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FOOTHILL RANCH, Calif.--(BUSINESS WIRE)--March 23, 2006--The Wet Seal, Inc. (Nasdaq:WTSLA), a leading specialty retailer to young women, today announced results for its fourth fiscal quarter and full fiscal year ended January 28, 2006.
The Company reported a quarterly net loss of $2.8 million, or $0.05 per diluted share, which included $6.8 million in non-cash stock compensation charges, $3.1 million in non-cash interest charges associated with conversions of its convertible notes and $0.6 million in asset impairment charges. This compares to a prior year fourth quarter loss of $47.8 million, or $1.31 per diluted share, which included $1.2 million in non-cash stock compensation charges, $16.4 million in store closure costs, and $1.0 million in asset impairment charges.
Fourth quarter operating income was $0.7 million, including a $6.8 million non-cash stock compensation charge. Before this charge, operating income was $7.4 million, or 5.3% of net sales. For the year, the operating loss was $16.2 million, including a $24.3 million non-cash stock compensation charge. Before this charge, operating income for the year was $8.1 million, or 1.6% of sales. Throughout the year, the trend in operating income has been improving.
For the fiscal year, the Company reported a net loss attributable to common stockholders of $52.9 million, or $1.19 per share, which included $24.3 million in non-cash stock compensation charges, $8.8 million in non-cash interest charges associated with conversions of its convertible notes, $23.3 million in accretion of non-cash dividends on convertible preferred stock, $4.5 million in store closure costs and $1.0 million in asset impairment charges. This compares to a prior year net loss of $198.3 million, or $5.89 per diluted share, which included $1.5 million in non-cash stock compensation charges, $16.4 million in store closure costs, $41.4 million in asset impairment charges, a $29.5 million provision for deferred income taxes, and $7.0 million of losses from discontinued operations.
Net sales for the 13 weeks ended January 28, 2006 increased 18.6% to $141.4 million versus net sales of $119.2 million for the same period last year. This increase was driven by a 44.6% increase in comparable store sales, partially offset by a reduction resulting from the closing of 154 Wet Seal stores in January and February of 2005.
Net sales for the 52 weeks ended January 28, 2006 increased 15.0% to $500.8 million versus net sales of $435.6 million for the same period last year. This increase was driven by a 44.7% increase in comparable store sales, partially offset by a reduction resulting from the Wet Seal store closures in January and February of 2005.
Mr. Joel Waller, chief executive officer, commented, "Operating income before non-cash stock compensation expense was $7.4 million, or 5.3% of net sales in the fourth quarter, and represents a substantial improvement from recent results. We were pleased to see improvements in merchandise margins due to a significantly lower overall markdown rate that resulted from stronger product assortment. Our primary goal in fiscal 2006 is to make further improvements in operating income rates, and we now have ample evidence that we are in a position to begin to open new locations to drive growth in sales and profits. We will open 20 to 25 new stores this year and anticipate increasing our store count annually between 15% and 20% beginning in fiscal 2007."
Financial and Operating Summary for the 13-Week Period Ended January 28, 2006
Net sales for the 13 weeks ended January 28, 2006 were $141.4 million, compared with net sales of $119.2 million for the comparable prior year period, an 18.6% increase. Sales increased over the prior year's quarter due to a 44.6% increase in comparable store sales, offset by the effects of stores closed. The growth in comparable store sales was driven by increased transaction counts, partially offset by a decrease in the average amount of each sale.
Gross profit increased to $47.6 million from $14.6 million in the prior year, and as a percent of sales, increased 21.4 percentage points to 33.6%. A number of factors contributed to these improvements, including significantly lower markdowns in the Company's Wet Seal and Arden B. divisions, and the positive effect of higher average store sales on occupancy, buying, planning and design costs.
Selling, general and administrative ("SG&A") expenses were $46.3 million, or 32.8% of sales, and included $6.8 million of non-cash stock compensation. Excluding non-cash compensation, SG&A expense was $39.6 million, or 28.0% of sales, a decrease of 6.8 percentage points from the comparable percentage of sales for the prior year period.
Store level operating expenses, a component of SG&A expenses, were $32.6 million, which was relatively flat when compared to the prior year. These costs, when expressed as a percent to sales, were 23.1%, and decreased 3.8 percentage points as a percentage of sales from the prior year. The decrease in the rate was centered in the Wet Seal division and was primarily due to the closing of low volume stores, lower spending for advertising and added sales leverage on the fixed cost component of this expense category.
General and administrative expenses ("G&A") are the other component of SG&A expenses. G&A expenses before non-cash stock compensation charges of $6.8 million in the current period, and $1.2 million in the prior year comparable period, were $6.9 million and decreased approximately $2.4 million from $9.3 million for the prior year fourth quarter. As a percent to sales, these expenses were 4.9%, versus 7.8% in the prior year period, with the change primarily a result of professional and other costs incurred in the prior year period associated with the Company's restructuring and leverage from additional sales.
Current year operating expense includes a $0.6 million asset impairment charge versus a $1.0 million charge in the prior year. The charges in both periods were a result of management's review of the historical and current operating performance of its stores and their related carrying values. This review indicated that it was unlikely the Company would recover the carrying value of certain assets.
The Company had net interest expense of $3.6 million for the 13-week period ended January 28, 2006, compared to $2.2 million for the comparable prior year period. Net interest expense for the current year period includes $3.1 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.
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.
During the 13-week period ended January 28, 2006, the Company opened one Wet Seal store and closed two Wet Seal stores and one Arden B. store. At January 28, 2006, the Company operated 308 Wet Seal stores and 92 Arden B. stores.
Capital Transactions
For the 13 weeks ended January 28, 2006, investors converted $3.7 million of the Company's convertible notes into 2,455,667 shares of Class A Common Stock. In accordance with generally accepted accounting principles ("GAAP"), the Company recorded net non-cash interest charges of $3.1 million during the quarter to write-off a ratable portion of unamortized debt discount, deferred financing costs and accrued interest associated with the convertible notes. When additional conversions of the notes occur, the Company will incur similar non-cash charges in future periods.
Investors in the Company's Series C Preferred Stock converted $0.8 million of their preferred stock into 281,000 shares of Class A Common Stock during the 13 weeks ended January 28, 2006, resulting in $9.7 million of Series C Preferred Stock remaining outstanding as of the end of the period. Investors also exercised portions of outstanding Series E Warrants during the fiscal quarter, resulting in issuance of 13,393 Class A Common shares. The proceeds received by the Company were not significant.
On March 23, 2006, the Company repaid its $8 million term loan that had a scheduled maturity date of May 27, 2007.
Reconciliation of Non-GAAP Financial Measure to Most Directly Comparable Financial Measure
Included above within this press release is a reference to operating income before non-cash stock compensation charges, which is a non-GAAP financial measure. The following is a reconciliation of this Non-GAAP financial measure to operating income for the fourth quarter and full year (In millions):
Fourth Fiscal
Quarter Year
Operating income before non-cash stock compensation
charges $7.4 $8.1
Less: Non-cash stock compensation charges (6.8) (24.3)
Rounding difference 0.1 -
------- -------
Operating income (loss) $0.7 $(16.2)
======= =======
Fiscal 2006 Information
The Company is planning its business for fiscal 2006 based upon a mid-single digit increase in comparable store sales.
The Company estimates non-cash stock compensation expense in fiscal 2006 will be approximately $11.0 million for performance shares associated with the Company's previously announced consulting agreement with Michael Gold and $5.3 million associated with stock options and stock grants to its board of directors and employees. The charges for performance shares granted to Michael Gold may vary considerably as a result of changes in the Company's stock price. To a lesser extent, other stock compensation charges may also vary due to changes in the Company's stock price and future grants and forfeitures.
The Company anticipates opening between 20 to 25 new stores during the fiscal year. The timing of the openings has yet to be determined. The Company expects to have capital expenditures of between $15.0 million and $17.0 million in fiscal 2006.
From the end of fiscal 2005 through March 22, 2006, investors converted $6.0 million of the Company's convertible notes into 4,028,315 shares of Class A Common Stock, and, due to these conversions, the Company will record net non-cash interest charges of $4.9 million in the first quarter to write-off a ratable portion of unamortized debt discount, deferred financing costs and accrued interest associated with the convertible notes. When additional conversions of the convertible notes occur, the Company will incur similar non-cash charges. As of March 22, 2006, the unamortized debt discount, deferred financing costs and accrued interest balances on the convertible notes totaled $32.4 million.
Beginning in fiscal 2006 the Company will begin recording expense for the fair value of stock options granted to its employees. The Company estimates the associated compensation charge will approximate $2.8 million for the year and has included this amount in the fiscal 2006 stock compensation expense estimate above.
The Company has approximately $180 million in federal net operating loss carryforwards available to reduce future income tax liabilities. The amounts able to be utilized are subject to an annual limitation. For the two-year period of fiscal 2006 and fiscal 2007, the Company estimates there is approximately $83 million in available net operating losses that can be used to reduce federal taxes. Any remaining balance will be available for carryover to future fiscal years through 2023 to 2025, subject to annual limitations. 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. 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 may cause increases in the Company's effective tax rate.
For purposes of calculating earnings per share, the Company estimates its fiscal 2006 share count will be approximately 101 million.
The Company will host a live conference call and question and answer session at 2:00 p.m. Pacific Standard Time today. To participate in the conference call, please dial (800) 479-9001 and provide ID#6930141. A replay of the call will be available until March 30, 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 400 stores in 46 states, the District of Columbia and Puerto Rico, including 308 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 52 Weeks Ended
January 28, January 29, January 28, January 29,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Net Sales $141,378 $119,216 $500,807 $435,582
Gross Margin 47,556 14,567 161,451 57,918
S, G & A expense 46,306 42,652 172,154 161,856
Store closure costs - 16,398 4,517 16,398
Asset impairment 566 989 989 41,378
----------- ----------- ----------- -----------
Operating income
(loss) 684 (45,472) (16,209) (161,714)
Interest expense, net (3,609) (2,189) (13,000) (2,111)
----------- ----------- ----------- -----------
Loss before income
taxes (2,925) (47,661) (29,209) (163,825)
(Benefit) provision
for income taxes (93) 127 330 27,509
----------- ----------- ----------- -----------
Net loss from
continuing operations (2,832) (47,788) (29,539) (191,334)
Net loss from
discontinued
operations - - - (6,967)
----------- ----------- ----------- -----------
Net loss (2,832) (47,788) (29,539) (198,301)
Accretion of non-cash
dividends on
convertible preferred
stock - - (23,317) -
----------- ----------- ----------- -----------
Net loss attributable
to common
stockholders $(2,832) $(47,788) $(52,856) $(198,301)
=========== =========== =========== ===========
Net loss per share,
basic and diluted:
Continuing
Operations ($0.05) ($1.31) ($1.19) ($5.68)
Discontinued
Operations $0.00 $0.00 $0.00 ($0.21)
----------- ----------- ----------- -----------
Net loss ($0.05) ($1.31) ($1.19) ($5.89)
=========== =========== =========== ===========
Weighted average
shares outstanding,
basic 52,482,225 36,396,070 44,340,894 33,698,912
=========== =========== =========== ===========
Weighted average
shares outstanding,
diluted 52,482,225 36,396,070 44,340,894 33,698,912
=========== =========== =========== ===========
THE WET SEAL, INC.
SUMMARY CONSOLIDATED BALANCE SHEETS
(000'S OMITTED)
(Unaudited)
January 28, 2006 January 29, 2005
---------------- ----------------
ASSETS
Cash and cash equivalents $96,806 $71,702
Income tax receivable 136 547
Merchandise inventories 25,475 18,372
Other current assets 6,394 6,896
---------------- ----------------
Total current assets 128,811 97,517
Property and equipment, net 43,637 53,991
Deferred financing costs 3,162 4,836
Goodwill 5,984 5,984
Other assets 1,633 1,595
---------------- ----------------
Total assets $183,227 $163,923
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable - merchandise $13,584 $10,435
Accounts payable - other 9,883 9,941
Accrued liabilities 36,472 39,557
Bridge loan payable - 10,577
---------------- ----------------
Total current liabilities 59,939 70,510
---------------- ----------------
Long-term debt 8,000 8,000
Secured convertible notes 11,824 11,811
Deferred rent 23,996 31,124
Other long-term liabilities 3,228 2,873
---------------- ----------------
Total long-term liabilities 47,048 53,808
---------------- ----------------
Convertible preferred stock 9,660 -
---------------- ----------------
Total stockholders' equity 66,580 39,605
---------------- ----------------
Total liabilities and stockholders'
equity $183,227 $163,923
================ ================
CONTACT: The Wet Seal, Inc. John Luttrell, 949-699-3918
SOURCE: The Wet Seal, Inc.