Wet Seal Shares Sink on Net Loss, Warning

Wall Street continued to hammer clothier Wet Seal Inc. on Friday, sending its stock plummeting nearly 60% to an all-time low and leading to speculation about a possible bankruptcy filing.

The Foothill Ranch-based company, which operates 468 Wet Seal and 95 Arden B. shops, surprised analysts Thursday when it reported lower-than-expected earnings in its fiscal second quarter and warned that third-quarter results would fall well below forecasts.

The shares fell $1.25 to 85 cents on Nasdaq. The stock is trading “as if the company had essentially reported a Chapter 11 scenario,” said Wedbush Morgan Securities analyst Adrienne Tennant, who downgraded the stock to “sell.”

In the quarter that ended July 31, Wet Seal lost $102.8 million, or $3.20 a share, compared with a net loss of $13.4 million, or 45 cents, a year earlier. Sales at stores open at least a year dropped 10.9%, continuing a long streak of same-store sales declines.

Sales volumes “are at abysmal levels,” said Jeff Van Sinderen, an equity analyst with B. Riley & Co., on Friday.

Wet Seal predicted that its third-quarter same-store sales would decline by a percentage in the mid-teens and that it would lose 69 cents a share. It also estimated it would end the quarter with just $11 million in cash -- a liquidity crisis that could make vendors nervous about the company’s future, analysts said.

The company said in a statement that it established a “special committee to analyze appropriate alternatives to enhance shareholder value” and would hire a financial advisor.

In the second quarter, it took a $36.7-million charge, writing down the value of 259 stores. Most of them will probably be closed and some converted to Arden B., said Brian J. Tunick, an analyst with J.P. Morgan Securities. The move “should have been considered months ago,” Tunick said.

The company has been troubled for some time. Earlier this month, Wet Seal’s creative director left one month after his “Granny Chic” and “Vintage Angels” fashions hit the stores. In July, La Sensa Corp., a Canadian lingerie seller headed by Irving Teitelbaum, then Wet Seal’s chairman, filed to sell its 3.1 million Wet Seal shares. Wet Seal then announced that Teitelbaum would retire as chairman after two decades with the company. Also, sales at stores open at least a year fell 14.7% in July -- the 25th consecutive month of same-store sales declines.

Wet Seal, according to retail analyst Liz Pierce with Sanders Morris Harris, knows it needs “to do some form of restructuring.”

One possible outcome, said Van Sinderen, is Chapter 11, often used to help reorganize ailing firms. “The company is trying to do what it can to avoid that,” he said. “I’m not convinced of the feasibility of options other than Chapter 11.”

Wet Seal also could restructure its leases without bankruptcy protection by using a real estate specialist to renegotiate lease terms. The odds of the company “pursuing this avenue should be highly likely,” according to a research note by Wedbush’s Tennant.

The company also could be sold. Wedbush Morgan believes the company “attempted this route earlier this year, with no success.”

Another possibility is spinning off the more successful Arden B. concept or converting some Wet Seal shops. (The company doesn’t release chain-specific sales numbers.)

Analysts value Arden B. from $2 to $3 or more a share. However, because of the “company’s dire situation,” any investor would probably want the company at a “significant discount,” Tennant said.

Wet Seal wouldn’t speculate.

“We are not trying to stonewall or keep information from you,” Chief Executive Peter Whitford said in a conference call with analysts and investors Thursday. “It’s simply that we do not have all the answers.”

*

Times wire services were used in compiling this report.