Wet Seal Files Chapter 11

As of Friday, January 23, 2015

Juniors retailer The Wet Seal Inc. announced Jan. 16 that it had filed a voluntary petition for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in Delaware.

The announcement follows a tumultuous period when it suddenly shuttered two-thirds of its fleet of stores, which was announced on Jan. 7. In a Dec. 10 conference call, Ed Thomas, Wet Seal’s chief executive officer, told Wall Street analysts there was a possibility that this company, which was founded in 1962, might go bankrupt.

In the Jan. 16 announcement, Thomas said that the Foothill Ranch, Calif.–based retailer negotiated a debtor in possession (DIP) financing arrangement and plan sponsorship agreement with B. Riley Financial Inc., the parent of B. Riley & Co. LLC and the Great American Group LLC.

On Jan. 16, Thomas said, “After careful consideration, the board of directors unanimously concluded that filing for Chapter 11 was the appropriate course of action for the company. Overall, we continue to believe in The Wet Seal and remain committed to executing on the strategic steps that we already started. We are thrilled to be working with B. Riley and other constituencies toward the successful and prompt emergence of the company from Chapter 11.”

The DIP provides for a $20 million term loan facility, subject to certain limitations and conditions, including a $5 million availability block at closing, from B. Riley to be funded on an interim and final basis. As of Jan. 12, the company had approximately $31 million of cash on the balance sheet, including nearly $11 million of cash used to collateralize letters of credit.

Emerging from bankruptcy will not be easy for Wet Seal, said Howard Davidowitz, chairman of Davidowitz & Associates, a New York–headquartered retail consulting and investment banking firm with more than 30 years of experience.

On top of the bankruptcy, Wet Seal must deal with the fallout from its closing of 338 stores and the layoff of 3,695 full- and part-time employees. Because stores typically sign leases with landlords, the retailer might have to deal with litigation from breaking leases.

“Can this company get out of bankruptcy and function?” Davidowitz asked. “I don’t know. A lot depends on how good are the stores that they have left.”

Wet Seal currently runs 173 stores, which include its physical stores and its e-commerce store (www.wetseal.com).

The mass shuttering of the stores and firing of employees promises to be expensive. Wet Seal said it expects to incur estimated pre-tax charges ranging from $5.4 million to $6.4 million connected with inventory write-off, asset impairments and employee terminations.

Another group that might suffer from the bankruptcy are the manufacturers that produce for Wet Seal. If Wet Seal liquidates, those companies might be stuck with inventory and will be forced to seek other retailers, perhaps off-price specialists, to unload the canceled goods.

Wet Seal’s bankruptcy comes at a time of crisis for traditional juniors retailers. In the past year, many juniors retailers have filed for bankruptcy or called it quits. In December, Philadelphia-headquartered Deb Shops filed for bankruptcy. It operates a fleet of 295 shops. During the same month, Delia’s, a New York–headquartered teen retailer, announced that it planned to seek Chapter 11 bankruptcy protection and said that it planned on liquidating. On Jan. 7, Body Central Corp., a teen retailer based in Jacksonville, Fla., announced that it was experiencing “significant liquidity challenges” and was considering Chapter 11 bankruptcy. One year ago, Dots LLC, an affordable women’s fashion retailer headquartered in Ohio, liquidated. Abercrombie & Fitch, which once was a top retailer at malls, announced in December that it plans to close 60 stores through lease expiration and also plans to restructure its Gilly Hicks intimates and sleepwear brand for juniors.

Retail consultant Davidowitz said one reason for the closings of so many formerly solid juniors retailers is that they were unable to handle challenges from fast-fashion retailers such as Forever 21, which brought a fast and constantly changing array of fashions to consumers.

“If you’re a juniors customer, you have different priorities than you used to,” he said. “It’s your sneakers and your iPhone compared to your sweaters and jeans,” Davidowitz said of the material obsessions of teen consumers. He also noted that teen unemployment has increased and many do not have as much disposable income as they once had to spend on clothes.