Will Wet Seal’s (WTSL) Staff Cuts Save the Stock?

by Ryan Fitzwater, Director of Research, The Oxford Club

Yesterday, teen-apparel retailer Wet Seal (Nasdaq: WTSL) announced a “cost savings plan” that involves reducing its staff.

The company plans to cut its field-management positions by 20% and its corporate offices by 24%. The reduction plan will cost Wet Seal around $600,000 in severance in the coming quarter and is projected to save the company about $5.7 million in annualized pre-tax costs starting in the fourth quarter of this year.

It has been a rough ride for the company. It’s had trouble competing with popular fashion retailers such as H&M and Forever 21. Wet Seal has seen sales drop year-over-year (YOY) in the last four quarters straight. And the last three were in the double-digits. Ouch!

Not much light at the end of the tunnel either. Consensus estimates have sales growth averaging -9% over the next three years. And management has been jumping ship. In August, Wet Seal’s CEO left. And at the beginning of October, its CFO resigned. That is never a good sign.

As you can see, over the last year Wet Seal’s stock price has fallen more than 80%.

Can Wet Seal stop the bleeding?

Edmond Thomas, who just became the company’s CEO for a second go-round, certainly hopes so. Aside from laying off workers, the new “cost savings plan” expects to save the company $1.3 million per year by implementing better operating efficiencies throughout the business, especially in its distribution center.

Thomas stated, “We have quickly begun to develop an action plan to stabilize the business, restore Wet Seal to profitable growth and create long-term value for our shareholders. While always a difficult decision to make, aligning our workforce to our current needs was one of the first steps in this process. I want to thank the affected employees for their dedication to Wet Seal during their tenure, and wish them the best in their future endeavors.”

While many scorn companies who cut workers to save a few bucks on the bottom line, it is a necessary step to keep dying businesses afloat. And at the end of the day, shareholders and Wall Street tends to favorite it.

Currently, shares are trading around $0.45, way down from the 52-week high of $3.92 in mid-October of last year.

Is Wet Seal a falling knife you should avoid at all costs? Or is today’s extremely discounted price a bargain-bin opportunity? Let’s turn to our Investment U Fundamental Factor Test to help answer that question:

Earnings-per-Share (EPS) Growth: Wet Seal’s EPS has been negative for the last four quarters straight. No wonder the stock has been taking a nosedive.

Price-to-Earnings (P/E) Ratio: With no earnings and projected earnings negative through 2016, we cannot calculate P/E.

Debt-to-Equity The debt load isn’t out of control yet, but Wet Seal’s debt-to-equity of 89.66% is well above the industry average of 57.18%. We cannot give it a pass here.

Free Cash Flow per Share Growth : Negative free-cash-flow growth of 27.57% is also unpassable.

Profit Margins Just like its earnings, Wet Seal’s profit margins are also negative, -17.59% to be exact. Next.

 Return on Equity Strike six! Wait, that isn’t part of baseball’s rules. Either way, Wet Seal whiffed again. It has a ROE of -129%. As you can see above, the company has a lot of work to do to get out of the red on multiple key metrics.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

F: Sell (One Key Metric or Less)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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