QuickLinks -- Click here to rapidly navigate through this document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/x/ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended November 3, 2001
or
| / / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-18632
THE WET SEAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of Incorporation) | | 33-0415940
(I.R.S. Employer Identification No.) |
26972 Burbank
Foothill Ranch, California
(Address of principal executive offices) |
|
92610
(Zip code) |
(949) 583-9029
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /
The number of shares outstanding of the registrant's Class A common stock, par value $.10 per share, and Class B common stock, par value $.10 per share, at December 17, 2001 were 16,631,325 and 3,309,138, respectively. There were no shares of Preferred Stock, par value $.01 per share, outstanding at December 17, 2001.
THE WET SEAL, INC.
FORM 10-Q
Index
| PART I. | | FINANCIAL INFORMATION | | |
Item 1. |
|
Financial Statements |
|
|
|
|
Consolidated balance sheets as of November 3, 2001 (unaudited) and February 3, 2001 |
|
3-4 |
|
|
Consolidated statements of income and comprehensive income (unaudited) for the 13 and 39 weeks ended November 3, 2001 and October 28, 2000 |
|
5 |
|
|
Consolidated statements of cash flows (unaudited) for the 39 weeks ended November 3, 2001 and October 28, 2000 |
|
6 |
|
|
Notes to consolidated financial statements |
|
7-8 |
Item 2. |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
9-15 |
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk |
|
15 |
PART II. |
|
OTHER INFORMATION |
|
16 |
|
|
SIGNATURE PAGE |
|
17 |
THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
| | November 3,
2001
| | February 3,
2001
| |
|---|
| | (unaudited)
| |
| |
|---|
| ASSETS | | | | | | | |
CURRENT ASSETS: |
|
|
|
|
|
|
|
| | Cash and cash equivalents | | $ | 32,035,000 | | $ | 30,122,000 | |
| | Short-term investments | | | 62,116,000 | | | 38,060,000 | |
| | Other receivables | | | 5,943,000 | | | 2,412,000 | |
| | Merchandise inventories | | | 40,517,000 | | | 30,102,000 | |
| | Prepaid expenses | | | 9,510,000 | | | 9,463,000 | |
| | Deferred tax charges | | | 1,094,000 | | | 1,094,000 | |
| | |
| |
| |
| | | Total current assets | | | 151,215,000 | | | 111,253,000 | |
| | |
| |
| |
| EQUIPMENT AND LEASEHOLD IMPROVEMENTS: | | | | | | | |
| | Leasehold improvements | | | 117,918,000 | | | 99,873,000 | |
| | Furniture, fixtures and equipment | | | 63,672,000 | | | 54,048,000 | |
| | Leasehold rights | | | 2,917,000 | | | 2,944,000 | |
| | |
| |
| |
| | | | 184,507,000 | | | 156,865,000 | |
| | Less accumulated depreciation | | | (95,183,000 | ) | | (85,483,000 | ) |
| | |
| |
| |
| | | Net equipment and leasehold improvements | | | 89,324,000 | | | 71,382,000 | |
| | |
| |
| |
LONG-TERM INVESTMENTS |
|
|
17,000,000 |
|
|
40,018,000 |
|
OTHER ASSETS: |
|
|
|
|
|
|
|
| | Deferred taxes and other assets | | | 14,915,000 | | | 14,541,000 | |
| | Goodwill, net of accumulated amortization of $1,681,000 and $1,386,000 as of November 3, 2001 and February 3, 2001, respectively | | | 6,422,000 | | | 6,717,000 | |
| | |
| |
| |
| | | Total other assets | | | 21,337,000 | | | 21,258,000 | |
| | |
| |
| |
| TOTAL ASSETS | | $ | 278,876,000 | | $ | 243,911,000 | |
| | |
| |
| |
See accompanying notes to consolidated financial statements
3
THE WET SEAL, INC.
CONSOLIDATED BALANCE SHEETS
| | November 3,
2001
| | February 3,
2001
| |
|---|
| | (unaudited)
| |
| |
|---|
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | |
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| | Accounts payable | | $ | 59,237,000 | | $ | 43,681,000 | |
| | Accrued liabilities | | | 18,744,000 | | | 17,811,000 | |
| | Income taxes payable | | | 911,000 | | | 5,548,000 | |
| | |
| |
| |
| | | Total current liabilities | | | 78,892,000 | | | 67,040,000 | |
| | |
| |
| |
LONG-TERM LIABILITIES: |
|
|
|
|
|
|
|
| | Deferred rent | | | 8,913,000 | | | 9,191,000 | |
| | Other long-term liabilities | | | 4,423,000 | | | 3,887,000 | |
| | |
| |
| |
| | | Total long-term liabilities | | | 13,336,000 | | | 13,078,000 | |
| | |
| |
| |
| | | Total liabilities | | | 92,228,000 | | | 80,118,000 | |
| | |
| |
| |
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY: |
|
|
|
|
|
|
|
| | Preferred Stock, $.01 par value, authorized 2,000,000 shares; none issued and outstanding | | | — | | | — | |
| | Common Stock, Class A, $.10 par value, authorized 60,000,000 shares; 17,772,725 and 16,855,319 shares issued and outstanding at November 3, 2001 and February 3, 2001, respectively | | | 1,777,000 | | | 1,685,000 | |
| | Common Stock, Class B Convertible, $.10 par value, authorized 10,000,000 shares; 4,142,138 and 4,368,998 shares issued and outstanding at November 3, 2001 and February 3, 2001, respectively | | | 414,000 | | | 437,000 | |
| | Paid-in capital | | | 74,987,000 | | | 67,951,000 | |
| | Retained earnings | | | 129,819,000 | | | 114,069,000 | |
| | Other comprehensive income | | | | | | | |
| | Treasury stock, 2,051,400 shares at cost | | | (20,349,000 | ) | | (20,349,000 | ) |
| | |
| |
| |
| | | Total stockholders' equity | | | 186,648,000 | | | 163,793,000 | |
| | |
| |
| |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 278,876,000 | | $ | 243,911,000 | |
| | |
| |
| |
See accompanying notes to consolidated financial statements
4
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
| | 13 Weeks Ended
| | 39 Weeks Ended
|
|---|
| | November 3,
2001
| | October 28,
2000
| | November 3,
2001
| | October 28,
2000
|
|---|
| SALES | | $ | 146,888,000 | | $ | 144,858,000 | | $ | 420,381,000 | | $ | 403,652,000 |
| COST OF SALES (including buying, distribution and occupancy costs) | | | 99,645,000 | | | 104,665,000 | | | 291,394,000 | | | 299,750,000 |
| | |
| |
| |
| |
|
| GROSS MARGIN | | | 47,243,000 | | | 40,193,000 | | | 128,987,000 | | | 103,902,000 |
| SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | | | 37,719,000 | | | 34,764,000 | | | 107,616,000 | | | 96,069,000 |
| | |
| |
| |
| |
|
| OPERATING INCOME | | | 9,524,000 | | | 5,429,000 | | | 21,371,000 | | | 7,833,000 |
| INTEREST INCOME, NET | | | 1,229,000 | | | 1,106,000 | | | 4,027,000 | | | 3,092,000 |
| | |
| |
| |
| |
|
| INCOME BEFORE PROVISION FOR INCOME TAXES | | | 10,753,000 | | | 6,535,000 | | | 25,398,000 | | | 10,925,000 |
| PROVISION FOR INCOME TAXES | | | 3,936,000 | | | 2,580,000 | | | 9,648,000 | | | 4,292,000 |
| | |
| |
| |
| |
|
| NET INCOME | | $ | 6,817,000 | | $ | 3,955,000 | | $ | 15,750,000 | | $ | 6,633,000 |
| | |
| |
| |
| |
|
| COMPREHENSIVE INCOME | | $ | 6,817,000 | | $ | 3,955,000 | | $ | 15,750,000 | | $ | 6,633,000 |
| | |
| |
| |
| |
|
| NET INCOME PER SHARE, BASIC | | $ | 0.34 | | $ | 0.21 | | $ | 0.80 | | $ | 0.35 |
| | |
| |
| |
| |
|
| NET INCOME PER SHARE, DILUTED | | $ | 0.34 | | $ | 0.21 | | $ | 0.78 | | $ | 0.35 |
| | |
| |
| |
| |
|
| WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC | | | 19,790,468 | | | 18,689,127 | | | 19,665,095 | | | 18,697,220 |
| | |
| |
| |
| |
|
| WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED | | | 20,289,605 | | | 19,036,665 | | | 20,241,939 | | | 18,980,366 |
| | |
| |
| |
| |
|
See accompanying notes to consolidated financial statements
5
THE WET SEAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| | 39 Weeks Ended
| |
|---|
| | November 3,
2001
| | October 28,
2000
| |
|---|
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
| | Net income | | $ | 15,750,000 | | $ | 6,633,000 | |
| | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| | | Depreciation and amortization | | | 15,713,000 | | | 15,550,000 | |
| | | Loss on disposal of equipment and leasehold improvements | | | 437,000 | | | 44,000 | |
| | | Changes in operating assets and liabilities: | | | | | | | |
| | | | Other receivables | | | (3,529,000 | ) | | 1,132,000 | |
| | | | Merchandise inventories | | | (10,415,000 | ) | | (8,994,000 | ) |
| | | | Prepaid expenses | | | (47,000 | ) | | — | |
| | | | Other assets | | | (373,000 | ) | | (345,000 | ) |
| | | | Accounts payable and accrued liabilities | | | 16,488,000 | | | 9,546,000 | |
| | | | Income taxes payable | | | (4,637,000 | ) | | (514,000 | ) |
| | | | Deferred rent | | | (279,000 | ) | | 532,000 | |
| | | | Other long-term liabilities | | | 536,000 | | | 656,000 | |
| | |
| |
| |
| | Net cash provided by operating activities | | | 29,644,000 | | | 24,240,000 | |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
| | Investment in equipment and leasehold improvements | | | (29,903,000 | ) | | (16,565,000 | ) |
| | Acquisition of store leases and store assets | | | (3,550,000 | ) | | — | |
| | Investment in marketable securities | | | (71,022,000 | ) | | (28,585,000 | ) |
| | Proceeds from sale of marketable securities | | | 69,640,000 | | | 19,409,000 | |
| | |
| |
| |
| | | Net cash used in investing activities | | | (34,835,000 | ) | | (25,741,000 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
| | Principal payments on long-term debt | | | — | | | (1,764,000 | ) |
| | Purchase of treasury stock | | | — | | | (290,000 | ) |
| | Proceeds from issuance of stock | | | 7,104,000 | | | 52,000 | |
| | |
| |
| |
| | | Net cash provided by (used in) financing activities | | | 7,104,000 | | | (2,002,000 | ) |
| | |
| |
| |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
1,913,000 |
|
|
(3,503,000 |
) |
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
30,122,000 |
|
|
44,921,000 |
|
| | |
| |
| |
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
32,035,000 |
|
$ |
41,418,000 |
|
| | |
| |
| |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
| | Cash paid during the period for: | | | | | | | |
| | | | Interest | | $ | — | | $ | 38,000 | |
| | | | Income taxes, net | | $ | 14,254,000 | | $ | 4,789,000 | |
See accompanying notes to consolidated financial statements
6
THE WET SEAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1—Basis of Presentation:
The information set forth in these consolidated financial statements is unaudited except for the February 3, 2001 balance sheet. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been included. The results of operations for the 13 and 39 weeks ended November 3, 2001 are not necessarily indicative of the results that may be expected for the year ending February 2, 2002 (fiscal 2001). For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report for the year ended February 3, 2001.
NOTE 2—Line of Credit and Loan Payable to Bank:
Under an unsecured revolving line-of-credit arrangement with Bank of America National Trust and Savings Association ("Bank of America"), the Company may borrow up to a maximum of $50,000,000 on a revolving basis through January 1, 2002. The cash borrowings under the arrangement bear interest at Bank of America's prime rate or, at the Company's option, LIBOR plus 1.5%. As of November 3, 2001, the Company had no borrowings outstanding under the credit arrangement.
The credit arrangement imposes quarterly and annual financial covenants requiring the Company to maintain certain financial ratios and achieve certain levels of annual income. In addition, the credit arrangement requires that Bank of America approve the payment of dividends and restricts the level of capital expenditures. At November 3, 2001, the Company was in compliance with these covenants.
NOTE 3—Net Income Per Share:
Net income per share, basic, is computed based on the weighted average number of shares of Class A and Class B common stock outstanding for the period.
Net income per share, diluted, is computed based on the weighted average number of shares of Class A and Class B common stock and potentially dilutive common stock equivalents outstanding for the period.
7
A reconciliation of the numerators and denominators used in basic and diluted net income per share is as follows:
| | Quarter Ended November 3, 2001
| | Quarter Ended October 28, 2000
| | Nine Months Ended November 3, 2001
| | Nine Months Ended October 28, 2000
|
|---|
| Net income | | $ | 6,817,000 | | $ | 3,955,000 | | $ | 15,750,000 | | $ | 6,633,000 |
| | |
| |
| |
| |
|
| Weighted average number of shares of common stock: | | | | | | | | | | | | |
| | Basic | | | 19,790,468 | | | 18,689,127 | | | 19,665,095 | | | 18,697,220 |
| | Effect of dilutive common stock equivalents | | | 499,137 | | | 347,538 | | | 576,844 | | | 283,146 |
| | |
| |
| |
| |
|
| | Diluted | | | 20,289,605 | | | 19,036,665 | | | 20,241,939 | | | 18,980,366 |
| | |
| |
| |
| |
|
| Net income per share: | | | | | | | | | | | | |
| | Basic | | $ | 0.34 | | $ | 0.21 | | $ | 0.80 | | $ | 0.35 |
| | Effect of dilutive common stock equivalents | | | 0.00 | | | 0.00 | | | 0.02 | | | 0.00 |
| | |
| |
| |
| |
|
| | Diluted | | $ | 0.34 | | $ | 0.21 | | $ | 0.78 | | $ | 0.35 |
| | |
| |
| |
| |
|
The Company effected a three-for-two stock split on July 24, 2001 on both the Class A and Class B common stock. Earnings per share and share outstanding amounts have been restated to give retroactive effect to the stock split in these financial statements.
NOTE 4—Treasury Stock:
The Company's Board of Directors authorized the repurchase of up to 20% of the outstanding shares of the Company's Class A common stock. As of November 3, 2001, 2,051,400 shares (split adjusted) had been repurchased at a cost of $20,349,000. Such repurchased shares are reflected as Treasury Stock in the Company's consolidated balance sheets. There were no shares repurchased in the three or nine months ended November 3, 2001.
8
Item 2—Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's consolidated financial statements and the notes thereto.
We are one of the leading national mall-based specialty retailers focusing primarily on young women's apparel, and currently operate 583 retail stores in 44 states, Washington D.C. and Puerto Rico. Of the 583 stores, 401 are Wet Seal stores and 67 are Contempo Casuals stores, both catering to the junior customer; 85 are Arden B. stores, focusing on a fashionable, sophisticated, contemporary customer and 30 are Zutopia stores, targeting the 'tween' customer. We published our first catalog in 1998 and launched our e-commerce web-site in 1999. In fiscal 2001, we do not plan to mail any catalogs, but will continue our e-commerce initiatives. We discontinued Limbo Lounge as a retail concept at the end of fiscal 2000.
On March 25, 2001, we acquired the leases, merchandise inventory and furniture and fixtures for 18 Zutopia stores from Gymboree, Inc. The purchase price of $3,625,000 was allocated to inventory, leasehold improvements and furniture, fixtures and equipment. Zutopia is a 'tween' retail concept which caters to the female customer ages five to 12. We continue to operate the acquired store locations under the Zutopia name.
As of November 3, 2001, we operated 568 stores compared to 568 stores as of October 28, 2000, the end of the third quarter of fiscal 2000. We opened 57 stores, acquired 18 stores and closed 75 stores for the period from October 29, 2000 to November 3, 2001.
Results of Operations
Quarter Ended November 3, 2001 Compared to Quarter Ended October 28, 2000
Sales for the quarter ended November 3, 2001 were $146.9 million compared to sales for the quarter ended October 28, 2000 of $144.9 million, an increase of $2.0 million or 1.4%. The increase in sales was due primarily to the increase in comparable store sales of 4.4% for the third quarter of fiscal 2001. Comparable store sales are defined as sales in stores that were open throughout the full prior 14 months. Management believes that the comparable store sales increase was primarily attributable to generally favorable customer reaction to our product offerings and merchandise assortment.
Cost of sales (including buying, distribution and occupancy costs) was $99.6 million for the quarter ended November 3, 2001 compared to $104.7 million for the quarter ended October 28, 2000, a decrease of $5.1 million. This decrease was due primarily to a decrease in the cost of merchandise. As a percentage of sales, cost of sales was 67.8% for the quarter ended November 3, 2001 compared to 72.3% for the quarter ended October 28, 2000, a decrease of 4.5%. This decrease related primarily to a decrease in the cost of merchandise due to an increase in the initial mark up offset partially by an increase in markdowns. To a lesser extent, the decrease in cost of sales as a percentage of sales was also due to decreases in occupancy and distribution costs as a percentage of sales due to leverage from the increase in comparable store sales. Slightly offsetting these decreases was an increase in buying costs and field supervision wages as a percentage of sales due to additional headcount added to support our growth.
Selling, general and administrative expenses were $37.7 million for the quarter ended November 3, 2001 compared to $34.8 million for the quarter ended October 28, 2000, an increase of $2.9 million. This increase was primarily due to the increase in total sales. As a percentage of sales, selling, general and administrative expenses was 25.7% for the quarter ended November 3, 2001 compared to 24.0% for the quarter ended October 28, 2000, an increase of 1.7%. The increase as a percentage of sales was primarily related to an increase in print media advertising, an increase in merchandise delivery costs
9
and an increase in selling wages over the prior year. This increase was offset partially by a decrease in executive wages due to a prior year separation payment to our former president.
Interest income, net, was $1.2 million for the quarter ended November 3, 2001 compared to $1.1 million for the quarter ended October 28, 2000, an increase of $100,000. This increase was due primarily to an increase in the average cash balance invested during the quarter offset by lower interest rates.
Income tax provision was $3.9 million for the quarter ended November 3, 2001 compared to $2.6 million for the quarter ended October 28, 2000. The effective income tax rate was 37.0% for the quarter ended November 3, 2001 compared to 39.0% for the quarter ended October 28, 2000. The effective tax rate decreased due to the apportionment among various states.
Based on the factors noted above, net income was $6.8 million for the quarter ended November 3, 2001 compared to $4.0 million for the quarter ended October 28, 2000, an increase of $2.8 million. As a percentage of sales, net income was 4.6% for the quarter ended November 3, 2001 compared to 2.7% for the quarter ended October 28, 2000.
Nine Months Ended November 3, 2001 Compared to Nine Months Ended October 28, 2000
Sales for the nine months ended November 3, 2001 were $420.4 million compared to sales for the nine months ended October 28, 2000 of $403.7 million, an increase of $16.7 million or 4.1%. The increase in sales was attributable to the increase in comparable store sales of 3.8% and the opening of 32 new stores year to date. The increase was slightly offset by the closing of 34 stores during the year.
Cost of sales (including buying, distribution and occupancy costs) was $291.4 million for the nine months ended November 3, 2001 compared to $299.8 million for the nine months ended October 28, 2000, a decrease of $8.4 million. The decrease was due primarily to a decrease in the cost of merchandise. As a percentage of sales, cost of sales was 69.3% for the nine months ended November 3, 2001 compared to 74.3% for the nine months ended October 28, 2000, a decrease of 5.0%. This decrease related primarily to a decrease in the cost of merchandise due to an increase in the initial mark up and offset by a slight increase in markdowns. To a lesser extent, the decrease in cost of sales as a percentage of sales was also due to decreases in occupancy and distribution costs as a percentage of sales due to leverage from the increase in comparable store sales. Slightly offsetting these decreases was an increase in buying costs as a percentage of sales due to additional headcount added to support our growth.
Selling, general and administrative expenses were $107.6 million for the nine months ended November 3, 2001 compared to $96.1 million for the nine months ended October 28, 2000, an increase of $11.5 million. This increase was primarily due to the increase in total sales. As a percentage of sales, selling, general and administrative expenses was 25.6% for the nine months ended November 3, 2001 compared to 23.8% for the nine months ended October 28, 2000, an increase of 1.8%. The increase as a percentage of sales was primarily related to an increase in print media advertising, an increase in merchandise delivery costs and an increase selling wages over the prior year. This increase was offset partially by a decrease in executive wages due to a prior year separation payment to our former president.
Interest income, net, was $4.0 million for the nine months ended November 3, 2001 compared to $3.1 million for the nine months ended October 28, 2000, an increase of $900,000. This increase was due primarily to an increase in the average cash balance invested during the year offset by lower interest rates.
Income tax provision was $9.6 million for the nine months ended November 3, 2001 compared to $4.3 million for the nine months ended October 28, 2000. The effective income tax rate was 38.0% for
10
the nine months ended November 3, 2001 compared to 39.0% for the nine months ended October 28, 2000. The effective tax rate decreased due to the apportionment among various states.
Based on the factors noted above, net income was $15.8 million for the nine months ended November 3, 2001 compared to $6.6 million for the nine months ended October 28, 2000, an increase of $9.2 million. As a percentage of sales, net income was 3.8% in fiscal 2001 compared to 1.6% in fiscal 2000.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended November 3, 2001 was $29.6 million. Working capital at November 3, 2001 was $72.3 million compared to $44.2 million at February 3, 2001, an increase of $28.1 million. This increase was primarily due to an increase in cash, cash equivalents and short-term investments of $26.0 million. In fiscal 2001 we have invested less cash in long-term investments. The increase in working capital was also due to the increase in inventory. Inventory was $40.5 million at November 3, 2001 compared to $30.1 million at February 3, 2001, an increase of $10.4 million. The increase was due to the net increase of sixteen stores, and the seasonal nature of the business; inventory levels are typically at a low point at fiscal year end. These increases were offset to some extent by the increase in accounts payable and accrued liabilities. The increase in accounts payable and accrued liabilities of $16.5 million compared to February 3, 2001 was primarily due to the increase in inventory and additional payables related to construction of new stores and remodeling of existing stores.
For the nine months ended November 3, 2001, the Company invested $33.5 million in equipment and leasehold improvements, including $3.6 million for the acquisition of Zutopia, compared to $16.6 million in the same period of the prior year. For the nine months ended November 3, 2001, the Company opened 32 stores, remodeled 28 stores, converted 147 Contempo Casual stores to Wet Seal Stores and acquired 18 stores. In the nine months ended October 28, 2000, the Company opened 34 stores and remodeled 17 stores and did not acquire any stores. The Company currently estimates that the capital expenditures for the remainder of fiscal 2001 will be approximately $11.0 million. These planned expenditures relate primarily to new store openings and remodel construction.
In September 1998, our Board of Directors authorized the repurchase of up to 20% of the outstanding shares of the Company's Class A common stock. As of November 3, 2001, 2,051,400 shares (split adjusted) had been repurchased at a cost of $20,349,000. Such repurchased shares are reflected as treasury stock in the accompanying consolidated financial statements.
We have an unsecured revolving line of credit arrangement with Bank of America National Trust and Savings Association ("Bank of America") in an aggregate principal amount of $50,000,000, maturing on January 1, 2002. At November 3, 2001, there were no outstanding borrowings under the credit arrangement and we were in compliance with all terms and covenants of the credit arrangement.
We invest our excess funds primarily in a short-term investment grade money market fund, investment grade commercial paper and U.S. Treasury and Agency obligations. Management believes our working capital and cash flows from operating activities will be sufficient to meet our operating and capital requirements in the foreseeable future.
Seasonality and Quarterly Operating Results
Our business is seasonal by nature with the Christmas season (beginning the week of Thanksgiving and ending the first Saturday after Christmas) and the back-to-school season (beginning the last week of July and ending the first week of September), historically accounting for the largest percentage of sales volume. In our three fiscal years ended February 3, 2001, the Christmas and back-to-school seasons together accounted for an average of approximately 31% of our annual sales, after adjusting
11
for sales increases related to new stores. We do not believe that inflation has had a material effect on the results of operations during the past three years. However, there can be no assurance that our business will not be affected by inflation in the future.
Statement Regarding Forward Looking Disclosure and Risk Factors
Certain sections of this Quarterly Report on Form 10-Q, including the preceding "Management's Discussion and Analysis of Financial Condition and Results of Operations", may contain various forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events.
Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as "believes," "plans," "anticipates," "estimates," "expects" or similar expressions. In addition, any statements concerning future financial performance, ongoing business 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 our company, economic and market factors and the industry in which we do business, among other things. These statements are not guaranties 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 and future events and actions to differ materially from such forward-looking statements, include, but are not limited to those discussed below and elsewhere in this Quarterly Report on Form 10-Q.
We may be unable to sustain comparable store sales growth.
Growth in our business depends, in part, on our ability to sustain comparable store sales growth. We use the term "comparable store sales" to refer to sales in stores that were open for at least 14 full fiscal months. A variety of factors effect comparable store sales results, including changes in fashion trends, changes in our merchandise mix, calendar shifts of holiday periods, actions of competitors, weather conditions and general economic conditions. Our comparable store sales results have fluctuated significantly in the past and we cannot assure you that comparable store sales will not decline in the future.
Our profitability depends on our ability to anticipate and react to new trends.
Our profitability depends largely on our ability to anticipate the changing fashion tastes of our customers and to respond to those changing tastes in a timely manner. The fashion tastes of our customers change frequently and if we fail to anticipate, identify or react appropriately to changing styles, trends or brand preferences of our customers, we may experience lower sales, excess inventories and more frequent markdowns, which could have a material adverse effect on our business. In addition, if we misjudge fashion trends, our image with our customers may be significantly impaired and our customers might cease to purchase additional merchandise from us in the future. This is particularly acute because we rely on a limited demographic for a large percentage of our sales.
Our sales and profitability also depend upon the continued demand by our customers for fashionable, casual apparel. Demand for our merchandise could be negatively affected by shifts in consumer discretionary spending to other goods such as electronic equipment, computers and music, for example. If the demand for apparel and related merchandise were to decline, our financial results would be adversely affected by any resulting decline in sales.
12
We compete with other retailers for sales and locations.
The young women's retail apparel industry is highly competitive. Fashion, quality, price, location, in-store environment and service are the principal factors in competing successfully in the retail industry. We compete for sales with specialty apparel retailers, catalog retailers, department stores and other apparel retailers. In addition, we compete for favorable site locations and lease terms in shopping malls. Some of our competitors have more resources than our company. We cannot assure you that we will be able to compete effectively against these other retailers in the future.
Our business is affected by local, regional and national economic conditions.
Our business is sensitive to consumer spending patterns and preferences. Various economic conditions affect the level of spending on the merchandise we offer, including general business conditions, interest rates, taxation, the availability of consumer credit and consumer confidence in future economic conditions. Our growth, sales and profitability may be adversely affected by unfavorable occurrences in these economic conditions on a local, regional or national level. We are especially affected by economic conditions in California, where approximately 19% of our stores are located.
Most of our stores are located in regional shopping malls. We derive sales, in part, from the high volume of traffic in these malls. The inability of mall "anchor" tenants and other area attractions to generate consumer traffic around our stores or the decline in popularity of malls as shopping destinations would reduce our sales volume.
Our success depends upon the performance of our senior management and our ability to attract and retain key management personnel.
Our company's success depends to a significant extent upon the performance of our senior management, particularly personnel engaged in merchandising and store operations. Our success also depends, in part, on our ability to identify, hire and retain additional key management personnel. Competition for qualified personnel in the retail apparel industry is intense and we cannot assure you that we will be able to identify, hire or retain the key personnel necessary to grow and operate our business as currently contemplated.
Increases in Federal and state minimum wage laws could increase our expenses.
Statutory increases in Federal and state minimum wages could adversely effect our profitability by increasing our expenses. Recently, California, Massachusetts and Washington each increased their state minimum wages above the Federal minimum. We operated a total of 130 stores in those states as of November 3, 2001. The recent state increases and any other future Federal or state increases could raise minimum wages above the current wages of some of our employees, and competitive factors could require us to make corresponding increases in employee wage rates. Increases in our wage rates increase our expenses, which can adversely effect our results of operations.
We must increase our regional and demographic scope to continue the growth of our business.
We rely on a relatively narrow demographic and a concentration of stores in particular geographic regions for a significant percentage of our sales. We believe we need to increase our demographic and geographic scope to continue our growth. As our operations grow, there will be increasing strains on our resources and we could experience difficulties enhancing our distribution, financial and operating systems. There can be no assurance that we will be able to expand, that any expansion will be profitable or that we will be able to manage our expansion effectively.
Our company has historically expanded by opening new stores, remodeling existing stores and acquiring other businesses that complement and enhance our operations. From time to time we have
13
created new retail concepts such as Arden B. There can be no assurance that these new fashion businesses will gain consumer acceptance or ultimately be successful. Our ability to open stores and the performance of newly opened stores depends upon several factors, including among others, our ability to:
- •
- locate and obtain favorable store sites;
- •
- negotiate acceptable lease terms;
- •
- obtain adequate supplies of merchandise; and
- •
- hire and train qualified management level and other employees.
The success of any acquisition depends on our ability to integrate the new business, its management, systems and relationships into our company. This integration is very difficult and may not be successful.
Our business is seasonal in nature.
The retail apparel industry is highly seasonal. We generate our highest level of sales during the Christmas season, which begins the week of Thanksgiving and ends the first Saturday after Christmas, and the "back to school" season, which begins the last week of July and ends the first week of September. Our profitability depends, to a significant degree, on the sales generated during these peak periods. Any decrease in sales or margins during these periods, whether as a result of then current economic conditions, poor weather or other factors beyond our control, could have a material adverse effect on our company.
We depend on key vendors to supply us with merchandise for our stores.
Our business depends on our ability to purchase current season apparel in sufficient quantities at competitive prices. The inability or failure of our key vendors to supply us with adequate quantities of desired merchandise, the loss of one or more key vendors or a material change in our current purchase terms could adversely affect our business. We have no long term purchase contracts or other contractual assurances of continued supply, pricing or access to new products. We cannot assure you that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future.
We depend on a single distribution facility.
Our distribution functions for all of our stores are handled from a single, leased facility in Foothill Ranch, California. Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures or other unforeseen causes could delay or impair our ability to distribute merchandise to our stores which could cause our sales to decline.
We do not authenticate the license rights of our suppliers.
We purchase merchandise from a number of vendors who hold manufacturing and distribution rights under the terms of license agreements. We generally rely upon each vendor's representation concerning those manufacturing and distribution rights and do not independently verify whether each vendor legally holds adequate rights to the licensed properties they are manufacturing or distributing. If we acquire unlicensed merchandise, we could be obligated to remove it from our stores, incur costs associated with destruction of the merchandise if the vendor is unwilling or unable to reimburse us, and be subject to liability under various civil and criminal causes of action. The occurrence of any of these events could adversely effect our financial condition and results of operations.
14
We experience business risks as a result of the internet.
We compete with catalog and internet businesses that handle similar lines of merchandise. These competitors have certain advantages, including the inapplicability of sales tax and the absence of retail real estate and related costs. As a result internet sales may result in increased price competition and decreased margins.
We operate an internet site where customers can purchase our merchandise on-line at "www.wetseal.com". This internet address is provided for informational purposes only and is not intended to be usable as a hyperlink. The information at this internet address is not a part of this filing. Our internet operations are subject to numerous risks, including:
- •
- reliance on third party computer and hardware providers;
- •
- diversion of sales from our retail stores; and
- •
- online security breaches and/or credit card fraud.
Our inability to effectively address these factors could prohibit the profitability of our internet business, and we cannot assure you that we will be able to compete successfully through our internet business.
New Accounting Pronouncements
In June 2001, the FASB approved SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of interest method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001. The amortization of existing goodwill will cease on February 2, 2002. Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. These standards will be adopted in fiscal 2002. We are currently evaluating the impact that these standards will have on our financial statements.
Item 3—Quantitative and Qualitative Disclosures About Market Risk
To the extent we borrow under our credit facility, we would be exposed to market risk related to changes in interest rates. At November 3, 2001 no borrowings were outstanding under the credit facility. We are not a party with respect to derivative financial instruments.
15
PART II—OTHER INFORMATION
Item 1—Legal Proceedings.
We are not party to any material legal proceedings, other than ordinary routine litigation incidental to our business.
Item 2—Changes in Securities.
None
Item 3—Defaults Upon Senior Securities.
Not Applicable
Item 4—Submission of Matters to a Vote of Security Holders.
None
Item 5—Other Information.
None
Item 6(a)—Exhibits.
None
Item 6(b)—Reports on Form 8-K.
On August 28, 2001 we filed a current report on Form 8-K reporting the resignation of our President and Chief Operating Officer.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | The Wet Seal, Inc.
(Registrant) |
Date: December 17, 2001 |
|
/s/ KATHY BRONSTEIN
Kathy Bronstein
Vice Chairman and Chief Executive Officer and Director (Principal Executive Officer) |
Date: December 17, 2001 |
|
/s/ WALTER PARKS
Walter Parks
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
17
QuickLinks
THE WET SEAL, INC. FORM 10-Q IndexTHE WET SEAL, INC. CONSOLIDATED BALANCE SHEETSTHE WET SEAL, INC. CONSOLIDATED BALANCE SHEETSTHE WET SEAL, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)THE WET SEAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)THE WET SEAL, INC. NOTES TO FINANCIAL STATEMENTSPART II—OTHER INFORMATIONSIGNATURES
