The Wet Seal, Inc. Business Information, Profile, and History

Company Perspectives:

In the business of fashion, as with fashion itself, putting the right combination together is essential. Wet Seal and Contempo Casuals have done just that, and the result is definitely ... us. We're more than just an outfit, we're an inspiration.

History of The Wet Seal, Inc.

A nationwide specialty retailer of moderately priced apparel for women, The Wet Seal, Inc. operates three chains under the "Contempo Casuals" and the "Wet Seal" and "Arden B." banners. During the mid-1990s, Wet Seal operated 363 retail stores in 34 states and Puerto Rico, with the majority of the company's stores located in California. After decades of unassuming prosperity, Wet Seal recorded explosive growth during the 1980s but began faltering in the 1990s. To restore profitability, the company acquired a 237-store retail junior women's chain named Contempo Casuals, Inc. in 1995. The acquisition nearly tripled the size of Wet Seal and greatly expanded the company's geographic scope. However, by the early 2000s, Wet Seal was struggling due to various internal and external factors, and in 2005 looked to its new CEO, Joel N. Waller, for a turnaround.

Origins

Wet Seal was established in late 1962 in California as a beachwear retailer, though its development into the 300-unit retail chain in operation during the mid-1990s occurred only after the company had significantly broadened its beachwear merchandise mix. During the first two decades of its existence, Wet Seal had developed into a $5-million-in-sales, 17-store chain, with all retail units located in California. Size, however, was not the chain's problem. Although Wet Seal's diminutive stature left it lost among the larger apparel retailers in California, its profitability stood out as its most glaring handicap. The company was awash in debt. The sweeping changes that transformed the company into one of the darlings of the California retail apparel industry during the 1980s occurred midway through the decade when the struggling chain gained new management and a new owner. In 1984, a Canadian retail store chain named Suzy Shier acquired Wet Seal, paying $2 million for the struggling and little-known business. The purchase marked the beginning of years of robust growth and Wet Seal's ascendancy to prominence in the fiercely competitive California retail market.

1980s Growth

The chief architect of Wet Seal's prolific rise was Ken Chilvers, head of Suzy Shier's operations. When Suzy Shier acquired Wet Seal in 1984, Chilvers left Toronto and moved to California to steward the fortunes of money-losing Wet Seal. For assistance in arresting the chain's financial slide, Chilvers turned to Kathy Peckham, a former Jordan Marsh merchandising executive. Peckham's changes were pervasive, essentially abolishing the strategy that had guided Wet Seal's existence during the 1960s and 1970s. She put together a merchandising mix designed to attract a much larger customer base, adding junior sportswear apparel items that quickly drew flocks of customers to the stores. Flowered denim, mini-skirts, colorful Aztec prints, and psychedelic bikinis graced Wet Seal's racks and shelves from the mid-1980s forward, drawing teenage girls in packs. Surprisingly, their mothers came as well, unafraid to don the youthful fashion trends of the day.

The metamorphosis worked, bringing in teenage customers and women in their late 40s. During the exponential growth that ensued, Chilvers was granted autonomy from his silent partners at Suzy Shier, gaining full control over all Wet Seal operations. Peckham, meanwhile, ascended to Wet Seal's executive vice-president and general merchandising manager posts, earning recognition for sparking growth that dazzled industry analysts. While describing the chain's meteoric rise, one member of the business press who cited Joseph Magnin and Contempo Casuals as the retail success stories of the 1960s and 1970s, respectively, hailed Wet Seal as the "retail phenom" of the 1980s, a distinction that few could discount given what the company had achieved during the latter half of the 1980s. Between 1985 and 1989, annual sales mushroomed more than 900 percent, approaching the $100 million plateau; the number of stores jumped from 17 to 78; and sales per square foot rose from $150 to $420. Most important, the company's profitability was restored, underscoring the importance of Chilvers' and Peckham's work.

By the end of the 1980s, Wet Seal's stature within the California retail industry had grown dramatically and Chilvers was intent on keeping the momentum. He invested heavily in increasing the size of each store, raising the average square footage of a Wet Seal unit from 2,500 to 4,000. Inside the stores, considerable capital had been invested as well. The enlarged units contained wide center aisles flanked by walls with merchandise stacked to the ceiling. Behind the central cash registers, massive computer-driven video walls played the latest rock music videos, accentuating the trendy appeal of Wet Seal merchandise.

By all accounts a successful formula had been created, but it was a formula that had yet be tested outside of California. That changed in 1989 when Wet Seal established its first stores outside of California, opening stores in Las Vegas and Phoenix that registered success commensurate with the company's California stores. Not stopping there, Chilvers looked to expand elsewhere and signed a lease in the summer of 1989 for a store in Hawaii, announcing concurrently that he planned to establish at least five stores in Hawaii by the following year. Ambitious plans were slated for Florida as well, where Chilvers anticipated establishing a minimum of 30 stores. For Chilvers, the success achieved during his first five years as Wet Seal's leader prompted him to map out ambitious plans for the company's future. However, for those industry pundits alarmed by the chain's rapid expansion, Chilvers had an answer. "We are taking a cautious approach," Chilvers explained to a Women's Wear Daily reporter in 1989. "We will do 25 to 30 new stores next year and, let's face it, there were a lot of people who came before us that went from 65 stores to 100 and then were dinosaurs at 300."

As the company entered the 1990s, it appeared the only hazard on the horizon was Chilvers' fear of expanding too rapidly. Store sales continued to climb, the company's merchandise was widely popular, and its march across California's borders was meeting with encouraging, uninterrupted success. As Chilvers perceived it, the greatest danger of excessively rapid expansion was sacrificing the quality and "look" of Wet Seal stores in order to save money to finance the establishment of additional stores. To combat this potential problem Chilvers refused to cut corners while expanding. He invested roughly twice the industry average for each store opening and continued to create hip havens for his customers. To fuel expansion, Chilvers took the company public in July 1990, raising $37 million from an initial public offering that was used to trim debt and finance the establishment of additional stores. By the end of the year, 20 new stores had been added to the chain, giving Wet Seal a total of 93 stores scattered across five states.

One year after moving out of California--where the company had been confined for 27 years--Wet Seal operated in Arizona, Nevada, Hawaii, and Florida. The 20 stores opened in 1990 helped lift sales over $100 million for the first time and the company's net income reached a record $7.1 million, providing tangible evidence that the prodigious expansion completed during the year had not negatively affected Wet Seal's performance. The company's financial performance, in fact, was particularly remarkable considering the state of the national economy during the early 1990s, as the first stirrings of a national recession signaled the beginning of hard times for retailers across the country. By 1991, the severity of the recession was intensifying, but unlike many of its competitors Wet Seal was moving forward, unchecked. Time magazine featured the company as one of the few retailers able to buck the trend spreading across the country that left many retailers pulling at their wrists as store sales plummeted and profits sagged. By constantly turning over its merchandise, which Wet Seal executives dubbed "multigenerational," and by awarding weekly bonuses to employees for inventory turnover, Wet Seal was exhibiting a financial vibrancy that distinguished it from rivals and lent credence to the statement that the company might be the "retail phenom" of the 1990s as well.

By the end of 1991 there were 112 stores composing the Wet Seal chain. Sales were up from the $107 million generated in 1990, climbing to $120 million, and although profits slipped to $4.2 million, the company's financial health was sound. As the company continued with its expansion plans in 1992, adding 13 stores during the year, industry observers were surprised by the announcement of Chilvers' departure in March. Forty-five years old at the time, Chilvers had opted to take early retirement, explaining that his reasons for leaving were "private and personal, relating to my health and my family, and do not bear upon my relationship with Wet Seal or its directors, which had always been excellent." Chilvers exit paved the way for Kathy Peckham, now Kathy Bronstein.

Financial Woes During the 1990s

With Bronstein in charge, Wet Seal pressed on with expansion for the remainder of 1992, but by the end of the year, when the company reported its second consecutive decline in annual profit totals, signs of trouble were evident. Sales for the year reached an all-time high of $150 million, but Wet Seal's net income slipped from $4.2 million to $3.6 million. Following this disheartening news, the company expanded only modestly in 1993, adding four stores as sales throughout the chain began to dip. By the end of the year, alarms were blaring loudly at the company's headquarters. Annual sales dropped to $140 million and, most disconcerting, the company's net income slipped into the red. Wet Seal lost $2.4 million in 1993 and another $1 million in 1994, as the years of explosive growth shuddered to a stop.

"It was a huge shock to be that hot and then turn sour," Bronstein reflected to a reporter from Women's Wear Daily. "It taught that even when you're doing well," she went on to explain, "there's only a limited time you have before you have to change. You've got to know when to pull the plug." During the two-year financial malaise, Bronstein and other Wet Seal executives searched for a solution, a way to restore the company's former luster. While expansion had continued, bringing the company's store count total up to 133 by the end of 1994, consumers had lost interest in junior apparel, sending a shock wave throughout the industry. Fashion tastes had changed and Wet Seal had not foreseen the shift, a mistake that thrust the company into a precarious position as it entered the mid-1990s.

In early 1995, the company discovered what it perceived as a solution to its financial woes, a solution Bronstein described as an "unbelievable break." In April, Chestnut Hill, Massachusetts-based Neiman Marcus Group agreed to sell its floundering Contempo Casuals chain to Wet Seal. Wet Seal, as its 1995 annual report declared, "went shopping for just the right fit" and Contempo Casuals, a specialty women's retail chain that had flourished during the 1970s, was selected. With 237 stores scattered throughout 34 states and Puerto Rico, Contempo Casuals represented a significant addition to Wet Seal's operations, nearly tripling the company's size and immediately transforming it into a genuine national retailer. Expected to be completed by the end of May, the deal was concluded in July for stock valued at $1 million.

Although some industry analysts questioned the benefits of combining Contempo Casuals, which lost $37 million on $303 million in sales in 1994, and Wet Seal, a money loser itself, Bronstein was confident the right move had been made, noting in Women's Wear Daily, "We saw that without adding significant overhead we could make ourselves instantly profitable." On the heels of the Contempo Casuals acquisition, the company continued to tinker with its business approach, testing a new concept store during late 1995 called "The Girl's Room," which featured apparel and accessories such as novelty toys, cosmetics, candles, and books. Positive early results prompted the company to push forward with the concept and make plans to incorporate "The Girl's Room" into 160 stores nationwide. Other plans for the late 1990s included the establishment of as many as ten new stores in 1996, but the primary focus after the Contempo Casuals acquisition was on improving sales and profitability. With this as its chief objective, Wet Seal entered the late 1990s intent on wielding its new-found national power to become a dominant force in the U.S. retail industry.

Comebacks Fizzle

In 1996, it appeared that Wet Seal was indeed on the brink of a new era of profitability. For the first time since 1992, the company was back in the black, thanks largely to its Contempo Casuals division. Net income for the year totaled $15.3 million on sales of $375 million, compared to $5.8 million in earnings on sales of $266.7 million in 1995. In November 1996, Wet Seal introduced a new store concept, Limbo Lounge, a "unisex" outlet that featured urban clothes for teenaged men and women in an "entertainment" setting that included TV screens, Internet access, and in one case, a juice bar. Two locations were opened in California. The following year, Wet Seal acquired 17 stores and one lease from the Los Angeles-based clothing retailer/manufacturer Rampage, which had filed for Chapter 11 bankruptcy protection; the terms of the deal were not disclosed. Wet Seal planned to continue operations under the Rampage brand name. In July 1998, the company acquired 102 more stores including 78 from Herndon, Virginia-based Britches Great Outdoors for an undisclosed sum and 19 Episode stores from Philadelphia maternity wear chain Mothers Work Inc. for $2.8 million. The acquisitions poised Wet Seal for the opening of Arden B., a new chain devoted to slightly upscale clothing for 20- to 40-year-old women, in November 1998.

By the end of 1998, Wet Seal showed income of $26 million, an 18 percent gain over the previous year. Sales rose 15 percent to $485.4 million over 1997. This success evaporated in 1999 when bad merchandising decisions sent Wet Seal stores customers to competitors. Attempting to cash in on the successful formula of khakis and polo shirts that had paid off for such competitors as Abercrombie & Fitch, J. Crew, and American Eagle Outfitters, the company remerchandised its flagship stores with preppy casual wear in place of the trendy clubwear styles it had long relied upon. Although sales totaled $524.4 million, an 8 percent increase over the previous year, net income plunged from $25.9 million in 1998 to $14.2 million in 1999, a drop of 45 percent. Some analysts attributed the company's woes to resources spread too thinly among its Wet Seal/Contempo Casuals, Limbo Lounge, and Arden B. divisions. A Wet Seal catalogue first issued in 1998 was discontinued after a single year. Sales remained weak in 2000 despite modest improvements in March and November. Wet Seal decided to cease acquisitions for a time, close down its Limbo Lounge outlets, now 26 in number, convert nearly all of its 200 Contempo Casuals stores into Wet Seal locations, and refocus on female fashion. Both Wet Seal stores and Arden B. locations underwent a makeover. Wet Seal outlets were brightened up with open ceilings, more lighting, and glossy pink, blue, and white walls. Some stores opened shoe departments and added mannequins. A separate merchandising and management team was put in place for Arden B., and the chain's concept was honed to differentiate it from the Wet Seal concept. The efforts paid off; sales increased 10.6 percent to $580 million in fiscal year 2000; income jumped 37 percent to $19.5 million.

In 2001, the company resumed acquisitions. Wet Seal paid an undisclosed amount to purchase 18 Zutopia stores from the children's wear retailer Gymboree Corp. Zutopia extended Wet Seal's target market to include 5- to 12-year-old children. CEO Kathy Bronstein told Kristin Young of Women's Wear Daily, "Strategically, it's our vision to pick [a customer] up when she's [age] five or six and drop her off somewhere between 50 and 60." By the end of the third quarter of fiscal 2001, sales were up 4.4 percent for the quarter and net income had jumped 70 percent to $6.8 million from the third quarter of the previous year. Commentators noted that the company was performing exceptionally well in an economic climate that had other specialty apparel retailers struggling. Product placements on the popular WB network reality show Popstars pushed Wet Seal's brand exposure. Through an exclusive deal, Wet Seal attired the cast and carried clothes modeled on those worn on the television show in stores under the Popstars brandname. Kathy Bronstein told Marianne Wilson of Chain Store Age that the company's strategy would hinge on pricing. "We are very recognizant of the onslaught of competition, new and existing, that can impact our business," Bronstein remarked. "Our job as a retailer is to make sure that if the customer is responding to fashion at a price, we are offering it."

The upswing of 2001 did not last into 2002. Factors including a slowing economy, rising unemployment, decreasing mall traffic, and lessening consumer confidence eroded retail sales industry wide during the first half of the year. A California dockworkers lockout interfered with merchants' ability to move inventory from offshore sewing contractors into stores, further complicating Wet Seal's increasingly bleak picture by causing shortages of key items, especially seasonal pants. Wet Seal continued to rely on the "bohemian" and "peasant-look" fashions that had scored sales successes a year earlier, although the market was saturated with such styles. In July, Wet Seal was able to report modest increases in sales (10.7 percent, or $302.8 million) and fair performance on income ($12.4 million, an increase of 38.7 percent), but it lowered its earnings estimates from 17 cents per share to 12 to 14 cents per share and warned investors that the third and fourth quarters might show no growth at all. At the end of 2002, the company showed an overall drop in income of 86.3 percent to $4.2 million. Sales during 2002 increased only 1.1 percent to $608.5 million. Wet Seal reported losses of $2.5 million in the third quarter of the year and $5.6 million in the fourth quarter, effectively wiping out the comeback of the previous year.

The economic recession dragged into 2003. David Moin of Women's Wear Daily called the early months of the year "a season of pink slips," as retailers showed numerous executives the door. Kathy Bronstein, having reported two weak quarters in a row, was abruptly forced out at Wet Seal. She retaliated with a lawsuit charging "wrongful termination, gender discrimination, emotional distress," and other offenses. The lawsuit was settled out of court in a deal that included $2.2 million in cash, a retirement plan with a surrender value of more than $915,000, $125,000 in attorney fees, 4,422 shares of stock, and stock options worth an estimated $4.2 million, with taxes on the cash settlement to be paid out of the stock distribution.

Australian-born Peter Whitford, formerly president-worldwide of The Disney Stores, replaced Bronstein as CEO in May 2003. In August, he brought in colleagues from Disney to fill key positions in the executive offices, including Joseph Deckop, who was appointed to the new post of executive vice-president of central planning and allocation, and Allan Haims, who became president of the Wet Seal division. As senior vice-president and creative director of the Wet Seal division, the company brought in designer Victor Alfaro, noted for his upscale women's couture.

In January 2004, the company closed down its Zutopia division, citing a need to refocus on its core business. Cautioning that spring and summer 2004 would be the earliest that the new leadership's influence would be felt, Wet Seal's management set about making changes in its marketing strategy. The company conducted in-store contests to find "stylizers," trendy teenage girls who would appear in its advertising and give feedback about the stores' merchandise. Sources inside and outside the company agreed, however, that Wet Seal needed to make a strong showing during the crucial back-to-school season in autumn 2004. In its quarterly SEC (Securities and Exchange Commission) filing of June 2004, Wet Seal noted that "potential reorganization under Chapter 11 of the U.S. bankruptcy code" was a looming possibility. The report also noted that vendors and factors had tightened the company's credit because of its poor showing over the previous two years. Industry analyst Liz Pierce of the firm Sanders Morris Harris commented to Kristin Young and Vicki M. Young of Women's Wear Daily that merchandise presentation was not working as planned. "Some of the [fall] product is coming [in stores] on an item-by-item basis. That's not merchandised like they told us it was going to be. They said it's going to be a compelling selling presentation." Wachovia Securities analyst Joseph Teklits pointed out that inventory issues and the departure of in-house talent, including Arden B. president Greg Scott, were making business worse for Wet Seal. "We have learned that Wet Seal's woes are deepening on all fronts," he wrote. Amidst these troubles, designer Alfaro departed the company in August 2004, just as his new line of "vintage angels" and "granny chic" looks was hitting stores.

The season did not go well. Sales declined 15.9 percent in the third quarter compared to the same period in 2003. Overall sales for the year showed a drop of 20.1 percent from 2003. Analysts noted that Alfaro's fashions were simply out-of-step with the big sellers of the season. In November, Whitford and Haims resigned, and the company once again looked for a change in marketing strategy that would save it from Chapter 11. In December 2004, amid speculation that bankruptcy proceedings were not far, the company announced the closure of 150 Wet Seal stores--a full third of the division's outlets--and the elimination of 2000 jobs. Relief came, however, in the form of a cash infusion from the New York firm S.A.C. Capital Management, which signed a deal to give $40 million in exchange for convertible notes. In late December, Joel N. Waller, formerly chairman of Wilsons Leather, was named CEO effective February 1, 2005. Michael Gold, a veteran of the company who had run more than 400 of its stories in the U.S. and Canada, was appointed as retail consultant. Despite these changes, industry opinion remained guarded as to Wet Seal's eventual fate.

Principal Divisions: Arden B.; Contempo Casuals; Wet Seal.

Principal Competitors: The Gap, Inc.; Abercrombie & Fitch Co.

Chronology

• Key Dates:
• 1962: Wet Seal is established in California as a beachwear retailer.
• 1984: Canadian retail store chain Suzy Shier acquires Wet Seal.
• 1991: The Wet Seal chain comprises 112 stores.
• 1995: Neiman Marcus Group sells its floundering Contempo Casuals chain to Wet Seal.
• 1996: Limbo Lounge, a "unisex" outlet featuring urban clothes for teenaged men and women, is launched.
• 1997: Wet Seal acquires 17 stores and one lease from the Los Angeles-based clothing retailer/manufacturer Rampage.
• 1998: The company acquires stores from Britches Great Outdoors and Mothers Work Inc.; Arden B. chain is launched.
• 2001: The company purchases 18 Zutopia stores from the children's wear retailer Gymboree Corporation.
• 2003: Following years of financially lackluster performance on the part of Wet Seal, CEO Kathy Bronstein is forced out of the company; Peter Whitford takes over as CEO and Allan Haims is named president of the Wet Seal division.
• 2004: Whitford and Haims resign from the company.
• 2005: Joel N. Waller is named CEO.