Wet Seal Retailer May Soon File For Bankruptcy

Amid the declining profitability of shopping mall chains across the U.S., retailer Wet Seal appears to be poised on the brink.

The Foothill Ranch-based company announced Jan. 7 that it will close 338 stores and lay off close to 3,700 employees, according to The Los Angeles Times. This represents approximately two-thirds of the retailer’s locations. The Wet Seal online business and 173 of its locations will continue to operate.

“Our financial condition leaves us no other alternative than to close these stores,” Chief Executive Ed Thomas said in a statement cited by the news source. “This was a very difficult decision to make.”

A lender on some of the company’s senior convertible notes has already issued a default notice with a Jan. 12 deadline, according to MarketWatch. Wet Seal has until that time to meet its obligations or strike a new deal – otherwise it may have little choice but to file for protection under the bankruptcy law. Rivals Delia’s and Deb Shops have already gone this route.

“I don’t think that there is a good chance (of it surviving) unless there is a trick up someone’s sleeve that we haven’t seen yet,” bankruptcy attorney David Tawil told MarketWatch. “It has been a long time coming.”

The causes behind the decline

The teen sector toward which Wet Seal is oriented has under performed as a whole compared to the broader retail segment, according to the news source. Even better known rival companies like Pacific Sunwear and Aeropostale Inc. are expected to close some stores this year as a means to shore up losses. As parents cut back on their kids’ allowance and teens shift their spending away from fashion and toward electronics, those companies in the sector that aren’t ready for shifting trends are having difficulty keeping up.

Wet seal has lost money in eight of the last 10 quarters, MarketWatch reported based on Retail Metrics data, and it is anticipated to continue this trend in the next two. Comparable sales dropped in 11 of the past 13 quarters. Most notably, sales experienced a 14 percent drop in the third quarter of last year and a 9.7 percent drop is expected in the holiday quarter.

New “fast fashion” retailers like Zara, H&M and Forever 21 have had more success in the modern environment due to their ability to quickly and cheaply shift between the latest trends, according to The LA Times. CEO Ed Thomas promised a focus on this strategy should the company he heads make it through this difficult time.