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The Wet Seal, Inc. Announces Third Quarter Fiscal 2012 Results

Provides Financial Outlook for Fourth Quarter 2012

FOOTHILL RANCH, Calif.--(BUSINESS WIRE)-- The Wet Seal, Inc. (Nasdaq:WTSLA), a leading specialty retailer to young women, announced results for its fiscal third quarter ended October 27, 2012, and provided its financial outlook for the fourth quarter of fiscal 2012.

For the third quarter:

The Company today issued the following statement:

"While business in the third quarter remained challenging, we were encouraged by early signs of progress. Adjustments made to our merchandise assortment contributed to improved sales trends as we moved through the quarter. We began to transition Wet Seal back to its roots of being a fast fashion retailer, offering a broad assortment of on-trend merchandise at value price points that align with the tastes of the young teens to early 20's target customer. We believe we are now on a path that will lead to improved financial performance.

"We also have a new board in place that brings a fresh perspective as well as in-depth merchandise expertise to our organization. They quickly became engaged during October and will be monitoring our progress during the fourth quarter as well as helping us refine the go-forward strategies we have in place."

Discontinuation of Monthly Sales Reporting

The Company announced it will discontinue monthly sales reporting, effective in the first quarter of fiscal 2013. This will align the Company's sales reporting cadence with most of its public company competitors and other specialty apparel retailers. The Company will report quarterly sales results on the first Thursday following the close of each fiscal quarter. The Company will continue to report monthly sales results through the end of the fourth quarter of fiscal 2012.

Store Openings and Closings

The Company had 5 store openings and 1 store closing at Wet Seal and no store openings and one store closing at Arden B during the third quarter. At October 27, 2012, the Company operated 553 stores in 47 states and Puerto Rico, including 472 Wet Seal stores and 81 Arden B stores.

Capital Expenditures and Depreciation

The Company invested $5.2 million in capital expenditures during the quarter, including $4.0 million for construction of new stores and remodels of existing stores. The Company recognized tenant improvement allowances of $0.8 million associated primarily with new store construction, resulting in net capital expenditures for the quarter of $4.4 million.

Depreciation in the quarter totaled $4.3 million as compared to $4.9 million in the prior year quarter.

Income Taxes

The Company had a benefit for income taxes of $10.0 million for the quarter, for an effective income tax rate of 40.5%. The Company expects its effective rate for the fiscal year to be approximately 38.8%, which is an increase over its prior estimate of 37.6% mainly due to higher than previously estimated benefits from federal and state job tax credits. The increase in estimated effective tax rate over the prior estimate resulted in additional benefit for income taxes for the quarter of $0.7 million.

Fourth Quarter Fiscal 2012 Financial Outlook

For the fourth quarter of fiscal 2012, the Company estimates net loss per diluted share in the range of $0.03 to $0.06 versus net income of $0.01 per diluted share in the prior year fourth quarter.

The financial outlook is based on the following assumptions:

For all of fiscal 2012, the Company now expects to have four net Wet Seal store closings and twenty net Arden B store closings. The Company forecasts fiscal 2012 net capital expenditures will be approximately $20 million to $21 million, of which approximately $14 million to $15 million will be for construction of new stores or remodeling of existing stores upon lease renewals and/or store relocations.

Conference Call

The Company will host a conference call and question and answer session at 1:30 p.m. Pacific Time today. To participate in the conference call, please dial 877-407-3982 or 201-493-6780. A broadcast of the call will also be available on the Company's website, www.wetsealinc.com. A replay of the call will be available through November 22, 2012. To access the replay, please call (877) 870-5176 or (858) 384-5517 and provide ID number 402320.

About The Wet Seal, Inc.

Headquartered in Foothill Ranch, California, The Wet Seal, Inc. is a leading specialty retailer of fashionable and contemporary apparel and accessory items. As of October 27, 2012, the Company operated a total of 553 stores in 47 states and Puerto Rico, including 472 Wet Seal stores and 81 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

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 financial outlook for its fourth quarter of fiscal 2012, its store opening and capital spending plans for all of fiscal 2012, and its merchandising and other strategic actions plans, 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.

     
Exhibit A
The Wet Seal, Inc.
Condensed Consolidated Balance Sheets

(000's Omitted)

(Unaudited)

 
 
October 27,
2012
January 28,
2012
October 29,
2011
ASSETS
Cash and cash equivalents $ 126,343 $ 157,185 $ 106,205
Short-term investments - - 25,056
Merchandise inventories 46,193 31,834 43,148
Other current assets 7,791 6,215 18,216
Deferred taxes   20,133   20,133   19,649
 
Total current assets 200,460 215,367 212,274
Net equipment and leasehold improvements 73,828 88,324 93,989
Deferred taxes 41,766 23,780 25,395
Other assets   3,069   3,062   3,046
 
Total assets $ 319,123 $ 330,533 $ 334,704
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable — merchandise $ 28,128 $ 18,520 $ 22,898
Accounts payable — other 13,369 8,269 11,409
Accrued liabilities 24,000 25,096 21,673
Current portion of deferred rent   2,456   2,561   3,222
 
Total current liabilities 67,953 54,446 59,202
Deferred rent 33,378 33,091 33,757
Other long-term liabilities   1,820   1,924   1,669
 
Total liabilities 103,151 89,461 94,628
Total stockholders' equity   215,972   241,072   240,076
 
Total liabilities and stockholders' equity $ 319,123 $ 330,533 $ 334,704
 
   
Exhibit A (Continued)
The Wet Seal, Inc.
Condensed Consolidated Statements of Operations

(000's Omitted, Except Share Data)

(Unaudited)

 
13 Weeks Ended 39 Weeks Ended

October 27,
2012

 

October 29,
2011

October 27,
2012

 

October 29,
2011

Net sales $ 135,537 $ 152,135 $ 418,743 $ 456,945
Gross margin 26,045 46,354 100,450 145,876
Selling, general & administrative expenses 44,405 39,492 126,215 121,047
Asset impairment   6,456     733   19,035     2,049
Operating (loss) income (24,816 ) 6,129 (44,800 ) 22,780
Interest (expense) income, net   (10 )   16   (28 )   67
(Loss) income before (benefit from) provision for income taxes (24,826 ) 6,145 (44,828 ) 22,847
(Benefit from) provision for income taxes   (10,047 )   2,397   (17,407 )   8,888
Net (loss) income $ (14,779 ) $ 3,748 $ (27,421 ) $ 13,959
Weighted average shares, basic 88,874,113 88,146,378 88,648,718 94,265,017
Net (loss) income per share, basic (1) $ (0.17 ) $ 0.04 $ (0.31 ) $ 0.14
Weighted average shares, diluted 88,874,113 88,244,855 88,648,718 94,351,425
Net (loss) income per share, diluted (1) $ (0.17 ) $ 0.04 $ (0.31 ) $ 0.14
 

(1) Calculation of the Company's net (loss) income per share requires the allocation of net income among common shareholders and participating security holders. The net (loss) income available to common shareholders used to calculate basic and diluted earnings per share, was $(14,779), $(14,779), $(27,421) and $(27,421) for the 13 and 39 weeks ended October 27, 2012, and $3,641, $3,642, $13,600, and $13,601 for the 13 and 39 weeks ended October 29, 2011, respectively.

 
Exhibit A (continued)
The Wet Seal, Inc.
Consolidated Statements of Cash Flows

(000's Omitted)

(Unaudited)

 
39 Weeks Ended
October 27,   October 29,
2012   2011  
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income $ (27,421 ) $ 13,959
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:
Depreciation and amortization 13,531 14,427
Amortization of premium on investments - 634
Amortization of deferred financing costs 81 75
Amortization of stock payment in lieu of rent - 46
Asset impairment 19,035 2,049
Loss on disposal of equipment and leasehold improvements 550 120
Deferred income taxes (17,986 ) 7,860
Stock-based compensation 2,596 3,172
Changes in operating assets and liabilities:
Income taxes receivable (460 ) -
Other receivables (17 ) (1,140 )
Merchandise inventories (14,359 ) (9,812 )
Prepaid expenses and other assets (1,180 ) (2,559 )
Other non-current assets (7 ) (118 )
Accounts payable and accrued liabilities 11,767 (878 )
Income taxes payable - (60 )
Deferred rent 182 2,741
Other long-term liabilities (104 ) (99 )
Net cash (used in) provided by operating activities (13,792 ) 30,417  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (16,775 ) (21,785 )
Proceeds from maturity of marketable securities -   25,000  
Net cash (used in) provided by investing activities (16,775 ) 3,215  
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 19 1,071
Repurchase of common stock (294 ) (53,860 )
Net cash used in financing activities (275 ) (52,789 )
 
DECREASE IN CASH AND CASH EQUIVALENTS (30,842 ) (19,157 )
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 157,185   125,362  
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 126,343   $ 106,205  
 

Exhibit B

Segment Reporting (Unaudited)

The Company operates exclusively in the retail apparel industry in which it sells fashionable and contemporary apparel and accessories items, primarily through mall-based chains of retail stores, to female consumers with a young, active lifestyle. The Company has identified two operating segments ("Wet Seal" and "Arden B") as defined under applicable accounting standards. E-commerce operations for Wet Seal and Arden B are included in their respective operating segments. Information for the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, for the two reportable segments is set forth below (in thousands, except store counts and sales per square foot):

Thirteen Weeks Ended October 27, 2012   Wet Seal   Arden B   Corporate   Total
Net sales $ 117,892 $ 17,645 n/a $ 135,537
% of total sales 87 % 13 % n/a 100 %
Comparable store sales % decrease (13.5 )% (13.8 )% n/a (13.5 )%
Operating loss $ (8,747 ) $ (3,733 ) $ (12,336 ) $ (24,816 )
Interest expense, net $ - $ - $ (10 ) $ (10 )
Loss before benefit from income taxes $ (8,747 ) $ (3,733 ) $ (12,346 ) $ (24,826 )
Depreciation $ 3,442 $ 404 $ 422 $ 4,268
Number of stores as of period end 472 81 n/a 553
Sales per square foot $ 59 $ 63 n/a $ 59
Square footage as of period end 1,885 251 n/a 2,136
 
Thirteen Weeks Ended October 29, 2011 Wet Seal Arden B Corporate Total
Net sales $ 131,216 $ 20,919 n/a $ 152,135
% of total sales 86 % 14 % n/a 100 %
Comparable store sales % decrease (0.1 )% (6.3 )% n/a (0.9 )%
Operating income (loss) $ 13,667 $ (1,011 ) $ (6,527 ) $ 6,129
Interest income, net $ - $ - $ 16 $ 16
Income (loss) before provision for income taxes $ 13,667 $ (1,011 ) $ (6,511 ) $ 6,145
Depreciation $ 4,032 $ 528 $ 387 $ 4,947
Number of stores as of period end 464 86 n/a 550
Sales per square foot $ 67 $ 74 n/a $ 69
Square footage as of period end 1,857 266 n/a 2,123
 
Thirty-Nine Weeks Ended October 27, 2012   Wet Seal   Arden B   Corporate   Total
Net sales $ 357,806 $ 60,937 n/a $ 418,743
% of total sales 85 % 15 % n/a 100 %
Comparable store sales % decrease (10.5 )% (12.2 )% n/a (10.7 )%
Operating loss $ (8,003 ) $ (6,614 ) $ (30,183 ) $ (44,800 )
Interest expense, net $ - $ - $ (28 ) $ (28 )
Loss before benefit from income taxes $ (8,003 ) $ (6,614 ) $ (30,211 ) $ (44,828 )
Depreciation $ 11,022 $ 1,314 $ 1,195 $ 13,531
Sales per square foot $ 180 $ 214 n/a $ 184
 
Thirty-Nine Weeks Ended October 29, 2011 Wet Seal Arden B Corporate Total
Net sales $ 387,302 $ 69,643 n/a $ 456,945
% of total sales 85 % 15 % n/a 100 %
Comparable store sales % increase (decrease) 4.6 % (0.3 )% n/a 3.9 %
Operating income (loss) $ 42,760 $ 3,000 $ (22,980 ) $ 22,780
Interest expense, net $ - $ - $ 67 $ 67
Income (loss) before provision for income taxes $ 42,760 $ 3,000 $ (22,913 ) $ 22,847
Depreciation $ 11,744 $ 1,572 $ 1,111 $ 14,427
Sales per square foot $ 202 $ 245 n/a $ 207
 

Exhibit B (Continued)

The "Corporate" column is presented solely to allow for reconciliation of store contribution amounts to consolidated operating income (loss), interest income or expense, net, and income (loss) before provision (benefit from) for income taxes. Wet Seal and Arden B segment results include net sales, cost of sales, asset impairment and other direct store and field management expenses, with no allocation of corporate overhead or interest income and expense.

Wet Seal operating segment results during the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, include $5.8 million, $16.3 million, $0.2 million and $1.0 million, respectively, of asset impairment charges.

Arden B operating segment results during the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, include $0.7 million, $2.7 million, $0.5 million and $1.0 million, respectively, of asset impairment charges.

Corporate expenses during the 39 weeks ended October 27, 2012, include $2.1 million in professional fees to defend against a shareholder proxy solicitation to replace a majority of the Company's board members. The proxy solicitation ultimately led to an agreement to replace four of the Company's seven board members during the quarter.

Exhibit C

Reconciliation of Non-GAAP Financial Measures to Most Directly Comparable Financial Measures

Included within this press release are references to operating (loss) income, net (loss) income and net (loss) income per diluted share excluding the effect of certain charges, which are measures not in compliance with accounting principles generally accepted in the United States of America, or "non-GAAP financial measures." The following is a reconciliation of these non-GAAP financial measures to the applicable GAAP financial measures for the 13 and 39 week periods ended October 27, 2012, and October 29, 2011 (in millions, except for net (loss) income per diluted share):

  13 Weeks Ended   13 Weeks Ended
October 27, 2012 October 29, 2011
Operating

Loss

  Net Loss  

Net Loss Per
Diluted Share

  Operating

Income

  Net Income  

Net Income Per
Diluted Share

 
Financial measure before certain charges (non-GAAP)

$

(16.2

)

$ (9.7 ) $ (0.11 ) $ 6.8 $ 4.1 $ 0.05
Charges:
Proxy solicitation costs, net of income taxes where applicable (2.1 ) (1.3 ) (0.01 ) - - -
Non-cash asset impairment charges, net of income taxes where applicable   (6.5 )   (3.8 )   (0.05 )  

(0.7

)

  (0.4 )   (0.01 )
 
GAAP financial measure

$

(24.8

)

$ (14.8 ) $ (0.17 ) $ 6.1   $ 3.7   $ 0.04  
 
39 Weeks Ended 39 Weeks Ended
October 27, 2012 October 29, 2011
Operating

Loss

Net Loss

Net Loss Per
Diluted Share

Operating

Income

Net Income

Net Income Per
Diluted Share

Financial measure before certain charges (non-GAAP)

$

(23.7

)

$ (14.5 ) $ (0.17 ) $ 24.8 $ 15.2 $ 0.15
Charges:
Proxy solicitation costs, net of income taxes where applicable (2.1 ) (1.3 ) (0.01 ) - - -
Non-cash asset impairment charges, net of income taxes where applicable   (19.0 )   (11.6 )   (0.13 )  

(2.0

)

  (1.2 )   (0.01 )
 
GAAP financial measure $ (44.8 ) $ (27.4 ) $ (0.31 ) $ 22.8   $ 14.0   $ 0.14  
 

During the current year third quarter, the Company engaged in a defense against a shareholder proxy solicitation that sought to replace a majority of the Company's board members, incurring professional fees of $2.1 million in this effort. The proxy solicitation ultimately led to an agreement to replace four of the Company's seven board members during the quarter. Given the unique nature of this corporate governance event and the magnitude of professional fees incurred, the Company believes the presentation of its historical financial information excluding these non-cash charges to be beneficial to its investors.

From time to time, the Company determines the carrying values of certain of its long-lived assets are not supported by their anticipated future cash flows and, as a result, must record non-cash charges to impair these assets. The timing and magnitude of these charges can be sporadic, thus significantly affecting the reported financial results of the fiscal period in which they are recorded. Given the unique nature and sporadic timing of these charges, the Company consistently presents these charges as a separate line item within its statements of operations and, similarly, believes the presentation of its historical financial information excluding these non-cash charges to be beneficial to its investors.

The Wet Seal, Inc.
Steven H. Benrubi, 949-699-3947

Source: The Wet Seal, Inc.

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