Challenges for fashion retailer The Wet Seal (Nasdaq: WTSLA) are not abating. This morning, the operator of Contempo Casuals, Wet Seal, and Arden B. announced that earnings for its fiscal second quarter fell to $0.29 per share from $0.35 last year. That decrease, in line with an earnings warning three weeks ago, was caused by an 8.5% drop in same-store sales. So far this quarter, trends are actually worsening: over the past three weeks, comparable store sales at its two core chains are down in the "mid-teens" range.
This sales slump indicates that the company doesn't have the right type of merchandise heading into the seasonally strong third and fourth quarters, which account for about two-thirds of annual profits. Sales (and profits) normally start to rise going into the back-to-school season and peak during the holiday season. If a fashion retailer is off-trend going into this period, it's rare for it to switch gears fast enough to recover before the end of the year. Although the company's earnings will certainly suffer, Wet Seal should be able to endure this rough patch since its balance sheet carries $59 million in cash and investments and no debt.
One bit of incremental news in today's earnings announcement is that the company plans to reduce future store openings. While plans to open 108 stores this year are unchanged (the company was probably too far in the development process to make changes), it will open only 40-50 new stores next year, compared to the 75 previously expected.
Management hopes this slower schedule will help it focus on the existing store base. Slowing down growth is always a tough decision, but it is often the right one when chain performance is struggling. I wish other companies would be as quick as Wet Seal to respond to developing problems in their stores. (Is anyone at CBRL Group (Nasdaq: CBRL), the operator of Cracker Barrel Old Country Stores, listening?)
Investors who follow fashion chains know that the sector is quite volatile. Stores do extraordinarily well for a spell when they have their fingers on the fashion pulse, only to see a downward spiral when their merchandise and trends diverge. With rare exceptions, this sector tends not to be a good one for buy-and-hold investors. Following the circuitous route of fashion trends, the stocks usually go way up only to fall right back down. Right now, Wet Seal is just about back to its starting point, trading for less than 20% above its initial public offering price nine years ago.
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