WTSLA The Wet Seal - Class A (MM)

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.