Wall Street doesn’t seem to mind Wet Seal Inc.’s latest loss.
The Foothill Ranch-based teen retailer came up short two weeks ago in its bid to buy G+G Retail Inc., a bankrupt New York-based clothing chain.
Wet Seal initially offered $15.2 million for G+G’s assets.
Vernon-based AZ3 Inc., known as BCBG Max Azria, swooped in with a more enticing offer: $15.2 million in cash and $22 million for the company’s unsecured creditors in the next five years.
BCBG pledged to rehire more than half of G+G’s staff and keep more stores open. Guggenheim Corporate Funding LLC provided some financial backing on the deal.
Analysts say Wet Seal doesn’t need G+G to continue its turnaround.
“Even without G+G, Wet Seal is on the cusp of significant sustained bottom-line growth,” wrote Eric Beder, analyst at Brean Murray Carret & Co., in a report.
He recently raised his rating on Wet Seal shares to “accumulate” from “hold.”
‘Compelling’ Buy
Beder called the drop in Wet Seal’s shares following the news a “compelling buying opportunity.”
Shares at a recent check were down about 4% from when Wet Seal announced it lost out in the G+G bidding.
“We believe that (Wet Seal) should eventually trade at a premium level as the company provides more compelling evidence that it has created a highly sustainable business model with potential for material upside,” Beder said.
Wet Seal will be able to grow through gains in its own operations, rather than by big acquisitions of other chains, he said.
The company spent the past few years revamping its clothing offering, restructuring management and closing more than 100 unprofitable Wet Seal stores under Chief Executive Joel Waller.
He brought in a retail consultant to help spearhead the changes, which have been paying off.
Wet Seal is better off focusing on what needs fixing than on making big acquisitions, said Pamela Nagler Quintiliano, analyst at WR Hambrecht + Co.
“In the end, they were biting off more than they can chew,” Quintiliano said of Wet Seal’s offer to buy G+G. “It’s better they focus on their core business. They’re clearly on the road to the recovery.”
Wet Seal has some 400 stores.
About 75% of the stores are under the Wet Seal name with the rest operating as its more upscale Arden B. chain,a better-performing unit during the company’s struggles of the past few years.
In January, sales at stores open at least a year jumped 51%, more than double Wall Street’s forecast of 21.2%.
There’s more to come, according to Jeff Van Sinderen, analyst at B. Riley & Co.
He said he liked Wet Seal’s bid to buy G+G. But the acquisition would have come with risks, Van Sinderen said.
“We were disappointed that they didn’t win the bid for G+G,” Van Sinderen said. “But the flipside is they don’t have to deal with the integration risks. They already have a business that’s turned around and gaining momentum. (Wet Seal) has a solid business with Wet Seal and Arden B.”
Reopening Stores
Plus, Van Sinderen said Wet Seal now can reopen some of the stores it closed when business was bad.
Wet Seal plans to open 25 stores this year, its “first major expansion in over four years,” said Beder of Brean Murray.
The bulk of the locations will be at former Wet Seal stores that were closed in the turnaround, which will cost less to reopen and be faster to ramp up, he said.
In 2007, Wet Seal plans to open 65 stores, Beder said.
“Management is confident that they can acquire the necessary leases from what has quickly become a very helpful pool of developers,” Beder said.
He said Wet Seal management believes they can “double” the size of the Wet Seal and Arden B. chains, “which translates into an over 400-unit expansion and continued double-digit growth for the future.”
Plus, Wet Seal can continue to tweak operations for more savings.
Wet Seal stores, which have new management and selling strategies, will continue to improve, Beder said.
Most of the “heavy lifting” was completed last year, so Wet Seal should see “further gains from fine-tuning” store operations, he said.
Other analysts see Wet Seal continuing to consider acquiring struggling retail chains.
“It is almost a given that they will remain active in this market,” said Kevin Starke, an analyst with Weeden & Co. “You go into your local mall, and there is no shortage of distress.”
Los Angeles Business Journal staff writer Rachel Brown contributed to this story.
