Citing Sliding Sales, Shareholder Urges Board to Sell Wet Seal

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Wet Seal, which struggled for years and almost filed for bankruptcy last year, dismissed its CEO Susan McGalla on Monday.

Foothill Ranch, CA—As has been the case recently with other beleaguered retailers, such as Talbots and Christopher & Banks, a shareholder in Wet Seal Inc. called for teen retailer to put itself up for sale.

The recommendation from Clinton Group, an asset management firm which holds a 4.25% stake in Wet Seal, followed the news Monday that Wet Seal dismissed Susan McGalla as its chief executive.

Calling McGalla’s termination a “good first step,” Joseph DePerio, senior portfolio manager at Clinton, told the company’s board of directors: “We simply cannot wait for the board to hire yet another chief executive–the next one will be the fourth in five years.”

McGalla was brought aboard in January 2011 from her previous position as president and chief merchandising officer at American Eagle Outfitters, Inc. During her tenure, Wet Seal saw sales slid and its stock price fell to half its value over the last year.

In its announcement of McGalla’s departure, Wet Seal cut its second quarter earnings outlook to loss of 6 to 7 cents a share before non-cash asset impairment and severance costs for McGalla.

Complicating matters for the 550-store retailer is a federal racial discrimination lawsuit filed earlier this month by three former managers who charge high level executives at the company had a policy against African American employees. They claim that Wet Seal executives fired or denied promotions and pay to black employees while hiring white employees who fit the Wet Seal “brand image.”

Wet Seal vigorously denied the allegations, and Steve Benrubi, chief financial officer, told the Associated Press that McGalla’s firing was “strictly due to the financial performance of the company.”

‘Something Fundamentally Wrong’

DePerio noted that in several recent transactions, strategic and private equity buyers have “rescued shareholders from the sort of chronic under-performance shareholders have suffered at Wet Seal,” and have provided the exiting public shareholders with a price that rewarded them for “some of the fruits of the anticipated turnaround.”

Criticizing McGalla for “unacceptable” underperformance, DePerio expressed concerns that embarking on yet another change in strategy to turn around the company would create more uncertainty. “Shareholder patience has grown thin,” DePerio added.

Responding to DePerio, Wet Seal’s board of directions acknowledged Clinton Group’s suggestions and said it would continue “to review their recommendation regarding use of the company’s capital.

“Wet Seal is committed to maintaining an active dialogue with its shareholders and, as always, will continue to consider ways to maximize value for all stockholders,” the board said, which analysts took to mean they are taking Clinton Group’s recommendations to heart.

Clinton Group, which reportedly has more than $2.7 billion assets under management, said Wet Seal could attract a takeover bid of $5 to $8 a share, giving the retailer a valuation of about $450 to $725 million.

Meanwhile, Wet Seal continues to struggle. The company swung into a net loss in its first quarter and total sales were down 5.2% with comparable store sales dropping 7.7%. For its July comparable store sales so far, the company said they have also fallen 13% to 14%.

Like Clinton Group, other shareholders have been scrutinizing the company’s plans to delve into its cash reserves, which stood at $148.1 million as its first quarter.

“There is something fundamentally wrong at this company and hopefully fresh eyes will turn it around,” said Brian Sozzi, retail analyst at BG Productions.

While the board searches for a new chief executive, Wet Seal will be run by an “Office of the Chairman” led by Hal Kahn, non-executive chairman of the board, Ken Seipel, president, and Benrubi.