MARGIN DROP HITS WET SEAL NET

Byline: Melanie Kletter

NEW YORK — Merchandise and margin problems continued to plague The Wet Seal in the fourth quarter, as profits took a dramatic plunge.
The youth-oriented retail chain, which now operates 548 stores under four concepts, has struggled all year to shore up its earnings and sales, and the firm again reported disappointing results in its most recent fiscal quarter and year, due in large part to significant margin erosion.
Sales trends have been off for much of the year due to the merchandise miscues, such as too much casualwear and not enough trendy items for which the chain is best known, according to analysts and industry executives.
In the fourth quarter ended Jan. 29, profits dropped to $3.4 million, or 27 cents a share, from $12.2 million, or 95 cents last year. Sales dipped 1.8 percent to $143.2 million from $145.9 million, but plunged 17.1 percent on a same-store basis.
Merchandise margins declined to 25 percent of sales from 34 percent last year.
In a conference call with Wall Street analysts last Friday, Wet Seal executives stressed that the chain would return to its roots of focusing more on fashion-forward products.
In addition, for the back-to-school period, Wet Seal plans to reduce its emphasis on private label and proprietary brands, which now account for about 75 percent of the firm’s offerings.
“In a nutshell, we misread cues from back-to-school and we positioned our inventory incorrectly,” Kathy Bronstein, vice chairman and chief executive officer, said on the call. “We lost our focus in the third and fourth quarters. We focused on casual merchandise, which has never been our strength. Also, we experienced a lot of change in management with our various merchants, and we had somewhat of a giant learning curve in merchandising.”
Another problem as of late has been the debut of the new Arden B. division, a contemporary chain geared toward slightly older consumers. Launched in November 1998, Arden B. now has 80 units, many of which were formerly Britches locations that Wet Seal purchased last February.
Company executives on the call declined to break out specific results for Arden B. except to note that the division failed to meet plan.
“We underestimated the task of opening a new division for which we lacked experience,” Bronstein said.
Overall, the last year was a tough one for the chain, which issued a series of sales and earnings warnings throughout the second, third and fourth quarter. Most recently, Wet Seal said late last month that earnings in the fourth quarter would come in between 24 and 27 cents a share, well below the 69 cents a share analysts on average had been expecting. Last year, earnings were 95 cents a share.
Wet Seal’s stock has also taken a beating. Traded on the Nasdaq, shares reached a 52-week high of 47 in May 1999 and have plunged steadily since then, falling to a low of 9 7/8 on Feb. 28.
On Friday, shares gained 2 1/8 to 14 3/8 after the company gave its more more optimistic outlook for 2000.
Kelly Armstrong, analyst at Wheat First Union, said it is “very hard to say” whether the firm is on the right track.
“We are coming out of three quarters of earnings-per-share declines,” Armstrong noted. “Based on the comments on the call, we have seen some improvement in same-store sales in the last few weeks, but it is hard to know.”
Richard Jaffe at PaineWebber added, “They need to get their groove back, and it’s going to be a struggle for a while.”
On a positive note, Bronstein said Wet Seal has filled a number of key vice president and merchandising positions, including new design and development executives. Late last year, Wet Seal said it would search to find a general merchandise manager, but on the call, Bronstein said she will continue to hold that role.
“I am focusing on the core division,” she said. “It is my strength, and I don’t think we can find a better gmm than me.”
She also expressed optimism about same-store sales, commenting, “We have every reason to believe we will see a return to positive comps this year.”
Wet Seal, based in Foothill Ranch, Calif., began with swimwear — its name was inspired by the “wet look” — in 1962. The chain grew quickly in the 1980s, and the company now operates four retail formats: Contempo Casual, Wet Seal, Arden B. and Limbo Lounge, an edgier, more media-inspired concept. Most of the stores are located in malls.
In June, Wet Seal made its initial foray into e-commerce with the launch of its Web site, BlueAsphalt.com, which features teen-oriented content and merchandise.
The stores feature national brands as well as its own private label brands, including Blue Asphalt, ENR and Formula X.
Earlier this year, Wet Seal embarked on a new price strategy, emphasizing value, according to analyst Elizabeth Pierce at Wedbush Morgan Securities. In the call, Bronstein said prices have been rolled back on about 10 percent of product offerings, primarily on basic fashion items such as five-pocket denim and T-shirts.
Executives said Wet Seal plans to open 40 new stores this year, including 19 Wet Seal stores, 13 Contempo Casual units, five Arden B. locations and three Limbo Lounges.
Edmond Thomas, president and chief operating officer, noted that Wet Seal has discontinued its catalog operation to focus on existing brick-and-mortar stores, as well as its e-commerce site.
In the year, earnings declined 80.5 percent to $14.2 million, or $1.11 a share, from $26 million, or $1.91.
Sales grew 8 percent to $524.4 million from $485.4 million, but fell 9.8 percent for the year. Margins declined to 27.5 percent of sales from 30.7 percent last year.

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