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Wet Seal (WTSLA)Stock (Apparel Stores Industry, Fashion Industry Industry, Retail Industry)
 In FY07, the Wet Seal chain's $478 million of sales[2] represented 78% of the company's revenue, as the Arden B. chain contributed $132 million[2] to net sales (22% of total) for the year. However in 2007, all of WTSLA's operating income was earned by the Wet Seal chain[2] as the Arden B. chain posted an operating loss of $14 million.[2] This was not the first year the chain failed to turn a profit, as the chain also posted an operating loss of $2 million in 2005[2]. Arden B.'s losses stem from declining sales and store traffic that cause the chain to markdown merchandise, thereby shrinking profit margins. After growing sales from 2005 to 2006, Arden B.'s sales fell 9.8%[2] as same store sales declined 8.2%[2] in fiscal 2007. WTSLA 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. In 2007, WTSLA earned 53% of its annual net income during the fourth quarter.[3] Beyond its stores, WTSLA operates e-commerce websites for each of its two brands and in early 2008 launched a social networking feature to its Wet Seal website in order to drive traffic and sales through its direct channel.[4]
[edit] Business OverviewWTSLA is a specialty women's apparel retailer that had over $611 million in sales in 2007[1]. WSTLA 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)[5]. 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[5]. In 2007, WTSLA's net sales increased 8.3% to $611 million[1] as the retailer earned a net profit of $23 million[1], after posting a net loss every year since 2002. WTSLA earned a 33.1% gross margin in 2007[1]; however the company only earned a 3.2% operating margin[1], significantly lower than figures at some of its competitors: Abercrombie & Fitch and J. Crew earned operating margins of 19.7%[6] and 12.9%[7] that same year. After growing same store sales 15.0%[1] and 12.7%[1] in 2005 and 2006, respectively, WTSLA's same store sales declined 1.1%[1] in 2007. WTSLA continued to struggle in 2008 as sales declined to $142 million[8] in the first quarter of FY08, as same store sales declined 7.5%[8]. Although sales fell in Q1 FY08, WTSLA's efficiency improved as the retailer earned a 6.1% operating margin[8] on its quarterly revenue, up from 4.8% in the same quarter of 2007[8]. Same store sales continued to decline in July 2008, falling 8.2% company-wide.[9]  [edit] Retail and Direct Channel Operations[edit] Wet Seal (78% of Total Company 2007 Sales, 100% of Total Company Operating Income[2])At the end of the first quarter of 2008, WTSLA operated 401[8] of its namesake Wet Seal 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")[5] under the Wet Seal private brand. Wet Seal has been far more successful than the company's other segment, Arden B., over the past several years, growing same store sales 74.1%, 8.8% and 1.2% annually in 2005-2007[2], respectively, while increasing its segment operating margin from 5.1% in 2005 to 14.5% in 2007[2]. In addition to the 401 Wet Seal store locations, WTSLA operates a Wet Seal e-commerce website to serve customers through a direct channel. [edit] Arden B. (22%, 0%[2])At the end of Q1 FY08, WTSLA operated 95 Arden B. domestic store locations[8]. 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[5]. Arden B. has struggled in the past three years, as its sales declined 9.8% to $132 million in 2007[2], with its same store sales falling 8.2%[2]. The chain has also failed to turn a profit in two of the last three years, posting a $2.7 million operating loss in 2005[2] and a $14.9 million operating loss in 2007[2]. 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. [edit] Trends and Forces[edit] Struggles with Arden B.WTSLA's Arden B. chain has struggled to maintain sales and profitability since 2005, only earning a positive operating profit in one year from 2005-2007, when it earned $2.8 million in operating income[2] on $147 million in sales[2] (a 2.0% operating margin[2]) in 2006. The company had its worst year in 2007, as net sales fell 9.8% to $132 million[2], as same store sales declined 8.2%[2] and the chain posted a $14.9 million operating loss[2]. Arden B. was still struggling in the middle of FY08, as same store sales fell 16.2%[9] at the chain. 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. [edit] Growing E-commerce Business with The Runway and My Boutique at WetSeal.comAlthough 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 2007[10]. 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"[4]. 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[11]. [edit] Second Half Strength: Back-to-School and Holiday ShoppingDue to the surge of shopping in the second half of the fiscal year created by the back-to-school and holiday season, WTSLA's performance in the third and fourth quarters are incredibly important to the company's success. In 2007, the second half of the year accounted for 51% of total sales[3] and the fourth quarter alone accounted for 53% of annual net income[3].
[edit] CompetitionWet 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. With only $611 million in sales in 2007, WTSLA is a small player in the women's apparel retail market, compared to sales of $3.7 billion at Abercrombie & Fitch Company (ANF)[6] and $2.4 billion at AnnTaylor Stores (ANN)[14]. Also, WTSLA has struggled to maintain profitability since 2003, posting a net profit in 2007 for the first time since 2002[1], while most of its competitors are mature businesses with solid profit margins (Abercrombie & Fitch Company (ANF) earned a 67.0% gross margin[6] and 19.7% operating margin[6] in 2007). Wet Seal competes with other specialty youth apparel retailers:
Arden B. competes with other women's apparel retailers and department stores:
 Wet Seal2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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