Wet Seal Inc. (WTSLA) reported modest results for the second quarter with earnings of 3 cents per share, which was in-line with the Zacks Consensus Estimate. However, earnings were down 9 cents year-over-year. Wet Seal is a specialty retailer, operating apparel and accessory items stores for female customers in the U.S.

Net sales for the quarter declined 8.5% year-over-year to $136.4 million. However, Internet sales grew 12.7% year-over-year. Overall comparable same-store sales declined 10.6%. Comparable same-store sales in the Wet Seal segment declined 11.9%, and at the Arden B segment it declined 4.1% year-over-year.

At the Wet Seal segment, this decline was primarily attributable to the challenging retail environment. However, much of this decline was due to the company’s weakness in assorting the merchandise.

In the Arden B segment, comparable same-store sales declined only 4.1%, as converting to a lower price merchandising strategy at the beginning of the year started reaping benefits.

Gross margin for the quarter contracted 606 basis points (bps) to 28.7% versus 34.8% in the comparable prior-year quarter. The decline is primarily due to the decrease in merchandise margins, especially in the Wet Seal segment. Operating margins declined 161 bps to 25.2% from 26.8% in the prior-year quarter.

The company ended the quarter with $144 million of cash and cash equivalents and $3.1 million of long-term debt. Capital expenditures for the quarter were $6.6 million.

Based on the performance of the company’s results in the first half, management provided guidance for the third quarter. Quarterly earnings are expected in the range of 2 cents to 5 cents per share.

Net sales for the third quarter are expected to be in the range $138 million to 142 million, while comparable store sales are expected to decline in the range of 6% to 9%. The company expects to open 3 new Wet Seal stores and close 1 Arden B store in the next quarter.

Zacks Investment Research
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