Analysts see grim future for cash-strapped Wet Seal

Fri Aug 20, 2004
By Emily Kaiser

CHICAGO, Aug 20 (Reuters) - Wet Seal Inc. (WTSLA.O: Quote, Profile, Research) may have little choice but to close hundreds of its teen-oriented stores and convert dozens more to its upscale Arden B. brand if it hopes to stay out of bankruptcy, analysts said on Friday.

Its shares lost more than half their value on the Nasdaq early on Friday, and analysts said the stock price indicated that investors were expecting a Chapter 11 bankruptcy.

The retailer, which reported a surprisingly large $102.8 million quarterly loss on Thursday afternoon, said it has formed a special committee to look at strategic alternatives, and acknowledged that it expects to have just $11 million in cash left by the end of its current fiscal quarter.

"We believe the company could either be forced into a Chapter 11 scenario should vendors stop delivering goods, or might voluntarily file for bankruptcy protection due to its onerous lease structure," said Wedbush Morgan Securities analyst Adrienne Tennant.

"The stock is trading as if the company had essentially reported a Chapter 11 scenario and that outcome is now priced in the stock," she said.

A Wet Seal spokeswoman did not immediately return calls seeking comment. When the question of bankruptcy came up during a heated conference call late on Thursday, Wet Seal executives said it was too early to comment on what alternatives its newly formed special committee might consider.

Wet Seal said its namesake chain had "lost its customer base," and was struggling to win back the notoriously fickle teen shoppers. But the pricier Arden B. chain has been performing better, and the company said it would consider turning some Wet Seal stores into Arden Bs.

J.P. Morgan analyst Brian Tunick noted that Wet Seal had taken a charge to write down the value of 259 of its 600 stores. "Most will likely be closed, with some converted into the Arden B. concept," he said.

HEATED CONFERENCE CALL

On Thursday's conference call, analysts peppered executives with tough questions about how they planned to keep the company afloat.

"What are you going to do about the cash crunch that you are in?" asked Marc Bettinger, an analyst with Whitaker Securities.

"I'm just trying to figure out what alternatives there might be, other than Chapter 11, at this point," said Jeff Van Sinderen, an analyst at B. Riley & Co.

Wells Capital analyst Mark Cooper called management's answers "ridiculous" and "shameful" at one point. He demanded that the retailer disclose financial information for both the struggling Wet Seal stores and the more successful Arden B. chain so that analysts could better value the company.

Wet Seal Chief Executive Peter Whitford gave few firm answers, noting that the special committee tasked with exploring alternatives had just been set up this week.

"We are not trying to stonewall you or keep information from you," he said. "It is simply that we do not have all the answers. It is too early in the process."

Shares of Wet Seal were down $1.07, or 51 percent, at $1.03 in early Nasdaq trading.

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