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Why Wet Seal (WTSL) Stock Is Up Today

NEW YORK (TheStreet) -- Wet Seal (WTSL) was gaining 5.9% to $1.26 Friday on news that it will wind down its Arden B brand.

The company announced it will begin winding down the brand, which currently operates 54 stores and an online store. Wet Seal will close 31 Arden B stores by the end of fiscal 2015.

During the wind-down process 31 stores will transition to sell Wet Seal Plus merchandise, while the remaining 23 will shift to Wet Seal merchandise. The company plans to complete the transitions to other merchandise before back-to-school season in late July.

Wet Seal anticipates $3 million in charges in the first quarter of fiscal 2014 related to Arden B. The company also expects about $100,000 of charges for severance costs in the first quarter, and about $300,000 of charges in the second and third quarter for employee retention programs.

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TheStreet Ratings team rates WET SEAL INC as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

"We rate WET SEAL INC (WTSL) a SELL. This is driven by some concerns, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its poor profit margins, weak operating cash flow and generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The gross profit margin for WET SEAL INC is rather low; currently it is at 21.60%. It has decreased from the same quarter the previous year. Along with this, the net profit margin of -22.07% is significantly below that of the industry average.
  • Net operating cash flow has decreased to -$14.06 million or 13.38% when compared to the same quarter last year. In conjunction, when comparing current results to the industry average, WET SEAL INC has marginally lower results.
  • WTSL's stock share price has done very poorly compared to where it was a year ago: Despite any rallies, the net result is that it is down by 63.34%, which is also worse that the performance of the S&P 500 Index. Investors have so far failed to pay much attention to the earnings improvements the company has managed to achieve over the last quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock's sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Specialty Retail industry and the overall market, WET SEAL INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • WTSL, with its decline in revenue, underperformed when compared the industry average of 6.5%. Since the same quarter one year prior, revenues fell by 22.8%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • You can view the full analysis from the report here: WTSL Ratings Report

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Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

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