California Specialty-Store Chains Are Preparing for Better Times in 2010

Last year, California-based retail chains catering to trendy customers were struggling to keep their heads above water. But this could be the year that these once high-flying retailers take off again.

Analysts who keep tabs on the retail world say the companies that stand a good chance of emerging from sustained losses this year are The Wet Seal Inc., Pacific Sunwear of California Inc. and Bebe Stores Inc.

All these retailers have experimented with new merchandising strategies, recruited new executives and maintained strong fiscal discipline in order to restore themselves as leading specialty chains.

If their new policies pay off, they could be headed for several consecutive quarters of positive same-store sales as well as improved margins and better inventory management. This all portends a solid recovery for 2010, said Jeffrey Van Sinderen, a retail analyst for Los Angeles–based financial services firm B. Riley & Co.

Perhaps leading the comeback charge for Wet Seal is its long-suffering Arden B. division, which serves a young contemporary customer. In December, the 80-store chain reported that same-store sales grew 14.1 percent. However, its much larger Wet Seal division, which caters to a fast-fashion teen customer, reported same-store sales declined 7.3 percent at its 424 stores.

Arden B.’s strong December sales helped the Foothill Ranch, Calif.–based Wet Seal parent company beat Wall Street’s estimates for the holiday season. A consensus of analysts had forecasted that Wet Seal, including its Arden B. division, would see its same-store sales dip 5.6 percent in December. Instead they declined 4.6 percent.

One reason for Wet Seal’s better-than-expected results was better merchandising, Van Sinderen said. That was helped along when Arden B. merchandising consultant Sharshy;on Hughes became the division’s new president and chief merchandising officer in November. Hughes, who had been working as the store’s merchandising consultant since 2008, was instrumental in the division’s turnaround, said Wet Seal Chief Executive Ed Thomas.

With Hughes now firmly entrenched at Arden B., it’s now time for the Wet Seal division to focus on improving its merchandising and executive team after Maria Comfort, president and chief merchandising officer of the division, resigned in November. A search for a replacement is still under way.

There are even some analysts out there who believe that Wet Seal could be a growth story, said Liz Pierce, an analyst for Newport Beach, Calif.–based financial services firm Roth Capital Partners. Wet Seal is on an aggressive campaign to selectively re-open 100 locations it closed in 2005, according to a Jan. 12 research note written by Pierce. Arden B. could also be headed for expansion, eventually adding to its 250 locations. In documents filed Dec. 2 with the Securities and Exchange Commission, Wet Seal noted it intended to expand its fleet of stores.

Other contenders to make a comeback are Bebe and Pacific Sunwear. Bebe, based in Brisbane, Calif., had a tough second quarter, which ended Oct. 3, with same-store sales slumping 23.1 percent. But Pierce said things could be looking up for the chain, which has 307 stores and caters to a contemporary client.

Its merchandise began improving during the holidays, which may be a result of Kathy Lee, a new chief merchandising officer who joined Bebe in June. Lee was senior vice president of merchandising for retail giant Forever 21. Another positive mark was more customers visited Bebe’s stores in December to browse through merchandise after retail traffic was poor in October and November, Pierce said.

Pacific Sunwear, which started out in 1980 as a surf shop in Newport Beach and has grown to a major chain carrying surf- and skate-oriented apparel, has not reported positive same-store sales since its third quarter in 2007. But Pierce is bullish about the company because recently appointed PacSun chief Gary Schoenfeld is taking the Anaheim, Calif.–based company, with 904 stores, in a new direction.

Schoenfeld has started out strong by promising to close a few stores and adding more focus to the surf brands that originally built PacSun’s business. Schoenfeld’s initiatives might start paying off in 2011, Pierce noted in a Nov. 17 research note.

Other retailers to watch this year include Zumiez and American Eagle Outfitters, Van Sinderen said. The Everett, Wash.–based Zumiez beat Wall Street estimates in December. Analysts’ consensus forecast same-store sales would decline 6.4 percent. Instead they inched up 0.3 percent.

In a Jan. 6 research note, Van Sinderen wrote that Zumiez is one of the few retailers that has the potential to increase its stable of 343 stores. Needham & Co. analyst Christine Chen agreed that Zumiez has potential for store growth. On Jan. 7, she upgraded her recommendation for the company’s stock from “hold” to “buy.”

Pittsburgh-based American Eagle Outfitters reported same-store sales in December were up 7 percent. Van Sinderen wrote in November that the company improved its fashion merchandising during the previous months, which gave it more fuel to compete against its main rival, Aeropostale.

True Religion, a Los Angeles denim maker that has been expanding into retail, has room to grow, said Todd Slater, an analyst for Lazard Capital Markets. On Jan 5, Slater upgraded his recommendation for the Los Angeles–based denim label’s stock from “hold” to “buy.” True Religion has been finding new opportunities in building branded boutiques that now number 70.