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WIKI ANALYSIS
Wet Seal (NYSE: WTSLA) sells clothes for teenagers and young women, operating two mall-based chains of retail stores in the United States under the names Wet Seal and Arden B. The Wet Seal private label brand targets 13 to 19 year old females, while Arden B. stores target 25 to 35 year-old women. The company also operates e-commerce websites for each of the two chains. The company operates 504 stores in 47 states.
Wet Seal counts on the second half of its fiscal year to provide a boost in sales, as its junior customers shop for the back-to-school season in the third quarter and as consumers shop for gifts in the holiday season in the fourth quarter.[1] Wet Seal earns about half of its annual net income during the fourth quarter. During slow economic times, consumers are less willing to spend money on discretionary purchases, especially during the holiday season. It is critical that Wet Seal maintain strong holiday season sales, otherwise their bottom line will struggle. In 2009, the company's net sales fell 5.4% due to decreased customer traffic.[2]
Company Overview
Wet Seal is a specialty women's apparel retailer. The company targets different age ranges within the women's apparel market through its two separate chains, Wet Seal and Arden B., which each sell their own private branded merchandise. Wet Seal offers fashionable and contemporary apparel and accessories designed for juniors (female teenagers from 13 to 19 years old). Arden B. targets 25 to 35 year old women with fashionable apparel and accessories that its customers can wear during the workweek or in more casual situations on the weekend.
Retail and Direct Channel Operations[3][4]
- Wet Seal: Wet Seal operates 424 of its namesake store locations in the United States. Wet Seal offers a variety of fashionable apparel, accessories and related merchandise designed for 13 to 19 year old teenage females ("juniors") under the Wet Seal private brand. In addition to the 424 Wet Seal store locations, the company operates a Wet Seal e-commerce website to serve customers through a direct channel.
- Arden B: the company operates 80 Arden B. domestic store locations. Arden B. targets 25 to 35 year old women with fashionable apparel, accessories and related merchandise that its customers can wear to work during the week or in casual situations on the weekend. The growing popularity of "fast-fashion" stores such as H&M and Zara has created strong competition for Arden B, contributing to its poor financial performance.
Business Growth
FY 2009 (ended January 30, 2010)[2]
- Net sales fell 5.4% to $561 million. Comparable store sales company-wide fell 7.1%, with an 8.5% decline at Wet Seal stores, which was offset by a 0.2% increase at Arden B stores.
- Net income more than tripled to $93 million. However, this includes the reversal of the valuation allowance against the net deferred tax assets in the amount of $71.3 million, recorded to (benefit) provision for income taxes. Without the benefit, net income was $21.7 million, a 28% decline.
- Comparable store sales growth declined every single month in 2009. The largest decreases were during the winter and summer months.[5]
- The company opened 8 new net stores in 2009. The company expects to open 25-40 Wet Seal stores and does not plan to change the number of Arden B stores in 2010.[4]
Trends and Forces
Back-to-School and Holiday Shopping Threatened By Weak Economy
Due to the surge of shopping in the second half of the fiscal year created by the back-to-school and holiday season, Wet Seal's performance in the third and fourth quarters are incredibly important to the company's success -- the fourth quarter alone accounts for nearly half of the company's annual net income.[1]
- Back-to-School: Since the majority of the company's sales come from the Wet Seal chain, whose customers range from 13 to 19 years old, most of the company's revenue comes from sales to junior high and high school students. As such Wet Seal experiences a significant boost in sales during the end of summer as students shop in preparation for school. The back-to-school shopping season also boosts sales for Wet Seal's competitors such as Abercrombie & Fitch, American Eagle Outfitters and Aeropostale. Most of the back-to-school sales are included in the third fiscal quarter, during which comparable store sales fell 7.6% in 2009.[6]
- Holiday Season: The retail industry typically sees a large boost in sales leading up to the holidays in November and December. Wet Seal is no different, as the company's fourth quarter sales account for nearly half of the company's net income. A lackluster performance during the holiday season can leave a retailer with surplus merchandise to markdown which impinges upon profitability. In 2009, the company reported comparable store sales decline of 6.7%.[1]
Growing E-commerce Business with The Runway and My Boutique at WetSeal.com
Although the company does not separately disclose sales figures for its e-commerce operations, WTSLA claims that it experienced significant growth in its online sales. In order to drive more traffic to its Wet Seal e-commerce website, WTSLA launched a social networking community on WetSeal.com, with two components labeled "My Boutique" and "The Runway". After creating a free account on the website, users can design and create their own outfits and entire wardrobes, combining various pieces of Wet Seal apparel with accessories. Users can then publish their designs and the community rates these outfits and has the option of purchasing these sets of merchandise through the Wet Seal e-commerce store. "The Runway" also allows users to message each other to discuss different outfits, designs, fashion and other topics. "My Boutique" and "The Runway" could help WTSLA to capitalize on the growing trend of social networking amongst teens, a segment where studies have shown regular usage of social networking sites by approximately 70% of girls ages 15-17 years.
Struggles with Arden B Are Pushing Down Profits
Arden B. has been trying to find a place for itself in the women's apparel market, as young women have been shopping at boutiques and fast-fashion stores such as H&M and Zara, where they can find clothing that is modeled after designer pieces seen on runways in Europe. In 2009 comparable store sales at Arden B stores declined every single month, with double digit declines during the summer months. Wet Seal has taken action to mitigate the losses from Arden B stores by closing several locations. Over two years the company has closed 15 stores, and does not plan to open any in 2010.
Competition
Wet Seal, Inc. competes with many other retailers in the women's apparel market. While Wet Seal vies for the favor of teenage girls with industry heavyweights such as Abercrombie & Fitch Company (ANF), Arden B. competes with retailers, such as Gap and Banana Republic, AnnTaylor and Chico's FAS (CHS), as well as department stores such as Nordstrom, for the 25 to 35 year old woman's purse.
Wet Seal is a small player in the women's apparel retail market, compared to Abercrombie & Fitch Company (ANF) and AnnTaylor Stores (ANN).
Wet Seal competes with other specialty youth apparel retailers:
- Abercrombie & Fitch Company (ANF)
- American Eagle Outfitters (AEO)
- Aeropostale (ARO)
- J. Crew Group (JCG)
- Tween Brands (TWB)
- Urban Outfitters (URBN)
- Forever 21
- H&M
Arden B. competes with other women's apparel retailers and department stores:
- AnnTaylor Stores (ANN)
- Chico's FAS (CHS)
- Talbots (TLB)
- Dress Barn (DBRN)
- Gap (GPS)
- Saks (SKS)
- Nordstrom (JWN)
- Macy's Inc. (M)
- J.C. Penney (JCP)
References
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