Is Wet Seal Beginning to Look Like J.C. Penney Did Before Its Turnaround Began?http://www.fool.com/investing/general/2013/12/16/is-wet-seal-beginning-to-look-like-jc-penney-did-b.aspx Daniel Jones
December 16, 2013
Last Wednesday, Wet Seal (NASDAQ: WTSL) reported earnings for its third quarter of 2013. In response to a significant earnings miss, shares of the retailer fell nearly 16% in after-hours trading. Given such a tremendous fall in price, is it possible that some value is being left on the table or is an investment in Wet Seal doomed to failure?
Wet Seal just couldn't deliver
On top of reporting lackluster top-line results, the company also reported earnings per share of -$0.18 which was $0.06 below estimates and $0.01 worse than the same period last year. According to the company's earnings release, the decline in its bottom line came about in spite of its cost of sales declining from 80.8% of sales to 77.3%, while its selling, general, and administrative expenses fell from 32.8% of sales to 30.3%. The improvement in these metrics resulted in the company reporting an operating loss that was significantly better than what it reported last year. However, a small tax expense this quarter and a large tax benefit in the quarter a year ago resulted in a worse bottom line this year.
What does Wet Seal expect going forward?
A sign of more trouble to come? Lessons from J.C. Penney
For instance, between 2011 and 2012 J.C. Penney's revenue fell by 24.8% from $17.26 billion to about $13 billion. Over that same time-frame, the company reported a net loss that widened from $152 million to $985 million. Both revenue and net income have continued to worsen year-to-date but the company did report a slight uptick in comparable store sales of 0.9% in the month of October and 10.1% in November. In response to this news, shareholders at J.C. Penney are cautiously optimistic about the company's future.
Looking at Wet Seal, the company may be following in J.C. Penney's footsteps. Just as revenue and net income fell off for J.C. Penney, the same appears to be true with Wet Seal. Despite the moderate news this quarter, next quarter will prove extremely challenging for the retailer. If management is correct about its prediction of significantly lower sales, this could leave Wet Seal stuck with unwanted inventory like J.C. Penney has seen. This could incite Wet Seal to offer larger sales in an attempt to rid itself of excess inventory. However, it might also result in the deterioration of Wet Seal's attractive balance sheet, which could cause solvency issues and bring into question the company's long-term viability.