The Wet Seal Inc. (WTSLA) delivered second-quarter 2010 earnings of 2 cents a share, in line with the Zacks Consensus Estimate and the year-ago numbers.
Revenue and Margins
Quarterly net sales slipped 3.6% to $131.5 million as against $136.4 million posted in the year-ago quarter. Consolidated comparable store sales declined 4.3% for the quarter.
From a year ago, quarterly operating income plunged 21.2% to $2.6 million. Operating margin dipped 40 basis points to 2.0% in the quarter.
Segment Details
Net sales at the Wet Seal segment declined 2.4% to $108.9 million while Arden B net sales plummeted 8.8% to $22.7 million in the quarter. Comparable store sales for Wet Seal and Arden B stores declined 4.3% and 4.5%, respectively.
Other Financial Updates
Wet Seal exited the quarter with $165.5 million of cash and cash equivalents and no debt. The company’s quarterly operating cash flow stood at $3.6 million.
Wet Seal’s capital expenditure was $11.8 million, including $9.5 million for the construction of new stores and re-imaging the existing stores.
At the end of the quarter, the company’s inventory per square foot was flat versus the prior year quarter, with a 1% dip at the Wet Seal division and 8% increase at the Arden B division.
During the quarter, the company had 10 Wet Seal net store openings and 3 Arden B net store closures. Headquartered in Foothill Ranch, California, Wet Seal ended the quarter with 508 stores in 47 states, the District of Columbia and Puerto Rico, including 432 Wet Seal stores and 76 Arden B stores.
Guidance
The company anticipates earnings in the range of 1–3 cents a share in the third-quarter of fiscal 2010. The Zacks Consensus Estimate is currently pegged at 3 cents a share, at the higher end of the company’s target.
Wet Seal guided its quarterly sales in $139–$144 million range versus $141.5 million registered in the year-ago period. The same-store sales are expected to decline 2%–5% in the third-quarter versus a dip of 6.2% recorded in the comparable period last year.
Wet Seal expects gross margin in the range of 28.2%–29.9% compared with 29.0% delivered in the prior-year quarter.
For the quarter, the company expects selling, general and administrative (SG&A) expenses as a percentage of revenue to be 26.5%–26.9% versus 25.4% in the prior-year period.
The company anticipates operating income to come in at $1.8–$4.9 million in the coming quarter versus $4.7 million in the prior-year quarter.
In the quarter, the company plans to commence 10 net new stores for the Wet Seal segment and 2 for Arden B. The company projects to have opened 25 net Wet Seal stores and 3 net Arden B stores in fiscal 2010.
The company forecasts fiscal 2010 net capital expenditures of $31–$32 million, of which approximately $20–$21 million will be for construction of new stores or remodeling of existing stores upon lease renewals and/or store relocations.
For fiscal 2011, Wet Seal plans to open 60 new Wet Seal stores with a focus on off-mall power centers in select markets domestically and continued focus on the better malls across the productive Wet Seal domestic stores. The company aims to grow Arden B stores moderately in fiscal 2011.
Management mentioned that new stores deliver solid returns and are accretive to earnings. The company expects expansion into off-mall centers to be a significant driver of the Wet Seal growth plan and a good capital investment.
Wet Seal shares maintain a Zacks #4 Rank, which translates into a short-term Sell recommendation. Our long-term recommendation for the stock remains Neutral.
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