The Wet Seal, Inc., a leading specialty retailer to young women, announced results for its fiscal third quarter ended October 27, 2012, and provided its financial outlook for the fourth quarter of fiscal 2012.
For the third quarter:
- Net sales were $135.5 million compared to net sales of $152.1 million for the prior year third quarter.
- Consolidated comparable store sales declined 13.5%. Comparable store sales for Wet Seal declined 13.5% and for Arden B declined 13.8%.
- Operating loss was $24.8 million, compared to operating income of $6.1 million, or 4.0% of net sales, in the prior year third quarter.
- The current year quarter included $2.1 million in professional fees to defend against a shareholder proxy solicitation to replace a majority of the Company's board members. The proxy solicitation ultimately led to an agreement to replace four of the Company's seven board members during the quarter.
- The current year quarter included $1.0 million in incremental legal fees for employment-related litigation and $0.6 million in charges for estimated settlement costs for various employment-related matters. The prior year quarter included a $1.3 million reversal of accrued incentive compensation expense, which reflected reduced expectations for achievement of incentive targets for the fiscal year.
- The current year and prior year quarters included $6.5 million and $0.7 million in non-cash asset impairment charges, respectively. Excluding the impact of these non-cash charges and the current year proxy solicitation costs, operating loss would have been $16.2 million in the current year quarter, compared to operating income of $6.8 million, or 4.5% of net sales, in the prior year quarter.
- Net loss was $14.8 million, or $0.17 per diluted share, as compared to net income of $3.7 million, or $0.04 per diluted share, in the prior year quarter. Excluding the after-tax effect of the non-cash asset impairment charges and proxy solicitation costs, net loss in the current year quarter would have been $9.7 million, or $0.11 per diluted share. Excluding the after-tax effect of the non-cash asset impairment charges, net income in the prior year quarter would have been $4.1 million, or $0.05 per diluted share.
- As of quarter-end, the Company's inventory per square foot was up 3% versus the prior year quarter, with Wet Seal up 5% and Arden B down 7%.
- The Company ended the quarter with $126.3 million of cash and cash equivalents and no debt. Due to the timing of quarter-end, the Company had not yet paid $9.6 million of its November rents and other landlord costs at that time. Typically, including at the end of the prior year quarter, the Company had made these payments during the quarter being reported.
The Company issued the following statement:
"While business in the third quarter remained challenging, we were encouraged by early signs of progress. Adjustments made to our merchandise assortment contributed to improved sales trends as we moved through the quarter. We began to transition Wet Seal back to its roots of being a fast fashion retailer, offering a broad assortment of on-trend merchandise at value price points that align with the tastes of the young teens to early 20's target customer. We believe we are now on a path that will lead to improved financial performance.
"We also have a new board in place that brings a fresh perspective as well as in-depth merchandise expertise to our organization. They quickly became engaged during October and will be monitoring our progress during the fourth quarter as well as helping us refine the go-forward strategies we have in place."
Store Openings and Closings
The Company had 5 store openings and 1 store closing at Wet Seal and no store openings and one store closing at Arden B during the third quarter. At October 27, 2012, the Company operated 553 stores in 47 states and Puerto Rico, including 472 Wet Seal stores and 81 Arden B stores.
Capital Expenditures and Depreciation
The Company invested $5.2 million in capital expenditures during the quarter, including $4.0 million for construction of new stores and remodels of existing stores. The Company recognized tenant improvement allowances of $0.8 million associated primarily with new store construction, resulting in net capital expenditures for the quarter of $4.4 million.
Depreciation in the quarter totaled $4.3 million as compared to $4.9 million in the prior year quarter.
Income Taxes
The Company had a benefit for income taxes of $10.0 million for the quarter, for an effective income tax rate of 40.5%. The Company expects its effective rate for the fiscal year to be approximately 38.8%, which is an increase over its prior estimate of 37.6% mainly due to higher than previously estimated benefits from federal and state job tax credits. The increase in estimated effective tax rate over the prior estimate resulted in additional benefit for income taxes for the quarter of $0.7 million.
Fourth Quarter Fiscal 2012 Financial Outlook
For the fourth quarter of fiscal 2012, the Company estimates net loss per diluted share in the range of $0.03 to $0.06 versus net income of $0.01 per diluted share in the prior year fourth quarter.
For all of fiscal 2012, the Company now expects to have four net Wet Seal store closings and twenty net Arden B store closings. The Company forecasts fiscal 2012 net capital expenditures will be approximately $20 million to $21 million, of which approximately $14 million to $15 million will be for construction of new stores or remodeling of existing stores upon lease renewals and/or store relocations.
