Cost Cutting Boosts Wet Seal

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Wet Seal's (Nasdaq: WTSLA) shares were up 15% to $2.40 in after-hours trading yesterday after the struggling specialty apparel retailer announced the next step of its "major restructuring plan."

In a last-ditch effort to cut costs and salvage its bleeding balance sheet, Wet Seal said it would close about 150 Wet Seal-brand stores, eliminating about 2,000 jobs. It also said it would announce the closing cost estimate in January, and that those costs would be accounted for in the fourth quarter ending January 29, 2005.

The action is necessary for survival. Wet Seal had only $22.8 million left on its balance sheet at the end of the third quarter, during which its net loss nearly quadrupled to $24.6 million (see "Wet Seal, Not Good"). And even after receiving a cash infusion from S.A.C. Capital -- one of its largest shareholders -- Wet Seal still only had a few quarters of cash left at the rate things were going.

What's more, Wet Seal's revenues are in a free fall, and not just due to the company's decreasing store count. For November, Wet Seal reported a 19.5% decline in same-store sales, following a 15.5% decline in October and a 12.6% decline in the third quarter. Really, just about the only thing that looks worth saving is the company's Arden B. stores, which unfortunately account for only 96 of the company's 559 stores.

If management can somehow pull off a miracle turnaround, there is the possibility of an upside in Wet Seal's beaten-down stock. That said, I still believe that the average investor would be better off sticking to the stronger brands in the industry, including Gap (NYSE: GPS), Pacific Sunwear (Nasdaq: PSUN), Abercrombie & Fitch (NYSE: ANF), American Eagle Outfitters (Nasdaq: AEOS), and Polo Ralph Lauren (NYSE: RL).

For more on Wet Seal, check out:

• Clubbing Wet Seal
• Wet Seal All Washed Up?
• Wet Seal's Dizzying Dive
• Waiting on Wet Seal
• Wet Seal's Slippery Slide

Fool contributor Jeff Hwang owns none of the companies mentioned above.