
The company began refocusing on “young adult females and maintaining an inventory mix of 70% fashion apparel and 30% basic apparel.” It also started “more frequent inventory purchases of less inventory per style,” following the footsteps of other fast-fashion retailers in tune with frequent changes in styles and trends.
Its efforts were a day late and a dollar short.
There was “insufficient time to implement the strategic vision” before Wet Seal’s new management “faced a liquidity crisis, resulting from extensive operating losses driven by persistent sales weakness,” according to court documents.
The retailer attempted to obtain lease concessions from its landlords, while vendors demanded cash on delivery. The negotiations failed, and Wet Seal closed 338 underperforming stores a week before seeking bankruptcy protection on Jan. 16.
Wet Seal’s hope now is that it will have a chance to emerge from bankruptcy once a winning bidder is determined on March 10.
