WET SEAL NET FLOUNDERS 49% IN QUARTER

Byline: Jennifer Weitzman

NEW YORK — Fashion specialty retailer The Wet Seal Inc. said its earnings for the first quarter were hurt by the comeback of the basic T-shirt.
The youth-oriented chain has struggled since the end of last year to shore up its earnings and sales, and the firm again reported disappointing results in its most recent fiscal quarter. For the quarter ended April 29, the Foothill Ranch, Calif.-based company said its earnings spiraled down 49 percent to $2.2 million, or 18 cents a diluted share, from $4.4 million, or 34 cents, a year ago. Sales were up slightly to $130.6 million, from $122.8 million, an increase of 7.3 percent.
The company announced on May 2 it expected its earnings to range between 16 and 18 cents a share due to poor sales. Original Wall Street estimates called for 23 cents a share.
The company said 22 new stores added from the prior year aided sales, while comparable-store sales fell 4.6 percent in the quarter after a 2.9 percent increase during the year-ago quarter. Same-store sales for the first two weeks of May were down 5.5 percent.
The company has suffered at the hands of today’s unpredictable teens, who are more apt to purchase an ornate skirt than top, typically a higher volume category for the company. The company said its cash position remains strong with $82.4 million in cash and investment and no long-term debt.
Gross margins after occupancy, distribution and buying costs were down for the quarter to 25.8 percent compared to 29.2 percent. The drop in gross margins was primarily a result of the increase in the occupancy costs as percentage of sales due to the decrease in comp-store sales. There was also an increase in the cost of merchandise due to a slight increase in markdowns as well as a decrease in the initial markons, which had been planned.
Kathy Bronstein, vice chairwoman and chief executive, said during a conference call last week that Wet Seal’s first quarter results were adversely affected by weak sales of its better-known fashion tops compared to the more popular basic tops. “Today’s fashion cycle is driven by the bottoms, so customers are looking to coordinate that with a basic or simpler top, and those, unfortunately, retail for less,” she said.
Bronstein continued by saying that bottoms were doing slightly better, but prices were down due to the weakening in the capri category and sales of shorts coming in below expectations.
Accessories continued to bang out good results for the company, particularly higher-end products.
The company added 19 new stores in the quarter and closed eight, for a total of 559 stores under three concepts: 451 Wet Seal/Contempo Casuals stores, 82 Arden B. and 26 Limbo Lounge, its unisex concept store. Total square footage increased to 2,228,381 from 2,143,770, up 3.9 percent.
To help offset expanding costs, the company said it decreased advertising expenditures and, through conversion to ground transportation from air delivery, shipping costs. As a result, inventory figures increased 6 percent to allow for more transit time.
Edmond Thomas, president and chief operating officer, said store expansion plans for the remainder of the year include 16 openings during the second quarter, four in the third and none in the fourth quarter, for a total of 39 new stores. He added that growth plans for 2001 are not finalized, other than an additional six to which the company is committed.
Thomas also said the company is pleased with the success of its various Web sites including its Blueasphalt.com. The company recently did away from its unpopular catalog to concentrate on e-commerce.
Last month, Greg Scott joined Wet Seal as president of the Arden B. division, which focuses on the needs of younger contemporary women, following four years as vice president of merchandising for Bebe Stores. Thomas said so far he has seen significant improvement with the group. Many of Arden B.’s locations were previously Britches stores that were purchased by Wet Seal in 1998.
To help drive more traffic to its stores, the company said it is currently working with Procter & Gamble’s Cover Girl division to test a makeup-selling kiosk installed near one of its stores. Thomas said he has seen the kiosk help increase traffic to the test store at the White Marsh Mall in Maryland. The company plans to test a second kiosk location in June.
Last year, the company introduced an accessories store-within-a-store by increasing the square footage of an existing store. The larger store would be able to sell hair accessories, jewelry, shoes and home goods. Thomas said he has also seen good results and plans on expanding to 14 additional stores before back-to-school sales begin.
Kelly B. Armstrong, an analyst with Wheat First Union, said Wet Seal, like many other retailers, was hurt during the quarter by various factors, including unexpected markdowns in February. “I thought they would be wrapped up more than they had been by the end of the fourth quarter,” Armstrong said.
Armstrong agreed with Bronstein’s analysis of how swings in the fashion cycle had adversely affected Wet Seal’s ability to sell higher-priced fashion tops. “The company did not miss anything in its bottoms line, but the company was hurt because it did not sell its higher-priced tops like last year,” she said.
She added the company needs to rebuild its brand in the eyes of the teen consumer. While its customers shop frequently, Armstrong said she is not expecting a huge shift, adding that it will take time for the company to rebuild its lost market share from last year.