In a December 18, 2013 company filing (page 12), New York-based hedge fund, Clinton Group Inc., stated that it is looking at financing alternatives to purchase Wet Seal Inc. (WTSL). Clinton is one of Wet Seal's largest investors. WSTL's stock rose 3.1 percent to $2.67 on that particular day on high volume. The day before the announcement, the stock price was down 50% from the 52.week high set on June 3, 2013. Yesterday, WTSL hit $1.73, a new 52-week low and close to an all-time low.
One has to wonder what Clinton's leadership is thinking now, and what its next move will be. But if it was serious about paying a premium to take WTSL private at $2.6, I would think that would be more than happy to purchase the company at near historic lows. The Clinton Group Inc., has been calling for a sale of Wet Seal since July 2012. The hedge fund holds the keys to a possible sale of the company with four board seats. Wet Seal enjoys a strong institutional support even at these low prices as seen in recent recent filings showing significant acquisitions.
On October 2013, The Street reported that KarpReilly Capital Partners LP, Advent, and other private equity firms that are known for investing in troubled retailers like Sun Capital Partners Inc., Golden Gate Capital and Sycamore Partners, have looked at WTSL as a potential acquisition target.
"We had a difficult fourth quarter, marked by ongoing softness in mall traffic, a highly promotional environment throughout the teen sector and elements of our assortments that did not resonate as well as we anticipated with our customers. This led to a greater than expected decline in comp store sales and pressured our merchandise margins. During this challenging period, we remain focused on the critical disciplines of expense control and inventory management. At fiscal year-end, inventory dollars per square foot were down approximately 9% versus the prior year at Wet Seal and down approximately 6% versus the prior year at Arden B."
Mr. Goodman continued, "While we did not meet our expectations for the fourth quarter, we are encouraged by progress made during the course of fiscal 2013 under our turnaround plan, which enabled us to narrow our comparable store sales decline to 4.1% and improve year-over-year merchandise margins by more than 150 basis points."
These were essentially the same reasons given in the company's 3Q 2013 reported on December 4, 2014. And this rationale is what prompted Clinton Group President Greg Taxin to state on a December 18, 2013 phone interview: "The notion that the business is worth half of what it was worth in July because all the teenage retailers had a crummy back-to-school is crazy to us ... We're happy to pay a market premium to this number for sure." Mr. Taxin also stated his company would prefer to work with a partner to take Wet Seal private and has had preliminary talks with private-equity firms as well as banks (according to Bloomberg).
Wet Seal is an attractive acquisition target because: 1) it has $66 million in cash, cash equivalents and short-term investments and no debt, 2) its stores are located in the best malls and has great locations inside these malls, and 3) it has a strong management team in place working hard on turning the company around [led by new CEO John Goodman, who at one time led The Gap's (GAP) outlet business], and 4) it's being pressured to improve its performance by activist shareholders such as the Clinton Group.
Wet Seal, Inc. is a nationwide specialty retailer of fashionable and contemporary apparel and accessory items designed for consumers with a young, active lifestyle. The company operates stores under the following names: Contemp Casual, Wet Seal, Arden B. and Limbo Lounge. The company also operates a catalog and an e-commerce under Blue Asphalt brand name. In recent years the company has seen more competition with fast-movers Forever 21 Inc., H&M and Zara, and others
I believe WTSL's stock price is about to bounce back up significantly because: 1) the potential of an acquisition, which has resonated strongly for almost two years, will likely heat up in weeks ahead, 2) the company's turnaround plan has been showing measurable improvements in key metrics, 3) it's strong balance sheet featuring 80c/share cash and no debt, 4) strong institutional support, and 5) it has historically performed better in spring/summer. But as with any investment in the stock market, investors should always read about the company's risks and uncertainties as stated in the company's filings with the SEC.