After bottoming out in 2004, apparel retailer operator The Wet Seal's (Nasdaq: WTSLA ) stock has engineered a small turnaround. Shares are trading higher following the release of the company's first-quarter results. But is there enough here for Foolish prospective investors to take a bite?
Net sales increased 10.3% year over year, with much of that growth coming from new store openings. In the first quarter alone, the company netted 18 new stores.
Meanwhile, same-store sales rose by 2.7%. Following the 20% comps increase the company achieved in the first quarter last year, the latest figures look even more impressive. CEO Joel Waller indicated that the positive trend in comps should continue through the summer.
Along with accelerating revenue, profitability plays an important role in any a turnaround story. Wet Seal has more work to do on this front. Gross margin, largely reflecting the health of merchandise sales, slipped to 35% from last year's 37.5%.
Fortunately this metric is expected to improve against year-ago levels in the next quarter. The company can help to stabilize that gross margin by closely monitoring inventory levels. Merchandise inventory, up 3.6% this past quarter, increased at a reasonable rate compared to expected growth.
Wet Seal did significantly improve profitability on an operational level. Despite weaker gross margin, operating income jumped by a dramatic 56.9%. Waller attributed the gains to "tight control" on overhead costs.
Overall, I like what I see from Wet Seal. It faces intense competition from youth-oriented brands like American Eagle Outfitters (NYSE: AEO ) , Abercrombie & Fitch (NYSE: ANF ) , and Aeropostale (NYSE: ARO ) . But a clearly differentiated product, distinguishable from these dominant teen brands, works in Wet Seal's favor. Its Arden B stores have a particular opportunity to carve out a nice niche at the high end of young women's merchandise; their closest competitor is bebe stores (Nasdaq: BEBE ) .
Beyond a decent merchandise lineup that appears to be attracting young shoppers, Fools should also note the company's efforts to tightly manage inventories and operational costs. Wet Seal's turnaround remains on track, giving interested investors good reason for a closer look.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.
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