Wet Seal Inc. (WTSLA) reported first quarter 2012 earnings of 2 cents per share, which was sharply lower than the year-ago quarter’s earnings of 8 cents. The earnings exclude the after-tax effect of non-cash asset impairment charges. However, earnings per share (EPS) were in line with Zacks Consensus Estimate.
The year-on-year downfall in the net earnings was due to decline in revenues and same store sales in both Wet Seal and Arden B stores
Consolidated Revenue and Margins
Wet Seal’s net sales in the reported quarter went down to $147.9 million from $156.1 million in the prior-year period. The lower sales in the tops business offset the measures that were taken by the company for a rebound in its Arden B stores. Additionally, sales also missed the Zacks Consensus Estimate of $149 million.
The company opened one and closed four Wet Seal Stores and two Arden B stores in the first quarter. As of April 28, 2012, the Company operated 553 stores in 47 states and Puerto Rico, comprising 469 Wet Seal stores and 84 Arden B stores.
The company suffered an operating loss of $0.4 million compared to an income of $13.3 million incurred in the year-ago quarter. Operating margin came down to 0.3% of net sales compared with8.5% of net sales in the year-ago quarter.
Selling, General and Administrative expenses went up to $40.4 million from $38.8 million in the prior year quarter.
The Wet Seal segment net sales came down year over year to$126.2 million compared with$131.0 million in the year-ago quarter. Same-store sales were a negative 7% compared to an increase of 8.3% in the prior-year quarter. Operating income went down to $9.3 million in the first quarter compared with$18.8 million a year ago.  
Net sales at the Arden B stores also came down to $21.7 million compared with$24.9 million in the year-ago quarter. Same store sales declined by 11.4% year over year compared witha decline of 0.1% in the year-ago quarter. The segment suffered operating loss of $1.3 million compared to an income of $2.6 million a year ago. 
Other Financial Updates
The company exited the quarter with cash and cash equivalents of $148.1 million as of April 28, 2012, up from $133.1 million as on April 28, 2011. Square footage went up to 2,142 from 2,060 in the year-ago quarter.
The company used $5.1 million cash from operations and incurred capital expenditure of $3.8 million. The company spent $2.4 million for new stores and remodeling of existing stores.
Based on the first-quarter fiscal 2012 results, Wet Seal estimates its second-quarter 2012 EPS to be in the range of 3 cents to 6 cents compared with earnings of 2 cents in the prior-year quarter. The Zacks Consensus Estimate is currently pegged at 2 cents for the second quarter of fiscal 2012 and 16 cents for fiscal year 2012.
For the second quarter, net sales are expected to be between $136 million and $141 million and comparable store sales are expected to decline in the range of 7% and 11%.
Gross margin is expected to be between 24.3% and 26.1% of net sales and operating loss is expected to bebetween $5.0 million and $8.7 million.
For fiscal 2012, the company plans a net 20 – 22 store openings at Wet Seal, down  from previously announced plan of opening 25 –30 stores. The company also plans to bring down Arden B store base from the current 84 stores to approximately 64 to 69 stores by the end of fiscal 2012.
Our Recommendation
Wet Seal faces stiff competition from American Eagle Outfitters Inc. (AEO) and Gap Inc. (GPS). Currently, Wet Seal carries a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.


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