Wet Seal Turns It Around

Shares of Wet Seal (WTSLA) haven't found a foothold since the stock climbed over $6 last summer, even though the mall-based teen-apparel chain has continuously posted mammoth monthly sales-growth figures.

Its monthly comps, a key retail metric gauging sales at stores open at least a year, have shown year-over-year gains in the 30% to 60% range. Such success reflects the fruits of a massive turnaround orchestrated under merchandising guru Michael Gold, a part-time consultant to the retailer. Despite the numbers, comparisons will get tough in 2006, and the shares have been locked in a trading range.

In the past few days, Wet Seal shares have dropped more than 3% since the retailer announced that its bid for bankrupt clothing retailer G&G Retail came up short. Investors, having expected the company to scoop up G&G at bargain-basement prices, came away disappointed. But with the stock trading lower, some analysts are unfazed, viewing the selloff as an opportunity to buy one of the last real growth stocks in specialty retailing's sweet spot.

"With teen apparel chains in the mall being what they are these days, I think the best is yet to come in terms of results from this turnaround story," says Jeff Van Sinderen, analyst with B. Riley & Co. "We still haven't seen the full effects of their cost reductions reflected on their income statement. Behind all the charges and the financings, there's a big growth potential here."

Van Sinderen holds a buy rating on Wet Seal with a $7 price target. He doesn't own shares, but his firm makes a market in the stock.

Many Wall Street analysts have steered clear of Wet Seal since it barely avoided bankruptcy in 2004. The company's recent financial statements show a maze of one-time charges related to hundreds of store closings over the last year, and its capital structure consists of an unusual mix of preferred share classes and convertible debt offerings that allow for large amounts of dilution in its share count. This makes financial modeling and earnings forecasting a tricky balancing act on Wall Street, where trading is so often concentrated on EPS measures.