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:
- Net sales were $135.5 million compared
to net sales of $152.1 million for the prior year third
quarter.
- Consolidated comparable store sales
declined 13.5%. Comparable store sales for Wet Seal declined 13.5%
and for Arden B declined 13.8%.
- Operating loss was $24.8 million,
compared to operating income of $6.1 million, or 4.0% of net sales,
in the prior year third quarter.
- The current year quarter included $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.
- The current year quarter included $1.0
million in incremental legal fees for employment-related litigation
and $0.6 million in charges for estimated settlement costs for
various employment-related matters. The prior year quarter included
a $1.3 million reversal of accrued incentive compensation expense,
which reflected reduced expectations for achievement of incentive
targets for the fiscal year.
- The current year and prior year
quarters included $6.5 million and $0.7 million in non-cash asset
impairment charges, respectively. Excluding the impact of these
non-cash charges and the current year proxy solicitation costs,
operating loss would have been $16.2 million in the current year
quarter, compared to operating income of $6.8 million, or 4.5% of
net sales, in the prior year quarter.
- Net loss was $14.8 million, or $0.17
per diluted share, as compared to net income of $3.7 million, or
$0.04 per diluted share, in the prior year quarter. Excluding the
after-tax effect of the non-cash asset impairment charges and proxy
solicitation costs, net loss in the current year quarter would have
been $9.7 million, or $0.11 per diluted share. Excluding the
after-tax effect of the non-cash asset impairment charges, net
income in the prior year quarter would have been $4.1 million, or
$0.05 per diluted share.
- As of quarter-end, the Company’s
inventory per square foot was up 3% versus the prior year quarter,
with Wet Seal up 5% and Arden B down 7%.
- The Company ended the quarter with
$126.3 million of cash and cash equivalents and no debt. Due to the
timing of quarter-end, the Company had not yet paid $9.6 million of
its November rents and other landlord costs at that time.
Typically, including at the end of the prior year quarter, the
Company had made these payments during the quarter being
reported.
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:
- Total net sales between $163 million
and $168 million versus $163.2 million in the fourth quarter of
fiscal 2011.
- Comparable store sales decrease in the
mid-single digits versus a 5.5% decrease in the prior year fourth
quarter.
- Gross margin rate between 23.4% and
25.7% of net sales versus 30.4% in the prior year fourth quarter,
with the decline driven primarily by aggressive promotion to
continue efforts to re-merchandise the stores early in the quarter
and the deleveraging effect of lower comparable store sales on
occupancy and buying costs.
- SG&A expense of 28.6% to 29.2% of
net sales versus 27.5% in the prior year fourth quarter, with the
increase due mainly to the deleveraging effect of lower comparable
store sales.
- Operating loss between $5.0 million and
$9.4 million versus operating income of $2.2 million in the prior
year fourth quarter.
- Interest expense of less than $0.1
million versus interest expense of less than $0.1 million in the
prior year fourth quarter.
- Income tax benefit of between $1.9
million and $3.6 million versus income tax expense of $1.1 million
in the prior year fourth quarter.
- Net store closings of four stores at
Wet Seal and fifteen stores at Arden B, with such closures
occurring at the end of the fiscal quarter.
- Weighted-average diluted shares
outstanding of approximately 89 million shares.
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 PerDiluted Share
Operating
Income
Net Income
Net Income PerDiluted 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 PerDiluted Share
Operating
Income
Net Income
Net Income PerDiluted 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.
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