THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
--------- THE SECURITIES EXCHANGE ACT OF 1934
---- FOR THE QUARTERLY PERIOD ENDED NOVEMBER 2, 1996MAY 3, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
-----
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18632
THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0415940
(State of Incorporation) (I.R.S. Employer Identification No.)
64 FAIRBANKS
IRVINE, CALIFORNIA 92718
(Address of principal executive offices) (Zip code)
(714) 583-9029
(Registrant's 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.
YesYES X No
---NO
---- ---
The number of shares outstanding of the registrant's Class A
Common stockStock and Class B Common stock,Stock, par value $.10 per share, at December 10, 1996May 30, 1997
were 10,618,56610,645,374 and 2,912,665, respectively. There were no shares of Preferred
stock,Stock, par value $.01 per share, outstanding at December 10, 1996.May 30, 1997.
THE WET SEAL, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated
Balance Sheets as of November 2, 1996May 3, 1997 (unaudited) and
February 3, 1996............................................3-4
Consolidated1, 1997.......................................3-4
Statements of Operations (unaudited) for the 13 and 39 weeks
ended November 2, 1996May 3, 1997 and October 28, 1995..................................................5
ConsolidatedMay 4, 1996........................5
Statements of Cash Flows (unaudited) for the 3913 weeks
ended November 2, 1996May 3, 1997 and October 28, 1995..................................................6May 4, 1996........................6
Notes to Consolidated Financial Statements......................7-9Statements..........................7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................10-17Operations...................9-13
PART II. OTHER INFORMATION................................................18INFORMATION.......................................14
SIGNATURE PAGE...................................................19PAGE..........................................15
THE WET SEAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(unaudited)
November 2, February 3,
1996 1996
May 3, February 1,
1997 1997
------------- --------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $65,631,000 $71,483,000
Marketable securities 24,200,000 17,700,000
Other receivables 1,812,000 1,577,000
Merchandise inventories 30,271,000 22,589,000
Prepaid expenses, including $5,500,000
of prepaid rent as of May 3, 1997 6,200,000 -
Deferred tax charges 693,000 693,000
------------- -------------
Total current assets 128,807,000 114,042,000
------------- -------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 55,871,000 55,429,000
Furniture, fixtures and equipment 22,094,000 21,742,000
Leasehold rights 3,342,000 3,342,000
Construction in progress 1,324,000 2,000
------------- -------------
82,631,000 80,515,000
Less accumulated depreciation (50,072,000) (47,285,000)
------------- -------------
Net equipment and leasehold improvements 32,559,000 33,230,000
------------- -------------
OTHER ASSETS:
Deferred tax charges and other assets 6,916,000 6,914,000
Goodwill, net of accumulated amortization of
$577,000 and $566,000 as of May 3, 1997
and February 1, 1997, respectively 555,000 566,000
------------- -------------
Total other assets 7,471,000 7,480,000
------------- -------------
$168,837,000 $154,752,000
------------- -------------
------------- -------------
------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $78,544,000 $57,153,000
Other receivables 519,000 523,000
Merchandise inventories 25,283,000 16,241,000
Prepaid expenses 5,006,000 428,000
Deferred tax charges 1,100,000 1,100,000
------------- ------------
Total current assets 110,452,000 75,445,000
------------- ------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 57,407,000 55,438,000
Furniture, fixtures and equipment 22,224,000 21,606,000
Leasehold rights 4,017,000 2,009,000
Construction in progress 2,000 9,000
------------- ------------
83,650,000 79,062,000
Less accumulated depreciation (49,807,000) (41,015,000)
------------- ------------
Net equipment and leasehold improvements 33,843,000 38,047,000
------------- ------------
OTHER ASSETS:
Deferred tax charges and other assets 4,437,000 3,461,000
Goodwill, net of accumulated amortization of
$555,000 and $521,000 as of November 2, 1996
and February 3, 1996, respectively 577,000 611,000
------------- ------------
Total other assets 5,014,000 4,072,000
------------- ------------
$149,309,000 $117,564,000
------------- ------------
------------- ------------
THE WET SEAL, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(unaudited)
November 2, FebruaryMAY 3, 1996 1996
------------- ------------FEBRUARY 1,
1997 1997
-------------- --------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $32,630,000 $19,491,000$41,426,000 $26,035,000
Accrued liabilities 22,936,000 22,813,00019,851,000 24,064,000
Income taxes payable -- 3,354,0001,984,000 2,152,000
Current portion of long-term debt 2,000,000 3,736,0002,000,000
------------- ------------
Total current liabilities 57,566,000 49,394,00065,261,000 54,251,000
------------- ------------
LONG-TERM LIABILITIES:
Long-term debt 3,764,000 5,264,0002,764,000 3,264,000
Deferred rent 5,839,000 5,171,0006,177,000 6,117,000
------------- ------------
Total long-term liabilities 9,603,000 10,435,0008,941,000 9,381,000
------------- ------------
Total liabilities 67,169,000 59,829,00074,202,000 63,632,000
------------- ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
2,000,000 shares; none issued and outstanding -- --- -
Common Stock, Class A, $.10 par value,
authorized 20,000,000 shares;
10,618,566 and 5,687,06610,628,874 shares issued and outstanding
at November 2, 1996May 3, 1997 and February 3,
1996,1, 1997, respectively 1,062,000 568,0001,063,000 1,063,000
Common Stock, Class B Convertible, $.10 par value,
authorized 10,000,000 shares;
2,912,665 and 6,807,665 shares issued and outstanding
at November 2, 1996May 3, 1997 and February 3,
1996,1, 1997, respectively 291,000 681,000291,000
Paid-in capital 54,638,000 38,568,00056,596,000 56,596,000
Retained earnings 26,149,000 17,918,00036,685,000 33,170,000
------------- ------------
Total Stockholders' Equity 82,140,000 57,735,000stockholders' equity 94,635,000 91,120,000
------------- ------------
$149,309,000 $117,564,000$168,837,000 $154,752,000
------------- ------------
------------- ------------
THE WET SEAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
13 Weeks Ended 39 Weeks Ended
---------------------------- ----------------------------
November 2, October 28, November 2, October 28,WEEKS ENDED
----------------------------------
MAY 3, MAY 4,
1997 1996
1995 1996 1995
------------- ------------ ------------- ---------------------------
SALES $95,571,000 $88,674,000 $270,502,000 $163,396,000$95,563,000 $80,575,000
COST OF SALES (including buying, distribution
and occupancy costs) 69,152,000 67,013,000 200,259,000 127,149,000
-------------70,122,000 61,537,000
------------ ------------- ------------
GROSS MARGIN 26,419,000 21,661,000 70,243,000 36,247,00025,441,000 19,038,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 20,046,000 19,066,000 58,005,000 36,432,00020,197,000 18,264,000
INTEREST INCOME, NET (834,000) (330,000) (1,916,000) (900,000)
-------------(714,000) (477,000)
------------ ------------- ------------
NET OPERATING EXPENSES 19,212,000 18,736,000 56,089,000 35,532,000
-------------19,483,000 17,787,000
------------ ------------- ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,207,000 2,925,000 14,154,000 715,0005,958,000 1,251,000
PROVISION FOR INCOME TAXES 3,013,000 1,103,000 5,923,000 297,000
-------------2,443,000 529,000
------------ ------------- ------------
NET INCOME $4,194,000 $1,822,000 $8,231,000 $418,000
-------------$3,515,000 $722,000
------------ ------------- ------------
------------- ------------ ------------- ------------
NET INCOME PER COMMON SHARE $0.30 $0.15 $0.61 $0.03
-------------$0.25 $0.06
------------ ------------- ------------
------------- ------------ ------------- ------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 13,526,605 12,492,586 13,114,293 12,349,030
------------- ------------ ------------- ------------
------------- ------------ ------------- ------------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 13,838,943 12,492,586 13,508,126 12,349,030
-------------13,832,051 12,497,842
------------ ------------- ------------
------------- ------------ ------------- ------------
THE WET SEAL, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
39 Weeks Ended
----------------------------
November 2, October 28,13 WEEKS ENDED
-------------------------------
MAY 3, MAY 4,
1997 1996
1995
------------- ----------------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $8,231,000 $418,000$3,515,000 $722,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,229,000 7,656,0002,798,000 3,178,000
Loss on disposal of equipment and leasehold improvements 70,000 13,000- 2,000
Changes in operating assets and liabilities, net of acquisition:liabilities:
(Increase) decrease in:
Other receivables 4,000 (516,000)
Tax refund receivable 59,000(235,000) 442,000
Merchandise inventories (9,042,000) (7,106,000)(7,682,000) (8,431,000)
Prepaid expenses (4,578,000) (389,000)(6,200,000) (5,045,000)
Other assets (976,000) (40,000)(2,000) 22,000
(Decrease) increase in:
Accounts payable and accrued liabilities 14,743,000 13,168,00011,178,000 13,910,000
Income taxes payable (3,354,000) (1,000)(168,000) (2,965,000)
Deferred rent 668,000 712,000
------------- ------------60,000 211,000
----------- -----------
Total adjustments 6,764,000 13,556,000
------------- ------------(251,000) 1,324,000
----------- -----------
Net cash provided by operating activities 14,995,000 13,974,000
------------- ------------3,264,000 2,046,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities 4,000,000 -
Investment in equipment and leasehold improvements (6,542,000) (2,017,000)
Cash paid for acquisition, less cash acquired (20,000)
------------- ------------(2,116,000) (2,356,000)
Investment in marketable securities (10,500,000) -
----------- -----------
Net cash used in investing activities (6,542,000) (2,037,000)
------------- ------------(8,616,000) (2,356,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (3,236,000) -(500,000) (500,000)
Proceeds from issuance of stock 16,174,000 7,000
Proceeds from issuance of debt - 10,000,000
------------- ------------27,000
----------- -----------
Net cash provided byused in financing activities 12,938,000 10,007,000
------------- ------------(500,000) (473,000
----------- -----------
NET INCREASEDECREASE IN CASH AND CASH EQUIVALENTS 21,391,000 21,944,000(5,852,000) (783,000)
CASH AND CASH EQUIVALENTS,beginning of period 71,483,000 57,153,000
25,369,000
------------- ----------------------- -----------
CASH AND CASH EQUIVALENTS,end of period $78,544,000 $47,313,000
------------- ------------
------------- ------------$65,631,000 $56,370,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $432,000 $290,000$98,000 $172,000
Income taxes net 10,288,000 336,0002,611,000 3,494,000
SCHEDULE OF NONCASH TRANSACTIONS:
During the thirty-nine weeks ended November 2, 1996, the Company reduced
certain estimated liabilities assumed in connection with the acquisition of
Contempo Casuals. As a result, a reduction in accounts payable of
$1,481,000 was recorded with a corresponding reduction in fixed assets.
During the thirty-nine weeks ended October 28, 1995, the Company
acquired the assets of Contempo Casuals for common stock valued at
$1,178,000.
THE WET SEAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The information set forth in these consolidated financial statements is unaudited except
for the February 3, 19961, 1997 balance sheet. These statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information, 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 generally accepted accounting principles for complete financial statements.
The accompanying consolidated financial statements consolidate the
accounts of Contempo Casuals, Inc. ("Contempo") which was acquired on July 1,
1995. All significant intercompany transactions have been eliminated.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the 13 and 39 weeks ended November 2, 1996May 3, 1997 are not necessarily
indicative of the results that may be expected for the year ending February 1, 1997.January 31,
1998. For further information, refer to the financial statements and notes
thereto included in the Company's Annual Report for the year ended February 3, 1996.
Certain reclassifications have been made to conform the October 28, 1995
financial statements to the November1,
1997.
Effective February 2, 1996 financial statements.
1997, Contempo Casuals, Inc. was merged with and into
The Wet Seal, Inc.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" which became effective for the Company beginning February 4, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees and will disclose the required
pro forma effect on net income and earnings per share.
NOTE 3 -LINE OF CREDIT AND LOAN PAYABLE TO BANK AND LINES OF CREDIT:
OnBANK:
Under an unsecured revolving line-of-credit arrangement with a bank, the
Company may borrow up to a maximum of $30 million on a revolving basis through
July 1, 1996, the Company renewed its three bank credit facilities which
consisted of two revolving lines of credit for an aggregate of $30,000,000 and
which expire on July 1, 1998, and one term loan for $10,000,000 which expires on
July 31, 2000.1998. The cash borrowings under the two revolving credit linesarrangement bear
interest at the bank's prime rate or, at the Company's option, the London
Interbank Offered Rate (LIBOR) plus 1.75% for both facilities. The Wet Seal
facility is guaranteed by Contempo. The Contempo facility is guaranteed by Wet
Seal and is also secured by the stock of Contempo. As of November 2, 1996 there
were no borrowings against either of the lines.
The Company's five year amortizing term loan in the amount of
$10,000,000 is repayable in twenty equal quarterly installments of $500,000
which commenced October 31, 1995. The borrowing bears interest at the
bank's prime rate or, at the Company's option, LIBOR plus 1.75%. As of May 3,
1997, the Company had no borrowings outstanding under the credit arrangement.
In June 1995, the Company entered into an unsecured five-year, $10 million
term loan. The loan bears interest at the bank's prime rate plus .25% or, at
the Company's option, LIBOR plus 1.75%. The estimated annual principal payments
on the loan are $2,000,000 payable in quarterly installments of $500,000 which
commenced October 31, 1995. As of May 3, 1997, the loan has a remaining
outstanding balance of $4,764,000.
The credit arrangement and the term loan is
guaranteed by Contempo. All ofimpose quarterly and annual
financial covenants requiring the above facilities are subjectCompany to maintain certain financial covenantsratios
and conditions with whichachieve certain levels of annual income. In addition, the credit
arrangement and the term loan
NOTE 2 - LOAN PAYABLE TO BANK AND LINE OF CREDIT (CONTINUED):
require that the bank approve the payment of dividends and restrict the level of
capital expenditures. At May 3, 1997, the Company was in compliance as
of November 2, 1996.
with these
covenants.
NOTE 43 - EARNINGS PER COMMON SHARE:
Earnings per common share are based on the weighted average number of
common and common stock equivalent shares outstanding, if dilutive, shares outstanding during the
periods.
NOTE 5 - ISSUANCE OF STOCK:
OnIn February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted
earnings per share. For the periods ended May 24,3, 1997 and May 4, 1996, the
Company completed its previously announced public
offering of 3,565,000 shares of its Class A Common Stock, ofamount reported as net income per common and common equivalent share is not
materially different than that which 765,000
shares were sold by the Companywould have been reported for basic and
2,800,000 were sold by Selling Stockholders.
The shares were sold to the public at an initial offering price of $20diluted earnings per share. The net proceeds to the Company from the sale of the 765,000 shares were
$14,459,000. The proceeds are being used for general corporate purposes, which
may include repayment of certain indebtedness, remodeling and opening of stores
and upgrading of the Company's point-of-sale system.share in accordance with SFAS No. 128.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company is one of the largest national mall-based specialty retailers
focusing primarily on young women's apparel, and currently operates 363 retail
stores in 34 states and Puerto Rico under the names "Wet Seal", "Contempo
Casuals", "Limbo Lounge" and "Next". The Company sells moderately priced,
fashionable, casual apparel and accessory items designed for consumers with a
young, active lifestyle.
On July 1, 1995, the Company acquired Contempo Casuals. The transaction was accounted for under the purchase method. During the second
quarter ended August 3, 1996, the Company reduced certain estimated liabilities
assumed in connection with the acquisition of Contempo Casuals. As a result, a
reduction in accounts payable of $1,481,000 was recorded with a corresponding
reduction in fixed assets.
The acquisition of Contempo Casuals
increased the number of stores the Company operates by 237 stores. As of November 2, 1996 the Company operated 361
stores as compared to 368 stores as of October 28, 1995, the end of the third
quarter of fiscal 1995. Acquiring
Contempo Casuals enabled the Company to significantly reduce fixed expenses as a
percentage of sales through the consolidation and integration of the two
companies' management teams, corporate offices and distribution centers. This
process was substantially completed at the time of the acquisition.
The following discussion and analysisAs of financial condition and
resultsMay 3, 1997 the Company operated 363 stores as compared to 362 stores
as of operations include a comparisonMay 4, 1996, the end of the resultsfirst quarter of operations forfiscal 1996. The Company
opened eleven stores during the thirdperiod from May 5, 1996 to May 3, 1997 and
closed ten stores.
Effective February 2, 1997, Contempo Casuals, Inc. was merged with and into
The Wet Seal, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's Financial Statements
and the Notes related thereto.
RESULTS OF OPERATIONS
THE 13 WEEKS ENDED MAY 3, 1997 (FIRST QUARTER OF FISCAL 1997) AS COMPARED TO THE
13 WEEKS ENDED MAY 4, 1996 (FIRST QUARTER OF FISCAL 1996)
Sales in the first quarter yearof fiscal 1997 were $95,563,000 compared to
datesales in the first quarter of fiscal 1996 which containedof $80,575,000, an increase of
$14,988,000 or 18.6%. The dollar increase in sales was primarily due to an
increase of 14.7% in comparable store sales. Comparable store sales are
defined as sales in stores that were open throughout the full period
results of bothfiscal year and
throughout the Wet Seal stores and the Contempo Casuals stores,full prior fiscal year. The comparable store sales increase is
due in part to the third quarter year to date of fiscal 1995, which contained the full period
results of the Wet Seal stores, and only the July 1995 to October 1995 results
for the Contempo Casuals stores, due to the fact that the Contempo Casuals
acquisition occurred on July 1, 1995. Therefore, the results of operations for
the third quarter year to date of fiscal 1996 are not directly comparable to the
third quarter year to date of fiscal 1995. The third quarter results, however,
are comparable given that both the current year and the prior year period
contain the full impact of the Contempo acquisition.increase in inventory levels
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Management's discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and the Notes related
thereto.
RESULTS OF OPERATIONS
THE 13 WEEKS ENDED NOVEMBER 2, 1996 (THIRD QUARTER OF FISCAL 1996) AS COMPARED
TO THE 13 WEEKS ENDED OCTOBER 28, 1995 (THIRD QUARTER OF FISCAL 1995)
Sales in the 13 weeks ended November 2, 1996 were $95,571,000CONTINUED:
compared to salesprior year. Inventory levels were considered to be below plan in
the 13 weeks ended October 28, 1995 of $88,674,000, an increase of
$6,897,000 or 7.8%. The dollar increase in sales was primarily due to an
increase of 10.5% in the comparable store sales for the combined Wet Seal and
Contempo chains. Comparable store sales is calculated based on the 13 weeks
ended November 2, 1996 comparedprior year. Further contributing to the same 13 week period ended November 4,
1995. This increase in sales due toincreases were the comparableopening of
eleven new stores with a higher sales productivity per store sales is slightly
offset by the fact that there were 361 stores opened at the end of the current
year third quarter as compared to 368 stores opened at the end of the prior year
period. Additionally, the third quarter of fiscal 1996 started and ended one
week later than the third quarter of fiscal 1995 resulting in a historically
'net' weaker 13 weeks of sales in the third quarter of fiscal 1996 as compared
to the 13 weeks of sales in the third quarter of fiscal 1995.ten closed
stores.
Cost of sales, including buying, distribution and occupancy costs, was
$69,152,000$70,122,000 in the thirdfirst quarter of fiscal 1997 compared to $61,537,000 in the
first quarter of fiscal 1996, compared to $67,013,000 in the
third quarter of fiscal 1995, an increase of $2,139,000.$8,585,000. The dollar increase in
cost of sales was due to the increase in the sales. As a percentage of sales, cost
of sales decreased from 75.6%76.4% in the third quarter of fiscal 1995 to 72.4%
in the thirdfirst quarter of fiscal 1996 to 73.4% in
the first quarter of fiscal 1997, a decrease of 3.2%3.0%. This decrease in cost of
sales as a percentage of sales was related to a decrease in occupancy costs as a
percentage of 2.1%sales of 3.9%, a decrease in distribution costs of 0.6%, and a decreaseoffset slightly by an increase in the cost of
merchandise of 0.5%.merchandise. The decreasesdecrease in occupancy costs and distribution costs
werewas associated primarily with the
improved leverage in fixed costs which was due to the increase in comparable
store sales.sales as well as a decrease in depreciation due to the impact of fully
depreciated assets. The decreaseincrease in the cost of merchandise was due to an
increase in the initial markup ratesmarkdowns in the thirdfirst quarter of fiscal 1997 as compared to the
first quarter of fiscal 1996. Markdowns in the first quarter of fiscal 1996
as comparedwere low due to the third quarter of fiscal 1995.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:inventory levels that were below plan.
Selling, general and administrative expenses were $20,046,000expense was $20,197,000 in the thirdfirst
quarter of fiscal 1997 compared to $18,264,000 in the first quarter of fiscal
1996, compared to $19,066,000 in the third quarter of
fiscal 1995, an increase of $980,000$1,933,000 or 5.1%10.6%. The dollar increase in selling,
general and administrative expensesexpense was primarily related to the increase in sales. As a
percentage of sales, selling, general and administrative expensesexpense decreased from
21.5%22.7% in the third quarter of fiscal 1995 to 21.0% in the thirdfirst quarter of fiscal 1996 to 21.1% in the first quarter of
fiscal 1997, a decrease of 0.5%1.6%. The decrease as a percentage of sales was
related to the leverage of the fixed components of this expense, primarily store
wages, as a result of the increase in the comparable store sales.
Interest income, net, was $834,000$714,000 in the thirdfirst quarter of fiscal 1997
compared to $477,000 in the first quarter of fiscal 1996, compared to $330,000 in the third quarter of fiscal 1995, an increase of
$504,000.$237,000. The increase was due to an increase in the average cash balance
invested in the current year period as compared to the prior year.
Due to the factors noted above, net incomeIncome tax provision was $4,194,000$2,443,000 in the thirdfirst quarter of fiscal 19961997
compared to $1,822,000$529,000 in the thirdfirst quarter of fiscal 1995. As a percentage of sales, net income1996. The effective tax
rate was 4.4%41.0% compared to 42.3% in the third quarter of
fiscal 1996 compared to 2.1% in the third quarter of fiscal 1995.
THE 39 WEEKS ENDED NOVEMBER 2, 1996 (THIRD QUARTER YEAR TO DATE OF FISCAL 1996)
AS COMPARED TO THE 39 WEEKS ENDED OCTOBER 28, 1995 (THIRD QUARTER YEAR TO DATE
OF FISCAL 1995):
Sales in the 39 weeks ended November 2, 1996 were $270,502,000
compared to sales in the 39 weeks ended October 28, 1995 of $163,396,000, an
increase of $107,106,000 or 65.5%. The dollar increase in sales was primarily
due to the acquisition of Contempo Casuals. The increase in sales is also due,
to a significantly lesser extent, to the 10.6% increase in comparable store
sales for the combined Wet Seal and Contempo chains.
Cost of sales, including buying, distribution and occupancy costs, was
$200,259,000 in the third quarter year to date of fiscal 1996 compared to
$127,149,000 in the third quarter year to date of fiscal 1995, an increase of
$73,110,000. The dollar increase in cost of sales was due to the increase in
the number of stores as a result of the acquisition of Contempo Casuals. As a
percentage of sales, cost of sales decreased from 77.8% in the third quarter
year to date of fiscal 1995 to 74.0% in the third quarter year to date of
fiscal 1996, a decrease of 3.8%. This decrease in cost of sales as a
percentage of sales was related primarily to a decrease in occupancy costs of
2.9%, a decrease in buying and distribution costs of 0.6%, and a decrease in the
cost of merchandise of 0.3%. The decrease in occupancy costs was associated
primarily with a decrease in depreciation resulting from the lower net book
value per store of the depreciable assets of Contempo Casuals, as compared to
Wet Seal, as well as to the improved leverage in fixed costs related to the
increase in the comparable store sales. The decrease in the buying and
distribution costs relate to the improved leverage in the fixed components of
these costs related to the increase in comparable store sales. The decrease in
the cost of merchandise was due to the increase in the initial markup rates.
Selling, general and administrative expenses were $58,005,000 in the
third quarter year to date of fiscal 1996 compared to $36,432,000 in the third
quarter year to date of fiscal 1995, an increase of $21,573,000. The dollar
increase in selling, general and administrative expenses was primarily due to
the acquisition of Contempo Casuals which served to substantially increase the
number of stores.prior year.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
As a percentage of sales, selling, general and administrative expenses
decreased from 22.3%Due to the factors noted above, net income was $3,515,000 in the thirdfirst
quarter year to date of fiscal 19951997 compared to 21.4%$722,000 in the thirdfirst quarter year to date of fiscal 1996, a decrease year to date of
0.9%. The decrease as a percentage of sales was related to the economies of
scale the Company achieved as a result of the Contempo acquisition and to the
increase in comparable store sales. The decrease was most notable in store
payroll expense.
Interest income, net, was $1,916,000 in the third quarter year to date
of fiscal 1996 compared to $900,000 in the third quarter year to date of fiscal
1995, an increase of $1,016,000. The increase was due primarily to an increase
in the average cash balance invested and was partially offset by an increase in
interest expense in fiscal 1996.
Income tax provision was $5,923,000 in the third quarter year to date
of fiscal 1996 compared to $297,000 in the third quarter year to date of fiscal
1995.
Net income was $8,231,000 in the third quarter year to date of fiscal
1996 compared to $418,000 in the third quarter year to date of fiscal 1995.
As a percentage of sales, net income was 3.0%3.7% in the thirdfirst quarter year to date of fiscal
19961997 compared to 0.3%0.9% in the thirdfirst quarter year to date of fiscal 1995.
The Company's return to profitability, which began in the second half of fiscal
1995, was related in part to the acquisition of Contempo Casuals. With this
acquisition, the Company achieved significant economies of scale in areas such
as buying, distribution and general and administrative costs. At the same time,
the acquisition enabled the Company to reduce its average depreciation cost per
store due, in part, to the favorable acquisition price. Also contributing to
the improvements in profitability is the increase in comparable store sales.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at November 2, 1996May 3, 1997 was $52,886,000$63,546,000 compared to $26,051,000$59,791,000 at
February 3, 1996,1, 1997, an increase of $26,835,000.$3,755,000. The Company's primary source of
working capital has historically been cash flows from operating activities. Net
cash flows provided by operating activities for the 39 weeks ended November 2, 1996first quarter of fiscal 1997
was $14,995,000$3,264,000 compared to $13,974,000$2,046,000 for the 39 weeks ended October 28, 1995.first quarter of fiscal 1996.
Inventory increased $9,042,000$7,682,000 at November 2,
1996May 3, 1997 compared to the fiscal year end
due to the seasonal nature of the business; inventory levels are typically at a
low point at year end. The increase in accounts payable and accrued liabilities
increase of $14,743,000$11,178,000 more than offset this increase in inventory due to the terms of
the payments in relation to the receipt of the inventory.
In the thirdfirst quarter year to date of fiscal 1996,1997, the Company invested $6,542,000$2,116,000 in
equipment leasehold improvements and leasehold rights.improvements. These expenditures related primarily to
the purchase of leasehold rights for three
stores that the Companyone store opened and seven additional stores that the Company will
open in the fourthfirst quarter of this fiscal year.1997 along with construction
in progress for additional new and remodeled stores. The Company currently
estimates that the capital expenditures for the remainder of fiscal 19961997 will be
$4,400,000.approximately $28,000,000. These planned expenditures relate primarily to store
openings and remodels as well as a new corporate office and distribution center.
Under an unsecured revolving line-of-credit arrangement with a bank, the
Company may borrow up to a new point-of-sale system.
Cash provided by financing activities was $12,938,000 inmaximum of $30 million on a revolving basis through
July 1, 1998. The cash borrowings under the third
quarter year to datearrangement bear interest at the
bank's prime rate or, at the Company's option, LIBOR plus 1.75%. As of fiscal 1996 due to the proceeds received from the sale
byMay 3,
1997, the Company of 765,000 shares of Class A Common Stock in a public offering
which closed on May 24, 1996.had no borrowings outstanding under the credit arrangement.
In July 1996, the Company renewed its lines of credit with Bank of
America National Trust and Savings Association ("Bank of America") in an
aggregate principal amount of $30,000,000 (the "Revolving Credit Facilities"),
and a five year amortizing term loan with Bank of America in the amount of
$10,000,000 (the "Term Loan"). In connection with the Contempo Casuals
acquisition,June 1995, the Company entered into an unsecured five-year, $10 million
term loan. The loan bears interest at the Term Loan to satisfy certain net worth
requirements related tobank's prime rate plus .25% or, at
the assignmentCompany's option, LIBOR plus 1.75%. The estimated annual principal payments
on the loan are $2,000,000 payable in quarterly installments of leases.$500,000 which
commenced October 31, 1995. As of November 2, 1996, there
were no borrowings underMay 3, 1997, the Revolving Creditloan
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
Facilities,has a remaining outstanding balance of $4,764,000.
The credit arrangement and the term loan impose quarterly and annual
financial covenants requiring the Company to maintain certain financial ratios
and achieve certain levels of annual income. In addition, the credit
arrangement and the term loan require that the bank approve the payment of
dividends and restrict the level of capital expenditures. At May 3, 1997, the
Company was in compliance with all terms and covenants of
such agreements.these covenants.
The Company invests its excess funds primarily in a short-term investment
grade money market fund, investment grade commercial paper and U.S. Treasury and
Agency obligations. Management believes the Company's working capital and cash
flows from operating activities will be sufficient to meet the
Company's operating and capital
requirements in the foreseeable future.
SEASONALITY AND QUARTERLY OPERATING RESULTS
The Company's business is seasonal by 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 the first week of September) historically accounting for the largest
percentage of sales volume. In the Company's three fiscal years ended February
3, 1996,1, 1997, the Christmas and back-to-school seasons together
accounted for an average of approximately 32% of the Company's annual sales,
after adjusting for sales increases related to new stores. The Company does not
believe that inflation has had a material effect on the results of operations
during the past three years. However, there can be no assurance that the
Company's business will not be affected by inflation in the future.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this Quarterly Report on Form 10-Q, including the
preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain various forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs concerning future
events. The Company cautions that these statements are further qualified by
important factors that could
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the retention by the Company of
suppliers for both brand name and Company-developed merchandise, the ability of
the Company to expand and to continue to increase comparable store sales, the
sufficiency of the Company's working capital and cash flows from operating
activities, a decline in demand for the merchandise offered by the Company, the
ability of the Company to locate and obtain acceptable store sites and lease
terms or renew existing leases, the ability of the Company to obtain adequate
merchandise supply, the
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUEDability of the Company to hire and train employees, the
ability of the Company to gauge the fashion tastes of its customercustomers and provide
merchandise that satisfies customer demand, management's ability to manage the
Company's expansion, the effect of economic conditions, the effect of severe
weather or natural disasters and the effect of competitive pressures from other
retailers.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128")
which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted
earnings per share. For the periods ended May 3, 1997 and May 4, 1996, the
amount reported as net income per common and common equivalent share is not
materially different than that which would have been reported for basic and
diluted earnings per share in accordance with SFAS No. 128.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
The Company is not party to any material legal proceedings, other
than ordinary routine litigation incidental to the Company's business.
ITEM 2 - CHANGES IN SECURITIES. Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES. Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
ITEM 5 - OTHER INFORMATION. Not Applicable
ITEM 6(A) - EXHIBITS. Not Applicable
ITEM 6(B) - REPORTS ON FORM 8-K. Not Applicable
SIGNATURES
Pursuant to the requirements 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.
The Wet Seal, Inc.
(Registrant)
Date: December 16, 1996JUNE 13, 1997 /S/KATHY BRONSTEIN
-------------------------- --------------------------------------------------------- ---------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer
(Principal Executive
Officer)
Date: December 16, 1996JUNE 13, 1997 /S/EDMOND THOMAS
-------------------------- --------------------------------------------------------- ---------------------------
Edmond Thomas
President and
Chief Operating Officer
Date: December 16, 1996JUNE 13, 1997 /S/ANN CADIER KIM
-------------------------- --------------------------------------------------------- ---------------------------
Ann Cadier Kim
Vice President of Finance
and Chief Financial
Officer (Principal
Financial and Accounting
Officer)