BUSINESS

Teen retailer Wet Seal files for Ch. 11 protection in effort to keep head above water

01/16/2015 07:39 EST | Updated 03/18/2015 05:59 EDT
NEW YORK, N.Y. - The Wet Seal Inc. has filed for Chapter 11 bankruptcy protection in an effort to keep its remaining teen clothing stores open.

The announcement Friday comes a little over a week after the chain said that it was closing 338 stores, or about two-thirds of its total.

Fellow teen clothing retailers Delia's Inc. and Deb Stores filed for Chapter 11 bankruptcy in December, further evidence of trouble in a business being hurt by tough competition and changing tastes among teenagers.

Wet Seal had warned last month that it might need to file for bankruptcy protection if it did not resolve its cash issues after reporting another quarter of losses.

Wet Seal and other chains are being hurt by stores like H&M and Forever 21 that are wooing young people with fast-changing selections of low-priced fashion. Teens are also more interested in outfitting themselves with the latest tech gadgets than new jeans.

The retailer began in 1962 as a bikini shack in Newport Beach, California. It was acquired by Canadian retailer Suzy Shier in 1984. The company, which today sells clothing, shoes and accessories aimed at teenage girls, went public in 1990.

Wet Seal expanded with additions such as Contempo Casuals, Arden B. and Zutopia. Wet Seal acquired Contempo in 1995, adding 200 Contempo Casuals stores. All of those stores were converted to the Wet Seal name by 2001.

Wet Seal has dealt with a long-running series of problems. The company restructured in 2013, closing stores, cutting jobs and changing management.

The executive shuffle included hiring retail-industry veteran John Goodman in January 2013 to help refocus the company after it fired former CEO Susan McGalla in July 2012 amid falling sales. Goodman resigned in September 2014, and Wet Seal brought back Ed Thomas, a former president and CEO, to lead the company.

In addition, Wet Seal dealt with a proxy battle in 2012 with an investment group that wasn't happy with its financial performance. And in 2013 the retailer agreed to pay $7.5 million to settle a federal racial discrimination lawsuit filed by three former employees.

Last year, year Wet Seal decided to shut down its Arden B chain, closing some stores and converting some to the Wet Seal name.

"Wet Seal failed for two reasons: a company that failed to stay in tune with their customers and new rivals like H&M that were able to get cooler merchandise to the stores quicker and with slightly better quality than Wet Seal," Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, said.

Bigger retailers like J.C. Penney Co. and Kohl's Corp. also "upped their games" in teen girls clothing, Sozzi said.

Wet Seal hopes to keep operating during bankruptcy. The Foothill Ranch, California-based company was running 173 stores in 42 states and Puerto Rico as of Thursday.

The retailer said that it has arranged a $20 million term loan facility through B. Riley Financial Inc. to help it keep paying its vendors and landlords. That funding still needs to be approved by the U.S. Bankruptcy Court for the District of Delaware.

The agreement would make B. Riley the majority stockholder of Wet Seal once the retailer exits bankruptcy.

Wet Seal estimates its assets to be between $10 million and $50 million, according to its bankruptcy filing. Liabilities are estimated between $100 million and $500 million. The company's largest creditor is Hudson Bay Master Fund Ltd. Other big creditors are primarily its shopping-mall landlords.

Shares of the company tumbled about 3 cents, or 40 per cent, to 5 cents in Friday afternoon trading. Companies' common stock often becomes worthless in a bankruptcy reorganization.