UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 28, 2012 April 28, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-18632
THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 33-0415940 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
26972 Burbank, Foothill Ranch, CA | 92610 | |
(Address of principal executive offices) | (Zip Code) |
(949) 699-3900
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer: | ¨ | Accelerated filer: | x | |||
Non-accelerated filer: | ¨ (Do not check if a smaller reporting company) | Smaller reporting company: | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the registrants Class A common stock, par value $0.10 per share, at May 21, 2012, was 90,455,916. There were no shares outstanding of the registrants Class B common stock, par value $0.10 per share, at May 21, 2012.
FORM 10-Q
Table of Contents
Page | ||||||
PART I. FINANCIAL INFORMATION |
||||||
Item 1. | Financial Statements (Unaudited) | |||||
2 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
8 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) | 9 | |||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 19 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 28 | ||||
Item 4. | Controls and Procedures | 29 | ||||
PART II. OTHER INFORMATION |
||||||
Item 1. | Legal Proceedings | 29 | ||||
Item 1A. | Risk Factors | 30 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 | ||||
Item 3. | Defaults Upon Senior Securities | 31 | ||||
Item 4. | Mine Safety Disclosures | 31 | ||||
Item 5. | Other Information | 31 | ||||
Item 6. | Exhibits | 32 | ||||
SIGNATURES | 33 | |||||
EXHIBIT 31.1 | ||||||
EXHIBIT 31.2 | ||||||
EXHIBIT 32.1 | ||||||
EXHIBIT 32.2 | ||||||
EXHIBIT 99.1 | ||||||
101.INS XBRL Instance Document | ||||||
101.SCH XBRL Taxonomy Extension Schema Document | ||||||
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
101.DEF XBRL Taxonomy Extension Definition Linkbase Document | ||||||
101.LAB XBRL Taxonomy Extension Label Linkbase Document | ||||||
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document |
1
Part I. Financial Information
Item 1. | Financial Statements (Unaudited) |
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
April 28, 2012 |
January 28, 2012 |
April 30, 2011 |
||||||||||
ASSETS | ||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
$ | 148,108 | $ | 157,185 | $ | 133,074 | ||||||
Short-term investments |
| | 50,455 | |||||||||
Income tax receivables |
510 | 200 | | |||||||||
Other receivables |
1,227 | 1,445 | 2,002 | |||||||||
Merchandise inventories |
40,080 | 31,834 | 37,100 | |||||||||
Prepaid expenses and other current assets |
14,469 | 4,570 | 12,690 | |||||||||
Deferred tax assets |
20,133 | 20,133 | 19,649 | |||||||||
|
|
|
|
|
|
|||||||
Total current assets |
224,527 | 215,367 | 254,970 | |||||||||
|
|
|
|
|
|
|||||||
EQUIPMENT AND LEASEHOLD IMPROVEMENTS: |
||||||||||||
Leasehold improvements |
122,835 | 123,066 | 117,279 | |||||||||
Furniture, fixtures and equipment |
80,301 | 79,159 | 78,484 | |||||||||
|
|
|
|
|
|
|||||||
203,136 | 202,225 | 195,763 | ||||||||||
Less accumulated depreciation and amortization |
(116,530 | ) | (113,901 | ) | (103,902 | ) | ||||||
|
|
|
|
|
|
|||||||
Net equipment and leasehold improvements |
86,606 | 88,324 | 91,861 | |||||||||
|
|
|
|
|
|
|||||||
OTHER ASSETS: |
||||||||||||
Deferred tax assets |
23,927 | 23,780 | 28,447 | |||||||||
Other assets |
3,054 | 3,062 | 3,031 | |||||||||
|
|
|
|
|
|
|||||||
Total other assets |
26,981 | 26,842 | 31,478 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL ASSETS |
$ | 338,114 | $ | 330,533 | $ | 378,309 | ||||||
|
|
|
|
|
|
|||||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Accounts payable merchandise |
$ | 23,802 | $ | 18,520 | $ | 21,659 | ||||||
Accounts payable other |
11,747 | 8,269 | 15,973 | |||||||||
Income taxes payable |
| | 44 | |||||||||
Accrued liabilities |
23,410 | 25,096 | 23,252 | |||||||||
Current portion of deferred rent |
2,619 | 2,561 | 3,380 | |||||||||
|
|
|
|
|
|
|||||||
Total current liabilities |
61,578 | 54,446 | 64,308 | |||||||||
|
|
|
|
|
|
|||||||
LONG-TERM LIABILITIES: |
||||||||||||
Deferred rent |
33,057 | 33,091 | 31,382 | |||||||||
Other long-term liabilities |
1,889 | 1,924 | 1,732 | |||||||||
|
|
|
|
|
|
|||||||
Total long-term liabilities |
34,946 | 35,015 | 33,114 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities |
96,524 | 89,461 | 97,422 | |||||||||
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
2
THE WET SEAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except share data)
(Unaudited)
April 28, 2012 |
January 28, 2012 |
April 30, 2011 |
||||||||||
COMMITMENTS AND CONTINGENCIES (Note 6) |
||||||||||||
STOCKHOLDERS EQUITY: |
||||||||||||
Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 90,840,928 shares issued and 90,461,783 outstanding at April 28, 2012; 90,660,347 shares issued and 90,419,469 shares outstanding at January 28, 2012; and 114,568,146 shares issued and 101,432,813 shares outstanding at April 30, 2011 |
9,084 | 9,066 | 11,457 | |||||||||
Common stock, Class B convertible, $0.10 par value, authorized 10,000,000 shares; no shares issued and outstanding |
| | | |||||||||
Paid-in capital |
239,995 | 239,000 | 324,158 | |||||||||
Accumulated deficit |
(6,523 | ) | (6,250 | ) | (13,319 | ) | ||||||
Treasury stock, 379,145 shares, 240,878 shares, and 13,135,333 shares, at cost, at April 28, 2012, January 28, 2012, and April 30, 2011, respectively |
(962 | ) | (740 | ) | (41,697 | ) | ||||||
Accumulated other comprehensive (loss ) income |
(4 | ) | (4 | ) | 288 | |||||||
|
|
|
|
|
|
|||||||
Total stockholders equity |
241,590 | 241,072 | 280,887 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 338,114 | $ | 330,533 | $ | 378,309 | ||||||
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
13 Weeks Ended | ||||||||
April 28, 2012 |
April 30, 2011 |
|||||||
Net sales |
$ | 147,945 | $ | 156,040 | ||||
Cost of sales |
104,342 | 102,595 | ||||||
|
|
|
|
|||||
Gross margin |
43,603 | 53,445 | ||||||
Selling, general, and administrative expenses |
40,438 | 39,860 | ||||||
Asset impairment |
3,606 | 259 | ||||||
|
|
|
|
|||||
Operating (loss) income |
(441 | ) | 13,326 | |||||
|
|
|
|
|||||
Interest income |
38 | 72 | ||||||
Interest expense |
(48 | ) | (43 | ) | ||||
|
|
|
|
|||||
Interest (expense) income, net |
(10 | ) | 29 | |||||
|
|
|
|
|||||
(Loss) income before (benefit) provision for income taxes |
(451 | ) | 13,355 | |||||
(Benefit) provision for income taxes |
(178 | ) | 5,342 | |||||
|
|
|
|
|||||
Net (loss) income |
$ | (273 | ) | $ | 8,013 | |||
|
|
|
|
|||||
Net (loss) income per share, basic |
$ | (0.00 | ) | $ | 0.08 | |||
|
|
|
|
|||||
Net (loss) income per share, diluted |
$ | (0.00 | ) | $ | 0.08 | |||
|
|
|
|
|||||
Weighted-average shares outstanding, basic |
88,486,977 | 98,916,747 | ||||||
|
|
|
|
|||||
Weighted-average shares outstanding, diluted |
88,486,977 | 98,975,965 | ||||||
|
|
|
|
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
13 Weeks Ended | ||||||||
April 28, 2012 |
April 30, 2011 |
|||||||
Net (loss) income |
$ | (273 | ) | $ | 8,013 | |||
Other comprehensive loss : |
||||||||
Amortization of actuarial gain under Supplemental Employee Retirement Plan |
| (2 | ) | |||||
|
|
|
|
|||||
Total other comprehensive loss |
| (2 | ) | |||||
|
|
|
|
|||||
Comprehensive (loss) income |
$ | (273 | ) | $ | 8,011 | |||
|
|
|
|
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)
Common Stock | Paid-In Capital |
Accumulated Deficit |
Treasury Stock |
Accumulated Other Comprehensive Loss |
Total Stockholders Equity |
|||||||||||||||||||||||||||||||
Class A | Class B | |||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | |||||||||||||||||||||||||||||||||
Balance at January 28, 2012 |
90,660,347 | $ | 9,066 | | $ | | $ | 239,000 | $ | (6,250 | ) | $ | (740 | ) | $ | (4 | ) | $ | 241,072 | |||||||||||||||||
Net loss |
| | | | | (273 | ) | | | (273 | ) | |||||||||||||||||||||||||
Stock issued pursuant to long-term incentive plans |
174,580 | 17 | | | (17 | ) | | | | | ||||||||||||||||||||||||||
Stock-based compensation |
| | | | 994 | | | | 994 | |||||||||||||||||||||||||||
Exercise of stock options |
6,001 | 1 | | | 18 | | | | 19 | |||||||||||||||||||||||||||
Repurchase of common stock |
| | | | | | (222 | ) | | (222 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at April 28, 2012 |
90,840,928 | $ | 9,084 | | $ | | $ | 239,995 | $ | (6,523 | ) | $ | (962 | ) | $ | (4 | ) | $ | 241,590 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
6
THE WET SEAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)
Common Stock | Paid-In Capital |
Accumulated Deficit |
Treasury Stock |
Accumulated Other Comprehensive Income |
Total Stockholders Equity |
|||||||||||||||||||||||||||||||
Class A | Class B | |||||||||||||||||||||||||||||||||||
Shares | Par Value | Shares | Par Value | |||||||||||||||||||||||||||||||||
Balance at January 29, 2011 |
113,736,844 | $ | 11,374 | | $ | | $ | 323,324 | $ | (21,332 | ) | $ | (37,963 | ) | $ | 290 | $ | 275,693 | ||||||||||||||||||
Net income |
| | | | | 8,013 | | | 8,013 | |||||||||||||||||||||||||||
Stock issued pursuant to long-term incentive plans |
830,635 | 83 | | | (83 | ) | | | | | ||||||||||||||||||||||||||
Stock-based compensation |
| | | | 900 | | | | 900 | |||||||||||||||||||||||||||
Amortization of stock payment in lieu of rent |
| | | | 15 | | | | 15 | |||||||||||||||||||||||||||
Exercise of stock options |
667 | | | | 2 | | | | 2 | |||||||||||||||||||||||||||
Repurchase of common stock |
| | | | | | (3,734 | ) | | (3,734 | ) | |||||||||||||||||||||||||
Amortization of actuarial gain under Supplemental Employee Retirement Plan |
| | | | | | | (2 | ) | (2 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at April 30, 2011 |
114,568,146 | $ | 11,457 | | $ | | $ | 324,158 | $ | (13,319 | ) | $ | (41,697 | ) | $ | 288 | $ | 280,887 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
13 Weeks Ended | ||||||||
April 28, 2012 |
April 30, 2011 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net (loss) income |
$ | (273 | ) | $ | 8,013 | |||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
4,691 | 4,666 | ||||||
Amortization of premium on investments |
| 235 | ||||||
Amortization of deferred financing costs |
27 | 26 | ||||||
Amortization of stock payment in lieu of rent |
| 15 | ||||||
Loss on disposal of equipment and leasehold improvements |
286 | 18 | ||||||
Asset impairment |
3,606 | 259 | ||||||
Deferred income taxes |
(147 | ) | 4,808 | |||||
Stock-based compensation |
994 | 900 | ||||||
Changes in operating assets and liabilities: |
||||||||
Income tax receivable |
(310 | ) | | |||||
Other receivables |
218 | (61 | ) | |||||
Merchandise inventories |
(8,246 | ) | (3,764 | ) | ||||
Prepaid expenses and other current assets |
(9,926 | ) | (65 | ) | ||||
Other non-current assets |
8 | (103 | ) | |||||
Accounts payable and accrued liabilities |
3,987 | 2,067 | ||||||
Income taxes payable |
| (16 | ) | |||||
Deferred rent |
24 | 524 | ||||||
Other long-term liabilities |
(35 | ) | (33 | ) | ||||
|
|
|
|
|||||
Net cash (used in) provided by operating activities |
(5,096 | ) | 17,489 | |||||
|
|
|
|
|||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of equipment and leasehold improvements |
(3,778 | ) | (6,045 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(3,778 | ) | (6,045 | ) | ||||
|
|
|
|
|||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from exercise of stock options |
19 | 2 | ||||||
Repurchase of common stock |
(222 | ) | (3,734 | ) | ||||
|
|
|
|
|||||
Net cash used in financing activities |
(203 | ) | (3,732 | ) | ||||
|
|
|
|
|||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(9,077 | ) | 7,712 | |||||
CASH AND CASH EQUIVALENTS, beginning of period |
157,185 | 125,362 | ||||||
|
|
|
|
|||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 148,108 | $ | 133,074 | ||||
|
|
|
|
|||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 19 | $ | 17 | ||||
Income taxes |
$ | 585 | $ | 475 | ||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS: |
||||||||
Purchase of equipment and leasehold improvements unpaid at end of period |
$ | 4,427 | $ | 6,215 | ||||
Amortization of actuarial gain under Supplemental Employee Retirement Plan |
$ | | $ | (2 | ) |
See notes to condensed consolidated financial statements.
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 1 Basis of Presentation, Significant Accounting Policies, and Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted
Basis of Presentation
The information set forth in these condensed consolidated financial statements is unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments necessary for a fair presentation have been included. The results of operations for the 13 weeks ended April 28, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 2013. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of The Wet Seal, Inc. (the Company) for the fiscal year ended January 28, 2012.
Significant Accounting Policies
Long-Lived Assets
The Company evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that indicates continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the 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 cash flows using the Companys weighted average cost of capital. Forecasted earnings, growth rates and other assumptions used to estimate carrying value recoverability rely heavily upon estimates made by the Companys management. If the Company is not able to achieve its projected growth rates and cash flows, this could result in additional impairment of assets in the future. The Company has considered the relevant valuation techniques that could be applied without undue cost and effort and has determined that the discounted cash flow approach continues to provide the most relevant and reliable means by which to determine fair value in this circumstance.
At least quarterly, the Company assesses whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. The Companys evaluations during the 13 weeks ended April 28, 2012, and April 30, 2011, indicated that operating losses or insufficient operating income existed at certain retail stores, with a projection that the operating losses or insufficient operating income for those locations would continue. As such, the Company recorded non-cash charges of $3.6 million and $0.3 million during the 13 weeks ended April 28, 2012, and April 30, 2011, respectively, 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.
Income Taxes
The Company began fiscal 2012 with approximately $65.7 million of federal net operating loss (NOL) carry forwards available to offset taxable income in fiscal 2012 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code.
The Companys effective income tax rate for the 13 weeks ended April 28, 2012, was approximately 39.5%. The Company expects a 39.5% effective income tax rate for fiscal 2012. Due to its expected utilization of federal and state NOL carry forwards during fiscal 2012, the Company anticipates cash payment for income taxes for the fiscal year will be approximately 6.9% of pre-tax income, representing the portion of federal and state alternative minimum taxes and state regular income taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash (benefit) provision for deferred income taxes.
9
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 1 Basis of Presentation, Significant Accounting Policies, and Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted (Continued)
Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted
In May 2011, the Financial Accounting Standards Board (the FASB) issued guidance on the application of fair value accounting where its use is already required or permitted by other standards within GAAP. This guidance changed the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Amendments include those that clarify the FASBs intent about the application of existing fair value measurement and disclosure requirements, and change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements. This guidance is effective during interim and annual periods beginning after December 15, 2011. The Company adopted this guidance, which did not significantly impact the Companys condensed consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. This guidance provided an entity with an option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, and is to be applied on a retrospective basis. The Company adopted this guidance and has presented total comprehensive (loss) income, the components of net (loss) income and the components of other comprehensive (loss) income in two separate but consecutive statements within its condensed consolidated financial statements.
NOTE 2 Stock-Based Compensation
The Company had one stock incentive plan under which shares were available for grant at April 28, 2012: the 2005 Stock Incentive Plan (the 2005 Plan). The Company also previously granted share awards under its 1996 Long-Term Incentive Plan (the 1996 Plan) and the 2000 Stock Incentive Plan (the 2000 Plan) that remain unvested and/or unexercised as of April 28, 2012; however, the 1996 Plan expired during fiscal 2006 and the 2000 Plan expired during fiscal 2009, and no further share awards may be granted under the 1996 Plan and 2000 Plan. The 2005 Plan, the 2000 Plan, and the 1996 Plan are collectively referred to as the Plans.
The 2005 Plan permits the granting of options, restricted common stock, performance shares, or other equity-based awards to the Companys employees, officers, directors, and consultants. The Company believes the granting of equity-based awards helps to align the interests of its employees, officers and directors with those of its stockholders. The Company has a practice of issuing new shares to satisfy stock option exercises, as well as for restricted stock and performance share grants. The 2005 Plan was approved by the Companys stockholders on January 10, 2005, as amended with stockholder approval on July 20, 2005, for the issuance of incentive awards covering 12,500,000 shares of Class A common stock. Additionally, an amended and restated 2005 Plan was approved by the Companys stockholders on May 19, 2010, which increased the incentive awards capacity to 17,500,000 shares of Class A common stock. An aggregate of 22,669,528 shares of Class A common stock have been issued or may be issued pursuant to the Plans. As of April 28, 2012, 2,610,432 shares were available for future grants.
Options
The Plans provide that the per-share exercise price of a stock option may not be less than the fair market value of the Companys Class A common stock on the date the option is granted. Under the Plans, outstanding options vest over periods ranging from three to five years from the grant date and expire from five to ten years after the grant date. Certain stock option and other equity-based awards provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data, the implied volatility of market-traded options and other factors to estimate the expected price volatility, option lives, and forfeiture rates.
10
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 2 Stock-Based Compensation (Continued)
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant and the estimated life of the option. The following weighted-average assumptions were used to estimate the fair value of options granted during the periods indicated using the Black-Scholes option-pricing model:
13 Weeks Ended | ||||||||
April 28, 2012 |
April 30, 2011 |
|||||||
Dividend Yield |
0.00 | % | 0.00 | % | ||||
Expected Volatility |
51.26 | % | 54.00 | % | ||||
Risk-Free Interest Rate |
0.51 | % | 1.42 | % | ||||
Expected Life of Options (in Years) |
3.3 | 3.3 |
The Company recorded compensation expense of $0.3 million and $0.2 million, in each case less than $0.01 per basic and diluted share, related to stock options outstanding during the 13 weeks ended April 28, 2012, and April 30, 2011, respectively.
At April 28, 2012, there was $2.8 million of total unrecognized compensation expense related to nonvested stock options under the Companys share-based payment plans, which will be recognized over an average period of 2.2 years, representing the remaining vesting periods of such options through fiscal 2015.
The following table summarizes the Companys stock option activities with respect to its Plans for the 13 weeks ended April 28, 2012, as follows (aggregate intrinsic value in thousands):
Options |
Number of Shares |
Weighted- Average Exercise Price Per Share |
Weighted- Average Remaining Contractual Life (in years) |
Aggregate Intrinsic Value |
||||||||||||
Outstanding at January 28, 2012 |
3,474,204 | $ | 4.64 | |||||||||||||
Granted |
55,000 | $ | 3.34 | |||||||||||||
Exercised |
(6,001 | ) | $ | 3.15 | ||||||||||||
Canceled |
(252,870 | ) | $ | 9.84 | ||||||||||||
|
|
|||||||||||||||
Outstanding at April 28, 2012 |
3,270,333 | $ | 4.22 | 4.29 | $ | 172 | ||||||||||
Vested and expected to vest in the future at April 28, 2012 |
2,869,241 | $ | 4.28 | 4.21 | $ | 152 | ||||||||||
Exercisable at April 28, 2012 |
1,153,835 | $ | 5.08 | 3.31 | $ | 49 |
Options vested and expected to vest in the future is comprised of all options outstanding at April 28, 2012, net of estimated forfeitures. Additional information regarding stock options outstanding as of April 28, 2012, is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Range of Exercise Prices |
Number Outstanding as of April 28, 2012 |
Weighted- Average Remaining Contractual Life (in years) |
Weighted- Average Exercise Price Per Share |
Number Exercisable as of April 28, 2012 |
Weighted- Average Exercise Price Per Share |
|||||||||||||||
$ 1.81 - $ 2.93 |
32,500 | 2.18 | $ | 2.78 | 22,500 | $ | 2.71 | |||||||||||||
2.96 - 4.44 |
2,861,833 | 4.68 | $ | 3.73 | 809,336 | $ | 3.74 | |||||||||||||
4.50 - 6.82 |
144,500 | 2.63 | $ | 5.38 | 90,499 | $ | 5.79 | |||||||||||||
8.00 - 23.02 |
231,500 | 0.86 | $ | 9.72 | 231,500 | $ | 9.72 | |||||||||||||
|
|
|
|
|||||||||||||||||
$ 1.81 - $23.02 |
3,270,333 | 4.29 | $ | 4.22 | 1,153,835 | $ | 5.08 | |||||||||||||
|
|
|
|
11
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 2 Stock-Based Compensation (Continued)
The weighted-average grant-date fair value of options granted during the 13 weeks ended April 28, 2012, and April 30, 2011, was $1.22 and $1.57, respectively. The total intrinsic value for options exercised during the 13 weeks ended April 28, 2012, and April 30, 2011, each was less than $0.1 million.
Cash received from option exercises under all Plans for the 13 weeks ended April 28, 2012, and April 30, 2011, was less than $0.1 million and less than $0.1 million, respectively. The Company did not realize tax benefits for the tax deductions from option exercises as it must first utilize its regular NOL prior to realizing the excess tax benefits.
Restricted Common Stock and Performance Shares
Under the 2005 Plan, the Company grants directors, certain executives, and other key employees restricted common stock with vesting contingent upon completion of specified service periods ranging from one to three-and-one-half years. The Company also grants certain executives and other key employees performance share awards with vesting contingent upon a combination of specified service periods and the Companys achievement of specified common stock price levels.
During the 13 weeks ended April 28, 2012, and April 30, 2011, the Company granted 174,580 and 430,635 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 13 weeks ended April 28, 2012, and April 30, 2011, was $3.58 and $3.87 per share, respectively. The Company recorded approximately $0.4 million and $0.3 million of compensation expense related to outstanding shares of restricted common stock during the 13 weeks ended April 28, 2012, and April 30, 2011, respectively.
During the 13 weeks ended April 28, 2012, and April 30, 2011, the Company granted none and 400,000 performance shares, respectively, under the 2005 Plan. The weighted-average grant-date fair value of the performance share grants made during the 13 weeks ended April 30, 2011, which included consideration of the probability of such shares vesting, was $3.08 per share. The Company recorded compensation expense of approximately $0.3 million and $0.4 million during the 13 weeks ended April 28, 2012, and April 30, 2011, respectively, related to performance shares.
The fair value of nonvested restricted common stock awards is equal to the closing trading price of the Companys Class A common stock on the grant date. The fair value of nonvested performance shares is determined based on a number of factors, including the closing trading price of the Companys Class A common stock and the estimated probability of achieving the Companys stock price performance conditions as of the grant date. The following table summarizes activity with respect to the Companys nonvested restricted common stock and performance shares for the 13 weeks ended April 28, 2012:
Nonvested Restricted Common Stock and Performance Shares |
Number of Shares |
Weighted- Average Grant- Date Fair Value |
||||||
Nonvested at January 28, 2012 |
2,105,112 | $ | 3.16 | |||||
Granted |
174,580 | $ | 3.58 | |||||
Vested |
(363,968 | ) | $ | 3.65 | ||||
Forfeited |
(34,787 | ) | $ | 5.38 | ||||
|
|
|||||||
Nonvested at April 28, 2012 |
1,880,937 | $ | 3.06 | |||||
|
|
The fair value of restricted common stock and performance shares that vested during the 13 weeks ended April 28, 2012, was $1.3 million.
At April 28, 2012, there was $4.3 million of total unrecognized compensation expense related to nonvested restricted common stock and performance shares under the Companys share-based payment plans, of which $2.9 million relates to restricted common stock and $1.4 million relates to performance shares. That cost is expected to be recognized over a weighted-average period of 1.6 years. These estimates utilize subjective assumptions about expected forfeiture rates, which could change over time. Therefore, the amount of unrecognized compensation expense noted above does not necessarily represent the expense that will ultimately be recognized by the Company in its condensed consolidated statements of operations.
12
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 2 Stock-Based Compensation (Continued)
The following table summarizes stock-based compensation recorded in the condensed consolidated statements of operations (in thousands):
13 Weeks Ended | ||||||||
April 28, 2012 |
April 30, 2011 |
|||||||
Cost of sales |
$ | 67 | $ | 45 | ||||
Selling, general, and administrative expenses |
927 | 855 | ||||||
|
|
|
|
|||||
Stock-based compensation |
$ | 994 | $ | 900 | ||||
|
|
|
|
NOTE 3 Senior Revolving Credit Facility
On February 3, 2011, the Company renewed, via amendment and restatement, its $35.0 million senior revolving credit facility with its existing lender (the Facility), which can be increased up to $50.0 million in the absence of any default and upon the satisfaction of certain conditions precedent specified in the Facility. The Facility expires in February 2016. Under the Facility, the Company is subject to borrowing base limitations on the amount that can be borrowed and certain customary covenants, including, under certain circumstances, covenants limiting the ability to incur additional indebtedness, make investments and acquisitions, grant liens, pay dividends, repurchase its Class A common stock, close stores, and dispose of assets, without the lenders consent. The ability of the Company to borrow and request the issuance of letters of credit is subject to the requirement that the Company maintain an excess of the borrowing base over the outstanding credit extensions of the greater of 10% of the aggregate amount of the Facility or $4.0 million. The annual interest rate on the revolving line of credit under the Facility is (i) the higher of the lenders prime rate, the Federal funds rate plus 0.5% or the one month London InterBank Offered Rate (LIBOR) plus 1.0%, collectively referred to as the Base Rate, plus the applicable margin ranging from 0.5% to 1.0% or, (ii) if the Company elects, either the one, two, three or six months LIBOR plus a margin ranging from 1.5% to 2.0%. The applicable Base Rate or LIBOR margin is based on the level of average excess availability, as defined under the Facility, at the time of election, as adjusted quarterly. The Company also incurs fees on outstanding letters of credit under the Facility at an annual rate equal to the applicable LIBOR margin for standby letters of credit and 23.0% of the applicable LIBOR margin for commercial letters of credit. Additionally, the Company is subject to commitment fees at an annual rate of 0.25% on the unused portion of the line of credit under the Facility.
Borrowings under the Facility are secured by cash, cash equivalents, investments, receivables and inventory held by the Company and two of its wholly owned subsidiaries, The Wet Seal Retail, Inc. and Wet Seal Catalog, Inc., each of which may be a borrower under the Facility.
At April 28, 2012, the amount outstanding under the Facility consisted of $4.4 million in open documentary letters of credit related to merchandise purchases and $1.2 million in outstanding standby letters of credit, and the Company had $29.4 million available under the Facility for cash advances and/or the issuance of additional letters of credit.
At April 28, 2012, the Company was in compliance with all covenant requirements related to the Facility.
NOTE 4 Fair Value Measurements and Disclosures
Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Companys own credit risk.
13
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 4 Fair Value Measurements and Disclosures (Continued)
Inputs used in measuring fair value are prioritized into a three-level hierarchy based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels:
| Level 1 Quoted prices for identical instruments in active markets; |
| Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets; and |
| Level 3 Valuations derived from valuation techniques in which one or more significant inputs are unobservable. |
The following tables present information on the Companys financial instruments (in thousands):
Carrying Amount at April 28, 2012 |
Fair Value Measurements at Reporting Date Using |
|||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 148,108 | $ | 33,788 | $ | 114,320 | $ | | ||||||||
Long-term tenant allowance receivables |
896 | | | 896 | ||||||||||||
Carrying Amount at January 28, 2012 |
Fair Value Measurements at Reporting Date Using |
|||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 157,185 | $ | 62,881 | $ | 94,304 | $ | | ||||||||
Long-term tenant allowance receivables |
875 | | | 875 | ||||||||||||
Carrying Amount at April 30, 2011 |
Fair Value Measurements at Reporting Date Using |
|||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 133,074 | $ | 19,336 | $ | 113,738 | $ | | ||||||||
Short-term investments |
50,455 | | 50,550 | | ||||||||||||
Long-term tenant allowance receivables |
817 | | | 817 |
Cash and cash equivalents are carried at either cost or amortized cost, which approximates fair value, due to their short term maturities. Certain money market funds are valued through the use of quoted market prices and are represented as Level 1. Other money market funds are valued at $1, which is generally the net asset value of these funds and are represented at Level 2. Units are redeemable on a daily basis and redemption requests generally can be received the same day as the effective date. The Companys short-term investments consisted of interest-bearing corporate bonds that were guaranteed by the U.S. Government under the Temporary Liquidity Guarantee Program, had maturities that were less than one year and were carried at amortized cost plus accrued income. Short-term investments were carried at amortized cost due to the Companys intent to hold to maturity. The fair value of the Companys short-term investments was determined based on quoted prices for similar instruments in active markets. The Company believes the carrying amounts of other receivables and accounts payable approximate fair value. The fair value of the long-term tenant allowance receivables was determined by discounting them to present value using an incremental borrowing rate of 9.26%, at the time of recording, over their five year collection period. The long-term tenant allowance receivables are included in other assets within the condensed consolidated balance sheet.
14
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 4 Fair Value Measurements and Disclosures (Continued)
The table below segregates all non-financial assets and liabilities as of April 28, 2012, January 28, 2012, and April 30, 2011, that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date:
Carrying Amount at April 28, 2012 |
Fair Value Measurements at Reporting Date Using |
Total Gains (Losses) |
||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Long-lived assets held and used |
$ | 86,606 | $ | | $ | | $ | 86,606 | $ | (3,606 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 86,606 | $ | | $ | | $ | 86,606 | $ | (3,606 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Carrying Amount at January 28, 2012 |
Fair Value Measurements at Reporting Date Using |
|||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Long-lived assets held and used |
$ | 88,324 | $ | | $ | | $ | 88,324 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 88,324 | $ | | $ | | $ | 88,324 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Carrying Amount at April 30, 2011 |
Fair Value Measurements at Reporting Date Using |
Total Gains (Losses) |
||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Long-lived assets held and used |
$ | 91,861 | $ | | $ | | $ | 91,861 | $ | (259 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 91,861 | $ | | $ | | $ | 91,861 | $ | (259 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
The Company performs impairment tests whenever there are indicators of impairment. Refer to Note 1 for further information.
NOTE 5 Net (Loss) Income Per Share
Net (loss) income per share, basic, is computed based on the weighted-average number of common shares outstanding for the period, including consideration of the two-class method with respect to certain of the Companys other equity securities (see below). Net (loss) income per share, diluted, is computed based on the weighted-average number of common and potentially dilutive common equivalent shares outstanding for the period, also with consideration given to the two-class method.
While the Company historically has paid no cash dividends, participants in the Companys equity compensation plans who were granted restricted stock and performance shares are allowed to receive cash dividends paid on unvested restricted stock and unvested performance shares. The Companys unvested restricted stock and unvested performance shares also qualify as participating securities and are included in the computation of earnings per share pursuant to the two-class method. For the dilutive computation, under the two-class method, determination of whether the unvested share-based payment awards are dilutive is based on the application of the treasury stock method and whether the performance criteria has been met. For the 13 weeks ended April 28, 2012, the Company incurred a net loss, as the participating securities are not allocated any portion of losses and there is no dilutive effect of any unvested share-based payment awards. For the 13 weeks ended April 30, 2011, the effect of the unvested share-based payment awards was anti-dilutive to the computation of diluted earnings per share.
15
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 5 Net (Loss) Income Per Share (Continued)
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 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 | ||||||||||||||||||||||||
April 28, 2012 | April 30, 2011 | |||||||||||||||||||||||
Net Loss | Shares | Per Share Amount |
Net Income | Shares | Per Share Amount |
|||||||||||||||||||
Net (loss) income per share, basic: |
||||||||||||||||||||||||
Net (loss) income |
$ | (273 | ) | $ | 8,013 | |||||||||||||||||||
Less: Undistributed earnings allocable to participating securities |
| (179 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net (loss) income per share, basic |
$ | (273 | ) | 88,486,977 | $ | (0.00 | ) | $ | 7,834 | 98,916,747 | $ | 0.08 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Net (loss) income per share, diluted: |
||||||||||||||||||||||||
Net (loss) income |
$ | (273 | ) | $ | 8,013 | |||||||||||||||||||
Less: Undistributed earnings allocable to participating securities |
| (179 | ) | |||||||||||||||||||||
Effect of dilutive securities |
| 59,218 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net (loss) income per share, diluted |
$ | (273 | ) | 88,486,977 | $ | (0.00 | ) | $ | 7,834 | 98,975,965 | $ | 0.08 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The computations of net (loss) income per share, diluted, excluded the following potentially dilutive securities exercisable into Class A common stock for the 13 weeks ended April 28, 2012, and April 30, 2011, respectively, because their effect would not have been dilutive.
13-Week Period Ended | ||||||||
April 28, 2012 |
April 30, 2011 |
|||||||
Stock options outstanding |
3,216,217 | 3,200,081 | ||||||
Performance shares and nonvested restricted stock awards |
2,077,361 | 2,253,790 | ||||||
|
|
|
|
|||||
Total |
5,293,578 | 5,453,871 | ||||||
|
|
|
|
NOTE 6 Commitments and Contingencies
On July 19, 2006, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles on behalf of certain of the Companys current and former employees that were employed and paid by the Company on an hourly basis during the four-year period from July 19, 2002 through July 19, 2006. The Company was named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On November 30, 2006, the Company reached an agreement to pay approximately $0.3 million to settle this matter, subject to Superior Court approval. On September 27, 2010, the Superior Court granted final approval of the settlement agreement. An appeal was subsequently filed on January 26, 2011. The Company is vigorously defending this appeal and is unable to predict the likely outcome. As of April 28, 2012, the Company has accrued an amount equal to the settlement amount in accrued liabilities in its condensed consolidated balance sheet.
16
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 6 Commitments and Contingencies (Continued)
On May 22, 2007, a complaint was filed in the Superior Court of the State of California for the County of Orange on behalf of certain of the Companys current and former employees who were employed and paid by the Company from May 22, 2003 through the present. The Company was named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and Wage Orders of the Industrial Welfare Commission. On December 17, 2010, the court denied Plaintiffs Motion for Class Certification and Motion For Leave to File An Amended Complaint. Plaintiffs have appealed both orders. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
On September 29, 2008, a complaint was filed in the Superior Court of the State of California for the County of San Francisco on behalf of certain of the Companys current and former employees who were employed and paid by the Company from September 29, 2004 through the present. The Company was named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On August 16, 2011, the court denied Plaintiffs Motion for Class Certification. Plaintiffs have appealed. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
On April 24, 2009, the U.S. Equal Employment Opportunity Commission (the EEOC) requested information and records relevant to several charges of discrimination by the Company against employees of the Company. In the course of this investigation, the EEOC served a subpoena seeking information related to current and former employees throughout the United States. In April 2010, the EEOC filed an application to enforce the subpoena in the U.S. District Court for the Eastern District of Pennsylvania, and is in the process of a nationwide investigation. The Company is awaiting the results of the investigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
On May 9, 2011, a complaint was filed in the Superior Court of the State of California for the County of Alameda on behalf of certain of the Companys current and former employees who were employed and paid by the Company from May 9, 2007 through the present. The Company was named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On February 3, 2012, the court granted the Companys motion to transfer venue to the County of Orange. Once the case is assigned to a new judge in the Superior Court of the State of California for the County of Orange, the Company intends to file a motion to compel arbitration. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
On October 27, 2011 a complaint was filed in the Superior Court of the State of California for the County of Los Angeles on behalf of certain of the Companys current and former employees who were employed in California during the time period from October 27, 2007 through the present. The Company was named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On April 2, 2012, the court granted the Companys motion to compel arbitration and to enforce the class action waiver in the arbitration agreement. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
As of April 28, 2012, the Company was not engaged in any other legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on its results of operations or financial condition. From time to time, the Company is involved in other litigation matters relating to claims arising out of its operations in the normal course of business. The Company believes that, in the event of a settlement or an adverse judgment on certain of these claims, the Company has insurance to cover a portion of such losses. However, certain other matters may exist or arise for which the Company does not have insurance coverage and which could have a material adverse effect on its results of operations or financial condition.
17
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended April 28, 2012, and April 30, 2011
(Unaudited)
NOTE 7 Segment Reporting
The Company operates exclusively in the retail apparel industry in which it sells apparel and accessory items, primarily through mall-based chains of retail stores, to female consumers with a young, active lifestyle. The Company has identified two operating segments (Wet Seal and Arden B). E-commerce operations for Wet Seal and Arden B are included in their respective operating segments.
Information for the 13 weeks ended April 28, 2012, and April 30, 2011, for the two reportable segments is set forth below (in thousands, except percentages):
13 Weeks Ended April 28, 2012 |
Wet Seal | Arden B | Corporate and Unallocated |
Total | ||||||||||||
Net sales |
$ | 126,175 | $ | 21,770 | $ | | $ | 147,945 | ||||||||
Percentage of consolidated net sales |
85 | % | 15 | % | | 100 | % | |||||||||
Operating income (loss) |
$ | 9,324 | $ | (1,304 | ) | $ | (8,461 | ) | $ | (441 | ) | |||||
Depreciation and amortization expense |
$ | 3,856 | $ | 454 | $ | 381 | $ | 4,691 | ||||||||
Interest income |
$ | | $ | | $ | 38 | $ | 38 | ||||||||
Interest expense |
$ | | $ | | $ | (48 | ) | $ | (48 | ) | ||||||
Income (loss) before provision (benefit) for income taxes |
$ | 9,324 | $ | (1,304 | ) | $ | (8,471 | ) | $ | (451 | ) |
13 Weeks Ended April 30, 2011 |
Wet Seal | Arden B | Corporate and Unallocated |
Total | ||||||||||||
Net sales |
$ | 131,054 | $ | 24,986 | $ | | $ | 156,040 | ||||||||
Percentage of consolidated net sales |
84 | % | 16 | % | | 100 | % | |||||||||
Operating income (loss) |
$ | 18,813 | $ | 2,564 | $ | (8,051 | ) | $ | 13,326 | |||||||
Depreciation and amortization expense |
$ | 3,784 | $ | 540 | $ | 342 | $ | 4,666 | ||||||||
Interest income |
$ | | $ | | $ | 72 | $ | 72 | ||||||||
Interest expense |
$ | | $ | | $ | (43 | ) | $ | (43 | ) | ||||||
Income (loss) before provision for income taxes |
$ | 18,813 | $ | 2,564 | $ | (8,022 | ) | $ | 13,355 |
The Corporate and Unallocated column is presented solely to allow for reconciliation of segment contribution to consolidated operating (loss) income, interest income, interest expense and (loss) income before (benefit) provision for income taxes. Wet Seal and Arden B segment results include net sales, cost of sales, asset impairment and other direct store and field management expenses, with no allocation of corporate overhead or interest income and expense. The application of accounting policies for segment reporting is consistent with the application of accounting policies for corporate reporting.
Wet Seal operating income during the 13 weeks ended April 28, 2012, and April 30, 2011, includes $2.7 million and $0.2 million, respectively, of asset impairment charges.
Arden B operating (loss) income during the 13 weeks ended April 28, 2012, and April 30, 2011, includes $0.9 million and $0.1 million, respectively, of asset impairment charges.
18
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto. The following discussion and analysis contains forward-looking statements. Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, and/or which include words such as believes, plans, intends, anticipates, estimates, expects, may, will, or similar expressions. In addition, any statements concerning future financial performance, ongoing strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and the industry in which we do business, among other things. These statements are not guarantees of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors that could cause our actual performance, future results and actions to differ materially from any forward-looking statements include, but are not limited to, those discussed in Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012, and elsewhere in this Quarterly Report of Form 10-Q.
All references to we, our, us, and the Company in this Quarterly Report on Form 10-Q mean The Wet Seal, Inc. and its wholly owned subsidiaries.
Executive Overview
We are a national specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers aged 15 to 39 years old. We operate two nationwide, primarily mall-based, chains of retail stores under the names Wet Seal and Arden B. At April 28, 2012, we had 553 retail stores in 47 states and Puerto Rico. Of the 553 stores, there were 469 Wet Seal stores and 84 Arden B stores. Our merchandise can also be purchased online through the respective websites of each of our operating segments
We consider the following to be key performance indicators in evaluating our performance:
Comparable store salesFor purposes of measuring comparable store sales, sales include merchandise sales as well as membership fee revenues recognized under our Wet Seal divisions frequent buyer program during the applicable period. Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or significant remodel/relocation, which we define to be a square footage increase or decrease of at least 20%. Stores that are remodeled or relocated with a resulting square footage change of less than 20% are maintained in the comparable store base with no interruption. However, stores that are closed for four or more days in a fiscal month due to remodel, relocation or other reasons, are removed from the comparable store base for that fiscal month as well as for the comparable fiscal month in the following fiscal year. Comparable store sales results are important in achieving operating leverage on expenses such as store payroll, occupancy, depreciation and amortization, general and administrative expenses, and other costs that are at least partially fixed. Positive comparable store sales results generate greater operating leverage on expenses while negative comparable store sales results negatively affect operating leverage. Comparable store sales results also have a direct impact on our total net sales, cash, and working capital.
Average transaction countsWe consider the trend in the average number of sales transactions occurring in our stores to be a key performance metric. To the extent we are able to increase transaction counts in our stores that more than offset the decrease, if any, in the average dollar sale per transaction, we will generate increases in our comparable store sales.
Gross marginsWe analyze the components of gross margin, specifically cumulative mark-on, markups, markdowns, shrink, buying costs, distribution costs, and store occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or in inventory shrink, or an inability to generate sufficient sales leverage on other components of cost of sales could have an adverse impact on our gross margin results and results of operations.
Operating incomeWe view operating income as a key indicator of our financial success. The key drivers of operating income are comparable store sales, gross margins, and the changes we experience in operating costs.
Cash flow and liquidity (working capital)We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs.
19
Business Segments
We report our results as two reportable segments representing our two retail divisions, Wet Seal and Arden B. E-commerce operations for Wet Seal and Arden B are included in their respective reporting segments. Although the two operating segments have many similarities in their products, production processes, distribution methods, and regulatory environment, there are differences in most of these areas and distinct differences in their economic characteristics. As a result, we consider these segments to be two distinct reportable segments.
Wet Seal. Wet Seal is a junior apparel brand for girls who seek fashionable clothing at a value, with a target customer age range of 15 to 23 years old. Wet Seal seeks to provide its customer base with a balance of trend right and fashion basic apparel and accessories that are affordably priced.
Arden B. Arden B is a fashion brand at value price points for the contemporary woman. Arden B targets customers aged 25 to 39 years old and seeks to deliver differentiated contemporary fashion, dresses, sportswear separates and accessories for any occasion of the customers lifestyles.
We maintain a Web-based store located at www.wetseal.com, offering Wet Seal merchandise comparable to that carried in our stores, to customers over the Internet. We also maintain a Web-based store located at www.ardenb.com, offering Arden B merchandise comparable to that carried in our stores, to customers over the Internet. Our e-commerce stores are designed to serve as an extension of the in-store experience and offer an expanded selection of merchandise, with the goal of growing both e-commerce and in-store sales. We continue to develop our Wet Seal and Arden B websites to increase their effectiveness in marketing our brands. We do not consider our Web-based business to be a distinct reportable segment. The Wet Seal and Arden B reportable segments include, in addition to data from their respective stores, data from their respective e-commerce operations.
See Note 7 of the notes to condensed consolidated financial statements for financial information regarding segment reporting, which information is incorporated herein by reference.
Current Trends and Outlook
The overall retail environment in the U.S. has shown slight improvement in the early months of 2012. However, only modest growth is expected for 2012 due to continued uncertainty regarding the global economy, the lack of significant improvement in the U.S. housing market and elevated unemployment rates across all regions of the U.S. In addition, U.S. gross domestic product growth remains slow, further contributing to a volatile, and generally weak, retail environment. During the first quarter of fiscal 2012, we ran aggressive promotions and took higher levels of clearance markdowns to address the challenges we experienced in our tops business in both brands. As a result, we experienced declines in our merchandise margin and comparable store sales. In addition, we continued to incur sourcing cost pressures in the first quarter of fiscal 2012 as a result of elevated commodity prices, primarily for cotton, increased labor costs due to labor shortages in China, from which a majority of our merchandise is sourced, and increased fuel costs. We expect many of these sourcing cost pressures to continue into fiscal 2012, although recent declines in cotton prices may begin to alleviate some of the commodity cost pressures late in 2012 or early 2013. The rising value of the currency in China relative to the U.S. dollar may also have a further impact on future product costs.
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 adversely affected.
20
Our comparable store sales decreased 7.7% during the 13 weeks ended April 28, 2012, driven by a 7.0% comparable store sales decrease in our Wet Seal division and an 11.4% comparable store sales decrease in our Arden B division. The Wet Seal divisions comparable store sales decrease was primarily driven by a decrease in transaction volume, partially offset by an increase in average dollar sales per transaction, which was driven by an increase in units purchased per customer, partially offset by a decrease in average unit selling price. At Wet Seal, we performed poorly in the tops category due to, we believe, a weak fashion offering, an overly narrow assortment breadth, and macro trends whereby tops are downtrending in favor of an uptrending bottoms cycle. This poor performance in tops was partially offset by strong performance in bottoms, shoes and outerwear. The Arden B division comparable store sales decrease was primarily driven by a decline in transaction volume, partially offset by an increase in its average dollar sales per transaction, which was driven by an increase in units purchased per customer, partially offset by a decrease in average unit selling price. At Arden B, we exceeded our expectations in bottoms and jewelry sales, which were more than offset by a weak tops assortment and dresses for which sales were below our expectations. Our combined e-commerce sales declined 17% during the 13 weeks ended April 28, 2012, from the prior year, as we continued our initiative to reduce promotional levels and rebalance inventories more toward regular price versus clearance items in the e-commerce channel in an effort to better align the e-commerce presentation and shopping experience with those of the stores. As we continue efforts to improve our fashion assortments at both Wet Seal and Arden B, we have experienced continued sales challenges to begin our second fiscal quarter. We have provided guidance for the second quarter of fiscal 2012 for a comparable store sales decline of between 7% and 11%.
Our top near-term strategic priority is to improve our business trends and drive sales productivity improvement in our stores by focusing on distortions by category to give our customer what is most desirable, expanding our assortment breadth to drive momentum in our top and mid-tier volume stores, and planning and implementing in-store, e-commerce and social networking strategies, immediately and through the third and fourth quarters, that will drive increases in traffic and conversion rates. We continue our work on our mid to long-term initiatives, including driving a more customer-obsessed culture in our stores and throughout the business, implementing merchandising improvements as informed by independent customer research we conducted during fiscal 2011, redefining our brand DNA for both divisions, which are aimed at filling niches we do not feel are addressed competitively today, modifying our Wet Seal store design to support our brands and enhance our customers shopping experience, redirecting our store labor toward service and selling through streamlined operational tasks and/or eliminated non-selling activities and introducing training programs focused on developing a selling culture. Higher store productivity would contribute to comparable store sales growth. Other strategic priorities include continuing to focus on improving merchandise margins in both divisions, improving the Arden B business to allow it to stabilize and reach its full potential, and expanding our existing Wet Seal retail store base and e-commerce businesses. We are also focused on improving gross margins by optimizing sourcing of merchandise, enhancing our inventory planning and allocation functions and improving supply chain efficiency through better coordination among and within our vendor base, internal distribution and store operations organizations. Although we have embarked on the strategic initiatives and priorities above, there is much work ahead of us to ensure the successful implementation of our strategy and to realize significant benefits to the business.
Store Openings and Closures
As we focus on day-to-day execution and traffic-driving and conversion strategies to generate near term sales momentum in our business, we have modified our fiscal 2012 store growth plans for Wet Seal and Arden B. This change in plans will allow all areas of our company to direct more energy toward key near-term priorities and will result in capital spending reductions for the year. At Wet Seal, we opened one new store and closed four stores during the 13 weeks ended April 28, 2012. We now plan 20 to 22 net store openings at Wet Seal for all of fiscal 2012, a decrease from our prior plan of 25 to 30 net openings. This reflects a more selective approach to new store development while we work on repositioning efforts at Wet Seal. This will also re-direct real estate focus more toward lease renewals, remodeling and/or refreshing of our current store base this year, as well as toward development of growth strategies for 2013 and beyond. At Arden B, we closed two stores during the 13 weeks ended April 28, 2012, taking our store count to 84. As we entered fiscal 2012, our plans were to maintain Arden B at 86 stores through the year, whereby we would renew most expiring leases and replace a few store closures upon lease expirations with new store openings. We will now focus on turning around the merchandise positioning and sales productivity at Arden B, while mitigating our financial investments in the process. As Arden B leases come up for renewal this year, we will either seek short-term extensions or allow the lease to expire and close the store. In addition, we will not be opening any new Arden B stores during fiscal 2012. With these actions, we expect the Arden B store base will decline from the current 84 stores to between 64 and 69 stores by the end of fiscal 2012. Of these 15 to 20 store closures, we expect approximately five to occur during the third quarter of fiscal 2012, with the remainder closing at the end of fiscal 2012. On a net basis, we do not expect the Arden B store closures to significantly change the four wall cash flow performance of this division as a whole.
21
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
The preparation of financial statements in conformity with GAAP requires the appropriate application of accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our condensed consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.
We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.
The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to our condensed consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.
We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policies with respect to revenue recognition, merchandise inventories, long-lived assets, stock-based compensation, accounting for income taxes and insurance reserves. There have been no significant additions to or modifications of the application of the critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012, except for the following updates for our critical accounting policies for long-lived assets and accounting for income taxes.
Long-Lived Assets
We evaluate the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that indicates continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the 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 cash flows using our weighted average cost of capital. Forecasted earnings, growth rates and other assumptions used to estimate carrying value recoverability rely heavily upon estimates made by management. If we are not able to achieve our projected growth rates and cash flows, this could result in additional impairment of assets in the future. We have considered all relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted cash flow approach continues to provide the most relevant and reliable means by which to determine fair value in this circumstance.
Quarterly, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. During the 13 weeks ended April 28, 2012, and April 30, 2011, we determined such events or changes in circumstances had occurred with respect to certain of our retail stores, and that operating losses or insufficient operating income would likely continue. As such, we recorded noncash charges of $3.6 million and $0.3 million, in our condensed consolidated statements of operations for the 13 weeks ended April 28, 2012, and April 30, 2011, respectively, to write down the carrying value of these stores long-lived assets to their estimated fair values.
Accounting for Income Taxes
We began fiscal 2012 with approximately $65.7 million of federal net operating loss (NOL) carry forwards available to offset taxable income in fiscal 2012 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code.
Our effective income tax rate for the 13 weeks ended April 28, 2012, was approximately 39.5%, which reflects our expected effective income tax rate for fiscal 2012. Due to our expected utilization of federal and state NOL carry forwards during fiscal 2012, we anticipate cash payment for income taxes for the fiscal year will be approximately 6.9% of pre-tax
22
income, representing the portion of federal and state alternative minimum taxes and state regular income taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash (benefit) provision for deferred incomes taxes.
Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted
In May 2011, the Financial Accounting Standards Board (the FASB) issued guidance on the application of fair value accounting where its use is already required or permitted by other standards within GAAP. This guidance changed the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Amendments include those that clarify the FASBs intent about the application of existing fair value measurement and disclosure requirements, and change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements. This guidance is effective during interim and annual periods beginning after December 15, 2011. We adopted this guidance and it did not significantly impact our condensed consolidated financial statements.
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. This guidance provided an entity with an option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance is 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.
Results of Operations
The following table sets forth selected condensed consolidated statements of operations data as a percentage of net sales for the periods indicated. The discussion that follows should be read in conjunction with the table below:
As a Percentage of Net Sales 13 Weeks Ended |
||||||||
April 28, 2012 |
April 30, 2011 |
|||||||
Net sales |
100.0 | % | 100.0 | % | ||||
Cost of sales |
70.5 | 65.8 | ||||||
|
|
|
|
|||||
Gross margin |
29.5 | 34.2 | ||||||
Selling, general, and administrative expenses |
27.4 | 25.5 | ||||||
Asset impairment |
2.4 | 0.2 | ||||||
|
|
|
|
|||||
Operating (loss) income |
(0.3 | ) | 8.5 | |||||
Interest (expense) income, net |
(0.0 | ) | 0.0 | |||||
|
|
|
|
|||||
(Loss) income before (benefit) provision for income taxes |
(0.3 | ) | 8.5 | |||||
(Benefit) provision for income taxes |
(0.1 | ) | 3.4 | |||||
|
|
|
|
|||||
Net (loss) income |
(0.2 | )% | 5.1 | % | ||||
|
|
|
|
Thirteen Weeks Ended April 28, 2012, Compared to Thirteen Weeks Ended April 30, 2011
Net sales
13 Weeks Ended April 28, 2012 |
Change From Prior Fiscal Period |
13 Weeks Ended April 30, 2011 |
||||||||||||||
($ in millions) | ||||||||||||||||
Net sales |
$ | 147.9 | $ | (8.1 | ) | (5.2 | )% | $ | 156.0 | |||||||
Comparable store sales decrease |
(7.7 | )% |
23
Net sales for the 13 weeks ended April 28, 2012, decreased primarily as a result of the following:
| A decrease of 7.7% in comparable store sales resulting from an 11.1% decrease in comparable store average transactions, partially offset by a 3.8% increase in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction increased mainly due to a 6.5% increase in the number of units purchased per customer, partially offset by a 3.2% decrease in average unit retail prices; and |
| A decrease of $1.7 million in net sales for our e-commerce business compared to the prior year, which is not a factor in calculating our comparable store sales. |
The increase in net sales was partially offset by an increase in number of stores open, from 536 stores as of April 30, 2011, to 553 stores as of April 28, 2012.
Cost of sales
13 Weeks Ended April 28, 2012 |
Change From Prior Fiscal Period |
13 Weeks Ended April 30, 2011 |
||||||||||||||
($ in millions) | ||||||||||||||||
Cost of sales |
$ | 104.3 | $ | 1.7 | 1.7 | % | $ | 102.6 | ||||||||
Percentage of net sales |
70.5 | % | 4.7 | % | 65.8 | % |
Cost of sales includes the cost of merchandise; markdowns; inventory shortages; inventory valuation adjustments; inbound freight; payroll expenses associated with buying, planning and allocation; processing, receiving and other warehouse costs; rent and other occupancy costs; and depreciation and amortization expense associated with our stores and distribution center.
Cost of sales as a percentage of net sales increased due primarily to a decrease in merchandise margin as a result of higher markdown rates in both the Wet Seal and Arden B divisions, as compared to the prior year, and the deleveraging effect on occupancy costs as a result of negative comparable store sales.
Cost of sales increased primarily due to the increase in merchandise costs as a result of higher markdowns and an increase in occupancy cost as a result of the increase in number of stores.
Selling, general, and administrative expenses (SG&A)
13 Weeks Ended April 28, 2012 |
Change From Prior Fiscal Period |
13 Weeks Ended April 30, 2011 |
||||||||||||||
($ in millions) | ||||||||||||||||
Selling, general, and administrative expenses |
$ | 40.4 | $ | 0.5 | 1.5 | % | $ | 39.9 | ||||||||
Percentage of net sales |
27.4 | % | 1.9 | % | 25.5 | % |
Our SG&A expenses are comprised of two components. Selling expenses include store and field support costs, including personnel, advertising, merchandise delivery, and transaction processing costs, as well as e-commerce processing and advertising costs. General and administrative expenses include the cost of corporate functions such as executives, legal, finance and accounting, information systems, human resources, real estate and construction, marketing, loss prevention, and other centralized services.
Selling expenses were in line with the prior year at $31.2 million. As a percentage of net sales, selling expenses were 21.1% of net sales, or 110 basis points higher than a year ago.
The following contributed to the current year offsetting increases and decreases in selling expenses:
| A $0.5 million net increase in advertising and marketing expenditures driven by brand definition work conducted to gain a better understanding of the Wet Seal and Arden B brand and customer personas, and an increase in visual merchandising materials, including window and in-store graphics; and |
| A $0.4 million increase in store payroll and benefits costs as a result of an increase in number of stores open, from 536 stores as of April 30, 2011, to 553 stores as of April 28, 2012. |
However, the increases in selling expenses were offset by the following decreases:
| A $0.5 million decrease in credit card fees due to a decline in average processing fees as a percent to sales; |
| A $0.2 million decrease in bags and boxes usage as a result of decreased sales volume; |
| A $0.1 million decrease in e-commerce production costs as a result of decreased sales volume; and |
| A $0.1 million decrease in security costs due to a decline in security system repairs. |
24
General and administrative expenses increased approximately $0.5 million from the prior year, to $9.2 million. As a percentage of net sales, general and administrative expenses were 6.3%, or 80 basis points higher than a year ago.
The following contributed to the current year increase in general and administrative expenses:
| A $0.4 million increase in corporate wages, primarily due to a new chief operating officer position that was not filled for one month in the prior year, and an increase in information systems wages due to growth in our information systems infrastructure to support efforts to increase sales volume; |
| A $0.3 million increase in loss on asset disposals due to the disposition of software development costs related to an e-commerce platform and a social media game which we are no longer pursuing; |
| A $0.2 million increase in legal fees associated with various legal matters; |
| A $0.1 million increase in stock compensation expense, primarily due to an increase in executive stock compensation for our new chief executive officer and president and chief operating officer; and |
| A $0.1 million increase in audit fees due to the timing of services performed as compared to the prior year. |
The increases in general and administrative expenses were partially offset by the following decreases:
| A $0.3 million decrease in corporate bonuses based on a shortfall in our financial performance relative to bonus targets; |
| A $0.2 million decrease in recruiting fees as the prior year included a portion of the costs for our searches for a new chief executive officer and president and chief operating officer; and |
| A $0.1 million net decrease in other general and administrative expenses. |
Asset impairment
13 Weeks Ended April 28, 2012 |
Change From Prior Fiscal Period |
13 Weeks Ended April 30, 2011 |
||||||||||||||
($ in millions) | ||||||||||||||||
Asset impairment |
$ | 3.6 | $ | 3.3 | 1,292.3 | % | $ | 0.3 | ||||||||
Percentage of net sales |
2.4 | % | 2.2 | % | 0.2 | % |
Based on our quarterly assessments of the carrying value of long-lived assets, during the 13 weeks ended April 28, 2012, and April 30, 2011, we identified certain retail stores with carrying values of their assets, including leasehold improvements, furniture, fixtures and equipment, in excess of such stores respective forecasted undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of $3.6 million and $0.3 million, respectively.
Interest (expense) income, net
13 Weeks Ended April 28, 2012 |
Change From Prior Fiscal Period |
13 Weeks Ended April 30, 2011 |
||||||||||||||
($ in millions) | ||||||||||||||||
Interest (expense) income, net |
$ | (0.0 | ) | $ | (0.0 | ) | 0.0 | % | $ | 0.0 | ||||||
Percentage of net sales |
0.0 | % | 0.0 | % | 0.0 | % |
We generated interest expense, net, of less than $0.1 million in the 13 weeks ended April 28, 2012, primarily from the amortization of deferred financing costs, partially offset by earnings from investments in cash and cash equivalents, and we generated interest income, net, of less than $0.1 million in the 13 weeks ended April 30, 2011, primarily from earnings from investments in cash and cash equivalents and short-term investments.
25
(Benefit) Provision for income taxes
13 Weeks Ended April 28, 2012 |
Change From Prior Fiscal Period |
13 Weeks Ended April 30, 2011 |
||||||||||||||
($ in millions) | ||||||||||||||||
(Benefit) Provision for income taxes |
$ | (0.2 | ) | $ | (5.5 | ) | (103.3 | )% | $ | 5.3 |
Our effective income tax rate for the 13 weeks ended April 28, 2012, was approximately 39.5%, which approximates our expected effective rate for fiscal 2012. Due to our expected utilization of federal and state NOL carry forwards during fiscal 2012, we anticipate cash payment for income taxes for the fiscal year will be approximately 6.9% of pre-tax income, representing the portion of federal and state alternative minimum taxes and state regular income taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash (benefit) provision for deferred income taxes.
Segment Information
The following is a discussion of the operating results of our business segments. We consider each of our operating divisions to be a segment. In the tables below, Wet Seal and Arden B reportable segments include data from their respective stores and e-commerce operations. Operating segment results include net sales, cost of sales, asset impairment, store closure costs, and other direct store and field management expenses, with no allocation of corporate overhead, interest income or expense.
Wet Seal:
(In thousands, except percentages, sales per square foot and number of stores) |
13 Weeks Ended April 28, 2012 |
13 Weeks Ended April 30, 2011 |
||||||
Net sales |
$ | 126,175 | $ | 131,054 | ||||
Percentage of consolidated net sales |
85 | % | 84 | % | ||||
Comparable store sales percentage (decrease) increase compared to the prior year fiscal quarter |
(7.0 | )% | 8.3 | % | ||||
Operating income |
$ | 9,324 | $ | 18,813 | ||||
Sales per square foot |
$ | 64 | $ | 69 | ||||
Number of stores as of quarter end |
469 | 454 | ||||||
Square footage as of quarter end |
1,881 | 1,806 |
The comparable store sales decrease during the 13 weeks ended April 28, 2012, was due primarily to a decrease of 10.5% in comparable store average transactions, partially offset by an increase of 3.8% in comparable store average dollar sales per transaction. The increase in comparable store average dollar sales per transaction resulted from a 6.0% increase in units purchased per customer, partially offset by a 2.9% decrease in our average unit retail prices. The net sales decrease was attributable to the comparable store sales decline and a $0.8 million decrease in net sales in our e-commerce business, partially offset by the increase in the number of stores compared to the prior year.
Wet Seals operating income decreased to 7.4% of net sales during the 13 weeks ended April 28, 2012, from 14.4% of net sales during the 13 weeks ended April 30, 2011. The decrease in operating income, as a percentage of sales, 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 negative comparable store sales, compared to the prior year. Additionally, during the 13 weeks ended April 28, 2012, and April 30, 2011, operating income included asset impairment charges of $2.7 million and $0.2 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.
Arden B:
(In thousands, except percentages, sales per square foot and number of stores) |
13 Weeks Ended April 28, 2012 |
13 Weeks Ended April 30, 2011 |
||||||
Net sales |
$ | 21,770 | $ | 24,986 | ||||
Percentage of consolidated net sales |
15 | % | 16 | % | ||||
Comparable store sales percentage decrease compared to the prior year fiscal quarter |
(11.4 | )% | (0.1 | )% | ||||
Operating (loss) income |
$ | (1,304 | ) | $ | 2,564 | |||
Sales per square foot |
$ | 76 | $ | 86 | ||||
Number of stores as of quarter end |
84 | 82 | ||||||
Square footage as of quarter end |
261 | 254 |
26
The comparable store sales decrease during the 13 weeks ended April 28, 2012, was due to a 17.6% decrease in comparable store average transactions, partially offset by a 7.5% increase in comparable store average dollar sales per transaction. The increase in the comparable store average dollar sales per transaction resulted from a 9.8% increase in units purchased per customer, partially offset by a 2.4% decrease in our average unit retail prices. The net sales decrease was attributable to the comparable sales decline and a $0.9 million decrease in net sales in our e-commerce business, partially offset by an increase in the number of stores compared to the prior year.
Arden B incurred an operating loss of 6.0% of net sales during the 13 weeks ended April 28, 2012, compared to operating income of 10.3% of net sales during the 13 weeks ended April 30, 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 negative comparable store sales, compared to the prior year. Additionally, during the 13 weeks ended April 28, 2012, and April 30, 2011, operating (loss) income included asset impairment charges of $0.9 million and $0.1 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.
Liquidity and Capital Resources
Net cash used in operating activities was $5.1 million for the 13 weeks ended April 28, 2012, compared to net cash provided by operating activities of $17.5 million for the same period last year. For the 13 weeks ended April 28, 2012, cash used in operating activities was comprised of net loss of $0.3 million, an increase in merchandise inventories over the increase of merchandise payables of $3.0 million, and a net use of cash from changes in other operating assets and liabilities of $11.3 million, which includes $9.5 million of February rents and other landlord costs due to the relatively early timing of fiscal 2011 year-end date, which in past years typically would have been paid before the end of the prior fiscal year, partially offset by net non-cash charges and credits, primarily depreciation and amortization, asset impairment, stock-based compensation and benefit for deferred income taxes, of $9.5 million. For the 13 weeks ended April 28, 2012, net cash used in investing activities of $3.8 million was comprised of capital expenditures, primarily for the construction of new Wet Seal stores, remodeling of existing Wet Seal and Arden B stores upon lease renewals and/or store relocations, and investment in the network infrastructure within our corporate offices. Capital expenditures that remain unpaid as of April 28, 2012, have increased $3.1 million since the end of fiscal 2011. We expect to pay nearly all of the total balance of such amounts payable of $4.4 million during the second quarter of fiscal 2012.
We estimate that, in fiscal 2012, capital expenditures will be between $32.0 million and $34.0 million, of which approximately $24.0 million to $26.0 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 and Arden B stores. We anticipate receiving approximately $5 million in tenant improvement allowances from landlords, resulting in net capital expenditures of between $27 million and $29 million.
For the 13 weeks ended April 28, 2012, net cash used by financing activities was $0.2 million, comprised of $0.2 million used to repurchase 67,247 shares of our Class A common stock to satisfy employee withholding tax obligations, slightly offset by less than $0.1 million of proceeds from the exercise of stock options.
Total cash and cash equivalents at April 28, 2012, was $148.1 million compared to $157.2 million at January 28, 2012.
On February 3, 2011, we renewed, via amendment and restatement, our $35.0 million senior revolving credit facility with our existing lender (the Facility), which can be increased up to $50.0 million in the absence of any default and upon the satisfaction of certain conditions precedent specified in the Facility. The Facility expires in February 2016. Under the Facility, we are subject to borrowing base limitations on the amount that can be borrowed and certain customary covenants, including, under certain circumstances, covenants limiting our ability to incur additional indebtedness, make investments and acquisitions, grant liens, pay dividends, repurchase our common stock, close stores and dispose of assets, without the lenders consent. Our ability to borrow and request the issuance of letters of credit is subject to the requirement that we maintain an excess of the borrowing base over the outstanding credit extensions of the greater of 10% of the aggregate amount of the Facility or $4.0 million. The annual interest rate on the revolving line of credit under the Facility is (i) the higher of the lenders prime rate, the Federal funds rate plus 0.5% or the one month London InterBank Offered Rate (LIBOR) plus 1.0%,
27
collectively referred to as the Base Rate, plus the applicable margin ranging from 0.5% to 1.0% or, (ii) if we elect, either the one, two, three or six months LIBOR plus a margin ranging from 1.5% to 2.0%. The applicable Base Rate or LIBOR margin is based on the level of average excess availability, as defined under the Facility, at the time of election, as adjusted quarterly. We also incur fees on outstanding letters of credit under the Facility at an annual rate equal to the applicable LIBOR margin for standby letters of credit and 23.0% of the applicable LIBOR margin for commercial letters of credit. Additionally, we are subject to commitment fees at an annual rate of 0.25% on the unused portion of the line of credit under the Facility.
Borrowings under the Facility are secured by cash, cash equivalents, investments, receivables, and inventory held by us and our wholly owned subsidiaries, The Wet Seal Retail, Inc. and Wet Seal Catalog, Inc., each of which may be a borrower under the Facility.
At April 28, 2012, the amount outstanding under the Facility consisted of $4.4 million in open documentary letters of credit related to merchandise purchases and $1.2 million in outstanding standby letters of credit. At April 28, 2012, we had $29.4 million available for cash advances and/or for the issuance of additional letters of credit, and we were in compliance with all covenant requirements under the Facility.
We believe we will have sufficient cash and credit availability to meet our operating and capital requirements for at least the next 12 months.
The financial performance of our business is susceptible to declines in discretionary consumer spending and availability of consumer credit and low consumer confidence in the United States. Increasing fuel prices and commodity costs may also cause a shift in consumer demand away from the retail clothing products that we offer. There are no guarantees that government or other initiatives will limit the duration or severity of the current economic challenges or stabilize factors that affect our sales and profitability. Continuing adverse economic trends could affect us more significantly than companies in other industries.
Seasonality and Inflation
Our business is seasonal in nature, with the Christmas season, beginning the week of Thanksgiving and ending the first Saturday after Christmas, and the back-to-school season, beginning the last week of July and ending during September, historically accounting for a large percentage of our sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of slightly less than 30% of our annual sales.
We do not believe that inflation has had a material effect on our results of operations during the past three years. However, we began to experience cost pressures in the fourth quarter of fiscal 2010 and saw further cost increases through fiscal 2011 as a result of rising commodity prices, primarily for cotton, increased labor costs, due to labor shortages in China, from which a majority of our merchandise is sourced, and increasing fuel costs. We expect many of these sourcing cost pressures to continue into fiscal 2012, although recent declines in cotton prices may begin to alleviate some of the commodity cost pressures late in 2012 or early 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 have evaluated and opportunistically adjusted our pricing in certain categories, are seeking to leverage our large vendor base to lower costs and are assessing ongoing promotional strategies and their impact on merchandise margin levels. We will continue to diligently monitor our costs as well as the competitive pricing environment in order to mitigate margin erosion. However, our margins have been and may continue to be adversely affected and we cannot be certain that our business will not be affected by inflation in the future.
Off-Balance Sheet Arrangements
As of April 28, 2012, we are not a party to any off-balance sheet arrangements, except for operating lease and purchase obligations as referenced in our Form 10-K for the fiscal year ended January 28, 2012, under Commitments and Contingencies and Other Off-Balance Sheet Arrangements.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
To the extent that we borrow under the Facility, we are exposed to market risk related to changes in interest rates. At April 28, 2012, no borrowings were outstanding under the Facility. At April 28, 2012, the weighted average interest rate on borrowings under the Facility was 1.333%. Based upon a sensitivity analysis as of April 28, 2012, if we had average outstanding borrowings of $1 million during first quarter of fiscal 2012, a 50 basis point increase in interest rates would have resulted in an increase in interest expense of approximately $1,250 for the first quarter of fiscal 2012.
28
As of April 28, 2012, we are not a party to any derivative financial instruments.
Foreign Currency Exchange Rate Risk
We contract for and settle all purchases in U.S. dollars. We only purchase a modest amount of goods directly from international vendors. Thus, we consider the effect of currency rate changes to be indirect and we believe the effect of a major shift in currency exchange rates on short-term results would be minimal, as a hypothetical 10% change in the foreign exchange rate of the Chinese currency against the U.S. dollar as of April 28, 2012, would not materially affect our results of operations or cash flows. Over a longer period, the cumulative year-to-year impact of such changes, especially the exchange rate of the Chinese currency against the U.S. dollar, could be significant, albeit indirectly, through increased charges in U.S. dollars from our vendors that source their products internationally.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief 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 the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commissions rules and forms. Our disclosure controls and procedures are also designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, in order to allow timely decisions regarding required disclosures. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of April 28, 2012.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended April 28, 2012, no changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
PART II. Other Information
Item 1. | Legal Proceedings |
On July 19, 2006, a complaint was filed in the Superior Court of the State of California for the County of Los Angeles on behalf of certain of our current and former employees that were employed and paid by us on an hourly basis during the four-year period from July 19, 2002 through July 19, 2006. We were named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On November 30, 2006, we reached an agreement to pay approximately $0.3 million to settle this matter, subject to Superior Court approval. On September 27, 2010, the Superior Court granted final approval of the settlement agreement. An appeal was subsequently filed on January 26, 2011. We are vigorously defending this appeal and are unable to predict the likely outcome. As of April 28, 2012, we have accrued an amount equal to the settlement amount in accrued liabilities in our condensed consolidated balance sheet.
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 have appealed both orders. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
On September 29, 2008, a complaint was filed in the Superior Court of the State of California for the County of San Francisco on behalf of certain of our current and former employees who were employed and paid by us from September 29, 2004 through the present. We were named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On August 16, 2011, the court denied Plaintiffs Motion for Class Certification. Plaintiffs have appealed. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
29
On April 24, 2009, the U.S. Equal Employment Opportunity Commission (the EEOC) requested information and records relevant to several charges of discrimination by us against employees of our Company. In the course of this investigation, the EEOC served a subpoena seeking information related to current and former employees throughout the United States. In April 2010, the EEOC filed an application to enforce the subpoena in the U.S. District Court for the Eastern District of Pennsylvania, and is in the process of a nationwide investigation. We are awaiting the results of the investigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
On May 9, 2011, a complaint was filed in the Superior Court of the State of California for the County of Alameda on behalf of certain of our current and former employees who were employed and paid by us from May 9, 2007 through the present. We were named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On February 3, 2012, the court granted our motion to transfer venue to the County of Orange. Once the case is assigned to a new judge in the Superior Court of the State of California for the County of Orange, we intend to file a motion to compel arbitration. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
On October 27, 2011 a complaint was filed in the Superior Court of the State of California for the County of Los Angeles on behalf of certain of our current and former employees who were employed in California during the time period from October 27, 2007 through the present. We were named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On April 2, 2012, the court granted our motion to compel arbitration and to enforce the class action waiver in the arbitration agreement. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of April 28, 2012.
As of April 28, 2012, we were not engaged in any other legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on our results of operations or financial condition. From time to time, we are involved in other litigation matters relating to claims arising out of our operations in the normal course of business. We believe that, in the event of a settlement or an adverse judgment on certain of these claims, we have insurance to cover a portion of such losses. However, certain other matters may exist or 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 1A. | Risk Factors |
We have recorded impairment charges in the past and we may record material impairment charges in the future.
At least quarterly, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. If we determine that the carrying value of long-lived assets is not recoverable, we will be required to record impairment charges relating to those assets. For example, our assessments during the 13 weeks ended April 28, 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 a non-cash charge of $3.6 million during the 13 weeks ended April 28, 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. In the future, we may determine that the carrying value of our long-lived assets may not be recoverable, particularly in light of the recent declines in our merchandise margin and comparable store sales. As a result, we may determine that additional impairment charges are required. In the event we record impairment charges, this could have a material adverse effect on our results of operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) | None. |
(b) | None. |
(c) | Issuer Purchases of Equity Securities |
30
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
January 29, 2012 to February 25, 2012 |
| $ | | | | |||||||||||
February 26, 2012 to March 31, 2012 |
| $ | | | | |||||||||||
April 1, 2012 to April 28, 2012 |
67,247 | $ | 3.30 | | |
(1) | An employee tendered 67,247 shares of our Class A common stock upon restricted stock and performance share vesting to satisfy employee withholding tax obligations for a total cost of approximately $0.2 million. |
Item 3. | Defaults Upon Senior Securities |
(a) | None. |
(b) | None. |
Item 4. | Mine Safety Disclosures |
None.
Item 5. | Other Information |
None.
31
Item 6. | Exhibits |
31.1 | Certification of the Chief Executive Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Chief Financial Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of the Chief Executive Officer furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of the Chief Financial Officer furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.1 | The Wet Seal, Inc. Code of Business Ethics and Conduct. | |
101 | The following materials from The Wet Seal, Inc.s Quarterly Report on Form 10-Q for the quarterly period ended April 28, 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. |
32
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE WET SEAL, INC. | ||||
(REGISTRANT) | ||||
Date: May 25, 2012 | By: | /s/ Susan P. McGalla | ||
Susan P. McGalla | ||||
Chief Executive Officer | ||||
Date: May 25, 2012 | By: | /s/ Steven H. Benrubi | ||
Steven H. Benrubi | ||||
Executive Vice President and Chief Financial Officer |
33
Exhibit 31.1
CERTIFICATION
I, Susan P. McGalla, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Wet Seal, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 25, 2012 | /s/ Susan P. McGalla | |||||
Susan P. McGalla Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Steven H. Benrubi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Wet Seal, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 25, 2012 |
/s/ Steven H. Benrubi | |||||
Steven H. Benrubi Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-Q of The Wet Seal, Inc. for the period ended April 28, 2012, I, Susan P. McGalla, Chief Executive Officer of The Wet Seal, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. | This Form 10-Q for the period ended April 28, 2012 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in this Form 10-Q for the period ended April 28, 2012 fairly presents, in all material respects, the financial condition and results of operations of The Wet Seal, Inc. |
Date: May 25, 2012 | /s/ Susan P. McGalla | |||||
Susan P. McGalla Chief Executive Officer (Principal Executive Officer) |
This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Exhibit 32.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report on Form 10-Q of The Wet Seal, Inc. for the period ended April 28, 2012, I, Steven H. Benrubi, Executive Vice President and Chief Financial Officer of The Wet Seal, Inc., hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. | This Form 10-Q for the period ended April 28, 2012 fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | The information contained in this Form 10-Q for the period ended April 28, 2012 fairly presents, in all material respects, the financial condition and results of operations of The Wet Seal, Inc. |
Date: May 25, 2012 | /s/ Steven H. Benrubi | |||||
Steven H. Benrubi Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
This certification accompanies this Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the registrant for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
Exhibit 99.1
THE WET SEAL, INC.
CODE OF BUSINESS ETHICS
AND
CONDUCT
The Wet Seal, Inc. Code of Business Ethics and Conduct
Table of Contents
INTRODUCTION |
1 | |
GENERAL BUSINESS GUIDELINES/COMPLIANCE WITH LAWS |
2 | |
ACCURATE AND COMPLETE ACCOUNTING |
3 | |
RECORD RETENTION |
4 | |
CONDUCT OUTSIDE THE COMPANY |
4 | |
FAIR DEALING |
4 | |
SELECTION OF VENDORS/SUPPLIERS |
4 | |
SOCIAL NETWORKING |
4 | |
CONFLICTS OF INTEREST |
5 | |
Gifts and Entertainment |
5 | |
Interests in Competitors, Suppliers and Third Parties |
7 | |
Indirect Interests or Relationships |
7 | |
SECURITIES LAWS |
8 | |
CORPORATE OPPORTUNITIES |
8 | |
SAFEGUARDING CORPORATE ASSETS |
9 | |
PROHIBITION AGAINST HARASSMENT AND HOSTILE WORK ENVIRONMENT |
9 | |
ASKING FOR HELP AND REPORTING CONCERNS |
9 |
Note: The Wet Seal, Inc. Code of Business Ethics and Conduct are current as of March 20, 2012. In adopting and publishing these guidelines, you should note that (1) in some respects the Companys policies may exceed minimum legal requirements or industry practice, (2) nothing contained in the Code should be construed as a binding definition or interpretation of a legal requirement or industry practice, and (3) any action by the Companys employees or agents in violation of the law or the Code is beyond the scope of such persons authority or duty and is not an act by the Company or on its behalf.
To obtain additional copies of the Code, you may contact your supervisor or the Corporate Ethics/Compliance Officer at 949-699-3900 ext. 4796.
Introduction
The Wet Seal, Inc. Code of Business Ethics and Conduct (this Code) is the Companys charter for ethical conduct. The Wet Seal, Inc. (the Company) has established the Code to describe the Companys expectations for business conduct. The Code applies to all actions of every director and every employee, from those who perform entry level functions to senior officers. All officers and managers are responsible for ensuring that employees under their supervision are familiar with the Code and are consistently applying it in all business conduct.
The Company has established means by which you can confidentially communicate any observations of code violations in particular accounting and financial reporting controls, auditing practices, or conflicts of interest and other concerns listed herein without fear of retaliation by the Company or its employees. Retaliation will not be tolerated. To report a concern, you may contact your supervisor or your supervisors manager.
If you are aware of or observe improper accounting or financial reporting, you may call the Companys Ethics Hotline at 1-800-435-1445 to speak with a live representative, 24 hours a day, from a third party, Global Compliance. These calls are reported back to the Companys Corporate Ethics/Compliance Officer. Any investigation of such complaints will be treated as confidentially as possible.
If you have concerns related to other matters covered by the Code, such as conflicts of interest and business ethics, you may call and leave an anonymous voicemail message at 1-888-679-3964, ext. 4796.
Additionally, in either case, you may also speak with the Companys Corporate Ethics/Compliance Officer, who is authorized to assist you in your report and discuss such issues with you and can be reached at 949-699-3900 ext. 4796.
* * *
After reading this Code, you should:
| Have a thorough knowledge of the Codes terms and provisions. |
| Be able to recognize situations that present legal or ethical dilemmas. |
| Be able to deal effectively with questionable situations in conformity with this Code. |
In order to be able to accomplish these goals, we recommend that you take the following steps:
| Read the entire Code thoroughly. |
| If there are references to more detailed policies that are not contained in this Code, obtain and read those policies if they apply to you. |
Page 1
| Think about how the provisions of this Code apply to your job, and consider how you might handle situations to avoid illegal, improper, or unethical actions. |
| If you have questions, ask your supervisor or the Companys Corporate Ethics/Compliance Officer. |
As far as your personal actions, when you are faced with a situation and you are not clear as to what action you should take, ask yourself the following questions:
| Does the action comply with this Code? |
| How will your decision affect others, including the Companys customers, shareholders, employees and the community? |
| How will your decision look to others? If your action is legal but can result in the appearance of wrongdoing, consider taking alternative steps. |
| Have you contacted your supervisor regarding the action? |
Please note that the Code is not an employment contract and does not modify the employment relationship between you and the Company. The Company does not create any contractual or legal rights or guarantees by issuing these policies, and we reserve the right to amend, alter and terminate policies at any time and for any reason
General Business Guidelines/Compliance with Laws
First and foremost, the Companys policy is to behave in an ethical manner and comply with all laws, rules and government regulations that apply to the Companys business. Although the Code addresses several important legal topics, the Code cannot anticipate every possible situation or cover every topic in detail. Therefore, each employee is responsible for knowing the laws and policies that relate to his or her own job and the locale where he or she is working or conducting business. It is also the responsibility of each employee to report any violations of the law or the Code. You may report such violations by following the compliance procedures contained in the section of the Code entitled Asking for Help and Reporting Concerns.
| All employees of the Company shall conduct their business in accordance with any applicable laws of the United States and any other countrys governmental jurisdictions with whom the Company conducts business. All employees should observe and practice the highest standards of business ethics. |
| You may not directly or indirectly make payment or give any gift to any governmental representative or personnel in order to obtain or retain business. No action of an employee of the Company should be taken that could be perceived as an action that may influence decisions in matters affecting the Company. The promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity is likewise prohibited. This is not meant to prohibit political |
Page 2
contributions but to ensure that any personal contribution to a political candidate, party or organization not be represented as a contribution from the Company. |
| No employee shall, on the Companys behalf or on the Company time or premises, solicit contributions for a political party, organization or committee or any candidate for public office, except in connection with a solicitation on behalf of any political action committee established by the Company, or other solicitation approved by the Chief Executive Officer of the Company. No employee may use any Company funds or property in support of any political party, organization or committee, or any candidate for public office unless the usage is permitted by law and approved by the Chief Executive Officer. Employees may not be reimbursed by the Company in any way, directly or indirectly, for personal political contributions. |
| You may not solicit, receive or accept any bribe, kickback or other payment (whether directly or indirectly) from any current or prospective vendor, supplier, landlord, or any other person who currently conducts business or may conduct business in the future with the Company. |
This discussion is not comprehensive and you are expected to familiarize yourself with all laws and regulations relevant to your position with the Company, as well as all of the Companys related written policies on these laws and regulations. Supervisors are responsible for ensuring that employees under their supervision have access to and are familiar with these laws and regulations.
Accurate and Complete Accounting
The Companys accounting and financial reporting policies must follow United States Generally Accepted Accounting Principles (GAAP) and other laws and regulations such as those of the Internal Revenue Service and the Securities and Exchange Commission. Laws and regulations require that the Company have and maintain internal controls to ensure the integrity of its financial statements. You are required to adhere to the following policies:
| All financial transactions (such as sales, leases or purchases) must be recorded truthfully, accurately, in a timely fashion and in sufficient detail so that the Companys accounting records are reliable and fairly reflect the nature of the transactions. |
| You may not make any false or misleading entries or maintain any unrecorded or secret fund, reserve, asset or account for any purpose. |
| You may not make any payment or transfer of funds or assets for any purpose other than that described in the documents supporting the payment or transfer. |
| No invoices believed to be false or fictitious may be paid. |
Page 3
| It is unlawful for you to fraudulently induce, coerce or mislead the Companys independent public accountants to make the Companys financial statements misleading. |
Suspected breaches or improper treatment of an accounting transaction must be reported and investigated. The Company will not retaliate against any employee for filing a good faith complaint or for cooperating in an investigation of an alleged violation, and will not tolerate or permit retaliation by management, employees or co-workers.
Record Retention
The Company will retain all books, records and statements in accordance with its record retention policies and all applicable laws and regulations. It is a crime to alter, destroy, modify or conceal documentation or other objects that are relevant to litigation or a government investigation, including not only formal reports but all less formal data such as e-mails, expense reports and internal memos. If you are informed that information in your possession is the subject of litigation or a government investigation, or if you have other reason to believe that such information may be involved in a judicial proceeding, no matter whether you think it is relevant or not, you are prohibited from making any effort to alter, destroy, modify or conceal that information.
Conduct Outside the Company
Because your conduct may be a reflection on the Company, every employee is expected to adhere to acceptable ethical behaviors in matters of personal conduct at all times. You must be committed to exhibiting a high degree of personal integrity at all times.
Fair Dealing
The Company is committed to maintaining the highest levels of integrity and fairness. You should not take unfair advantage of anyone (customers, contractors and even competitors) through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practice. If you are unclear regarding what constitutes an unfair-dealing practice, please ask your direct manager or the senior manager of your division.
Selection of Vendors/Suppliers
Whenever possible, vendors and suppliers should be selected after fair and open competitive bids have been submitted. The vendor or supplier selected should be of the highest value in quality, need, performance and cost. Any purchases made with these selected vendors and suppliers should be made in accordance with the Companys purchasing policies.
Social Networking
Personal Web sites and Web logs (blogs), such as My Space, Facebook, and Twitter have become prevalent methods of self-expression and communication within todays modern society and culture. While the company understands that employees may participate in these activities
Page 4
outside of work, the company expects employees to use these mediums for personal use only, during their own personal time. In certain situations, employees may use company equipment to access these sites if necessary or applicable for business purposes and with the approval of their supervisor.
| Employees should not have the expectation of privacy regarding these sites as they are accessible for anyone to view or read. |
| Employees should refrain from making any unlawful, disrespectful or defamatory comments about the company, its employees and affiliates or others, and from identifying himself or herself as a Wet Seal employee in any unlawful manner that negatively affects or harms the Companys reputation or brand. |
| Employees should not disclose any confidential or proprietary information of the company or the confidential and proprietary information of any third party that an employee has had access to through their employment with the Company. Consult the companys confidentiality policy for guidance about what constitutes confidential information. |
If the activities as described above are seen as compromising to the Companys reputation, the company may request that the employee stop this commentary and the employee may be subject to counseling and, potentially, disciplinary action up to and including termination.
Conflicts of Interest
You must be able to perform your duties and exercise judgment on behalf of the Company without influence or impairment, or the appearance of influence or impairment, due to a non-company activity, interest or relationship.
Conflicts of interest arise:
| when your private interest interferes or even appears to interfere in any way with the Companys interests; |
| when you take actions or have interests that may make it difficult to perform your work objectively and effectively; and |
| when you, or a member of your family, receive(s) improper personal benefits (especially loans or guarantees of obligations) as a result of your position in the Company. |
Gifts and Entertainment
The Company expects all employees of the Company to maintain the highest levels of integrity and fairness, use good judgment, and uphold the Companys reputation of high standards and continued ethical business conduct. The Company recognizes that the acceptance of gifts, entertainment or favors from vendors or other business partners may have the appearance of
Page 5
favoritism in some circumstances. This policy applies both to employees and members of his or her immediate family.
Employees are permitted to accept occasional invitations from vendors or other business partners to business meals or to attend sporting or other cultural events that are in accordance with customary industry practice and that may help to advance the Companys business purposes; however, employee acceptance of personal travel or vacation arrangements or similar favors is prohibited. When attending a business meal or entertainment event, the vendor or other business partner hosting said event must be in attendance.
In order to avoid the appearance of favoritism and/or conflict of interest in regards to gifts and entertainment, the following guidelines are in place for every employee:
| No gift or favor from vendors or other business partners above a nominal value, or that is more than occasional in frequency, may be accepted |
| No entertainment event invitation from a vendor or other business partners may be accepted if the value is excessive and/or is above and beyond customary industry practice |
| Employees should politely decline any gifts, favors or entertainment event invitations that exceed policy limitations, and remind the vendor or other business partner of the Companys gift and entertainment policy |
| No employee may solicit a gift or entertainment event |
For the avoidance of any doubt, all employee acceptances of favors or invitations to entertainment events from vendors or other business partners must be approved in advance by the Companys Chief Executive Officer (CEO) or Chief Financial Officer (CFO). Also, upon receiving any gifts from vendors or other business partners, employees must inform the Companys CEO or CFO, who will then determine whether the employee may keep the gift. Acceptances of any such favors, invitations or gifts by the CEO require advance approval by the CFO, and acceptances of any such favors, invitations or gifts by the CFO require advance approval by the CEO. To the extent practical, disallowed but received gifts, services, discounts, etc., will be shared within the Company or donated to charity.
In addition to receiving CEO or CFO approval before accepting any gifts, favors or entertainment event invitations, you must advise your supervisor of all gifts, favors or entertainment event invitations that you receive from vendors or other business partners.
Employees may occasionally host vendors or other business partners for business meals or to attend sporting or other cultural events that are in accordance with customary industry practice and that may help to advance the Companys business purposes. Except for ordinary course business meals, employee provision of entertainment or favors to the Companys customers, prospective customers, and public officials and others who are affiliated with such individuals require pre-approval by the CFO, and provision of any such entertainment or favors by the CFO requires pre-approval by the CEO. All funds expended for business meals, entertainment and
Page 6
gifts must be fully and accurately documented and reflected in the books and records of the Company.
Some business units or departments may follow stricter standards on gifts and entertainment than those stated here. Always review and adhere to any local policies or procedures that govern your business conduct.
Interests in Competitors, Suppliers and Third Parties
You should not have any direct or indirect interest in any transaction to which the Company will be a party if your interest or relationship could influence, or appear to influence, your actions with regard to your Company duties. You should not have any financial or other interest in any competitor, vendor, supplier (i.e., someone who provides products or services to the Company) or third party with whom you could influence or appear to influence the Companys decision to do business (or proposing to do business).
If any of the following situations pertain to you, notify the Companys Corporate Ethics/Compliance Officer, who will ensure that the situation is reviewed to determine whether the Companys business relationship with the relevant vendor, etc., is in the best interest of the Company:
| You (or your relative) have ownership interests in any of the Companys competitors, vendors, suppliers or other third parties with whom we do business or are proposing to do business (except for ownership of less than one percent of the securities of a company whose securities are traded on a national securities exchange); |
| You are currently an employee, trustee, director, agent or officer of a Company supplier, vendor, or other third party that is doing business or proposes to do business with the Company; |
| You are directly or indirectly engaged in business transactions with one or more of the Companys competitors, vendors, suppliers or other third parties. |
Indirect Interests or Relationships
You should not be in a position to influence the Companys decision to engage in business directly or indirectly with one of your relatives. The definition of a relative includes your spouse, child, parent, sibling, siblings spouse, son-in-law, daughter-in-law, other in-law and any relative who resides with you or person sharing your home. (For more information, you may refer to the Companys Employee Handbook, Hiring Relatives, Section 3.B). You must disclose to the Companys Corporate Ethics/Compliance Officer any situation in which one of your relatives has an interest in a competitor, supplier or other party to any transaction involving the Company. The Corporate Ethics/Compliance Officer will then ensure that the situation is reviewed to determine whether the Companys business relationship with the relevant vendor, etc., is in the best interest of the Company.
Page 7
Securities Laws
Because the Companys shares are publicly traded, the Company is subject to a number of federal laws concerning the purchase and sale of its shares and other publicly traded securities. These Federal Laws prohibit and punish anyone who gives or releases to anyone data or information of a confidential nature concerning the Company.
Employees who know important information stemming from their employment with the Company not generally known to the public (legally known as material undisclosed information) about the Company or any other corporation, including customers, suppliers, or competitors, could be found to be in violation of such laws and regulations if they take advantage of that information by:
| Trading in the Companys shares, or |
| Trading in another companys shares by utilizing confidential information, or |
| Inducing, or in any way assisting others, to trade in such shares. |
Important information includes but is not limited to significant new products or discoveries, sales and earnings forecasts, major contracts, plans for stock splits, and acquisitions or mergers. Such information in the case of another corporation would also include knowledge that the other corporation will enter into or is negotiating for a contract important to it for the sale of goods and services to or by the Company.
Employees shall not, without the proper authority, give or release to anyone data or information of a confidential nature concerning the Company. Employees must always use the highest care to protect this information from outside parties and other employees that are not authorized to see the information. Each employee is always encouraged to seek his or her supervisors guidance in maintaining the confidentiality of such information.
For more information about the Companys policy concerning the securities laws, you should refer to the Companys Corporate Policy and Procedure on Insider Trading and Disclosure of Information to the Public for Employees of The Wet Seal, Inc. To obtain a copy of this policy, or if you have any questions concerning the securities laws or about the Companys policy with regard to those laws, or regarding the correct ethical and legal action to take in a situation involving material inside information, please contact the Corporate Ethics/Compliance Officer. A copy of this policy is also available at the Companys website, www.wetsealinc.com.
Corporate Opportunities
Business opportunities relating to the Companys line of business can only be utilized by the Company itself and not by employees acting in a private manner. Any business opportunity that fits into the strategic plans or that satisfies the Companys commercial objectives also belongs only to the Company. Unless the terms of the Companys articles of incorporation or bylaws dictate otherwise, you may not direct these kinds of business opportunities to the Companys competitors, to other third parties or to other businesses that you own or are affiliated with in any
Page 8
way. Under no circumstances may an employee exploit the Companys business opportunities for his or her own personal gain.
Safeguarding Corporate Assets
The Companys assets and funds can only be used for legitimate business purposes to advance the Companys strategic objectives. Each employee is responsible for any Company assets and funds in his or her possession or under his or her control. Each employee must diligently work to protect these assets and funds from theft, misuse and waste.
The Companys assets and funds may never be used for an unlawful purpose. Carefully safeguarding the Companys assets makes the Company more efficient and avoids the potential for loss and embarrassment to you and the Company. If you become aware of theft, waste or misuse of the Companys assets or funds or have any questions about your proper use of them, you should speak immediately with your supervisor or the Companys Corporate Ethics/Compliance Officer.
Prohibition Against Harassment and Hostile Work Environment
It is the Companys policy that all employment relationships shall be conducted in an environment that is not hostile or offensive. Harassment based on race, color, religion, ancestry, marital status, gender, gender identity and perceived gender, pregnancy, sex, sexual orientation, national origin, political affiliation, military status, age or mental/physical disability, or any other basis prohibited by applicable local, state, or federal law will not be tolerated at the Company.
If you believe that you have been subjected to harassment by a supervisor, manager, fellow employee, customer, client, vendor or any other person in connection with your employment at the Company, you should immediately bring the matter to the attention of your supervisor, a manager, or the Companys Corporate Ethics/Compliance Officer.
All complaints of harassment will be investigated promptly and, where necessary, corrective action will be taken. Any investigation of such complaints will be treated as confidentially as possible. No employee will be punished or suffer any adverse employment action as a result of bringing any good faith harassment complaint to the Companys attention.
Any supervisor, agent, or other employee who is found to have engaged in harassment or retaliation against an employee for exercising rights protected by this policy will be subject to appropriate discipline, up to and including discharge. If the individual found to have engaged in harassing behavior does not work for the Company, the Company will take prompt appropriate action toward preventing any further harassment.
Asking For Help and Reporting Concerns
The Code has been adopted by the Board of Directors of the Company. Your failure to adhere to the Code could result in civil or criminal penalties and/or disciplinary action up to and including termination of employment.
Page 9
When in doubt, ask. Whenever you have a question or concern, are unsure about what the appropriate course of action is, or if you suspect that a violation of the law or the Code has occurred, please talk with your supervisor, your supervisors manager, or the Companys Corporate Ethics/Compliance Officer.
Again, the Company has established means by which you can confidentially communicate any observations of Code violations without fear of retaliation by the Company or its employees. Retaliation will not be tolerated. To report a concern, you may contact your supervisor or your supervisors manager. If the concern is related to improper accounting or financial reporting, you may call the Companys Ethics Hotline at 1-800-435-1445, which is monitored by Global Compliance. If the concern is related to another sensitive area, such as a potential conflict of interest or other business ethics questions, you may call and leave an anonymous voicemail message at 1-888-679-3964, ext. 4796. In either case, you may also speak with the Companys Corporate Ethics/Compliance Officer, who is authorized to assist you in your report and discuss such issues with you and can be reached at 949-699-3900 ext. 4796.
Page 10
Inquiry Form-Confidential
If you have a question or concern as to whether specific behavior is a violation of corporate policy, please fill out the following inquiry form and return it to the Human Resources Department, Attention Corporate Ethics/Compliance Officer, The Wet Seal, Inc., 26972 Burbank, Foothill Ranch, CA 92610.
Name
Date
Please describe your question or concern in as much detail as possible.
If you would like the Company to contact you or respond to you at home, please provide the following information:
Home Address
Phone No.
I certify that the information stated above is true and correct to the best of my knowledge. I understand that any disclosures I make are subject to review and investigation. I understand that my disclosures may be reviewed by other appropriate Company personnel who will use said information to conduct a reasonable inquiry.
I understand that the disclosures that I make will be held confidential and I will suffer no retaliation for reporting concerns.
Signature
Date
Page 11
Confirmation Certificate
I have been provided with a copy of The Wet Seal, Inc. Code of Business Ethics and Conduct dated March 20, 2012 and I acknowledge that I have read the Code, understand my responsibilities under it and have complied with it. I further acknowledge that I should follow the compliance procedures described in the Code if I have any questions or concerns.
Employee Name (Please Print) |
Employee Signature |
Date |
Store Number, City and State (if applicable) |
Page 12