Back-to-School Jitters Batter Wet Seal Stock

Unable to recover from a fashion faux pas during the back-to-school shopping season, specialty retailer Wet Seal Inc. warned Tuesday that it expects earnings to slump in the fiscal third quarter because of slow sales.

After the warning, the company’s stock sagged to a 52-week low of $12.75 before rebounding a bit at $13.50, down $2.31, or nearly 15%, in Nasdaq trading.

The Foothill Ranch-based retailer said it expects to earn 21 cents to 23 cents a share for the three months ending Oct. 30, down from 41 cents a share during the same period last year. Analysts had predicted earnings of 36 cents a share.

The company also said sales at stores open at least a year, a key industry indicator, are down 12.5% so far this quarter.

Already aware that Wet Seal had misjudged its back-to-school merchandise by stocking too much fancy apparel and too few basics, analysts were not anticipating a rosy earnings report. “As it turns out, it was worse than we expected,” said Dennis Van Zelfden, with Robinson-Humphrey in Atlanta. “They missed the season in the sense that what they had in the stores was not really what the customer wanted.”

Chief Executive Kathy Bronstein, who has also been general merchandise manager for the Wet Seal and Contempo Casuals chains, concentrated in the summer on the company’s newest concept, Arden B stores that cater to a slightly older and more affluent customer than the 13- to 18-year-old market sought by the other stores, Van Zelfden said.

“Unfortunately, when she took her eye off the ball in Wet Seal, that’s when they had their problems,” he said. “They were stretched a little thin managerially.”

Analysts applauded the company for recently hiring more people to help select merchandise. And they said they were encouraged by Wet Seal’s announcement Tuesday that it had snagged former Quiksilver Inc. executive Adrienne Ernst to become its senior vice president of design and product development, a new position. Ernst was previously vice president, director of merchandise and design of Roxy, the Huntington Beach-based Quiksilver’s red-hot junior division.

“They have had holes in their merchandise team since last September,” analyst Joan Bogucki said of Wet Seal. “They have been filling them along the way and have just announced a couple of new changes as well. However, I don’t think we’re going to see a meaningful impact until next year.”

Wet Seal is optimistic about the upcoming holiday season and believes its merchandise “is well positioned,” Bronstein said in a statement. And Ernst may introduce a new brand that “focuses on the active lifestyles of our customers,” the statement added.

Company officials could not be reached for further comment.

Wet Seal, which caters mostly to young women, who have notoriously fickle fashion impulses, has been struggling in recent months. In the second quarter, the retailer issued two earnings warnings before finally posting a 24% drop in earnings and announcing it would curtail next year’s expansion plans.

The company stumbled during the important back-to-school season, analyst said, by stocking too much “club wear”--miniskirts, tight pants and crop tops in shiny or stretchy fabrics--and too few fashion basics, such as denim and khaki pants and casual tops.

“They tried to make adjustments along the way by not taking in as many orders as they would have if the products had been selling, but in the end, October was a slower month for them,” said Bogucki, with Wedbush Morgan Securities in Los Angeles. “They just couldn’t adjust the mix enough to make a big difference.”

Wet Seal operates 544 stores, including 244 Contempo Casuals, 200 Wet Seal stores, 79 Arden B stores and 21 Limbo Lounge outlets. It has opened 94 new stores--55 of them Arden B outlets--since the beginning of the fiscal year and plans to open 14 more. Next year, the company expects to open 40 to 50 stores.

Despite Wet Seal’s recent difficulties, analysts said they believe the retailer can bounce back.

“This company is known for merchandising themselves out of a fashion faux pas within a quarter,” Bogucki said.

Van Zelfden agreed. “I think they are very capable of getting this turned around,” he said. “And if they do, there should be a significant upside.”

But both were cautious about the stock, which Bogucki rates a “hold” and Van Zelfden rates a “neutral.”

“The next season is the fall/holiday, which is making its way into the stores now,” Van Zelfden said. “The question is, will this weakness continue? And I’m not sure I know what the answer is.”

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Stock Slump

Wet Seal Inc.’s stock tumbled to a 52-week low of $12.75 a share during Tuesday’s trading session after the Foothill Ranch-based retailer of young women’s apparel warned that third-quarter earnings will be disappointing. Weekly closing prices:

May: $45.31

Tuesday close: $13.50

Source: Bloomberg News