Wet Seal: Earnings Preview

Aug.17.11 | About: The Wet (WTSL)

Wet Seal Inc. (WTSLA), one of the leaders in specialty retailing that sells fashionable and contemporary apparel and accessory items to the female customers scheduled to report its second-quarter 2011 financial results on Thursday, August 18, 2011.

The current Zacks Consensus Estimate for the quarter is pegged at 2 cents a share. The Zacks Consensus Estimate projects revenues for the quarter to be $148 million.

Fourth Quarter 2011 Recaps

Wet Seal, which faces stiff competition from American Eagle Outfitters, Inc. (NYSE:AEO) and Gap Inc. (NYSE:GPS), posted robust results for the first quarter of 2011 as earnings shot up by 166.7% year-over-year to 8 cents per share. EPS was in line with the Zacks Consensus Estimate.

The company reported strong growth of 7% in same-store sales for the 13-week period ended April 30, 2011. The growth in comparable same store sales was in line with the company’s expectations and was primarily driven by the late Easter Holiday this year.

Net sales climbed 13.2% fuelled bya 15.0% increase in Wet Seal division and a 4.5% growth in Arden B.

Management Guidance

For the second quarter of 2011, earnings are expected in the range of 1 to 2 cents a share. Net sales for the quarter are expected to be in the range of $145 million to $147 million with comparable store sales increase in the low to mid single digit range. The Zacks Consensus Estimate for the next quarter is 4 cents and that for the fiscal year is pegged at 22 cents.

First-Quarter 2011 Zacks Consensus

Earnings estimates for the second quarter of 2011, as provided by the analysts, range from a low of 2 cents to a high of 3 cents. Thus, the current Zacks Consensus Estimate for the quarter is pegged at 2 cents per share.

Over the past 30 days, two analysts revised the earnings estimate upward. The current Zacks Consensus Estimate inched down by a penny over the last 90 days. However, with no analysts making any revision to their estimates in the last 7 days, the Zacks Consensus Estimate remained at 2 cents.

Earnings History Outpaces Zacks

With respect to earnings surprises, Wet Seal has topped the Zacks Consensus Estimate in two of the preceding four quarters. Over the last four quarters, the earnings surprise ranged from 0.00% to a positive of 75.00%, with the average earnings surprise being 75.00%, suggesting that Wet Seal has outperformed the Zacks Consensus Estimate.

Recommendation

We are encouraged by the fact that Wet Seal primarily focuses on improving its current stores, which should generate greater profit in the coming quarters. The company’s balance sheet reveals strength. However, highly competitive nature of the women’s apparel industry and seasonal nature of the same keeps us concerned.

Currently, we prefer to rate the stock as Neutral. Further, Wet Seal holds the Zacks #2 Rank, which translates into a short-term Buy rating.