Retailer Wet Seal Files for Chapter 11 to Stay Afloat

The Wet Seal Inc. (NASDAQ:WTSL), a teen clothing retailer, has filed for Chapter 11 bankruptcy protection in an effort to keep its remaining 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.

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.

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 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.

Wet Seal 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.

In 2004 Wet Seal announced it was closing Zutopia, which targeted preteens and early teenage girls. And last year Wet Seal decided to shut down Arden B, closing some stores and converting some to the Wet Seal name.

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 stay in business, including 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 reorganizes and exits bankruptcy protection.

Wet Seal also expects to continue to fund its operations with available cash and cash generated during the Chapter 11 cases.

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.

Wet Seal said it had about $31 million in cash on its balance sheet as of Monday.

Shares of the company tumbled 3 cents, or 35.9 percent, to 5 cents in Friday morning trading. Companies' common stock often becomes worthless in a bankruptcy reorganization.