<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 JULY 31, 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 August 30,
1999 were 10,889,886 and 2,912,665, respectively. There were no shares of
Preferred Stock, par value $.01 per share, outstanding at August 30, 1999.
<PAGE>
THE WET SEAL, INC.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 1999 (unaudited) and
January 30, 1999..................................................3-4
Statements of Income and Comprehensive Income (unaudited)
for the 13 and 26 weeks ended July 31, 1999 and
August 1, 1998......................................................5
Statements of Cash Flows (unaudited) for the 26 weeks ended
July 31, 1999 and August 1, 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>
JULY 31, JANUARY 30,
1999 1999
-------------------- -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $20,344,000 $31,590,000
Short-term investments 24,313,000 21,943,000
Other receivables 1,370,000 3,665,000
Merchandise inventories 43,375,000 28,002,000
Prepaid expenses 7,814,000 -
Deferred taxes 1,791,000 1,791,000
-------------------- -------------------
Total current assets 99,007,000 86,991,000
-------------------- -------------------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements 97,866,000 75,659,000
Furniture, fixtures and equipment 45,857,000 37,758,000
Leasehold rights 3,577,000 3,577,000
Construction in progress 1,176,000 489,000
-------------------- -------------------
148,476,000 117,483,000
Less accumulated depreciation (65,522,000) (57,110,000)
-------------------- -------------------
Net equipment and leasehold improvements 82,954,000 60,373,000
-------------------- -------------------
LONG-TERM INVESTMENTS 14,511,000 37,973,000
OTHER ASSETS:
Deferred taxes and other assets 11,705,000 11,677,000
Goodwill, net of accumulated amortization of
$795,000 and $656,000 as of July 31, 1999
and January 30, 1999, respectively 7,308,000 476,000
-------------------- -------------------
Total other assets 19,013,000 12,153,000
-------------------- -------------------
$215,485,000 $197,490,000
-------------------- -------------------
-------------------- -------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
THE WET SEAL, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JULY 31, JANUARY 30,
1999 1999
-------------------- -------------------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $51,790,000 $37,515,000
Accrued liabilities 18,843,000 20,430,000
Income taxes payable 745,000 6,190,000
Current portion of long-term debt 1,000,000 1,000,000
-------------------- -------------------
Total current liabilities 72,378,000 65,135,000
-------------------- -------------------
LONG-TERM LIABILITIES:
Long-term debt 1,264,000 1,264,000
Deferred rent 8,071,000 7,458,000
Other long-term liabilities 3,700,000 3,355,000
-------------------- -------------------
Total long-term liabilities 13,035,000 12,077,000
-------------------- -------------------
Total liabilities 85,413,000 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 July 31, 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 July 31, 1999 and January 30, 1999 291,000 291,000
Paid-in capital 60,014,000 58,356,000
Retained earnings 88,459,000 80,374,000
Other comprehensive income (139,000) (139,000)
Treasury stock, 1,327,000 shares at cost (19,675,000) (19,675,000)
-------------------- -------------------
Total stockholders' equity 130,072,000 120,278,000
-------------------- -------------------
$215,485,000 $197,490,000
-------------------- -------------------
-------------------- -------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
--------------------------------- ---------------------------------------
JULY 31, AUGUST 1, JULY 31, AUGUST 1,
1999 1998 1999 1998
-------------- ------------- -------------- -------------------
<S> <C> <C> <C> <C>
SALES $126,904,000 $113,036,000 $249,739,000 $217,881,000
COST OF SALES (including buying, distribution
and occupancy costs) 90,939,000 80,148,000 177,931,000 155,020,000
------------- ------------- -------------- -------------------
GROSS MARGIN 35,965,000 32,888,000 71,808,000 62,861,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 30,497,000 25,856,000 59,862,000 51,276,000
-------------- ------------- --------------- -------------------
OPERATING INCOME 5,468,000 7,032,000 11,946,000 11,585,000
INTEREST INCOME, NET 675,000 901,000 1,529,000 2,020,000
-------------- ------------- --------------- -------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,143,000 7,933,000 13,475,000 13,605,000
PROVISION FOR INCOME TAXES 2,457,000 3,054,000 5,390,000 5,238,000
-------------- ------------- --------------- -------------------
NET INCOME $3,686,000 $4,879,000 $8,085,000 $8,367,000
-------------- ------------- --------------- -------------------
-------------- ------------- --------------- -------------------
COMPREHENSIVE INCOME $3,686,000 $4,879,000 $8,085,000 $8,367,000
-------------- ------------- --------------- -------------------
-------------- ------------- --------------- -------------------
NET INCOME PER SHARE, BASIC $0.30 $0.36 $0.65 $0.62
-------------- ------------- --------------- -------------------
-------------- ------------- --------------- -------------------
NET INCOME PER SHARE, DILUTED $0.29 $0.35 $0.63 $0.59
-------------- ------------- --------------- -------------------
-------------- ------------- --------------- -------------------
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC 12,474,760 13,584,408 12,395,834 13,579,963
-------------- ------------- --------------- -------------------
-------------- ------------- --------------- -------------------
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED 12,886,556 14,091,995 12,849,452 14,098,178
-------------- ------------- --------------- -------------------
-------------- ------------- --------------- -------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
THE WET SEAL, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
26 WEEKS ENDED
---------------------------------------------
JULY 31, AUGUST 1,
1999 1998
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $8,085,000 $8,367,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,552,000 5,915,000
Changes in operating assets and liabilities:
Other receivables 2,295,000 576,000
Merchandise inventories (15,373,000) (11,894,000)
Prepaid expenses (7,814,000) (5,106,000)
Other assets (28,000) (154,000)
Accounts payable and accrued liabilities 12,688,000 8,019,000
Income taxes payable (5,445,000) (1,569,000)
Deferred rent 613,000 447,000
Other long-term liabilities 345,000 345,000
-------------------- -------------------
Net cash provided by operating activities 3,918,000 4,946,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (22,261,000) (13,120,000)
Acquisition of store leases and related store assets (15,704,000) -
Investment in marketable securities (8,612,000) (23,081,000)
Proceeds from sale of marketable securities 29,704,000 17,170,000
-------------------- -------------------
Net cash used in investing activities (16,873,000) (19,031,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt - (1,000,000)
Proceeds from issuance of stock associated with stock options 1,709,000 148,000
-------------------- -------------------
Net cash provided by (used in) financing activities 1,709,000 (852,000)
-------------------- -------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,246,000) (14,937,000)
CASH AND CASH EQUIVALENTS, beginning of period 31,590,000 76,056,000
-------------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $20,344,000 $61,119,000
-------------------- -------------------
-------------------- -------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $74,000 $114,000
Income taxes, net 10,834,000 3,973,000
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<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 26 weeks ended July 31,
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 $30 million on a revolving basis
through July 1, 2000. 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 July 31, 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 annual 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 July
31, 1999, the Company was in compliance with these covenants.
<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 26 WEEKS ENDED 26 WEEKS ENDED
JULY 31, 1999 AUGUST 1, 1998 JULY 31, 1999 AUGUST 1, 1998
<S> <C> <C> <C> <C>
Net income:
Basic and diluted....... $3,686,000 $4,879,000 $8,085,000 $8,367,000
------------- ------------- -------------- -------------
------------- ------------- -------------- -------------
Weighted average Number of common shares:
Basic................... 12,474,760 13,584,408 12,395,834 13,579,963
Effect of dilutive
Securities-stock options 411,796 507,587 453,618 518,215
------------- ------------- -------------- -------------
Diluted................. 12,886,556 14,091,995 12,849,452 14,098,178
Net income per share:
Basic................... $0.30 $0.36 $0.65 $0.62
Effect of dilutive
Securities-stock options 0.01 0.01 0.02 0.03
------------- ------------- -------------- -------------
Diluted................. $0.29 $0.35 $0.63 $0.59
</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 July 31, 1999, 1,327,000 shares have been repurchased at
a cost of $19,675,000. Such repurchased shares are reflected as Treasury
Stock in the Company's Balance Sheet.
<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.
<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
540 retail stores in 42 states, Washington D.C. and Puerto Rico. Of the 540
stores, 245 operate under the name "Contempo Casuals," 198 operate under the
name "Wet Seal," 78 operate under the name "Arden B.," 18 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 and second quarters of fiscal 1998 there were approximately 6.5
million catalogs mailed, whereas there were no catalogs mailed during the
first and second quarters 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 78 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
converted the locations to Arden B., Wet Seal, Contempo Casuals
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
and Limbo Lounge stores during the first quarter of fiscal 1999, with the
majority of the locations converted to Arden B.
As of July 31, 1999, the end of the second quarter of fiscal 1999,
the Company operated 539 stores compared to 413 stores as of August 1, 1998,
the end of the second quarter of fiscal 1998. The Company opened 146 stores
during the period from August 1, 1998 to July 31, 1999 and closed 20 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 JULY 31, 1999 (SECOND QUARTER OF FISCAL 1999) AS COMPARED
TO THE 13 WEEKS ENDED AUGUST 1, 1998 (SECOND QUARTER OF FISCAL 1998)
Sales in the second quarter of fiscal 1999 were $126,904,000 compared
to sales in the second quarter of fiscal 1998 of $113,036,000, an increase of
$13,868,000 or 12.3%. The dollar increase in sales was primarily due to the
net increase of 126 stores; 539 stores at the end of the second quarter of
fiscal 1999 compared to 413 stores at the end of the second quarter of fiscal
1998. The increase in sales was offset somewhat by the 8.5% 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 the 4.0 million catalogs mailed in the second quarter, whereas there
were no catalogs mailed in the current year second quarter.
Cost of sales, including buying, distribution and occupancy costs,
was $90,939,000 in the second quarter of fiscal 1999 compared to $80,148,00
in the second quarter of fiscal 1998, an increase of $10,791,000. The dollar
increase in cost of sales was due to the increase in sales. As a percentage
of sales, cost of sales was 71.7% in the second quarter of fiscal 1999
compared to 70.9% in the second quarter of fiscal 1998, an increase of 0.8%.
This increase as a percentage of sales was due primarily to a 3.2% increase
in occupancy costs as a percentage of sales along with a 0.1% 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 primarily to the lack of leverage on store occupancy costs
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
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 2.3% decrease in the cost of
merchandise and a 0.3% 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 second quarter of fiscal
1999 along with a decrease in the shrink reserve, offset somewhat by higher
markdowns. The 0.3% 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 and due to the lack of catalog-related expenses this year
compared to the prior year.
Selling, general and administrative expenses were $30,497,000 in the
second quarter of fiscal 1999 compared to $25,856,000 in the second quarter
of fiscal 1998, an increase of $4,641,000. 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 24.0% in the second quarter of fiscal 1999 compared to 22.9% in the
second quarter of fiscal 1998, an increase of 1.1%. 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 1.9% 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 $675,000 in the second quarter of fiscal
1999 compared to $901,000 in the second quarter of fiscal 1998, a decrease of
$226,000. The decrease was due to a decrease in the average cash balance
invested compared to the prior year.
Income tax provision was $2,457,000 in the second quarter of
<PAGE>
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
fiscal 1999 compared to $3,054,000 in the second 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 in the current year.
Due to the factors noted above, net income was $3,686,000 in the
second quarter of fiscal 1999 compared to $4,879,000 in the second quarter of
fiscal 1998. As a percentage of sales, net income was 2.9% in the second
quarter of fiscal 1999 compared to 4.3% in the second quarter of fiscal 1998.
THE 26 WEEKS ENDED JULY 31, 1999 (SECOND QUARTER OF FISCAL 1999) AS COMPARED
TO THE 26 WEEKS ENDED AUGUST 1, 1998 (SECOND QUARTER OF FISCAL 1998)
Sales in the 26 weeks ended July 31, 1999 were $249,739,000 compared
to sales in the 26 weeks ended August 1, 1998 of $217,881,000, an increase of
$31,858,000 or 14.6%. The dollar increase in sales was primarily due to the
net increase of 126 stores during the period from August 2, 1998 to July 31,
1999. The increase in sales was offset somewhat by the 3.0% 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 6.5 million catalogs mailed in the first and second quarters, whereas
there were no catalogs mailed in the current year first and second quarters.
Cost of sales, including buying, distribution and occupancy costs,
was $177,931,000 in the second quarter year to date of fiscal 1999 compared
to $155,020,00 in the second quarter year to date of fiscal 1998, an increase
of $22,911,000. The dollar increase in cost of sales was due to the increase
in sales. As a percentage of sales, cost of sales was 71.2% in the second
quarter year to date of fiscal 1999 compared to 71.1% in the second quarter
year to date of fiscal 1998, an increase of 0.1%. This increase as a
percentage of sales was due primarily to a 2.2% increase in occupancy costs
as a percentage of sales along with 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 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 increase in
regional and district wages as a percentage of sales was due to additional
headcounts added in the current year to support expansion and growth. These
increases were offset by a 1.6% decrease in the cost of
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED:
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 year to date second 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 year to date and due to the lack of catalog-related
expenses this year compared to the prior year.
Selling, general and administrative expenses were $59,862,000 in the
second quarter year to date of fiscal 1999 compared to $51,276,000 in the
second quarter year to date of fiscal 1998, an increase of $8,586,000. 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 24.0% in the second quarter year to date of
fiscal 1999 compared to 23.5% in the second quarter year to date of fiscal
1998, an increase of 0.5%. 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 1.4% 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 $1,529,000 in the second quarter year to
date of fiscal 1999 compared to $2,020,000 in the second quarter year to date
of fiscal 1998, a decrease of $491,000. The decrease was due to a decrease in
the average cash balance invested compared to the prior year.
Income tax provision was $5,390,000 in the second quarter year to
date of fiscal 1999 compared to $5,238,000 in the second 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 in the current year.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
Due to the factors noted above, net income was $8,085,000 in the
second quarter year to date of fiscal 1999 compared to $8,367,000 in the
second quarter year to date of fiscal 1998. As a percentage of sales, net
income was 3.2% in the second quarter year to date of fiscal 1999 compared to
3.8% in the second quarter year to date of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the first half of
fiscal 1999 was $3,918,000. Working capital at July 31, 1999 was $26,629,000
compared to $21,856,000 at January 30, 1999, an increase of $4,773,000. 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, offset somewhat by
an increase in accounts payable and accrued liabilities. Inventory was
$43,375,000 at July 31, 1999 compared to $28,002,000 at January 30, 1999, an
increase of $15,373,000, due to the 91 new stores opened 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 and accrued
liabilities of $12,688,000 at July 31, 1999 compared to January 30, 1999 was
primarily attributable to the increase in inventory.
In the first half of fiscal 1999, the Company invested $22,261,000 in
equipment and leasehold improvements, compared to $13,120,000 in the same
period of the prior year. These expenditures related primarily to the 91 new
stores opened and six stores remodeled in the first half of fiscal 1999 along
with construction in progress for additional new and remodeled stores in the
third 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 $12,000,000. These planned expenditures relate primarily to
new store openings and remodel construction.
<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 $30,000,000 and a five year
amortizing term loan with Bank of America in the amount of $10,000,000,
maturing on July 1, 2000. At July 31, 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
<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 or is in the process of obtaining assurance from the vendors that
the products purchased are in fact Year 2000 compliant. The Company will also
complete an independent review of such systems to further verify Year 2000
compliance. The Company has performed a thorough
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, CONTINUED
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 is also in the process of completing
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 July 31, 1999 totaled
$148,000.
<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 July 31, 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.
<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.
ITEM5 - OTHER INFORMATION. Not Applicable
ITEM 6(a) - EXHIBITS.
(27) Financial Data Schedule
ITEM 6(b) - REPORTS ON FORM 8-K. Not Applicable
<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: September 10, 1999 /S/KATHY BRONSTEIN
------------------ ---------------------------
Kathy Bronstein
Vice Chairman and Chief
Executive Officer
(Principal Executive
Officer)
Date: September 10, 1999 /S/EDMOND THOMAS
------------------ ---------------------------
Edmond Thomas
President and
Chief Operating Officer
Date: September 10, 1999 /S/ANN CADIER KIM
------------------ ---------------------------
Ann Cadier Kim
Senior Vice President of
Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE WET
SEAL, INC. BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 20,344,000
<SECURITIES> 38,824,000
<RECEIVABLES> 1,370,000
<ALLOWANCES> 0
<INVENTORY> 43,375,000
<CURRENT-ASSETS> 99,007,000
<PP&E> 148,476,000
<DEPRECIATION> 65,522,000
<TOTAL-ASSETS> 215,485,000
<CURRENT-LIABILITIES> 72,378,000
<BONDS> 0
0
0
<COMMON> 1,413,000
<OTHER-SE> 128,659,000
<TOTAL-LIABILITY-AND-EQUITY> 215,485,000
<SALES> 249,739,000
<TOTAL-REVENUES> 249,739,000
<CGS> 177,931,000
<TOTAL-COSTS> 59,862,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,529,000)
<INCOME-PRETAX> 13,475,000
<INCOME-TAX> 5,390,000
<INCOME-CONTINUING> 8,085,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,085,000
<EPS-BASIC> 0.65
<EPS-DILUTED> 0.63
</TABLE>
