The Wet Seal Inc. could be on the verge of filing for Chapter 11 bankruptcy protection. The move could allow the chain, which includes Arden B., Zutopia and Wet Seal stores, to immediately reject leases and stop paying rent on any of its unprofitable locations. That could mean trouble for Simon Property Group, Rouse Co., Taubman Centers and General Growth. The three REITs have Wet Seal stores renting at least 0.50 percent of their total owned space. With 131 stores, Simon has the highest exposure to Wet Seal stores -- 0.57 percent, according to Morgan Stanley analyst Matt Ostrower.
Earlier in the year, Wet Seal announced plans to shutter all of its 31 Zutopia stores. The retailers' same-store sales have been on a steady decline. Wall Street expects June's sales to fall as much as 14 percent, and several valuable merchandising executives have jumped ship. Plus, for the past 22 months, Wet Seal says its vendors are giving it the cold shoulder. "Its best merchants have been hired away or have left on their own; therefore we continue to be skeptical that management can turn this business around," Teklits says. "The odds of a Chapter 11 filing over the next 12 months appears to us to be greater than 50 percent."
Whitaker Securities analyst Marc Bettinger is less sure of the retailer's imminent bankruptcy. "If the odds of Chapter 11 are greater than 50 percent, then a current $5-$6 valuation makes little sense, as the market would value the company at a much lower level," he says in a report today.
The retailer is also an acquisition target for some competitors who see value in the Arden B. concept, which caters to 22-35 year olds in search of runway knock-offs at not-so-cheap price points, Teklits says. But few companies are willing to take on a turnaround of the Wet Seal division, he adds.