Wet Seal Turns It Around

"Wet Seal now looks like a fashion leader in this space," Van Sinderen says.

Although it's unlikely Wet Seal will deliver the level of same-store sales gains it posted its turnaround year, January's results suggested that it will continue to grow comps even as the hurdles get higher. The company recorded a 51.5% same-store sales gain for the month -- more than twice the average analyst estimate reported by Thomson First Call. That compares to January 2005, when the merchandise transformation was already under way and Wet Sale posted an 8% comp-sales rise.

"The January sales result is really quite remarkable," Starke says. "It's got people revisiting their models because it opens the door to big comps for much of the rest of the year."

Starke predicts Wet Seal will generate a 20% rise in same-store sales in the first half of this year and a 15% gain in the second half. He thinks the company will end 2006 with sales of $387 per square foot. Meanwhile, at around $5.39, the stock is trading at roughly 17 times earnings estimates for 2006. That falls in line with the average for the specialty retail group, but a rejuvenated Wet Seal's growth prospects suggest that its valuation should be higher.

"This is not a value play anymore," Starke says. "It's a growth story that hasn't really caught on yet. It's stuck in an in-between time where distressed players are done with it, but the plain-vanilla and institutional players haven't come back yet. If things keep going the way they've been going, they'll be back."

On Wednesday, Wet Seal announced that its bid to acquire G&G was trumped by a better offer from BCBG Max Azria Group, a women's apparel supplier based in Vernon, Calif. Starke says Wet Seal shareholders should take heart in the fact that the company wanted to buy G&G in the first place.

"They must have been real confident in their business model to feel they could pull off that turnaround," he says. "G&G was a real basketcase."

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