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The Wet Seal, Inc. Announces First Quarter Fiscal 2014 Financial Results

Provides Second Quarter 2014 Financial Guidance

FOOTHILL RANCH, Calif.--(BUSINESS WIRE)-- The Wet Seal, Inc. (Nasdaq: WTSL), a leading specialty retailer to young women, today announced financial results for the first quarter of fiscal 2014 ended May 3, 2014.

First Quarter 2014

John D. Goodman, Chief Executive Officer, stated, "Our first quarter results were in line with our expectations and primarily reflect the macro factors that pressured the retail sector over the past several months - soft mall traffic, elevated promotional activity and disruptive weather. Our performance trend improved during the last month of the quarter and was highlighted by a strong Easter week. Throughout the period we saw increasing strength in our Wet Seal e-commerce business, which posted a first quarter gain of more than 8% versus a 9% increase last year.

"While we are disappointed with our first quarter results, the initiatives under our new strategic plan are beginning to bear fruit and we anticipate they will enable us to generate sequential improvement in our comparable store sales trend and merchandise margin rate throughout fiscal 2014. While mall traffic remains soft, we are implementing our refined product, pricing and promotional strategies designed to strengthen customer engagement and drive conversion. At the same time, we are continuing to see marked improvement in our Wet Seal e-commerce business thus far in the second quarter."

Balance Sheet

As of May 3, 2014, the Company had cash and cash equivalents and short-term investments of $54.5 million. Inventory totaled $38.8 million compared to $36.3 million a year ago. Inventory per square foot increased 6.4% versus the prior year at Wet Seal and 3.0% at Arden B.

During the first quarter of 2014, the Company issued $27.0 million of senior convertible notes and warrants to purchase up to 8,804,348 shares of the Company's Class A common stock to a single institutional investor, with proceeds to the Company, net of $1.9 million of deferred financing costs, of $25.1 million. The senior convertible notes were initially recorded net of a discount of $5.7 million, reflecting the fair value of the warrants and embedded derivatives within the senior convertible notes on the issuance date. The $5.7 million debt discount will be amortized through interest expense on the condensed consolidated statements of operations, using the effective interest method, over the term of the senior convertible notes. The $1.9 million of deferred financing costs will be amortized through interest expense on the condensed consolidated statements of operations over the term of the senior convertible notes.

The $5.7 million fair value of the warrants and embedded derivatives was recorded within long-term liabilities on the condensed consolidated balance sheets. The warrants and embedded derivatives will be marked to market quarterly, with any change recorded as an adjustment to the carrying value of these liabilities and the gain or (loss) on warrants and derivatives liabilities recorded in the condensed consolidated statements of operations. The fair value of the warrants and embedded derivatives from the issuance date to the end of the first quarter declined $0.4 million. Accordingly, this amount was recorded as a gain on warrants and derivatives liabilities in the condensed consolidated statements of operations.

Arden B Wind Down

The Company expects to complete the planned conversion of 54 Arden B locations to Wet Seal and Wet Seal Plus merchandise by the end of the second quarter of fiscal 2014. The conversion of 31 Arden B locations to Wet Seal Plus provides the Company with a timely and low risk opportunity to further test the concept and lay the groundwork for building Wet Seal's presence in the junior plus market. The stores will operate as Wet Seal Plus through the term of their respective leases, or longer if performance and lease renewal options warrant. The Company estimates it will close 17 Arden B locations through lease expirations and the exercise of early termination provisions through the remainder of fiscal 2014.

Real Estate

As previously announced, in fiscal 2014 the Company expects to open 10 new Wet Seal stores, primarily in outlet centers and off-mall, and now estimates it will close 23 Wet Seal locations upon lease expiration. During the first quarter of fiscal 2014, the Company opened 4 Wet Seal stores and closed 1 Wet Seal location.

Goodman concluded, "We are on track with our transition work to exit the Arden B concept, including the conversion of 54 locations to Wet Seal and Wet Seal Plus merchandise, which is expected to be completed by late July. We're particularly excited about the 31 new Wet Seal Plus stores coming on line in high visibility locations, which will allow us to quickly establish a strong foothold in the rapidly growing junior plus market."

Second Quarter Fiscal 2014 Financial Outlook

For the second quarter of fiscal 2014, the Company expects loss per diluted share, before non-cash asset impairments and Arden B exit costs, to be in the range of $0.09 to $0.12, which includes a loss of $0.02 per diluted share from the Arden B business segment. The guidance is based on a comparable store sales decline, including e-commerce ranging from 8% to 11%.

First Quarter Conference Call Information

The Company will host a conference call to discuss first quarter fiscal 2014 financial results today, Tuesday, May 27, 2014, at 1:30 p.m. Pacific Time. The call will be hosted by John D. Goodman, Chief Executive Officer, and Steve Benrubi, Executive Vice President and Chief Financial Officer.

To participate in the call, please dial (877) 407-3982 or (201) 493-6780. A broadcast of the call will also be available on the Company's web site at www.wetsealinc.com. A replay of the call will be available through June 10, 2014. To access the replay, please dial (877) 870-5176 or (858) 384-5517 and provide pin number 13580729.

About The Wet Seal, Inc.

The Wet Seal, Inc., a pioneer in fast fashion retailing, sells apparel, footwear and accessories designed for teen girls and young women through retail stores nationwide, as well as two e-commerce websites. The Company operates 532 stores in 47 states and Puerto Rico, www.wetseal.com and www.ardenb.com. For additional corporate information, please 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 estimated fiscal 2014 second quarter financial outlook, its transition of Arden B stores to Wet Seal and Wet Seal Plus, and its fiscal 2014 estimated store openings and closings, and as well as 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)

 
 
May 3,

2014

  February 1,
2014
  May 4,

2013

ASSETS
Cash and cash equivalents $ 51,551 $ 38,772 $ 50,320
Short-term investments 2,943 7,386 61,342
Merchandise inventories 38,799 31,209 36,341
Other current assets   14,525     16,113     16,258

 

Total current assets 107,818 93,480 164,261
Net equipment and leasehold improvements 49,012 56,289 63,569
Other assets   3,101     1,970     3,040
Total assets $ 159,931   $ 151,739   $ 230,870
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of convertible notes $ 3,450 $ - $ -
Accounts payable - merchandise 19,971 18,530 20,644
Accounts payable - other 8,148 8,814 17,470
Accrued liabilities 23,031 20,704 27,970
Current portion of deferred rent   3,640     3,508     2,717
 
Total current liabilities 58,240 51,556 68,801
Warrants and embedded derivatives liabilities 5,252 - -
Convertible notes, net of discount of $5,481 at May 3, 2014 18,069 - -
Deferred rent 30,498 31,066 31,674
Other long-term liabilities   1,747     1,784     1,871
 
Total liabilities 113,806 84,406 102,346
Total stockholders' equity   46,125     67,333     128,524
 
Total liabilities and stockholders' equity $ 159,931   $ 151,739   $ 230,870
 
 
Exhibit A (continued)
 
The Wet Seal, Inc.
Condensed Consolidated Statements of Operations

(000's Omitted, Except Share and Per Share Data)

(Unaudited)

 
13 Weeks Ended
May 3, 2014   May 4, 2013
Net sales $ 116,728   $ 140,445
Gross margin 23,131 42,231
Selling, general & administrative expenses 37,497 37,437
Asset impairment   7,318       1,596  
Operating (loss) income (21,684 ) 3,198
Interest expense, net (422 ) (6 )
Gain on warrants and derivatives liabilities   439       -  
(Loss) income before provision for income taxes (21,667 ) 3,192
Provision for income taxes   114       82  
Net (loss) income $ (21,781 )   $ 3,110  
Net (loss) income per share, basic $ (0.26 )   $ 0.03  
Net (loss) income per share, diluted $ (0.26 )   $ 0.03  
Weighted average shares outstanding, basic   84,107,731       88,501,179  
Weighted average shares outstanding, diluted   84,107,731       88,503,407  
 

Calculation of the Company's earnings per share requires the allocation of net income among common shareholders and participating security holders. The net income available to common shareholders used to calculate basic and diluted earnings per share was $3,079 for the 13 weeks ended May 4, 2013.

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

(000's Omitted)

(Unaudited)

 
13 Weeks Ended
May 3,
2014
  May 4,
2013
CASH FLOW FROM OPERATING ACTIVITIES:  
Net (loss) income $ (21,781 ) $ 3,110
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization 2,939 3,338
Amortization of debt discount 210 -
Amortization of premium on investments 3 152
Amortization of deferred financing costs 78 27
Gain on warrants and derivatives liabilities (439 ) -
Asset impairment 7,318 1,596
Loss on disposal of equipment and leasehold improvements 13 18
Stock-based compensation 644 369
Changes in operating assets and liabilities:
Income tax receivable 141 -
Other receivables 450 (2,874 )
Merchandise inventories (7,590 ) (2,553 )
Prepaid expenses and other assets 1,500 2,056
Other non-current assets 119 13
Accounts payable and accrued liabilities 2,369 3,950
Deferred rent (436 ) (34 )
Other long-term liabilities   (37 )     (37 )
 
Net cash (used in) provided by operating activities   (14,499 )     9,131  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements (2,684 ) (3,603 )
Proceeds from disposal of equipment and leasehold improvements 23 -
Proceeds from maturity of marketable securities   4,440       6,200  
 
Net cash provided by investing activities   1,779       2,597  
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options - 94
Repurchase of common stock (71 ) (3,781 )
Payment of deferred financing costs (1,430 ) -
Proceeds from issuance of convertible notes   27,000       -  
 
Net cash provided by (used in) financing activities   25,499       (3,687 )
 
INCREASE IN CASH AND CASH EQUIVALENTS 12,779 8,041
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD   38,772       42,279  
 
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,551     $ 50,320  
 

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 weeks ended May 3, 2014, and May 4, 2013, for the two reportable segments is set forth below (in thousands, except number of stores as of period end and sales per square foot):

Thirteen Weeks Ended May 3, 2014   Wet Seal   Arden B   Corporate   Total
Net sales   $ 103,309   $ 13,419   n/a   $ 116,728
% of total sales 89 % 11 % n/a 100 %
Comparable store sales % decrease (16.5 )% (19.4 )% n/a (16.9 )%
Operating loss $ (8,386 ) $ (4,630 ) $ (8,668 ) $ (21,684 )
Interest expense, net $ $ $ (422 ) $ (422 )
Gain on warrants and derivatives liabilities $ $ $ 439 $ 439
Loss before provision for income taxes $ (8,386 ) $ (4,630 ) $ (8,651 ) $ (21,667 )
Depreciation $ 2,250 $ 165 $ 524 $ 2,939
Number of stores as of period end 478 54 n/a 532
Sales per square foot $ 51 $ 68 n/a $ 52
Square footage as of period end 1,900 171 n/a 2,071
 
Thirteen Weeks Ended May 4, 2013   Wet Seal   Arden B   Corporate   Total
Net sales   $ 122,799   $ 17,646   n/a   $ 140,445
% of total sales 87 % 13 % n/a 100 %
Comparable store sales % (decrease) increase (3.4 )% 0.9 % n/a (2.9 )%
Operating income (loss) $ 9,553 $ 558 $ (6,913 ) $ 3,198
Interest expense, net $ $ $ (6 ) $ (6 )
Income (loss) before provision for income taxes $ 9,553 $ 558 $ (6,919 ) $ 3,192
Depreciation $ 2,584 $ 260 $ 494 $ 3,338
Number of stores as of period end 464 62 n/a 526
Sales per square foot $ 62 $ 81 n/a $ 64
Square footage as of period end 1,856 192 n/a 2,048
 

The "Corporate" column is presented to allow for reconciliation of store contribution amounts to consolidated operating (loss) income, gain on warrants and derivatives liabilities, interest expense, net, and (loss) income before provision 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 for the 13 weeks ended May 3, 2014, and May 4, 2013, include $4.1 million and $1.1 million, respectively, of non-cash asset impairment charges.

Arden B operating segment results for the 13 weeks ended May 3, 2014, and May 4, 2013, include $0.3 million of Arden B exit costs and $3.2 million and $0.5 million, respectively, of non-cash asset impairment charges.

Corporate expenses for the 13 weeks ended May 3, 2014, include a $0.5 million benefit for miscellaneous non-recurring other income.

Corporate expenses for the 13 weeks ended May 4, 2013, include a $3.5 million benefit to adjust a loss contingency related to legal matters.

Exhibit C

Reconciliation of Non-GAAP Financial Measures to Most Directly Comparable Financial Measures (Unaudited)

Included within this press release are references to non-GAAP financial measures ("non-GAAP" or "adjusted"), including operating (loss) income, net (loss) income and net (loss) income per diluted share before certain benefits and charges. These financial measures are not in compliance with U.S. generally accepted accounting principles ("GAAP") and are not necessarily comparable to similar measures presented by other companies. The Company believes that this non-GAAP information is useful as an additional means for investors to evaluate the Company's operating performance when reviewed in conjunction with its GAAP financial statements. These amounts are not determined in accordance with GAAP and therefore should not be used exclusively in evaluating the Company's business and operations. For further information, see "Company Statement on Disclosure of Non-GAAP Financial Measures" within the Investor Relations section of the Company's corporate web site, www.wetsealinc.com.

The following is a reconciliation of the applicable GAAP financial measures to these non-GAAP financial measures (in millions, except for net (loss) income per diluted share):

  13 Weeks Ended

May 3, 2014

  13 Weeks Ended

May 4, 2013

Operating

Loss

  Net Loss  

Net Loss Per
Diluted Share

Operating

Income

  Net Income  

Net Income Per
Diluted Share

       
GAAP financial measure

$

(21.7

)

$ (21.8 ) $ (0.26 ) $ 3.2 $ 3.1 $ 0.03
 
Benefits:
Adjustment to loss contingency, net of income taxes where applicable - - - (3.5 ) (3.4 ) (0.04 )
Miscellaneous other income (0.5 ) (0.5 ) (0.01 ) - - -
Fair value adjustment for warrants and embedded derivatives

-

(0.4 ) -

-

- -
 
Charges:
Arden B exit costs 0.3 0.3 - - - -
Non-cash asset impairment charges   7.3       7.3       0.09    

1.6

      1.6       0.02  
 
Non-GAAP financial measure

$

(14.6

)

  $ (15.1 )   $ ( 0.18 ) $ 1.3     $ 1.3     $ 0.01  
 

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

Source: The Wet Seal, Inc.

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