Wet Seal: Wrong Call

A year ago, Michael Relich was telling a success story about the virtual private network and Web portal he’d launched as chief information officer of Wet Seal. Today, he’s an observer as the apparel retailer struggles for survival.

CIO at jeans maker Guess since April, Relich still believes in the network success story he recounted repeatedly on behalf of SonicWall, a vendor of virtual private network and firewall gear. VPN technology, he says, let Wet Seal create broadband connections to its stores with digital phone lines, at a fraction of the cost of a traditional private line for business data networking.

Wet Seal got faster connections to speed customers through the checkout line. That cut the wait for credit card authorization by about 75%, compared with its old dial-up credit card processing. And there were other efficiencies from things like putting procedure manuals online, rather than relying on paper memos and binders. But efficiency wasn’t the problem.

View the PDF — Turn off pop-up blockers!

“At the end of the day, the consumer is driven by the product,” Relich says. If they don’t like what’s in your stores, “it doesn’t matter how good your back office or support systems are.”

What he found: Technology can accelerate the success of a company with the right products and strategy, but it can’t make up for the lack of them. The retailer, which sells items such as $50 denim cargo skirts and $30 nylon/polyester puffer vests, today has a precarious future because it’s not selling the products girls want at prices they’re willing to pay.

Another youth apparel retailer, Hot Topic, uses its broadband network to help it stay current with fast-changing teen trends—for example, by encouraging store associates to report by e-mail when a band catches on in their area and the store needs to start stocking its T-shirts (see “Small Companies, Big Returns,” October 2003, p. 41). But the practice of offering free concert tickets in return for those reports was in place years before the network upgrade, except for the switch from paper to e-mail.

Hot Topic’s program fine-tuned the inventory on store shelves, but Wet Seal appears to need a more extensive merchandise overhaul. Wet Seal’s attempt to realign itself with teen tastes came earlier this year with the introduction of its “stylizers,” a panel of what the company calls “ordinary girls” recruited to give feedback on what they did and didn’t like in Wet Seal stores. The company is recruiting more of them on its Web site and offering opportunities to model in its advertisements.

But like many of the turnaround plans Wet Seal has announced, this is too little, too late, says Jennifer Black, whose firm Jennifer Black & Associates analyzes retail stocks. “You’ve got to have the right product, first and foremost,” she says. “If you don’t have the right product but you’ve got the stylizers—great, I wish them luck.” Meanwhile, according to Black, other firms like privately owned Forever 21 are stealing away girls who used to be Wet Seal customers because of their reputation for trendier clothes at better prices.

Cathy Hotka, a senior technology consultant to the Retail Industry Leaders Association, says effective use of broadband can be part of a strategy for staying abreast of trends. But if a retailer gets caught with its shelves stocked with styles that have suddenly become uncool, no technology will bail it out. “In these cases, where you’re dealing with really faddish stuff, I would never turn to a system and say that’s the problem,” she explains.

Wet Seal’s current management doesn’t dispute that the company needs to repair its image. In a conference call to discuss a $102.8 million loss in the quarter that ended in July, CEO Peter D. Whitford suggested that Wet Seal had lost its hold on its core market of 17- to 19-year-old girls by alternately trying to reach girls as young as 14 and women in their early 20s. “The pendulum swinging back and forth over the past five years has confused the customer,” he says. “There were also some fashion misses during that period, and that has made it difficult to rebuild that customer base.”

Wet Seal says its Arden B subsidiary, which sells to women in their 20s and 30s, is doing better, although it refuses to release separate sales and profitability figures for the smaller chain. Arden B has 96 stores so far, but one option the chain is looking at is converting some of its 468 Wet Seal stores to the other format.

After eight straight quarters of dropping same-store sales, Wet Seal has also hired an outside financial adviser known for counseling cash-strapped companies on options such as bankruptcy. Helen Rotherham, Wet Seal’s vice president of investor relations and communications, says the company was busy “evaluating alternatives” and would not comment further. Former CEO Kathy Bronstein, who was fired in 2003 after 11 years at the helm, is reportedly trying to arrange financing to rescue the retailer.

Wet Seal has been talking about the need for a turnaround since at least 2001, and this year it has been promising investors that the turn would come with the back-to-school season. But in August same-store sales (sales at stores open a year or more) were down 14.8%. The back-to-school season was disappointing for many other retailers, reflecting broader economic trends, but some youth-oriented retailers made headway anyway. For example, Pacific Sunwear and American Eagle Outfitters saw same-store gains of 3.7% and 23.9%, respectively.

Wet Seal expects its cash reserves to drop to $11 million in the quarter that ends in October, down from $36 million in July.

Relich joined Wet Seal in August 2001, a year when the company’s profit margin topped 5%, as opposed to a 7.5% loss last year. Wet Seal had just installed Retek’s retail enterprise resource planning system and a new point-of-sale system based on Dell PCs and Windows 2000. Relich saw the potential to use these Web-enabled sales terminals as communications tools, not just cash registers, by connecting them to a better network.

Moving Up From Dial-Up

Unlike large department and discount stores, which have had high-capacity network links for years, mall boutique stores have only recently begun upgrading from dial-up connections. For example, Hot Topic has installed frame relay connections to its stores. On the other hand, Pacific Sunwear says it continues to squeeze good performance out of dial-up modems.

Relich chose a middle path, eschewing the expense of frame relay but demanding higher performance than dial-up. Instead, he took advantage of Digital Subscriber Line (DSL) technology, a high-speed service on traditional phone networks that’s typically sold to consumers. He added SonicWall equipment to create VPNs and make transmissions secure.

While not as reliable as frame relay, a more established telecommunications service for corporate data networking, Relich says his setup was far less expensive. He estimates frame relay would have cost about $250 per month for each store, where the digital lines averaged about $68 per month. Where DSL wasn’t available, he used an alternative such as cable modem service. Network performance wound up as good or better than he could have expected with frame relay.

And although the consumer-level reliability of these services meant that connections were sometimes dropped, the SonicWall units automatically switched to dial-up when that happened. “We worked with SonicWall to perfect that feature,” Relich says.

Simply moving credit card transactions to a central network, rather than using dial-up connections from each store, saved the chain about $275,000 a year, he says. The old dial-up network was also unreliable. For example, the nightly process of polling stores to retrieve sales figures would fail in about 6% of cases. With broadband, that dropped to about 2%, Relich says. Downloads of large files containing new prices succeeded on the first try only 20% of the time with dial-up, but the success rate now tops 98%, he points out.

Hot Topic saw similar gains with its frame relay network. Tom Beauchamp, who joined Hot Topic as CIO in June, says frame relay has the advantage of being reliable enough to support voice-over-Internet Protocol (VOIP) telephony in addition to data traffic. The technology allows store personnel to call each other and headquarters without running up long-distance phone bills.

But Relich says he couldn’t justify the cost of implementing voice communications over Internet protocols, given relatively cheap long-distance rates and the limited need for phone communication between headquarters and the stores. Choosing frame relay instead of the DSL-and-VPN combination, by his calculations, would have cost him over $100 more per month for each store—enough to pay for a lot of phone calls.

Relich then used the network for a sales portal that lets store employees see performance trends, arrange merchandise transfers from other stores and communicate with headquarters. Developed using Oracle Portal Server and the Oracle 9i Application Server, the portal has been “phenomenally successful” at replacing cumbersome processes with streamlined online applications, Relich says. Before, headquarters personnel communicated with store managers largely through weekly paper documents. For more immediate news, including corrections to those documents, Wet Seal used voice-mail accounts that store managers were supposed to check five times a day.

The portal provides Web-based e-mail between stores and headquarters. That communication helps with basic store operations such as how promotional displays are to be set up, Relich says. Because it taps into Retek’s inventory database, the portal also supports applications such as one that allows store personnel to locate an out-of-stock item at a sister outlet. Clerks can then order the item to be held for pickup by the customer, or transferred between stores. Alternatively, clerks can have the item delivered to the customer’s home through wetseal.com.

In another area where technology can make a difference, Wet Seal doesn’t seem to need a lot of help. With its Retek system, the chain has put in place tight inventory management that gives it one of the highest turnover rates in the industry: 7.5 turns, compared with less than five for most other teen retailers. Higher turnover usually signals higher sales, but that’s not translating into robust sales and profits at Wet Seal. The only way Wet Seal can keep merchandise moving is by slashing prices.

That’s why Wet Seal measures up poorly in another key metric: its sales per square foot, which came in at $229 in 2003. According to Wachovia Securities, the average for specialty apparel retailers is about $400. By contrast, rival Hot Topic stands out on this front, with sales of $619 per square foot.

Ronald L. Ehlers, Pacific Sunwear’s vice president of information systems, who knows and respects Relich, says it’s clear Wet Seal’s decline can’t be blamed on technology shortcomings. “I think they had all the technology in place needed to run the business, but they made fundamental merchandising and strategy mistakes, and they’ve had a hard time recovering,” he says.

Ehlers says his chain hasn’t made the leap to broadband yet, largely because it has tuned store systems to work efficiently over dial-up. However, he is planning to launch a broadband-and-VPN pilot project at some of his largest stores in time for the holiday season to give them faster credit card authorization.

Relich says Wet Seal funded the technology it needed for success, and by the end of his tenure he told management not to spend more. He thought the focus ought to be on adding or refining applications that would, for example, get more mileage out of the portal. After years of providing no applications to the stores beyond cash registers and credit card terminals, he adds, the chain could now offer network-centric applications—like the Arden B loyalty card program—largely because of the portal.

“You want to do cool things to keep your staff motivated,” Relich points out. “But we had pretty superior systems that would serve a business well. We needed to use that as a vehicle to actually start cutting expense.”

Those systems could be part of a long-awaited turnaround for Wet Seal. But they won’t cause it.

—Tom Steinert-Threlkeld contributed to this report

Wet Seal Base Case

Headquarters: 26972 Burbank, Foothill Ranch, CA 92610

Phone: (949) 583-9029

Business: Clothing retailer that targets teen-age girls through its Wet Seal chain and young women through its Arden B stores.

Chief Information Officer: Vacant; formerly Michael Relich

Financials in 2003: Lost $47.3 million on sales of $517.6 million.

Challenge: Recover from marketing and merchandising errors that have hurt the Wet Seal brand and eroded sales, while capitalizing on the relative strength of the Arden B chain.

Baseline Goals: