Wet Seal Leaves Little to Love

Wet Seal Leaves Little to Love

Teen-girl-focused retailer Wet Seal got punished last week upon releasing its third-quarter earnings. The specialty retail market, especially for young-people clothing, has been brutal lately and Wet Seal may be one of the hardest hit. Sales dropped along with demand, and although the company mitigated some of the damage with cost control efforts, it wasn't enough to keep the bottom line from dipping into the red. Looking ahead, investors and analysts have little to comfort them as the company expects another loss for the fourth quarter. Wet Seal is trading at its 52-week low, but its valuation isn't quite cheap enough to make this a deep value play. With neither growth nor value on the menu, what does Wet Seal offer investors?

Earnings recap
Sales came in at $127.7 million for Wet Seal's third quarter -- about 5% under last year's $135.5 million and below analyst estimates. The company, which owns both its namesake store as well as the higher market Arden B, actually achieved marginally higher same-store sales. The core brand performed respectably, up 1.6%, while Arden B was down 6.7%.

Management has focused on inventory practices and, coupled with lower SG&A expenses, the company's gross margin increased 350 basis points leading to an 11% increase in gross profit. Product markdowns were lower even though the company ran aggressive promotional campaigns.

On the bottom line, the company posted an adjusted net loss of $0.12 per share -- one penny below last year's number and a hair under analyst estimates.

As mentioned, fourth-quarter guidance dictates lower sales (both top line and store level) and an operating loss, though management is still improving margins with tighter cost controls and inventory management.

When companies and their respective stocks bottom out, it can be Christmas come (just a little bit) early for value-oriented investors. Retailers are often hard hit based on short-term performance, much of which is dictated by the macroeconomic environment, but maintain solid fundamentals and competitive advantages in the long term.

Wet Seal, at its current valuation, does not fall into this category.

Teen apparel is an ultracompetitive market. When that market experiences a demand squeeze, the name of the game is price cuts. It's lose-lose, as companies have no choice but to cut prices and crunch their margins. Wet Seal does have a formidable mall presence, but its products do little to separate it from the guy next door.

At 22 times projected forward earnings, Wet Seal largely eliminates the value appeal of a deeply cut retail stock. Other than the solid efforts from management to keep the business operating efficiently during this troubling period, there isn't much evidence of improvement on the horizon.

If Wet Seal gets cheaper or shows signs of renewed life, there may be an opportunity. Until then, keep on walking toward the food court.

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The article Wet Seal Leaves Little to Love originally appeared on Fool.com.

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