ANF Abercrombie and Fitch Co

Wet Seal Inc. (WTSLA) reported adjusted earnings of 8 cents a share in the first quarter of 2012. Earnings were in line with the Zacks Consensus Estimate. However, this was a 166.7% increase from the year-ago quarter.

Comparable Same Store Sales

The Foothill Ranch, California based leading specialty retailer reported strong growth in same-store sales of 7.0% for the 13-week period ended April 30, 2011 compared to a marginal 2.0% increase in the prior-year quarter. 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.

The company operates two primary mall-based chains of retail stores under the names Wet Seal (flagship division) and Arden B. Comparable store sales for Wet Seal increased 8.3% compared to 1.5% increase in the prior-year quarter while it decreased 0.1% for Arden B compared to an increase of 4.8% in the prior-year quarter.

Growth at Wet Seal was largely driven by a balanced assortment of merchandise at competitive prices which drove sales and merchandise margins. Over the past six months, the company has been witnessing mid-single-digit growth in its flagship division.

While Arden B margins were strong, quarterly sales were slightly below expectations.  

It was a mixed bag among the competitors of Wet Seal. Same-store sales at Gap Inc. (GPS) contracted 3%for the same period due to higher costs of cotton and high labor costs in China. On the other hand, consolidated comparable sales for Abercrombie and Fitch (ANF) increased 10%, driven by strong sales in individual segments.

Sales and Margins

Consolidated net sales increased 13.2% during the quarter, primarily driven by a 15.0% increase in Wet Seal division and a 4.5% growth in Arden B.  

Gross margin for the quarter expanded 150 basis points to 34.3% versus 32.7% in the prior-year quarter. The increase was driven by strong merchandise contents across all categories in both store formats.

Operating income for the quarter also expanded to $13.3 million compared to $9.9 million in the prior-year quarter. At the end of the quarter, the inventory per square foot declined 1.9% versus the comparable prior-year period. Inventory per square foot at Wet Seal was down 3.0% while it was up 5.1% at Arden B.

Balance Sheet and Cash Flow

The company ended the quarter with cash and cash equivalents of $183.5 million and generated cash flow worth $17.5 million. Capital expenditures for the quarter came in at $6.0 million out of which $4.9 million was spent on construction of new stores and remodeling of existing stores.

Share Repurchase

During the first quarter of 2011, the company repurchased 1 million shares of its Class A common stock for $3.7 million. In addition, the Board also authorized an increase of $31.7 million to the existing share repurchase plan.

Guidance

Concurrent with the earnings release, management provided guidance for the second quarter of 2012.

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.

Wet Seal intends to open 8 net new stores, with 6 net openings at Wet Seal and 2 net openings at Arden B.

Gross margin for the quarter is estimated to range between 29.2% and 30.3% while operating income is expected to be in the range of $1.9 million to $3.6 million.

Conclusion

Encouraged by the positive comparable store sales the company plans to further increase its sales in the existing store base. It has therefore implemented several initiatives to improve its brand positioning and strengthen its understanding of customers in both divisions. Wet Seal believes these initiatives should be accretive to its earnings going forward.

Currently, Wet Seal has a Zacks #3 Rank which implies short term Hold’ rating on the stock. On a long-term basis as well we are Neutral on the stock.

 
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