| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
November 2, 2013
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Delaware | 33-0415940 | |
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| 26972 Burbank, Foothill Ranch, CA | 92610 | |
| (Address of principal executive offices) | (Zip Code) | |
| Large accelerated filer: | ¨ | Accelerated filer: | ||||
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| Non-accelerated filer: | ¨ | Smaller reporting company: | ¨ | |||
29, 2013.
Item 1. Financial Statements (Unaudited) Item 2. Item 3. Item 1. Item 1A. Item 2. Item 3. Item 4. Item 5. Item 6. CURRENT ASSETS: Cash and cash equivalents Short-term investments Income tax receivables Other receivables Merchandise inventories Prepaid expenses and other current assets Deferred tax assets Total current assets EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Leasehold improvements Furniture, fixtures and equipment Less accumulated depreciation and amortization Net equipment and leasehold improvements OTHER ASSETS: Deferred tax assets Other assets Total other assets TOTAL ASSETS CURRENT LIABILITIES: Accounts payable – merchandise Accounts payable – other Accrued liabilities Current portion of deferred rent Total current liabilities LONG-TERM LIABILITIES: Deferred rent Other long-term liabilities Total long-term liabilities Total liabilities COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS’ EQUITY: 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 Common stock, Class B convertible, $0.10 par value, authorized 10,000,000 shares; no shares issued and outstanding Paid-in capital Accumulated deficit 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 Accumulated other comprehensive (loss) income Total stockholders’ equity TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY Net sales Cost of sales Gross margin Selling, general, and administrative expenses Asset impairment Operating (loss) income Interest income Interest expense Interest (expense) income, net (Loss) income before (benefit from) provision for income taxes (Benefit from) provision for income taxes Net (loss) income Net (loss) income per share, basic Net (loss) income per share, diluted Weighted-average shares outstanding, basic Weighted-average shares outstanding, diluted STOCKHOLDERS’ EQUITY thousands, except share data) Net (loss) income Other comprehensive loss: Amortization of actuarial gain under Supplemental Employee Retirement Plan Total other comprehensive loss Comprehensive (loss) income Balance at January 28, 2012 Net loss Stock issued pursuant to long-term incentive plans Stock-based compensation Exercise of stock options Repurchase of common stock Retirement of treasury stock Balance at October 27, 2012 CASH FLOWS thousands) Balance at January 29, 2011 Net income Stock issued pursuant to long-term incentive plans Stock-based compensation Amortization of stock payment in lieu of rent Exercise of stock options Repurchase of common stock Retirement of treasury stock Amortization of actuarial gain under Supplemental Employee Retirement Plan Balance at October 29, 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization Amortization of premium on investments Amortization of deferred financing costs Amortization of stock payment in lieu of rent Loss on disposal of equipment and leasehold improvements Asset impairment Deferred income taxes Stock-based compensation Changes in operating assets and liabilities: Income tax receivables Other receivables Merchandise inventories Prepaid expenses and other current assets Other non-current assets Accounts payable and accrued liabilities Income taxes payable Deferred rent Other long-term liabilities Net cash (used in) provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and leasehold improvements Proceeds from maturity of marketable securities Net cash (used in) provided by investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options Repurchase of common stock Net cash used in financing activities NET DECREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period CASH AND CASH EQUIVALENTS, end of period SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest Income taxes SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS: Retirement of treasury shares Purchase of equipment and leasehold improvements unpaid at end of period Amortization of actuarial gain under Supplemental Employee Retirement Plan The information set forth in these condensed consolidated financial statements as of February 2, 2013. 1, 2014 Aggregate carrying value of all long-lived assets impaired Less: Impairment charges Aggregate fair value of all long-lived assets impaired Number of stores with asset impairment values (in thousands except for number of stores): expected to reverse. Deferred income tax expense or benefit results from the change in net deferred tax assets or deferred tax liabilities. Such guidance requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Due to the Company's three-year cumulative operating losses, the Company established a valuation allowance against all of its deferred tax assets in fiscal 2012. In addition, the Company discontinued recording income tax benefits in the condensed consolidated statements of operations. The Company will not record income tax benefits until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. The Company remains in a cumulative three-year operating loss position and realization of its deferred income tax assets is not deemed to be more likely than not. Prospectively, as the Company continues to evaluate available evidence, it is possible that the Company may deem some or all of its deferred income tax assets to be realizable. The Company has approximately shares to satisfy stock option exercises, as well as for restricted stock, incentive awards covering grants under the 2005 Plan. The Plans provide that the per-share exercise price of a stock option may not be less than the fair market value of the Company’s 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. Dividend Yield Expected Volatility Risk-Free Interest Rate Expected Life of Options (in Years) 2016. Options Outstanding at January 28, 2012 Granted Exercised Canceled Outstanding at October 27, 2012 Vested and expected to vest in the future at October 27, 2012 Exercisable at October 27, 2012 Options vested and expected to vest in the future is comprised of all options outstanding at Range of Exercise Prices $ 1.81 - $ 2.74 2.77 - 4.19 4.26 - 6.82 8.00 - 11.49 $ 1.81 - $11.49 Stock Units upon vesting. objectives. The fair value of nonvested restricted common stock awards, restricted stock units, performance share awards and performance stock units is equal to the Nonvested Restricted Common Stock and Performance Shares Nonvested at January 28, 2012 Granted Vested Forfeited Nonvested at October 27, 2012 November 2, 2013: Cost of sales Selling, general, and administrative expenses Stock-based compensation on outstanding letters of credit under the Facility at an annual rate equal to the applicable LIBOR margin for standby letters of credit and 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. Financial assets: Cash and cash equivalents Long-term tenant allowance receivables Financial assets: Cash and cash equivalents Long-term tenant allowance receivables Financial assets: Cash and cash equivalents Short-term investments Long-term tenant allowance receivables Cash and cash equivalents are carried at either cost or amortized cost, which approximates fair value, due to their short term maturities. sheet. Net (loss) income per share, basic: Net (loss) income Less: Undistributed earnings allocable to participating securities Net (loss) income per share, basic Net (loss) income per share, diluted: Net (loss) income Less: Undistributed earnings allocable to participating securities Effect of dilutive securities Net (loss) income per share, diluted Net (loss) income per share, basic: Net (loss) income Less: Undistributed earnings allocable to participating securities Net (loss) income per share, basic Net (loss) income per share, diluted: Net (loss) income Less: Undistributed earnings allocable to participating securities Effect of dilutive securities Net (loss) income per share, diluted The computations of net Stock options outstanding Performance shares and nonvested restricted stock awards Total matter. lead plaintiff in the above-referenced class action. currently pending. 13 Weeks Ended October 27, 2012 Net sales Percentage of consolidated net sales Operating loss Depreciation and amortization expense Interest income Interest expense Loss before benefit from income taxes 13 Weeks Ended October 29, 2011 Net sales Percentage of consolidated net sales Operating income (loss) Depreciation and amortization expense Interest income Interest expense Income (loss) before provision for income taxes 39 Weeks Ended October 27, 2012 Net sales Percentage of consolidated net sales Operating loss Depreciation and amortization expense Interest income Interest expense Loss before benefit from income taxes 39 Weeks Ended October 29, 2011 Net sales Percentage of consolidated net sales Operating income (loss) Depreciation and amortization expense Interest income Interest expense Income (loss) before provision for income taxes Company Class A common stock. November 2, 2013 taxes and legal loss contingencies. During the included elsewhere in this report. Our effective statements included elsewhere in this report. Future developments may require us to adjust the amount of this accrual, which, if increased, could have a material adverse effect on our results of operations or financial condition. Net sales Cost of sales Gross margin Selling, general, and administrative expenses Asset impairment Operating (loss) income Interest (expense) income, net (Loss) income before (benefit from) provision for income taxes (Benefit from) provision for income taxes Net (loss) income Net sales Comparable store sales decrease Cost of sales Percentage of net sales quarter. Selling, general, and administrative expenses Percentage of net sales A A $0.1 million decrease in A $0.1 million increase in store General and administrative expenses ago. A $2.1 million A A $0.4 million A $0.2 million A $0.1 million A A $0.2 million increase in computer maintenance costs; Asset impairment Percentage of net sales Interest (expense) income, net Percentage of net sales November 2, 2013 (Benefit from) provision for income taxes limitations, to offset our regular taxable income. (In thousands, except percentages, sales per square foot and number of stores) Net sales Percentage of consolidated net sales Comparable store sales percentage decrease compared to the prior year period Operating (loss) income Sales per square foot Number of stores as of period end Square footage as of period end year, partially offset by a comparable store sales increase. The comparable store sales increase during the Additionally, the decrease was attributable to an increase in merchandise margin as a result of lower markdown rates. (In thousands, except percentages, sales per square foot and number of stores) Net sales Percentage of consolidated net sales Comparable store sales percentage decrease compared to the prior year period Operating loss Sales per square foot Number of stores as of period end Square footage as of period end Net sales Comparable store sales decrease A decrease of Cost of sales Percentage of net sales certain expensive Arden B store leases in late fiscal 2012. Selling, general, and administrative expenses Percentage of net sales A A A A $0.3 million decrease in store supplies; and A A General and administrative expenses A $3.5 million decrease in legal costs due to the recording of a $3.5 million benefit related to certain insurance recoveries; A $1.0 million A $0.4 million A $0.1 million The A A Asset impairment Percentage of net sales Interest (expense) income, net Percentage of net sales (Benefit from) Provision for income taxes fiscal 2013 that are not based on consolidated net income. We have net operating loss carryforwards (NOLs) available, subject to certain limitations, to offset our regular taxable income. (In thousands, except percentages, sales per square foot and number of stores) Net sales Percentage of consolidated net sales Comparable store sales percentage (decrease) increase compared to the prior year period Operating (loss) income Sales per square foot Number of stores as of period end Square footage as of period end The comparable store sales increase during the (In thousands, except percentages, sales per square foot and number of stores) Net sales Percentage of consolidated net sales Comparable store sales percentage decrease compared to the prior year period Operating (loss) income Sales per square foot Number of stores as of period end Square footage as of period end 2013 matter. "for cause" finding related to certain allegations made by one complainant, who is the lead plaintiff in the above-referenced class action. appeal that is currently pending. Contents Period July 29, 2012 to August 25, 2012 August 26, 2012 to September 29, 2012 September 30, 2012 to October 27, 2012 /s/ Steven H. Benrubi Page PART I. FINANCIAL INFORMATION PART I. FINANCIAL INFORMATION 2 34 5 7820Item 4. 32Item 4.323334353636363637 October 27,
2012 January 28,
2012 October 29,
2011 ASSETS $ 126,343 $ 157,185 $ 106,205 — — 25,056 660 200 — 1,462 1,445 3,081 46,193 31,834 43,148 5,669 4,570 15,135 20,133 20,133 19,649 200,460 215,367 212,274 102,462 123,066 124,339 66,512 79,159 80,148 168,974 202,225 204,487 (95,146 ) (113,901 ) (110,498 ) 73,828 88,324 93,989 41,766 23,780 25,395 3,069 3,062 3,046 44,835 26,842 28,441 $ 319,123 $ 330,533 $ 334,704 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 28,128 $ 18,520 $ 22,898 13,369 8,269 11,409 24,000 25,096 21,673 2,456 2,561 3,222 67,953 54,446 59,202 33,378 33,091 33,757 1,820 1,924 1,669 35,198 35,015 35,426 103,151 89,461 94,628 9,007 9,066 9,066 — — — 240,712 239,000 238,175 (33,671 ) (6,250 ) (7,373 ) (72 ) (740 ) (77 ) (4 ) (4 ) 285 215,972 241,072 240,076 $ 319,123 $ 330,533 $ 334,704 November 2, 2013 February 2, 2013 October 27, 2012 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 30,084 $ 42,279 $ 126,343 Short-term investments 35,812 67,694 — Income tax receivables 141 286 660 Other receivables 2,680 1,738 1,462 Merchandise inventories 42,587 33,788 46,193 Prepaid expenses and other current assets 13,289 13,443 5,669 Deferred tax assets — — 20,133 Total current assets 124,593 159,228 200,460 EQUIPMENT AND LEASEHOLD IMPROVEMENTS: Leasehold improvements 87,970 90,666 102,462 Furniture, fixtures and equipment 65,066 62,486 66,512 153,036 153,152 168,974 Less accumulated depreciation and amortization (88,117 ) (88,927 ) (95,146 ) Net equipment and leasehold improvements 64,919 64,225 73,828 OTHER ASSETS: Deferred tax assets — — 41,766 Other assets 2,003 3,053 3,069 Total other assets 2,003 3,053 44,835 TOTAL ASSETS $ 191,515 $ 226,506 $ 319,123 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable – merchandise $ 24,623 $ 16,978 $ 28,128 Accounts payable – other 11,361 18,116 13,369 Accrued liabilities 24,203 26,347 24,000 Current portion of deferred rent 3,909 2,289 2,456 Total current liabilities 64,096 63,730 67,953 LONG-TERM LIABILITIES: Deferred rent 31,092 32,136 33,378 Other long-term liabilities 1,796 1,908 1,820 Total long-term liabilities 32,888 34,044 35,198 Total liabilities 96,984 97,774 103,151 COMMITMENTS AND CONTINGENCIES (Note 6) STOCKHOLDERS’ EQUITY: Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 84,730,594 shares issued and 84,724,419 outstanding at November 2, 2013; 90,541,144 shares issued and 89,730,376 shares outstanding at February 2, 2013; and 90,072,035 shares issued and 89,727,234 shares outstanding at October 27, 2012 8,473 9,054 9,007 Common stock, Class B convertible, $0.10 par value, authorized 10,000,000 shares; no shares issued and outstanding — — — Paid-in capital 216,512 239,698 240,712 Accumulated deficit (130,323 ) (119,481 ) (33,671 ) Treasury stock, 6,175 shares, 810,768 shares, and 344,801 shares, at cost, at November 2, 2013, February 2, 2013, and October 27, 2012, respectively (4 ) (412 ) (72 ) Accumulated other comprehensive loss (127 ) (127 ) (4 ) Total stockholders’ equity 94,531 128,732 215,972 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 191,515 $ 226,506 $ 319,123 13 Weeks Ended 39 Weeks Ended October 27,
2012 October 29,
2011 October 27,
2012 October 29,
2011 $ 135,537 $ 152,135 $ 418,743 $ 456,945 109,492 105,781 318,293 311,069 26,045 46,354 100,450 145,876 44,405 39,492 126,215 121,047 6,456 733 19,035 2,049 (24,816 ) 6,129 (44,800 ) 22,780 35 57 108 195 (45 ) (41 ) (136 ) (128 ) (10 ) 16 (28 ) 67 (24,826 ) 6,145 (44,828 ) 22,847 (10,047 ) 2,397 (17,407 ) 8,888 $ (14,779 ) $ 3,748 $ (27,421 ) $ 13,959 $ (0.17 ) $ 0.04 $ (0.31 ) $ 0.14 $ (0.17 ) $ 0.04 $ (0.31 ) $ 0.14 88,877,993 88,146,378 88,650,011 94,265,017 88,877,993 88,244,855 88,650,011 94,351,425 13 Weeks Ended 39 Weeks Ended November 2, 2013 October 27, 2012 November 2, 2013 October 27, 2012 Net sales $ 127,664 $ 135,537 $ 405,358 $ 418,743 Cost of sales 98,715 109,492 293,526 318,293 Gross margin 28,949 26,045 111,832 100,450 Selling, general, and administrative expenses 38,743 44,405 115,592 126,215 Asset impairment 5,061 6,456 6,919 19,035 Operating loss (14,855 ) (24,816 ) (10,679 ) (44,800 ) Interest income 49 35 150 108 Interest expense (55 ) (45 ) (163 ) (136 ) Interest expense, net (6 ) (10 ) (13 ) (28 ) Loss before provision (benefit) for income taxes (14,861 ) (24,826 ) (10,692 ) (44,828 ) Provision (benefit) for income taxes 49 (10,047 ) 150 (17,407 ) Net loss $ (14,910 ) $ (14,779 ) $ (10,842 ) $ (27,421 ) Net loss per share, basic $ (0.18 ) $ (0.17 ) $ (0.13 ) $ (0.31 ) Net loss per share, diluted $ (0.18 ) $ (0.17 ) $ (0.13 ) $ (0.31 ) Weighted-average shares outstanding, basic 83,729,646 88,877,993 86,028,985 88,650,011 Weighted-average shares outstanding, diluted 83,729,646 88,877,993 86,028,985 88,650,011 COMPREHENSIVE (LOSS) INCOMEthousands) 13 Weeks Ended 39 Weeks Ended October 27,
2012 October 29,
2011 October 27,
2012 October 29,
2011 $ (14,779 ) $ 3,748 $ (27,421 ) $ 13,959 — (2 ) — (5 ) — (2 ) — (5 ) $ (14,779 ) $ 3,746 $ (27,421 ) $ 13,954 Common Stock Class A Class B Shares Par Value Shares Par Value Balance at February 2, 2013 90,541,144 $ 9,054 — $ — $ 239,698 $ (119,481 ) $ (412 ) $ (127 ) $ 128,732 Net loss — — — — — (10,842 ) — — (10,842 ) Stock issued pursuant to long-term incentive plans 496,292 50 — — (50 ) — — — — Stock-based compensation — — — — 1,212 — — — 1,212 Exercise of stock options 210,528 21 — — 726 — — — 747 Repurchase of common stock — — — — — — (25,318 ) — (25,318 ) Retirement of treasury stock (6,517,370 ) (652 ) — — (25,074 ) — 25,726 — — Balance at November 2, 2013 84,730,594 $ 8,473 — $ — $ 216,512 $ (130,323 ) $ (4 ) $ (127 ) $ 94,531 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 90,660,347 $ 9,066 — $ — $ 239,000 $ (6,250 ) $ (740 ) $ (4 ) $ 241,072 — — — — — (27,421 ) — — (27,421 ) 651,367 65 — — (65 ) — — — — — — — — 2,596 — — — 2,596 6,001 1 — — 18 — — — 19 — — — — — — (294 ) — (294 ) ) (1,245,680 ) (125 ) — — (837 ) — 962 — — 90,072,035 $ 9,007 — $ — $ 240,712 $ (33,671 ) $ (72 ) $ (4 ) $ 215,972 Common Stock 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 STOCKHOLDERS’ EQUITYthousands, except share data) 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 113,736,844 $ 11,374 — $ — $ 323,324 $ (21,332 ) $ (37,963 ) $ 290 $ 275,693 — — — — — 13,959 — — 13,959 831,388 83 — — (83 ) — — — — — — — — 3,172 — — — 3,172 — — — — 46 — — — 46 334,334 33 — — 1,038 — — — 1,071 — — — — — — (53,860 ) — (53,860 ) (24,242,219 ) (2,424 ) — — (89,322 ) — 91,746 — — — — — — — — — (5 ) (5 ) 90,660,347 $ 9,066 — $ — $ 238,175 $ (7,373 ) $ (77 ) $ 285 $ 240,076 39 Weeks Ended November 2, 2013 October 27, 2012 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (10,842 ) $ (27,421 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 10,198 13,531 Amortization of premium on investments 123 — Amortization of deferred financing costs 81 81 Loss on disposal of equipment and leasehold improvements 83 550 Asset impairment 6,919 19,035 Deferred income taxes — (17,986 ) Stock-based compensation 1,212 2,596 Changes in operating assets and liabilities: Income tax receivables 145 (460 ) Other receivables 79 (17 ) Merchandise inventories (8,799 ) (14,359 ) Prepaid expenses and other current assets 73 (1,180 ) Other non-current assets 29 (7 ) Accounts payable and accrued liabilities (3,295 ) 11,767 Deferred rent 576 182 Other long-term liabilities (112 ) (104 ) Net cash used in operating activities (3,530 ) (13,792 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and leasehold improvements (15,853 ) (16,775 ) Investment in marketable securities (9,500 ) — Proceeds from maturity of marketable securities 41,259 — Net cash provided by (used in) investing activities 15,906 (16,775 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 747 19 Repurchase of common stock (25,318 ) (294 ) Net cash used in financing activities (24,571 ) (275 ) NET DECREASE IN CASH AND CASH EQUIVALENTS (12,195 ) (30,842 ) CASH AND CASH EQUIVALENTS, beginning of period 42,279 157,185 CASH AND CASH EQUIVALENTS, end of period $ 30,084 $ 126,343 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 57 $ 57 Income taxes $ 267 $ 865 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS: Retirement of treasury shares $ 25,726 $ 962 Purchase of equipment and leasehold improvements unpaid at end of period $ 4,170 $ 3,366 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)(Unaudited) 39 Weeks Ended October 27,
2012 October 29,
2011 $ (27,421 ) $ 13,959 13,531 14,427 — 634 81 75 — 46 550 120 19,035 2,049 (17,986 ) 7,860 2,596 3,172 (460 ) — (17 ) (1,140 ) (14,359 ) (9,812 ) (1,180 ) (2,559 ) (7 ) (118 ) 11,767 (878 ) — (60 ) 182 2,741 (104 ) (99 ) (13,792 ) 30,417 (16,775 ) (21,785 ) — 25,000 (16,775 ) 3,215 19 1,071 (294 ) (53,860 ) (275 ) (52,789 ) (30,842 ) (19,157 ) 157,185 125,362 $ 126,343 $ 106,205 $ 57 $ 53 $ 865 $ 1,996 $ 962 $ 91,746 $ 3,366 $ 4,256 $ — $ (5 ) See notes to condensed consolidated financial statements. and October 29, 2011 Significant Accounting Policies, and Recently Adopted Accounting PronouncementsBasis of PresentationOctober 27, 2012, and for the 13 and 39 weeks ended November 2, 2013, and October 27, 2012 and October 29, 2011 (collectively, the “Interim Financial Statements”), areis 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 Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012.2, 2013.will beis recognized, measured asby the difference between the carrying value and the estimated fair value of the assets, based on discounted estimated future cash flows using the Company’s weighted average cost of capital. TheWith regard to store assets, which are comprised of leasehold improvements, fixtures and computer hardware and software, the Company considers the assets at each individual store to represent an asset group. In addition, 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 provideprovides the most relevant and reliable means by which to determine fair value in this circumstance.Company’sCompany conducts its quarterly impairment evaluation at the individual store level using the guidance under applicable accounting standards. The quarterly analysis includes the Company's estimates of future cash flows using only the cash inflows and outflows that are directly related to each store assets includes consideration of currentover the remaining lease term. Key assumptions made by the Company and included within the cash flow estimates are future sales and gross margin projections. The Company determines the future sales and gross margin projections by considering each store's recent and historical performance, the Company's overall performance trends and projections of future profitability. The profitability projections rely upon estimates made byand the Company’s management, including store-level sales, gross margins, and direct expenses, and, by their nature, include judgments about how currentpotential impact of strategic initiatives will impacton future performance.Company’s financial performance in the first three quarters of fiscal 2012 declined more than was projected by the Company’s management in past impairment analyses, which resulted in asset impairment charges each quarter since the beginning of fiscal 2012. Each period reflected the Company’s 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 Company’s current financial performance trend, the Company would incur additional impairment of assets in the future.The Company’sCompany's evaluations during the October 29, 2011, indicated that operating losses or insufficient operating income existed at certain retail101 stores with a projection thatand resulted in 23, 32, 29 and 80 stores being impaired, respectively, as their projected future cash flows were not sufficient to recover the operating losses or insufficient operating income for those locations would continue.net carrying value of their assets. 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’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) $ 6,456 $ 733 $ 19,313 $ 2,049 (6,456 ) (733 ) (19,035 ) (2,049 ) $ — $ — $ 278 $ — 29 3 80 9 and October 29, 2011 13 Weeks Ended 39 Weeks Ended November 2, 2013 October 27, 2012 November 2, 2013 October 27, 2012 Aggregate carrying value of all long-lived assets impaired $ 5,718 $ 6,456 $ 7,817 $ 19,313 Less: Impairment charges 5,061 6,456 6,919 19,035 Aggregate fair value of all long-lived assets impaired $ 657 $ — $ 898 $ 278 Number of stores with asset impairment 23 29 32 80 (Unaudited)17NOTE 1 – Basis of Presentation, Significant Accounting Policies, and Recently Adopted Accounting PronouncementsBasis of Presentation (Continued)The long-lived assets disclosed above stores that were written downtested and not determined to their respective fair values consistedbe impaired during the 13 weeks ended November 2, 2013, 9 could be deemed to be at risk of leasehold improvements, furniture, fixturesfuture impairment. When making this determination, the Company considered the potential impact that reasonably possible changes to sales and equipment. Based on historical operatinggross margin performance andversus the projected outlookCompany's current projections for these stores could have on their current estimated cash flows.believesconsiders the positive impact expected from its strategic initiatives when determining the key assumptions to use within the projected cash flows for each store during its quarterly analysis. 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 Company's current financial performance trend, the Company may incur additional impairment in the future for those stores tested and not deemed to be impaired in its most recent quarterly analysis, as well as for additional stores not tested in its most recent quarterly analysis.remaining asset valuesCompany recognize deferred tax assets, which include net operating loss carryforwards (NOLs) and tax credits, and liabilities based on the differences between the financial statement carrying amounts and the tax bases of approximately $0.3 million forassets and liabilities, using enacted tax rates in effect in the 39 weeks ended October 27, 2012,years the differences are recoverable.Income Taxes$75.9$121.4 million of federal net operating loss (“NOL”) carry forwardsNOLs available to offset taxable income in fiscal 20122013 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code. The Company’sCompany's effective income tax ratesrate for the 13 and 39 weeks ended October 27, 2012, were 40.5%November 2, 2013, was approximately negative 0.3% and 38.8%negative 1.4%, respectively.respectively, despite its net loss. This effective rate is due to certain state income taxes for fiscal 2013 that are not based on consolidated net income. The Company expects a 38.8%negative 1.2% effective income tax rate for fiscal 2012.2013.Company’s 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 Company’s recently closed IRS audit of its fiscal 2008 and 2009 tax years and $0.3 million for tax credits taken on the Company’s fiscal 2011 tax return in the fiscal 2012 third quarter, which are discrete items. The Company anticipates cash payment for income taxesCompany's comprehensive loss for the fiscal year will be approximately $0.1 million, representing certain state income taxes. The difference between13 and 39 weeks ended November 2, 2013, and October 27, 2012 was equal to the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash benefit for deferred income taxes.Recently AdoptedCompany's net loss.May 2011,February 2013, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued amended guidance on the applicationdisclosure of fair value accounting where its useaccumulated other comprehensive income. The amendments in this update require an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is already required or permitted by other standards within U.S. GAAP. This guidance changedto present, either on the wording used to describe manyface 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 FASB’s intent about the application of existing fair value measurement and disclosure requirements, and change a particular principleincome statement 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 applicationnotes, significant amounts reclassified from accumulated otherrequirements. This guidance became effective for interim39 weeks ended November 2, 2013, and annual periods beginning after December 15, 2011.October 27, 2012significantly impact the Company’s 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.October 27, 2012:November 2, 2013: 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;November 2, 2013; 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 WET SEAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor the 39 weeks ended October 27, 2012, and October 29, 2011(Unaudited)NOTE 2 – Stock-Based Compensation (Continued)and performance share grants.grants and other awards made or settled in the form of Company stock. The 2005 Plan was approved by the Company’s stockholders on January 10, 2005, as amended with stockholder approval on July 20, 2005, for the issuance of22,669,52822,557,528 shares of Class A common stock have been issued or may be issued pursuant to the Plans. As of October 27, 2012, 3,977,081November 2, 2013, 4,411,479 shares were available for future grants.Options 13 Weeks Ended 39 Weeks Ended October 27,
2012 October 29,
2011 October 27,
2012 October 29,
2011 0.00 % 0.00 % 0.00 % 0.00 % 46.47 % 54.00 % 48.58 % 54.00 % 0.47 % 0.51 % 0.48 % 0.96 % 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 Company’s previous chief executive officer. 13 Weeks Ended 39 Weeks Ended November 2, 2013 October 27, 2012 November 2, 2013 October 27, 2012 Dividend Yield — % — % — % — % Expected Volatility 40.73 % 46.47 % 40.89 % 48.58 % Risk-Free Interest Rate 1.00 % 0.47 % 0.63 % 0.48 % Expected Life of Options (in Years) 3.3 3.3 3.3 3.3 October 27, 2012,November 2, 2013, there was $1.0$0.4 million of total unrecognized compensation expense related to nonvested stock options under the Company’s share-based payment plans, which will be recognized over an average period of 1.71.8 years, representing the remaining vesting periods of such options through fiscal 2015.October 27, 2012, as followsNovember 2, 2013 (aggregate intrinsic value in thousands): Number of
Shares Weighted-
Average
Exercise
Price Per
Share Weighted-
Average
Remaining
Contractual Life
(in years) Aggregate
Intrinsic
Value 3,474,204 $ 4.64 125,000 $ 3.10 (6,001 ) $ 3.15 (1,003,738 ) $ 5.62 2,589,465 $ 4.20 2.21 $ 8 2,452,317 $ 4.22 2.11 $ 7 1,723,349 $ 4.42 1.39 $ 4 Options Outstanding at February 2, 2013 1,564,167 $ 4.29 Granted 180,000 $ 3.78 Exercised (210,528 ) $ 3.55 Canceled (656,171 ) $ 4.90 Outstanding at November 2, 2013 877,468 $ 3.92 3.17 $ 70 Vested and expected to vest in the future at November 2, 2013 817,397 $ 3.93 3.10 $ 64 Exercisable at November 2, 2013 540,856 $ 4.01 2.73 $ 39 THE WET SEAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor the 39 weeks ended October 27, 2012, and October 29, 2011(Unaudited)NOTE 2 – Stock-Based Compensation (Continued)October 27, 2012,November 2, 2013, net of estimated forfeitures. Additional information regarding stock options outstanding as of October 27, 2012,November 2, 2013, is as follows: Options Outstanding Options Exercisable 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 27,500 3.64 $ 2.57 7,500 $ 2.26 2,132,299 2.27 $ 3.70 1,342,853 $ 3.68 211,666 3.33 $ 4.91 154,996 $ 5.08 218,000 0.42 $ 8.61 218,000 $ 8.61 2,589,465 2.21 $ 4.20 1,723,349 $ 4.42 Options Outstanding Options Exercisable Range of Exercise Prices $ 2.66 - $ 4.15 618,468 3.26 $ 3.49 368,526 $ 3.51 $ 4.19 - $ 6.82 256,000 2.97 $ 4.88 169,330 $ 4.98 $ 10.95 - $ 10.95 3,000 0.09 $ 10.95 3,000 $ 10.95 $ 2.66 - $ 10.95 877,468 3.17 $ 3.92 540,856 $ 4.01 October 29, 2011, was $0.94, $1.08, $1.61 and $1.55,$1.08, respectively. The total intrinsic valuevalues for options exercised during the 39 weeks ended October 27, 2012, and during the 13 and 39 weeks ended November 2, 2013, and October 29, 2011,27, 2012, was less than $0.1$0.1 million, $0.2 million, none, and $0.5less than $0.1 million, respectively.allthe Plans for the 39 weeks ended November 2, 2013, and October 27, 2012, was $0.7 million and October 29, 2011, was less than $0.1$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.Sharesthree-and-one-half years.three years. The Company also grants certain executives and other key employees performance share awards and performance stock units with vesting contingent upon a combination of specified service periods and the Company’s achievement of specified corporate performance objectives. Restricted stock units and performance stock units awarded to employees represent the right to receive one share of the Company's Class A common stock price levels. and October 29, 2011,, the Company granted 401,370234,759 and 431,388401,370 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 November 2, 2013, and October 27, 2012, was $3.03 and October 29, 2011, was $3.22 and $3.87$3.22 per share, respectively. TheAdditionally, the Company recorded approximately $0.4 million, $1.7 million, $0.4 million and $1.0 million of compensation expense relatedgranted 249,338 restricted stock units to outstanding shares of restricted common stockcertain employees during the 13 and 39 weeks ended October 27, 2012, and October 29, 2011, respectively. The expense forNovember 2, 2013 with a weighted-average grant-date fair value of $3.67 per share. reflects$0.6 million charge for vesting acceleration resulting fromgrant-date fair value of $2.95 per share. Additionally, the departureCompany granted 183,758 performance stock units to certain employees during the 39 weeks ended November 2, 2013, with a weighted-average grant-date fair value of $3.09 per share, with the Company’s previous chief executive officer.opportunity of an additional 32,375 performance stock units to be earned if certain corporate performance objectives are achieved, which are not included in the total outstanding share awards below. During the 13 weeks ended October 27, 2012,November 2, 2013, the Company granted 249,997 shares of restricted commonreversed the previously recorded performance stock to certain board members for additional services to be provided. However, the board subsequently rescindedawards 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 compensationunits 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 ofdeclines in corporate performance shares as a result of the departure of the Company’s previous chief executive officer.THE WET SEAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor the 39 weeks ended October 27, 2012, and October 29, 2011(Unaudited)NOTE 2 – Stock-Based Compensation (Continued)closing tradingspecified grant date price of the Company’s 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 Company’s Class A common stock and the estimated probability of achieving the Company’s stock price performance conditions as of the grant date. The following table summarizes activity with respect to the Company’s nonvested restricted common stock, restricted stock units, performance share awards and performance shares forstock units during the 39 weeks ended October 27, 2012: Number of
Shares Weighted-
Average Grant-
Date Fair Value 2,105,112 $ 3.16 651,367 $ 3.22 (774,080 ) $ 3.65 (1,181,935 ) $ 2.81 800,464 $ 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 Company’s certificate of incorporation, upon retirement, such treasury shares resumed the status of authorized and unissued shares of Company common stock.Restricted Common Stock, Restricted Stock Units, Performance Share Awards, and Performance Stock Units Number of Shares Weighted-Average Grant-Date Fair Value Nonvested at February 2, 2013 644,492 $ 2.89 Granted 929,388 $ 3.19 Vested (115,119 ) $ 3.14 Forfeited (56,992 ) $ 3.11 Nonvested at November 2, 2013 1,401,769 $ 3.06 October 27, 2012,November 2, 2013, there was $1.8$2.1 million of total unrecognized compensation expense related to nonvested restricted common stock, restricted stock units, performance share awards, and performance sharesstock units under the Company’s share-based payment plans, of which $1.4$1.3 million relates to is for restricted common stock and $0.4performance stock awards, and $0.8 million relates to is for restricted and performance shares.stock units. That cost is expected to be recognized over a weighted-average period of 1.32.1 years. These estimates utilize subjective assumptions, about expected forfeiture rates, which could change over time.depend upon achievement of a combination of specified service periods and performance objectives. The number of shares to vest, and the related stock-based compensation expense to be incurred, may differ dependent upon actual performance objectives achieved. 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.table summarizestables summarize 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 $ 86 $ 98 $ 221 $ 189 519 1,114 2,375 2,983 $ 605 $ 1,212 $ 2,596 $ 3,172 13 Weeks Ended 39 Weeks Ended November 2, 2013 October 27, 2012 November 2, 2013 October 27, 2012 Stock options $ 89 $ 175 $ 211 $ 1,055 Restricted and performance stock awards and units 278 430 1,001 1,541 Stock-based compensation $ 367 $ 605 $ 1,212 $ 2,596 13 Weeks Ended 39 Weeks Ended November 2, 2013 October 27, 2012 November 2, 2013 October 27, 2012 Cost of sales $ 117 $ 86 $ 239 $ 221 Selling, general, and administrative expenses 250 519 973 2,375 Stock-based compensation $ 367 $ 605 $ 1,212 $ 2,596 $35.0$35.0 million senior revolving credit facility with its existing lender (the “Facility”), which can be increased up to $50.0$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 lender’s 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.$4.0 million. The annual interest rate on the revolving line of credit under the Facility is (i) the higher of the lender’s 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 feesTHE WET SEAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor the 39 weeks ended October 27, 2012, and October 29, 2011(Unaudited)NOTE 3 – Senior Revolving Credit Facility (Continued)October 27, 2012,November 2, 2013, the amount outstanding under the Facility consisted of $6.2$2.0 million in open documentary letters of credit related to merchandise purchases and $1.5$1.7 million in outstanding standby letters of credit, and the Company had $27.3$31.3 million available under the Facility for cash advances and/or the issuance of additional letters of credit.October 27, 2012,November 2, 2013, the Company was in compliance with all covenant requirements related tounder the Facility.Company’sCompany's own credit risk.Company’sCompany's market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels: Carrying
Amount
at October 27,
2012 Fair Value Measurements
at Reporting Date Using Level 1 Level 2 Level 3 $ 126,343 $ 21,992 $ 104,351 $ — 938 — — 938 Carrying
Amount
at January 28,
2012 Fair Value Measurements
at Reporting Date Using Level 1 Level 2 �� Level 3 $ 157,185 $ 62,881 $ 94,304 $ — 875 — — 875 Carrying
Amount
at October 29,
2011 Fair Value Measurements
at Reporting Date Using Level 1 Level 2 Level 3 $ 106,205 $ 11,916 $ 94,289 $ — 25,056 — 25,059 — 855 — — 855 Level 1 Level 2 Level 3 Financial assets: Cash $ 16,098 $ 16,098 $ — $ — Money market funds 13,986 — 13,986 — Cash and cash equivalents 30,084 Certificates of deposit 5,490 — 5,476 — US treasury securities 4,994 — 5,000 — US government agency securities 25,328 — 25,303 — Short-term investments 35,812 Tenant allowances receivable 1,029 — — 1,029 Level 1 Level 2 Level 3 Financial assets: Cash $ 5,612 $ 5,612 $ — $ — Money market funds 36,667 — 36,667 — Cash and cash equivalents 42,279 Certificates of deposit 5,053 — 5,047 — US treasury securities 19,991 — 19,991 — US government agency securities 42,650 — 42,592 — Short-term investments 67,694 — — — Long-term tenant allowances receivable 960 — — 960 Level 1 Level 2 Level 3 Financial assets: Cash $ 21,992 $ 21,992 $ — $ — Money market funds 104,351 — 104,351 — Cash and cash equivalents 126,343 Long-term tenant allowances receivable 938 — — 938 and October 29, 2011(Unaudited)NOTE 4 – Fair Value Measurements and Disclosures (Continued)Certain money market funds are valued through the use of quoted market prices and are represented as Level 1. OtherThe Company's money market funds are valued at $1,$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 Company’s short-term investments consistedconsist of interest-bearing corporate bonds that were guaranteed by theof various U.S. Government under the Temporary Liquidity Guarantee Program, hadagencies, U.S. treasury securities and certificates of deposit, have maturities that wereare less than one year and wereare carried at amortized cost plus accrued income. Short-term investments wereare carried at amortized cost due to the Company’s intent to hold to maturity. The fair value of the Company’s 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 receivablesallowances receivable 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 receivablesAs of November 2, 2013, they are included in other assetsreceivables within the condensed consolidated balance sheets.capital rate.capital. During the 13 and 39 weeks ended November 2, 2013, and October 27, 2012 and October 29, 2011,, the Company recorded $6.5$5.1 million $19.0, $6.9 million $0.7, $6.5 million and $2.0$19.0 million of impairment charges, respectively, in the accompanying condensed consolidated statements of operations. Refer to Note 1, “Basis“Summary of Presentation, Significant Accounting Policies, and Recently Adopted Accounting Pronouncements.Policies.”(Loss) IncomeLoss Per Share(loss) incomeloss 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 Company’s other equity securities (see below). Net (loss) incomeloss 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.iswas 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.THE WET SEAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor 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 $ (14,779 ) $ 3,748 — (107 ) $ (14,779 ) 88,877,993 $ (0.17 ) $ 3,641 88,146,378 $ 0.04 $ (14,779 ) $ 3,748 — (106 ) — 98,477 $ (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 $ (27,421 ) $ 13,959 — (359 ) $ (27,421 ) 88,650,011 $ (0.31 ) $ 13,600 94,265,017 $ 0.14 $ (27,421 ) $ 13,959 — (358 ) — 86,408 $ (27,421 ) 88,650,011 $ (0.31 ) $ 13,601 94,351,425 $ 0.14 (loss) incomeloss per share, diluted, excluded the following potentially dilutive securities exercisable into Class A common stock for the 13 and 39 weeks ended November 2, 2013, and 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 2,592,016 2,598,282 2,592,419 2,466,663 838,225 2,588,704 1,560,491 2,485,530 3,430,241 5,186,986 4,152,910 4,952,193 THE WET SEAL, INC.anti-dilutive.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor the 39 weeks ended October 27, 2012, and October 29, 2011(Unaudited) 13 Weeks Ended 39 Weeks Ended November 2, 2013 October 27, 2012 November 2, 2013 October 27, 2012 Stock options outstanding 567,225 2,592,016 471,806 2,592,419 Unvested restricted and performance stock awards and units 1,389,281 838,225 1,290,574 1,560,491 Total 1,956,506 3,430,241 1,762,380 4,152,910 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 Company’s 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 Company’s 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 court’s 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 Company’s results of operations or financial condition.Company’sCompany's 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 allegesalleged various violations under the State of California Labor Code and the State of California Business and Professions Code. Plaintiffs soughtPlaintiffs’Plaintiffs' Motion for Class Certification. Plaintiffs appealed and, on October 12, 2012, the California Court of Appeals affirmed the lower court’scourt's ruling. TheOn January 23, 2013, the California Supreme Court denied Plaintiffs' petition for review. On February 4, 2013, the Court of Appeals issued an order to send the case back to the trial court to proceed on behalf of only the three named plaintiffs and not as a class action. In October 2013, the Company is vigorously defending this litigation and is unable to predictentered into confidential settlement agreements that resolved 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 Company’s results of operations or financial condition.concludesconcluded the EEOC’sEEOC's investigation. TheBetween November 2012 and March 2013, the Company has accruedpaid approximately $0.5$0.8 million for settlements to settle with some of the individual complainants. The Company also agreed to programmatic initiatives that are consistent with the Company’sCompany's 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 havehad an opportunity to bring a private lawsuit within ninety days from the date they receive areceived their November 26, 2012 right-to-sue notice from the EEOC. The CompanyEEOC, however, that time period is not certain whentolled for those notices will issue. The Company is unable to predict whether any complainant will fileindividuals who are putative class members in a private lawsuit and ifrace discrimination class action 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 recordedJuly 12, 2012 in the future which mayUnited States District Court for the Central District of California with respect to any race discrimination claims they have that are within the scope of the putative class action (see below). On December 12, 2012, the EEOC issued a material adverse effect on"for cause" finding related to certain allegations made by one complainant, who is the Company’s results of operations or financial condition.Company’sCompany's 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. Plaintiffs are seeking statutory penalties, civil penalties, injunctive relief, and attorneys' fees and costs. On February 3, 2012, the court granted the Company’sCompany's motion to transfer venue to the County of Orange. On July 13, 2012, the Court granted the Company’sCompany's motion to compel arbitration. Plaintiffs appealed. Onappealed, and on November 15, 2013, the Court of Appeals issued an order affirming the trial court's order compelling individual arbitration, but reversing the trial court's order compelling arbitration of Plaintiffs' Private Attorney General Act (PAGA) claims on an individual basis. The Company intends to appeal the decision to the California Supreme Court. In a concurrent proceeding, 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 Company’sCompany's 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 PlaintiffsPlaintiffs' 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 Company’s results of operations or financial condition.THE WET SEAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor the 39 weeks ended October 27, 2012, and October 29, 2011(Unaudited)NOTE 6 – Commitments and Contingencies (Continued)Company’sCompany's 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. Plaintiffs are seeking unpaid wages, civil and statutory penalties, restitution, injunctive relief, interest, and attorneys' fees and costs. 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 Company’sCompany's motion to compel arbitration. On September 21, 2012, the Company filed a notice of appeal. The Companyappeal that 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 Company’s results of operations or financial condition.Company’sCompany's current and former African American retail store employees. The Company was named as a defendant. The complaint allegesalleged 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 allegingalleged retaliation. Plaintiffs are seekingalso sought 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’attorneys' fees, and interest. On May 8, 2013, the Company and Class Representatives filed papers memorializing an amicable resolution to the case pending final court approval. The Settlement Agreement provides for a cash payment of $7.5 million and also includes programmatic relief under which the Company agrees to post open positions, implement new selection criteria and interview protocols, revamp its annualthis litigationthe pending matters and is unablewill continue to predictevaluate its potential exposure and estimated costs as these matters progress. Future developments may require the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of October 27, 2012. Depending onCompany to adjust the actual outcomeamount of this case, provisionsaccrual, which, if increased, could be recorded in the future which may have a material adverse effect on the Company’sCompany's results of operations or financial condition.the Company has insurance tomay cover a portion of such losses. However, certainthe outcome of the Company's litigation matters couldcannot be accurately predicted and there may be existing matters or matters that arise for which the Company does not have insurance coverage andor for which insurance provides only partial coverage. Such outcome could have a material adverse effect on itsthe Company's results of operations or financial condition.THE WET SEAL, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFor the 39 weeks ended October 27, 2012, and October 29, 2011(Unaudited) and October 29, 2011,, for the two reportable segments is set forth below (in thousands, except percentages): Wet Seal Arden B Corporate
and
Unallocated Total $ 117,892 $ 17,645 $ — $ 135,537 87 % 13 % — 100 % $ (8,747 ) $ (3,733 ) $ (12,336 ) $ (24,816 ) $ 3,442 $ 404 $ 422 $ 4,268 $ — $ — $ 35 $ 35 $ — $ — $ (45 ) $ (45 ) $ (8,747 ) $ (3,733 ) $ (12,346 ) $ (24,826 ) Wet Seal Arden B Corporate
and
Unallocated Total $ 131,216 $ 20,919 $ — $ 152,135 86 % 14 % — 100 % $ 13,667 $ (1,011 ) $ (6,527 ) $ 6,129 $ 4,032 $ 528 $ 387 $ 4,947 $ — $ — $ 57 $ 57 $ — $ — $ (41 ) $ (41 ) $ 13,667 $ (1,011 ) $ (6,511 ) $ 6,145 Wet Seal Arden B Corporate
and
Unallocated Total $ 357,806 $ 60,937 $ — $ 418,743 85 % 15 % — 100 % $ (8,003 ) $ (6,614 ) $ (30,183 ) $ (44,800 ) $ 11,022 $ 1,314 $ 1,195 $ 13,531 $ — $ — $ 108 $ 108 $ — $ — $ (136 ) $ (136 ) $ (8,003 ) $ (6,614 ) $ (30,211 ) $ (44,828 ) Wet Seal Arden B Corporate
and
Unallocated Total $ 387,302 $ 69,643 $ — $ 456,945 85 % 15 % — 100 % $ 42,760 $ 3,000 $ (22,980 ) $ 22,780 $ 11,744 $ 1,572 $ 1,111 $ 14,427 $ — $ — $ 195 $ 195 $ — $ — $ (128 ) $ (128 ) $ 42,760 $ 3,000 $ (22,913 ) $ 22,847 13 Weeks Ended November 2, 2013 Wet Seal Arden B Total Net sales $ 114,878 $ 12,786 $ — $ 127,664 Percentage of consolidated net sales 90 % 10 % — % 100 % Operating loss $ (4,575 ) $ (2,427 ) $ (7,853 ) $ (14,855 ) Depreciation and amortization expense $ 2,615 $ 304 $ 504 $ 3,423 Interest income $ — $ — $ 49 $ 49 Interest expense $ — $ — $ (55 ) $ (55 ) Loss before provision for income taxes $ (4,575 ) $ (2,427 ) $ (7,859 ) $ (14,861 ) 13 Weeks Ended October 27, 2012 Wet Seal Arden B 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 for income taxes $ (8,747 ) $ (3,733 ) $ (12,346 ) $ (24,826 ) and October 29, 2011NOTE 7 – Segment Reporting (Continued)39 Weeks Ended November 2, 2013 Wet Seal Arden B Total Net sales $ 358,245 $ 47,113 $ — $ 405,358 Percentage of consolidated net sales 88 % 12 % — % 100 % Operating income (loss) $ 13,928 $ (1,380 ) $ (23,227 ) $ (10,679 ) Depreciation and amortization expense $ 7,934 $ 882 $ 1,382 $ 10,198 Interest income $ — $ — $ 150 $ 150 Interest expense $ — $ — $ (163 ) $ (163 ) Income (loss) before provision for income taxes $ 13,928 $ (1,380 ) $ (23,240 ) $ (10,692 ) 39 Weeks Ended October 27, 2012 Wet Seal Arden B 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 for income taxes $ (8,003 ) $ (6,614 ) $ (30,211 ) $ (44,828 ) solely to allow for reconciliation of segment contribution to consolidated operating income (loss) income,, interest income, interest expense and income (loss) income before (benefit from) provision (benefit) 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.$0.1$0.1 million and $2.0 million, respectively, of severance costs resulting from the departure of the Company’sCompany's 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 Company’s board members. The proxy solicitation ultimately led to an agreement to replace four of the Company’s seven board members during October 2012.Wet Seal operating (loss) income during13Company's Board of Directors authorized a program to repurchase up to $25.0 million of the outstanding shares of its Class A common stock, to be executed through open market or privately negotiated transactions. The timing and number of shares repurchased was to be determined by the Company’s management based on its evaluation of market conditions and other factors.October 27, 2012, and October 29, 2011, includes $5.8November 2, 2013, the Company repurchased 5,565,873 shares of its Class A common stock at a weighted average market price of $4.48 per share, for a total cost, including commissions, of $25.0 million $16.3 million, $0.2 million and $1.0 million, respectively,, representing full execution of asset impairment charges.Arden B operating (loss) income during the 13 andstock repurchase program. Additionally, the Company tendered October 29, 2011, includes $0.7 million, $2.7 million, $0.5 millionthe terms of the Company’s certificate of incorporation, upon retirement, such treasury shares resumed the status of authorized and $1.0 million, respectively,unissued shares of asset impairment charges.Item 2.Management’s Discussion and Analysis of Financial Condition and Results of OperationsJanuary 28, 2012,February 2, 2013, and elsewhere in this Quarterly Report on Form 10-Q.from their early teensaged 13 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,November 2, 2013, we had 553530 retail stores in 47 states and Puerto Rico. Of the 553530 stores, there were 472471 Wet Seal stores and 8159 Arden B stores. Our merchandise can also be purchased online through the respective websites of each of our chains.lifestyles.lifestyle.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.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.decreased 13.5%increased 0.8% during the 13 weeks ended October 27, 2012,November 2, 2013, driven by a 13.5%1.7% comparable store sales decreaseincrease in our Wet Seal division, andoffset by a 13.8%6.7% comparable store sales decrease in our Arden B division. During the quarter we achieved a consolidated comparable store sales increase and significantly improved merchandise margins versus the prior year quarter, despite a challenging retail environment. We noted a declining trend in comparable store sales over the course of the third fiscal 2013 quarter, after late August. As we proceed through the holiday season, we are maintaining an appropriate mix of regular and promotional pricing and remaining focused on inventory management. As of November 2, 2013, inventory dollars per square foot were down approximately 3% versus the prior year at Wet Seal and down approximately 20% versus the prior year at Arden B. Additionally, we continue to exercise control over costs, resulting in a decrease in selling, general and administrative expenses versus the prior year quarter.division’sdivision's comparable store sales decreaseincrease was primarily driven by a decreasean increase in transaction volume, andpartially offset by a decrease in average dollar sales per transaction, which was driven by a decrease in average unit selling price, partiallyunits purchased per customer 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.average unit selling price. The Arden B division comparable store sales decrease was primarily driven by a declinedecrease in transaction volume and a decrease in average dollar sales per transaction, which was driven by a decrease in average unit selling price,units purchased per customer, 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. average unit selling price. increased 8.7% during the 13 weeks ended October 27, 2012, as compared to the prior year quarter.The third quarter, marked an important transition period for us as we executed uponwhich is not a factor in calculating 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 monthdeclined approximately 19% for the monthan increase of 8.7% 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 ClosuresFor 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. Through more disciplined management of promotional pricing, we generated an improved e-commerce merchandise margin rate versus the prior year quarter. However, the transition to a new e-commerce platform during the third fiscal 2013 quarter negatively impacted sales results. The re-platform was completed in late October 2013 and is now enabling customers to view content and execute transactions more efficiently on both desktop and mobile or tablet devices.one storetwo stores during the 13 weeks ended October 27, 2012.Notes to Consolidated Financial StatementsSignificant Accounting Policies" and in Management’s 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.February 2, 2013.January 28, 2012,February 2, 2013, except for the following updates for our critical accounting policies for long-lived assets, and accounting for income taxes.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.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. 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$5.1 million, $6.9 million, $6.5 million and $19.0 million, respectively, of $6.5 million, $19.0 million, $0.7 million and $2.0 million, in ourimpairment charges. Additional information required by this item is incorporated herein by reference to Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial 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.$75.9$121.4 million of federal net operating loss (“NOL”) carry forwardsNOLs available to offset taxable income in fiscal 20122013 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code.income tax ratesrate for the October 27, 2012, were 40.5%November 2, 2013, was approximately negative 0.3% and 38.8%negative 1.4%, respectively.respectively, despite our net loss. This effective rate is due to certain state income taxes for fiscal 2013 that are not based on consolidated net income. We expect a 38.8%negative 1.2% effective income tax rate for fiscal 2012. Our effective income tax rates reflect a $0.3 million write-off2013. Additional information required by this item is incorporated herein by reference to Note 1, "Summary of certain deferred tax assets inSignificant Accounting Policies," to 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 PronouncementsIn 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 FASB’s 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,statements included elsewhere in this report.FASB issued amended guidance onpossibility of various legal losses. We consider the presentationlikelihood of comprehensive income. This guidance provided an entity with an optionloss or the incurrence of a liability, as well as our ability to presentreasonably estimate the totalamount of comprehensive income, the components of net incomeloss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred and the componentsamount of other comprehensive income eitherloss can be reasonably estimated. We evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. As of November 2, 2013, we have accrued $0.2 million for loss contingencies in a single continuous statement of comprehensive income orconnection with the litigation matters discussed in two separate but consecutive statements. In both options, an entity is required Note 6, "Commitments and Contingencies," 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. 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 100.0 % 100.0 % 100.0 % 100.0 % 80.8 69.5 76.0 68.1 19.2 30.5 24.0 31.9 32.8 26.0 30.1 26.5 4.7 0.5 4.6 0.4 (18.3 ) 4.0 (10.7 ) 5.0 (0.0 ) 0.0 (0.0 ) 0.0 (18.3 ) 4.0 (10.7 ) 5.0 (7.4 ) 1.5 (4.2 ) 1.9 (10.9 )% 2.5 % (6.5 )% 3.1 % 13 Weeks Ended 39 Weeks Ended November 2, 2013 October 27, 2012 November 2, 2013 October 27, 2012 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 77.3 80.8 72.4 76.0 Gross margin 22.7 19.2 27.6 24.0 Selling, general, and administrative expenses 30.3 32.8 28.5 30.1 Asset impairment 4.0 4.7 1.7 4.6 Operating loss (11.6 ) (18.3 ) (2.6 ) (10.7 ) Interest expense, net — — — — Loss before provision (benefit) for income taxes (11.6 ) (18.3 ) (2.6 ) (10.7 ) Provision (benefit) for income taxes 0.1 (7.4 ) 0.1 (4.2 ) Net loss (11.7 )% (10.9 )% (2.7 )% (6.5 )% October 27, 2012,November 2, 2013, Compared to Thirteen Weeks Ended October 29, 201127, 2012 13 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 13 Weeks
Ended
October 29, 2011 ($ in millions) $ 135.5 $ (16.6 ) (10.9 )% $ 152.1 (13.5 )% 13 Weeks Ended November 2, 2013 13 Weeks Ended October 27, 2012 ($ in millions) Net sales $ 127.7 $ (7.8 ) (5.8 )% $ 135.5 Comparable store sales increase 0.8 % October 27, 2012,November 2, 2013 decreased primarily as a result of athe following:13.5%$2.8 million due to the retail calendar shift, which replaced a higher volume August back to school week in fiscal 2012 with a lower volume late October week in fiscal 2013;resulting fromincrease during the 13 weeks ended November 2, 2013 was due to a 13.0% decrease5.0% increase in comparable store average transactions, andpartially offset by a 0.8%4.1% decrease in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction decreased mainly due to a 4.2%5.0% decrease in average unit retail prices, partially offset by a 3.4% increase in the number of units purchased per customer.The decrease in net sales wascustomer, partially offset by ana 0.6% increase in numberaverage unit retail prices. 13 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 13 Weeks
Ended
October 29, 2011 ($ in millions) $ 109.5 $ 3.7 3.5 % $ 105.8 80.8 % 11.3 % 69.5 % 13 Weeks Ended November 2, 2013 Change From
Prior Fiscal Period 13 Weeks Ended October 27, 2012 ($ in millions) Cost of sales $ 98.7 $ (10.8 ) (9.8 )% $ 109.5 Percentage of net sales 77.3 % (350 bps) 80.8 % increaseddecreased due primarily to a decreasean increase in merchandise margin of 350 basis points as a result of significantly higherlower markdown rates in both the Wet Seal and Arden B divisions,divisions. The decline in cost of sales was additionally driven by a decline in sales, partially offset by a slight increase in occupancy costs as a result of higher new store pre-opening costs 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. 13 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 13 Weeks
Ended
October 29, 2011 ($ in millions) $ 44.4 $ 4.9 12.4 % $ 39.5 32.8 % 6.8 % 26.0 % 13 Weeks Ended November 2, 2013 13 Weeks Ended October 27, 2012 ($ in millions) Selling, general, and administrative expenses $ 38.7 $ (5.7 ) (12.8 )% $ 44.4 Percentage of net sales 30.3 % (250 bps) 32.8 % 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.$0.8$0.9 million from the prior year to $31.5$30.6 million. As a percentage of net sales, selling expenses were 23.3%24.0% of net sales, or 20070 basis points higher than a year ago.yearquarter decrease in selling expenses:$1.1$0.7 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; andbonusesinternet order fulfillment costs as a result of lower e-commerce transaction volume;declining performance.lower units shipped; andHowever, theincreases:increase: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;and field meeting expenses; andA $0.1 million net increase in other selling expenses.increased $5.7decreased $4.8 million from the prior year quarter, to $12.9$8.1 million. As a percentage of net sales, general and administrative expenses were 9.5%6.3%, or 480320 basis points higherlower than in the priora year quarter.year increasequarter decrease in general and administrative expenses:increasedecrease in legal fees associated with various legal matters in the prior year quarter, including $1.0 million associated with employee-related matters;solicitation;solicitation in the prior year quarter;$1.2$0.5 million increasedecrease in corporate incentive bonuses due to prior year includingbonus expense reversals, as a benefit for reversalresult 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;increasedecrease 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;increasedecrease in stock compensation due to employee performance share award expense reversals, as a creditresult of declining operating performance;insurance flood proceedsthe open chief executive officer search in the prior year;year quarter; andincrease in corporate wages due to filled positions; andA $0.1 million increasedecrease in severance forcosts resulting from the formerdeparture of the previous chief executive officer.increasesdecreases in general and administrative expenses were partially offset by the following decreases:increases:$0.6$0.3 million decreaseincrease in stock compensationcorporate wages due to filled positions and an increase in the open chief executive officer position; anddecreaseincrease in other general and administrative expenses.The continued decline in our business has led to non-cash impairment charges during the 13 weeks ended October 27, 2012. If we are not able to achieve our projected growth rates and cash flows, and strategic initiatives currently being implemented do not result in significant improvements in our current financial performance trend, we would incur additional impairment of assets in the future. 13 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 13 Weeks
Ended
October 29, 2011 ($ in millions) $ 6.5 $ 5.8 780.8 % $ 0.7 4.7 % 4.2 % 0.5 % 13 Weeks Ended November 2, 2013 13 Weeks Ended October 27, 2012 ($ in millions) Asset impairment $ 5.1 $ (1.4 ) (21.6 )% $ 6.5 Percentage of net sales 4.0 % (70 bps) 4.7 % 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’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$5.1 million and $0.7$6.5 million, respectively.(expense) income,expense, net 13 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 13 Weeks
Ended
October 29, 2011 ($ in millions) $ (0.0 ) $ (0.0 ) (0.0 )% $ 0.0 0.0 % 0.0 % 0.0 % generatedincurred interest expense, net, of less than $0.1 million induring the 13 weeks ended November 2, 2013, and October 27, 2012, primarily from the amortization of deferred financing costs, partially offset by earnings from investments in cash and cash equivalents and short-term investments. 13 Weeks Ended November 2, 2013 13 Weeks Ended October 27, 2012 ($ in millions) Provision (benefit) for income taxes $ 0.1 $ 10.1 100.5 % $ (10.0 ) generated interest income, net,established a valuation allowance against all of less than $0.1 millionour deferred tax assets in the fourth quarter of fiscal 2012. Accordingly, we did not record a tax benefit for pretax losses during the 13 weeks ended October 29, 2011, primarily from earnings from investments in cash and cash equivalents and short-term investments, partially offset by amortization of deferred financing costs.(Benefit from) Provision. We recognized a provision for income taxes 13 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 13 Weeks
Ended
October 29, 2011 ($ in millions) $ (10.0 ) $ (12.4 ) (519.1 )% $ 2.4 Our that resulted in an effective income tax rate forof negative 0.3% during the 13 weeks ended October 27, 2012, was approximately 40.5%. We expect a 38.8%November 2, 2013 for federal and state income taxes. This 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 fordue to certain state income taxes for the fiscal year will be approximately $0.1 million, representing2013 that are not based on consolidated net income. We have net operating loss carryforwards (NOLs) available, subject to 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. 13 Weeks
Ended
October 27, 2012 13 Weeks
Ended
October 29, 2011 $ 117,892 $ 131,216 87 % 86 % (13.5 )% (0.1 )% $ (8,747 ) $ 13,667 $ 59 $ 67 472 464 1,885 1,857 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. (In thousands, except percentages, sales per square foot and number of stores data) 13 Weeks Ended November 2, 2013 13 Weeks Ended October 27, 2012 Net sales $ 114,878 $ 117,892 Percentage of consolidated net sales 90 % 87 % Comparable store sales percentage increase (decrease) compared to the prior year 1.7 % (13.5 )% Operating loss $ (4,575 ) $ (8,747 ) Sales per square foot $ 58 $ 59 Number of stores as of period end 471 472 Square footage as of period end 1,881 1,885 comparable store sales decline, partially offset byretail calendar shift, a $0.7$1.3 million increasedecrease in net sales in our e-commerce business and an increasea slight decrease in the number of stores compared to the prior year.incurredgenerated an operating loss of 4.0% of net sales during the 13 weeks ended November 2, 2013, compared to 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 resultasset impairment charges of significantly higher markdown rates in an effort$1.0 million during the 13 weeks ended November 2, 2013, compared 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. 13 Weeks
Ended
October 27, 2012 13 Weeks
Ended
October 29, 2011 $ 17,645 $ 20,919 13 % 14 % (13.8 )% (6.3 )% $ (3,733 ) $ (1,011 ) $ 63 $ 74 81 86 251 266 (In thousands, except percentages, sales per square foot and number of stores data) 13 Weeks Ended November 2, 2013 13 Weeks Ended October 27, 2012 Net sales $ 12,786 $ 17,645 Percentage of consolidated net sales 10 % 13 % Comparable store sales percentage decrease compared to the prior year (6.7 )% (13.8 )% Operating loss $ (2,427 ) $ (3,733 ) Sales per square foot $ 61 $ 63 Number of stores as of period end 59 81 Square footage as of period end 183 251 October 27, 2012,November 2, 2013, was due to a 10.6%5.3% decrease in comparable store average transactions and a 3.5%1.5% 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%3.9% decrease in units purchased per customer, partially offset by an increase of 2.8% in our average unit retail prices, partially offset by a 5.8% increase in units purchased per customer. Theprices.decrease was primarily attributable toduring the comparable sales decline and a decrease in the number of stores13 weeks ended November 2, 2013, compared to the prior year.Arden B incurred an operating loss of 21.2% of net sales during the 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 decreasean increase in merchandise margin as a result of higherlower markdown rates and an increasea decrease in occupancy costs due to a decrease indeleveraging effecttermination of certain high rent Arden B store leases late in fiscal 2012. Additionally, the significant declinedecrease was attributable to a decrease in comparable store sales. Additionally,asset impairment charges of $0.4 million during the 13 weeks ended November 2, 2013, compared to the 13 weeks ended October 27, 2012 and October 29, 2011, operating loss included asset impairment charges of $0.7 million and $0.5 million, respectively,, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. Compared to Thirty-Nine Weeks Ended October 29, 2011 39 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 39 Weeks
Ended
October 29, 2011 ($ in millions) $ 418.7 $ (38.2 ) (8.4 )% $ 456.9 (10.7 )% 39 Weeks Ended November 2, 2013 Change From
Prior Fiscal Period 39 Weeks Ended October 27, 2012 ($ in millions) Net sales $ 405.4 $ (13.3 ) (3.2 )% $ 418.7 Comparable store sales increase 0.4 % October 27, 2012,November 2, 2013 decreased primarily as a result of the following:10.7%$1.4 million due to the retail calendar shift, which replaced a higher volume late January week in fiscal 2012 with a lower volume late October week in fiscal 2013;resulting from an 11.8% decreaseincrease during the 39 weeks ended November 2, 2013 was due to a 2.3% increase in comparable store average transactions, partially offset by a 1.0% increase1.8% decrease in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction increaseddecreased mainly due to a 3.5% increase2.7% decrease in the number of units purchased per customer, partially offset by a 3.1% decrease0.7% increase in average unit retail prices; andprices.A decrease of $1.3 million in net sales for our e-commerce business as compared to the prior year, which is not a factor in calculating our comparable store sales.The decrease in net sales was partially offset by an increase in number of stores open, from 550 stores as of October 29, 2011, to 553 stores as of October 27, 2012. 39 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 39 Weeks
Ended
October29, 2011 ($ in millions) $ 318.3 $ 7.2 2.3 % $ 311.1 76.0 % 7.9 % 68.1 % 39 Weeks Ended November 2, 2013 Change From
Prior Fiscal Period 39 Weeks Ended October 27, 2012 ($ in millions) Cost of sales $ 293.5 $ (24.8 ) (7.8 )% $ 318.3 Percentage of net sales 72.4 % (360 bps) 76.0 % increaseddecreased due primarily to a decreasean increase in merchandise margin of 270 basis points as a result of significantly higherlower markdown rates in both the Wet Seal and Arden B divisions, as compared to the prior year, and the deleveraging effect ona decrease in 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 a decrease in depreciation for stores impaired in the increaseprior year and a decrease in numberminimum rent related to the termination of stores. 39 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 39 Weeks
Ended
October 29, 2011 ($ in millions) $ 126.2 $ 5.2 4.3 % $ 121.0 30.1 % 3.6 % 26.5 % 39 Weeks Ended November 2, 2013 39 Weeks Ended October 27, 2012 ($ in millions) Selling, general, and administrative expenses $ 115.6 $ (10.6 ) (8.4 )% $ 126.2 Percentage of net sales 28.5 % (160 bps) 30.1 % approximately $2.1$2.9 million from the prior year to $94.2$91.3 million. As a percentage of net sales, selling expenses were 22.5%, or flat compared to the prior year.$1.9$2.1 million decrease in store and field payroll and benefits costs as a result of decreased sales volume and lower incentive bonuses;$1.4$0.4 million decrease in credit card feesadvertising and marketing expenditures due to a declineless in-store signage and window banner costs in average processing fees as a percent to sales and decreased sales volume;$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$0.4 million decrease in merchandise delivery costs due to merchandise handling efficiencies;lower units shipped andsecurity costs due to a decline in security system repairs.store and field travel and meeting expenses.However, the$1.3$0.3 million increase in advertisinginternet order fulfillment costs as a result of increased shipping and marketing expenditures;$0.4$0.1 million net increase in travel and meeting costs primarily associated with additional field employee training; andA $0.2 million increase in our internet fulfillment.increased approximately $7.3decreased $7.7 million from the prior year, to $32.0$24.3 million. As a percentage of net sales, general and administrative expenses were 7.6%6.0%, or 220160 basis points higherlower than a year ago.increasedecrease in general and administrative expenses:increasedecrease in severance costs resulting from the departure of ourthe previous chief executive officer;A $2.1 million increaseofficer in professional fees associated with the proxy solicitation;increasedecrease in corporate wagesstock compensation due to filled positions;A $1.0 million increasehigher executive stock compensation in legal fees associated with employment-related matters;A $0.8 million increase in legal fees associated with various legal matters;A $0.6 million increase in chargesthe prior year for estimated settlement costs for various employment-related matters;increasedecrease 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;increasedecrease in auditrecruiting fees due toprimarily associated with the timing of services performed as compared toadditional recruiting fees for the open chief executive officer search in the prior year;A $0.1 million increase in corporate incentive bonuses due to the employee retention plan; andA $0.1 million increase in computer maintenance costs.increasesdecreases in general and administrative expenses were partially offset by the following decreases:$0.6$0.4 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 feesmiscellaneous income as the prior year included a portion of the costsrefund from a factoring company for our searches and relocation costs for our previous chief executive office, and our president and chief operating officer; and$0.1$0.3 million increase in computer maintenance costs;decreaseincrease in other general and administrative expenses; andThe continued decline in our business has led to non-cash impairment charges during the 39 weeks ended October 27, 2012. If we are not able to achieve our projected growth rates and cash flows, and strategic initiatives currently being implemented do not result in significant improvements in our current financial performance trend, we would incur additional impairment of assets in the future 39 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 39 Weeks
Ended
October 29, 2011 ($ in millions) $ 19.0 $ 17.0 829.0 % $ 2.0 4.6 % 4.2 % 0.4 % 39 Weeks Ended November 2, 2013 39 Weeks Ended October 27, 2012 ($ in millions) Asset impairment $ 6.9 $ (12.1 ) (63.7 )% $ 19.0 Percentage of net sales 1.7 % (290 bps) 4.6 % 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’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$6.9 million and $2.0$19.0 million, respectively.(expense) income,expense, net 39 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 39 Weeks
Ended
October 29, 2011 ($ in millions) $ (0.0 ) $ (0.1 ) 0.0 % $ 0.1 (0.0 )% (0.0 )% 0.0 % generatedincurred interest expense, net, of less than $0.1 million induring the 39 weeks ended November 2, 2013, and 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 $0.1 million in the 39 weeks ended October 29, 2011, primarily from earnings from investments in cash and cash equivalents and short-term investments, partially offset by amortization of deferred financing costs.(Benefit from) investments. 39 Weeks
Ended
October 27, 2012 Change From
Prior Fiscal Period 39 Weeks
Ended
October 29, 2011 ($ in millions) $ (17.4 ) $ (26.3 ) (295.8 )% $ 8.9 Our effective 39 Weeks Ended November 2, 2013 Change From
Prior Fiscal Period 39 Weeks Ended October 27, 2012 ($ in millions) Provision (benefit) for income taxes $ 0.2 $ 17.6 100.9 % $ (17.4 ) rate for the 39 weeks ended October 27, 2012,assets was approximately 38.8%deemed not to be more likely than not due to our three-year cumulative operating losses, and we expectestablished a 38.8% effective income tax rate for fiscal 2012. Our effective income tax rates reflect a $0.3 million write-offvaluation allowance against all of certainour deferred tax assets in the fourth quarter of fiscal 2012 second quarter as2012. Accordingly, we did not record a result of IRS adjustments from our closed IRS audit of our fiscal 2008 and 2009 tax years and $0.3 millionbenefit for tax credits taken on our fiscal 2011 tax return inpretax losses during the fiscal 2012 third quarter.39 weeks ended November 2, 2013. We anticipate cash paymentrecognized a provision for income taxes that resulted in an effective tax rate of negative 1.4% during the 39 weeks ended November 2, 2013for the fiscal year will be approximately $0.1 million, representingfederal and state income taxes. This effective rate is due to 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. 39 Weeks
Ended
October 27, 2012 39 Weeks
Ended
October 29, 2011 $ 357,806 $ 387,302 85 % 85 % (10.5) % 4.6 % $ (8,003) $ 42,760 $ 180 $ 202 472 464 1,885 1,857 (In thousands, except percentages, sales per square foot and number of stores data) 39 Weeks Ended November 2, 2013 39 Weeks Ended October 27, 2012 Net sales $ 358,245 $ 357,806 Percentage of consolidated net sales 88 % 85 % Comparable store sales percentage increase (decrease) compared to the prior year 0.6 % (10.5 )% Operating income (loss) $ 13,928 $ (8,003 ) Sales per square foot $ 183 $ 180 Number of stores as of period end 471 472 Square footage as of period end 1,881 1,885 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 attributableof $1.2 million due to the comparable store sales decline andretail calendar shift, a $0.5$0.8 million decrease in net sales in our e-commerce business partially offset by the increaseand a slight decrease in the number of stores compared to the prior year.incurredgenerated operating income of 3.9% of net sales during the 39 weeks ended November 2, 2013, compared to 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 decreaseincrease was due primarily to a decrease in asset impairment charges of $10.2 million during the 39 weeks ended November 2, 2013, compared to the 39 weeks ended October 27, 2012, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. Additionally, the increase was attributable to the increase in merchandise margin as a result of significantly higherlower 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 increasedecrease in occupancy costs due to a reduction in store depreciation as a result of stores impaired in the deleveraging effectprior year.(In thousands, except percentages, sales per square foot and number of stores data) 39 Weeks Ended November 2, 2013 39 Weeks Ended October 27, 2012 Net sales $ 47,113 $ 60,937 Percentage of consolidated net sales 12 % 15 % Comparable store sales percentage decrease compared to the prior year (1.0 )% (12.2 )% Operating loss $ (1,380 ) $ (6,614 ) Sales per square foot $ 219 $ 214 Number of stores as of period end 59 81 Square footage as of period end 183 251 significant declineretail calendar shift, a decrease in the number of stores compared to the prior year and a $0.6 million decrease in net sales in our e-commerce business. The comparable store sales decrease during the 39 weeks ended November 2, 2013, was due to a 1.4% decrease in comparable store sales. Additionally,average dollar sales per transaction, partially offset by an increase of 0.3% in comparable store average transactions. Comparable store average dollar sales per transaction decreased mainly due to a 7.8% decrease in the number of units purchased per customer, partially offset by a 7.0% increase in average unit retail prices.29, 2011,27, 2012, operating (loss) incomeloss included asset impairment charges of $16.3$0.8 million and $1.0$2.7 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.Arden B: 39 Weeks
Ended
October 27, 2012 39 Weeks
Ended
October 29, 2011 $ 60,937 $ 69,643 15 % 15 % (12.2) % (0.3) % $ (6,614) $ 3,000 $ 214 $ 245 81 86 251 266 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.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.Net cash used in operating activities was $13.8 million 39 Weeks Ended November 2, 2013 39 Weeks Ended October 27, 2012 (In thousands) Net cash used in operating activities $ (3,530 ) $ (13,792 ) Net cash provided by (used in) investing activities 15,906 (16,775 ) Net cash used in financing activities (24,571 ) (275 ) Net decrease in cash and cash equivalents (12,195 ) (30,842 ) Cash and cash equivalents, beginning of period 42,279 157,185 Cash and cash equivalents, end of period $ 30,084 $ 126,343 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,November 2, 2013, 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$10.8 million, and an increase in merchandise inventories over the increase of merchandise payables of $4.8 million partially offset by net cash provided byused in changes in other operating assets and liabilities of $0.6$11.3 million, partially offset by net non-cash charges, primarily depreciation and amortization, asset impairment, deferred income taxes, and stock-based compensation, of $18.6 million.October 27, 2012,November 2, 2013, net cash used inprovided by investing activities of $16.8 million was comprised of $41.3 million of proceeds from maturity of investment securities, partially offset by $9.5 million of investment of cash from money market funds into short-term investments and $15.9 million 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.construction of new Wet Seal stores. Capital expenditures that remain unpaid as of October 27, 2012,November 2, 2013, have increased $2.0 million since the end of fiscal 2011.2012. We expect to pay nearly all of the total balance of such amounts payable during the fourth quarterremainder 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.October 27, 2012,November 2, 2013, net cash used in financing activities was $0.3 million, comprised primarily of $0.3$25.3 million used to repurchase 91,848 5,565,873 shares of our Class A common stock under a $25.0 million share repurchase program and 90,703performance and restricted stock vesting,vestings, slightly offset by less than $0.1$0.7 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.October 27, 2012,November 2, 2013, the amount outstanding under the Facility consisted of $6.2$2.0 million in open documentary letters of credit related to merchandise purchases and $1.5$1.7 million in outstanding standby letters of credit. At October 27, 2012,November 2, 2013, we had $27.3$31.3 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.susceptible to declines in discretionary consumeradversely affected during periods of declining consumers spending, and availability oftightened 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.large percentagesignificant portion of our annual 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 net sales.volatileincreasing fuel costs. Our business could be affected by similarAlthough cotton prices havein the future and theare expected to continue through fiscal 2013. 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 the cost increases, we seek to leverage our large vendor base to lower costs, are identifying new vendors and closely manageare assessing ongoing promotional strategies in efforts to mitigate the impact onmaintain or improve upon historical 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.October 27, 2012,November 2, 2013, 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,February 2, 2013, underNote 6, “Commitments and Contingencies” and “Other Off-Balance Sheet Arrangements,” and as referenced in this Quarterly Report on Form 10-Q under Note 6, “Commitments and Contingencies” and “Other Off-Balance Sheet Arrangements.”to the condensed consolidated financial statements included elsewhere in this report.Item 3.Quantitative and Qualitative Disclosures About Market RiskOctober 27, 2012,November 2, 2013, no borrowings were outstanding under the Facility. At October 27, 2012,November 2, 2013, the weighted average interest rate on borrowings under the Facility would be 1.333%1.85%. Based upon a sensitivity analysis as of October 27, 2012,November 2, 2013, if we had average outstanding borrowings of $1$1.0 million during third quarter of fiscal 2012,2013, a 50 basis point increase in interest rates would have resulted inhad an increase in interest expense of approximately $1,250immaterial impact for the third quarter of fiscal 2012.2013.October 27, 2012,November 2, 2013, we are not a party to any derivative financial instruments.October 27, 2012,November 2, 2013, 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 Proceduresco-principalchief executive officersofficer and principalchief 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 Commission’s 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-principalchief executive officersofficer and principalchief financial officer, in order to allow timely decisions regarding required disclosures. Based on this evaluation, our co-principalchief executive officersofficer and principalchief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of October 27, 2012.November 2, 2013.October 27, 2012,November 2, 2013, 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.Item 1.Legal ProceedingsOn 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 court’s 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.allegesalleged various violations under the State of California Labor Code and the State of California Business and Professions Code. Plaintiffs sought reimbursement for alleged uniform and business expenses, injunctive relief, restitution, civil penalties, interest, and attorney's fees and costs. On August 16, 2011, the court denied Plaintiffs’Plaintiffs' Motion for Class Certification. Plaintiffs appealed and, on October 12, 2012, the California Court of Appeals affirmed the lower court’scourt's ruling. We are vigorously defending this litigationOn January 23, 2013, the California Supreme Court denied Plaintiffs' petition for review. On February 4, 2013, the Court of Appeals issued an order to send the case back to the trial court to proceed on behalf of only the three named plaintiffs and are unable to predictnot as a class action. In October 2013, we entered into confidential settlement agreements that resolved 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.employees of the Company.employees. 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 concludesconcluded the EEOC’sEEOC's investigation. We have accruedBetween November 2012 and March 2013, we paid approximately $0.5$0.8 million for settlementsto settle 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 havehad an opportunity to bring a private lawsuit within ninety days from the date they receive areceived their November 26, 2012 right-to-sue notice from the EEOC. WeEEOC, however, that time period is tolled for those individuals who are not certain when those notices will issue. We are unable to predict whether any complainant will fileputative class members in a private lawsuit and ifrace discrimination class action 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 recordedJuly 12, 2012 in the future which mayUnited States District Court for the Central District of California with respect to any race discrimination claims they have that are within the scope of the putative class action (see below). On December 12, 2012, the EEOC issued a material adverse effect on our results of operations or financial condition.appealed. Onappealed, and on November 15, 2013, the Court of Appeals issued an order affirming the trail court's order compelling individual arbitration, but reversing the trail court's order compelling arbitration of Plaintiffs' Private Attorney General Act (PAGA) claims on an individual basis. We intend to appeal the decision to the California Supreme Court. In a concurrent proceeding, 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 onupon their hiring bywith 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 PlaintiffsPlaintiffs' 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.usour 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.allegesalleged 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 allegingalleged retaliation. Plaintiffs are seekingalso sought reinstatement or instatement of Plaintiffs and class members to their alleged rightfulattorneys’attorneys' fees, and interest. On May 8, 2013, we filed papers memorializing an amicable resolution to the case pending final court approval. The Settlement Agreement provides for a cash payment of $7.5 million and also includes programmatic relief under which we agree to post open positions, implement new selection criteria and interview protocols, revamp our annual performance reviews and compensation structure, add regional human resources directors, implement more diversity and inclusion communications and training for field and corporate office employees, and enhance our investigations training and processes. We have also reflected our commitment to use diverse models in our marketing and to partnerships with organizations dedicated to the advancement and well-being of African Americans and other diverse groups. On June 12, 2013, the court granted preliminary approval of the settlement and in June 2013 we issued payment to the settlement administrator for $7.5 million. The final approval hearing was held on November 18, 2013 and a decision is currently pending.this litigationthe pending matters and are unablewill continue to predictevaluate our potential exposure and estimated costs as these matters progress. Future developments may require us to adjust the likely outcome. Accordingly, no provision for a loss contingency has been accrued as of October 27, 2012. Depending on the actual outcomeamount of this case, provisionsaccrual, which, if increased, 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. we have insurance tomay cover a portion of such losses. However, certainthe outcome of these litigation matters couldcannot be accurately predicted and there may be existing matters or matters that arise for which we do not have insurance coverage andor for which insurance provides only partial coverage. Such outcome could have a material adverse effect on our results of operations or financial condition.Item 1A.Risk FactorsThe following risk factors represent additionsJanuary 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 valueFebruary 2, 2013.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.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(a) None. (b) None. (c) Issuer Purchases of Equity Securities by the Issuer and Affiliated Purchasers 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 23,596 $ 2.93 — — 1,005 $ 2.90 — — — $ — — — (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.Period Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs August 4, 2013 to August 31, 2013 31,306 $ 3.86 — $ — September 1, 2013 to October 5, 2013 981 $ 3.65 — $ — October 6, 2013 to November 2, 2013 — $ — — $ — Item 3.Defaults Upon Senior Securities(a) None. (b) None. Item 4.Mine Safety DisclosuresItem 5.Other InformationNone.Item 6.Exhibits 3.1Certificate 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). 4.1Rights 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). 4.2First 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). 10.1Agreement, 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. 32.132.1+ Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.232.2+ Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1General Release, dated November 5, 2012 (incorporated by referenceInteractive data files (furnished electronically herewith pursuant to our Current Report on Form 8-K filed on November 7, 2012)Rule 406T of Regulation S-T).101The 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.THE WET SEAL, INC.(REGISTRANT)Date: November 21, 2012(REGISTRANT) December 4, 2013 By: /s/ John D. Goodman By:John D. Goodman /s/ Ken SeipelKen SeipelPresident and Chief Operating OfficerDate: November 21, 2012December 4, 2013 By: Steven H. Benrubi Executive Vice President and Chief Financial Officer 37