Another quarter is in the bag, and Wet Seal (Nasdaq: WTSLA ) has put even more distance between itself and the virtual oblivion it faced in mid-2004. It's an encouraging message for investors in other troubled retail concepts (Pier 1 Imports (NYSE: PIR ) , anyone?), but don't assume it's all easy swimming from here.
Thanks largely to the wonders of easy comparisons, Wet Seal saw sales rise more than 20% once again, with same-store sales growth of roughly 20% this quarter. Gross margins also continued to improve -- the fruits of both stocking better merchandise and rethinking its clearance/discounting process. And though there was another host of charges and items this quarter, the company was profitable on the operating line and at the net income line, after adjustments.
The news wasn't all warm and fuzzy, though. The company guided to negative comps for the month of May, because of both a more challenging comparison in the prior year and an inadequate inventory in women's tops and dresses. Normally, I don't care about month-to-month same-store sales, unless an overreaction gives me an opportunistic chance to buy or sell. In this case, though, it's a bit disappointing to see a minor merchandising misstep. Wet Seal is still reestablishing its credibility with investors, and while this mistake is understandable, it's not exactly helpful.
Let's also not forget that at least some of the juice for the next leg of the recovery will have to come from the Arden B. business. I wouldn't exactly pronounce Wet Seal "fixed" just yet, but it's on the road to recovery. With Arden B., though, you're talking about an equally tough sector, but with different moving parts. After all, while Guess? (NYSE: GES ) has been pretty strong, bebe (Nasdaq: BEBE ) , New York & Co. (NYSE: NWY ) , and Gap (NYSE: GPS ) have had tougher going.
Better performance at Arden B. might well be the driver that takes Wet Seal stock to the next level of its recovery, though that's not to say that the namesake chain isn't also an important part of the story. Turnarounds like Wet Seal take a fair bit of patience and faith, though. This still isn't a great idea for the timid or insecure.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).