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FOOTHILL RANCH, Calif.--(BUSINESS WIRE)--May 22, 2006--The Wet Seal, Inc. (Nasdaq:WTSLA), a leading specialty retailer to young women, today announced results for its first fiscal quarter ended April 29, 2006.
The Company reported a quarterly net loss of $13.7 million, or $0.22 per diluted share. These results included a non-cash interest charge of $18.1 million associated with conversions of the Company's convertible notes, a non-cash charge of $5.6 million for stock compensation, a charge of $0.7 million for severance, and a $0.4 million reduction to store closure reserves. The Company also modified the terms of its Arden B division's customer loyalty program, resulting in a credit of $2.3 million to reduce the deferred sales balance associated with the program. Before the effect of these charges and credits, net income was $8.0 million, or $0.09 per diluted share, and operating income was $8.1 million, or 6.6% of net sales.
These results compare to a prior year first quarter net loss of $8.6 million, or $0.23 per diluted share, and a quarterly operating loss of $6.8 million, which included charges of $5.2 million for store closure costs and $0.5 million for non-cash stock compensation.
Mr. Joel Waller, chief executive officer, commented, "I am extremely pleased with our first quarter financial results. Our operating income rate substantially exceeded our expectations and resulted from growth in merchandise margins, leverage from additional sales, and improvements in almost every component of our selling and general and administrative expenses. Our operation is running smoothly and we are continually finding ways to improve our efficiency and reduce costs. We are on track to open 20 to 25 stores this year with the full expectation we can accelerate square footage growth beginning in 2007."
During the 13 weeks ended April 29, 2006, the Company opened two Wet Seal stores and closed one Wet Seal store. At April, 29, 2006, the Company operated 309 Wet Seal stores and 92 Arden B stores.
Financial and Operating Summary for the 13-Week Period Ended April 29, 2006
Net sales for the 13 weeks ended April 29, 2006 were $125.1 million, compared with net sales of $103.8 million for the comparable prior year period, a 20.5% increase. Sales increased over the prior year's quarter primarily due to a 20.0% increase in comparable store sales. The growth in comparable store sales was driven by increased transaction counts and the number of items purchased per customer, partially offset by a decrease in the average retail price per item sold. The Company also modified the terms of its Arden B customer loyalty program, resulting in recognition of sales previously deferred of $2.3 million. The amount of the sales increase associated with the credit was not included in determining comparable store sales for the quarter.
Gross profit increased to $46.8 million from $32.6 million in the prior year, and as a percent of sales, increased 6.0 percentage points to 37.4%. Excluding the impact of the loyalty program adjustment, gross profit as a percent of sales was 36.2%. A number of factors contributed to this improvement, including the positive effect of higher merchandise margins and higher average store sales on occupancy, buying and distribution costs.
Selling, general and administrative ("SG&A") expenses were $42.7 million, or 34.1% of sales, and included $5.4 million of non-cash stock compensation and $0.7 million in severance costs for a former executive. Excluding these charges, SG&A expense was $36.6 million, or 29.2% of sales, a decrease of 3.2 percentage points from the percentage of sales for the prior year period on a comparable basis.
Non-cash stock compensation within SG&A in the current period included $4.1 million for performance shares associated with the Company's consulting agreement with Michael Gold and $1.3 million for stock options and restricted stock grants to its Board of Directors and employees. The Company continues to estimate fiscal 2006 charges associated with the performance shares will total $11.0 million and charges for stock options and restricted stock will be $5.3 million. However, such charges may vary considerably as a result of changes in the Company's stock price.
The Company had net interest expense of $18.2 million for the current year period, compared to $1.8 million for the comparable prior year period. Net interest expense for the current year period includes $18.1 million to write-off a ratable portion of unamortized debt discount, deferred financing costs and accrued interest associated with notes converted to common stock in the quarter.
Included within non-cash stock compensation charges for the current period is $0.6 million of stock option expense resulting from the Company's adoption of Statement of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment," as of the beginning of fiscal 2006.
The Company has discontinued recognizing income tax benefits until it determines it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets.
Capital Transactions
During the 13 weeks ended April 29, 2006, investors converted $22.5 million of the Company's convertible notes into 14,994,982 shares of Class A Common Stock. As a result of these conversions, the Company recorded net non-cash interest charges of $18.1 million during the quarter to write-off a ratable portion of unamortized debt discount, deferred financing costs and accrued interest. If additional conversions of the convertible notes occur, the Company would incur similar non-cash charges in future periods. As of April 29, 2006, the unamortized debt discount and deferred financing costs associated with the convertible notes, net of accrued interest, totaled $18.5 million.
Investors in the Company's Series C Preferred Stock converted $0.2 million of such preferred stock into 73,000 shares of Class A Common Stock during the 13 weeks ended April 29, 2006. Investors also exercised portions of outstanding Series B and C Warrants during the fiscal quarter, resulting in issuance of 855,000 shares of Class A Common Stock in exchange for $2.1 million of cash proceeds to the Company.
In March 2006, the Company repaid its $8 million junior secured term loan, which was scheduled to mature in 2007.
Reconciliation of Non-GAAP Financial Measures to Most Directly Comparable Financial Measures
Included within this press release are references to net income and operating income before certain charges and credits, which are non-GAAP financial measures. The following is a reconciliation of these non-GAAP financial measures to the applicable GAAP financial measures for the quarter (in millions):
Net Income Operating
(Loss) Income
----------- ---------
Financial measure before certain charges and
credits (non-GAAP) $8.0 $8.1
Charges and credits:
Non-cash interest expense associated with
conversions of convertible notes (18.1) -
Non-cash stock compensation expense (5.6) (5.6)
Credit to sales upon modification of Arden B
customer loyalty program. 2.3 2.3
Severance charge for a former executive (0.7) (0.7)
Store closure reserve adjustment 0.4 0.4
----------- ---------
GAAP financial measure $(13.7) $4.5
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Fiscal 2006 Information
In the month of May, the Company is estimating a comparable store sales decrease in the high single digits due to the strength of the prior year increase and due to lack of inventory in fashion tops and dresses at the Wet Seal division. According to Joel Waller, "Although we identified the trends related to fashion tops and dresses, we did not have sufficient inventory of the fashion merchandise to meet the demand. We expect to be fully stocked sometime in middle or late June."
The Company is planning the remainder of 2006 with a mid-single digit increase in comparable store sales.
The Company anticipates opening between 20 to 25 new stores during the fiscal year and expects capital expenditures of between $15.0 million to $17.0 million.
The Company has federal and state net operating loss carryforwards available to reduce future income tax liabilities. The amounts able to be utilized are subject to annual limitations. For fiscal 2006, the Company estimates it will be able to utilize up to approximately $62 million in federal net operating losses. Also, with respect to income taxes, certain of the Company's expenses for financial reporting purposes, including non-cash interest charges upon conversion of convertible notes and the amortization of the convertible notes discount, are not tax-deductible, which cause increases in the Company's effective tax rate. In addition, under federal alternative minimum tax ("AMT") regulations, the Company will be subject to a limitation that allows it only to utilize AMT-based net operating loss carryforwards to reduce its AMT liability by 90%. The utilization of state net operating carryforwards may also be limited and will be determined on a state-by-state basis after considering the income attributable to each state and any limitation on net operating loss utilization for that state.
For purposes of calculating earnings per share, the Company estimates its fiscal 2006 share count will be approximately 103 million. The estimated share count could significantly change with changes in the Company's stock price.
The Company will host a live conference call and question and answer session at 2:00 p.m. Pacific Daylight Time today. To participate in the conference call, please dial (800) 946-0706 and provide ID#9861046. A replay of the call will be available until May 29, 2006. To access the replay, please call (888) 203-1112 or (719) 457-0820 and provide the ID number above. A webcast of the call will also be available on our website www.wetsealinc.com.
Headquartered in Foothill Ranch, California, The Wet Seal, Inc. is a leading specialty retailer of fashionable and contemporary apparel and accessory items. The Company currently operates a total of 401 stores in 46 states, the District of Columbia and Puerto Rico, including 309 Wet Seal stores and 92 Arden B stores. The Company's products can also be purchased online at www.wetseal.com or www.ardenb.com. For more company information, visit www.wetsealinc.com.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This news release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements that relate to the Company's opening and closing of stores, profitability and growth, demand for its products or any other statements that relate to the intent, belief, plans or expectations of the Company or its management. All forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based on factors beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission. This news release contains results reflecting partial year data and non-fiscal data that may not be indicative of results for similar future periods or for the full year. The Company will not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.
THE WET SEAL, INC.
SUMMARY STATEMENTS OF OPERATIONS
(000'S OMITTED, EXCEPT SHARE DATA)
(Unaudited)
13 Weeks Ended
April 29, 2006 April 30, 2005
---------------- ----------------
Net sales $125,149 $103,824
Gross margin 46,752 32,553
Selling, general & administrative
expenses 42,693 34,184
Store closure (adjustments) costs (446) 5,152
---------------- ----------------
Operating income (loss) 4,505 (6,783)
Interest expense, net (18,201) (1,767)
---------------- ----------------
Loss before income taxes (13,696) (8,550)
Benefit for income taxes (2) -
---------------- ----------------
Net loss $(13,694) $(8,550)
================ ================
Net loss per share, basic and
diluted ($0.22) ($0.23)
================ ================
Weighted average shares outstanding,
basic and diluted 63,183,165 36,672,903
================ ================
THE WET SEAL, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
(Unaudited)
April 29, 2006 January 28, 2006
---------------- ----------------
ASSETS
Cash and cash equivalents $87,483 $96,806
Income taxes receivable 134 136
Merchandise inventories 32,714 25,475
Other current assets 6,303 6,394
---------------- ----------------
Total current assets 126,634 128,811
Equipment and leasehold
improvements, net 42,679 43,637
Deferred financing costs 1,512 3,162
Other assets 1,635 1,633
Goodwill 5,984 5,984
---------------- ----------------
Total assets $178,444 $183,227
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - merchandise $11,660 $13,584
Accounts payable - other 9,286 9,883
Accrued liabilities 34,909 36,472
---------------- ----------------
Total current liabilities 55,855 59,939
---------------- ----------------
Long-term debt - 8,000
Secured convertible notes 6,403 11,824
Deferred rent 23,061 23,996
Other long-term liabilities 2,970 3,228
---------------- ----------------
Total long-term
liabilities 32,434 47,048
---------------- ----------------
Convertible preferred
stock 9,441 9,660
---------------- ----------------
Total stockholders'
equity 80,714 66,580
---------------- ----------------
Total liabilities and stockholders'
equity $178,444 $183,227
================ ================
CONTACT: The Wet Seal, Inc. John Luttrell, 949-699-3918
SOURCE: The Wet Seal, Inc.