In the words of one analyst, Foothill Ranch-based Wet Seal Inc. is in the running to become the turnaround story of hard-hit mall retailers.
But the seller of clothes for teen girls and young women only is part of the way there.
Wet Seal is in the midst of a revival that’s teetering on the edges. Stores have been shuttered, workers have been cut and lackluster fashions have been spiced up and brought into stores quicker. Prices have been slashed and operations streamlined.
The company’s smaller Arden B. chain for young women is back after slumping for much of 2008 and early this year.
But its more dominant Wet Seal chain for teen girls still is struggling.
Wet Seal has been posting consistent drops in sales at stores open at least a year, although September’s 5.3% same-store sales drop was the best since April’s 4% decline.
The unit’s operating income was $6 million, or 5.4% of sales, for the three months through Aug. 1. A year earlier, operating income was 15% of sales.
The company runs 420 Wet Seals and 80 Arden B. stores.
Problems at Wet Seal are being addressed, according to Chief Executive Edmond Thomas, who took the helm during a delicate time in late 2008.
“There are definitely areas we felt we had weaknesses in and have mostly corrected,” he said. “We feel pretty good going into (the holiday season) this year.”
As for Arden B., “It’s a true turnaround, in terms of the profitability of the business,” Thomas said.
For the three months through Aug. 1, Arden B. was the bright spot of Wet Seal’s business with operating income of $3.3 million, or 13.1% of sales.
A year earlier, operating income at Arden B. was 3.6% of sales.
Arden B.’s operating margin was “the highest for the division in 10 quarters,” wrote Brean Murray Carret & Co. analyst Eric Beder in a recent note to clients.
The chain is selling fewer clothes at a discount and has cut operating costs, Beder wrote. It’s also tapped low-cost, “fast fashion” suppliers catering to trend savvy shoppers looking for value, he said.
In September, same-store sales at Arden B. fell 1.1% from a year earlier—not bad given the ongoing retail slump and a big improvement from the 22% drop it saw a year earlier.
Thomas and the rest of Arden B.’s management deserve “a lot of credit for coming up with a strong assortment and implementing a value-price-oriented strategy,” analyst Jeff Van Sinderen of B. Riley & Co. said.
Investors and analysts appear to be betting on a larger turnaround at Wet Seal.
Shares of Wet Seal are up about 60% since bottoming out in March. The company had a recent market value of about $310 million.
Analysts, for the most part, have “buy” ratings on Wet Seal’s stock.
But some are growing impatient.
“We have remained tantalized by the upside potential,” Brean Murray’s Beder wrote. “That said, we are running out of patience waiting for it to occur. We are willing to maintain our positive stance (for the three months through October) and the holiday season, but we believe investors can only wait so long.”
A return to growth amid the current industry downturn “takes longer than people wish for,” Thomas said.
Most of the company’s remaining issues are at Wet Seal.
Elizabeth Pierce, an analyst at Newport Beach-based Roth Capital Partners LLC, lays blame on “the mix” at the teen mall chain.
Too many basic tops, not enough jewelry and other accessories and few fashion tops and dresses have hampered sales. That’s forced Wet Seal to blow out unsold clothes, denting the unit’s profits.
Basic clothes aren’t what teen girls go to Wet Seal for, Van Sinderen said.
“That customer, the junior customer, wants fashion, period,” Van Sinderen said. “They want to be inspired by fashion, by something that’s interesting, different and fashion forward.”
The challenge of Wet Seal—with its fickle young shoppers—is greater than at Arden B., according to Thomas.
“There’s more competition. It’s very fast,” said Thomas, who’s on his second stint at Wet Seal after spending 1992 to 2000 as president and chief operating officer.
The company has made strides at Wet Seal that became noticeable during the back-to-school season, according to analysts.
“We saw assortment improve, and we’ll continue to see that gradually into the holidays and spring,” Van Sinderen said. “Pretty much all of the areas they’ve identified where they’ve seen shortfalls are starting to improve.”
Wet Seal recently affirmed its outlook for the three months through October. It expects same-stores sales to decline for both of its chains about 6% to 9% on total sales of $138 million to $142 million, which would be down about 5% from a year earlier. It projects a profit of $1.9 million to $4.8 million.
Results are due Nov. 19.
Analysts give Thomas high marks for protecting the company’s balance sheet. It had $144 million in cash as of Aug. 1.
“Not only does the company have a seasoned management to lead growth, but it also has the balance sheet to fund it,” Roth’s Pierce wrote.
To boost sales, the company is starting to remodel 18% of Wet Seal stores. New layouts are designed to be easier to shop with cleaner layouts and better displays.
Thomas plans to open about 17 Wet Seal stores, mostly in malls where they had done well before but had to close amid the recent cost cutting.
Brea Mall is one that is set to see a Wet Seal again, Thomas said.
The company also plans to close about 16 shops when their leases expire.
“If they can be consistent with Arden B. then they’ll be in a mode where they can open some high productivity stores,” Van Sinderen said. “They could easily double the size of the Arden B. chain.”
Growth also is seen for Wet Seal.
“The Wet Seal chain could have some 600 stores,” he said. “There are roughly 1,200 malls in the U.S. Frankly, they’d be bringing fashion to a lot of these malls where they don’t have a concept like Wet Seal.”
A turnaround like that would be “one of the most powerful turns in retailing,” Beder said.
Gomez is a freelance writer based in Long Beach.
