Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4,August 3, 2013

OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-35634 

THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)

Delaware33-0415940
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
26972 Burbank, Foothill Ranch, CA92610
(Address of principal executive offices)(Zip Code)
(949) 699-3900
(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  ý    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  ý    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:ý
Non-accelerated filer:
¨ (Do
(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  ý
The number of shares outstanding of the registrant’s Class A common stock, par value $0.10 per share, at May 24,August 23, 2013, was 88,976,080.84,721,068. There were no shares outstanding of the registrant’s Class B common stock, par value $0.10 per share, at May 24,August 23, 2013.


Table of Contents

THE WET SEAL, INC.
FORM 10-Q
Table of Contents
 
   
  Page
PART I. FINANCIAL INFORMATION 
   
Item 1.Financial Statements (Unaudited) 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
  
 
   
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
EXHIBIT 10.5
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
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
 



Table of Contents

PART I. Financial Information

Item 1.        Financial Statements (Unaudited)

THE WET SEAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
May 4, 2013 February 2, 2013 April 28, 2012August 3, 2013 February 2, 2013 July 28, 2012
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents$50,320
 $42,279
 $148,108
$27,773
 $42,279
 $146,470
Short-term investments61,342
 67,694
 
51,948
 67,694
 
Income tax receivables286
 286
 510
141
 286
 660
Other receivables4,612
 1,738
 1,227
975
 1,738
 1,744
Merchandise inventories36,341
 33,788
 40,080
40,910
 33,788
 41,479
Prepaid expenses and other current assets11,360
 13,443
 14,469
13,803
 13,443
 6,363
Deferred tax assets
 
 20,133

 
 20,133
Total current assets164,261
 159,228
 224,527
135,550
 159,228
 216,849
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:          
Leasehold improvements90,673
 90,666
 122,835
91,480
 90,666
 109,142
Furniture, fixtures and equipment63,694
 62,486
 80,301
64,345
 62,486
 67,812
154,367
 153,152
 203,136
155,825
 153,152
 176,954
Less accumulated depreciation and amortization(90,798) (88,927) (116,530)(89,812) (88,927) (97,080)
Net equipment and leasehold improvements63,569
 64,225
 86,606
66,013
 64,225
 79,874
OTHER ASSETS:          
Deferred tax assets
 
 23,927

 
 31,081
Other assets3,040
 3,053
 3,054
3,016
 3,053
 3,034
Total other assets3,040
 3,053
 26,981
3,016
 3,053
 34,115
TOTAL ASSETS$230,870
 $226,506
 $338,114
$204,579
 $226,506
 $330,838
LIABILITIES AND STOCKHOLDERS’ EQUITY          
CURRENT LIABILITIES:          
Accounts payable – merchandise$20,644
 $16,978
 $23,802
$24,401
 $16,978
 $24,738
Accounts payable – other17,470
 18,116
 11,747
10,410
 18,116
 11,828
Accrued liabilities27,970
 26,347
 23,410
24,826
 26,347
 26,112
Current portion of deferred rent2,717
 2,289
 2,619
2,952
 2,289
 3,018
Total current liabilities68,801
 63,730
 61,578
62,589
 63,730
 65,696
LONG-TERM LIABILITIES:          
Deferred rent31,674
 32,136
 33,057
31,171
 32,136
 33,068
Other long-term liabilities1,871
 1,908
 1,889
1,834
 1,908
 1,855
Total long-term liabilities33,545
 34,044
 34,946
33,005
 34,044
 34,923
Total liabilities102,346
 97,774
 96,524
95,594
 97,774
 100,619
COMMITMENTS AND CONTINGENCIES (Note 6)

 

 



 

 

STOCKHOLDERS’ EQUITY:          
Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 91,067,436 shares issued and 88,976,080 outstanding at May 4, 2013; 90,541,144 shares issued and 89,730,376 shares outstanding at February 2, 2013; and 90,840,928 shares issued and 90,461,783 shares outstanding at April 28, 20129,107
 9,054
 9,084
Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 91,188,299 shares issued and 84,702,041 outstanding at August 3, 2013; 90,541,144 shares issued and 89,730,376 shares outstanding at February 2, 2013; and 90,840,928 shares issued and 89,595,248 shares outstanding at July 28, 20129,119
 9,054
 9,084
Common stock, Class B convertible, $0.10 par value, authorized 10,000,000 shares; no shares issued and outstanding
 
 

 
 
Paid-in capital240,108
 239,698
 239,995
241,012
 239,698
 240,993
Accumulated deficit(116,371) (119,481) (6,523)(115,413) (119,481) (18,892)
Treasury stock, 2,091,356 shares, 810,768 shares, and 379,145 shares, at cost, at May 4, 2013, February 2, 2013, and April 28, 2012, respectively(4,193) (412) (962)
Treasury stock, 6,486,258 shares, 810,768 shares, and 1,245,680 shares, at cost, at August 3, 2013, February 2, 2013, and July 28, 2012, respectively(25,606) (412) (962)
Accumulated other comprehensive loss(127) (127) (4)(127) (127) (4)
Total stockholders’ equity128,524
 128,732
 241,590
108,985
 128,732
 230,219
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$230,870
 $226,506
 $338,114
$204,579
 $226,506
 $330,838
See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
 
13 Weeks Ended13 Weeks Ended 26 Weeks Ended
May 4, 2013 April 28, 2012August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Net sales$140,445
 $147,945
$137,249
 $135,261
 $277,694
 $283,206
Cost of sales98,214
 104,342
96,597
 104,459
 194,811
 208,801
Gross margin42,231
 43,603
40,652
 30,802
 82,883
 74,405
Selling, general, and administrative expenses37,437
 40,438
39,412
 41,372
 76,849
 81,810
Asset impairment1,596
 3,606
262
 8,973
 1,858
 12,579
Operating income (loss)3,198
 (441)978
 (19,543) 4,176
 (19,984)
Interest income40
 38
53
 38
 101
 76
Interest expense(46) (48)(54) (46) (108) (94)
Interest expense, net(6) (10)(1) (8) (7) (18)
Income (loss) before provision (benefit) for income taxes3,192
 (451)977
 (19,551) 4,169
 (20,002)
Provision (benefit) for income taxes82
 (178)19
 (7,182) 101
 (7,360)
Net income (loss)$3,110
 $(273)$958
 $(12,369) $4,068
 $(12,642)
Net income (loss) per share, basic$0.03
 $ (0.00)
$0.01
 $(0.14) $0.05
 $(0.14)
Net income (loss) per share, diluted$0.03
 $ (0.00)
$0.01
 $(0.14) $0.05
 $(0.14)
Weighted-average shares outstanding, basic88,501,179
 88,486,977
85,800,626
 88,585,063
 87,178,655
 88,536,020
Weighted-average shares outstanding, diluted88,503,407
 88,486,977
85,975,029
 88,585,063
 87,243,412
 88,536,020
See notes to condensed consolidated financial statements.

2

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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
Loss
 
Total
Stockholders’
Equity
Common Stock 
Paid-In
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
Class A Class B Class A Class B 
Shares Par Value Shares Par Value Shares Par Value Shares Par Value 
Balance at February 2, 201390,541,144
 $9,054
 
 $
 $239,698
 $(119,481) $(412) $(127) $128,732
90,541,144
 $9,054
 
 $
 $239,698
 $(119,481) $(412) $(127) $128,732
Net income
 
 
 
 
 3,110
 
 
 3,110

 
 
 
 
 4,068
 
 
 4,068
Stock issued pursuant to long-term incentive plans496,292
 50
 
 
 (50) 
 
 
 
496,292
 50
 
 
 (50) 
 
 
 
Stock-based compensation
 
 
 
 369
 
 
 
 369

 
 
 
 845
 
 
 
 845
Exercise of stock options30,000
 3
 
 
 91
 
 
 
 94
150,863
 15
 
 
 519
 
 
 
 534
Repurchase of common stock
 
 
 
 
 
 (3,781) 
 (3,781)
 
 
 
 
 
 (25,194) 
 (25,194)
Balance at May 4, 201391,067,436
 $9,107
 
 $
 $240,108
 $(116,371) $(4,193) $(127) $128,524
Balance at August 3, 201391,188,299
 $9,119
 
 $
 $241,012
 $(115,413) $(25,606) $(127) $108,985
 
See notes to condensed consolidated financial statements.

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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
Loss
 
Total
Stockholders’
Equity
Common Stock 
Paid-In
Capital
 
Accumulated
Deficit
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
Class A Class B Class A Class B 
Shares Par Value Shares Par Value Shares Par Value Shares Par Value 
Balance at January 28, 201290,660,347
 $9,066
 
 $
 $239,000
 $(6,250) $(740) $(4) $241,072
90,660,347
 $9,066
 
 $
 $239,000
 $(6,250) $(740) $(4) $241,072
Net loss
 
 
 
 
 (273) 
 
 (273)
 
 
 
 
 (12,642) 
 
 (12,642)
Stock issued pursuant to long-term incentive plans174,580
 17
 
 
 (17) 
 
 
 
174,580
 17
 
 
 (17) 
 
 
 
Stock-based compensation
 
 
 
 994
 
 
 
 994

 
 
 
 1,992
 
 
 
 1,992
Exercise of stock options6,001
 1
 
 
 18
 
 
 
 19
6,001
 1
 
 
 18
 
 
 
 19
Repurchase of common stock
 
 
 
 
 
 (222) 
 (222)
 
 
 
 
 
 (222) 
 (222)
Balance at April 28, 201290,840,928
 $9,084
 
 $
 $239,995
 $(6,523) $(962) $(4) $241,590
Balance at July 28, 201290,840,928
 $9,084
 
 $
 $240,993
 $(18,892) $(962) $(4) $230,219
See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
13 Weeks Ended26 Weeks Ended
May 4, 2013 April 28, 2012August 3, 2013 July 28, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:      
Net income (loss)$3,110
 $(273)$4,068
 $(12,642)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:   
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Depreciation and amortization3,338
 4,691
6,775
 9,261
Amortization of premium on investments152
 
112
 
Amortization of deferred financing costs27
 27
54
 54
Loss on disposal of equipment and leasehold improvements18
 286
47
 483
Asset impairment1,596
 3,606
1,858
 12,579
Deferred income taxes
 (147)
 (7,301)
Stock-based compensation369
 994
845
 1,992
Changes in operating assets and liabilities:      
Income tax receivables
 (310)145
 (460)
Other receivables(2,874) 218
763
 (299)
Merchandise inventories(2,553) (8,246)(7,122) (9,645)
Prepaid expenses and other current assets2,056
 (9,926)(414) (1,847)
Other non-current assets13
 8
37
 28
Accounts payable and accrued liabilities3,950
 3,987
(3,409) 8,511
Deferred rent(34) 24
(302) 434
Other long-term liabilities(37) (35)(74) (69)
Net cash provided by (used in) operating activities9,131
 (5,096)
Net cash provided by operating activities3,383
 1,079
CASH FLOWS FROM INVESTING ACTIVITIES:      
Purchase of equipment and leasehold improvements(3,603) (3,778)(8,863) (11,591)
Investment in marketable securities(9,500) 
Proceeds from maturity of marketable securities6,200
 
25,134
 
Net cash provided by (used in) investing activities2,597
 (3,778)6,771
 (11,591)
CASH FLOWS FROM FINANCING ACTIVITIES:      
Proceeds from exercise of stock options94
 19
534
 19
Repurchase of common stock(3,781) (222)(25,194) (222)
Net cash used in financing activities(3,687) (203)(24,660) (203)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS8,041
 (9,077)
NET DECREASE IN CASH AND CASH EQUIVALENTS(14,506) (10,715)
CASH AND CASH EQUIVALENTS, beginning of period42,279
 157,185
42,279
 157,185
CASH AND CASH EQUIVALENTS, end of period$50,320
 $148,108
$27,773
 $146,470
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:      
Cash paid during the period for:      
Interest$18
 $19
$37
 $39
Income taxes$183
 $585
$420
 $839
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:      
Purchase of equipment and leasehold improvements unpaid at end of period$2,822
 $4,427
$3,733
 $3,622
See notes to condensed consolidated financial statements.

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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)


NOTE 1 – Summary of Significant Accounting Policies
Basis of Presentation
The information set forth in these condensed consolidated financial statements as of and for the 13 and 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012 (collectively, the “Interim Financial Statements”), are unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and footnote disclosures normally included in The Wet Seal, Inc. (the “Company”) annual consolidated financial statements have been condensed or omitted, as permitted under applicable rules and regulations. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2013.
In the opinion of management, the Interim Financial Statements reflect all adjustments that are of a normal and recurring nature necessary to fairly present the Company’s financial position and results of operations and cash flows in all material respects as of the dates and for the periods presented. The results of operations presented in the Interim Financial Statements are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2014.
Significant Accounting Policies
Long-Lived Assets
The Company evaluates the carrying value of long-lived assets for impairment quarterly or 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 estimated undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value and the estimated fair value of the assets, based on discounted estimated future cash flows using the Company’s weighted average cost of capital. With regard to store assets, which are comprised of leasehold improvements, fixtures and computer hardware and software, the Company considers the assets at each individual store to represent an asset group. In addition, the Company has considered the relevant valuation techniques that could be applied without undue cost and effort and has determined that the discounted estimated future cash flow approach provides the most relevant and reliable means by which to determine fair value in this circumstance.
The Company conducts its quarterly impairment evaluation at the individual store level using the guidance under applicable accounting standards. The quarterly analysis includes the Company's estimates of future cash flows using only the cash inflows and outflows that are directly related to each store over the remaining lease term. Key assumptions made by the Company and included within the cash flow estimates are future sales and gross margin projections. The Company determines the future sales and gross margin projections by considering each store's recent and historical performance, the Company's overall performance trends and projections and the potential impact of strategic initiatives on future performance.
The Company's evaluations during the 13 and 26 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012 included impairment testing of 3038, 47, 48 and 2361 stores and resulted in 72, 8, 41 and 1351 stores being impaired, respectively, as their projected future cash flows were not sufficient to coverrecover the net carrying value of their assets. As such, the Company recorded the following non-cash charges related to its retail stores within asset impairment in the condensed consolidated statements of operations to write down the carrying values of these stores' long-lived assets to their estimated fair values (in thousands except for number of stores).:

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Table of Contents
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

 13 Weeks Ended 13 Weeks Ended26 Weeks Ended
 May 4, 2013 April 28, 2012 August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Aggregate carrying value of all long-lived assets impaired $2,314
 $3,884
 $262
 $9,660
 $2,135
 $13,266
Less: Impairment charges 1,596
 3,606
 262
 8,973
 1,858
 12,579
Aggregate fair value of all long-lived assets impaired $718
 $278
 $
 $687
 $277
 $687
Number of stores with asset impairment 7
 13
 2
 41
 8
 51
Of the 2336 remaining stores that were tested and not determined to be impaired during the 13 weeks ended May 4,August 3, 2013, 713 could be deemed to be at risk of future impairment. When making this determination, the Company considered the potential impact that reasonably possible changes to sales and gross margin performance versus the Company's current projections for these stores could have on their current estimated cash flows.
As noted above, the Company considers the positive impact expected from its strategic initiatives when determining the key assumptions to use within the projected cash flows for each store during its quarterly analysis. If the Company is not able to achieve its projected key financial metrics, and strategic initiatives being implemented do not result in significant improvements in the Company's current financial performance trend, the Company may incur additional impairment in the future for those stores tested and not deemed to be impaired in its most recent quarterly analysis, as well as for additional stores not tested in its most recent quarterly analysis.
Income Taxes
The Company accounts for income taxes in accordance with applicable accounting standards which require that the Company recognize deferred tax assets, which include net operating loss carryforwards (NOLs) and tax credits, and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax expense or benefit results from the change in net deferred tax assets or deferred tax liabilities. Such guidance requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Due to the Company's three-year cumulative operating losses, the Company established a valuation allowance against all of its deferred tax assets in fiscal 2012. In addition, the Company discontinued recording income tax benefits in the condensed consolidated statements of operations. The Company will not record such income tax benefits until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. For the 1326 weeks ended May 4,August 3, 2013, the Company generated operating income, however, the Company remains in a cumulative three-year operating loss position and realization of its deferred income tax assets is not deemed to be more likely than not. Prospectively, as the Company continues to evaluate available evidence, it is possible that the Company may deem some or all of its deferred income tax assets to be realizable.
The Company has approximately $121.5 million of federal NOLs available to offset taxable income in fiscal 2013 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code. The Company believes its NOLs available will be sufficient to offset any federal regular taxable income in fiscal 2013. The Company’sCompany's effective income tax rate for the 13 and 26 weeks ended May 4,August 3, 2013, was approximately 2.6%1.9%. and 2.4%, respectively. The Company expects a 1.8%1.9% effective income tax rate for fiscal 2013.
Other Comprehensive Income
Other comprehensive income refers to gains and losses that are recorded as an element of stockholders' equity but are excluded from net income (loss). The Company's comprehensive income (loss) for the 13 and 26 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012 was equal to the Company's net income (loss).
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued amended guidance on the disclosure of accumulated other comprehensive income. The amendments in this update require an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified from accumulated other

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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

comprehensive income byto the net income line item.statement of operations. The Company adopted this guidance, which did not impact 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 May 4,August 3, 2013: the 2005 Stock Incentive Plan (the “2005 Plan”). The Company 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 May 4,August 3, 2013; however, the 1996 Plan expired during fiscal 2006 and the 2000 Plan expired during fiscal 2009, and no further share awards may be granted under the 1996 Plan and 2000 Plan. The 2005 Plan, the 2000 Plan, and the 1996 Plan are collectively referred to as the “Plans.”
The 2005 Plan permits the granting of options, restricted common stock, performance shares awards, restricted and performance stock units, or other equity-based awards to the Company’s 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, performance share grants and other awards made or settled in the form of Company stock. The 2005 Plan was approved by the Company’s stockholders on January 10, 2005, as amended with stockholder approval on July 20, 2005, for the issuance of incentive awards covering 12,500,000 shares of Class A common stock. Additionally, an amended and restated 2005 Plan was approved by the Company’s stockholders on May 19, 2010, which increased the incentive awards capacity to 17,500,000 shares of Class A common stock. An aggregate of 22,557,528 shares of Class A common stock have been issued or may be issued pursuant to the Plans. As of May 4,August 3, 2013, 4,477,6434,548,424 shares were available for future grants under the Plan.
Stock 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 Company’s Class A common stock on the date the option is granted. Under the Plans, outstanding options vest over periods ranging from three to five years from the grant date and expire from five to ten years after the grant date. Certain stock option and other equity-based awards provide for accelerated vesting if there is a change in control (as defined in the Plans). The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The Company uses historical data, the implied volatility of market-traded options and other factors to estimate the expected price volatility, option lives, and forfeiture rates.
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 Ended13 Weeks Ended 26 Weeks Ended
May 4, 2013 April 28, 2012August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Dividend Yield% %% % % %
Expected Volatility41.09% 51.26%40.73% 46.47% 40.92% 48.87%
Risk-Free Interest Rate0.44% 0.51%0.70% 0.45% 0.56% 0.48%
Expected Life of Options (in Years)3.3
 3.3
3.3
 3.3
 3.3
 3.3
At May 4,August 3, 2013, there was $0.50.4 million of total unrecognized compensation expense related to nonvested stock options under the Company’s share-based payment plans, which will be recognized over an average period of 1.61.8 years, representing the remaining vesting periods of such options through fiscal 2016.




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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

The following table summarizes the Company’s stock option activities with respect to its Plans for the 1326 weeks ended May 4,August 3, 2013, 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
Number of
Shares
 
Weighted-
Average
Exercise
Price Per
Share
 
Weighted-
Average
Remaining
Contractual Life
(in years)
 
Aggregate
Intrinsic
Value
Outstanding at February 2, 20131,564,167
 $4.29
  1,564,167
 $4.29
  
Granted80,000
 $3.06
  150,000
 $3.78
  
Exercised(30,000) $3.14
  (150,863) $3.54
  
Canceled(470,403) $5.37
  (606,437) $4.97
  
Outstanding at May 4, 20131,143,764
 $3.79
 2.80 $131
Vested and expected to vest in the future at May 4, 20131,076,535
 $3.81
 2.72 $118
Exercisable at May 4, 2013675,147
 $3.91
 2.03 $57
Outstanding at August 3, 2013956,867
 $3.93
 3.07 $621
Vested and expected to vest in the future at August 3, 2013897,202
 $3.94
 2.99 $571
Exercisable at August 3, 2013521,817
 $4.07
 2.54 $318
Options vested and expected to vest in the future is comprised of all options outstanding at May 4,August 3, 2013, net of estimated forfeitures. Additional information regarding stock options outstanding as of May 4,August 3, 2013, is as follows:
 Options Outstanding Options Exercisable
Range of Exercise Prices
Number
Outstanding
as of
May 4, 2013
 
Weighted-
Average
Remaining
Contractual Life
(in years)
 
Weighted-
Average
Exercise
Price Per
Share
 
Number
Exercisable
as of
May 4, 2013
 
Weighted-
Average
Exercise
Price Per
Share
$ 1.81 - $  2.7422,500
 3.90 $2.58
 2,500
 $1.81
$ 2.77 - $  4.19920,931
 2.77 $3.54
 522,317
 $3.54
$ 4.26 -  $ 6.82195,833
 2.88 $4.93
 145,830
 $5.08
$ 8.67 -   $ 10.954,500
 0.47 $10.19
 4,500
 $10.19
$ 1.81 - $ 10.951,143,764
 2.80 $3.79
 675,147
 $3.91
 Options Outstanding Options Exercisable
Range of Exercise Prices
Number
Outstanding
as of
August 3, 2013
 
Weighted-
Average
Remaining
Contractual Life
(in years)
 
Weighted-
Average
Exercise
Price Per
Share
 
Number
Exercisable
as of
August 3, 2013
 
Weighted-
Average
Exercise
Price Per
Share
$ 2.66 - $  4.09492,001
 3.14 $3.22
 280,995
 $3.32
$ 4.15 -  $ 6.82457,866
 3.05 $4.58
 233,822
 $4.79
$ 8.67 -   $ 10.957,000
 0.17 $10.46
 7,000
 $10.46
$ 2.66 - $ 10.95956,867
 3.07 $3.93
 521,817
 $4.07
The weighted-average grant-date fair value of options granted during the 13 and 26 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, was $0.911.37, $1.13, $0.98 and $1.221.10, respectively. The total intrinsic values for options exercised during the 13 and 26 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, were bothwas $0.2 million, $0.2 million, none and less than $0.1 million, respectively.
Cash received from option exercises under all Plans for the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, was $0.10.5 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, Restricted Stock Units, Performance Share Awards, and Performance Stock Units
Under the 2005 Plan, the Company grants directors, certain executives, and other key employees restricted common stock and restricted stock units with vesting contingent upon completion of specified service periods ranging from one to three years. The Company also grants certain executives and other key employees performance share awards and performance stock units with vesting contingent upon a combination of specified service periods and the Company’s achievement of specified corporate performance objectives. Restricted stock units and performance stock units awarded to employees represent the right to receive one share of the Company's Class A common stock upon vesting.
During the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, the Company granted 234,759 and 174,580 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 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, was $3.03 and $3.58 per share, respectively. Additionally, the Company granted 79,33997,126 restricted stock units to certain employees during the 1326 weeks ended May 4,August 3, 2013 with a weighted-average grant-date fair value of $2.953.34 per share.

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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

During the 1326 weeks ended May 4,August 3, 2013, the Company granted 261,533 performance share awards under the 2005 Plan, with a grant-date fair value of $2.95 per share. Additionally, the Company granted 171,900183,758 performance stock units to certain employees during the 1326 weeks ended May 4,August 3, 2013, with a weighted-average grant-date fair value of $2.953.09 per share, with the opportunity of an additional 26,446 performance stock units to be earned if certain EBITDA targetscorporate performance objectives are achieved, and which are not included in the total outstanding share awards below.
The fair value of nonvested restricted common stock awards, restricted stock units, performance share awards restricted stock units and performance stock units is equal to the specified grant date price of the Company’s Class A common stock on the grant date. The following table summarizes activity with respect to the Company’s nonvested restricted common stock, restricted stock units, performance share awards and performance stock units during the 1326 weeks ended May 4,August 3, 2013:
Nonvested Restricted Common Stock, Restricted Stock Units, Performance Share Awards, and Performance Stock UnitsNumber of Shares Weighted-Average Grant-Date Fair ValueNumber of Shares Weighted-Average Grant-Date Fair Value
Nonvested at February 2, 2013644,492
 $2.89
644,492
 $2.89
Granted747,531
 $3.00
777,176
 $3.01
Vested
 $
(30,000) $3.34
Forfeited(27,067) $3.08
(49,601) $3.08
Nonvested at May 4, 20131,364,956
 $2.95
Nonvested at August 3, 20131,342,067
 $2.94
At May 4,August 3, 2013, there was $2.82.3 million of total unrecognized compensation expense related to nonvested restricted common stock, restricted stock units, performance share awards, and performance stock units under the Company’s share-based payment plans, of which $2.11.9 million relates to restricted common stock $0.2 million relates to restrictedand performance stock units,awards, and $0.4 million relates to performance share awardsrestricted and$0.1 million relates to performance stock units. That cost is expected to be recognized over a weighted-average period of 2.3 years. These estimates utilize subjective assumptions, which depend upon achievement of a combination of specified service periods and performance objectives. The number of shares to vest, and the related stock-based compensation expense to be incurred, may differ dependent upon actual performance objectives achieved. Therefore, the amount of unrecognized compensation expense noted above does not necessarily represent the expense that will ultimately be recognized by the Company in its condensed consolidated statements of operations.
The following tables summarize stock-based compensation recorded in the condensed consolidated statements of operations (in thousands):
13 Weeks Ended13 Weeks Ended 26 Weeks Ended
May 4, 2013 April 28, 2012August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Stock options$49
 $285
$73
 $595
 $122
 $880
Restricted stock awards and units294
 401
Performance share awards and units$26
 $308
Restricted and performance stock awards and units403
 403
 723
 1,112
Stock-based compensation$369
 $994
$476
 $998
 $845
 $1,992
 
13 Weeks Ended13 Weeks Ended 39 Weeks Ended
May 4, 2013 April 28, 2012August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Cost of sales$50
 $67
$72
 $69
 $122
 $135
Selling, general, and administrative expenses319
 927
404
 929
 723
 1,857
Stock-based compensation$369
 $994
$476
 $998
 $845
 $1,992
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

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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

Facility, the Company is subject to borrowing base limitations on the amount that can be borrowed and certain customary covenants, including, under certain circumstances, covenants limiting the ability to incur additional indebtedness, make investments and acquisitions, grant liens, pay dividends, repurchase its Class A common stock, close stores, and dispose of assets, without the lender’s consent. The ability of the Company to borrow and request the issuance of letters of credit is subject to the requirement that the Company maintain an excess of the borrowing base over the outstanding credit extensions of the greater of 10% of the aggregate amount of the Facility or $4.0 million. The annual interest rate on the revolving line of credit under the Facility is (i) the higher of the lender’s prime rate, the Federal funds rate plus 0.5% or the one month London InterBank Offered Rate (LIBOR) plus 1.0%, collectively referred to as the “Base Rate”, plus the applicable margin ranging from 0.5% to 1.0% or, (ii) if the Company elects, either the one, two, three or six months LIBOR plus a margin ranging from 1.5% to 2.0%. The applicable Base Rate or LIBOR margin is based on the level of average excess availability, as defined under the Facility, at the time of election, as adjusted quarterly. The Company also incurs 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 May 4,August 3, 2013, the amount outstanding under the Facility consisted of $1.92.0 million in open documentary letters of credit related to merchandise purchases and $1.51.7 million in outstanding standby letters of credit, and the Company had $31.631.3 million available under the Facility for cash advances and/or the issuance of additional letters of credit.
At May 4,August 3, 2013, the Company was in compliance with all covenant requirements under 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 Company's own credit risk.
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 Company's 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.








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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

The following tables present information on the Company’s financial instruments (in thousands):
Carrying
Amount as of
May 4, 2013
 
Fair Value Measurements
at Reporting Date Using
Carrying
Amount as of
August 3, 2013
 
Fair Value Measurements
at Reporting Date Using
Level 1 Level 2 Level 3Level 1 Level 2 Level 3
Financial assets:              
Cash$17,285
 $17,285
 $
 $
$18,540
 $18,540
 $
 $
Money market funds33,035
 
 33,035
 
9,233
 
 9,233
 
Cash and cash equivalents50,320
      27,773
      
              
Certificates of deposit5,936
 
 5,925
 
7,613
 
 7,596
 
US treasury securities14,989
 
 14,997
 
9,991
 
 9,999
 
US government securities40,417
 
 40,343
 
34,344
 
 34,319
 
Short-term investments61,342
      51,948
      
              
Long-term tenant allowances receivable982
 
 
 982
1,005
 
 
 1,005
 
Carrying
Amount as of
February 2, 2013
 
Fair Value Measurements
at Reporting Date Using
Level 1 Level 2 Level 3
Financial assets:       
Cash$5,612
 $5,612
 $
 $
Money market funds36,667
 
 36,667
 
Cash and cash equivalents42,279
      
        
Certificates of deposit5,053
 
 5,047
 
US treasury securities19,991
 
 19,991
 
US government securities42,650
 
 42,592
 
Short-term investments67,694
 
 
 
        
Long-term tenant allowances receivable960
 
 
 960
Carrying
Amount as of
April 28, 2012
 
Fair Value Measurements
at Reporting Date Using
Carrying
Amount as of
July 28, 2012
 
Fair Value Measurements
at Reporting Date Using
Level 1 Level 2 Level 3Level 1 Level 2 Level 3
Financial assets:              
Cash$33,788
 $33,788
 $
 $
$32,134
 $32,134
 $
 $
Money market funds114,320
 
 114,320
 
114,336
 
 114,336
 
Cash and cash equivalents148,108
      146,470
      
              
Long-term tenant allowances receivable896
 
 
 896
917
 
 
 917
Cash and cash equivalents are carried at either cost or amortized cost, which approximates fair value, due to their short term maturities. The Company's 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 Company’s short-term investments consist of interest-bearing bonds of various U.S. Government agencies and certificates of deposit, have maturities that wereare less than one year and are carried at amortized cost plus accrued income. Short-term investments are carried at amortized cost due to the Company’s intent to hold to maturity. The fair value of the Company’s

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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

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 allowances receivable was determined by discounting them to present value using an incremental borrowing rate of 9.26%, at the time of recording, over their five year collection period. They are included in other assets within the condensed consolidated balance sheet.
On a non-recurring basis, the Company measures certain of its long-lived assets at fair value based on Level 3 inputs consisting of, but not limited to, projected sales growth, estimated gross margins, projected operating costs and an estimated weighted-average cost of capital rate. During the 13 and 26 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, the Company recorded $1.60.3 million, $1.9 million, $9.0 million and $3.612.6 million of impairment charges, respectively, in the accompanying condensed consolidated statements of operations. Refer to Note 1, “Summary of Significant Accounting Policies.”
NOTE 5 – Net Income (Loss) Per Share
Net income (loss) per share, basic, is computed based on the weighted-average number of common shares outstanding for the period, including consideration of the two-class method with respect to certain of the Company’s other equity securities (see below). Net income (loss) 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 Company’s 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 Company’s 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. Restricted stock units and performance stock units are not participating securities. 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 and 26 weeks ended AprilJuly 28, 2012, the Company incurred a net loss and there was no dilutive effect of any unvested share-based payment awards.
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 Ended13 Weeks Ended
May 4, 2013 April 28, 2012August 3, 2013 July 28, 2012
Net Income Shares 
Per Share
Amount
 Net Loss Shares 
Per Share
Amount
Net Income Shares 
Per Share
Amount
 Net Loss Shares 
Per Share
Amount
Net income (loss) per share, basic:                     
Net income (loss)$3,110
     $(273)   $958
     $(12,369)    
Less: Undistributed earnings allocable to participating securities(31)     
    (12)     
    
Net income (loss) per share, basic$3,079
 88,501,179
 $0.03
 $(273) 88,486,977
 $ (0.00)$946
 85,800,626
 $0.01
 $(12,369) 88,585,063
 $(0.14)
Net income (loss) per share, diluted:                     
Net income (loss)$3,110
     $(273)   $958
     $(12,369)    
Less: Undistributed earnings allocable to participating securities(31)     
   (12)     
    
Effect of dilutive securities  2,228
     
    174,403
     
  
Net income (loss) per share, diluted$3,079
 88,503,407
 $0.03
 $(273) 88,486,977
 $ (0.00)$946
 85,975,029
 $0.01
 $(12,369) 88,585,063
 $(0.14)


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Table of Contents
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

 26 Weeks Ended
 August 3, 2013 July 28, 2012
 Net Income Shares 
Per Share
Amount
 Net Loss Shares 
Per Share
Amount
Net income (loss) per share, basic:           
Net income (loss)$4,068
     $(12,642)    
Less: Undistributed earnings allocable to participating securities(46)     
    
Net income (loss) per share, basic$4,022
 87,178,655
 $0.05
 $(12,642) 88,536,020
 $(0.14)
Net income (loss) per share, diluted:           
Net income (loss)$4,068
     $(12,642)    
Less: Undistributed earnings allocable to participating securities(46)     
    
Effect of dilutive securities  64,757
     
  
Net income (loss) per share, diluted$4,022
 87,243,412
 $0.05
 $(12,642) 88,536,020
 $(0.14)
The computations of net income (loss) per share, diluted, excluded the following potentially dilutive securities exercisable into Class A common stock for the 13 and 26 weeks endedMay 4, August 3, 2013, and AprilJuly 28, 2012, respectively, because their effect would not have been dilutive.
 
13 Weeks Ended13 Weeks Ended 26 Weeks Ended
May 4, 2013 April 28, 2012August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Stock options outstanding1,116,264
 3,216,217
237,977
 2,737,632
 487,735
 2,712,136
Unvested performance shares and restricted stock awards977,322
 2,077,361
Unvested restricted and performance stock awards and units1,366,185
 1,813,329
 1,171,813
 1,916,896
Total2,093,586
 5,293,578
1,604,162
 4,550,961
 1,659,548
 4,629,032

NOTE 6 – Commitments and Contingencies
Litigation

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 Company's current and former employees who were employed and paid by the Company from September 29, 2004 through the present. The Company was named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. Plaintiffs are seeking reimbursement for alleged uniform and business expenses, injunctive relief, restitution, civil penalties, interest, and attorney's fees and costs. On August 16, 2011, the court denied Plaintiffs' Motion for Class Certification. Plaintiffs appealed and, on October 12, 2012, the California Court of Appeals affirmed the lower court's ruling. On January 23, 2013, the California Supreme Court denied Plaintiffs' petition for review. On February 4, 2013, the Court of Appeals issued an order to send the case back to the trial court where it will proceed on behalf of only the three named plaintiffs and not as a class action.

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. On November 14, 2012, the Company reached resolution with the EEOC and several of the individual complainants that concluded the EEOC's investigation. Between November 2012 and March 2013, the Company paid approximately $0.8 million to settle with individual complainants. The Company also agreed to programmatic initiatives that are consistent with the Company's diversity plan. The Company will report progress on its initiatives and results periodically to the EEOC. Claimants with whom the Company did not enter into a settlement had an opportunity to bring a private lawsuit within ninety days from the date they received their November 26, 2012 right-to-sue notice from the EEOC, however, that time period is tolled for those individuals who are putative class members in a race discrimination class action filed on July 12, 2012 in the United States

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Table of Contents
THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 26 weeks ended August 3, 2013, and July 28, 2012
(Unaudited)

District Court for the Central District of California with respect to any race discrimination claims they have that are within the scope of the putative class action (see below).  On December 12, 2012, the EEOC issued a "for cause" finding related to certain allegations made by one complainant, who is the lead plaintiff in the above-referenced class action.

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 Company's current and former employees who were employed and paid by the Company from May 9, 2007 through the present. The Company was named as a defendant. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. Plaintiffs are seeking statutory penalties, civil penalties, injunctive relief, and attorneys' fees and costs. On February 3, 2012, the court granted the Company's motion to transfer venue to the County of Orange. On July 13, 2012, the Court granted the Company's motion to compel arbitration. Plaintiffs appealed and that appealan oral agrument is pending.scheduled for September 23, 2013. Also, on July 18, 2012, the Company received notice that Plaintiffs filed charges with the National Labor Relations Board (NLRB) under Section 7 of the National Labor Relations Board Act based on the arbitration agreements Plaintiffs signed upon their hiring with the Company. Plaintiffs alleged that the Company's arbitration agreements unlawfully compel employees to waive their rights to participate in class or representative actions against the Company. On September 20, 2012, the NLRB dismissed Plaintiffs claims.

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 Company's current and former employees who were employed in California during the time period from October 27, 2007 through the present. The Company was named as a defendant. Plaintiffs are seeking unpaid

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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 13 weeks ended May 4, 2013, and April 28, 2012
(Unaudited)

wages, civil and statutory penalties, restitution, injunctive relief, interest, and attorneys' fees and costs. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On March 28, 2012, the court entered an Order denying the Company's motion to compel arbitration. On September 21, 2012, the Company filed a notice of appeal.appeal that is currently pending.

On July 12, 2012, a complaint was filed in United States District Court for the Central District of California on behalf of certain of the Company's current and former African American retail store employees. The Company was named as a defendant. The complaint alleged various violations under 42 U.S.C. § 1981, including allegations that the Company engaged in disparate treatment discrimination of those African American current and former employees in promotion to management positions and against African American store management employees with respect to compensation and termination from 2008 through the present. Plaintiffs also alleged retaliation. Plaintiffs also sought reinstatement or instatement of Plaintiffs and class members to their alleged rightful employment positions, lost pay and benefits allegedly sustained by Plaintiffs and class members, compensatory damages for emotional distress, front pay, punitive damages, attorneys' fees, and interest. On May 8, 2013, the Company and Class Representatives filed papers memorializing an amicable resolution to the case pending final court approval. The Settlement Agreement provides for a cash payment of $7.5 million and also includes programmatic relief under which the Company agrees to post open positions, implement new selection criteria and interview protocols, revamp its annual performance reviews and compensation structure, add regional human resource directors, implement more diversity and inclusion communications and training for field and corporate office employees, and enhance its investigations training and processes. The Company has also reflected its commitment to use diverse models in its marketing and to partnerships with organizations dedicated to the advancement and well-being of African Americans and other diverse groups. AOn June 12, 2013, the court granted preliminary approval of the settlement and in June 2013 the Company issued payment to the settlement administrator for $7.5 million. A hearing on final approval has been requestedscheduled for JuneNovember 18, 2013.

As of May 4,August 3, 2013, the Company has accrued $7.60.2 million for loss contingencies in connection with the litigation matters enumerated above, and certain other legal matters, which is included in accounts payable - other on the condensed consolidated balance sheet. Some of these contingency matters include or may include insurance recovery. The Company is vigorously defending the pending matters and will continue to evaluate its potential exposure and estimated costs as these matters progress. Future developments may require the Company to adjust the amount of this accrual, which, if increased, could have a material adverse effect on the Company's 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, insurance may cover a portion of such losses. However, the outcome of the Company's litigation matters cannot be accurately predicted and there may be existing matters or matters that arise for which the Company does not have insurance coverage or for which insurance provides only partial coverage. Such outcome could have a material adverse effect on the Company's results of operations or financial condition.

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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 26 weeks ended August 3, 2013, and July 28, 2012
(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 and 26 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, for the two reportable segments is set forth below (in thousands, except percentages):
 
13 Weeks Ended August 3, 2013 Wet Seal Arden B 
Corporate
and
Unallocated
 Total
Net sales $120,567
 $16,682
 $
 $137,249
Percentage of consolidated net sales 88% 12% % 100%
Operating income (loss) $8,950
 $491
 $(8,463) $978
Depreciation and amortization expense $2,732
 $322
 $383
 $3,437
Interest income $
 $
 $53
 $53
Interest expense $
 $
 $(54) $(54)
Income (loss) before provision for income taxes $8,950
 $491
 $(8,464) $977
13 Weeks Ended July 28, 2012 Wet Seal Arden B 
Corporate
and
Unallocated
 Total
Net sales $113,739
 $21,522
 $
 $135,261
Percentage of consolidated net sales 84% 16% % 100%
Operating loss $(8,579) $(1,578) $(9,386) $(19,543)
Depreciation and amortization expense $3,723
 $456
 $391
 $4,570
Interest income $
 $
 $38
 $38
Interest expense $
 $
 $(46) $(46)
Loss before benefit for income taxes $(8,579) $(1,578) $(9,394) $(19,551)
26 Weeks Ended August 3, 2013 Wet Seal Arden B 
Corporate
and
Unallocated
 Total
Net sales $243,367
 $34,327
 $
 $277,694
Percentage of consolidated net sales 88% 12% % 100%
Operating income (loss) $18,502
 $1,048
 $(15,374) $4,176
Depreciation and amortization expense $5,317
 $581
 $877
 $6,775
Interest income $
 $
 $101
 $101
Interest expense $
 $
 $(108) $(108)
Income (loss) before provision for income taxes $18,502
 $1,048
 $(15,381) $4,169


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THE WET SEAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the 1326 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012
(Unaudited)

13 Weeks Ended May 4, 2013 Wet Seal Arden B 
Corporate
and
Unallocated
 Total
26 Weeks Ended July 28, 2012 Wet Seal Arden B 
Corporate
and
Unallocated
 Total
Net sales $122,799
 $17,646
 $
 $140,445
 $239,914
 $43,292
 $
 $283,206
Percentage of consolidated net sales 87% 13% 
 100% 85% 15% % 100%
Operating income (loss) $9,553
 $558
 $(6,913) $3,198
 $745
 $(2,882) $(17,847) $(19,984)
Depreciation and amortization expense $2,584
 $260
 $494
 $3,338
 $7,577
 $911
 $773
 $9,261
Interest income $
 $
 $40
 $40
 $
 $
 $76
 $76
Interest expense $
 $
 $(46) $(46) $
 $
 $(94) $(94)
Income (loss) before provision for income taxes $9,553
 $558
 $(6,919) $3,192
Income (loss) before benefit for income taxes $745
 $(2,882) $(17,865) $(20,002)
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 benefit for income taxes $9,324
 $(1,304) $(8,471) $(451)

 
The “Corporate and Unallocated” column is presented solely to allow for reconciliation of segment contribution to consolidated operating income (loss), interest income, interest expense and income (loss) before provision (benefit) for income taxes. Wet Seal and Arden B segment results include net sales, cost of sales, asset impairment and other direct store and field management expenses, with no allocation of corporate overhead or interest income and expense. The application of accounting policies for segment reporting is consistent with the application of accounting policies for corporate reporting.
Wet Seal operating income (loss) during the 13 and 26 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, includes $1.10.3 million, $1.4 million, $7.9 million and $2.710.6 million, respectively, of asset impairment charges.
Arden B operating income (loss) during the 1326 weeks ended May 4,August 3, 2013, and the 13 and 26 weeks ended , and AprilJuly 28, 2012, includes $0.5 million, $1.1 million and $0.92.0 million, respectively, of asset impairment charges.
Corporate expenses during the 1326 weeks ended May 4,August 3, 2013, include a $3.5 million benefit to adjust loss contingency charges for several litigationlegal matters. Corporate expenses during the 13 and 26 weeks ended July 28, 2012, include $1.9 million of severance costs resulting from the departure of the Company's previous chief executive officer.

NOTE 8 – Treasury Stock
On February 1, 2013, the Company's Board of Directors authorized a program to repurchase up to $25.0 million of the outstanding shares of its Class A common stock, to be executed through open market or privately negotiated transactions. The timing and number of shares repurchased willwas to be determined by the Company’s management based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time.
During the 1326 weeks ended May 4,August 3, 2013, the Company repurchased 1,206,6495,565,873 shares of its Class A common stock at a weighted average market price of $3.004.48 per share, for a total cost, including commissions, of approximately $3.625.0 million., representing full execution of the stock repurchase program. Additionally, the Company tendered 46,87258,416 shares of its Class A common stock upon restricted stock vesting to satisfy employee withholding tax obligations for a total cost of approximately $0.2 million, as well as 27,06751,201 shares reacquired by the Company, at no cost, upon employee forfeitures of stock-based compensation.
Effective August 22, 2013, the Company retired 6,517,370 shares of its Class A common stock held in treasury. In accordance with Delaware law and the terms of the Company’s certificate of incorporation, upon retirement, such treasury shares resumed the status of authorized and unissued shares of Company common stock.



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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s 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 February 2, 2013, and elsewhere in this Quarterly Report on 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 13 to 39 years old. We operate two nationwide, primarily mall-based, chains of retail stores under the names “Wet Seal” and “Arden B.” At May 4,August 3, 2013, we had 526525 retail stores in 47 states and Puerto Rico. Of the 526525 stores, there were 464 Wet Seal stores and 6261 Arden B stores. Our merchandise can also be purchased online through the respective websites of each of our chains.
We consider the following to be key performance indicators in evaluating our performance:
Comparable store sales—For purposes of measuring comparable store sales, sales include merchandise sales as well as membership fee revenues recognized under our Wet Seal division’s 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 counts—We 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 margins—We 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 income (loss)—We view operating income (loss) as a key indicator of our financial success. The key drivers of operating income (loss) 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.

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Business Segments
We report our results as two reportable segments representing our two retail divisions. 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 and young women who seek fashionable clothing at a value, with a target customer age range of teens to early twenties. 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.lifestyle.
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 - "Segment Reporting," to the unaudited condensed consolidated financial statements for financial information regarding segment reporting, which information is incorporated herein by reference.
Current Trends and Outlook
Our comparable store sales decreased 2.9%increased 3.7% during the 13 weeks ended May 4,August 3, 2013, driven by a 3.4%3.9% comparable store sales decreaseincrease in our Wet Seal division and a 0.9%2.0% comparable store sales increase in our Arden B division. AfterDuring the quarter we achieved a consolidated high-single digit comparable store sales increase in May, and, despite a challenging startretail environment that we believe led to a decline in February, primarily due to macro headwinds,mall traffic, we achievedgenerated a consolidated positive low-single digit comparable store salessale increase in the combined March-April time-frameJune and generated positiveJuly, resulting in a consolidated mid-single digit comparable store sales in the final month ofincrease for the quarter. At the same time, we saw significant sequential improvementWe continued to generate positive comparable store sales stemming from an improved blend of regular and promotional pricing, which also enabled us to generate a substantial increase in our merchandise margin which came in approximately flat versus a year ago. Additionally, we ended the prior year quarter.quarter with inventories that we believe were well-positioned entering into the important back-to-school season.
The Wet Seal division's comparable store sales decreaseincrease was primarily driven by a decreasean increase in transaction volume and average dollar sales per transaction, which was driven by a decreasean increase in average unit selling price andoffset by a decrease in units purchased per customer. At Wet Seal, we believe the customer is responding well and returning to the Wet Seal brand more quickly than we originally anticipated, which has enabled us to stabilize the business and exceed our financial forecasts in the first quarter.
business. The Arden B division comparable store sales increase was primarily driven by an increase in transaction volume offset by a decrease in average dollar sales per transaction, which was driven by an increase in average unit selling price, partially offset by a decrease in units purchased per customer. The increase in average dollar sales per transaction was partially offset by a decrease in transaction volume. At Arden B, we madecontinued to make progress in the fiscal 2013 firstsecond quarter as evidenced by achieving slightly positive low-single digit comparable store sales. This progress and the recent appointment of a new Vice President, General Merchandise Manager for this division, make us optimistic that we can reinvigorate the Arden B brand.
Our combined e-commerce net sales increased 4.6% duringcompared to the prior year quarter, which is not a factor in calculating our comparable store sales, were flat for the 13 weeks ended May 4,August 3, 2013, as compared to.
Since the priorbeginning of the year, quarter.
we have made notable progress toward restoring top line growth and improving margins by delivering improved product and enhancing our brand positioning. We were encouraged by our fiscal first quarter 2013 performance and we intend to continue our initiatives focused on improving our execution under a fast fashion merchandising model,are continuing to improveexecute against our product assortments and re-engaging our core Wet Seal and Arden B customers to lead us to a level of sales and earnings that our fast fashion strategy, had drivenwhile strengthening our new marketing programs and partnerships planned for many prior years.back-to-school and holiday, and customer engagement initiatives, which we believe are enabling us to win back the Wet Seal customer. We also recently appointed a new Executive Vice President, Stores and Operations, who will lead our field organization and store teams, and should help to improve consistent execution at the store level.
Store Openings and Closures
For all of fiscal 2013, we expect to open 1923 to 2325 new Wet Seal stores, primarily to replace the approximately 20 to 22 stores that will be closing upon lease expiration in fiscal 2013, with openings primarily in outlet centers, in which we have experienced

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relatively stronger sales productivity and profitability versus our mall-based stores. We currently plan to close

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approximately 108 Arden B stores in fiscal 2013 upon lease expiration, as we focus efforts on improving merchandising and marketing strategies in that business.
At Wet Seal, we opened twoone new storesstore and closed six storesone store during the 13 weeks ended May 4,August 3, 2013. At Arden B, we had noclosed one store opening or closing activity during the 13 weeks ended May 4,August 3, 2013.
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 (“U.S. 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 U.S. GAAP for complete financial statements.
The preparation of financial statements in conformity with U.S. 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, "Summary of Significant Accounting Policies" and in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.
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, legal loss contingencies 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 February 2, 2013, except for the following updates for our critical accounting policies for long-lived assets, accounting for income taxes and legal loss contingencies.
Long-Lived Assets
We evaluate the carrying value of long-lived assets for impairment quarterly or 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. During the 13 and 26 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, we recorded $1.60.3 million, $1.9 million, $9.0 million and $3.612.6 million, respectively, of impairment charges. Additional information required by this item is incorporated herein by reference to Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included elsewhere in this report.
Accounting for Income Taxes
The information required by this item is incorporated herein by reference to Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included elsewhere in this report.
Legal Loss Contingencies
We are subject to the possibility of various legal losses. We consider the likelihood of loss or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required. As of May 4,August 3, 2013, we have accrued $7.6$0.2 million for loss contingencies in connection with the litigation matters discussed in

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Note 6, "Commitments and Contingencies," to the condensed consolidated financial statements included elsewhere in this report.

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Primarily as the result of our preliminary settlement of a legal matter and related insurance recovery agreed upon by our insurance providers, we recorded a net benefit of $3.5 million pertaining to loss contingencies during the 13 weeks ended May 4, 2013. We are vigorously defending the pending matters and will continue to evaluate our potential exposure and estimated costs as these matters progress. Future developments may require us to adjust the amount of this accrual, which, if increased, could have a material adverse effect on our results of operations or financial condition.
Recently AdoptedRecent Accounting Pronouncements
The information required by this item is incorporated herein by reference to Note 1, "Summary of Significant Accounting Policies," to the condensed consolidated financial statements included elsewhere in this report.

Results of Operations
The following table sets forth selected condensed consolidated statements of operations data as a percentage of net sales for the period indicated. The discussion that follows should be read in conjunction with the table below:
13 Weeks Ended13 Weeks Ended 26 Weeks Ended
May 4, 2013 April 28, 2012August 3, 2013 July 28, 2012 August 3, 2013 July 28, 2012
Net sales100.0% 100.0 %100.0% 100.0 % 100.0% 100.0 %
Cost of sales69.9
 70.5
70.4
 77.2
 70.2
 73.7
Gross margin30.1
 29.5
29.6
 22.8
 29.8
 26.3
Selling, general, and administrative expenses26.7
 27.4
28.7
 30.6
 27.7
 28.9
Asset impairment1.1
 2.4
0.2
 6.6
 0.6
 4.5
Operating income (loss)2.3
 (0.3)0.7
 (14.4) 1.5
 (7.1)
Interest expense, net
 

 
 
 
Income (loss) before provision (benefit) for income taxes2.3
 (0.3)0.7
 (14.4) 1.5
 (7.1)
Provision (benefit) for income taxes0.1
 (0.1)
 (5.3) 
 (2.6)
Net income (loss)2.2% (0.2)%0.7% (9.1)% 1.5% (4.5)%
Thirteen Weeks Ended May 4,August 3, 2013, Compared to Thirteen Weeks Ended AprilJuly 28, 2012
Net sales
13 Weeks Ended May 4, 2013 
Change From
Prior Fiscal Period
 13 Weeks Ended April 28, 201213 Weeks Ended August 3, 2013 
Change From
Prior Fiscal Period
 13 Weeks Ended July 28, 2012
  ($ in millions)      ($ in millions)    
Net sales$140.4
 $(7.5) (5.1)% $147.9
$137.2
 $1.9
 1.5% $135.3
Comparable store sales decrease    (2.9)%  
Comparable store sales increase    3.7%  
Net sales for the 13 weeks ended May 4,August 3, 2013 decreasedincreased primarily as a result of the following:
A decreaseAn increase of 2.9%3.7% in comparable store sales, resulting from an 0.7% decreasea 2.8% increase in comparable store average transactions and a 2.2% decrease1.0% increase in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction decreasedincreased mainly due to a 1.7%2.3% increase in average unit retail prices, partially offset by a 1.6% decrease in the number of units purchased per customer andcustomer.
The increase in net sales was partially offset by a 0.6% decrease in average unit retail prices; and
A decrease in number of stores open, from 553550 stores as of AprilJuly 28, 2012, to 526525 stores as of May 4,August 3, 2013.
Net sales for our e-commerce business compared to the prior year quarter, which is not a factor in calculating our comparable store sales, increased $0.3 million, or 4.6%.were flat for the period.







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Cost of sales
13 Weeks Ended May 4, 2013 Change From
Prior Fiscal Period
 13 Weeks Ended April 28, 201213 Weeks Ended August 3, 2013 Change From
Prior Fiscal Period
 13 Weeks Ended July 28, 2012
  ($ in millions)    ($ in millions)  
Cost of sales$98.2
 $(6.1) 5.9 % $104.3
$96.6
 $(7.9) (7.5)% $104.5
Percentage of net sales69.9%   (0.6)% 70.5%70.4%   (6.8)% 77.2%
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 decreased due primarily to an increase in merchandise margin as a result of lower markdown rates in both the Wet Seal and Arden B divisions, as compared to the prior year, and a decrease in occupancy costs as a result of a decrease in depreciation for stores impaired in the prior year quarter and a decrease in minimum rent related to the buyout of certain expensive Arden B store leases in late fiscal 2012.

Selling, general, and administrative expenses (SG&A)
13 Weeks Ended May 4, 2013 
Change From
Prior Fiscal Period
 13 Weeks Ended April 28, 201213 Weeks Ended August 3, 2013 
Change From
Prior Fiscal Period
 13 Weeks Ended July 28, 2012
  ($ in millions)    ($ in millions)  
Selling, general, and administrative expenses$37.4
 $(3.0)(7.4)% $40.4
$39.4
 $(2.0)(4.7)% $41.4
Percentage of net sales26.7%  (0.7)% 27.4%28.7%  (1.9)% 30.6%
Our SG&A expenses are comprised of two components. Selling expenses include store and field support costs, including personnel, advertising and merchandise delivery costs as well as e-commerce processing 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, loss prevention and other centralized services.
Selling expenses decreased $1.1$1.0 million from the prior year to $30.1$30.5 million. As a percentage of net sales, selling expenses were 21.4%22.2% of net sales, or 30110 basis points higherlower than a year ago.
The following contributed to the current quarter decrease in selling expenses:
A $1.3$0.4 million decrease in advertising and marketing expenditures due to less in-store signage and window banners than in the prior year quarter;
A $0.3 million decrease in store and field payroll costs due to fewer stores during the quarter;
A $0.2 million decrease in sales and fewer stores at the end of the quarter;store supplies;
A $0.2 million decrease in merchandise delivery costs due to fewer units shipped;lower average unit weight shipped and freight credit received;
A $0.1 million decrease in store supplies due to decreased sales volume and fewer stores at the end of the quarter;field travel and meeting expenses; and
A $0.1 million net decrease in other selling expenses.
However, theThe decreases in selling expenses were partially offset by the following increases:
A $0.3 million increase in store and field meeting expenses primarily associated with additional field employee training;
A $0.2 million increase in internet fulfillment costs as a result of increased shipping and handling costs due to higher e-commerce transaction volume; and
A $0.1 million increase in store and field bonuses due to improved operating results.
General and administrative expenses decreased $1.9$1.0 million from the prior year quarter, to $7.3$8.9 million. As a percentage of net sales, general and administrative expenses were 5.2%6.5%, or 10080 basis points lower than in the priora year quarter.ago.
The following contributed to the current quarter decrease in general and administrative expenses:
A $1.9 million decrease in severance costs resulting from the departure of the previous chief executive officer in the prior year quarter;

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A $1.8 million decrease in legal costs due to the recording of a $3.5 million benefit related to certain insurance recoveries, offset by increases in legal fees associated with various legal matters;
A $0.6$0.2 million decrease in stock compensation due to higher executive stock compensation in the prior year quarter for the previous chief executive officer and previous president and chief operating officer;
A $0.3 million decrease in loss on disposal fees related to the write-off of an e-commerce platform and a social media game in the prior quarter; and
A $0.1 million decrease in corporate wages and benefits primarily due to elimination of the president and chief operating officer position at the end of fiscal 2012, partially offset by an increase in headcountthe number of regionalcertain human resource directors.resources positions; and
A $0.1 million decrease in consulting fees.
The decreases in general and administrative expenses were partially offset by the following increases:
A $0.4$0.5 million increase in bonuses for annual corporate incentive bonuses and an employee retention plan not recordedlegal fees associated with various legal matters, including $0.3 million associated with employee-related matters;
A $0.3 million decrease in miscellaneous income as the prior year;year included a refund from a factoring company for adjustments to prior years' payments to merchandise vendors;
A $0.2$0.3 million increase in severance costs;corporate bonuses as a result of improved operating performance;
A $0.1 million increase in computer maintenance costs;
A $0.1 million increase in consulting fees; and
A $0.1 million increase in audit fees due to a change in timing of services performed as compared to the prior quarter.insurance expenses.

Asset impairment
13 Weeks Ended May 4, 2013 
Change From
Prior Fiscal Period
 13 Weeks Ended April 28, 201213 Weeks Ended August 3, 2013 
Change From
Prior Fiscal Period
 13 Weeks Ended July 28, 2012
($ in millions)($ in millions)
Asset impairment$1.6
 $(2.0)(55.7)% $3.6
$0.3
 $(8.7)(97.1)% $9.0
Percentage of net sales1.1%  (1.3)% 2.4%0.2%  (6.4)% 6.6%
Based on our quarterly assessments of the carrying value of long-lived assets, during the 13 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, 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 $1.60.3 million and $3.69.0 million, respectively.
Interest expense, net
We generated interest expense, net, of less than $0.1 million during the 13 weeks ended May 4,August 3, 2013, and AprilJuly 28, 2012, primarily from the amortization of deferred financing costs, partially offset by earnings from investments in cash and cash equivalents and short-term investments.
Provision (benefit) for income taxes
 13 Weeks Ended May 4, 2013 
Change From
Prior Fiscal Period
 13 Weeks Ended April 28, 2012
   ($ in millions)  
Provision (benefit) for income taxes$0.1
 $0.3
146.1% $(0.2)
 13 Weeks Ended August 3, 2013 
Change From
Prior Fiscal Period
 13 Weeks Ended July 28, 2012
   ($ in millions)  
Provision (benefit) for income taxes$
 $7.2
100.3% $(7.2)
DueRealization of our deferred income tax assets was deemed not to be more likely than not due to our three-year cumulative operating losses, and we established a valuation allowance against all of our deferred tax assets in fiscal 2012. In addition, we discontinued recordingWe have net operating loss carryforwards (NOLs) available, subject to certain limitations, to offset our regular taxable income. We recognized a provision for income taxes that resulted in an effective tax benefits inrate of 1.9% during the condensed consolidated statements of operations. We will not record such income tax benefits until it is determined that it is more likely than not that we will generate sufficient taxable income to realize the deferred income tax assets. For the 13 weeks ended May 4,August 3, 2013 we generated operating for federal and state income however, we remain in a cumulative three-year operating loss positiontaxes. This effective rate is due to certain federal and realization of our deferredstate income taxes for fiscal 2013 that cannot be offset by NOLs.


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tax assets is not deemed to be more likely than not. Prospectively, as we continue to evaluate available evidence, it is possible that we may deem some or all of our deferred income tax assets to be realizable.

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 and 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 data)13 Weeks Ended May 4, 2013 13 Weeks Ended April 28, 201213 Weeks Ended August 3, 2013 13 Weeks Ended July 28, 2012
Net sales$122,799
 $126,175
$120,567
 $113,739
Percentage of consolidated net sales87 % 85 %88% 84 %
Comparable store sales percentage decrease compared to the prior year period(3.4)% (7.0)%
Operating income$9,553
 $9,324
Comparable store sales percentage increase (decrease) compared to the prior year3.9% (11.0)%
Operating income (loss)$8,950
 $(8,579)
Sales per square foot$62
 $64
$62
 $58
Number of stores as of period end464
 469
464
 468
Square footage as of period end1,856
 1,881
1,859
 1,870
The comparable store sales decreaseincrease during the 13 weeks ended May 4,August 3, 2013 was due to a decreasean increase of 1.3%3.2% in comparable store average transactions and an increase of 0.8% in comparable store average dollar sales per transaction. The increase in comparable store average dollar sales per transaction resulted from a 1.9% increase in our average unit retail prices, partially offset by a 1.4% decrease in units purchased per customer. The net sales increase was attributable to the comparable store sales increase and a $0.1 million increase in net sales in our e-commerce business, partially offset by a decrease in the number of stores compared to the prior year.
Wet Seal generated operating income of 7.4% of net sales during the 13 weeks ended August 3, 2013, compared to operating loss of 7.5% of net sales during the 13 weeks ended July 28, 2012. This increase was due primarily to a decrease in asset impairment charges of $7.6 million during the 13 weeks ended August 3, 2013, compared to the 13 weeks ended July 28, 2012, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. Additionally, the increase was attributable to an increase in merchandise margin as a result of lower markdown rates and a decrease in occupancy costs due to a reduction in store depreciation as a result of stores impaired in the prior year.
Arden B:
(In thousands, except percentages, sales per square foot and number of stores data)13 Weeks Ended August 3, 2013 13 Weeks Ended July 28, 2012
Net sales$16,682
 $21,522
Percentage of consolidated net sales12% 16 %
Comparable store sales percentage increase (decrease) compared to the prior year2.0% (11.6)%
Operating income (loss)$491
 $(1,578)
Sales per square foot$76
 $75
Number of stores as of period end61
 82
Square footage as of period end189
 254
The comparable store sales increase during the 13 weeks ended August 3, 2013, was due to a 4.9% increase in comparable store average dollar sales per transaction, partially offset by a 2.8% decrease in comparable store average transactions. The increase in the comparable store average dollar sales per transaction resulted from a 17.0% increase in our average unit retail prices, partially offset by a 10.4% decrease in units purchased per customer. The net sales decrease was primarily attributable to a decrease in the number of stores compared to the prior year and a $0.2 million decrease in net sales in our e-commerce business, partially offset by the comparable sales increase.
Arden B generated operating income of 2.9% of net sales during the 13 weeks ended August 3, 2013, compared to operating loss of 7.3% of net sales during the 13 weeks ended July 28, 2012. This increase was due primarily to an increase in

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merchandise margin as a result of lower markdown rates and a decrease in occupancy costs due to a decrease in depreciation for stores impaired since the prior year and a decrease in minimum rent due to the buyout of certain high rent Arden B store leases late in fiscal 2012. Additionally, during the 13 weeks ended July 28, 2012, operating loss included asset impairment $1.1 million, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.
Twenty-Six Weeks Ended August 3, 2013, Compared to Twenty-Six Weeks Ended July 28, 2012
Net sales
 26 Weeks Ended August 3, 2013 Change From
Prior Fiscal Period
 26 Weeks Ended July 28, 2012
   ($ in millions)  
Net sales$277.7
 $(5.5) (1.9)% $283.2
Comparable store sales increase    0.2 %  
Net sales for the 26 weeks ended August 3, 2013 decreased primarily as a result of the following:
A decrease in number of stores open, from 550 stores as of July 28, 2012, to 525 stores as of August 3, 2013.
The decrease in net sales was partially offset by the following increases:
An increase of 0.2% in comparable store sales, resulting from a 1.0% increase in comparable store average transactions, partially offset by a 0.8% decrease in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction decreased mainly due to a 1.8% decrease in the number of units purchased per customer, partially offset by a 0.7% increase in average unit retail prices; and
An increase in e-commerce sales compared to the prior year, which is not a factor in calculating our comparable store sales, of $0.3 million, or 2.1%.

Cost of sales
 26 Weeks Ended August 3, 2013 Change From
Prior Fiscal Period
 26 Weeks Ended July 28, 2012
   ($ in millions)  
Cost of sales$194.8
 $(14.0) (6.7)% $208.8
Percentage of net sales70.2%   (3.5)% 73.7%
Cost of sales as a percentage of net sales decreased due primarily to an increase in merchandise margin as a result of lower markdown rates in both the Wet Seal and Arden B divisions, as compared to the prior year, and a decrease in occupancy costs as a result of a decrease in depreciation for stores impaired in the prior year and a decrease in minimum rent related to the buyout of certain expensive Arden B store leases in late fiscal 2012.

Selling, general, and administrative expenses (SG&A)
 26 Weeks Ended August 3, 2013 
Change From
Prior Fiscal Period
 26 Weeks Ended July 28, 2012
   ($ in millions)  
Selling, general, and administrative expenses$76.8
 $(5.0)(6.1)% $81.8
Percentage of net sales27.7%  (1.2)% 28.9%
Selling expenses decreased $2.1 million from the prior year to $60.6 million. As a percentage of net sales, selling expenses were 21.8% of net sales, or 40 basis points lower than a year ago.
The following contributed to the current year decrease in selling expenses:
A $1.4 million decrease in store and field payroll costs due to fewer stores in the current year;

25


A $0.4 million decrease in advertising and marketing expenditures due to less in-store signage and window banners in the current year;
A $0.4 million decrease in store supplies;
A $0.3 million decrease in merchandise delivery costs due to lower average unit weight shipped and freight credit received; and
A $0.2 million decrease in store and field travel and meeting expenses.
The decreases in selling expenses were partially offset by the following increases:
A $0.4 million increase in internet fulfillment costs as a result of increased shipping and handling costs due to higher e-commerce transaction volume; and
A $0.1 million increase in store and field bonuses due to improved operating results; and
A $0.1 million net increase in other selling expenses.
General and administrative expenses decreased $2.9 million from the prior year, to $16.2 million. As a percentage of net sales, general and administrative expenses were 5.9%, or 80 basis points lower than a year ago.
The following contributed to the current year decrease in general and administrative expenses:
A $1.9 million decrease in severance costs resulting from the departure of the previous chief executive officer in the prior year;
A $1.3 million decrease in legal costs due to the recording of a $3.5 million benefit related to certain insurance recoveries, offset by increases in legal fees associated with various legal matters;
A $0.8 million decrease in stock compensation due to higher executive stock compensation in the prior year quarter for the previous chief executive officer and previous president and chief operating officer; and
A $0.2 million decrease in corporate wages and benefits primarily due to elimination of the president and chief operating officer position at the end of fiscal 2012, partially offset by an increase in the number of certain human resources positions.
The decreases in general and administrative expenses were partially offset by the following increases:
A $0.7 million increase in corporate bonuses as a result of improved operating performance;
A $0.3 million decrease in miscellaneous income as the prior year included a refund from a factoring company for adjustments to prior years' payments to merchandise vendors;
A $0.2 million increase in computer maintenance costs; and
A $0.1 million increase in insurance expenses.

Asset impairment
 26 Weeks Ended August 3, 2013 
Change From
Prior Fiscal Period
 26 Weeks Ended July 28, 2012
 ($ in millions)
Asset impairment$1.9
 $(10.7)(85.2)% $12.6
Percentage of net sales0.6%  (3.8)% 4.4%
Based on our quarterly assessments of the carrying value of long-lived assets, during the 26 weeks ended August 3, 2013, and July 28, 2012, 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 $1.9 million and $12.6 million, respectively.
Interest expense, net
We generated interest expense, net, of less than $0.1 million during the 26 weeks ended August 3, 2013, and July 28, 2012, primarily from the amortization of deferred financing costs, partially offset by earnings from investments in cash and cash equivalents and short-term investments.

26


Provision (benefit) for income taxes
 26 Weeks Ended August 3, 2013 
Change From
Prior Fiscal Period
 26 Weeks Ended July 28, 2012
   ($ in millions)  
Provision (benefit) for income taxes$0.1
 $7.5
101.4% $(7.4)
Realization of our deferred income tax assets was deemed not to be more likely than not due to our three-year cumulative operating losses, and we established a valuation allowance against all of our deferred tax assets in fiscal 2012. We have net operating loss carryforwards (NOLs) available, subject to certain limitations, to offset our regular taxable income. We recognized a provision for income taxes that resulted in an effective tax rate of 2.4% during the 26 weeks ended August 3, 2013 for federal and state income taxes. This effective rate is due to certain federal and state income taxes for fiscal 2013 that cannot be offset by NOLs.
Segment Information
Wet Seal:
(In thousands, except percentages, sales per square foot and number of stores data)26 Weeks Ended August 3, 2013 26 Weeks Ended July 28, 2012
Net sales$243,367
 $239,914
Percentage of consolidated net sales88% 85 %
Comparable store sales percentage increase (decrease) compared to the prior year0.1% (8.9)%
Operating income$18,502
 $745
Sales per square foot$124
 $122
Number of stores as of period end464
 468
Square footage as of period end1,859
 1,870
The comparable store sales increase during the 26 weeks ended August 3, 2013 was due to an increase of 0.9% in comparable store average transactions, partially offset by a decrease of 2.1%0.7% in comparable store average dollar sales per transaction. The decrease in comparable store average dollar sales per transaction resulted from a 1.3%1.4% decrease in units purchased per customer, andpartially offset by a 1.1% decrease0.3% increase in our average unit retail prices. The net sales decreaseincrease was attributable to the comparable store sales declineincrease and an increase of $0.5 million in net sales in our e-commerce business, partially offset by a decrease in the number of stores compared to the prior year, offset by a $0.4 million increase in net sales in our e-commerce business.year.
Wet Seal generated operating income of 7.8%7.6% of net sales during the 1326 weeks ended May 4,August 3, 2013, compared to operating income of 7.4%0.3% of net sales during the 1326 weeks ended AprilJuly 28, 2012. This increase was due primarily to a decrease in asset impairment charges of $1.6$9.2 million during the 1326 weeks ended May 4,August 3, 2013, compared to the 1326 weeks ended AprilJuly 28, 2012, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations. This decreaseAdditionally, the increase was partially offset by a slight decreaseattributable to the increase in merchandise margin as a result of higherlower markdown rates and an increasea decrease in distributionoccupancy costs due to fewer vendor violationsa reduction in store depreciation as a result of higher compliance, partially offset by a decreasestores impaired in temporary labor as a resultthe prior year.







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Arden B:
(In thousands, except percentages, sales per square foot and number of stores data)13 Weeks Ended May 4, 2013 13 Weeks Ended April 28, 201226 Weeks Ended August 3, 2013 26 Weeks Ended July 28, 2012
Net sales$17,646
 $21,770
$34,327
 $43,292
Percentage of consolidated net sales13% 15 %12% 15 %
Comparable store sales percentage increase (decrease) compared to the prior year period0.9% (11.4)%
Comparable store sales percentage increase (decrease) compared to the prior year1.4% (11.5)%
Operating income (loss)$558
 $(1,304)$1,048
 $(2,882)
Sales per square foot$81
 $76
$157
 $150
Number of stores as of period end62
 84
61
 82
Square footage as of period end192
 261
189
 254
The comparable store sales increase during the 1326 weeks ended May 4,August 3, 2013, was due to a 9.3%2.8% increase in comparable store average transactions, partially offset by a 7.6%1.5% decrease in comparable store average dollar sales per transaction. The decrease in the comparable store average dollar sales per transaction resulted from an 8.4%a 9.3% decrease in units purchased per

23


customer, partially offset by a 0.9%an 8.6% increase in our average unit retail prices. The net sales decrease was primarily attributable to a decrease in the number of stores compared to the prior year and a decrease of $0.2 million in net sales in our e-commerce business, partially offset by the comparable store sales increase.
Arden B generated operating income of 3.2%3.1% of net sales during the 1326 weeks ended May 4,August 3, 2013, compared to operating loss of 6.0%6.7% of net sales during the 1326 weeks ended AprilJuly 28, 2012. This increase was due primarily to aan increase in merchandise margin as a result of lower markdown rates and a decrease in occupancy costs due to a decrease in depreciation for stores impaired since the prior year and a decrease in minimum rent due to the buyout of certain high rent Arden B store leases late in fiscal 2012. Additionally, during the 1326 weeks ended May 4,August 3, 2013 and AprilJuly 28, 2012, operating income (loss) included asset impairment charges of $0.5 million and $0.9$2.0 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.

Liquidity and Capital Resources
  13 Weeks Ended May 4, 2013 13 Weeks Ended April 28, 2012
  (In thousands)
     
Net cash provided by (used in) operating activities $9,131
 $(5,096)
Net cash provided by (used in) investing activities 2,597
 (3,778)
Net cash used in financing activities (3,687) (203)
Net increase (decrease) in cash and cash equivalents 8,041
 (9,077)
Cash and cash equivalents, beginning of year 42,279
 157,185
Cash and cash equivalents, end of year $50,320
 $148,108
 26 Weeks Ended August 3, 2013 26 Weeks Ended July 28, 2012
 (In thousands)
    
Net cash provided by operating activities$3,383
 $1,079
Net cash provided by (used in) investing activities6,771
 (11,591)
Net cash used in financing activities(24,660) (203)
Net decrease in cash and cash equivalents(14,506) (10,715)
Cash and cash equivalents, beginning of period42,279
 157,185
Cash and cash equivalents, end of period$27,773
 $146,470
1326 Weeks Ended May 4,August 3, 2013
For the 1326 weeks ended May 4,August 3, 2013, cash provided by operating activities was comprised of net income of $3.14.1 million, and net non-cash charges, primarily depreciation and amortization, asset impairment, deferred income taxes, and stock-based compensation, of $5.59.7 million, andpartially offset by net cash provided byused in changes in other operating assets and liabilities of $0.510.4 million.
For the 1326 weeks ended May 4,August 3, 2013, net cash provided by investing activities was comprised of $6.2$25.1 million of proceeds from maturity of investment securities, partially offset by $3.6$9.5 million of investment of cash from money market funds into short-term investments and $8.8 million of capital expenditures, primarily for the remodeling of existing Wet Seal stores upon lease renewals and/or store relocations and construction of new Wet Seal stores. Capital expenditures that remain unpaid as of May 4,August 3, 2013, have increased $0.7$1.6 million since the end of fiscal 2012. We expect to pay nearly all of the balance of such amounts during the second quarterremaining of fiscal 2013.

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For the 1326 weeks ended May 4,August 3, 2013, net cash used in financing activities was comprised primarily of $3.8$25.2 million used to repurchase 1,206,6495,565,873 shares of our Class A common stock under our currenta $25.0 million share repurchase program and 46,87258,416 shares of our Class A common stock to satisfy employee withholding tax obligations, upon restricted stock vestings, slightly offset by $0.1$0.5 million of proceeds from the exercise of stock options.
Senior Revolving Credit Facility
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 lender’s 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 lender’s prime rate, the Federal funds rate plus 0.5% or the one month London InterBank Offered Rate (LIBOR) plus 1.0%, collectively referred to as the “Base Rate,” plus the applicable margin ranging from 0.5% to 1.0% or, (ii) if 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

24

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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 May 4,August 3, 2013, the amount outstanding under the Facility consisted of $1.9$2.0 million in open documentary letters of credit related to merchandise purchases and $1.5$1.7 million in outstanding standby letters of credit. At May 4,August 3, 2013, we had $31.6$31.3 million available for cash advances and/or for the issuance of additional letters of credit, and we were in compliance with all covenant requirements under the Facility.
We believe we will have sufficient cash and credit availability to meet our operating capital, and share repurchase program activitycapital 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.
Capital Expenditures
We estimate that, in fiscal 2013, capital expenditures will be between $22.0 million and $24.0 million, of which approximately $16.0 million to $17.0$18.0 million is expected to be for the remodeling and/or relocation of existing Wet Seal stores upon lease renewals and the construction of new Wet Seal stores. We anticipate receiving approximately $2.0 million in tenant improvement allowances from landlords, resulting in net capital expenditures of between $20.0 million and $22.0 million.

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 net 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 and most of fiscal 2012, as a result of rising commodity prices, primarily for cotton, increased labor costs, due to labor shortages in

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China, from which a majority of our merchandise is sourced, and increasing fuel costs. Although cotton prices have stabilized, the other sourcing cost pressures are expected to continue intothrough fiscal 2013. The rising value of the currency in China relative to the U.S. dollar may also have an impact on future product costs. In response to the costscost increases, we leverage our large vendor base to lower costs, are identifying new vendors and are assessing ongoing promotional strategies in efforts to maintain or improve upon historical merchandise margin levels. We cannot be certain that our business will not be affected by inflation in the future.
Off-Balance Sheet Arrangements
As of May 4,August 3, 2013, we are not a party to any off-balance sheet arrangements, except for operating lease and purchase obligations and other commitments, as referenced in our Form 10-K for the fiscal year ended February 2, 2013, under Note 6, “Commitments and Contingencies” and “Other Off-Balance Sheet Arrangements,” and as referenced in this Quarterly Report on Form 10-Q under Note 6, “Commitments and Contingencies” to the condensed consolidated financial statements included elsewhere in this report.
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 May 4,August 3, 2013, no borrowings were outstanding under the Facility. At May 4,August 3, 2013, the weighted average interest rate on borrowings under the Facility would be 1.333%. Based upon a sensitivity analysis as of May 4,August 3, 2013, if we had average

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outstanding borrowings of $1 million during firstsecond quarter of fiscal 2013, a 50 basis point increase in interest rates would have resulted in an increase in interest expense of approximately $1,250 for the firstsecond quarter of fiscal 2013.
As of May 4,August 3, 2013, 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 10.0% change in the foreign exchange rate of the Chinese currency against the U.S. dollar as of May 4,August 3, 2013, would not materially affect our results of operations or cash flows. Over a longer period, the cumulative year-to-year impact of such changes, especially the exchange rate of the Chinese currency against the U.S. dollar, could be significant, albeit indirectly, through increased charges in U.S. dollars from our vendors that source their products internationally.

Item 4.        Controls and 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 us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures are also designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our 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 chief financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of May 4,August 3, 2013.

Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended May 4,August 3, 2013, no changes occurred with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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PART II. Other Information

Item 1.        Legal Proceedings

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. Plaintiffs are seeking reimbursement for alleged uniform and business expenses, injunctive relief, restitution, civil penalties, interest, and attorney's fees and costs. On August 16, 2011, the court denied Plaintiffs' Motion for Class Certification. Plaintiffs appealed and, on October 12, 2012, the California Court of Appeals affirmed the lower court's ruling. On January 23, 2013, the California Supreme Court denied Plaintiffs' petition for review. On February 4, 2013, the Court of Appeals issued a remittitur to send the case back to the trial court where it will proceed on behalf of only the three named plaintiffs and not as a class action.

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. In the course of this investigation, the EEOC served a subpoena seeking information related to current and former employees throughout the United States. On November 14, 2012, we reached resolution with the EEOC and several of the individual complainants that concluded the EEOC's investigation. Between November 2012 and March 2013, we paid approximately $0.8 million to settle with individual complainants. We also agreed to programmatic initiatives that are consistent with our diversity plan. We will report progress on its initiatives and results periodically to the EEOC. Claimants with whom we did not enter into a settlement had an opportunity to bring a private lawsuit within ninety days from the date they received their November 26, 2012 right-to-sue notice from the EEOC, however, that time period is tolled for those individuals who are putative class members in a race discrimination class action filed on July 12, 2012 in the United States District Court for the Central District of California with respect to any race discrimination claims they have that are within the scope of the putative class action (see below).  On December 12, 2012, the

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EEOC issued a "for cause" finding related to certain allegations made by one complainant, who is the lead plaintiff in the above-referenced class action.

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. Plaintiffs are seeking statutory penalties, civil penalties, injunctive relief, and attorneys' fees and costs. On February 3, 2012, the court granted us motion to transfer venue to the County of Orange. On July 13, 2012, the Court granted the Company's motion to compel arbitration. PlaintiffsPlaintiffs' appealed and that appealoral agrument is pending.scheduled for September 23, 2013. Also, on July 18, 2012, we received notice that Plaintiffs filed charges with the National Labor Relations Board (NLRB) under Section 7 of the National Labor Relations Board Act based on the arbitration agreements Plaintiffs signed upon their hiring with us. Plaintiffs alleged that our arbitration agreements unlawfully compel employees to waive their rights to participate in class or representative actions against us. On September 20, 2012, the NLRB dismissed Plaintiffs claims.

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. Plaintiffs are seeking unpaid wages, civil and statutory penalties, restitution, injunctive relief, interest, and attorneys' fees and costs. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On March 28, 2012, the court entered an Order denying our motion to compel arbitration. On September 21, 2012, we filed a notice of appeal.appeal that is currently pending.

On July 12, 2012, a complaint was filed in United States District Court for the Central District of California on behalf of certain of our current and former African American retail store employees. We were named as a defendant. The complaint alleged various violations under 42 U.S.C. § 1981, including allegations that we engaged in disparate treatment discrimination of those African American current and former employees in promotion to management positions and against African American store management employees with respect to compensation and termination from 2008 through the present. Plaintiffs also alleged retaliation. Plaintiffs also sought reinstatement or instatement of Plaintiffs and class members to their alleged rightful employment positions, lost pay and benefits allegedly sustained by Plaintiffs and class members, compensatory damages for emotional distress, front pay, punitive damages, attorneys' fees, and interest. On May 8, 2013, we filed papers memorializing an amicable resolution to the case pending final court approval. The Settlement Agreement provides for a cash payment of $7.5

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million and also includes programmatic relief under which we agree to post open positions, implement new selection criteria and interview protocols, revamp itsour annual performance reviews and compensation structure, add regional human resources directors, implement more diversity and inclusion communications and training for field and corporate office employees, and enhance itsour investigations training and processes. We have also reflected itsour commitment to use diverse models in itsour marketing and to partnerships with organizations dedicated to the advancement and well-being of African Americans and other diverse groups. AOn June 12, 2013, the court granted preliminary approval of the settlement and in June 2013 we issued payment to the settlement administrator for $7.5 million. A hearing on final approval has been requestedscheduled for JuneNovember 18, 2013.

As of May 4,August 3, 2013, we have accrued $7.60.2 million for loss contingencies in connection with the litigation matters enumerated above, and certain other legal matters, which is included in accounts payable - other on the condensed consolidated balance sheet. Some of these contingency matters include or may include insurance recovery. We are vigorously defending the pending matters and will continue to evaluate itsour potential exposure and estimated costs as these matters progress. Future developments may require us to adjust the amount of this accrual, which, if increased, could have a material adverse effect on our results of operations or financial condition.

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, insurance may cover a portion of such losses. However, the outcome of these litigation matters cannot be accurately predicted and there may be existing matters or matters that arise for which we do not have insurance coverage or for which insurance provides only partial coverage. Such outcome could have a material adverse effect on our results of operations or financial condition.


Item 1A.    Risk Factors
There are no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2013.

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Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds
(a)None.
(b)None.
(c)Purchases of Equity Securities the Issuer and Affiliated Purchasers
Period
Total Number of
Shares Purchased (1)(2)
 
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 (1)
February 3, 2013 to March 2, 201375,100
 $2.98
 75,100
 $24,776,573
March 3, 2013 to April 6, 2013446,872
 $3.03
 400,000
 $23,565,675
April 7, 2013 to May 4, 2013731,549
 $3.01
 731,549
 $21,363,224
Period
Total Number of
Shares Purchased (1)
 
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 (1)
May 5, 2013 to June 1, 2013240,000
 $5.01
 240,000
 $20,159,672
June 2, 2013 to July 6, 20133,793,171
 $4.88
 3,793,171
 $1,637,881
July 7, 2013 to August 3, 2013337,597
 $5.02
 326,053
 $
 
(1)On February 1, 2013, our Company's Board of Directors authorized a program to repurchase up to $25.0 million of the outstanding shares of our Class A common stock, to be executed through open market or privately negotiated transactions. The timing and number of shares repurchased will bewas determined by the Company’s management based on its evaluation of market conditions and other factors. The repurchase program may be suspended or discontinued at any time.

Pursuant to this program, we repurchased 1,206,6494,359,224 shares of our Class A common stock during the firstsecond quarter of fiscal 2013, at a weighted average market price of $3.00$4.89 per share, for a total cost, including commissions, of approximately $3.6 million.$21.4 million, completing the stock repurchase program.

During Marchfiscal July 2013, we tendered 46,87211,544 shares of our Class A common stock upon restricted stock vesting to satisfy employee withholding tax obligations, for a total cost of approximately $0.2$0.1 million.

(2)Our Chief Executive Officer, John D. Goodman, purchased 218,256 shares during the first quarter of fiscal 2013, of our Class A common stock at a weighted average market price of $2.98 per share for a total cost of approximately $650,000. Mr. Goodman's purchases were made pursuant to his Employment Agreement. Mr. Goodman may be deemed an "affiliated purchaser" of the Company. The table set forth above does not included Mr. Goodman's purchases.


Item 3.         Defaults Upon Senior Securities
(a)None.
(b)None.

Item 4.         Mine Safety Disclosures
None.

Item 5.         Other Information
None.

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Item 6.         Exhibits
10.1*The Wet Seal, Inc. Severance and Change in Control Plan (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on April 11, 2013).
10.2*Employment Agreement Termination Agreement between our company and Steven H. Benrubi, dated April 8, 2013 (incorporated by reference to Exhibit 10.2 of our Current Report on Form 8-K filed on April 11, 2013).
10.3*Form of Performance Stock Unit Agreement (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on April 11, 2013).
10.4*Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.4 of our Current Report on Form 8-K filed on April 11, 2013).
10.5Settlement Agreement, dated May 8, 2013, between our company and Nicole Cogdell et al.
31.1Certification filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.132.1+Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.232.2+Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101+
Interactive data files (furnished electronically herewith pursuant to Rule 406T of Regulations S-T).

* Management contract or compensatory plan or arrangement.

+ This exhibit will not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to liability under 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 the Company specifically incorporates it by reference.

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SIGNATURES
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)
May 29,August 27, 2013By:/s/ John D. Goodman
  John D. Goodman
  Chief Executive Officer
May 29,August 27, 2013By:/s/ Steven H. Benrubi
  Steven H. Benrubi
  Executive Vice President and Chief Financial Officer


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