The Wet Seal, Inc. with its subsidiaries engages in the retail sale of women apparel, shoes and various accessories in the United States. The company operates under two brands - Wet Seal and Arden B. The Wet Seal stores network offers apparel for teenage girls aged 13 to 19 years old. The Arden B stores sell contemporary apparel and accessories for women mainly aged 25 to 35. The company currently operates 502 stores in 49 states in the United States. The company also runs web-based stores at www.wetseal.com and www.ardenb.com enabling customers to buy the company’s production online.
Despite nearly 5% quarterly increase in revenue totaling $150 million for the third quarter of 2007, the company has incurred a net loss of $3.3 million. The stockholder equity has consequently decreased by 1.6% to $114 million.
The company is constantly expanding their existing store base. However due to increased cost of revenue the company’s income from sales has actually dropped for the last quarter. The company said they had been marking down the inventories in their stores as a long term cost reduction strategy. The company also plans to revive the Arden B business and expand marketing through the internet as well as make minor improvements in current stores. Currently the company is adequately financed to employ these marketing and restructuring methods.
On January 10, 2008 the company has announced they expect earnings of 6 to 8 cents per share for the 4th quarter of 2007. These numbers are quite optimistic compared to the previous expectation of 3 to 6 cents per share. There is still no SEC filing for the last quarter however if the company’s expectations will be met it can be expected the stock will react to this improvement and rally up at least in the short term.
The company hasn’t shown peak performance for the last quarter however their plans of business improvement and cost reduction seem reasonable. In our opinion if the Wet Seal will be able to sustain growth in their revenues and reduce cost expenses the company’s expansion will drive the stock price up in the long term.
Here's the description from company's SEC filing:
Overview
We are a national specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers aged 15 to 35. We operate two nationwide, primarily mall-based, chains of retail stores under the names "Wet Seal" and "Arden B". As of November 3, 2007, we operated 490 retail stores in 47 states, Puerto Rico and Washington D.C. Our products can also be purchased online.
We consider the following to be key indicators in evaluating our performance:
Comparable store sales-For purposes of measuring comparable store sales, sales include merchandise sales as well as membership fee revenues recognized under our Wet Seal concept's frequent buyer program during the applicable period. Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or significant remodel/relocation, which we define to be a square footage increase or decrease of at least 20%. Stores that are remodeled or relocated with a resulting square footage change of less than 20% are maintained in the comparable store base with no interruption. However, stores that are closed for four or more days in a fiscal month, due to remodel, relocation or other reasons, are removed from the comparable store base that fiscal month as well as for the comparable fiscal month in the following fiscal year. Comparable store sales results are important in achieving operating leverage on certain expenses such as store payroll, occupancy, depreciation and amortization, general and administrative expenses, and other costs that are at least partially fixed. Positive comparable store sales results generate greater operating leverage on expenses while negative comparable store sales results negatively affect operating leverage. Comparable store sales results also have a direct impact on our total net sales, cash, and working capital.
Average transaction counts-We consider the trend in the average number of sales transactions occurring in our stores to be a key performance metric. To the extent we are able to increase transaction counts in our stores that more than offset any decrease in the average dollar sale per transaction, we will generate increases in our comparable store sales.
Gross margins-We analyze the components of gross margin, specifically cumulative mark-on, markups, markdowns, buying costs, distribution costs, shrink and store occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or in inventory shrink, or an inability to generate sufficient sales leverage on other components of cost of sales could have an adverse impact on our gross margin results and results of operations.
Operating income (loss)-We view operating income (loss) as a key indicator of our success. The key drivers of operating income (loss) are comparable store sales, gross margins, and the changes we experience in operating costs.
Cash flow and liquidity (working capital)-We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs.
Store Formats
Wet Seal. Wet Seal is a junior apparel brand for teenage girls that seek fashion-first clothing with a target customer age of 13 to 19 years old. Wet Seal seeks to provide its customer base with a balance of affordably priced fashionable apparel and accessories. Wet Seal stores average approximately 4,000 square feet in size. As of November 3, 2007, we operated 396 Wet Seal stores.
Arden B. Arden B is a fashion brand for the sophisticated feminine contemporary woman with sex appeal. Arden B targets customers aged 25 to 35 and seeks to deliver contemporary collections of branded fashion separates and accessories for various aspects of the customers' lifestyles. Arden B stores average approximately 3,200 square feet in size. As of November 3, 2007, we operated 94 Arden B stores.
Internet Operations. In 1999, we established Wet Seal online, a web-based store located at www.wetseal.com, offering Wet Seal merchandise to customers over the Internet. In August 2002, we expanded our online operations with the launch of www.ardenb.com, offering Arden B apparel and accessories comparable to those carried in the stores. Our online stores are designed to serve as an extension of the in-store experience, and offer a wide selection of merchandise, which helps expand in-store sales. In fiscal 2006 and for the 39 weeks ended November 3, 2007, we experienced rapid growth in our online sales and we will continue to develop our Wet Seal and Arden B websites to increase their effectiveness in marketing our brands.
Current Trends and Outlook
Our comparable store sales decreased 3.4% for the 13 weeks ended November 3, 2007 primarily as a result of continued softness in average store transaction counts and lower than anticipated full-priced selling at both our Wet Seal and Arden B concepts. We believe these overall traffic trends may continue through the fiscal fourth quarter and are planning our merchandise inventories and managing our costs with this expectation. During the 13 weeks ended November 3, 2007 we aggressively marked down inventories in our stores to appropriately position our inventory as we enter the holiday season. The holiday season begins the week of Thanksgiving and ends the first Saturday after Christmas. During the 4 weeks ended December 1, 2007, the first fiscal month of our fourth quarter, we experienced a 1.7% decrease in comparable store sales.
Our long term strategy is to expand our existing retail store base, return to positive comparable store sales growth, revive the Arden B business and expand our online business. We are also taking several steps to drive higher sales productivity in our retail stores, including improved store layout and visual displays, and have embarked on several initiatives to improve gross margins, including efforts to optimize sourcing of merchandise, enhance our inventory planning and allocation functions, better align merchandise mix with customer wants, rationalize our vendor base and improve supply chain efficiency through better coordination among and within our vendor, internal distribution and store operations organizations.
Our operating performance since fiscal 2005 has resulted in increased liquidity and improved credit standing with suppliers. However, we may experience future declines in comparable store sales or may be unsuccessful in executing some or all of our business strategy. If our comparable store sales drop significantly for an extended period of time, or we falter in execution of our business strategy, we may not achieve our financial performance goals, which could impact our results of operations and operating cash flow, and we may be forced to seek alternatives to address cash constraints, including seeking debt and/or equity financing.
Appointment of New President and Chief Executive Officer and Chief Financial Officer
As we previously announced, Mr. Joel N. Waller, our former president, chief executive officer and chairman of our board of directors, resigned from the Company and Mr. Edmond S. Thomas was appointed as president and chief executive officer of the Company, effective October 8, 2007.
Additionally, as we previously announced, we recently appointed Steven H. Benrubi as our new chief financial officer effective as of September 21, 2007.
Despite nearly 5% quarterly increase in revenue totaling $150 million for the third quarter of 2007, the company has incurred a net loss of $3.3 million. The stockholder equity has consequently decreased by 1.6% to $114 million.
The company is constantly expanding their existing store base. However due to increased cost of revenue the company’s income from sales has actually dropped for the last quarter. The company said they had been marking down the inventories in their stores as a long term cost reduction strategy. The company also plans to revive the Arden B business and expand marketing through the internet as well as make minor improvements in current stores. Currently the company is adequately financed to employ these marketing and restructuring methods.
On January 10, 2008 the company has announced they expect earnings of 6 to 8 cents per share for the 4th quarter of 2007. These numbers are quite optimistic compared to the previous expectation of 3 to 6 cents per share. There is still no SEC filing for the last quarter however if the company’s expectations will be met it can be expected the stock will react to this improvement and rally up at least in the short term.
The company hasn’t shown peak performance for the last quarter however their plans of business improvement and cost reduction seem reasonable. In our opinion if the Wet Seal will be able to sustain growth in their revenues and reduce cost expenses the company’s expansion will drive the stock price up in the long term.
Here's the description from company's SEC filing:
Overview
We are a national specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers aged 15 to 35. We operate two nationwide, primarily mall-based, chains of retail stores under the names "Wet Seal" and "Arden B". As of November 3, 2007, we operated 490 retail stores in 47 states, Puerto Rico and Washington D.C. Our products can also be purchased online.
We consider the following to be key indicators in evaluating our performance:
Comparable store sales-For purposes of measuring comparable store sales, sales include merchandise sales as well as membership fee revenues recognized under our Wet Seal concept's frequent buyer program during the applicable period. Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or significant remodel/relocation, which we define to be a square footage increase or decrease of at least 20%. Stores that are remodeled or relocated with a resulting square footage change of less than 20% are maintained in the comparable store base with no interruption. However, stores that are closed for four or more days in a fiscal month, due to remodel, relocation or other reasons, are removed from the comparable store base that fiscal month as well as for the comparable fiscal month in the following fiscal year. Comparable store sales results are important in achieving operating leverage on certain expenses such as store payroll, occupancy, depreciation and amortization, general and administrative expenses, and other costs that are at least partially fixed. Positive comparable store sales results generate greater operating leverage on expenses while negative comparable store sales results negatively affect operating leverage. Comparable store sales results also have a direct impact on our total net sales, cash, and working capital.
Average transaction counts-We consider the trend in the average number of sales transactions occurring in our stores to be a key performance metric. To the extent we are able to increase transaction counts in our stores that more than offset any decrease in the average dollar sale per transaction, we will generate increases in our comparable store sales.
Gross margins-We analyze the components of gross margin, specifically cumulative mark-on, markups, markdowns, buying costs, distribution costs, shrink and store occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or in inventory shrink, or an inability to generate sufficient sales leverage on other components of cost of sales could have an adverse impact on our gross margin results and results of operations.
Operating income (loss)-We view operating income (loss) as a key indicator of our success. The key drivers of operating income (loss) are comparable store sales, gross margins, and the changes we experience in operating costs.
Cash flow and liquidity (working capital)-We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs.
Store Formats
Wet Seal. Wet Seal is a junior apparel brand for teenage girls that seek fashion-first clothing with a target customer age of 13 to 19 years old. Wet Seal seeks to provide its customer base with a balance of affordably priced fashionable apparel and accessories. Wet Seal stores average approximately 4,000 square feet in size. As of November 3, 2007, we operated 396 Wet Seal stores.
Arden B. Arden B is a fashion brand for the sophisticated feminine contemporary woman with sex appeal. Arden B targets customers aged 25 to 35 and seeks to deliver contemporary collections of branded fashion separates and accessories for various aspects of the customers' lifestyles. Arden B stores average approximately 3,200 square feet in size. As of November 3, 2007, we operated 94 Arden B stores.
Internet Operations. In 1999, we established Wet Seal online, a web-based store located at www.wetseal.com, offering Wet Seal merchandise to customers over the Internet. In August 2002, we expanded our online operations with the launch of www.ardenb.com, offering Arden B apparel and accessories comparable to those carried in the stores. Our online stores are designed to serve as an extension of the in-store experience, and offer a wide selection of merchandise, which helps expand in-store sales. In fiscal 2006 and for the 39 weeks ended November 3, 2007, we experienced rapid growth in our online sales and we will continue to develop our Wet Seal and Arden B websites to increase their effectiveness in marketing our brands.
Current Trends and Outlook
Our comparable store sales decreased 3.4% for the 13 weeks ended November 3, 2007 primarily as a result of continued softness in average store transaction counts and lower than anticipated full-priced selling at both our Wet Seal and Arden B concepts. We believe these overall traffic trends may continue through the fiscal fourth quarter and are planning our merchandise inventories and managing our costs with this expectation. During the 13 weeks ended November 3, 2007 we aggressively marked down inventories in our stores to appropriately position our inventory as we enter the holiday season. The holiday season begins the week of Thanksgiving and ends the first Saturday after Christmas. During the 4 weeks ended December 1, 2007, the first fiscal month of our fourth quarter, we experienced a 1.7% decrease in comparable store sales.
Our long term strategy is to expand our existing retail store base, return to positive comparable store sales growth, revive the Arden B business and expand our online business. We are also taking several steps to drive higher sales productivity in our retail stores, including improved store layout and visual displays, and have embarked on several initiatives to improve gross margins, including efforts to optimize sourcing of merchandise, enhance our inventory planning and allocation functions, better align merchandise mix with customer wants, rationalize our vendor base and improve supply chain efficiency through better coordination among and within our vendor, internal distribution and store operations organizations.
Our operating performance since fiscal 2005 has resulted in increased liquidity and improved credit standing with suppliers. However, we may experience future declines in comparable store sales or may be unsuccessful in executing some or all of our business strategy. If our comparable store sales drop significantly for an extended period of time, or we falter in execution of our business strategy, we may not achieve our financial performance goals, which could impact our results of operations and operating cash flow, and we may be forced to seek alternatives to address cash constraints, including seeking debt and/or equity financing.
Appointment of New President and Chief Executive Officer and Chief Financial Officer
As we previously announced, Mr. Joel N. Waller, our former president, chief executive officer and chairman of our board of directors, resigned from the Company and Mr. Edmond S. Thomas was appointed as president and chief executive officer of the Company, effective October 8, 2007.
Additionally, as we previously announced, we recently appointed Steven H. Benrubi as our new chief financial officer effective as of September 21, 2007.
