That old friend of specialty retailing -- share price volatility -- came knocking on the door of women's fashion retailer The Wet Seal (Nasdaq: WTSLA), which watched its stock get dunked for a 7% loss this morning after announcing guidance for the fiscal fourth quarter. Simply put, the outlook ain't pretty.
Earnings per share are seen coming in between $0.24 and $0.27, down from last year's $0.95 and short of the First Call mean estimate of $0.69. Sales during the period (including catalog sales) fell 1.8% from a year ago to $143.2 million. The real black eye, however, was the firm's quarterly same-store sales results, which dropped by a severe 17.1%.
For investors who have followed Wet Seal's descent over the past year, today's news is just more of the same. Report bad comps, watch share price sink. Rinse, lather, repeat.
The recent close relationship between Wet Seal's share price and its same-store sales performance is illustrated by the following chart. The "comps" represent the same-store sales performance for the quarter in question, while "share price" refers to the closing price of the firm's stock on the closest trading day to the final day of the quarter (Note: fiscal Q4 ended January 29, which was a Saturday. The share price listed is from January 28.)
This scenario suggests that Wet Seal won't see a turnaround in its share price until it can reverse the comps slide. To do that, the firm must reposition its merchandise and get a buzz around its products again. This has been the magic equation of specialty retailing for the past few years -- hot product = hot stock price. As Fool Warren Gump stated in the earlier stages of the Wet Seal slide last year, "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."
Investors must accept the fact that Wet Seal's income statements are going to look pretty ugly for at least a little while longer. With that in mind, tracking the company's balance sheet and cash flow statements will take on added importance. Today, the company gave an initial indication that the boat has plenty of ballast with cash totaling $78 million at the end of the year and no debt.
The cash position (which the company calculates as cash and equivalents plus short- and long-term investments) is an interesting nugget of incremental information, as it has increased by some $25 million since the end of fiscal Q3. The ramp-up definitely didn't result from improved operating cash flow, so something else must have happened in the financing and investing department during the quarter. Investors will have to wait until earnings are reported in March 16 to get a hint about these areas and the full picture won't be available until the year-end 10-K is filed later in the spring.
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