Shares of Wet Seal Inc. (WTSL) hit a new 52-week low of 60 cents on Sep 18 after reporting disappointing second-quarter fiscal 2014 results on Sep 10. The discount retailer’s share price declined more than 6% on that day after it released the quarterly results.
Why the Share Price Decline?
On Sep 10, Wet Seal reported lower-than-expected second quarter fiscal 2014 and also provided a bleak outlook for the third quarter.
Wet Seal posted loss of 15 cents per share in the second-quarter fiscal 2014, wider than the Zacks Consensus Estimate of 10 cents and management’s guidance range of a loss 9 to 12 cents due to lower-than-expected comparable store sales. Results were also wider than a loss of 1 cent incurred in the year-ago quarter due to weak top line. (Read: Wet Seal Q2 Loss Wider than Expected; Sales Miss Estimates)
Revenues slipped 11.7% to $121.2 million due a sharp 12.4% decline in comps during the quarter, which compared unfavorable with a gain of 3.4% in the previous year mainly due to weak mall traffic. Net sales also missed the Zacks Consensus Estimate of $124.0 million by 2.3%.
Wet Seal has been witnessing declining comparable-store sales for several quarters due to lower comps at both Wet Seal and Arden B Stores. Moreover, Arden B stores have been underperforming for the past several quarters. Though the company has taken initiatives to turnaround its business, we prefer to wait until these initiatives yield substantial results. Moreover, prolonged constrained discretionary spending environment, poor back-to-school season and unemployment are lowering comps further.
Gross profit dipped 35.1% to $26.4 million compared with $40.7 million a year ago. The gross margin shrank 780 basis points to 21.8% versus 29.6% a year ago due to lower merchandise margins and higher occupancy costs. Wet Seal suffered an operating loss of $11.1 million, compared to $1.1 million income incurred a year ago.
Management is not too optimistic about the third quarter. Wet Seal expects to report net loss per share in the 22 to 28 cents range in the third quarter of 2014, wider than the Zacks Consensus Estimate of a loss of 8 cents. The guidance also compared unfavorably to a loss of 12 cents incurred a year ago. The cautious third-quarter outlook shows that revival in consumer spending will take time. It expects comparable store sales to decline in the range of mid-to-high teens compared to an increase of 1% in the previous year.
Wet Seal currently carries a Zacks Rank #3 (Hold).
Other Stocks to Consider
Some better-ranked stocks to consider in the retail apparel/shoe industry include Citi Trends, Inc. (CTRN), Express Inc. (EXPR) and Foot Locker Inc. (FL). While Citi Trends sports a Zacks Rank #1 (Strong Buy), Express and Foot Locker carry a Zacks Rank #2 (Buy).
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