Summary of Significant Accounting Policies | 3 Months Ended |
3-May-14 |
Accounting Policies [Abstract] | ' |
Summary of Significant Accounting Policies | ' |
Summary of Significant Accounting Policies |
Basis of Presentation |
The information set forth in these condensed consolidated financial statements as of and for the 13 weeks ended May 3, 2014, and May 4, 2013 (collectively, the “Interim Financial Statements”), is 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 1, 2014. All references in this Quarterly Report on Form 10-Q to “fiscal 2013” and “fiscal 2014” mean the fiscal years ended February 1, 2014 and ending January 31, 2015, respectively. |
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 January 31, 2015. |
On April 24, 2014, the Company committed to a plan to wind down the operations of its Arden B brand (the "Plan") due to the long-term financial under-performance of the business. Arden B currently operates 54 mall based stores and an e-commerce website. As part of the Plan, the Company expects that 31 Arden B locations will transition to Wet Seal Plus merchandise and that the remaining 23 locations will transition from Arden B to Wet Seal merchandise. Where permissible, the Company intends that Arden B locations will be refreshed with either Wet Seal or Wet Seal Plus signage. The Company expects to complete this transition by the start of the back-to-school selling season in late July 2014. The Company further expects that, through lease expirations and the exercise of early termination provisions, the Company will close 17 of the current Arden B locations through the remainder of fiscal 2014 and 9 Arden B locations in fiscal 2015. For the interim period while Arden B locations remain open, the stores will offer Wet Seal or Wet Seal Plus merchandise, as noted above. As of May 3, 2014, the Company has evaluated the applicable accounting standards guidance for discontinued operations due to the wind down of the Arden B operations and has concluded that discontinued operations presentation is not appropriate at this time. However, the Company will continue to evaluate this throughout fiscal 2014. |
In fiscal 2013 and the first quarter of fiscal 2014, the Company incurred net losses of $38.4 million and $21.8 million and negative cash flow from operations of $17.6 million and $14.5 million, respectively. As of May 3, 2014, the Company had cash and cash equivalents and short-term investments of $54.5 million and the Company increased its liquidity in March 2014 through the senior convertible notes placement described in Note 4, "Senior Convertible Notes and Warrants." In addition, the Company has a $35.0 million senior revolving credit facility with $29.6 million of availability as of May 3, 2014. Including cash and cash equivalents, short-term investments and availability on the Company’s senior revolving credit facility, the Company’s total available liquidity as of May 3, 2014 was $84.1 million. The Company believes it has sufficient liquidity for fiscal 2014. However, if the Company continues to experience negative cash flow from operations, it will need to continue to rely on its cash reserves to fund its business or seek additional capital. There can be no assurance that any additional equity or debt financing would be available to the Company, or if available, that such financing would be on terms acceptable to the Company. Accordingly, if the Company's business does not generate sufficient cash flow from operations to fund its working capital needs and planned capital expenditures, and its cash reserves are depleted, the Company may need to take various actions, such as down-sizing, which could include exit costs, or reducing or delaying capital expenditures, strategic investments or other actions, and the Company's business could be materially and adversely affected. |
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 commitment to the Plan on April 24, 2014 to wind down the operations of its Arden B brand, which occurred during the Company's quarterly evaluation of the carrying value of its long-lived assets, was an event indicating the carrying value of the long-lived assets for the Arden B locations and website may not be recoverable. |
The Company's evaluations during the 13 weeks ended May 3, 2014, and May 4, 2013 included impairment testing of 41 and 30 stores and resulted in 31 and 7 stores being impaired, respectively, as their projected future cash flows were not sufficient to recover the net carrying value of their assets. Due to the Company's plan to wind down the Arden B brand, it tested all Arden B stores with carrying value and the corporate assets associated with the Arden B website, which was also impaired as of May 3, 2014. 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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| 13 Weeks Ended |
| May 3, 2014 | | May 4, 2013 |
Aggregate carrying value of all long-lived assets impaired | $ | 7,441 | | | $ | 2,314 | |
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Less: Impairment charges - stores | 6,934 | | | 1,596 | |
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Impairment charges - corporate | 384 | | | — | |
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Aggregate fair value of all long-lived assets impaired | $ | 123 | | | $ | 718 | |
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Number of stores with asset impairment | 31 | | | 7 | |
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Of the 10 stores that were tested and not determined to be impaired during the 13 weeks ended May 3, 2014, 7 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. Of the $7.3 million in impairment charges for the 13 Weeks Ended May 3, 2014, $3.2 million was for Arden B stores and the Arden B website. |
As noted above, the Company considers the potential 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 the 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. |
Warrants for Common Stock and Embedded Derivatives |
The Company’s common stock warrants and embedded derivatives have been bifurcated from the debt host and are classified as liabilities on the condensed consolidated balance sheet. The Company records the warrants and embedded derivatives liabilities at fair value and adjusts the carrying value of the common stock warrants and embedded derivatives to their estimated fair value at each reporting date with the increases or decreases in the fair value of such warrants and derivatives at each reporting date, recorded as a gain or (loss) in the consolidated statements of operations. Refer to Note 4, "Senior Convertible Notes and Warrants" and Note 5, "Fair Value Measurements and Disclosures." |
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 income tax benefits until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets. The Company remains in a cumulative three-year operating loss position and realization of its deferred income tax assets is not deemed to be more likely than not. Prospectively, as the Company continues to evaluate available evidence, it is possible that the Company may deem some or all of its deferred income tax assets to be realizable. |
The Company has approximately $165.0 million of federal NOLs available to offset taxable income in fiscal 2014 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code. The Company's effective tax rate for the 13 weeks ended May 3, 2014, was approximately negative 0.5% despite its net loss. This effective rate is due to certain state income taxes for fiscal 2014 that are not based on consolidated net income. The Company expects a negative 0.6% effective income tax rate for fiscal 2014, although a number of factors could cause our actual effective tax rate for fiscal 2014 to differ from this expected tax rate. |
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 loss. The Company's comprehensive loss for the 13 weeks ended May 3, 2014, and May 4, 2013 was equal to the Company's net loss. |
Recent Accounting Pronouncements |
In March 2014, the Financial Accounting Standards Board (“FASB”) issued amended guidance on various glossary terms, covering a wide range of topics in the accounting standards codification. The amendments represent changes to clarify the master glossary, consolidate multiple instances of the same term into a single definition, or make minor improvements to the master glossary that are not expected to result in substantive changes to the application of existing guidance. The Company adopted this guidance, which did not impact its condensed consolidated financial statements. |
In April 2014, the FASB issued amended guidance on the presentation of financial statements and reporting discontinued operations and disclosures of disposals of components of an entity within property, plant and equipment. This guidance amends the definition of a discontinued operation and requires entities to disclose additional information about disposal transactions that do not meet the discontinued-operations criteria. The effective date is for disposals that occur in annual periods (and interim periods therein) beginning on or after December 15, 2014. Early adoption is permitted. Pending further analysis of the Arden B brand wind down, the Company may elect early adoption of this guidance. |