Bloomberg News

Wet Seal Hires Financial Advisers and Adopts Poison Pill

August 21, 2012

Wet Seal Inc. (WTSLA:US), the women’s apparel chain under pressure by an activist investor to sell the company, hired financial advisers and adopted a so-called poison pill to block an amassing of shares.

The pill, which expires June 2013, discourages an investor from acquiring more than 10 percent or more of the company, the Foothill Ranch, California-based chain said in a statement. The board has also engaged Guggenheim Securities LLC and Peter J. Solomon Co. to pursue strategic options to increase shareholder value.

The retailer fired CEO Susan McGalla on July 23 after a year and a half amid declining sales. On the same day, Clinton Group Inc., a Wet Seal investor with a 3.9 percent stake in the company, published a letter it sent to the board pushing for a sale to maximize shareholder value. That came after a letter in June criticizing the performance of McGalla and the company.

“We took this action to insure the board has sufficient time to consider any option,” Wet Seal Chairman Harold Kahn said on a conference call with analysts.

Joseph De Perio, a senior portfolio manager for Clinton Group, didn’t immediately respond to a phone call seeking comment.

Wet Seal, which operates 550 stores in the U.S. and Puerto Rico, reported a net loss of $12.4 million for the quarter ended July 28, or 14 cents a share, compared with net income of $2.2 million, or 2 cents, a year earlier. The company reported an 11 percent decline in second-quarter same-store sales (WTSLA:US), a key measure of a retailer’s growth. Such revenue may fall as much as 18 percent in this quarter, Wet Seal said.

Fast-Fashion Roots

To improve results, Wet Seal will return to its fast- fashion roots, according to Kahn. Under McGalla, the company began designing its own apparel, which increased the time it took products to reach stores and alienated customers, he said.

The company will now focus on identifying trends and buying from suppliers as quickly as possible to speed up time to market. Wet Seal expects to have most of its new merchandise in stores by November. Until then, it will be clearing old clothes with discounts that will continue to hurt profit margins, Kahn said.

“We believe that a strategy that brings us to ordering more merchandise closer to the need of delivery is very, very important to the young junior customer who is very, very understanding of fashion,” he said on the call. “This is not a new turnaround strategy. This is going back to a strategy.”

The company faces off against larger competition in the fast-fashion category, including Hennes & Mauritz AB (HMB)’s H&M, Forever 21 and Fast Retailing Co. (9983)’s Uniqlo. Wet Seal’s return to focusing on the most popular trends and low prices won’t take long to win back the customers it lost, Kahn said.

“It’s still a strong brand,” he said.

Wet Seal was little changed at $3.06 at 6 p.m. in New York. The shares have declined 6.1 percent this year.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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