Is Wet Seal a Slam Dunk?

After its recent earnings report, Wet Seal (NASDAQ: WTSL  ) was a slam-dunk: Unfortunately, only in the sense that the company's share price got slammed, then dunked. With shares of Wet Seal trading at four-year lows, is it now a buy? With other retailers such as Ascena Retail Group  (NASDAQ: ASNA  ) and even Pacific Sunwear of California (NASDAQ: PSUN  ) reporting better results, Fools may want to continue to back off and wait for Wet Seal to perform its next act.

Wet Seal's results
Wet Seal reported fiscal third-quarter results on Dec. 4. Net sales tumbled 5.8% to $127.7 million. Same-store sales inched up 0.8%. Net loss was $14.9 million or $0.18 per share, close to the result from last year. CEO John Goodman blamed "considerable softening of mall traffic as the period progressed" and "the difficult macro environment."

Goodman has a "cautious outlook for the remainder of the year." For the holiday quarter, Wet Seal expects a net loss of $0.14 to $0.17 with a 17% drop in sales. Though some of that drop is due to a shift in the fiscal calendar, same-store sales are expected to nosedive "in the high single digits to low double digits." Sounds like a roughly 10% drop, otherwise known as a lump of coal in your stocking this year, unfortunately.

In the conference call, Goodman said that Wet Seal has stepped up its promotions and plans to "move through the product during the holiday season in order to enter January in a clean position." In other words, dump their inventory for whatever they can get for it and try something else. Sounds like severe markdowns are coming. That's not exactly confidence inspiring.

Goodman further explained, "Mall traffic shifted dramatically in September. And since that time, the environment has remained tough." He also warned that November was not good, with the only bright spot being Black Friday itself. Looking forward, he went on to say, "There is no question this holiday season will continue to be highly promotional throughout the mall."

CFO Steven Benrubi added, "November has been a very challenging retail environment from an aggressiveness level of promotional cadence throughout the mall." It sounds like there will be some winners and some losers this holiday season, and Wet Seal unfortunately expects that it will be one of the losers.

Ascena, a possible winner
You would think that Ascena and Wet Seal operate in entirely different industries. Last quarter, Ascena's sales rose 5% to $1.197 billion. Same-store sales climbed 4%. All of Ascena's brands -- which include Justice and maurices -- saw higher sales and even its e-commerce division saw a 27% rise.

Though CEO David Jaffe said the situation was "challenging for the foreseeable future," he still sees profitable growth ahead for Ascena. The company had a great Black Friday weekend and it expects overall sales to trend up during the holiday season.

Even Pacific Sunwear saw some light at the end of the tunnel. You might think "sunwear" in cold December might run into a bit of a snag, but the company is forecasting a same-store sales increase anywhere between 1% and 5% following a 6% rise in November. Didn't Wet Seal say, or at least imply, that the environment was too tough for everybody?

Last quarter Pacific Sunwear reported its seventh quarter in a row of positive same-store sales gains, so the environment certainly isn't making this company slip. CEO Gary Schoenfeld stated, "Overall, we believe our results continue to validate the unique positioning we are establishing for PacSun as we strive to become the leading specialty retailer for great brands and on-trend fashion and fashion basics." This is a completely different tone than that of Wet Seal.

Foolish final thoughts
Don't get in the tank with Wet Seal right now; wait until it's healthy. It's always tempting to try to catch a bargain at the bottom, but cautious Fools generally would rather pay a bit of a premium that comes with less risk. If and when Wet Seal shows tangible evidence of a turnaround, or at least displays some confidence in itself, then that may be the time to dive in.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 19, 2013, at 2:52 PM, DiArcy wrote:

    What are your thoughts on a possible buyout as indicated by the Clinton Group?

  • Report this Comment On December 26, 2013, at 4:19 PM, hudsonriver01 wrote:

    This article is a joke! I was at the mall this Holiday Season and looked at the customer traffic into the retail stores (Peter Lynch style!). The customer traffic into Wet Seal and teh cash box line was much higher than that of Justice and PacSun! Plus the CEO just bough over 13K company shares at over $3.60 according to SEC. (you don't bet on something that you know you are going to loose!) The company just spend $25M on a share buyback program.(Wasted working capital here, NOPE The CEO messed-up here! NOPE!!! Opinions are opinions fact are fact. If the CEO is cooperating with the Clinton Group and has a different agenda than being loyal to shareholder that's a different story. Stop the foolishness!

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