<PAGE>
THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18632
THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0415940
(State of Incorporation) (I.R.S. Employer Identification No.)
26972 BURBANK
FOOTHILL RANCH, CALIFORNIA 92610
(Address of principal executive offices) (Zip code)
(949) 583-9029
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
The number of shares outstanding of the registrant's Class A Common
Stock and Class B Common Stock, par value $.10 per share, at December 10,
1999 were 10,889,886 and 2,912,665, respectively. There were no shares of
Preferred Stock, par value $.01 per share, outstanding at December 10, 1999.
<PAGE>
THE WET SEAL, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of October 30, 1999 (unaudited) and January 30,
1999...........................................................3-4
Statements of Income and Comprehensive Income (unaudited) for
the 13 and 39 weeks ended October 30, 1999 and
October 1, 1998..................................................5
Statements of Cash Flows (unaudited) for the 39 weeks ended
October 30, 1999 and October 31, 1998............................6
Notes to Financial Statements..................................7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................10-18
Item 3. Quantitative and Qualitative Disclosures About Market
Risk............................................................19
PART II. OTHER INFORMATION...............................................20
SIGNATURE PAGE..................................................21
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 30 JANUARY 30,
1999 1999
------------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $7,727,000 $31,590,000
Short-term investments 25,823,000 21,943,000
Other receivables 2,293,000 3,665,000
Merchandise inventories 42,081,000 28,002,000
Prepaid expenses 7,689,000 -
Deferred taxes 1,791,000 1,791,000
------------------- ------------------
Total current assets 87,404,000 86,991,000
------------------- ------------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 101,687,000 75,659,000
Furniture, fixtures and equipment 47,829,000 37,758,000
Leasehold rights 4,446,000 3,577,000
Construction in progress 2,000 489,000
------------------- ------------------
153,964,000 117,483,000
Less accumulated depreciation (70,344,000) (57,110,000)
------------------- ------------------
Net equipment and leasehold improvements 83,620,000 60,373,000
------------------- ------------------
LONG-TERM INVESTMENTS 19,224,000 37,973,000
OTHER ASSETS:
Deferred taxes and other assets 12,142,000 11,677,000
Goodwill, net of accumulated amortization of
$894,000 and $656,000 as of October 30, 1999
and January 30, 1999, respectively 7,210,000 476,000
------------------- ------------------
Total other assets 19,352,000 12,153,000
------------------- ------------------
$209,600,000 $197,490,000
------------------- ------------------
------------------- ------------------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 30 JANUARY 30,
1999 1999
------------------- ------------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $43,648,000 $37,515,000
Accrued liabilities 17,190,000 20,430,000
Income taxes payable 1,795,000 6,190,000
Current portion of long-term debt 2,000,000 1,000,000
------------------- ------------------
Total current liabilities 64,633,000 65,135,000
------------------- ------------------
LONG-TERM LIABILITIES:
Long-term debt 264,000 1,264,000
Deferred rent 8,396,000 7,458,000
Other long-term liabilities 3,872,000 3,355,000
------------------- ------------------
Total long-term liabilities 12,532,000 12,077,000
------------------- ------------------
Total liabilities 77,165,000 77,212,000
------------------- ------------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, authorized
2,000,000 shares; none issued and outstanding - -
Common Stock, Class A, $.10 par value,
authorized 20,000,000 shares;
10,889,886 and 10,704,886 shares issued and outstanding
at October 30, 1999 and January 30, 1999, respectively 1,122,000 1,071,000
Common Stock, Class B Convertible, $.10 par value,
authorized 10,000,000 shares;
2,912,665 shares issued and outstanding
at October 30, 1999 and January 30, 1999 291,000 291,000
Paid-in capital 60,014,000 58,356,000
Retained earnings 91,206,000 80,374,000
Other comprehensive income (139,000) (139,000)
Treasury stock, 1,347,600 shares at cost (20,059,000) (19,675,000)
------------------- ------------------
Total stockholders' equity 132,435,000 120,278,000
------------------- ------------------
$209,600,000 $197,490,000
------------------- ------------------
------------------- ------------------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------------- --------------------------------
OCTOBER 30 OCTOBER 31, OCTOBER 30 OCTOBER 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SALES $131,465,000 $121,622,000 $381,204,000 $339,503,000
COST OF SALES (INCLUDING BUYING, DISTRIBUTION
AND OCCUPANCY COSTS) 94,622,000 85,121,000 272,553,000 240,141,000
------------ ------------ ------------ ------------
GROSS MARGIN 36,843,000 36,501,000 108,651,000 99,362,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 32,940,000 28,648,000 92,802,000 79,924,000
------------ ------------ ------------ ------------
OPERATING INCOME 3,903,000 7,853,000 15,849,000 19,438,000
INTEREST INCOME, NET 701,000 957,000 2,230,000 2,977,000
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 4,604,000 8,810,000 18,079,000 22,415,000
PROVISION FOR INCOME TAXES 1,857,000 3,392,000 7,247,000 8,630,000
------------ ------------ ------------ ------------
NET INCOME $ 2,747,000 $ 5,418,000 $ 10,832,000 $ 13,785,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 2,747,000 $ 5,418,000 $ 10,832,000 $ 13,785,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER SHARE, BASIC $ 0.22 $ 0.42 $ 0.87 $ 1.03
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER SHARE, DILUTED $ 0.22 $ 0.41 $ 0.84 $ 1.00
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC 12,455,973 12,915,100 12,415,880 13,358,342
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED 12,574,681 13,249,208 12,833,058 13,849,798
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
-------------------------------------
OCTOBER 30 OCTOBER 31,
1999 1998
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,832,000 $13,785,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,471,000 9,186,000
Changes in operating assets and liabilities: -
(Increase) decrease in:
Other receivables 1,371,000 214,000
Merchandise inventories (10,079,000) (9,371,000)
Prepaid expenses (7,689,000) (5,496,000)
Other assets (464,000) (585,000)
(Decrease) increase in:
Accounts payable and accrued liabilities (1,107,000) 10,581,000
Income taxes payable (4,394,000) (498,000)
Deferred rent 937,000 740,000
Other long-term liabilities 517,000 518,000
----------------- -----------------
Net cash provided by operating activities 3,395,000 19,074,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (27,749,000) (19,586,000)
Acquisition of store leases and related store assets (15,704,000)
Investment in marketable securities (3,879,000) (32,785,000)
Proceeds from sale of marketable securities 18,749,000 31,285,000
----------------- -----------------
Net cash used in investing activities (28,583,000) (21,086,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt - (1,000,000)
Purchase of treasury stock (384,000) (19,675,000)
Proceeds from issuance of stock associated with stock options 1,709,000 148,000
----------------- -----------------
Net cash provided by (used in) financing activities 1,325,000 (20,527,000)
----------------- -----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (23,863,000) (22,539,000)
CASH AND CASH EQUIVALENTS, beginning of period 31,590,000 76,056,000
----------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $7,727,000 $53,517,000
----------------- -----------------
----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $100,000 $154,000
Income taxes, net 11,386,000 6,290,000
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION:
The information set forth in these financial statements is unaudited
except for the January 30, 1999 balance sheet. These statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information, the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation have been included. The
results of operations for the 13 and 39 weeks ended October 30, 1999 are not
necessarily indicative of the results that may be expected for the year
ending January 29, 2000. For further information, refer to the financial
statements and notes thereto included in the Company's Annual Report for the
year ended January 30, 1999.
NOTE 2 - LINE OF CREDIT AND LOAN PAYABLE TO BANK:
Under an unsecured revolving line-of-credit arrangement with Bank of
America National Trust and Savings Association ("Bank of America"), the
Company may borrow up to a maximum of $50 million on a revolving basis
through July 1, 2002. The cash borrowings under the arrangement bear interest
at Bank of America's prime rate or, at the Company's option, LIBOR plus
1.75%. As of October 30, 1999, the Company had no borrowings outstanding
under the credit arrangement.
In June 1995, the Company entered into an unsecured five-year, $10
million term loan. The loan bears interest at Bank of America's prime rate
plus 0.25% or, at the Company's option, LIBOR plus 1.75%. Under the terms of
the loan agreement, the outstanding balance of $2,264,000 will be repaid in
quarterly installments of $500,000, commencing October 31, 1999, until paid.
Aggregate principal payments during fiscal 1999 and fiscal 2000 are
$1,000,000 and $1,264,000, respectively.
The credit arrangement and the term loan impose quarterly and annual
financial covenants requiring the Company to maintain certain financial
ratios and achieve certain levels of quarterly income. In addition, the
credit arrangement and the term loan require that Bank of America approve the
payment of dividends and restrict the level of capital expenditures. At
October 30, 1999, the Company was in compliance with these covenants.
7
<PAGE>
NOTE 3 - NET INCOME PER SHARE:
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128") beginning with the Company's fourth
quarter of fiscal 1997. Net income per share, basic, is computed based on the
weighted average number of common shares outstanding for the period. Net
income per share, diluted, is computed based on the weighted average number
of common and potentially dilutive common equivalent shares outstanding for
the period. A reconciliation of the numerators and denominators used in basic
and diluted net income per share is as follows:
<TABLE>
<CAPTION>
13 WEEKS ENDED 13 WEEKS ENDED 39 WEEKS ENDED 39 WEEKS ENDED
OCTOBER 30, 1999 OCTOBER 31, 1998 OCTOBER 30, 1999 OCTOBER 31, 1998.
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net income:
Basic and diluted............................ $2,747,000 $5,418,000 $10,832,000 $13,785,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average Number of common shares:
Basic........................................ 12,455,973 12,915,100 12,415,880 13,358,342
Effect of dilutive
Securities-stock options..................... 118,708 334,108 417,178 491,456
---------- ---------- ---------- ----------
Diluted...................................... 12,574,681 13,249,208 12,833,058 13,849,798
Net income per share:
Basic........................................ $0.22 $0.42 $0.87 $1.03
Effect of dilutive
Securities-stock options..................... 0.00 0.01 0.03 0.03
---------- ---------- ---------- ----------
Diluted...................................... $0.22 $0.41 $0.84 $1.00
</TABLE>
NOTE 4 - TREASURY STOCK:
In fiscal 1998, the Company's Board of Directors authorized the
repurchase of up to 20% of the outstanding shares of the Company's Class A
common stock. As of October 30, 1999, 1,347,600 shares have been repurchased
by the Company at a cost of $20,059,000. Such repurchased shares are
reflected as Treasury Stock in the Company's Balance Sheet.
8
<PAGE>
NOTE 5 - ACQUISITION:
On February 1, 1999, the Company acquired the leases and furniture
and fixtures for 80 store locations from Britches of Georgetowne, Inc. The
purchase price, which aggregated $15,704,000, was allocated to equipment and
leasehold improvements ($8,732,000) and goodwill ($6,972,000). Goodwill
associated with this transaction will be amortized over 20 years. The Company
converted the store locations to Arden B., Wet Seal, Contempo Casuals and
Limbo Lounge stores during the first quarter of fiscal 1999, with the
majority of the locations converted to Arden B. stores.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company is one of the largest national mall-based specialty
retailers focusing primarily on young women's apparel, and currently operates
545 retail stores in 42 states, Washington D.C. and Puerto Rico. Of the 545
stores, 244 operate under the name "Contempo Casuals," 200 operate under the
name "Wet Seal," 79 operate under the name "Arden B.," 21 operate under the
name "Limbo Lounge" and one store operates under the name "Next."
On July 1, 1995, the Company acquired Contempo Casuals, a 237-store
junior women's retail chain. This acquisition substantially increased the
size of the Company. Effective February 2, 1997, Contempo Casuals, Inc. was
merged with and into The Wet Seal, Inc.
In January 1998, the Company introduced the "Wet Seal Catalog." In
the first three quarters of fiscal 1998 there were approximately 11.0 million
catalogs mailed, whereas there were no catalogs mailed during the first and
second quarters and only 2 million catalogs mailed in the third quarter of
fiscal 1999. For the second half of fiscal 1999, the Company has repositioned
the catalog under the "Blue Asphalt" brand name. Blue Asphalt is the number
one denim brand in both Wet Seal and Contempo Casuals stores, and has been
expanded to a full assortment of fashion apparel and accessories. The first
Blue Asphalt magalog was mailed at the beginning of August 1999 to
approximately 2.0 million customers. The Company has also introduced a
related web-site under the Blue Asphalt name as of the beginning of the third
quarter of fiscal 1999. The new site includes an on-line shopping "magalog."
The Blue Asphalt magalog and web-site both offer Blue Asphalt merchandise and
youth-targeted editorial content intended to build brand awareness and
increase customer base and sales.
In November 1998, the Company introduced a new retail concept, Arden
B., which offers a collection of dressy and casual apparel, accessories and
footwear for the young contemporary customer. Arden B. serves to fill the
void between a "junior" and a "missy" customer, aged 20 to 40. The Company
currently operates 79 Arden B. stores, 67 of which were acquired through two
acquisitions. On December 1, 1998, the Company acquired the leases and
furniture and fixtures for 19 store locations from Mothers Work, Inc. The
majority of the locations acquired were converted to Arden B. stores. On
February 1, 1999, the Company acquired the leases and furniture and fixtures
for 80 store locations from Britches of Georgetowne, Inc. The Company
10
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
converted the locations to Arden B., Wet Seal, Contempo Casuals and Limbo
Lounge stores during the first quarter of fiscal 1999, with the majority of
the locations converted to Arden B.
As of October 30, 1999, the end of the third quarter of fiscal 1999,
the Company operated 545 stores compared to 424 stores as of October 31,
1998, the end of the third quarter of fiscal 1998. The Company opened 140
stores during the period from October 31, 1998 to October 30, 1999 and closed
19 stores.
Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
Financial Statements and the Notes related thereto.
RESULTS OF OPERATIONS
THE 13 WEEKS ENDED OCTOBER 30, 1999 (THIRD QUARTER OF FISCAL 1999) AS
COMPARED TO THE 13 WEEKS ENDED OCTOBER 31, 1998 (THIRD QUARTER OF FISCAL 1998)
Sales in the third quarter of fiscal 1999 were $131,465,000 compared
to sales in the third quarter of fiscal 1998 of $121,622,000, an increase of
$9,843,000 or 8.1%. The dollar increase in sales was primarily due to the net
increase of 121 stores; 545 stores at the end of the third quarter of fiscal
1999 compared to 424 stores at the end of the third quarter of fiscal 1998.
The increase in sales was offset somewhat by the 11.6% decrease in comparable
store sales. Comparable store sales are defined as sales in stores that were
open throughout the full prior 14 months. The increase in sales was also
offset somewhat by the fact that the prior year included catalog sales from
two catalog mailings with a total of 4.5 million circulation in the third
quarter, whereas there was only one catalog mailing with a 2 million
circulation in the current year third quarter.
Cost of sales, including buying, distribution and occupancy costs,
was $94,622,000 in the third quarter of fiscal 1999 compared to $85,121,000
in the third quarter of fiscal 1998, an increase of $9,501,000. The dollar
increase in cost of sales was due to the increase in sales. As a percentage
of sales, cost of sales was 72.0% in the third quarter of fiscal 1999
compared to 70.0% in the third quarter of fiscal 1998, an increase of 2.0%.
This increase as a percentage of sales was due primarily to a 4.9% increase
in occupancy costs as a percentage of sales along with a 0.2% increase in
buying wages and a 0.1% increase in regional and district wages as a
percentage of sales. The increase in occupancy costs as a percentage of sales
was due
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED:
primarily to the lack of leverage on store occupancy costs resulting from the
decrease in comparable store sales and to a lesser extent due to the decrease
in catalog sales. The increases in buying wages and in regional and district
wages as a percentage of sales were due to additional headcounts added in the
current year to support expansion and growth. These increases were offset to
some extent by a 2.6% decrease in the cost of merchandise and a 0.6% decrease
in distribution costs as a percentage of sales. The decrease in the cost of
merchandise as a percentage of sales was due to improvement in the initial
margins in the third quarter of fiscal 1999 along with a decrease in the
shrink reserve, offset somewhat by higher markdowns. The 0.6% decrease in the
distribution costs as a percentage of sales was due primarily to a decrease
in the unit cost of processing in the current quarter.
Selling, general and administrative expenses were $32,940,000 in the
third quarter of fiscal 1999 compared to $28,648,000 in the third quarter of
fiscal 1998, an increase of $4,292,000. The dollar increase in selling,
general and administrative expenses was related to the increase in total
sales. As a percentage of sales, selling, general and administrative expenses
were 25.1% in the third quarter of fiscal 1999 compared to 23.6% in the third
quarter of fiscal 1998, an increase of 1.5%. The increase as a percentage of
sales was primarily related to increases in selling wages and advertising
expenses as a percentage of sales offset somewhat by the impact of the fixed
costs associated with catalog production on the prior year. Without the
impact of the catalog operation on the prior year, selling, general and
administrative expenses increased 2.6% as a percentage of sales. This
increase was primarily due to an increase in selling wages as a percentage of
sales due to the impact of the decrease in comparable store sales on the
fixed portion of store wages. Additionally, the increase was due to the fact
that the Company has implemented national advertising campaigns in the
current year promoting the Arden B. store concept and the Blue Asphalt
Collection. The Company expects to spend approximately $3 million in fiscal
1999 related to this advertising versus no expense in prior year.
Interest income, net, was $701,000 in the third quarter of fiscal
1999 compared to $957,000 in the third quarter of fiscal 1998, a decrease of
$256,000. The decrease was due to a decrease in the average cash balance
invested compared to the prior year.
Income tax provision was $1,857,000 in the third quarter of
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, CONTINUED
fiscal 1999 compared to $3,392,000 in the third quarter of fiscal 1998. The
effective tax rate was 40.3% compared to 38.5% in the prior year. The
increase in the effective tax rate was due to the decrease in tax exempt
interest in the current year.
Due to the factors noted above, net income was $2,747,000 in the
third quarter of fiscal 1999 compared to $5,418,000 in the third quarter of
fiscal 1998. As a percentage of sales, net income was 2.1% in the third
quarter of fiscal 1999 compared to 4.5% in the third quarter of fiscal 1998.
THE 39 WEEKS ENDED OCTOBER 30, 1999 (THIRD QUARTER OF FISCAL 1999) AS
COMPARED TO THE 39 WEEKS ENDED OCTOBER 31, 1998 (THIRD QUARTER OF FISCAL 1998)
Sales in the 39 weeks ended October 30, 1999 were $381,204,000
compared to sales in the 39 weeks ended October 31, 1998 of $339,503,000, an
increase of $41,701,000 or 12.3%. The dollar increase in sales was primarily
due to the net increase of 121 stores during the period from October 31, 1998
to October 30, 1999. The increase in sales was offset somewhat by the 7.1%
decrease in comparable store sales for the year to date. The increase in
sales was also offset somewhat by the fact that the prior year included
catalog sales from the 5 catalog mailings with 11.0 million in circulation
for three quarters, whereas there was only one catalog mailing with a 2
million circulation in the three quarters of the current year.
Cost of sales, including buying, distribution and occupancy costs,
was $272,553,000 in the third quarter year to date of fiscal 1999 compared to
$240,141,000 in the third quarter year to date of fiscal 1998, an increase of
$32,412,000. The dollar increase in cost of sales was due to the increase in
sales. As a percentage of sales, cost of sales was 71.6% in the third quarter
year to date of fiscal 1999 compared to 70.7% in the third quarter year to
date of fiscal 1998, an increase of 0.9%. This increase as a percentage of
sales was due primarily to a 3.1% increase in occupancy costs as a percentage
of sales along with a 0.1% increase in both the buying wages and regional and
district wages as a percentage of sales. The increase in occupancy costs as a
percentage of sales was due primarily to the lack of leverage on store
occupancy costs resulting from the 7.1% decrease in comparable store sales
and to a lesser extent due to the decrease in catalog sales. The increases in
buying wages and in regional and district wages as a percentage of sales were
due to additional headcounts added in the current year to support expansion
and growth. These increases were offset by a 1.9%
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
decrease in the cost of merchandise and a 0.8% decrease in distribution costs
as a percentage of sales. The decrease in the cost of merchandise as a
percentage of sales was due to improvement in the initial margins in the year
to date third quarter of fiscal 1999 along with a decrease in the shrink
reserve, offset somewhat by higher markdowns. The 0.8% decrease in the
distribution costs as a percentage of sales was due primarily to a decrease
in the unit cost of processing in the current year to date and due to the
lack of distribution cost related to catalog this year compared to the prior
year.
Selling, general and administrative expenses were $92,800,000 for the
third quarter year to date of fiscal 1999 compared to $79,924,000 for the
third quarter year to date of fiscal 1998, an increase of $12,876,000. The
dollar increase in selling, general and administrative expenses was related
to the increase in total sales. As a percentage of sales, selling, general
and administrative expenses were 24.3% in the third quarter year to date of
fiscal 1999 compared to 23.5% in the third quarter year to date of fiscal
1998, an increase of 0.8%. The increase as a percentage of sales was
primarily related to increases in selling wages and advertising expenses as a
percentage of sales offset somewhat by the impact of the fixed costs
associated with catalog production on the prior year. Without the impact of
the catalog operation on the prior year, selling, general and administrative
expenses increased 1.8% as a percentage of sales. This increase was primarily
due to an increase in selling wages as a percentage of sales due to the
impact of the decrease in comparable store sales on the fixed portion of
store wages. Additionally, the increase was due to the fact that the Company
has implemented national advertising campaigns in the current year promoting
the Arden B. store concept and the Blue Asphalt Collection. The Company
expects to spend approximately $3 million in fiscal 1999 related to this
advertising versus no expense in prior year.
Interest income, net, was $2,230,000 in the third quarter year to
date of fiscal 1999 compared to $2,977,000 in the third quarter year to date
of fiscal 1998, a decrease of $747,000. The decrease was due to a decrease in
the average cash balance invested compared to the prior year.
Income tax provision was $7,247,000 in the third quarter year to date of
fiscal 1999 compared to $8,630,000 in the third quarter of fiscal 1998. The
effective tax rate was 40.0% compared to 38.5% in the prior year. The increase
in the effective tax rate was due to the decrease in tax exempt interest
14
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
in the current year.
Due to the factors noted above, net income was $10,832,000 in the
third quarter year to date of fiscal 1999 compared to $13,785,000 in the
third quarter year to date of fiscal 1998. As a percentage of sales, net
income was 2.8% in the third quarter year to date of fiscal 1999 compared to
4.1% in the third quarter year to date of fiscal 1998.
SALES TRENDS
Negative comparable store sales continue in the fourth quarter. As a
result, fourth quarter merchandise margins will be negatively impacted due to
the merchandise markdowns which management believes will be required to move
current inventory.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first three
quarters of fiscal 1999 was $3,395,000. Working capital at October 30, 1999
was $22,771,000 compared to $21,856,000 at January 30, 1999, an increase of
$915,000. This increase in working capital was primarily due to an increase
in inventory, an increase in prepaid expenses due to the timing of rent
payments, a decrease in income taxes payable due to the timing of tax
payments, a decrease in accrued liabilities, offset somewhat by an increase
in accounts payable. Inventory was $42,081,000 at October 30, 1999 compared
to $28,002,000 at January 30, 1999, an increase of $14,079,000, due to the
100 new stores during this period and the seasonal nature of the business;
inventory levels are typically at a low point at year end. The increase in
accounts payable of $6,133,000 at October 30, 1999 compared to January 30,
1999 was primarily attributable to the increase in inventory.
In the first three quarters of fiscal 1999, the Company invested
$27,749,000 in equipment and leasehold improvements, compared to $19,586,000
in the same period of the prior year. These expenditures related primarily to
the 100 new stores opened and twelve stores remodeled in the first three
quarters of fiscal 1999 along with construction in progress for additional
new and remodeled stores in the fourth quarter. On February 1, 1999, the
Company acquired the leases and furniture and fixtures for 80 store locations
from Britches of Georgetowne, Inc. for $15,704,000, of which $6,972,000 is
classified as goodwill. The Company converted the locations to Arden B., Wet
Seal, Contempo Casuals and Limbo Lounge stores during the first quarter of
fiscal 1999, with the majority of the locations converted to Arden B. The
Company currently estimates that the capital expenditures for the remainder
of fiscal 1999 will be approximately $7,700,000. These planned expenditures
relate primarily to new store openings and remodel construction.
15
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
The Company has an unsecured revolving line of credit arrangement
with Bank of America National Trust and Savings Association ("Bank of
America") in an aggregate principal amount of $50,000,000 and a five year
amortizing term loan with Bank of America in the amount of $10,000,000,
maturing on July 1, 2002. At October 30, 1999, there were no outstanding
borrowings under the credit arrangement, there was $2,264,000 outstanding
under the term loan, and the Company was in compliance with all terms and
covenants of the credit arrangement and the term loan.
The Company invests its excess funds primarily in an investment grade
money market fund, investment grade commercial paper and U.S. Treasury and
Agency obligations. Management believes the Company's working capital and
cash flows from operating activities will be sufficient to meet the Company's
operating and capital requirements for the foreseeable future.
SEASONALITY AND QUARTERLY OPERATING RESULTS
The Company's business is seasonal by nature with the Christmas
season (beginning the week of Thanksgiving and ending the first Saturday
after Christmas) and the back-to-school season (beginning the last week of
July and ending the first week of September) historically accounting for the
largest percentage of sales volume. In the Company's three fiscal years ended
January 30, 1999, the Christmas and back-to-school seasons together accounted
for an average of approximately 33% of the Company's annual sales, after
adjusting for sales increases related to new stores. The Company does not
believe that inflation has had a material effect on the results of operations
during the past three years. However, there can be no assurance that the
Company's business will not be affected by inflation in the future.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this Quarterly Report on Form 10-Q, including the
preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations," may contain various forward looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities
16
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Act"), and Section 21E of the Securities Exchange Act of 1934, as amended,
which represent the Company's expectations or beliefs concerning future
events. The Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward looking statements, including, without limitation, the
retention by the Company of suppliers for both brand name and
Company-developed merchandise, the ability of the Company to expand and to
continue to increase comparable store sales and the sufficiency of the
Company's working capital and cash flows from operating activities. In
addition, these statements are further qualified by important factors that
could cause actual results to differ materially from those in the forward
looking statements, including, without limitation, a decline in demand for
the merchandise offered by the Company, the ability of the Company to locate
and obtain acceptable store sites and lease terms or renew existing leases,
the ability of the Company to obtain adequate merchandise supply, the ability
of the Company to hire and train employees, the ability of the Company to
gauge the fashion tastes of its customers and provide merchandise that
satisfies customer demand, management's ability to manage the Company's
expansion, the effect of economic conditions, the effect of severe weather or
natural disasters and the effect of competitive pressures from other
retailers. The Company disclaims any obligation or undertaking to disseminate
any updates or revisions to any forward looking statement contained herein or
to reflect any change in the expectations of the Company after the date
hereof or any change in events, conditions or circumstances on which any
statement is based.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000.
During fiscal 1999, the Company is in the process of completing the
conversion of substantially all of its computer software systems and
hardware. Prior to the purchase of the new systems and hardware, the Company
obtained assurance from the vendors that the products purchased are in fact
Year 2000 compliant. The company has completed an independent review of
17
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
such systems to further verify Year 2000 compliance. The Company also has
performed a thorough review of its existing computer software systems and
hardware to identify processes that may be affected by Year 2000 problems. At
this time, no significant issues have been identified and the Company has
developed an adequate plan for Year 2000 compliance should the conversions
fall behind schedule.
During fiscal 1999, the Company has completed a Year 2000 review of
its relationships with suppliers and financial institutions to obtain
assurance, where necessary, that these entities are Year 2000 compliant. The
Company's total Year 2000 project costs include the estimated costs and time
associated with the impact of a third party's Year 2000 issue on the Company,
and are based on presently available information. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems,
would not have a material adverse effect on the Company's business, results
of operations, cash flows and financial condition.
If the Company is not completely successful in mitigating internal
and external Year 2000 risks, the result could be a system failure causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, distribute merchandise, or engage in
similar normal business activities at the Company or its vendors and
suppliers. The Company believes that under a worst case scenario, it could
continue the majority of its normal business activities on a manual basis.
With respect to potential Year 2000 failures of its vendors and suppliers,
the Company plans to mitigate this risk by not depending on any single vendor
or supplier for products or merchandise.
Due to the fact that the majority of the Company's computer software
systems and hardware have been purchased or developed recently and were
designed to be Year 2000 compliant, the Company does not expect to incur
significant additional costs in addressing the Year 2000 issue. The total
cost of the Year 2000 project is estimated at $300,000, and will be funded
through operating cash flows. Year 2000 costs as of October 30, 1999 totaled
$152,000.
18
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company is exposed to a variety of risks, including changes in
interest rates affecting the cost of its bank debt. The Company's outstanding
term loan balance of $2.264 million at October 30, 1999 bears interest at the
lending bank's prime rate plus 0.25% or, at the Company's option, LIBOR plus
1.75%. The Company believes that if interest rates were to increase by as
much as 10%, the impact on the Company's financial statements would not be
material.
19
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
The Company is not party to any material legal proceedings, other
than ordinary routine litigation incidental to the Company's business.
ITEM 2 - CHANGES IN SECURITIES. Not Applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES. Not Applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its most recent annual meeting on June 8, 1999. At
the meeting, the Company's shareholders elected George H. Benter, Jr., Kathy
Bronstein, Stephen Gross, Walter F. Loeb, Wilfred Posluns, Gerald Randolph,
Alan Siegel, Irving Teitelbaum and Edmond Thomas to the Board of Directors
with an affirmative vote of at least 8,528,234 Class A shares and 2,912,665
Class B shares for each director, with no more than 104,068 Class A shares
voting against any director. The shareholders ratified and approved the
performance bonus award and incentive bonus award to the Vice Chairman and
Chief Executive Officer with an affirmative vote of 8,075,090 Class A shares
and 2,912,665 Class B shares, with 403,954 Class A shares voting against. The
shareholders ratified and approved the performance bonus award and incentive
bonus award to the President and Chief Operating Officer with an affirmative
vote of 8,110,110 Class A shares and 2,912,665 Class B shares, with 395,419
Class A shares voting against. The shareholders also ratified the Company's
selection of Deloitte & Touche LLP as the independent certified public
accountants for the fiscal year ending January 29, 2000 with an affirmative
vote of 8,625,969 Class A shares and 2,912,665 Class B shares, with 1,608
Class A shares voting against. The proposal to increase the number of
authorized shares did not pass, as it received an affirmative vote of
4,074,622 Class A shares and 2,912,665 Class B shares, while 3,546,036 Class
A shares voted against the proposal. This proposal required an affirmative
vote from the majority of Class A shares in order to pass. Class A shares are
entitled to one vote per share. Class B shares are entitled to two votes per
share.
ITEM 5 - OTHER INFORMATION. Not Applicable
ITEM 6(a) - EXHIBITS.
(27) Financial Data Schedule
ITEM 6(b) - REPORTS ON FORM 8-K. Not Applicable
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Wet Seal, Inc.
(Registrant)
Date: December 14, 1999 /s/ KATHY BRONSTEIN
---------------------- ------------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer
(Principal Executive Officer)
Date: December 14, 1999 /s/ EDMOND THOMAS
---------------------- -------------------------------
Edmond Thomas
President and
Chief Operating Officer
Date: December 14, 1999 /s/ ANN CADIER KIM
----------------------- ---------------------------
Ann Cadier Kim
Senior Vice President of
Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WET
SEAL, INC BALANCE SHEETS AND STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 7,727,000
<SECURITIES> 45,047,000
<RECEIVABLES> 2,293,000
<ALLOWANCES> 0
<INVENTORY> 42,081,000
<CURRENT-ASSETS> 87,404,000
<PP&E> 153,964,000
<DEPRECIATION> 70,344,000
<TOTAL-ASSETS> 209,600,000
<CURRENT-LIABILITIES> 64,633,000
<BONDS> 0
0
0
<COMMON> 1,413,000
<OTHER-SE> 131,022,000
<TOTAL-LIABILITY-AND-EQUITY> 209,600,000
<SALES> 381,204,000
<TOTAL-REVENUES> 381,204,000
<CGS> 272,553,000
<TOTAL-COSTS> 92,802,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,230,000)
<INCOME-PRETAX> 18,079,000
<INCOME-TAX> 7,247,000
<INCOME-CONTINUING> 10,832,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,832,000
<EPS-BASIC> 0.87
<EPS-DILUTED> 0.84
</TABLE>
