Can Wet Seal Still Save Itself as a Brand and Company?

In mid-summer, 24/7 Wall St. issued one of its key lists of companies that have perhaps the most dubious honor of all companies. It was a list of brands that would not survive to the end of the next year, or in this case 10 brands that will disappear in 2015. While not all of these will be due to a true disappearance, many of them are truly failing as a money-making business. Wet Seal Inc. (NASDAQ: WTSL) did not make the formal list, but it was a runner-up in our screening process, and the news on Wednesday showed exactly how bad it situation is becoming.

Wet Seal shares tanked on Wednesday after the announcement that the company had replaced its CEO, John Goodman. The company went with former chief executive officer, Edmond Thomas, to take the reins for this rough patch. But can he stop the bleeding and reverse major losses and a decline in same-store sales?

Wet Seal showed that Thomas was the company’s CEO from 2007 to 2011, and prior to that he had been the chief operating officer from 1992 to 2000. This marks the second time in about two years that the CEO has been changed. Wet Seal has been under pressure from activist investors as well. The Clinton Group owns a 7% stake in the company and was one of its largest shareholders. In the wake of this, Wet Seal has appointed Gregory Taxin, the president of Clinton Group, to join its board.

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Wet Seal did at least take the opportunity to raise capital, selling common stock to a limited number of institutional investors in a private placement for gross proceeds of approximately $18.5 million. Also mentioned was a rights offering that may raise $25 million to $30 million.

We consider this an outright termination. Perhaps the company did not say that verbatim, but it said in its official release that it reached an agreement with Goodman for him to step down as CEO and as a member of the board of directors immediately. Perhaps the $23.3 million operating loss on the $121.2 million in quarterly sales was the kicker. Or maybe the same-store sales being down 12.4% on a consolidated basis was the last straw.

Adam Rothstein was appointed as chairman of the board of directors, effective October 1.

Perhaps the only good news is that Wet Seal ended its second quarter with cash and cash equivalents of $40.3 million. It also had no borrowings outstanding under its senior credit facility, and inventory levels were down 6% from a year ago.

Several other things have been under development recently. Late in August came word of a potential Nasdaq delisting due to the $1 rule, giving the company 180 days to remedy the situation.

It was just at the end of July that the company named Christine Lee as its chief merchandising officer. She had spent 18 years with Urban Outfitters.

In April, Wet Seal said it was shutting down the Arden B. brand stores. That would lead to 54 mall-based stores disappearing. Of those, 31 were scheduled to become Wet Seal Plus stores and 23 would become Wet Seal stores.

The chart tells an even uglier story. This stock stayed between $3 and $5 for most of 2010 to 2013, but by the end of 2013 the stock broke under $3.50, then $3, then under $2.50 early in 2014, and all the way down to less than $1 of late.

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So, just how bad are things? Wet Seal shares closed down 28.5% at $0.75 on more than 6 million shares traded on Wednesday. The stock hit a 52-week low (or multiyear low) of $0.70 on Wednesday. Wet Seal’s market cap at the close was listed as just over $63 million, without the impact of the capital raised.

Our take is that the dilution would be welcome if the outside investors believe that the old CEO can turn this ship around immediately. We would have also expected investors to look ahead rather than backward at poor sales numbers if this was to be viewed as a successful move. For the stock to hit a multiyear low (maybe even an all-time low), how big an endorsement is that from the market?