Wet Seal fires CEO; shareholder calls for sale

Mon Jul 23, 2012 2:36pm EDT

(Reuters) - One of Wet Seal Inc's WTSLA.O top shareholders called for the sale of the women's apparel retailer, after it fired CEO Susan McGalla, who presided over 11 straight months of declining same-store sales.

Asset management firm Clinton Group, which holds a stake of about 4.25 percent in Wet Seal, described McGalla's dismissal as "a good first step" and said "the right next step is for the company to be sold."

"We simply cannot wait for the board to hire yet another chief executive - the next one will be the fourth in five years," Clinton's senior portfolio manager Joseph DePerio, wrote in a letter to the company's board.

DePerio, criticizing McGalla for "unacceptable" underperformance, expressed concerns that embarking on yet another change in strategy to turn around the company would create more uncertainty.

The company has been struggling to woo fashion-conscious teenagers at both its Arden B and namesake chains, reflected by lackluster sales of its assortment of tops. Arden B stores are offering more dresses and pants to drive sales.

Clinton Group, which has more than $2.7 billion assets under management, said the company may attract an offer of $5 to $8 per share, valuing the retailer at about $450-$725 million.

The Foothill Ranch, California-based company's stock was trading down 11.5 percent at $2.62 on Monday afternoon. At that price, the company, which has lost more than 40 percent of its value in the last 12 months, has a market value of $237 million.

"We do not believe the fast fashion model that Wet Seal espouses has lost market share or become less valid in the overall apparel retailing world," analyst Eric Beder of Brean Murray Carret & Co said.

Fast fashion retailers try to read current trends and incorporate it in their styles. They have short lead times and sell their merchandise at affordable prices.

Beder reckons fast fashion has actually continued to gain market share but McGalla's intention to move away from this business model was a complete failure.

ON A SLIPPERY SLOPE

NBG Productions analyst Brian Sozzi said Wet Seal is losing ground to rivals such as Aeropostale Inc (ARO.N) and American Eagle Outfitters Inc (AEO.N).

Sozzi said the company lost customers because of its strategy of offering fewer promotions online.

Wet Seal said same-store sales will decline between 10 percent and 11 percent in the second quarter. It had forecast a fall of 7 to 11 percent.

The company's sales started declining barely months after McGalla took over from Ed Thomas in January 2011.

Prior to joining company, McGalla was the president and chief merchandising officer of American Eagle Outfitters from 2007 to 2009.

"There is something fundamentally wrong at this company and hopefully fresh eyes will turn it around," Sozzi said.

Shareholders have also been keeping an eye on the company's plans to use its cash reserves, which stood at $148.1 million as of April 28.

The retailer estimates a second-quarter loss of between 6 to 7 cents per share, before non-cash asset impairment and CEO severance costs.

Wet Seal, which also sells accessories such as hats, watches and jewelry, said McGalla's employment would be terminated with immediate effect. The company did not provide any reason for the CEO's departure and was not available for comment.

Chief Operating Officer Ken Seipel and Chief Financial Officer Steve Benrubi will take over as co-principal executive officers while Wet Seal searches for a new CEO.

Earlier this month, three former employees accused the company's "most senior executives" of discriminating against black store managers since 2008 because they did not fit the image of the U.S. retailer.

However, the company denied all allegations and said "it is an equal opportunity employer with a diverse workforce." (Reporting by Juhi Arora in Bangalore; Editing by Sreejiraj Eluvangal, Viraj Nair)

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