California Apparel News

After burning through tons of cash and reporting a huge quarterly loss, The Wet Seal Inc. may have run out of pixie dust, according to many Wall Street analysts. Its only choice for survival is to file for Chapter 11 bankruptcy protection.

After two solid years of negative same-store sales, the Foothill Ranch, Calif.–based company announced net profit loss of $102.8 million for the second quarter, ending July 31. Same-store sales in the second quarter declined 10.9 percent.

Analysts said that leads to one thing.

“There’s Chapter 11, there’s Chapter 11, and there’s Chapter 11,” said Jeffrey van Sinderen, an equity analyst with B. Riley & Co. in Los Angeles. “There’s a lot of options you can entertain, but they’re not likely to happen. The most likely is Chapter 11, where Wet Seal stores are shuttered and Arden B. is sold or acts as the go-forward business for the Chapter 11 reorganization.”

Arden B. is the company’s 95-store division focusing on young contemporary casual clothes for women in their early 20s. The Wet Seal division targets the juniors market with 468 stores. Early this year, the company announced it would close its 31 tween-oriented Zutopia stores.

Peter D. Whitford, chief executive of the beleaguered retailer, announced during an Aug. 19 conference call with analysts that the company’s board of directors would explore the retailer’s options.

Since the conference call, Wet Seal’s stock on the NASDAQ has plummeted. Its 52-week high was $12.50 on Oct. 16, 2003. Its 52-week low was 69 cents on Aug. 23.

Many observers said they believe the company needs to accept the inevitable and reorganize.

Paul Buxbaum, principal for the Buxbaum Group, a Calabasas, Calif.–based company specializing in liquidating store inventories, said it would have been in Wet Seal’s best interest to file for Chapter 11 bankruptcy months ago.

“In general, when a company gets into trouble, you need to conserve cash and develop a plan to turn around the business,” Buxbaum said. “This company kept reorganizing their product mix and kept thinking that it would stop their downward spiral. That hasn’t happened.”

In 1998, Buxbaum’s company developed plans to turn around Rampage, a Los Angeles–based manufacturer and retailer. The retail division was spun off and sold to San Diego–based Charlotte Russe.

“I assume there’s still goodwill in the name [Wet Seal] and the operation,” Buxbaum said. “It’s proven they can do business in the junior world. The question is, does someone have the coal to stoke it up?”

Van Sinderen was doubtful that Arden B. could be sold outside a Chapter 11 bankruptcy filing. Buyers may hesitate to purchase both retail store chains because Wet Seal is considered a liability, he said.

Whitford noted that the company has considered converting some Wet Seal stores to Arden B. outlets. He forecast that Arden B. could grow to between 200 and 250 stores. Arden B.’s samestore sales have posted double-digit growth in the past year, according to the retail executive.

Andy Graves, a senior equity analyst at Pacific Growth Equities Inc. in San Francisco, estimated that Arden B. is worth at least $100 million. He forecast that management of Arden B. would stay intact but that the Wet Seal store base would be vastly downsized or even liquidated.

Whitford, who took over as chief executive in May 2003, after longtime head honcho Kathy Bronstein was fired months earlier, was frank about Wet Seal’s poor sales performance.

“The business has been in decline for such a long time [that] the Wet Seal business lost its customer base,” he explained during the conference call. “We’ve done a good job in the marketing area. I think the stores look better, but we are certainly missing the ability to drive additional transactions.”

He noted that the chain consistently targeted the wrong demographics during the past five years, first focusing on 14-year-old girls and then on women in their early 20s. He views Wet Seal’s demographic as girls ages 17 to 19.

Early this month, Wet Seal announced it would move its design headquarters to the Gerry Building in downtown Los Angeles. Operators of the Gerry Building said they are moving forward with the deal but continue to monitor the company’s financial health.

“We have not signed a lease,” said Larry Hudson with MJW Investments Inc., which owns the Gerry Building. “We haven’t killed the deal either.”

With all this turmoil surrounding the retailer, the company’s chief executive is confident about Wet Seal’s future. When asked by analysts if he thought the company would make a comeback, Whitford wasted few words. “I do,” he said.