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Brand Equity Key to Wet Seal Turnaround if Buyout Takes Place

Struggling specialty apparel retailer Wet Seal has become the latest in a long string of chains looking to orchestrate a buyout. But it remains to be seen whether Wet Seal’s brand value is strong enough to allow a private owner to manage a successful turnaround.

On July 24, Wet Seal executives announced they’ve received letters from The Clinton Group, a New York City-based private equity firm that is one of its largest shareholder, urging them to sell the company. The retailer has been posting a dismal performance for some time—in June, its same-store sales fell 9 percent and same-store sales for the second quarter are projected to fall between 7 and 11 percent—and it also recently announced the departure of its latest CEO, Susan McGalla, two years before her contract was set to run out. It has not yet found a permanent replacement.

“Wet Seal has kind of lost it, whatever ‘it’ was,” says Bob Phibbs, The Retail Doctor, an industry consultant based in West Coxsackie, N.Y. “You go by their stores and they are okay, but they’ve just had so many management changes in the past five years. Women’s retail is really hard right now; you have the pressure from H&M and Forever 21 on the low end and from boutiques on the high end. Wet Seal was somewhere in between and that’s a punishing place to be… What does that brand represent? I don’t think anybody could give you a good answer.”

At more than 500 stores, the retailer might offer a potential buyer high transaction volume, but “it’s not as high as it should be,” says Jeff Green, president of Jeff Green Partners, a Phoenix-based retail real estate consulting firm. “It’s because of sheer store count.”

Unlike some of its peers, however, Wet Seal seems to have plenty of money, according to Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York City-based retail consulting and investment banking firm. The company ended the first quarter of 2012 with approximately $148 million in cash and no long-term debt. Its earnings per share during the period totaled 2 cents per share.

That means a new owner would not have to sink mountains of cash into the retailer in order to bring about necessary changes, Davidowitz notes. Plus, with Wet Seal’s stock currently trading at $2.72 per share, down from a 52-week high of $5.23 per share, it’s an opportune time to make the acquisition on the cheap.

What comes after

At issue, if a transaction takes place, is whether Wet Seal’s brand image can be salvaged in an environment full of specialty apparel retailers who target the same customers: teenagers and young women. While Forever 21 has been prospering, Abercrombie & Fitch, which used to rule the sector, is experiencing problems both at home and abroad because teenagers as a group now have far less money to spend than they used to.

“In the run-up to 2007 and 2008, all we heard about was the teen and tween market,” says Doug Stephens, head of Retail Prophet, a specialty consultancy. “And now, of course, there has been a severe contraction in the market and it sort of became a game of musical chairs and Wet Seal didn’t find a chair. Given how competitive the landscape is, people really need to understand what [your brand] is about. These guys just haven’t done a good enough job of carving out a brand essence. And [changing that] takes a lot of time and it can take a lot of money.”

Whoever ends up taking the helms at Wet Seal will also have to make some tough decisions about store closings, according to Davidowitz and Phibbs. Knowing how rough today’s employment market is, many executives are reluctant to close underperforming stores because they know the move will result in job losses, Phibbs notes. But if it’s going to survive, Wet Seal needs to take a close look at its store fleet and get rid of the stores that don’t make sense.

“If they could close 100 stores, the closures can be a short-term solution because you are able to cut out what’s not working and focus on what can,” Phibbs says. “Then they can grow back up again. You don’t want a distraction when you are trying to get your feed on the ground.”

Up until now, Wet Seal has been in expansion mode. In fiscal 2011, the company opened a net 22 new Wet Seal stores, plus three Arden B stores. In fiscal 2012, it had plans to open another 25 to 30 net new Wet Seal stores while maintaining the same store count for Arden B. Today, the retailer operates a total of 553 stores, including 470 Wet Seal locations and 83 Arden B locations.

Wet Seal leases all of its stores, with the average lease term lasting 10 years.

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