Now comes the hard part for Foothill Ranch-based Wet Seal Inc.
The teen clothing retailer has been posting eye-catching gains in same-store sales for the past year or so as it bounces back from a downturn that started in 2004.
In December, Wet Seal beat Wall Street expectations with a 39% gain in sales at stores open at least a year.
It was the 12th straight monthly increase for Wet Seal.
“Management has done a really impressive job,” said analyst Eric Beder at Brean Murray Carret & Co. “They’ve taken this company from the dead and revived the chain, and positioned it where it could have profitable growth.”
Now Wall Street is wondering what’s next.
“The real question for investors is, ‘Where do you go from here?'” Beder said. “What’s the next phase? That’s what we’re waiting for.”
It’s going to get harder for Wet Seal to beat its big jumps in same-store sales, Beder said.
“The key will be its ability to demonstrate to investors the potential for further growth when the comparisons shift from a dead cat bounce to more normalized levels,” the analyst wrote in a recent report.
‘Radio Silence’
Wet Seal has been tight-lipped about its plans. Chief Executive Joel Waller declined to comment for this story.
Management briefly broke its “radio silence” during a recent conference call, Beder said.
“We welcome the dialogue,” he wrote.
Wet Seal runs about 400 stores in shopping malls. About 300 fall under the Wet Seal name and target teens and young women. The rest of the stores are Arden B., a more upscale chain.
More stores could be part of the company’s plan for growth,an about-face from the past year, when Wet Seal closed some 150 stores as part of its turnaround plan.
This year, Wet Seal could open 20 to 25 stores, according to Beder. Eventual plans call for possibly doubling the Arden B. chain and opening 200 to 300 Wet Seal stores, he said.
“They’re setting up for significant store growth in 2007,” Beder said.
Wet Seal still has some basics to tackle, according to Jeff Van Sinderen, an analyst at B. Riley & Co.
“The company has to layer on additional improvements to keep the (same-store) sales going and to continue to improve operating expenses,” he wrote in a recent report.
Wet Seal has made “significant progress,” driven largely by retail consultant Michael Gold, Van Sinderen said.
Gold’s contract with Wet Seal runs through next January. He stands to earn $1.6 million this year, according to the company. So far, Gold has helped the retailer revamp merchandising and selling tactics.
Changes
Changes have included lower prices, wider selection and rotating out clothing collections more often.
Wet Seal now competes more effectively with Los Angeles-based Forever 21 Inc., which had been snatching away customers.
The changes also caught the eye of Abercrombie & Fitch Co., which recently sued Wet Seal for trademark infringement.
“Wet Seal has become more promotional, a lower price concept,” Van Sinderen said. “It’s a different business than it was.”
Profits are an issue. Wet Seal needs to better its margins, Van Sinderen said.
The company has made progress on gross margin, which expanded to 31% for the 13 weeks ended Oct. 29 from 16.5% a year earlier.
“They can’t give (product) away,” Van Sinderen said. “They have to make money selling it.”
Wall Street still hasn’t seen the company “deliver much in the way of profitability,” Van Sinderen said.
“We have to see bottom line results,” he said.
Wet Seal posted a net loss of $6.4 million for the quarter ended Oct. 29, with a $272,000 operational profit.
Profit Question
The company needs better profits before its stock can get out of the bargain bin. Wet Seal’s shares, which have doubled in the past year, were trading at about $4 last week, with a market value of about $265 million.
Wet Seal could earn about $14 million this year on $600 million in sales, according to analysts.
“We await a clearer road map from management before we would counsel investors to become more constructive in the name,” B. Riley’s Beder wrote.
Analysts also are waiting to see what Wet Seal has planned for its management team.
The company recently brought in a chief financial officer, John Luttrell, a former executive vice president and chief financial officer at Cost Plus Inc.
Luttrell fills a big void at Wet Seal, Beder said.
“There are still more hires to go, especially in the financial area,” he said.
