A big drop in same-store sales at Wet Seal ( WTSLA) and news that it is expecting its seventh consecutive quarterly loss are casting doubt on the retailer's supposed turnaround plan. The stock was trounced in Monday trading, closing at a 52-week low. "This is a company that's really having a huge number of problems," said Craig Johnson, president of Customer Growth Partners, a retail consulting firm. "The sectors of the market where people are fickle with their taste ... if you aren't spot-on with what your customers want, you're like yesterday's newspaper." The company's series of fashion misses, which have led to poor operating results for the past two years, are old news. So while most retailers were up against easy comparisons for March same-store sales, Wet Seal should have had it easier. But the teen retailer missed analysts' expectations once again, reporting Thursday that same-store sales fell 21.1%, compared with First Call's estimate for an 11% decline. The company said transactions at its Wet Seal division were weak, "impacted by significantly lower clearance sales compared with the prior year." Double-digit drops in same-store sales results are lately a constant at Wet Seal; it has reported double-digit declines in 13 of the last 16 months. Wet Seal shares closed down 91 cents, or 11.5%, to $7 on Monday. In November, TheStreet.com reported that
a turnaround could be in the works at Wet Seal, but after four more months of negative same-store sales, analysts are concerned. Katharine Rice Galligan of the research firm Aperion Group, doesn't think a turnaround by back-to-school season is feasible, as the company and other analysts have projected. "They're just buying too much of the same stuff," said Galligan. Galligan thinks the company's biggest issue has been pinning down its core consumer. "They don't know who their target customer is. They keep redefining who that person is going to be, and they keep missing it," she said.
Rob Wilson, an analyst at Tiburon Research Group, concurred. "They've really struggled because they've lost their core consumer, and they've really confused them in the last six months. No one knows what they really stand for." In the past, Wet Seal's weak sales have stemmed from a penchant for aggressive markdowns, something it tried to kick in March. But that didn't beef up sales either, even though most retail analysts believe that lower markdowns are part of what drove positive same-store sales at other retailers. Ultimately, Wet Seal's reluctance to mark down its merchandise is what hurt the month's results, said Galligan. "The
Wet Seal customer is conditioned to sales," she said. "All of a sudden, not to have the same clearance items as years past is confusing and discouraging for the customer." As one of the many retailers vying for the picky teen's business, the Foothill Ranch, Calif.-based company also confirmed its prior first-quarter guidance on Thursday for a loss from continuing operations of 54 cents to 59 cents a share. The company has reported a loss in each quarter since the third quarter of 2002. In its fourth quarter , the company had a loss of $17.81 million, or 60 cents a share, compared with a year-ago loss of $5.65 million, or 20 cents a share. Sales dropped 15% to $143.08 million from $155.63 million in the fourth quarter of 2002. Wet Seal's cash position is strong but declining. It ended the fourth quarter with $63.5 million in cash and equivalents, compared with $94.8 million last year and about $130 million two years ago. A bright spot remains in the company's women's adult contemporary concept, Arden B., of which it has 99 stores that make up over 20% of total sales. The stores are outperforming expectations as summer approaches, and Wet Seal thinks its merchandise assortment is on track with customer preferences.
Galligan agrees. "The merchandise is designed in-house for Arden B.," she said, so the company has more control over it. Meanwhile, the merchandise at Wet Seal is outsourced. Thus, "If they make a few
fashion missteps, they're ordering inventories out, and it takes months" to rebound," she said. Yet the company has had far more than a few months' worth of negative monthly comps. UBS analyst Richard Jaffe is not as concerned as Galligan, though, and he expects sales to improve in the back-to-school season. He noted that Wet Seal had operating losses in 1993 and 1994 but was out of the red by the fourth quarter of 1995. With the memory of junior apparel retailer Gadzooks' February bankruptcy fresh in Wall Street's mind, analysts are mixed on whether Wet Seal needs to drop its core concept in order to stay afloat. "I would be surprised if they folded the core Wet Seal concept ," said Galligan. "They've invested time and money in a new designer," Victor Alfaro. But can Alfaro save Wet Seal? Many analysts seem to be holding to that fact, but his designs have yet to hit the shelves. Wilson believes Wet Seal will have improved product by the back-to-school season, but that might not mean its negative 20% same-store sales will go away. He said the company had improved product last year but that the impact was minimal. "If they continuing doing negative 20% comps, this will come to a head in early fall. As they try to build up holiday inventory, they might run into trouble," Wilson predicted. "If they can do negative 5% monthly comps , they can make it through this year." Ultimately, he said, "I could see these guys dropping out and keeping Arden B."