UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended October 27, 2012
OR
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission file number 001-35634
THE WET SEAL,
INC.
(Exact name of registrant as specified in its charter)
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Delaware
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33-0415940
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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26972 Burbank, Foothill Ranch, CA
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92610
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(Address of principal executive offices)
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(Zip Code)
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(949) 699-3900
(Registrants telephone number, including area code)
Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
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Large accelerated filer:
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¨
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Accelerated filer:
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x
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Non-accelerated filer:
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¨
(Do not check if a smaller reporting company)
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Smaller reporting company:
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¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
¨
No
x
The number of shares outstanding of the registrants Class A common stock, par value $0.10 per share, at November 19,
2012, was 89,610,534. There were no shares outstanding of the registrants Class B common stock, par value $0.10 per share, at November 19, 2012.
THE WET SEAL, INC.
FORM 10-Q
Table of Contents
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Page
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PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements (Unaudited)
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Condensed Consolidated Balance Sheets (Unaudited) as of October 27, 2012, January
28, 2012, and October 29, 2011
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2
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Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 39 Weeks Ended October 27, 2012,
and October 29, 2011
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3
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Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the 13 and 39 Weeks Ended
October 27, 2012, and October 29, 2011
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4
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Condensed Consolidated Statements of Stockholders Equity (Unaudited) for the 39 Weeks Ended October 27,
2012, and October 29, 2011
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5
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Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39 Weeks Ended October 27, 2012, and October
29, 2011
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7
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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8
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Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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32
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Item 4.
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Controls and Procedures
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32
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PART II. OTHER INFORMATION
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Item 1.
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Legal Proceedings
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33
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Item 1A.
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Risk Factors
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34
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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35
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Item 3.
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Defaults Upon Senior Securities
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36
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Item 4.
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Mine Safety Disclosures
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36
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Item 5.
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Other Information
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36
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Item 6.
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Exhibits
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36
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SIGNATURES
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37
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EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
101.INS XBRL Instance
Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension
Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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1
THE WET SEAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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October 27,
2012
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January 28,
2012
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October 29,
2011
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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126,343
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$
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157,185
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$
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106,205
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Short-term investments
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25,056
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Income tax receivables
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660
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200
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Other receivables
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1,462
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1,445
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3,081
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Merchandise inventories
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46,193
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31,834
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43,148
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Prepaid expenses and other current assets
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5,669
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4,570
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15,135
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Deferred tax assets
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20,133
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20,133
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19,649
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Total current assets
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200,460
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215,367
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212,274
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EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
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Leasehold improvements
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102,462
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123,066
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124,339
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Furniture, fixtures and equipment
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66,512
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79,159
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80,148
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168,974
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202,225
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204,487
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Less accumulated depreciation and amortization
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(95,146
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)
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(113,901
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)
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(110,498
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)
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Net equipment and leasehold improvements
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73,828
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88,324
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93,989
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OTHER ASSETS:
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Deferred tax assets
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41,766
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23,780
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25,395
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Other assets
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3,069
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3,062
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3,046
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Total other assets
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44,835
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26,842
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28,441
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TOTAL ASSETS
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$
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319,123
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$
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330,533
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$
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334,704
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES:
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Accounts payable merchandise
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$
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28,128
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$
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18,520
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$
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22,898
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Accounts payable other
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13,369
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8,269
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11,409
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Accrued liabilities
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24,000
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25,096
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21,673
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Current portion of deferred rent
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2,456
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2,561
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3,222
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Total current liabilities
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67,953
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54,446
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59,202
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LONG-TERM LIABILITIES:
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Deferred rent
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33,378
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33,091
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33,757
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Other long-term liabilities
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1,820
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1,924
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1,669
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Total long-term liabilities
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35,198
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35,015
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35,426
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Total liabilities
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103,151
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89,461
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94,628
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COMMITMENTS AND CONTINGENCIES (Note 6)
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STOCKHOLDERS EQUITY:
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Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 90,072,035 shares issued and 89,727,234 outstanding
at October 27, 2012; 90,660,347 shares issued and 90,419,469 shares outstanding at January 28, 2012; and 90,660,347 shares issued and 90,642,957 shares outstanding at October 29, 2011
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9,007
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9,066
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9,066
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Common stock, Class B convertible, $0.10 par value, authorized 10,000,000 shares; no shares issued and
outstanding
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Paid-in capital
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240,712
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239,000
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238,175
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Accumulated deficit
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(33,671
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)
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|
(6,250
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)
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(7,373
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)
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Treasury stock, 344,801 shares, 240,878 shares, and 17,390 shares, at cost, at October 27, 2012, January 28, 2012, and
October 29, 2011, respectively
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(72
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)
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(740
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)
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|
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(77
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)
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Accumulated other comprehensive (loss) income
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|
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(4
|
)
|
|
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(4
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)
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|
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285
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|
|
|
|
|
|
|
|
|
|
|
|
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Total stockholders equity
|
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215,972
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|
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241,072
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|
|
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240,076
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|
|
|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
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|
$
|
319,123
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$
|
330,533
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|
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$
|
334,704
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|
|
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|
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See notes to condensed consolidated financial statements.
2
THE WET SEAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
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|
|
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|
|
|
|
|
|
|
|
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13 Weeks Ended
|
|
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39 Weeks Ended
|
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|
|
October 27,
2012
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October 29,
2011
|
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|
October 27,
2012
|
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October 29,
2011
|
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Net sales
|
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$
|
135,537
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$
|
152,135
|
|
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$
|
418,743
|
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|
$
|
456,945
|
|
Cost of sales
|
|
|
109,492
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|
|
|
105,781
|
|
|
|
318,293
|
|
|
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311,069
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|
|
|
|
|
|
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Gross margin
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26,045
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46,354
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100,450
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145,876
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Selling, general, and administrative expenses
|
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44,405
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|
39,492
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|
|
|
126,215
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|
|
|
121,047
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Asset impairment
|
|
|
6,456
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|
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|
733
|
|
|
|
19,035
|
|
|
|
2,049
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|
|
|
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Operating (loss) income
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|
(24,816
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)
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|
|
6,129
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|
|
|
(44,800
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)
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|
|
22,780
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Interest income
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|
35
|
|
|
|
57
|
|
|
|
108
|
|
|
|
195
|
|
Interest expense
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|
|
(45
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)
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|
|
(41
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)
|
|
|
(136
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)
|
|
|
(128
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (expense) income, net
|
|
|
(10
|
)
|
|
|
16
|
|
|
|
(28
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)
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, basic
|
|
$
|
(0.17
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.31
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, diluted
|
|
$
|
(0.17
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.31
|
)
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic
|
|
|
88,877,993
|
|
|
|
88,146,378
|
|
|
|
88,650,011
|
|
|
|
94,265,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, diluted
|
|
|
88,877,993
|
|
|
|
88,244,855
|
|
|
|
88,650,011
|
|
|
|
94,351,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
THE WET SEAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
Net (loss) income
|
|
$
|
(14,779
|
)
|
|
$
|
3,748
|
|
|
$
|
(27,421
|
)
|
|
$
|
13,959
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain under Supplemental Employee Retirement Plan
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(14,779
|
)
|
|
$
|
3,746
|
|
|
$
|
(27,421
|
)
|
|
$
|
13,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
THE WET SEAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total
Stockholders
Equity
|
|
|
|
Class A
|
|
|
Class B
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
|
|
|
|
Balance at January 28, 2012
|
|
|
90,660,347
|
|
|
$
|
9,066
|
|
|
|
|
|
|
$
|
|
|
|
$
|
239,000
|
|
|
$
|
(6,250
|
)
|
|
$
|
(740
|
)
|
|
$
|
(4
|
)
|
|
$
|
241,072
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,421
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,421
|
)
|
Stock issued pursuant to long-term incentive plans
|
|
|
651,367
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,596
|
|
Exercise of stock options
|
|
|
6,001
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(294
|
)
|
|
|
|
|
|
|
(294
|
) )
|
Retirement of treasury stock
|
|
|
(1,245,680
|
)
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
|
|
(837
|
)
|
|
|
|
|
|
|
962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 27, 2012
|
|
|
90,072,035
|
|
|
$
|
9,007
|
|
|
|
|
|
|
$
|
|
|
|
$
|
240,712
|
|
|
$
|
(33,671
|
)
|
|
$
|
(72
|
)
|
|
$
|
(4
|
)
|
|
$
|
215,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to
condensed consolidated financial statements.
5
THE WET SEAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Treasury
Stock
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total
Stockholders
Equity
|
|
|
|
Class A
|
|
|
Class B
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Par Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
|
|
|
|
Balance at January 29, 2011
|
|
|
113,736,844
|
|
|
$
|
11,374
|
|
|
|
|
|
|
$
|
|
|
|
$
|
323,324
|
|
|
$
|
(21,332
|
)
|
|
$
|
(37,963
|
)
|
|
$
|
290
|
|
|
$
|
275,693
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,959
|
|
|
|
|
|
|
|
|
|
|
|
13,959
|
|
Stock issued pursuant to long-term incentive plans
|
|
|
831,388
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,172
|
|
Amortization of stock payment in lieu of rent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Exercise of stock options
|
|
|
334,334
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,071
|
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,860
|
)
|
|
|
|
|
|
|
(53,860
|
)
|
Retirement of treasury stock
|
|
|
(24,242,219
|
)
|
|
|
(2,424
|
)
|
|
|
|
|
|
|
|
|
|
|
(89,322
|
)
|
|
|
|
|
|
|
91,746
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain under Supplemental Employee Retirement Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 29, 2011
|
|
|
90,660,347
|
|
|
$
|
9,066
|
|
|
|
|
|
|
$
|
|
|
|
$
|
238,175
|
|
|
$
|
(7,373
|
)
|
|
$
|
(77
|
)
|
|
$
|
285
|
|
|
$
|
240,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
THE WET SEAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
CASH FLOWS 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
|
|
Loss on disposal of equipment and leasehold improvements
|
|
|
550
|
|
|
|
120
|
|
Asset impairment
|
|
|
19,035
|
|
|
|
2,049
|
|
Deferred income taxes
|
|
|
(17,986
|
)
|
|
|
7,860
|
|
Stock-based compensation
|
|
|
2,596
|
|
|
|
3,172
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Income tax receivables
|
|
|
(460
|
)
|
|
|
|
|
Other receivables
|
|
|
(17
|
)
|
|
|
(1,140
|
)
|
Merchandise inventories
|
|
|
(14,359
|
)
|
|
|
(9,812
|
)
|
Prepaid expenses and other current 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
|
)
|
|
|
|
|
|
|
|
|
|
NET 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
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
57
|
|
|
$
|
53
|
|
Income taxes
|
|
$
|
865
|
|
|
$
|
1,996
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
|
|
|
|
|
|
|
|
|
Retirement of treasury shares
|
|
$
|
962
|
|
|
$
|
91,746
|
|
Purchase of equipment and leasehold improvements unpaid at end of period
|
|
$
|
3,366
|
|
|
$
|
4,256
|
|
Amortization of actuarial gain under Supplemental Employee Retirement Plan
|
|
$
|
|
|
|
$
|
(5
|
)
|
See notes to condensed consolidated financial statements.
7
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks
ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 1 Basis of Presentation, Significant Accounting Policies, and Recently Adopted Accounting Pronouncements
Basis of Presentation
The information set forth in these condensed consolidated financial statements as of October 27, 2012, and for the 13 and 39 weeks
ended October 27, 2012, and October 29, 2011 (collectively, the Interim Financial Statements), are unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States
of America (U.S. GAAP) for interim financial information. Certain information and footnote disclosures normally included in The Wet Seal, Inc. (the Company) annual consolidated financial statements have been condensed or
omitted, as permitted under applicable rules and regulations. For further information, refer to the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended
January 28, 2012.
In the opinion of management, the Interim Financial Statements reflect all adjustments that are of a
normal and recurring nature necessary to fairly present the Companys financial position and results of operations and cash flows in all material respects as of the dates and for the periods presented. The results of operations presented in the
Interim Financial Statements are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 2013.
Significant Accounting Policies
Long-Lived Assets
The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a
history of operating or cash flow losses and a projection or forecast that indicates continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the
manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If
the estimated undiscounted future cash flows are less than the carrying value, an impairment loss will be recognized, measured as the difference between the carrying value and the estimated fair value of the assets, based on discounted estimated
future cash flows using the Companys weighted average cost of capital. The Company has considered the relevant valuation techniques that could be applied without undue cost and effort and has determined that the discounted estimated future
cash flow approach continues to provide the most relevant and reliable means by which to determine fair value in this circumstance.
The Companys quarterly evaluation of store assets includes consideration of current and historical performance and projections of future profitability. The profitability projections rely upon
estimates made by the Companys management, including store-level sales, gross margins, and direct expenses, and, by their nature, include judgments about how current strategic initiatives will impact future performance.
The Companys financial performance in the first three quarters of fiscal 2012 declined more than was projected by the
Companys management in past impairment analyses, which resulted in asset impairment charges each quarter since the beginning of fiscal 2012. Each period reflected the Companys best estimate at the time. If the Company is not able to
achieve its projected key financial metrics, and strategic initiatives being implemented do not result in significant improvements in the Companys current financial performance trend, the Company would incur additional impairment of assets in
the future.
The Companys evaluations during the 13 and 39 weeks ended October 27, 2012, and October 29, 2011,
indicated that operating losses or insufficient operating income existed at certain retail stores, with a projection that the operating losses or insufficient operating income for those locations would continue.
As such, the Company recorded the following non-cash charges related to its retail stores within asset impairment in the condensed consolidated statements of operations, to write
down the carrying values of these stores long-lived assets to their estimated fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
|
|
(In thousands)
|
|
Aggregate carrying value of all long-lived assets impaired
|
|
$
|
6,456
|
|
|
$
|
733
|
|
|
$
|
19,313
|
|
|
$
|
2,049
|
|
Less: Impairment charges
|
|
|
(6,456
|
)
|
|
|
(733
|
)
|
|
|
(19,035
|
)
|
|
|
(2,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate fair value of all long-lived assets impaired
|
|
$
|
|
|
|
$
|
|
|
|
$
|
278
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores with asset impairment
|
|
|
29
|
|
|
|
3
|
|
|
|
80
|
|
|
|
9
|
|
8
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 1 Basis of Presentation, Significant Accounting Policies, and Recently Adopted
Accounting Pronouncements
Basis of Presentation (Continued)
The long-lived assets disclosed above that were written down to their respective fair values consisted
of leasehold improvements, furniture, fixtures and equipment. Based on historical operating performance and the projected outlook for these stores, the Company believes that the remaining asset values of approximately $0.3 million for the 39 weeks
ended October 27, 2012, are recoverable.
Income Taxes
The Company has approximately $75.9 million of federal net operating loss (NOL) carry forwards available to offset taxable income in fiscal 2012 and thereafter, subject to certain annual
limitations based on the provisions of Section 382 of the Internal Revenue Code. The Companys effective income tax rates for the 13 and 39 weeks ended October 27, 2012, were 40.5% and 38.8%, respectively. The Company expects a 38.8%
effective income tax rate for fiscal 2012. The Companys effective income tax rates reflect a $0.3 million write-off of certain deferred tax assets in the fiscal 2012 second quarter as a result of IRS adjustments from the Companys
recently closed IRS audit of its fiscal 2008 and 2009 tax years and $0.3 million for tax credits taken on the Companys fiscal 2011 tax return in the fiscal 2012 third quarter, which are discrete items. The Company anticipates cash payment for
income taxes for the fiscal year will be approximately $0.1 million, representing certain state income taxes. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash benefit for
deferred income taxes.
Recently Adopted Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (the FASB) issued guidance on the application of fair value accounting
where its use is already required or permitted by other standards within U.S. GAAP. This guidance changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value
measurements. Amendments include those that clarify the FASBs intent about the application of existing fair value measurement and disclosure requirements, and change a particular principle or requirement for measuring fair value or for
disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements. This guidance became effective for interim and annual
periods beginning after December 15, 2011. The Company adopted this guidance, which did not significantly impact the Companys condensed consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. This guidance provided an entity with an
option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both
options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The
guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, and is to be applied on a retrospective basis. The Company adopted this guidance and has presented total comprehensive
(loss) income, the components of net (loss) income and the components of other comprehensive (loss) income in two separate but consecutive statements within its condensed consolidated financial statements.
NOTE 2 Stock-Based Compensation
The Company had one stock incentive plan under which shares were available for grant at October 27, 2012: the 2005
Stock Incentive Plan (the 2005 Plan). The Company also previously granted share awards under its 1996 Long-Term Incentive Plan (the 1996 Plan) and the 2000 Stock Incentive Plan (the 2000 Plan) that remain unvested
and/or unexercised as of October 27, 2012; however, the 1996 Plan expired during fiscal 2006 and the 2000 Plan expired during fiscal 2009, and no further share awards may be granted under the 1996 Plan and 2000 Plan. The 2005 Plan, the 2000
Plan, and the 1996 Plan are collectively referred to as the Plans.
The 2005 Plan permits the granting of options,
restricted common stock, performance shares, or other equity-based awards to the Companys employees, officers, directors, and consultants. The Company believes the granting of equity-based awards helps to align the interests of its employees,
officers and directors with those of its stockholders. The Company has a practice of issuing new
9
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 2 Stock-Based Compensation (Continued)
shares to satisfy stock option exercises, as well as for restricted stock and performance share grants. The 2005 Plan was approved by the Companys stockholders on January 10, 2005, as
amended with stockholder approval on July 20, 2005, for the issuance of
incentive awards covering 12,500,000 shares of Class A
common stock. Additionally, an amended and restated 2005 Plan was approved by the Companys stockholders on May 19, 2010, which increased the incentive awards capacity to 17,500,000 shares of Class A common stock. An aggregate of
22,669,528 shares of Class A common stock have been issued or may be issued pursuant to the Plans. As of October 27, 2012, 3,977,081 shares were available for future grants.
Options
The Plans provide that the per-share exercise price of a stock
option may not be less than the fair market value of the Companys Class A common stock on the date the option is granted. Under the Plans, outstanding options vest over periods ranging from three to five years from the grant date and
expire from five to ten years after the grant date. Certain stock option and other equity-based awards provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company records compensation expense for employee
stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data, the implied volatility of market-traded options and other factors to estimate the
expected price volatility, option lives, and forfeiture rates.
The risk-free rate is based on the U.S. Treasury yield curve
in effect at the time of grant and the estimated life of the option.
The following weighted-average assumptions were used to estimate the fair value of options granted during the periods indicated using
the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
Dividend Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected Volatility
|
|
|
46.47
|
%
|
|
|
54.00
|
%
|
|
|
48.58
|
%
|
|
|
54.00
|
%
|
Risk-Free Interest Rate
|
|
|
0.47
|
%
|
|
|
0.51
|
%
|
|
|
0.48
|
%
|
|
|
0.96
|
%
|
Expected Life of Options (in Years)
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
3.3
|
|
|
|
3.3
|
|
The Company recorded compensation expense of $0.2 million, $1.0 million, $0.3 million and $0.8 million, or less than
$0.01, $0.01, less than $0.01 and less than $0.01 per basic and diluted share, related to stock options outstanding during the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, respectively. The expense for the 39 weeks ended
October 27, 2012, reflects a $0.4 million charge for vesting acceleration resulting from the departure of the Companys previous chief executive officer.
At October 27, 2012, there was $1.0 million of total unrecognized compensation expense related to nonvested stock options under the Companys share-based payment plans, which will be recognized
over an average period of 1.7 years, representing the remaining vesting periods of such options through fiscal 2015.
The following table summarizes the Companys
stock option activities with respect to its Plans for the 39 weeks ended October 27, 2012, as follows (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual Life
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 28, 2012
|
|
|
3,474,204
|
|
|
$
|
4.64
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
125,000
|
|
|
$
|
3.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,001
|
)
|
|
$
|
3.15
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,003,738
|
)
|
|
$
|
5.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 27, 2012
|
|
|
2,589,465
|
|
|
$
|
4.20
|
|
|
|
2.21
|
|
|
$
|
8
|
|
Vested and expected to vest in the future at October 27, 2012
|
|
|
2,452,317
|
|
|
$
|
4.22
|
|
|
|
2.11
|
|
|
$
|
7
|
|
Exercisable at October 27, 2012
|
|
|
1,723,349
|
|
|
$
|
4.42
|
|
|
|
1.39
|
|
|
$
|
4
|
|
10
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 2 Stock-Based Compensation (Continued)
Options vested and expected to vest in the future is comprised of all options
outstanding at October 27, 2012, net of estimated forfeitures.
Additional information regarding stock options outstanding as of October 27, 2012, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
as of
October 27,
2012
|
|
|
Weighted-
Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
|
Number
Exercisable
as of
October 27,
2012
|
|
|
Weighted-
Average
Exercise
Price Per
Share
|
|
$ 1.81 - $ 2.74
|
|
|
27,500
|
|
|
|
3.64
|
|
|
$
|
2.57
|
|
|
|
7,500
|
|
|
$
|
2.26
|
|
2.77 - 4.19
|
|
|
2,132,299
|
|
|
|
2.27
|
|
|
$
|
3.70
|
|
|
|
1,342,853
|
|
|
$
|
3.68
|
|
4.26 - 6.82
|
|
|
211,666
|
|
|
|
3.33
|
|
|
$
|
4.91
|
|
|
|
154,996
|
|
|
$
|
5.08
|
|
8.00 - 11.49
|
|
|
218,000
|
|
|
|
0.42
|
|
|
$
|
8.61
|
|
|
|
218,000
|
|
|
$
|
8.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.81 - $11.49
|
|
|
2,589,465
|
|
|
|
2.21
|
|
|
$
|
4.20
|
|
|
|
1,723,349
|
|
|
$
|
4.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted during the 13 and 39 weeks ended October 27, 2012,
and October 29, 2011, was $0.94, $1.08, $1.61 and $1.55, respectively. The total intrinsic value for options exercised during the 39 weeks ended October 27, 2012, and during the 13 and 39 weeks ended October 29, 2011, was less than
$0.1 million, $0.2 million and $0.5 million, respectively.
Cash received from option exercises under all Plans for the 39
weeks ended October 27, 2012, and October 29, 2011, was less than $0.1 million and $1.1 million, respectively. The Company did not realize tax benefits for the tax deductions from option exercises as it must first utilize its regular
NOL prior to realizing the excess tax benefits.
Restricted Common Stock and Performance Shares
Under the 2005 Plan, the Company grants directors, certain executives, and other key employees restricted common stock with vesting
contingent upon completion of specified service periods ranging from one to three-and-one-half years. The Company also grants certain executives and other key employees performance share awards with vesting contingent upon a combination of specified
service periods and the Companys achievement of specified common stock price levels.
During the 39 weeks ended
October 27, 2012, and October 29, 2011, the Company granted 401,370 and 431,388 shares, respectively, of restricted common stock to certain employees and directors under the Plans. The weighted-average grant-date fair value of the
restricted common stock granted during the 39 weeks ended October 27, 2012, and October 29, 2011, was $3.22 and $3.87 per share, respectively. The Company recorded approximately $0.4 million, $1.7 million, $0.4 million and $1.0 million of
compensation expense related to outstanding shares of restricted common stock during the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, respectively. The expense for the 39 weeks ended October 27, 2012 reflects a $0.6
million charge for vesting acceleration resulting from the departure of the Companys previous chief executive officer. During the 13 weeks ended October 27, 2012, the Company granted 249,997 shares of restricted common stock to certain board
members for additional services to be provided. However, the board subsequently rescinded and cancelled such grants during the 13 weeks ended October 27, 2012, resulting in no financial statement impact during the period.
During the 39 weeks ended October 29, 2011, the Company granted 400,000 performance shares under the 2005 Plan. The weighted-average
grant-date fair value of the performance share grants made during the 39 weeks ended October 29, 2011, which included consideration of the probability of such shares vesting, was $3.08 per share, respectively. The Company recorded compensation
expense (benefit) of approximately $0.1 million and $(0.1) million and compensation expense of approximately $0.5 million and $1.4 million during the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, respectively, related to
performance shares. The compensation benefits during the 39 weeks ended October 27, 2012, was due to the forfeiture of performance shares as a result of the departure of the Companys previous chief executive officer.
11
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 2 Stock-Based Compensation (Continued)
The fair value of nonvested restricted common stock awards is equal to the closing
trading price of the Companys Class A common stock on the grant date. The fair value of nonvested performance shares is determined based on a number of factors, including the closing trading price of the Companys Class A common
stock and the estimated probability of achieving the Companys stock price performance conditions as of the grant date.
The following table summarizes activity with respect to the Companys nonvested restricted common stock and performance shares for the 39
weeks ended October 27, 2012:
|
|
|
|
|
|
|
|
|
Nonvested Restricted Common Stock and Performance Shares
|
|
Number of
Shares
|
|
|
Weighted-
Average Grant-
Date Fair Value
|
|
Nonvested at January 28, 2012
|
|
|
2,105,112
|
|
|
$
|
3.16
|
|
Granted
|
|
|
651,367
|
|
|
$
|
3.22
|
|
Vested
|
|
|
(774,080
|
)
|
|
$
|
3.65
|
|
Forfeited
|
|
|
(1,181,935
|
)
|
|
$
|
2.81
|
|
|
|
|
|
|
|
|
|
|
Nonvested at October 27, 2012
|
|
|
800,464
|
|
|
$
|
3.43
|
|
|
|
|
|
|
|
|
|
|
The fair value of restricted common stock and performance shares that vested during the 39 weeks ended October 27,
2012, was $2.4 million. During the 39 weeks ended October 27, 2012, upon vesting of restricted common stock and performance shares, certain employees tendered 91,848 shares of our Class A common stock to satisfy employee withholding tax
obligations of approximately $0.3 million.
Effective August 16, 2012, the Company retired 1,245,680 shares of its Class A
common stock held in treasury. In accordance with Delaware law and the terms of the Companys certificate of incorporation, upon retirement, such treasury shares resumed the status of authorized and unissued shares of Company common stock.
At October 27, 2012, there was $1.8 million of total unrecognized compensation expense related to nonvested restricted
common stock and performance shares under the Companys share-based payment plans, of which $1.4 million relates to restricted common stock and $0.4 million relates to performance shares. That cost is expected to be recognized over a
weighted-average period of 1.3 years. These estimates utilize subjective assumptions about expected forfeiture rates, which could change over time. Therefore, the amount of unrecognized compensation expense noted above does not necessarily represent
the expense that will ultimately be recognized by the Company in its condensed consolidated statements of operations.
The following table
summarizes stock-based compensation recorded in the condensed consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
Cost of sales
|
|
$
|
86
|
|
|
$
|
98
|
|
|
$
|
221
|
|
|
$
|
189
|
|
Selling, general, and administrative expenses
|
|
|
519
|
|
|
|
1,114
|
|
|
|
2,375
|
|
|
|
2,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
$
|
605
|
|
|
$
|
1,212
|
|
|
$
|
2,596
|
|
|
$
|
3,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 3 Senior Revolving Credit Facility
On February 3, 2011, the Company renewed, via amendment and restatement, its $35.0 million senior revolving credit
facility with its existing lender (the Facility), which can be increased up to $50.0 million in the absence of any default and upon the satisfaction of certain conditions precedent specified in the Facility. The Facility expires in
February 2016. Under the Facility, the Company is subject to borrowing base limitations on the amount that can be borrowed and certain customary covenants, including, under certain circumstances, covenants limiting the ability to incur additional
indebtedness, make investments and acquisitions, grant liens, pay dividends, repurchase its Class A common stock, close stores, and dispose of assets, without the lenders consent. The ability of the Company to borrow and request the
issuance of letters of credit is subject to the requirement that the Company maintain an excess of the borrowing base over the outstanding credit extensions of the greater of 10% of the aggregate amount of the Facility or $4.0 million. The annual
interest rate on the revolving line of credit under the Facility is (i) the higher of the lenders prime rate, the Federal funds rate plus 0.5% or the one month London InterBank Offered Rate (LIBOR) plus 1.0%, collectively referred to as
the Base Rate, plus the applicable margin ranging from 0.5% to 1.0% or, (ii) if the Company elects, either the one, two, three or six months LIBOR plus a margin ranging from 1.5% to 2.0%. The applicable Base Rate or LIBOR margin is
based on the level of average excess availability, as defined under the Facility, at the time of election, as adjusted quarterly. The Company also incurs fees
12
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 3 Senior Revolving Credit Facility (Continued)
on outstanding letters of credit under the Facility at an annual rate equal to the applicable LIBOR margin for standby letters of credit and 23.0% of the applicable LIBOR margin for commercial
letters of credit. Additionally, the Company is subject to commitment fees at an annual rate of 0.25% on the unused portion of the line of credit under the Facility.
Borrowings under the Facility are secured by cash, cash equivalents, investments, receivables and inventory held by the Company and two of its wholly owned subsidiaries, The Wet Seal Retail, Inc. and Wet
Seal Catalog, Inc., each of which may be a borrower under the Facility.
At October 27, 2012, the amount outstanding
under the Facility consisted of $6.2 million in open documentary letters of credit related to merchandise purchases and $1.5 million in outstanding standby letters of credit, and the Company had $27.3 million available under the Facility for cash
advances and/or the issuance of additional letters of credit.
At October 27, 2012, the Company was in compliance with
all covenant requirements related to the Facility.
NOTE 4 Fair Value Measurements and Disclosures
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in
an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in
pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Companys own credit risk.
Inputs used in measuring fair value are prioritized into a three-level hierarchy based on whether the inputs to those measurements are
observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys market assumptions. The fair-value hierarchy requires the use of observable market data when
available and consists of the following levels:
|
|
|
Level 1 Quoted prices for identical instruments in active markets;
|
|
|
|
Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not
active; and model-derived valuations in which all significant inputs are observable in active markets; and
|
|
|
|
Level 3 Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
|
The following tables present information on the Companys financial
instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
at October 27,
2012
|
|
|
Fair Value Measurements
at Reporting Date Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
126,343
|
|
|
$
|
21,992
|
|
|
$
|
104,351
|
|
|
$
|
|
|
Long-term tenant allowance receivables
|
|
|
938
|
|
|
|
|
|
|
|
|
|
|
|
938
|
|
|
|
|
|
|
Carrying
Amount
at January 28,
2012
|
|
|
Fair Value Measurements
at Reporting Date Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
157,185
|
|
|
$
|
62,881
|
|
|
$
|
94,304
|
|
|
$
|
|
|
Long-term tenant allowance receivables
|
|
|
875
|
|
|
|
|
|
|
|
|
|
|
|
875
|
|
|
|
|
|
|
Carrying
Amount
at October 29,
2011
|
|
|
Fair Value Measurements
at Reporting Date Using
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
106,205
|
|
|
$
|
11,916
|
|
|
$
|
94,289
|
|
|
$
|
|
|
Short-term investments
|
|
|
25,056
|
|
|
|
|
|
|
|
25,059
|
|
|
|
|
|
Long-term tenant allowance receivables
|
|
|
855
|
|
|
|
|
|
|
|
|
|
|
|
855
|
|
13
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 4 Fair Value Measurements and Disclosures (Continued)
Cash and cash equivalents are carried at either cost or amortized cost, which
approximates fair value, due to their short term maturities. Certain money market funds are valued through the use of quoted market prices and are represented as Level 1. Other money market funds are valued at $1, which is generally the net asset
value of these funds, and are represented at Level 2. Units are redeemable on a daily basis and redemption requests generally can be received the same day as the effective date. The Companys short-term investments consisted of interest-bearing
corporate bonds that were guaranteed by the U.S. Government under the Temporary Liquidity Guarantee Program, had maturities that were less than one year and were carried at amortized cost plus accrued income. Short-term investments were carried at
amortized cost due to the Companys intent to hold to maturity. The fair value of the Companys short-term investments was determined based on quoted prices for similar instruments in active markets. The Company believes the carrying
amounts of other receivables and accounts payable approximate fair value. The fair value of the long-term tenant allowance receivables was determined by discounting them to present value using an incremental borrowing rate of 9.26%, at the time of
recording, over their five year collection period. The long-term tenant allowance receivables are included in other assets within the condensed consolidated balance sheets.
On a non-recurring basis, the Company measures certain of its long-lived assets at fair value based on Level 3 inputs consisting of, but not limited to, projected sales growth, estimated gross margins,
projected operating costs and an estimated weighted-average cost of capital rate. During the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, the Company recorded $6.5 million, $19.0 million, $0.7 million and $2.0 million of
impairment charges in the accompanying condensed consolidated statements of operations. Refer to Note 1, Basis of Presentation, Significant Accounting Policies, and Recently Adopted Accounting Pronouncements.
NOTE 5 Net (Loss) Income Per Share
Net (loss) income per share, basic, is computed based on the weighted-average number of common shares outstanding for
the period, including consideration of the two-class method with respect to certain of the Companys other equity securities (see below). Net (loss) income per share, diluted, is computed based on the weighted-average number of common and
potentially dilutive common equivalent shares outstanding for the period, also with consideration given to the two-class method.
While the Company historically has paid no cash dividends, participants in the Companys equity compensation plans who were granted restricted stock and performance shares are allowed to receive cash
dividends paid on unvested restricted stock and unvested performance shares. The Companys unvested restricted stock and unvested performance shares also qualify as participating securities and are included in the computation of earnings per
share pursuant to the two-class method. For the dilutive computation, under the two-class method, determination of whether the unvested share-based payment awards are dilutive is based on the application of the treasury stock method and
whether the performance criteria has been met. For the 13 and 39 weeks ended October 27, 2012, the Company incurred a net loss and there is no dilutive effect of any unvested share-based payment awards. For the 13 and 39 weeks ended
October 29, 2011, the effect of the unvested share-based payment awards was anti-dilutive to the computation of diluted earnings per share.
The two-class method requires allocation of undistributed earnings per share between the common stock and unvested share-based payment awards based on the dividend and other distribution participation
rights under each of these securities.
14
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 5 Net (Loss) Income Per Share (Continued)
The following table summarizes the allocation of undistributed
earnings among common stock and other participating securities using the two-class method and reconciles the weighted average common shares used in the computation of basic and diluted earnings per share (in thousands, except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
|
October 27, 2012
|
|
|
October 29, 2011
|
|
|
|
Net Loss
|
|
|
Shares
|
|
|
Per Share
Amount
|
|
|
Net Income
|
|
|
Shares
|
|
|
Per Share
Amount
|
|
Net (loss) income per share, basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(14,779
|
)
|
|
|
|
|
|
|
|
|
|
$
|
3,748
|
|
|
|
|
|
|
|
|
|
Less: Undistributed earnings allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, basic
|
|
$
|
(14,779
|
)
|
|
|
88,877,993
|
|
|
$
|
(0.17
|
)
|
|
$
|
3,641
|
|
|
|
88,146,378
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(14,779
|
)
|
|
|
|
|
|
|
|
|
|
$
|
3,748
|
|
|
|
|
|
|
|
|
|
Less: Undistributed earnings allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, diluted
|
|
$
|
(14,779
|
)
|
|
|
88,877,993
|
|
|
$
|
(0.17
|
)
|
|
$
|
3,642
|
|
|
|
88,244,855
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended
|
|
|
|
October 27, 2012
|
|
|
October 29, 2011
|
|
|
|
Net Loss
|
|
|
Shares
|
|
|
Per Share
Amount
|
|
|
Net Income
|
|
|
Shares
|
|
|
Per Share
Amount
|
|
Net (loss) income per share, basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(27,421
|
)
|
|
|
|
|
|
|
|
|
|
$
|
13,959
|
|
|
|
|
|
|
|
|
|
Less: Undistributed earnings allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, basic
|
|
$
|
(27,421
|
)
|
|
|
88,650,011
|
|
|
$
|
(0.31
|
)
|
|
$
|
13,600
|
|
|
|
94,265,017
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(27,421
|
)
|
|
|
|
|
|
|
|
|
|
$
|
13,959
|
|
|
|
|
|
|
|
|
|
Less: Undistributed earnings allocable to participating securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(358
|
)
|
|
|
|
|
|
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share, diluted
|
|
$
|
(27,421
|
)
|
|
|
88,650,011
|
|
|
$
|
(0.31
|
)
|
|
$
|
13,601
|
|
|
|
94,351,425
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The computations of net (loss)
income per share, diluted, excluded the following potentially dilutive securities exercisable into Class A common stock for the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, respectively, because their effect would not
have been dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended
|
|
|
39 Weeks Ended
|
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
Stock options outstanding
|
|
|
2,592,016
|
|
|
|
2,598,282
|
|
|
|
2,592,419
|
|
|
|
2,466,663
|
|
Performance shares and nonvested restricted stock awards
|
|
|
838,225
|
|
|
|
2,588,704
|
|
|
|
1,560,491
|
|
|
|
2,485,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,430,241
|
|
|
|
5,186,986
|
|
|
|
4,152,910
|
|
|
|
4,952,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 6 Commitments and Contingencies
On July 19, 2006, a complaint was filed in the Superior Court of the State of California for the County of Los
Angeles on behalf of certain of the Companys current and former employees that were employed and paid by the Company on an hourly basis during the four-year period from July 19, 2002, through July 19, 2006. The Company was
named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On November 30, 2006,
the Company reached an agreement to pay approximately $0.3 million to settle this matter, subject to Superior Court approval. On September 27, 2010, the Superior Court granted final approval of the settlement agreement. An appeal was
subsequently filed on January 26, 2011. On July 25, 2012, the Court of Appeals dismissed Plaintiffs appeal. In mid-September 2012, the Company paid approximately $0.3 million to settle the matter plus $0.1 million in settlement
administration fees.
On May 22, 2007, a complaint was filed in the Superior Court of the State of California for the
County of Orange on behalf of certain of the Companys current and former employees who were employed and paid by the Company from May 22, 2003 through the present. The Company was named as a defendant. The complaint alleged
various violations under the State of California Labor Code, the State of California Business and Professions Code, and Wage Orders of the Industrial Welfare Commission. On December 17, 2010, the court denied Plaintiffs Motion
for Class Certification and Motion For Leave to File An Amended Complaint. Plaintiffs appealed both orders. On April 4, 2012, the Court of Appeal affirmed the trial courts denial of class certification and leave
to amend the complaint. On September 11, 2012, the matter was transferred to a new judge in the lower court. There are currently only the four named plaintiffs in the lawsuit. A trial date has been set for June 3, 2013. The Company is
vigorously defending this litigation and is unable to predict the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of October 27, 2012. Depending on the actual outcome of this case, provisions could be
recorded in the future which may have a material adverse effect on the Companys results of operations or financial condition.
On September 29, 2008, a complaint was filed in the Superior Court of the State of California for the County of San Francisco on behalf of certain of the Companys current and former employees who
were employed and paid by the Company from September 29, 2004 through the present. The Company was named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and
Professions Code. On August 16, 2011, the court denied Plaintiffs Motion for Class Certification. Plaintiffs appealed and, on October 12, 2012, the California Court of Appeals affirmed the lower courts ruling. The Company is vigorously
defending this litigation and is unable to predict the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of October 27, 2012. Depending on the actual outcome of this case, provisions could be recorded in the future
which may have a material adverse effect on the Companys results of operations or financial condition.
On April 24,
2009, the U.S. Equal Employment Opportunity Commission (the EEOC) requested information and records relevant to several charges of discrimination by the Company against employees of the Company. In the course of this investigation, the
EEOC served a subpoena seeking information related to current and former employees throughout the United States. On November 14, 2012, the Company reached resolution with the EEOC and several of the individual complainants that concludes the
EEOCs investigation. The Company has accrued approximately $0.5 million for settlements with some of the individual complainants. The Company also agreed to programmatic initiatives that are consistent with the Companys diversity plan.
The Company will report progress on its initiatives and results periodically to the EEOC. Claimants with whom the Company did not enter into a settlement will have an opportunity to bring a private lawsuit within ninety days from the date they
receive a right-to-sue notice from the EEOC. The Company is not certain when those notices will issue. The Company is unable to predict whether any complainant will file a private lawsuit and if filed, the likely outcome. Accordingly, no provision
for a loss contingency has been accrued as of October 27, 2012. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on the Companys results of operations or
financial condition.
On May 9, 2011, a complaint was filed in the Superior Court of the State of California for the County of
Alameda on behalf of certain of the Companys current and former employees who were employed and paid by the Company from May 9, 2007 through the present. The Company was named as a defendant. The complaint alleges various violations under the
State of California Labor Code and the State of California Business and Professions Code. On February 3, 2012, the court granted the Companys motion to transfer venue to the County of Orange. On July 13, 2012, the Court granted the
Companys motion to compel arbitration. Plaintiffs appealed. On July 18, 2012, the Company received notice that Plaintiffs filed charges with the National Labor Relations Board (NLRB) under Section 7 of the National Labor Relations Board Act
based on the arbitration agreements Plaintiffs signed upon their hiring with the Company. Plaintiffs alleged that the Companys arbitration agreements unlawfully compel employees to waive their rights to participate in class or representative
actions against the Company. On September 20, 2012, the NLRB dismissed Plaintiffs claims. The Company is vigorously defending this litigation and is unable to predict the likely outcome. Accordingly, no provision for a loss contingency has been
accrued as of October 27, 2012. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on the Companys results of operations or financial condition.
16
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 6 Commitments and Contingencies (Continued)
On October 27, 2011, a complaint was filed in the Superior Court of the State of
California for the County of Los Angeles on behalf of certain of the Companys current and former employees who were employed in California during the time period from October 27, 2007 through the present. The Company was named as a
defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On March 28, 2012, the court entered an Order denying the Companys motion to compel
arbitration. On September 21, 2012, the Company filed a notice of appeal. The Company is vigorously defending this litigation and is unable to predict the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of
October 27, 2012. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on the Companys results of operations or financial condition.
On July 12, 2012, a complaint was filed in United States District Court for the Central District of California on behalf of certain of
the Companys current and former African American retail store employees. The Company was named as a defendant. The complaint alleges various violations under 42 U.S.C. § 1981, including allegations that the Company engaged in disparate
treatment discrimination of those African American current and former employees in promotion to management positions and against African American store management employees with respect to compensation and termination from 2008 through the present.
Plaintiffs are also alleging retaliation. Plaintiffs are seeking reinstatement or instatement of Plaintiffs and class members to their alleged rightful employment positions, lost pay and benefits allegedly sustained by Plaintiffs and class members,
compensatory damages for emotional distress, front pay, punitive damages, attorneys fees, and interest. The Company is vigorously defending this litigation and is unable to predict the likely outcome. Accordingly, no provision for a loss
contingency has been accrued as of October 27, 2012. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on the Companys results of operations or financial
condition.
From time to time, the Company is involved in other litigation matters relating to claims arising out of its
operations in the normal course of business. The Company believes that, in the event of a settlement or an adverse judgment on certain of these claims, the Company has insurance to cover a portion of such losses. However, certain matters could arise
for which the Company does not have insurance coverage and which could have a material adverse effect on its results of operations or financial condition.
17
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 7 Segment Reporting
The Company operates exclusively in the retail apparel industry in which it sells apparel and accessory 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). 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 percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended October 27, 2012
|
|
Wet Seal
|
|
|
Arden B
|
|
|
Corporate
and
Unallocated
|
|
|
Total
|
|
Net sales
|
|
$
|
117,892
|
|
|
$
|
17,645
|
|
|
$
|
|
|
|
$
|
135,537
|
|
Percentage of consolidated net sales
|
|
|
87
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
100
|
%
|
Operating loss
|
|
$
|
(8,747
|
)
|
|
$
|
(3,733
|
)
|
|
$
|
(12,336
|
)
|
|
$
|
(24,816
|
)
|
Depreciation and amortization expense
|
|
$
|
3,442
|
|
|
$
|
404
|
|
|
$
|
422
|
|
|
$
|
4,268
|
|
Interest income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35
|
|
|
$
|
35
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(45
|
)
|
|
$
|
(45
|
)
|
Loss before benefit from income taxes
|
|
$
|
(8,747
|
)
|
|
$
|
(3,733
|
)
|
|
$
|
(12,346
|
)
|
|
$
|
(24,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks Ended October 29, 2011
|
|
Wet Seal
|
|
|
Arden B
|
|
|
Corporate
and
Unallocated
|
|
|
Total
|
|
Net sales
|
|
$
|
131,216
|
|
|
$
|
20,919
|
|
|
$
|
|
|
|
$
|
152,135
|
|
Percentage of consolidated net sales
|
|
|
86
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
100
|
%
|
Operating income (loss)
|
|
$
|
13,667
|
|
|
$
|
(1,011
|
)
|
|
$
|
(6,527
|
)
|
|
$
|
6,129
|
|
Depreciation and amortization expense
|
|
$
|
4,032
|
|
|
$
|
528
|
|
|
$
|
387
|
|
|
$
|
4,947
|
|
Interest income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
57
|
|
|
$
|
57
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(41
|
)
|
|
$
|
(41
|
)
|
Income (loss) before provision for income taxes
|
|
$
|
13,667
|
|
|
$
|
(1,011
|
)
|
|
$
|
(6,511
|
)
|
|
$
|
6,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks Ended October 27, 2012
|
|
Wet Seal
|
|
|
Arden B
|
|
|
Corporate
and
Unallocated
|
|
|
Total
|
|
Net sales
|
|
$
|
357,806
|
|
|
$
|
60,937
|
|
|
$
|
|
|
|
$
|
418,743
|
|
Percentage of consolidated net sales
|
|
|
85
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
100
|
%
|
Operating loss
|
|
$
|
(8,003
|
)
|
|
$
|
(6,614
|
)
|
|
$
|
(30,183
|
)
|
|
$
|
(44,800
|
)
|
Depreciation and amortization expense
|
|
$
|
11,022
|
|
|
$
|
1,314
|
|
|
$
|
1,195
|
|
|
$
|
13,531
|
|
Interest income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
108
|
|
|
$
|
108
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(136
|
)
|
|
$
|
(136
|
)
|
Loss before benefit from income taxes
|
|
$
|
(8,003
|
)
|
|
$
|
(6,614
|
)
|
|
$
|
(30,211
|
)
|
|
$
|
(44,828
|
)
|
|
|
|
|
|
39 Weeks Ended October 29, 2011
|
|
Wet Seal
|
|
|
Arden B
|
|
|
Corporate
and
Unallocated
|
|
|
Total
|
|
Net sales
|
|
$
|
387,302
|
|
|
$
|
69,643
|
|
|
$
|
|
|
|
$
|
456,945
|
|
Percentage of consolidated net sales
|
|
|
85
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
100
|
%
|
Operating income (loss)
|
|
$
|
42,760
|
|
|
$
|
3,000
|
|
|
$
|
(22,980
|
)
|
|
$
|
22,780
|
|
Depreciation and amortization expense
|
|
$
|
11,744
|
|
|
$
|
1,572
|
|
|
$
|
1,111
|
|
|
$
|
14,427
|
|
Interest income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
195
|
|
|
$
|
195
|
|
Interest expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(128
|
)
|
|
$
|
(128
|
)
|
Income (loss) before provision for income taxes
|
|
$
|
42,760
|
|
|
$
|
3,000
|
|
|
$
|
(22,913
|
)
|
|
$
|
22,847
|
|
18
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 39 weeks ended October 27, 2012, and October 29, 2011
(Unaudited)
NOTE 7 Segment Reporting (Continued)
The Corporate and Unallocated column is presented solely to allow for
reconciliation of segment contribution to consolidated operating (loss) income, interest income, interest expense and (loss) income before (benefit from) 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. The application of accounting policies for segment reporting is consistent with the application of
accounting policies for corporate reporting.
Corporate expenses during the 13 and 39 weeks ended October 27, 2012,
include $0.1 million and $2.0 million of severance costs resulting from the departure of the Companys previous chief executive officer. Corporate expenses during the 13 and 39 weeks ended October 27, 2012, included $2.1 million in
professional fees to defend against a shareholder proxy solicitation to replace a majority of the Companys board members. The proxy solicitation ultimately led to an agreement to replace four of the Companys seven board members during
October 2012.
Wet Seal operating (loss) income during the 13 and 39 weeks ended October 27, 2012, and October 29,
2011, includes $5.8 million, $16.3 million, $0.2 million and $1.0 million, respectively, of asset impairment charges.
Arden B
operating (loss) income during the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, includes $0.7 million, $2.7 million, $0.5 million and $1.0 million, respectively, of asset impairment charges.
19
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our
unaudited condensed consolidated financial statements and the notes thereto. The following discussion and analysis contains forward-looking statements. Forward-looking statements include statements that are predictive in nature, which depend upon or
refer to future events or conditions, and/or which include words such as believes, plans, intends, anticipates, estimates, expects, may, will, or similar
expressions. In addition, any statements concerning future financial performance, ongoing strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements
are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and the industry in which we do business, among other things. These
statements are not guarantees of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of
factors. Factors that could cause our actual performance, future results and actions to differ materially from any forward-looking statements include, but are not limited to, those discussed in Risk Factors included in our Annual Report
on Form 10-K for the fiscal year ended January 28, 2012, and elsewhere in this Quarterly Report on Form 10-Q.
All
references to we, our, us, and the Company in this Quarterly Report on Form 10-Q mean The Wet Seal, Inc. and its wholly owned subsidiaries.
Executive Overview
We are a national specialty retailer operating stores
selling fashionable and contemporary apparel and accessory items designed for female customers from their early teens to 39 years old. We operate two nationwide, primarily mall-based, chains of retail stores under the names Wet Seal and
Arden B. At October 27, 2012, we had 553 retail stores in 47 states and Puerto Rico. Of the 553 stores, there were 472 Wet Seal stores and 81 Arden B stores. Our merchandise can also be purchased online through the respective
websites of each of our chains.
We consider the following to be key performance indicators in evaluating our performance:
Comparable store sales
For purposes of measuring comparable store sales, sales include merchandise sales as well
as membership fee revenues recognized under our Wet Seal divisions frequent buyer program during the applicable period. Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or
significant remodel/relocation, which we define to be a square footage increase or decrease of at least 20%. Stores that are remodeled or relocated with a resulting square footage change of less than 20% are maintained in the comparable store base
with no interruption. However, stores that are closed for four or more days in a fiscal month due to remodel, relocation or other reasons are removed from the comparable store base for that fiscal month as well as for the comparable fiscal month in
the following fiscal year. Comparable store sales results are important in achieving operating leverage on expenses such as store payroll, occupancy, depreciation and amortization, general and administrative expenses, and other costs that are at
least partially fixed. Positive comparable store sales results generate greater operating leverage on expenses while negative comparable store sales results negatively affect operating leverage. Comparable store sales results also have a direct
impact on our total net sales, cash, and working capital.
Average transaction counts
We consider the trend in the
average number of sales transactions occurring in our stores to be a key performance metric. To the extent we are able to increase transaction counts in our stores that more than offset the decrease, if any, in the average dollar sale per
transaction, we will generate increases in our comparable store sales.
Gross margins
We analyze the components of
gross margin, specifically cumulative mark-on, markups, markdowns, shrink, buying costs, distribution costs, and store occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or
in inventory shrink, or an inability to generate sufficient sales leverage on other components of cost of sales could have an adverse impact on our gross margin results and results of operations.
Operating income
We view operating income as a key indicator of our financial success. The key drivers of operating income
are comparable store sales, gross margins, and the changes we experience in operating costs.
Cash flow and liquidity
(working capital)
We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs.
20
Business Segments
We report our results as two reportable segments representing our two retail divisions. Although the two operating segments have many similarities in their products, production processes, distribution
methods, and regulatory environment, there are differences in most of these areas and distinct differences in their economic characteristics. As a result, we consider these segments to be two distinct reportable segments.
Wet Seal.
Wet Seal is a junior apparel brand for girls and young women who seek fashionable clothing at a value, with
a target customer age range of teens to early twenties. Wet Seal seeks to provide its customer base with a balance of trend right and fashion basic apparel and accessories that are affordably priced.
Arden B.
Arden B is a fashion brand at value price points for the contemporary woman. Arden B targets customers aged
25 to 39 years old and seeks to deliver differentiated contemporary fashion, dresses, sportswear separates and accessories for any occasion of the customers lifestyles.
We maintain a Web-based store located at
www.wetseal.com
, offering Wet Seal merchandise comparable to that carried in our stores, to customers over the Internet. We also maintain a Web-based store
located at
www.ardenb.com
, offering Arden B merchandise comparable to that carried in our stores, to customers over the Internet. Our e-commerce stores are designed to serve as an extension of the in-store experience and offer an expanded
selection of merchandise, with the goal of growing both e-commerce and in-store sales. We continue to develop our Wet Seal and Arden B websites to increase their effectiveness in marketing our brands. We do not consider our Web-based business to be
a distinct reportable segment. The Wet Seal and Arden B reportable segments include, in addition to data from their respective stores, data from their respective e-commerce operations.
See Note 7, Segment Reporting, to the unaudited condensed consolidated financial statements for financial information
regarding segment reporting, which information is incorporated herein by reference.
Current Trends and Outlook
The retail environment in the U.S. has shown slight improvement in the first three quarters of 2012. However, only modest growth in the
retail industry is expected for 2012 due to continued uncertainty regarding the global economy and the lack of significant improvement in the U.S. housing market and unemployment rates. In addition, U.S. gross domestic product growth remains slow,
further contributing to a volatile, and generally weak, retail environment. Year-to-date fiscal 2012, we ran aggressive promotions and incurred high levels of clearance markdowns at both Wet Seal and Arden B to address product that was performing
below expectations, primarily in the tops category, and more recently during the fiscal 2012 third quarter, in an effort to clear merchandise from the previous strategy and re-merchandise our Wet Seal stores with product that appeals to a broader
demographic. As a result, we experienced significant declines in our merchandise margin and comparable store sales. Although we expect improvement in our merchandise margins once our stores are fully re-merchandised, we expect a very competitive
environment throughout the holiday season will require aggressive promotional levels that will continue to challenge our margins.
Our performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer spending. Consumer purchases of discretionary items, including our merchandise,
generally decline during periods when disposable income is adversely affected or there is economic uncertainty. As a result of the continued difficult economic conditions, we may face risks that will impact many facets of our operations, including,
among other things, the ability of one or more of our vendors to deliver their merchandise in a timely manner or otherwise meet their obligations to us. Although we believe we are sufficiently prepared and financially strong enough to endure poor
economic conditions in the U.S. and world economic markets, if such conditions continue, or if they deteriorate further, our business, financial condition, and results of operations may be further materially adversely affected.
Our comparable store sales decreased 13.5% during the 13 weeks ended October 27, 2012, driven by a 13.5% comparable store sales
decrease in our Wet Seal division and a 13.8% comparable store sales decrease in our Arden B division. The Wet Seal divisions comparable store sales decrease was primarily driven by a decrease in transaction volume and average dollar sales per
transaction, which was driven by a decrease in average unit selling price, partially offset by an increase in units purchased per customer. At Wet Seal, our underperformance reflected our planned strategy to transition away from an assortment geared
toward more elevated product and a more mature customer, versus our historical product mix and customer target, with aggressive promotions. Our tops, excluding woven tops, dressy bottoms, active, and jewelry businesses declined significantly, while
woven tops, denim bottoms, shoes, outerwear and accessory sales increased. The Arden B division comparable store sales decrease was primarily driven by a decline in transaction volume and a decrease in average dollar sales per transaction, which was
driven by a decrease in average unit selling price, partially offset by an increase in units purchased per customer. At Arden B, our performance reflects declines in all categories except outerwear and bottoms. Although the Arden B dress business
did not increase over the prior year, it did perform well on lower inventory levels. We are focused on continuing to build our inventory levels in dresses and the other key categories to drive near term sales increases during the holiday season. Our
combined e-commerce sales increased 8.7% during the 13 weeks ended October 27, 2012, as compared to the prior year quarter.
21
The third quarter marked an important transition period for us as we executed upon our
decision to return to our core expertise of fast fashion merchandising. We took aggressive actions towards refocusing our Wet Seal division strategy, including returning to merchandising to a broader demographic, including the young teen customer,
sourcing a broader variety of product more directly from fast fashion vendors, committing to merchandise purchases closer to time of need, and focusing our price points on our core customer, which long supported our success. These actions allowed us
to achieve progressive improvement in comparable store sales trend from month to month in the fiscal 2012 third quarter, as we had planned. We seek continued improvement in the fiscal 2012 fourth quarter that we expect will ultimately return us to a
level of sales and earnings that our fast fashion strategy has driven for many years.
Store Openings and Closures
For all of fiscal 2012, we expect to have four net store closings at Wet Seal and 20 net store closings at Arden B. As a result, we
estimate we will end fiscal 2012 with 468 Wet Seal stores and 66 Arden B stores.
At Wet Seal, we opened five new stores and
closed one store during the 13 weeks ended October 27, 2012. At Arden B, we closed one store during the 13 weeks ended October 27, 2012.
Critical Accounting Policies and Estimates
Our condensed consolidated
financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires the appropriate application of accounting policies, some of which require us to make estimates and assumptions about future
events and their impact on amounts reported in our condensed consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.
We believe the application of our accounting policies, and the estimates inherently required therein, are
reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 of Notes to Consolidated
Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.
The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to
our condensed consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.
We have certain accounting policies that require more significant management judgment and estimates than others. These include our
accounting policies with respect to revenue recognition, merchandise inventories, long-lived assets, stock-based compensation, accounting for income taxes and insurance reserves. There have been no significant additions to or modifications of the
application of the critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012, except for the following updates for our critical accounting policies for long-lived assets and accounting
for income taxes.
Long-Lived Assets
We evaluate the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors that are
considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that indicates
continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend.
This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the estimated undiscounted future cash flows are less than the carrying value, an
impairment loss will be recognized, measured as the difference between the carrying value and the estimated fair value of the assets, based on discounted estimated future cash flows using our weighted average cost of capital. We have considered all
relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach continues to provide the most relevant and reliable means by which to determine fair value
in this circumstance.
22
Our quarterly evaluation of store assets includes consideration of current and
historical performance and projections of future profitability. The profitability projections rely upon estimates made by us, including store-level sales, gross margins, and direct expenses, and, by their nature, include judgments about
how current strategic initiatives will impact future performance.
Our financial performance in the first three quarters of
fiscal 2012 declined more than projected by us in past impairment analyses, which resulted in asset impairment charges each quarter since the beginning of fiscal 2012. Each period reflected our best estimate at the time. If we are not able to
achieve our projected key financial metrics, and strategic initiatives being implemented do not result in significant improvements in our current financial performance trend, we would incur additional impairment of assets in the future.
During the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, we determined such events or changes in circumstances
had occurred with respect to certain of our retail stores, and that operating losses or insufficient operating income would likely continue. As such, we recorded noncash charges of $6.5 million, $19.0 million, $0.7 million and $2.0 million, in our
condensed consolidated statements of operations for the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, respectively, to write down the carrying value of these stores long-lived assets to their estimated fair values.
Accounting for Income Taxes
We have approximately $75.9 million of federal net operating loss (NOL) carry forwards available to offset taxable income in fiscal 2012 and thereafter, subject to certain annual limitations
based on the provisions of Section 382 of the Internal Revenue Code.
Our effective income tax rates for the 13 and 39
weeks ended October 27, 2012, were 40.5% and 38.8%, respectively. We expect a 38.8% effective income tax rate for fiscal 2012. Our effective income tax rates reflect a $0.3 million write-off of certain deferred tax assets in the fiscal 2012
second quarter as a result of IRS adjustments from our closed IRS audit of our fiscal 2008 and 2009 tax years and $0.3 million for tax credits taken on our fiscal year 2011 tax return and recorded in the fiscal 2012 third quarter, which are discrete
items. We anticipate cash payment for income taxes for the fiscal year will be approximately $0.1 million, representing certain state income taxes. The difference between the effective income tax rate and the anticipated cash income taxes is
recorded as a non-cash benefit for deferred income taxes.
Recently Adopted Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (the FASB) issued guidance on the application of fair value accounting
where its use is already required or permitted by other standards within U.S. GAAP. This guidance changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value
measurements. Amendments include those that clarify the FASBs intent about the application of existing fair value measurement and disclosure requirements, and change a particular principle or requirement for measuring fair value or for
disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements. This guidance became effective for interim and annual
periods beginning after December 15, 2011. We adopted this guidance and it did not significantly impact our condensed consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. This guidance provided an entity with an option to present the total of comprehensive income, the components of
net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income
along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance became effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2011, and is to be applied on a retrospective basis. We have adopted this guidance and have presented total comprehensive (loss) income, the components of net (loss) income and the components of
other comprehensive (loss) income in two separate but consecutive statements within our condensed consolidated financial statements.
23
Results of Operations
The following table sets forth selected condensed consolidated statements of operations data as a percentage of net sales for the periods indicated. The discussion that follows should be read in
conjunction with the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percentage of Net Sales
13 Weeks Ended
|
|
|
As a Percentage of Net Sales
39 Weeks Ended
|
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
|
October 27,
2012
|
|
|
October 29,
2011
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
80.8
|
|
|
|
69.5
|
|
|
|
76.0
|
|
|
|
68.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
19.2
|
|
|
|
30.5
|
|
|
|
24.0
|
|
|
|
31.9
|
|
Selling, general, and administrative expenses
|
|
|
32.8
|
|
|
|
26.0
|
|
|
|
30.1
|
|
|
|
26.5
|
|
Asset impairment
|
|
|
4.7
|
|
|
|
0.5
|
|
|
|
4.6
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(18.3
|
)
|
|
|
4.0
|
|
|
|
(10.7
|
)
|
|
|
5.0
|
|
Interest (expense) income, net
|
|
|
(0.0
|
)
|
|
|
0.0
|
|
|
|
(0.0
|
)
|
|
|
0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before (benefit from) provision for income taxes
|
|
|
(18.3
|
)
|
|
|
4.0
|
|
|
|
(10.7
|
)
|
|
|
5.0
|
|
(Benefit from) provision for income taxes
|
|
|
(7.4
|
)
|
|
|
1.5
|
|
|
|
(4.2
|
)
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(10.9
|
)%
|
|
|
2.5
|
%
|
|
|
(6.5
|
)%
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended October 27, 2012, Compared to Thirteen Weeks Ended October 29, 2011
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
13 Weeks
Ended
October 29, 2011
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
Net sales
|
|
$
|
135.5
|
|
|
$
|
(16.6
|
)
|
|
|
(10.9
|
)%
|
|
$
|
152.1
|
|
Comparable store sales decrease
|
|
|
|
|
|
|
|
|
|
|
(13.5
|
)%
|
|
|
|
|
Net sales for the 13 weeks ended October 27, 2012, decreased primarily as a result of a decrease of
13.5% in comparable store sales, resulting from a 13.0% decrease in comparable store average transactions and a 0.8% decrease in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction decreased
mainly due to a 4.2% decrease in average unit retail prices, partially offset by a 3.4% increase in the number of units purchased per customer.
The decrease in net sales was partially offset by an increase in number of stores, from 550 stores as of October 29, 2011, to 553 stores as of October 27, 2012, and an increase of $0.7 million
in net sales for our e-commerce business as compared to the prior year, which is not a factor in calculating our comparable store sales.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
13 Weeks
Ended
October 29, 2011
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
Cost of sales
|
|
$
|
109.5
|
|
|
$
|
3.7
|
|
|
|
3.5
|
%
|
|
$
|
105.8
|
|
Percentage of net sales
|
|
|
80.8
|
%
|
|
|
|
|
|
|
11.3
|
%
|
|
|
69.5
|
%
|
Cost of sales includes the cost of merchandise; markdowns; inventory shortages; inventory valuation
adjustments; inbound freight; payroll expenses associated with buying, planning and allocation; processing, receiving and other warehouse costs; rent and other occupancy costs; and depreciation and amortization expense associated with our stores and
distribution center.
Cost of sales as a percentage of net sales increased due primarily to a decrease in merchandise margin
as a result of significantly higher markdown rates in both the Wet Seal and Arden B divisions, as compared to the prior year, and the deleveraging effect on occupancy, buying and planning and allocation costs from the decline in comparable store
sales.
Cost of sales dollars increased primarily due to higher markdowns, partially offset by the decline in sales.
24
Selling, general, and administrative expenses (SG&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
13 Weeks
Ended
October 29, 2011
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
Selling, general, and administrative expenses
|
|
$
|
44.4
|
|
|
$
|
4.9
|
|
|
|
12.4
|
%
|
|
$
|
39.5
|
|
Percentage of net sales
|
|
|
32.8
|
%
|
|
|
|
|
|
|
6.8
|
%
|
|
|
26.0
|
%
|
Our SG&A expenses are comprised of two components. Selling expenses include store and field support
costs, including personnel, advertising, merchandise delivery, and transaction processing costs, as well as e-commerce processing and advertising costs. General and administrative expenses include the cost of corporate functions such as executives,
legal, finance and accounting, information systems, human resources, real estate and construction, marketing, loss prevention, and other centralized services.
Selling expenses decreased $0.8 million from the prior year to $31.5 million. As a percentage of net sales, selling expenses were 23.3% of net sales, or 200 basis points higher than a year ago.
The following contributed to the current year decrease in selling expenses:
|
|
|
A $1.1 million decrease in store and field payroll costs due to a decrease in sales volume and a decrease in employee benefit costs;
|
|
|
|
A $0.4 million decrease in credit card fees due to a decline in debit card processing fees;
|
|
|
|
A $0.2 million decrease in store supplies; and
|
|
|
|
A $0.1 million decrease in bonuses due to declining performance.
|
However, the decreases in selling expenses were partially offset by the following increases:
|
|
|
A $0.4 million increase in our internet fulfillment due to higher sales;
|
|
|
|
A $0.2 million increase in advertising and marketing expenditures driven by an increase in our e-commerce advertising, primarily due to increased fees
for social data services and increased photo shoots;
|
|
|
|
A $0.2 million increase in merchandise delivery costs due to recalled product and hangers;
|
|
|
|
A $0.1 million increase in store and field meeting expenses; and
|
|
|
|
A $0.1 million net increase in other selling expenses.
|
General and administrative expenses increased $5.7 million from the prior year, to $12.9 million. As a percentage of net sales, general and administrative expenses were 9.5%, or 480 basis points
higher than in the prior year quarter.
The following contributed to the current year increase in general and administrative
expenses:
|
|
|
A $2.1 million increase in professional fees associated with the proxy solicitation;
|
|
|
|
A $1.2 million increase in corporate incentive bonuses due to prior year including a benefit for reversal of accrued bonus;
|
|
|
|
A $1.0 million increase in legal fees associated with employment-related matters;
|
|
|
|
A $0.8 million increase in legal fees associated with various other legal matters;
|
|
|
|
A $0.6 million increase in charges for estimated settlement costs for various employment-related matters;
|
|
|
|
A $0.4 million increase in board of directors fees for a cash payment to our previous Chairman of the Board for additional services provided and
for new directors added to the board;
|
|
|
|
A $0.2 million increase due to a credit for insurance flood proceeds in the prior year;
|
|
|
|
A $0.1 million increase in corporate wages due to filled positions; and
|
|
|
|
A $0.1 million increase in severance for the former chief executive officer.
|
The increases in general and administrative expenses were partially offset by the following decreases:
|
|
|
A $0.6 million decrease in stock compensation due to the open chief executive officer position; and
|
|
|
|
A $0.2 million net decrease in other general and administrative expenses.
|
25
Asset impairment
The continued decline in our business has led to non-cash impairment charges during the 13 weeks ended October 27, 2012. If we are not able to achieve our projected growth rates and cash flows, and
strategic initiatives currently being implemented do not result in significant improvements in our current financial performance trend, we would incur additional impairment of assets in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
13 Weeks
Ended
October 29, 2011
|
|
|
|
($ in millions)
|
|
Asset impairment
|
|
$
|
6.5
|
|
|
$
|
5.8
|
|
|
|
780.8
|
%
|
|
$
|
0.7
|
|
Percentage of net sales
|
|
|
4.7
|
%
|
|
|
|
|
|
|
4.2
|
%
|
|
|
0.5
|
%
|
Based on our quarterly assessments of the carrying value of long-lived assets, during the 13 weeks ended
October 27, 2012, and October 29, 2011, we identified certain retail stores with carrying values of their assets, including leasehold improvements, furniture, fixtures, and equipment, in excess of such stores respective forecasted
undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of $6.5 million and $0.7 million, respectively.
Interest (expense) income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
13 Weeks
Ended
October 29, 2011
|
|
|
|
($ in millions)
|
|
Interest (expense) income, net
|
|
$
|
(0.0
|
)
|
|
$
|
(0.0
|
)
|
|
|
(0.0
|
)%
|
|
$
|
0.0
|
|
Percentage of net sales
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
We generated interest expense, net, of less than $0.1 million in the 13 weeks ended October 27,
2012, primarily from the amortization of deferred financing costs, partially offset by earnings from investments in cash and cash equivalents, and we generated interest income, net, of less than $0.1 million in the 13 weeks ended October 29,
2011, primarily from earnings from investments in cash and cash equivalents and short-term investments, partially offset by amortization of deferred financing costs.
(Benefit from) Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
13 Weeks
Ended
October 29, 2011
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
$
|
(10.0
|
)
|
|
$
|
(12.4
|
)
|
|
|
(519.1
|
)%
|
|
$
|
2.4
|
|
Our effective income tax rate for the 13 weeks ended October 27, 2012, was approximately 40.5%. We
expect a 38.8% effective income tax rate for fiscal 2012. Our effective income tax rate for the 13 weeks ended October 27, 2012, reflects $0.3 million for tax credits taken on our fiscal year 2011 tax return, which is a discrete item. We
anticipate cash payment for income taxes for the fiscal year will be approximately $0.1 million, representing certain state income taxes. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a
non-cash benefit for deferred income taxes.
Segment Information
The following is a discussion of the operating results of our business segments. We consider each of our operating divisions to be a
segment. In the tables below, Wet Seal and Arden B reportable segments include data from their respective stores and e-commerce operations. Operating segment results include net sales, cost of sales, asset impairment, store closure costs, and other
direct store and field management expenses, with no allocation of corporate overhead, interest income or expense.
Wet
Seal:
|
|
|
|
|
|
|
|
|
(In thousands, except percentages, sales per square foot and number of stores)
|
|
13 Weeks
Ended
October 27, 2012
|
|
|
13 Weeks
Ended
October 29, 2011
|
|
Net sales
|
|
$
|
117,892
|
|
|
$
|
131,216
|
|
Percentage of consolidated net sales
|
|
|
87
|
%
|
|
|
86
|
%
|
Comparable store sales percentage decrease compared to the prior year period
|
|
|
(13.5
|
)%
|
|
|
(0.1
|
)%
|
Operating (loss) income
|
|
$
|
(8,747
|
)
|
|
$
|
13,667
|
|
Sales per square foot
|
|
$
|
59
|
|
|
$
|
67
|
|
Number of stores as of period end
|
|
|
472
|
|
|
|
464
|
|
Square footage as of period end
|
|
|
1,885
|
|
|
|
1,857
|
|
26
The comparable store sales decrease during the 13 weeks ended October 27, 2012, was due
primarily to a decrease of 13.2% in comparable store average transactions and a decrease of 0.5% in comparable store average dollar sales per transaction. The decrease in comparable store average dollar sales per transaction resulted from a 4.0%
decrease in our average unit retail prices, partially offset by a 3.0% increase in units purchased per customer. The net sales decrease was attributable to the comparable store sales decline, partially offset by a $0.7 million increase in net sales
in our e-commerce business and an increase in the number of stores compared to the prior year.
Wet Seal incurred an operating
loss of 7.4% of net sales during the 13 weeks ended October 27, 2012, compared to operating income of 10.4% of net sales during the 13 weeks ended October 29, 2011. This decrease was due primarily to a decrease in merchandise margin as a
result of significantly higher markdown rates in an effort to clear merchandise from the previous strategy and re-merchandise our stores with product that appeals to a broader demographic and an increase in occupancy costs due to the deleveraging
effect of the significant decline in comparable store sales. Additionally, during the 13 weeks ended October 27, 2012, and October 29, 2011, operating (loss) income included asset impairment charges of $5.8 million and $0.2 million,
respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.
Arden B:
|
|
|
|
|
|
|
|
|
(In thousands, except percentages, sales per square foot and number of stores)
|
|
13 Weeks
Ended
October 27, 2012
|
|
|
13 Weeks
Ended
October 29, 2011
|
|
Net sales
|
|
$
|
17,645
|
|
|
$
|
20,919
|
|
Percentage of consolidated net sales
|
|
|
13
|
%
|
|
|
14
|
%
|
Comparable store sales percentage decrease compared to the prior year period
|
|
|
(13.8
|
)%
|
|
|
(6.3
|
)%
|
Operating loss
|
|
$
|
(3,733
|
)
|
|
$
|
(1,011
|
)
|
Sales per square foot
|
|
$
|
63
|
|
|
$
|
74
|
|
Number of stores as of period end
|
|
|
81
|
|
|
|
86
|
|
Square footage as of period end
|
|
|
251
|
|
|
|
266
|
|
The comparable store sales decrease during the 13 weeks ended October 27, 2012, was due to a 10.6%
decrease in comparable store average transactions and a 3.5% decrease in comparable store average dollar sales per transaction. The decrease in the comparable store average dollar sales per transaction resulted from a 9.0% decrease in our average
unit retail prices, partially offset by a 5.8% increase in units purchased per customer. The net sales decrease was primarily attributable to the comparable sales decline and a decrease in the number of stores compared to the prior year.
Arden B incurred an operating loss of 21.2% of net sales during the 13 weeks ended October 27, 2012, compared to operating loss of
4.8% of net sales during the 13 weeks ended October 29, 2011. This decrease was due primarily to a decrease in merchandise margin as a result of higher markdown rates and an increase in occupancy costs due to the deleveraging effect of the
significant decline in comparable store sales. Additionally, during the 13 weeks ended October 27, 2012 and October 29, 2011, operating loss included asset impairment charges of $0.7 million and $0.5 million, respectively, to write down
the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.
Thirty-Nine Weeks Ended
October 27, 2012, Compared to Thirty-Nine Weeks Ended October 29, 2011
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
39 Weeks
Ended
October 29, 2011
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
Net sales
|
|
$
|
418.7
|
|
|
$
|
(38.2
|
)
|
|
|
(8.4
|
)%
|
|
$
|
456.9
|
|
Comparable store sales decrease
|
|
|
|
|
|
|
|
|
|
|
(10.7
|
)%
|
|
|
|
|
Net sales for the 39 weeks ended October 27, 2012, decreased primarily as a result of the following:
|
|
|
A decrease of 10.7% in comparable store sales resulting from an 11.8% decrease in comparable store average transactions partially offset by a 1.0%
increase in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction increased mainly due to a 3.5% increase in the number of units purchased per customer, partially offset by a 3.1% decrease in
average unit retail prices; and
|
|
|
|
A decrease of $1.3 million in net sales for our e-commerce business as compared to the prior year, which is not a factor in calculating our comparable
store sales.
|
27
The decrease in net sales was partially offset by an increase in number of stores open, from
550 stores as of October 29, 2011, to 553 stores as of October 27, 2012.
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
39 Weeks
Ended
October29, 2011
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
Cost of sales
|
|
$
|
318.3
|
|
|
$
|
7.2
|
|
|
|
2.3
|
%
|
|
$
|
311.1
|
|
Percentage of net sales
|
|
|
76.0
|
%
|
|
|
|
|
|
|
7.9
|
%
|
|
|
68.1
|
%
|
Cost of sales as a percentage of net sales increased due primarily to a decrease in merchandise margin as
a result of significantly higher markdown rates in both the Wet Seal and Arden B divisions, as compared to the prior year, and the deleveraging effect on occupancy costs from the decline in comparable store sales.
Cost of sales dollars increased primarily due to higher markdowns, partially offset by the decline in sales, and a slight increase in
occupancy cost as a result of the increase in number of stores.
Selling, general, and administrative expenses (SG&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
39 Weeks
Ended
October 29, 2011
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
Selling, general, and administrative expenses
|
|
$
|
126.2
|
|
|
$
|
5.2
|
|
|
|
4.3
|
%
|
|
$
|
121.0
|
|
Percentage of net sales
|
|
|
30.1
|
%
|
|
|
|
|
|
|
3.6
|
%
|
|
|
26.5
|
%
|
Selling expenses decreased approximately $2.1 million from the prior year to $94.2 million. As a
percentage of net sales, selling expenses were 22.5% of net sales, or 140 basis points higher than a year ago.
The following
contributed to the current year decrease in selling expenses:
|
|
|
A $1.9 million decrease in store payroll and benefits costs as a result of decreased sales volume and lower incentive bonuses;
|
|
|
|
A $1.4 million decrease in credit card fees due to a decline in average processing fees as a percent to sales and decreased sales volume;
|
|
|
|
A $0.3 million decrease in store supplies as a result of decreased sales volume;
|
|
|
|
A $0.2 million decrease in bags and boxes usage as a result of decreased sales volume;
|
|
|
|
A $0.1 million decrease in merchandise delivery costs due to merchandise handling efficiencies; and
|
|
|
|
A $0.1 million decrease in security costs due to a decline in security system repairs.
|
However, the decreases in selling expenses were partially offset by the following increases:
|
|
|
A $1.3 million increase in advertising and marketing expenditures;
|
|
|
|
A $0.4 million increase in travel and meeting costs primarily associated with additional field employee training; and
|
|
|
|
A $0.2 million increase in our internet fulfillment.
|
General and administrative expenses increased approximately $7.3 million from the prior year, to $32.0 million. As a percentage of net sales, general and administrative expenses were 7.6%, or 220
basis points higher than a year ago.
The following contributed to the current year increase in general and administrative
expenses:
|
|
|
A $2.0 million increase in severance costs resulting from the departure of our previous chief executive officer;
|
|
|
|
A $2.1 million increase in professional fees associated with the proxy solicitation;
|
|
|
|
A $1.0 million increase in corporate wages due to filled positions;
|
|
|
|
A $1.0 million increase in legal fees associated with employment-related matters;
|
28
|
|
|
A $0.8 million increase in legal fees associated with various legal matters;
|
|
|
|
A $0.6 million increase in charges for estimated settlement costs for various employment-related matters;
|
|
|
|
A $0.4 million increase in board of directors fees for a cash payment to our previous Chairman of the Board for additional services provided and
for new directors added to the board;
|
|
|
|
A $0.1 million increase in audit fees due to the timing of services performed as compared to the prior year;
|
|
|
|
A $0.1 million increase in corporate incentive bonuses due to the employee retention plan; and
|
|
|
|
A $0.1 million increase in computer maintenance costs.
|
The increases in general and administrative expenses were partially offset by the following decreases:
|
|
|
A $0.6 million decrease in stock compensation primarily due to the forfeitures related to the departure of the previous chief executive officer;
|
|
|
|
A $0.2 million decrease in recruiting fees as the prior year included a portion of the costs for our searches and relocation costs for our previous
chief executive office, and our president and chief operating officer; and
|
|
|
|
A $0.1 million net decrease in other general and administrative expenses.
|
Asset impairment
The continued decline in our business has led to non-cash
impairment charges during the 39 weeks ended October 27, 2012. If we are not able to achieve our projected growth rates and cash flows, and strategic initiatives currently being implemented do not result in significant improvements in our
current financial performance trend, we would incur additional impairment of assets in the future
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
39 Weeks
Ended
October 29, 2011
|
|
|
|
($ in millions)
|
|
Asset impairment
|
|
$
|
19.0
|
|
|
$
|
17.0
|
|
|
|
829.0
|
%
|
|
$
|
2.0
|
|
Percentage of net sales
|
|
|
4.6
|
%
|
|
|
|
|
|
|
4.2
|
%
|
|
|
0.4
|
%
|
Based on our quarterly assessments of the carrying value of long-lived assets, during the 39 weeks ended
October 27, 2012, and October 29, 2011, we identified certain retail stores with carrying values of their assets, including leasehold improvements, furniture, fixtures, and equipment, in excess of such stores respective forecasted
undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of $19.0 million and $2.0 million, respectively.
Interest (expense) income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
39 Weeks
Ended
October 29, 2011
|
|
|
|
($ in millions)
|
|
Interest (expense) income, net
|
|
$
|
(0.0
|
)
|
|
$
|
(0.1
|
)
|
|
|
0.0
|
%
|
|
$
|
0.1
|
|
Percentage of net sales
|
|
|
(0.0
|
)%
|
|
|
|
|
|
|
(0.0
|
)%
|
|
|
0.0
|
%
|
We generated interest expense, net, of less than $0.1 million in the 39 weeks ended October 27,
2012, primarily from the amortization of deferred financing costs, partially offset by earnings from investments in cash and cash equivalents, and we generated interest income, net, of $0.1 million in the 39 weeks ended October 29, 2011,
primarily from earnings from investments in cash and cash equivalents and short-term investments, partially offset by amortization of deferred financing costs.
(Benefit from) Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 Weeks
Ended
October 27, 2012
|
|
|
Change From
Prior Fiscal Period
|
|
|
39 Weeks
Ended
October 29, 2011
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
(Benefit from) Provision for income taxes
|
|
$
|
(17.4
|
)
|
|
$
|
(26.3
|
)
|
|
|
(295.8
|
)%
|
|
$
|
8.9
|
|
29
Our effective income tax rate for the 39 weeks ended October 27, 2012, was
approximately 38.8% and we expect a 38.8% effective income tax rate for fiscal 2012. Our effective income tax rates reflect a $0.3 million write-off of certain deferred tax assets in the fiscal 2012 second quarter as a result of IRS adjustments from
our closed IRS audit of our fiscal 2008 and 2009 tax years and $0.3 million for tax credits taken on our fiscal 2011 tax return in the fiscal 2012 third quarter. We anticipate cash payment for income taxes for the fiscal year will be approximately
$0.1 million, representing certain state income taxes. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash benefit for deferred income taxes.
Segment Information
Wet Seal:
|
|
|
|
|
|
|
|
|
(In thousands, except percentages, sales per square foot and number of stores)
|
|
39 Weeks
Ended
October 27, 2012
|
|
|
39 Weeks
Ended
October 29, 2011
|
|
Net sales
|
|
$
|
357,806
|
|
|
$
|
387,302
|
|
Percentage of consolidated net sales
|
|
|
85
|
%
|
|
|
85
|
%
|
Comparable store sales percentage (decrease) increase compared to the prior year period
|
|
|
(10.5)
|
%
|
|
|
4.6
|
%
|
Operating (loss) income
|
|
$
|
(8,003)
|
|
|
$
|
42,760
|
|
Sales per square foot
|
|
$
|
180
|
|
|
$
|
202
|
|
Number of stores as of period end
|
|
|
472
|
|
|
|
464
|
|
Square footage as of period end
|
|
|
1,885
|
|
|
|
1,857
|
|
The comparable store sales decrease during the 39 weeks ended October 27, 2012, was due primarily to
a decrease of 11.8% in comparable store average transactions, partially offset by an increase of 1.2% in comparable store average dollar sales per transaction. The increase in comparable store average dollar sales per transaction resulted from a
3.4% increase in units purchased per customer, partially offset by a 2.8% decrease in our average unit retail prices. The net sales decrease was attributable to the comparable store sales decline and a $0.5 million decrease in net sales in our
e-commerce business, partially offset by the increase in the number of stores compared to the prior year.
Wet Seal incurred
an operating loss of 2.2% of net sales during the 39 weeks ended October 27, 2012, compared to operating income of 11.0% of net sales during the 39 weeks ended October 29, 2011. This decrease was due primarily to a decrease in merchandise
margin as a result of significantly higher markdown rates in an effort to clear merchandise from the previous strategy and re-merchandise our stores with product that appeals to a broader demographic and an increase in occupancy costs due to the
deleveraging effect of the significant decline in comparable store sales. Additionally, during the 39 weeks ended October 27, 2012, and October 29, 2011, operating (loss) income included asset impairment charges of $16.3 million and $1.0
million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.
Arden B:
|
|
|
|
|
|
|
|
|
(In thousands, except percentages, sales per square foot and number of stores)
|
|
39 Weeks
Ended
October 27, 2012
|
|
|
39 Weeks
Ended
October 29, 2011
|
|
Net sales
|
|
$
|
60,937
|
|
|
$
|
69,643
|
|
Percentage of consolidated net sales
|
|
|
15
|
%
|
|
|
15
|
%
|
Comparable store sales percentage decrease compared to the prior year period
|
|
|
(12.2)
|
%
|
|
|
(0.3)
|
%
|
Operating (loss) income
|
|
$
|
(6,614)
|
|
|
$
|
3,000
|
|
Sales per square foot
|
|
$
|
214
|
|
|
$
|
245
|
|
Number of stores as of period end
|
|
|
81
|
|
|
|
86
|
|
Square footage as of period end
|
|
|
251
|
|
|
|
266
|
|
The comparable store sales decrease during the 39 weeks ended October 27, 2012, was due to a 12.2%
decrease in comparable store average transactions and a slight decrease in comparable average dollar sales per transaction, which was primarily driven by a 7.4% decrease in our average unit retail prices, offset by a 7.7% increase in units purchased
per customer. The net sales decrease was attributable to the significant comparable sales decline, a decrease in the number of stores compared to the prior year, and a $0.7 million decrease in net sales in our e-commerce business, as compared to the
prior year.
30
Arden B incurred an operating loss of 10.9% of net sales during the 39 weeks ended
October 27, 2012, compared to operating income of 4.3% of net sales during the 39 weeks ended October 29, 2011. This decrease was due primarily to a decrease in merchandise margin as a result of higher markdown rates and an increase in
occupancy costs due to the deleveraging effect of the significant decline in comparable store sales. Additionally, during the 39 weeks ended October 27, 2012, and October 29, 2011, operating (loss) income included asset impairment charges
of $2.7 million and $1.0 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.
Liquidity and Capital Resources
Net cash used in operating activities was
$13.8 million for the 39 weeks ended October 27, 2012, compared to net cash provided by operating activities of $30.4 million for the same period last year. For the 39 weeks ended October 27, 2012, cash used in operating activities was
comprised of net non-cash charges and credits, primarily depreciation and amortization, asset impairment, stock-based compensation and benefit for deferred income taxes, of $17.8 million, offset by a net loss of $27.4 million and an increase in
merchandise inventories over the increase of merchandise payables of $4.8 million partially offset by net cash provided by changes in other operating assets and liabilities of $0.6 million. For the 39 weeks ended October 27, 2012, net cash used
in investing activities of $16.8 million was comprised of capital expenditures, primarily for the construction of new Wet Seal stores, remodeling of existing Wet Seal and Arden B stores upon lease renewals and/or store relocations, and investment in
the network infrastructure within our corporate offices. Capital expenditures that remain unpaid as of October 27, 2012, have increased $2.0 million since the end of fiscal 2011. We expect to pay nearly all of the total balance of such amounts
payable during the fourth quarter of fiscal 2012.
We estimate that, in fiscal 2012, capital expenditures will be between $22
million and $23 million, of which approximately $16 million to $17 million is expected to be for the remodeling and/or relocation of existing Wet Seal and Arden B stores upon lease renewals and the construction of new Wet Seal stores. We anticipate
receiving approximately $2 million in tenant improvement allowances from landlords, resulting in net capital expenditures of between $20 million and $21 million.
For the 39 weeks ended October 27, 2012, net cash used in financing activities was $0.3 million, comprised of $0.3 million used to repurchase 91,848 shares of our Class A common stock to satisfy
employee withholding tax obligations, upon performance and restricted stock vesting, slightly offset by less than $0.1 million of proceeds from the exercise of stock options.
Total cash and cash equivalents at October 27, 2012, was $126.3 million compared to $157.2 million at January 28, 2012. Due to the timing of the third quarter end date, we had not yet paid $9.6
million of our November rents and other landlord costs at that time. Typically, we have made such payments as of the fiscal quarter-end date.
Senior Revolving Credit Facility
On February 3, 2011, we renewed, via amendment and restatement, our $35.0 million senior revolving credit facility with our existing lender (the Facility), which can be increased up to
$50.0 million in the absence of any default and upon the satisfaction of certain conditions precedent specified in the Facility. The Facility expires in February 2016. Under the Facility, we are subject to borrowing base limitations on the amount
that can be borrowed and certain customary covenants, including, under certain circumstances, covenants limiting our ability to incur additional indebtedness, make investments and acquisitions, grant liens, pay dividends, repurchase our common
stock, close stores and dispose of assets, without the lenders consent. Our ability to borrow and request the issuance of letters of credit is subject to the requirement that we maintain an excess of the borrowing base over the outstanding
credit extensions of the greater of 10% of the aggregate amount of the Facility or $4.0 million. The annual interest rate on the revolving line of credit under the Facility is (i) the higher of the lenders prime rate, the Federal funds
rate plus 0.5% or the one month London InterBank Offered Rate (LIBOR) plus 1.0%, collectively referred to as the Base Rate, plus the applicable margin ranging from 0.5% to 1.0% or, (ii) if we elect, either the one, two, three or six
months LIBOR plus a margin ranging from 1.5% to 2.0%. The applicable Base Rate or LIBOR margin is based on the level of average excess availability, as defined under the Facility, at the time of election, as adjusted quarterly. We also incur fees on
outstanding letters of credit under the Facility at an annual rate equal to the applicable LIBOR margin for standby letters of credit and 23.0% of the applicable LIBOR margin for commercial letters of credit. Additionally, we are subject to
commitment fees at an annual rate of 0.25% on the unused portion of the line of credit under the Facility.
Borrowings under
the Facility are secured by cash, cash equivalents, investments, receivables, and inventory held by us and our wholly owned subsidiaries, The Wet Seal Retail, Inc. and Wet Seal Catalog, Inc., each of which may be a borrower under the Facility.
At October 27, 2012, the amount outstanding under the Facility consisted of $6.2 million in open documentary letters of
credit related to merchandise purchases and $1.5 million in outstanding standby letters of credit. At October 27, 2012, we had $27.3 million available for cash advances and/or for the issuance of additional letters of credit, and we were in
compliance with all covenant requirements under the Facility.
We believe we will have sufficient cash and credit availability
to meet our operating and capital requirements for at least the next 12 months.
31
The financial performance of our business is susceptible to declines in discretionary
consumer spending and availability of consumer credit and low consumer confidence in the United States. Increasing fuel prices and commodity costs may also cause a shift in consumer demand away from the retail clothing products that we offer. There
are no guarantees that government or other initiatives will limit the duration or severity of the current economic challenges or stabilize factors that affect our sales and profitability. Continuing adverse economic trends could affect us more
significantly than companies in other industries.
Seasonality and Inflation
Our business is seasonal in nature, with the Christmas season, beginning the week of Thanksgiving and ending the first Saturday after
Christmas, and the back-to-school season, beginning the last week of July and ending during September, historically accounting for a large percentage of our sales volume. For the past three fiscal years, the Christmas and back-to-school seasons
together accounted for an average of slightly less than 30% of our annual sales.
We do not believe that inflation has had a
material effect on our results of operations during the past three years. However, we began to experience cost pressures in the fourth quarter of fiscal 2010 and saw further cost increases through fiscal 2011 as a result of rising commodity prices,
primarily for cotton, increased labor costs, due to labor shortages in China, from which a majority of our merchandise is sourced, and volatile fuel costs. Our business could be affected by similar cost pressures in the future and the rising value
of the currency in China relative to the U.S. dollar may also have an impact on future product costs. In response to cost increases, we seek to leverage our large vendor base to lower costs and closely manage promotional strategies to mitigate the
impact on merchandise margin levels. We will continue to diligently monitor our costs as well as the competitive pricing environment in order to control margin erosion and ensure we continue to offer fashion at a value. However, our margins have
been and may continue to be adversely affected and we cannot be certain that our business will not be affected by inflation in the future.
Off-Balance Sheet Arrangements
As of October 27, 2012, we are not a party to any off-balance sheet arrangements, except for operating lease and purchase obligations and other commitments, as referenced in our Form 10-K for the
fiscal year ended January 28, 2012, under Note 6, Commitments and Contingencies and Other Off-Balance Sheet Arrangements.
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Interest Rate Risk
To the extent that we borrow under the Facility, we are
exposed to market risk related to changes in interest rates. At October 27, 2012, no borrowings were outstanding under the Facility. At October 27, 2012, the weighted average interest rate on borrowings under the Facility would be 1.333%.
Based upon a sensitivity analysis as of October 27, 2012, if we had average outstanding borrowings of $1 million during third quarter of fiscal 2012, a 50 basis point increase in interest rates would have resulted in an increase in interest
expense of approximately $1,250 for the third quarter of fiscal 2012.
As of October 27, 2012, we are not a party to any
derivative financial instruments.
Foreign Currency Exchange Rate Risk
We contract for and settle all purchases in U.S. dollars. We only purchase a modest amount of goods directly from international vendors.
Thus, we consider the effect of currency rate changes to be indirect and we believe the effect of a major shift in currency exchange rates on short-term results would be minimal, as a hypothetical 10.0% change in the foreign exchange rate of the
Chinese currency against the U.S. dollar as of October 27, 2012, would not materially affect our results of operations or cash flows. Over a longer period, the cumulative year-to-year impact of such changes, especially the exchange rate of the
Chinese currency against the U.S. dollar, could be significant, albeit indirectly, through increased charges in U.S. dollars from our vendors that source their products internationally.
Item 4.
|
Controls and Procedures
|
Disclosure
Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our co-principal
executive officers and principal financial officer, of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the Exchange Act). These
disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified by the Securities and Exchange Commissions rules and forms. Our disclosure controls and procedures are also designed to provide reasonable assurance that information required to be disclosed in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our management, including our co-principal executive officers and principal financial officer, in order to allow timely decisions regarding required disclosures. Based on this
evaluation, our co-principal executive officers and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of October 27, 2012.
32
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended October 27, 2012, no changes occurred with respect to our internal control over financial reporting
that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
PART II. Other Information
Item 1.
|
Legal Proceedings
|
On
July 19, 2006, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles on behalf of certain of our current and former employees that were employed and paid by us on an hourly basis during the
four-year period from July 19, 2002, through July 19, 2006. We were named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code,
and orders issued by the Industrial Welfare Commission. On November 30, 2006, we reached an agreement to pay approximately $0.3 million to settle this matter, subject to Superior Court approval. On September 27, 2010, the Superior Court
granted final approval of the settlement agreement. An appeal was subsequently filed on January 26, 2011. On July 25, 2012, the Court of Appeals dismissed Plaintiffs appeal. In mid-September 2012, we paid approximately $0.3 million
to settle the matter plus $0.1 million in settlement administration fees.
On May 22, 2007, a complaint was filed in the
Superior Court of the State of California for the County of Orange on behalf of certain of our current and former employees who were employed and paid by us from May 22, 2003 through the present. We were named as a defendant. The
complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and Wage Orders of the Industrial Welfare Commission. On December 17, 2010, the court denied
Plaintiffs Motion for Class Certification and Motion For Leave to File An Amended Complaint. Plaintiffs appealed both orders. On April 4, 2012, the Court of Appeal affirmed the trial courts denial of class
certification and leave to amend the complaint. On September 11 2012, the matter was transferred to a new judge in the lower court. There are currently only the four named plaintiffs in the lawsuit. A trial date has been set for June 3,
2013. We are vigorously defending this litigation and are unable to predict the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of October 27, 2012. Depending on the actual outcome of this case, provisions
could be recorded in the future which may have a material adverse effect on our results of operations or financial condition.
On September 29, 2008, a complaint was filed in the Superior Court of the State of California for the County of San Francisco on
behalf of certain of our current and former employees who were employed and paid by us from September 29, 2004 through the present. We were named as a defendant. The complaint alleges various violations under the State of California Labor
Code and the State of California Business and Professions Code. On August 16, 2011, the court denied Plaintiffs Motion for Class Certification. Plaintiffs appealed and, on October 12, 2012, the California Court of Appeals affirmed
the lower courts ruling. We are vigorously defending this litigation and are unable to predict the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of October 27, 2012. Depending on the actual outcome
of this case, provisions could be recorded in the future which may have a material adverse effect on our results of operations or financial condition.
On April 24, 2009, the U.S. Equal Employment Opportunity Commission (the EEOC) requested information and records relevant to several charges of discrimination by us against employees of
the Company. In the course of this investigation, the EEOC served a subpoena seeking information related to current and former employees throughout the United States. On November 14, 2012, we reached resolution with the EEOC and several of the
individual complainants that concludes the EEOCs investigation. We have accrued approximately $0.5 million for settlements with some of the individual complainants. We also agreed to programmatic initiatives that are consistent with
our diversity plan. We will report progress on its initiatives and results periodically to the EEOC. Claimants with whom we did not enter into a settlement will have an opportunity to bring a private lawsuit within ninety days from the date they
receive a right-to-sue notice from the EEOC. We are not certain when those notices will issue. We are unable to predict whether any complainant will file a private lawsuit and if filed, the likely outcome. Accordingly, no provision for a
loss contingency has been accrued as of October 27, 2012. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on our results of operations or financial condition.
On May 9, 2011, a complaint was filed in the Superior Court of the State of California for the County of
Alameda on behalf of certain of our current and former employees who were employed and paid by us from May 9, 2007 through the present. We were named as a defendant. The complaint alleges various violations under the State
of California Labor Code and the State of California Business and Professions Code. On February 3, 2012, the court granted us motion to transfer venue to the County of Orange. On July 13, 2012, the Court granted us motion to compel
arbitration. Plaintiffs appealed. On July 18, 2012, we received notice that Plaintiffs filed charges with the National Labor Relations Board (NLRB) under Section 7 of the National Labor Relations Board Act based on the arbitration
agreements Plaintiffs signed on their hiring by us. Plaintiffs alleged that our arbitration agreements unlawfully compel employees to waive their rights to participate in class or representative actions against us. On September 20, 2012, the
NLRB dismissed Plaintiffs claims. We are vigorously defending this litigation and are unable to predict the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of October 27, 2012. Depending on the actual outcome of
this case, provisions could be recorded in the future which may have a material adverse effect on our results of operations or financial condition.
33
On October 27, 2011, a complaint was filed in the Superior Court
of the State of California for the County of Los Angeles on behalf of certain of our current and former employees who were employed in California during the time period from October 27, 2007 through the present. We
were named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On March 28, 2012, the court entered an Order denying us motion to
compel arbitration. On September 21, 2012, we filed a notice of appeal. We are vigorously defending this litigation and are unable to predict the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of October 27,
2012. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on our results of operations or financial condition.
On July 12, 2012, a complaint was filed in United States District Court for the Central District of California on behalf of certain
of our current and former African American retail store employees. We were named as a defendant. The complaint alleges various violations under 42 U.S.C. § 1981, including allegations that we engaged in disparate treatment
discrimination of those African American current and former employees in promotion to management positions and against African American store management employees with respect to compensation and termination from 2008 through the
present. Plaintiffs are also alleging retaliation. Plaintiffs are seeking reinstatement or instatement of Plaintiffs and class members to their alleged rightful employment positions, lost pay and benefits allegedly sustained by Plaintiffs
and class members, compensatory damages for emotional distress, front pay, punitive damages, attorneys fees, and interest. We are vigorously defending this litigation and are unable to predict the likely outcome. Accordingly, no provision
for a loss contingency has been accrued as of October 27, 2012. Depending on the actual outcome of this case, provisions could be recorded in the future which may have a material adverse effect on our results of operations or financial
condition.
As of October 27, 2012, we were not engaged in any other legal proceedings that are expected, individually or
in the aggregate, to have a material adverse effect on our results of operations or financial condition. From time to time, we are involved in other litigation matters relating to claims arising out of our operations in the normal course of
business. We believe that, in the event of a settlement or an adverse judgment on certain of these claims, we have insurance to cover a portion of such losses. However, certain matters could arise for which we do not have insurance coverage and
which could have a material adverse effect on our results of operations or financial condition.
The
following risk factors represent additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012 and our quarterly Reports on Form 10-Q for the quarterly periods ended April 28,
2012 and July 28, 2012.
We have recorded asset impairment charges in the past and we may record material asset impairment charges in
the future.
Quarterly, we assess whether events or changes in circumstances have occurred that potentially indicate
the carrying value of long-lived assets may not be recoverable. If we determine that the carrying value of long-lived assets is not recoverable, we will be required to record impairment charges relating to those assets. For example, our assessments
during the 39 weeks ended October 27, 2012, indicated that operating losses or insufficient operating income existed at certain retail stores, with a projection that the operating losses or insufficient operating income for those locations
would continue. As such, we recorded non-cash charges of $19.0 million during the 39 weeks ended October 27, 2012 within asset impairment in the condensed consolidated statements of operations, to write down the carrying values of these
stores long-lived assets to their estimated fair values.
Our quarterly evaluation of store assets includes
consideration of current and historical performance and projections of future profitability. The profitability projections rely upon estimates made by us, including store-level sales, gross margins, and direct expenses, and, by their nature, include
judgments about how current strategic initiatives will impact future performance. If we are not able to achieve the projected key financial metrics for any reason, including because any of the strategic initiatives being implemented do not result in
significant improvements in our current financial performance trend, we would incur additional impairment of assets in the future.
In the event we record additional impairment charges, this could have a material adverse effect on our results of operations and financial position.
34
We may incur significant costs and face other risks associated with our effort to attract a new chief
executive officer for our Company, and as we transition our new board directors.
On July 23, 2012, we announced
the departure of our former chief executive officer. Our Board of Directors has hired an executive recruitment firm, to assist in its search for a new chief executive officer. We may incur significant costs to attract a new chief executive officer
and we cannot assure you we will be able to appoint a new chief executive officer in a timely manner. If we appoint a new chief executive officer, we anticipate that we will experience a transition period before the new chief executive officer is
fully integrated into his or her new roles. During the time we search for a new chief executive officer and the transition period after any such person is hired, we may experience a disruption to our customer relationships, employee morale and/or
business. The departure of any of our senior executives could also have a significant impact on our business performance and our ability to execute our turnaround strategy, especially during the period prior to us hiring a new chief executive
officer.
In addition, our recent appointment of six new members to our Board and the resulting transition and integration of
these individuals may impact our ability to execute our business strategy in the near term. On September 18, 2012, we appointed two new directors to our Board, Ms. Kathy Bronstein and Mr. John Goodman. On October 4, 2012, we entered into an
agreement (Settlement Agreement) with Clinton Group, Inc., for the purpose of resolving a pending consent solicitation and effecting an orderly change in the composition of our Board. Pursuant to the Settlement Agreement, four of the
members of our Board resigned, Mr. Harold Kahn, Mr. Jon Duskin, Mr. Sidney Horn and Mr. Henry Winterstern, and four new directors, Ms. Dorrit Bern, Ms. Linda Davey, Ms. Mindy Meads and Mr. John Mills, were appointed as directors of the Board to fill
the four vacancies created by the resignations. As a result of the recent changes, six of the seven members of our Board were recently appointed. While all of the recently appointed directors have become immediately engaged in our business, we
expect that we will continue to experience a transition period until they are fully integrated into their roles. We cannot provide any assurance that there will not be any disruption that adversely impacts our business during such transition period.
We may continue to experience declines in comparable store sales, and there can be no guarantee that the strategic initiatives we are
implementing to improve our results will be successful.
During the 13 and 39 weeks ended October 27, 2012, our
comparable store sales declined by 13.5% and 10.7%, respectively. We have taken and will continue to take steps to return to our core expertise of fast fashion merchandising which long supported our success in the past. However, there can be no
guarantee that our financial results will improve and, if they do, there can be no guarantee as to the timing, duration or significance of such improvement.
We have experienced poor comparable store sales and operating results in our Arden B division and expect to significantly reduce our Arden B store base by the end of fiscal 2012. We cannot assure
that we will be able to re-establish and sustain improvements in the future.
In fiscal 2011, and through the first
three quarters of fiscal 2012, we experienced weak comparable same store sales and operating results in our Arden B division. By the end of fiscal 2012, we expect to significantly reduce our Arden B store base to 66 stores, which may impact our
ability to procure merchandise and attract talent for this division going forward. There can be no guarantee that our efforts to improve results will be successful and that the financial performance of our Arden B division will improve.
We face risks related to claims and legal proceedings, which could have a material adverse effect on our results of operations or financial
condition.
From time to time, we are subject to various claims and legal proceedings, including, without limitation,
those arising or allegedly arising out of wage and hour claims, discrimination claims and other claims under labor laws. For example, we are currently subject to the legal proceedings described under Part II. Other Information
Item 1. Legal Proceedings. The claims and legal proceedings to which we are or may become subject could involve large damages or settlements and significant defense costs. We maintain insurance to cover a portion of the losses associated
with settlements and adverse judgments, but those losses could exceed the scope of the coverage in effect, or coverage of particular claims or legal proceedings could be unavailable or denied. As a result, certain claims and legal proceedings could
arise for which we do not have insurance coverage and which could have a material adverse effect on our results of operations or financial condition.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
(c)
|
Issuer Purchases of Equity Securities
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number of
Shares Purchased
|
|
|
Average Price Paid per
Share
|
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or
Programs (1)
|
|
|
Maximum Dollar
Value of
Shares that May Yet Be
Purchased Under
the
Plans or Programs
|
|
July 29, 2012 to August 25, 2012
|
|
|
23,596
|
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
August 26, 2012 to September 29, 2012
|
|
|
1,005
|
|
|
$
|
2.90
|
|
|
|
|
|
|
|
|
|
September 30, 2012 to October 27, 2012
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Employees tendered 24,601 shares of our Class A common stock upon restricted stock share vesting to satisfy employee withholding tax obligations of approximately
$0.1 million.
|
Item 3.
|
Defaults Upon Senior Securities
|
Item 4.
|
Mine Safety Disclosures
|
None.
Item 5.
|
Other Information
|
None.
|
|
|
|
|
3.1
|
|
Certificate of Designations of Series D Junior Participating Preferred Stock of The Wet Seal, Inc., filed with the Secretary of State of the State of Delaware on August 21, 2012
(incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on August 21, 2012).
|
|
|
4.1
|
|
Rights Agreement, dated as of August 21, 2012, between The Wet Seal, Inc. and American Stock Transfer & Trust Company, LLC, which includes the Form of Certificate of
Designations of Series D Junior Participating Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4.1 of our Current
Report on Form 8-K filed on August 21, 2012).
|
|
|
4.2
|
|
First Amendment to the Rights Agreement, dated as of September 19, 2012, by and between The Wet Seal, Inc. and American Stock Transfer & Trust Company, LLC, as Rights Agent
(incorporated by reference to Exhibit 4.1 of our Current Report on Form 8-K filed on September 20, 2012).
|
|
|
10.1
|
|
Agreement, dated October 4, 2012, between the Clinton Group, Inc. and The Wet Seal, Inc. (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on
October 5, 2012).
|
|
|
31.1
|
|
Certification filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
|
Certification filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
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Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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99.1
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General Release, dated November 5, 2012 (incorporated by reference to our Current Report on Form 8-K filed on November 7, 2012).
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101
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The following materials from The Wet Seal, Inc.s Quarterly Report on Form 10-Q for the quarterly period ended October 27, 2012, formatted in XBRL (Extensible Business
Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets (Unaudited), (ii) the Condensed Consolidated Statements of Operations (Unaudited), (iii) the Condensed Consolidated Statements of Comprehensive
(Loss) Income (Unaudited) (iv) the Condensed Consolidated Statements of Stockholders Equity (Unaudited), (v) the Condensed Consolidated Statements of Cash Flows (Unaudited), and (vi) Notes to Condensed Consolidated Financial Statements
(Unaudited), tagged as blocks of text. This exhibit will not be deemed filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by
reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
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36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
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T
HE
W
ET
S
EAL
, I
NC
.
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(REGISTRANT)
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Date: November 21, 2012
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By:
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/s/ Ken Seipel
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Ken Seipel
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President and Chief Operating Officer
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Date: November 21, 2012
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By:
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/s/ Steven H. Benrubi
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Steven H. Benrubi
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Executive Vice President and Chief Financial Officer
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37
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