Wet Seal's Shares Underwater -- Again (News) August 4, 1999

Wet Seal's Shares Underwater -- Again

August 4, 1999

Long-time investors in young women's fashion retailer Wet Seal (Nasdaq: WTSLA) can tell you that buying shares in this company is like buying a ticket to the circus. You're not exactly sure what you're going to get, but it's fair to say that laughs of merriment one minute can quickly be replaced by anxious gasps the next.

A mere two months ago, shareholders were basking in the sun after the company bounced back from an atrocious fall in late 1998 to hit a 52-week high of $47 per share. Today, the firm's shares fell to less than half that figure following a warning that earnings for the fiscal second quarter will be $0.06 to $0.08 per share short of the current First Call mean estimate of $0.36 per share.

What happened?

Same-store sales trends are always monitored closely by retailing investors, and Wet Seal's current comps look glaringly bad. Same-store sales for the quarter are down 8.5%, compared to a 4.3% rise during the same period a year ago. That's worse than the trend reported by management six weeks ago, when the company said a "mid single digit" decline in comps would result in Q2 EPS flat with last year's $0.35. Yesterday's warning ruined that forecast. Current market jitters about the possibility of higher interest rates, which could crimp consumer spending, added enough uncertainty to the mix to send the stock reeling.

Wet Seal said last year's sales figures benefited from catalog mailings in the first and second quarter, while this year's first catalog will not be sent out until the third quarter. Still, first half sales figures for fiscal 1999 are up a respectable 15% from a year ago at a shade under $250 million. So, it appears that the firm's trendy products are indeed moving off of the racks and into consumers' closets.

That fact, however, is being overshadowed by the rather conservative way that the company tallies its same-store sales figures. Only stores that were open throughout the full fiscal year and throughout the full prior fiscal year are included in the calculation, which means that any sales growth from the company's continuing roll-out of its Arden B. concept is being hidden from view.

Investors weighing the bad news on one flipper and the firm's currently distressed valuation on the other may want to keep an eye on what Wet Seal's management does next. The last time the company's shares suffered through a death spiral of this nature, in the fall of 1998, the head honchos in Foothill Ranch, California started an aggressive share repurchase program. That turned out to be a brilliant stroke, as the company's stock soared 245% from its September low of $13 5/8 per share in only eight short months. If the ringmasters at Wet Seal view today's drop as yet another prime buying opportunity, retailing investors may want to put down their popcorn and jump on this three-ring circus train before it leaves town.

By Brian Graney (TMF Panic) (TMF Panic)

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