Foothill Ranch, CA—Saying that its recently implemented fast fashion strategy will have a positive impact on Wet Seal results “in a matter of months, not years,” the company’s board of directors Thursday asked Clinton Group Inc., one of its shareholders, to hold off on its calls to replace four of the five current board of directors.
The Clinton Group had filed with the Securities and Exchange Commission (SEC) preliminary consent solicitation materials seeking stockholder consent to appoint the five new independent members.
“We believe this is the wrong time to disrupt our business with a wholesale makeover of the board as we prepare for the critical fourth quarter and holiday season,” the board said in a statement.
Current Board Knows ‘Strengths and Weaknesses’
The board said while it recognized the “the immediate need” to improve the retailer’s performance—“as we have previously announced, the board is in the process of returning to a tested fast fashion strategy that we believe will have a positive impact on results in a matter of months, not years.”
To bring so many new board members on at this important juncture would “deleteriously affect” Wet Seal in the coming months. “That would not be in the best interests of all of our shareholders,” the board said.
On August 21, Wet Seal announced it was taking steps to stabilize its business by returning to its core expertise of fast fashion merchandising.
The company said it believes performance will bottom out in the third quarter before showing “clear signs of improvement in sales and profitability in the fourth quarter.” The fast fashion strategy should be able to return to $45 million to $50 million.
“The current board knows Wet Seal and its strengths and weaknesses. It is far more capable of managing a quick and seamless return to our historic and successful fast fashion model than a group of new directors, no matter how experienced they may be.”
Meanwhile, board and its advisers say they will review the Clinton Group’s materials and respond when it completes that evaluation.
Clinton Group, which owns a 3.92% stake in Wet Seal, had urged the company to sell rather than look for a new CEO when Susan McGalla was fired in July.
Then last month, Wet Seal Chairman Harold Kahn and the board adopted an anti-takeover defense, or “poison pill,” hired Guggenheim Securities LLC and Peter J. Solomon Co. to perform a strategic review of the company to maximize shareholder value.
Under Wet Seal’s “poison pill” current shareholders will receive the right to buy preferred stock if someone acquires more than 10% of the company’s common stock, or announces a tender offer for more than 10% of the company’s common stock.
The Clinton Group’s board nominees include: Raphael Benaroya, founder of the United Retail Group; Dorrit Bern, former chairman, president and CEO of Charming Shoppes Inc.; Lynda Davey, chairman and CEO of investment bank Avalon Group Ltd. and Avalon Securities Ltd.; Mindy Meads, former president and co-CEO of Aeropostale Inc.; and John Mills, president of consulting firm SDE.
‘A Tough Couple of Months’
It’s been a tough few months at Wet Seal, besides McGalla’s firing, the teen-oriented specialty retailer a second quarter loss of $12.4 million, or 14 cents a share, compared with a profit of $2.2 million, or two cents a share, a year ago. Excluding CEO severance charges and other impacts, the per share loss was 7 cents, compared with a year-earlier profit of 3 cents.
In July, three former Wet Seal managers filed a federal racial discrimination class action lawsuit seeking “back pay, general and punitive damages” as well as class action on behalf of 250 other African American current and former employees.
According to the lawsuit, Wet Seal’s senior vice president of store operations sent an email in 2009 discussing the need for greater racial diversity among store staff after she inspected them. The email read: “African American dominate—huge issue.” One of the managers said she was fired the day after the email was sent. She also alleges that she overheard a senior executive tell a district manager to hire someone “blond hair and blue eyes.”
The suit also alleges that the same executive told various managers to “lighten up” the store’s work force in store locations where there were more white customers.
Although declining comment on the lawsuit, the company said “Wet Seal is an equal opportunity employer with a very diverse workforce and customer base. We deny any and all allegations of race discrimination and will vigorously defend this matter.”