The Deal: Wet Seal Sale Awaits as Turnaround Continues

NEW YORK (The Deal) -- Wet Seal (WTSL), the teen apparel retailer, will continue its turnaround efforts for the next six months and then eye a sale of the company, said a source familiar with the situation. 

Those recent turnaround efforts include increasing square footage through new store openings, particularly in outlet stores, and launching a plus-size apparel offering. 

Though some of those efforts have paid off, success is not guaranteed. After reporting that consolidated comparable stores sales increased 3.7% for the fiscal second quarter ended Aug. 3, with net income at $1 million compared to a loss of $12 million year-over-year, Wet Seal also on Oct 15 lowered its third-quarter guidance, saying it expected a net loss of between 10 cents and 12 cents per share, as compared to previously announced 2 cents and 3 cents per share. 

But that should be taken against a backdrop of a year when most youth clothing retailers came off of poorer than expected back-to-school results. 

Wet Seal did not immediately respond to a request for comment. 

Activist hedge fund Clinton Group Inc. holds the keys to a possible sale of the company with four board seats that it snagged last year after the company settled a bitterly contested consent solicitation. 

With the hedge fund firmly ensconced on the board, the company chose its new chief executive John Goodman, who led The Gap's (GPS) outlet business at one point in his 20-plus-year apparel retail career. He was brought on board in January to resuscitate the purveyor of teen clothing, replacing Susan McGalla, who was sacked the previous July because of falling sales. 

And Goodman may be, once again, trying to dress up a retailer for sale. 

The chief executive oversaw the recent sale process of Charlotte Russe Holding Inc. as its CEO. The retailer announced a strategic review at the beginning of 2009, shortly after Goodman joined to run it in November of 2008, ending with a buyout deal with private equity firm Advent International Corp. for $380 million in Aug. 2009. 

Wet Seal's uneven financial performance in recent years is due not only to the vicissitudes of an industry susceptible to consumer spending trends, but also because of the highly competitive nature of the teen apparel sector, which has heated up with fast fashion entrants such as Forever 21 Inc., H&M and Zara. 

Wet Seal had revenues of $580 million and negative EBITDA of nearly $26 million for its fiscal year ended Feb. 2, 2013, compared to the previous year's results of $620 million in revenues and EBITDA of nearly $49 million. For next year, analysts estimate that revenues will be about $574 million and nearly $13 million in EBITDA, according to Bloomberg

Despite the company's struggles, another person familiar with the situation said its turnaround is working as it opens new stores, including outlets, has a strong management team in place and a healthy balance sheet. 

And as of Aug. 3, the company said it had nearly $80 million in cash, cash equivalents and short-term investments and no debt. 

At one point, Clinton Group had advocated for a sale of the company. 

"From a strategic-buyer perspective, the company has a fantastic footprint - it's in the best malls and has the best locations inside the malls," Greg Taxin, Clinton Group's managing director, told The Deal last August. 

Taxin said at the time that the company could be a bargain for a PE buyer. "We also believe there is and will continue to be private equity interest - the business used to do $60 million of EBITDA, but it's underperformed lately." 

And, in July 2012, Clinton Group senior portfolio manager Joseph De Perio suggested in a report that Wet Seal could fetch $5 to $8 per share. 

Sources told The Deal last fall that investment bank Peter J. Solomon Co. LP was fielding offers for the company. 

By the fall of 2012 the hedge fund was more interested in stabilizing the company, hiring an executive who could return the teen fixation to a position of strength. 

KarpReilly Capital Partners LP, which not only was a bidder for Charlotte Russe, but hired former Wet Seal CEO Ed Thomas, who is a partner at the firm, has looked at the company in the past, sources said. 

Another potential bidder could include Advent - especially given the Goodman relationship. Other private equity firms that are known for investing in troubled retailers include Sun Capital Partners Inc., Golden Gate Capital and Sycamore Partners.

Wet Seal's 60-day moving average share price was $3.60 as of Thursday; its market capitalization was about $304.4 million.

Written by By Richard Collings.

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