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Wet Seal Lumbers On to the Next Step

Compared with where the company had been, Wet Seal (Nasdaq: WTSLA  ) has already made some pretty significant strides. After all, it wasn't that long ago when it looked like the lights were going to go out permanently. By the same token, compare Wet Seal with teen retailers like Aeropostale (NYSE: ARO  ) or Buckle (NYSE: BKE  ) or women's retailers like bebe (Nasdaq: BEBE  ) , and it's clear that there is still a ways left on the road to recovery.

To that end, Wet Seal's second quarter was neither notably good nor notably bad. Total revenue was up more than 2% despite a 2.2% decline in comp sales. Within the comp numbers, I do take some measure of confidence from the facts that transaction counts were up and results for July were solidly positive. That said, the operating performance is not up to snuff just yet, and the company has ample room (and need) to improve profitability, asset utilization, and overall returns.

For the most part, I think the company has done what it needed to do on the storefront side of things. Shoppers are once again coming into the stores and buying things (as you might have expected with transactions up 5% this quarter), and Wet Seal does seem to have a solid grasp on what teenage girls want to buy.

By the same token, there are still some challenges in making sure the back office is in tune with the storefront. Inadequate inventories have been a problem, and that suggests to me that Wet Seal still has work to do in ironing out the kinks in its supply chain and forging deeper relationships with suppliers. Along those lines, I wouldn't be terribly worried about the seemingly steep rise in inventories this quarter, because some of that is based on correcting past problems and avoiding similar issues going into the fall shopping season.

There are still strong elements of faith and hope needed for an investment in Wet Seal these days. After all, shoppers are once again in the stores, but if management can't solve its remaining issues, or if the economy slides further than expected, it'll be tough to continue making progress. That means that Wet Seal still qualifies as a high risk/high reward speculative bet on the retail sector.

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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).

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