Seal123 (WTSL) 10-Q 2012 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

    x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended July 28, 2012

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)

Delaware	33-0415940
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
26972 Burbank, Foothill Ranch, CA	92610
(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  x    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  x    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:	x
Non-accelerated filer:	¨  (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  x

The number of shares outstanding of the registrant’s Class A common stock, par value $0.10 per share, at August 20, 2012, was 89,584,244. There were no shares outstanding of the registrant’s Class B common stock, par value $0.10 per share, at August 20, 2012.

THE WET SEAL, INC.

FORM 10-Q

Table of Contents

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets (Unaudited) as of July 28, 2012, January  28, 2012, and July 30, 2011		2
	Condensed Consolidated Statements of Operations (Unaudited) for the 13 and 26 Weeks Ended July 28, 2012, and July 30, 2011		3
	Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) for the 13 and 26 Weeks Ended July 28, 2012, and July 30, 2011		4
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the 26 Weeks Ended July 28, 2012, and July 30, 2011		5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 26 Weeks Ended July 28, 2012, and July 30, 2011		7
	Notes to Condensed Consolidated Financial Statements (Unaudited)		8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		35
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		35
Item 1A.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3.	Defaults Upon Senior Securities		38
Item 4.	Mine Safety Disclosures		38
Item 5.	Other Information		38
Item 6.	Exhibits		39
SIGNATURES			40
EXHIBIT 10.1
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

1

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

THE WET SEAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

	July 28, 2012			January 28, 2012			July 30, 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	146,470		$	157,185		$	109,566
Short-term investments		—			—			38,230
Income tax receivables		660			200			—
Other receivables		1,744			1,445			2,540
Merchandise inventories		41,479			31,834			43,176
Prepaid expenses and other current assets		6,363			4,570			15,080
Deferred tax assets		20,133			20,133			19,649
Total current assets		216,849			215,367			228,241
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements		109,142			123,066			120,416
Furniture, fixtures and equipment		67,812			79,159			79,334
		176,954			202,225			199,750
Less accumulated depreciation and amortization		(97,080	)		(113,901	)		(106,586	)
Net equipment and leasehold improvements		79,874			88,324			93,164
OTHER ASSETS:
Deferred tax assets		31,081			23,780			27,516
Other assets		3,034			3,062			3,034
Total other assets		34,115			26,842			30,550
TOTAL ASSETS	$	330,838		$	330,533		$	351,955
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable – merchandise	$	24,738		$	18,520		$	29,287
Accounts payable – other		11,828			8,269			14,221
Accrued liabilities		26,112			25,096			26,248
Current portion of deferred rent		3,018			2,561			3,435
Total current liabilities		65,696			54,446			73,191
LONG-TERM LIABILITIES:
Deferred rent		33,068			33,091			31,800
Other long-term liabilities		1,855			1,924			1,700
Total long-term liabilities		34,923			35,015			33,500
Total liabilities		100,619			89,461			106,691
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS’ EQUITY:
Common stock, Class A, $0.10 par value, authorized 300,000,000 shares; 90,840,928 shares issued and 89,595,248 outstanding at July 28, 2012; 90,660,347 shares issued and 90,419,469 shares outstanding at January 28, 2012; and 114,742,482 shares issued and 92,826,224 shares outstanding at July 30, 2011		9,084			9,066			11,474
Common stock, Class B convertible, $0.10 par value, authorized 10,000,000 shares; no shares issued and outstanding		—			—			—
Paid-in capital		240,993			239,000			325,710
Accumulated deficit		(18,892	)		(6,250	)		(11,121	)
Treasury stock, 1,245,680 shares, 240,878 shares, and 21,916,258 shares, at cost, at July 28, 2012, January 28, 2012, and July 30, 2011, respectively		(962	)		(740	)		(81,086	)
Accumulated other comprehensive (loss ) income		(4	)		(4	)		287
Total stockholders’ equity		230,219			241,072			245,264
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	330,838		$	330,533		$	351,955

See notes to condensed consolidated financial statements.

2

THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

	13 Weeks Ended						26 Weeks Ended
	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
Net sales	$	135,261		$	148,770		$	283,206		$	304,810
Cost of sales		104,459			102,693			208,801			205,288
Gross margin		30,802			46,077			74,405			99,522
Selling, general, and administrative expenses		41,372			41,695			81,810			81,555
Asset impairment		8,973			1,057			12,579			1,316
Operating (loss) income		(19,543	)		3,325			(19,984	)		16,651
Interest income		38			66			76			138
Interest expense		(46	)		(44	)		(94	)		(87	)
Interest (expense) income, net		(8	)		22			(18	)		51
(Loss) income before (benefit) provision for income taxes		(19,551	)		3,347			(20,002	)		16,702
(Benefit) provision for income taxes		(7,182	)		1,149			(7,360	)		6,491
Net (loss) income	$	(12,369	)	$	2,198		$	(12,642	)	$	10,211
Net (loss) income per share, basic	$	(0.14	)	$	0.02		$	(0.14	)	$	0.10
Net (loss) income per share, diluted	$	(0.14	)	$	0.02		$	(0.14	)	$	0.10
Weighted-average shares outstanding, basic		88,585,063			95,731,926			88,536,020			97,324,336
Weighted-average shares outstanding, diluted		88,585,063			95,835,044			88,536,020			97,399,349

See notes to condensed consolidated financial statements.

3

THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(In thousands)

(Unaudited)

	13 Weeks Ended						26 Weeks Ended
	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
Net (loss) income	$	(12,369	)	$	2,198		$	(12,642	)	$	10,211
Other comprehensive loss:
Amortization of actuarial gain under Supplemental Employee Retirement Plan		—			(1	)		—			(3	)
Total other comprehensive loss		—			(1	)		—			(3	)
Comprehensive (loss) income	$	(12,369	)	$	2,197		$	(12,642	)	$	10,208

See notes to condensed consolidated financial statements.

4

THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

	Common Stock								Paid-In Capital						Treasury			Accumulated Other Comprehensive			Total Stockholders’
	Class A				Class B							Accumulated
	Shares		Par Value		Shares		Par Value					Deficit			Stock			Loss			Equity
Balance at January 28, 2012		90,660,347	$	9,066		—	$	—	$	239,000		$	(6,250	)	$	(740	)	$	(4	)	$	241,072
Net loss		—		—		—		—		—			(12,642	)		—			—			(12,642	)
Stock issued pursuant to long-term incentive plans		174,580		17		—		—		(17	)		—			—			—			—
Stock-based compensation		—		—		—		—		1,992			—			—			—			1,992
Exercise of stock options		6,001		1		—		—		18			—			—			—			19
Repurchase of common stock		—		—		—		—		—			—			(222	)		—			(222	)
Balance at July 28, 2012		90,840,928	$	9,084		—	$	—	$	240,993		$	(18,892	)	$	(962	)	$	(4	)	$	230,219

See notes to condensed consolidated financial statements.

5

THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

	Common Stock								Paid-In			Accumulated			Treasury			Accumulated Other Comprehensive			Total Stockholders’
	Class A				Class B
	Shares		Par Value		Shares		Par Value		Capital			Deficit			Stock			Income			Equity
Balance at January 29, 2011		113,736,844	$	11,374		—	$	—	$	323,324		$	(21,332	)	$	(37,963	)	$	290		$	275,693
Net income		—		—		—		—		—			10,211			—			—			10,211
Stock issued pursuant to long-term incentive plans		830,635		83		—		—		(83	)		—			—			—			—
Stock-based compensation		—		—		—		—		1,960			—			—			—			1,960
Amortization of stock payment in lieu of rent		—		—		—		—		31			—			—			—			31
Exercise of stock options		175,003		17		—		—		478			—			—			—			495
Repurchase of common stock		—		—		—		—		—			—			(43,123	)		—			(43,123	)
Amortization of actuarial gain under Supplemental Employee Retirement Plan		—		—		—		—		—			—			—			(3	)		(3	)
Balance at July 30, 2011		114,742,482	$	11,474		—	$	—	$	325,710		$	(11,121	)	$	(81,086	)	$	287		$	245,264

See notes to condensed consolidated financial statements.

6

THE WET SEAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	26 Weeks Ended
	July 28, 2012			July 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(12,642	)	$	10,211
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		9,261			9,481
Amortization of premium on investments		—			460
Amortization of deferred financing costs		54			52
Amortization of stock payment in lieu of rent		—			31
Loss on disposal of equipment and leasehold improvements		483			46
Asset impairment		12,579			1,316
Deferred income taxes		(7,301	)		5,739
Stock-based compensation		1,992			1,960
Changes in operating assets and liabilities:
Income tax receivables		(460	)		—
Other receivables		(299	)		(599	)
Merchandise inventories		(9,645	)		(9,840	)
Prepaid expenses and other current assets		(1,847	)		(2,481	)
Other non-current assets		28			(106	)
Accounts payable and accrued liabilities		8,511			9,841
Income taxes payable		—			(60	)
Deferred rent		434			997
Other long-term liabilities		(69	)		(66	)
Net cash provided by operating activities		1,079			26,982
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements		(11,591	)		(14,096	)
Proceeds from maturity of marketable securities		—			12,000
Net cash used in investing activities		(11,591	)		(2,096	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		19			495
Repurchase of common stock		(222	)		(41,177	)
Net cash used in financing activities		(203	)		(40,682	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(10,715	)		(15,796	)
CASH AND CASH EQUIVALENTS, beginning of period		157,185			125,362
CASH AND CASH EQUIVALENTS, end of period	$	146,470		$	109,566
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	39		$	35
Income taxes	$	839		$	1,892
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
Repurchase of common stock unpaid at end of period	$	—		$	1,946
Purchase of equipment and leasehold improvements unpaid at end of period	$	3,622		$	5,366
Amortization of actuarial gain under Supplemental Employee Retirement Plan	$	—		$	(3	)

See notes to condensed consolidated financial statements.

7

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 1 – Basis of Presentation, Significant Accounting Policies, and Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted

Basis of Presentation

The information set forth in these condensed consolidated financial statements is unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 GAAP for complete financial statements.

In the opinion of management, all adjustments necessary for a fair presentation have been included. The results of operations for the 26 weeks ended July 28, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending February 2, 2013. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of The Wet Seal, Inc. (the “Company”) for the fiscal year ended January 28, 2012.

Significant Accounting Policies

Long-Lived Assets

The Company evaluates the carrying value of long-lived assets for impairment 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 will be recognized, measured as 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. Forecasted earnings, growth rates and other assumptions used to estimate carrying value recoverability rely heavily upon estimates made by the Company’s management, including continued declines in comparable store sales in the short term and modest growth in future periods, and the expected outcomes of strategic initiatives being implemented. If the Company is not able to achieve its projected growth rates and cash flows, and strategic initiatives currently being implemented do not result in significant improvements in the Company’s current financial performance trend, the Company would incur additional impairment of assets in the future. 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 continues to provide the most relevant and reliable means by which to determine fair value in this circumstance.

At least quarterly, the Company assesses whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. The Company’s evaluations during the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, indicated that operating losses or insufficient operating income existed at certain retail stores, with a projection that the operating losses or insufficient operating income for those locations would continue. As such, the Company recorded the following non-cash charges primarily 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.

	13 Weeks Ended						26 Weeks Ended
	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
	(In thousands)
Aggregate carrying value of all long-lived assets impaired	$	9,660		$	1,057		$	13,266		$	1,316
Less: Impairment charges		(8,973	)		(1,057	)		(12,579	)		(1,316	)
Aggregate fair value of all long-lived assets impaired	$	687		$	—		$	687		$	—
Number of stores with asset impairment		41			4			51			6

The long-lived assets disclosed above that were written down to their respective fair values consisted primarily of leasehold improvements, furniture, fixtures and equipment. Based on historical operating performance and the projected outlook for these stores, the Company believes that the remaining asset value of approximately $0.7 million as of July 28, 2012, is recoverable.

Income Taxes

The Company has approximately $74.0 million of federal net operating loss (“NOL”) carry forwards available to offset taxable income in fiscal 2012 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code. This NOL balance reflects adjustments resulting from recently closed Internal Revenue Service (“IRS”) audits of the Company’s fiscal 2008 and 2009 tax years.

8

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 1 – Basis of Presentation, Significant Accounting Policies, and Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted (Continued)

The Company’s effective income tax rate for the 13 and 26 weeks ended July 28, 2012, was approximately 36.7% and 36.8%, respectively. The Company expects a 37.6% effective income tax rate for fiscal 2012. The Company’s effective income tax rates reflect a $0.3 million write-off of certain deferred tax assets as a result of the IRS adjustments discussed above, which is discrete to the quarter ended July 28, 2012. The Company anticipates cash payment for income taxes for the fiscal year will be approximately $0.1 million, representing certain state income taxes. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash benefit for deferred income taxes.

Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued guidance on the application of fair value accounting where its use is already required or permitted by other standards within GAAP. This guidance changed the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Amendments include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements, and change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements. This guidance became effective for interim and annual periods beginning after December 15, 2011. The Company adopted this guidance, which did not significantly impact the Company’s condensed consolidated financial statements.

In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. This guidance provided an entity with an option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, and is to be applied on a retrospective basis. The Company adopted this guidance and has presented total comprehensive (loss) income, the components of net (loss) income and the components of other comprehensive (loss) income in two separate but consecutive statements within 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 July 28, 2012: the 2005 Stock Incentive Plan (the “2005 Plan”). The Company also 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 July 28, 2012; 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, 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 and performance share grants. 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 22,669,528 shares of Class A common stock have been issued or may be issued pursuant to the Plans. As of July 28, 2012, 3,974,001 shares were available for future grants.

9

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 2 – Stock-Based Compensation (Continued)

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 Ended						26 Weeks Ended
	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
Dividend Yield		0.00	%		0.00	%		0.00	%		0.00	%
Expected Volatility		46.47	%		54.00	%		48.87	%		54.00	%
Risk-Free Interest Rate		0.45	%		0.91	%		0.48	%		1.31	%
Expected Life of Options (in Years)		3.3			3.3			3.3			3.3

The Company recorded compensation expense of $0.6 million, $0.9 million, $0.2 million and $0.4 million, or less than $0.01, $0.01, less than $0.01 and less than $0.01 per basic and diluted share, related to stock options outstanding during the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, respectively. The expense for the 13 and 26 weeks ended July 28, 2012 reflects a $0.4 million charge for potential vesting acceleration resulting from the departure of the Company’s previous chief executive officer.

At July 28, 2012, there was $1.4 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 1.9 years, representing the remaining vesting periods of such options through fiscal 2015.

The following table summarizes the Company’s stock option activities with respect to its Plans for the 26 weeks ended July 28, 2012, 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
Outstanding at January 28, 2012		3,474,204		$	4.64
Granted		110,000		$	3.14
Exercised		(6,001	)	$	3.15
Canceled		(833,071	)	$	6.05
Outstanding at July 28, 2012		2,745,132		$	4.15		2.57	$	4
Vested and expected to vest in the future at July 28, 2012		2,544,727		$	4.19		2.44	$	4
Exercisable at July 28, 2012		1,511,331		$	4.51		1.32	$	3

10

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 2 – Stock-Based Compensation (Continued)

Options vested and expected to vest in the future is comprised of all options outstanding at July 28, 2012, net of estimated forfeitures. Additional information regarding stock options outstanding as of July 28, 2012, is as follows:

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding as of July 28, 2012		Weighted- Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price Per Share		Number Exercisable as of July 28, 2012		Weighted- Average Exercise Price Per Share
$ 1.81 - $  2.74		27,500		3.89	$	2.57		7,500	$	2.26
2.93 -     4.44		2,398,133		2.72	$	3.71		1,220,999	$	3.72
4.50 -     6.82		105,499		2.57	$	5.54		68,832	$	5.97
8.00 -   11.49		214,000		0.68	$	8.64		214,000	$	8.64
$ 1.81 - $11.49		2,745,132		2.57	$	4.15		1,511,331	$	4.51

The weighted-average grant-date fair value of options granted during the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, was $0.98, $1.10, $1.69 and $1.60, respectively. The total intrinsic value for options exercised during the 26 weeks ended July 28, 2012, and the 13 and 26 weeks ended July 30, 2011, was less than $0.1 million, $0.3 million and $0.3 million, respectively.

Cash received from option exercises under all Plans for the 26 weeks ended July 28, 2012, and July 30, 2011, was less than $0.1 million and $0.5 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 and Performance Shares

Under the 2005 Plan, the Company grants directors, certain executives, and other key employees restricted common stock with vesting contingent upon completion of specified service periods ranging from one to three-and-one-half years. The Company also grants certain executives and other key employees performance share awards with vesting contingent upon a combination of specified service periods and the Company’s achievement of specified common stock price levels.

During the 26 weeks ended July 28, 2012, and July 30, 2011, the Company granted 174,580 and 430,635 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 26 weeks ended July 28, 2012, and July 30, 2011, was $3.58 and $3.87 per share, respectively. The Company recorded approximately $0.9 million, $1.3 million, $0.4 million and $0.7 million of compensation expense related to outstanding shares of restricted common stock during the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, respectively. The expense for the 13 and 26 weeks ended July 28, 2012 reflects a $0.6 million charge for potential vesting acceleration resulting from the departure of the Company’s previous chief executive officer.

During the 26 weeks ended July 30, 2011, the Company granted 400,000 performance shares under the 2005 Plan. The weighted-average grant-date fair value of the performance share grants made during the 26 weeks ended July 30, 2011, which included consideration of the probability of such shares vesting, was $3.08 per share. The Company recorded compensation benefits of approximately $0.5 million and $0.2 million and compensation expense of approximately $0.5 million and $0.9 million during the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, respectively, related to performance shares. The compensation benefits during the 13 and 26 weeks ended July 28, 2012 were due to the forfeiture of performance shares as a result of the departure of the Company’s previous chief executive officer.

11

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 2 – Stock-Based Compensation (Continued)

The fair value of nonvested restricted common stock awards is equal to the closing trading price of the Company’s Class A common stock on the grant date. The fair value of nonvested performance shares is determined based on a number of factors, including the closing trading price of the Company’s Class A common stock and the estimated probability of achieving the Company’s stock price performance conditions as of the grant date. The following table summarizes activity with respect to the Company’s nonvested restricted common stock and performance shares for the 26 weeks ended July 28, 2012:

Nonvested Restricted Common Stock and Performance Shares	Number of Shares			Weighted- Average Grant- Date Fair Value
Nonvested at January 28, 2012		2,105,112		$	3.16
Granted		174,580		$	3.58
Vested		(614,219	)	$	3.68
Forfeited		(890,655	)	$	2.70
Nonvested at July 28, 2012		774,818		$	3.29

The fair value of restricted common stock and performance shares that vested during the 26 weeks ended July 28, 2012, was $1.9 million.

At July 28, 2012, there was $1.7 million of total unrecognized compensation expense related to nonvested restricted common stock and performance shares under the Company’s share-based payment plans, of which $1.3 million relates to restricted common stock and $0.4 million relates to performance shares. That cost is expected to be recognized over a weighted-average period of 1.2 years. These estimates utilize subjective assumptions about expected forfeiture rates, which could change over time. 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 table summarizes stock-based compensation recorded in the condensed consolidated statements of operations (in thousands):

	13 Weeks Ended				26 Weeks Ended
	July 28, 2012		July 30, 2011		July 28, 2012		July 30, 2011
Cost of sales	$	69	$	45	$	135	$	91
Selling, general, and administrative expenses		929		1,015		1,857		1,869
Stock-based compensation	$	998	$	1,060	$	1,992	$	1,960

12

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

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 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 July 28, 2012, the amount outstanding under the Facility consisted of $3.8 million in open documentary letters of credit related to merchandise purchases and $1.5 million in outstanding standby letters of credit, and the Company had $29.7 million available under the Facility for cash advances and/or the issuance of additional letters of credit.

At July 28, 2012, the Company was in compliance with all covenant requirements related to 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.

13

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 4 – Fair Value Measurements and Disclosures (Continued)

The following tables present information on the Company’s financial instruments (in thousands):

	Carrying Amount at July 28, 2012		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	146,470	$	32,134	$	114,336	$	—
Long-term tenant allowance receivables		917		—		—		917
	Carrying Amount at January 28, 2012		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	157,185	$	62,881	$	94,304	$	—
Long-term tenant allowance receivables		875		—		—		875
	Carrying Amount at July 30, 2011		Fair Value Measurements at Reporting Date Using
			Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	109,566	$	23,394	$	86,172	$	—
Short-term investments		38,230		—		38,243		—
Long-term tenant allowance receivables		836		—		—		836

Cash and cash equivalents are carried at either cost or amortized cost, which approximates fair value, due to their short term maturities. Certain money market funds are valued through the use of quoted market prices and are represented as Level 1. Other 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 consisted of interest-bearing corporate bonds that were guaranteed by the U.S. Government under the Temporary Liquidity Guarantee Program, had maturities that were less than one year and were carried at amortized cost plus accrued income. Short-term investments were carried at amortized cost due to the Company’s intent to hold to maturity. The fair value of the Company’s 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 allowance receivables 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. The long-term tenant allowance receivables are included in other assets within the condensed consolidated balance sheets.

14

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 4 – Fair Value Measurements and Disclosures (Continued)

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 July 28, 2012, and July 30, 2011, the Company recorded $9.0 million, $12.6 million, $1.1 million and $1.3 million of impairment charges in the accompanying condensed consolidated statements of operations. Refer to Note 1- Long-Lived Assets.

NOTE 5 – Net (Loss) Income Per Share

Net (loss) income 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 (loss) income 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. 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 July 28, 2012, the Company incurred a net loss and, there is no dilutive effect of any unvested share-based payment awards. For the 13 and 26 weeks ended July 30, 2011, the effect of the unvested share-based payment awards was anti-dilutive to the computation of diluted earnings per share.

15

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 5 – Net (Loss) Income Per Share (Continued)

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 Ended
	July 28, 2012								July 30, 2011
	Net Loss			Shares		Per Share Amount			Net Income			Shares		Per Share Amount
Net (loss) income per share, basic:
Net (loss) income	$	(12,369	)						$	2,198
Less: Undistributed earnings allocable to participating securities		—								(59	)
Net (loss) income per share, basic	$	(12,369	)		88,585,063	$	(0.14	)	$	2,139			95,731,926	$	0.02
Net (loss) income per share, diluted:
Net (loss) income	$	(12,369	)						$	2,198
Less: Undistributed earnings allocable to participating securities		—								(59	)
Effect of dilutive securities					—								103,118
Net (loss) income per share, diluted	$	(12,369	)		88,585,063	$	(0.14	)	$	2,139			95,835,044	$	0.02

	26 Weeks Ended
	July 28, 2012								July 30, 2011
	Net Loss			Shares		Per Share Amount			Net Income			Shares		Per Share Amount
Net (loss) income per share, basic:
Net (loss) income	$	(12,642	)						$	10,211
Less: Undistributed earnings allocable to participating securities		—								(249	)
Net (loss) income per share, basic	$	(12,642	)		88,536,020	$	(0.14	)	$	9,962			97,324,336	$	0.10
Net (loss) income per share, diluted:
Net (loss) income	$	(12,642	)						$	10,211
Less: Undistributed earnings allocable to participating securities		—								(249	)
Effect of dilutive securities					—								75,013
Net (loss) income per share, diluted	$	(12,642	)		88,536,020	$	(0.14	)	$	9,962			97,399,349	$	0.10

16

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 5 – Net (Loss) Income Per Share (Continued)

The computations of net (loss) income per share, diluted, excluded the following potentially dilutive securities exercisable into Class A common stock for the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, respectively, because their effect would not have been dilutive.

	13 Weeks Ended				26 Weeks Ended
	July 28, 2012		July 30, 2011		July 28, 2012		July 30, 2011
Stock options outstanding		2,737,632		2,253,002		2,712,136		2,490,845
Performance shares and nonvested restricted stock awards		1,813,329		2,659,099		1,916,896		2,433,945
Total		4,550,961		4,912,101		4,629,032		4,924,790

NOTE 6 – Commitments and Contingencies

On July 19, 2006, 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 that were employed and paid by the Company on an hourly basis during the four-year period from July 19, 2002, through July 19, 2006. The Company was named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On November 30, 2006, the Company reached an agreement to pay approximately $0.3 million to settle this matter, subject to Superior Court approval. On September 27, 2010, the Superior Court granted final approval of the settlement agreement. An appeal was subsequently filed on January 26, 2011. On July 25, 2012, the Court of Appeals dismissed Plaintiffs’ appeal. Plaintiffs’ counsel has forty days from July 25, 2012, to file a petition for appeal to the California Supreme Court. As of July 28, 2012, the Company has accrued an amount equal to the settlement amount, plus $0.1 million in settlement administration fees, in accrued liabilities in its condensed consolidated balance sheet.

On May 22, 2007, a complaint was filed in the Superior Court of the State of California for the County of Orange on behalf of certain of the Company’s current and former employees who were employed and paid by the Company from May 22, 2003 through the present. The Company was named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and Wage Orders of the Industrial Welfare Commission. On December 17, 2010, the court denied Plaintiffs’ Motion for Class Certification and Motion For Leave to File An Amended Complaint. Plaintiffs have appealed both orders. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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. On August 16, 2011, the court denied Plaintiffs’ Motion for Class Certification. Plaintiffs have appealed. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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. In April 2010, the EEOC filed an application to enforce the subpoena in the U.S. District Court for the Eastern District of Pennsylvania, and is in the process of a nationwide investigation. The Company is awaiting the results of the investigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

17

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 6 – Commitments and Contingencies (Continued)

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. 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. 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 commencement with their employment for the Company. Plaintiffs allege that the Company’s arbitration agreements unlawfully compel employees to waive their rights to participate in class or representative actions against the Company. The NLRB is investigating these charges, however, the Court has already found that the arbitration agreements are enforceable and declined to follow the NLRB’s ruling inIn re D.R. Horton, Inc. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On April 2, 2012, the court granted the Company’s motion to compel arbitration and to enforce the class action waiver in the arbitration agreement between the Plaintiff and the Company. The Plaintiff filed a stipulated motion to amend her complaint and agreed to dismiss with prejudice all individual claims subject to arbitration. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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 alleges 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 are also alleging retaliation. Plaintiffs are seeking 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. The Company is vigorously defending this litigation and is unable to predict the likely outcome and whether such outcome may have a material adverse effect on its results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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, the Company has insurance to cover a portion of such losses. However, certain matters may exist or arise for which the Company does not have insurance coverage and which could have a material adverse effect on its results of operations or financial condition.

18

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(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 July 28, 2012, and July 30, 2011, for the two reportable segments is set forth below (in thousands, except percentages):

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	)

13 Weeks Ended July 30, 2011	Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	125,033		$	23,737		$	—		$	148,770
Percentage of consolidated net sales		84	%		16	%		—			100	%
Operating income (loss)	$	10,280		$	1,449		$	(8,404	)	$	3,325
Depreciation and amortization expense	$	3,929		$	504		$	381		$	4,814
Interest income	$	—		$	—		$	66		$	66
Interest expense	$	—		$	—		$	(44	)	$	(44	)
Income (loss) before provision for income taxes	$	10,280		$	1,449		$	(8,382	)	$	3,347

26 Weeks Ended July 28, 2012	Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	239,914		$	43,292		$	—		$	283,206
Percentage of consolidated net sales		85	%		15	%		—			100	%
Operating income (loss)	$	745		$	(2,882	)	$	(17,847	)	$	(19,984	)
Depreciation and amortization expense	$	7,577		$	911		$	773		$	9,261
Interest income	$	—		$	—		$	76		$	76
Interest expense	$	—		$	—		$	(94	)	$	(94	)
Income (loss) before benefit for income taxes	$	745		$	(2,882	)	$	(17,865	)	$	(20,002	)

26 Weeks Ended July 30, 2011	Wet Seal			Arden B			Corporate and Unallocated			Total
Net sales	$	256,086		$	48,724		$	—		$	304,810
Percentage of consolidated net sales		84	%		16	%		—			100	%
Operating income (loss)	$	29,094		$	4,014		$	(16,457	)	$	16,651
Depreciation and amortization expense	$	7,713		$	1,044		$	724		$	9,481
Interest income	$	—		$	—		$	138		$	138
Interest expense	$	—		$	—		$	(87	)	$	(87	)
Income (loss) before provision for income taxes	$	29,094		$	4,014		$	(16,406	)	$	16,702

19

THE WET SEAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the 26 weeks ended July 28, 2012, and July 30, 2011

(Unaudited)

NOTE 7 – Segment Reporting (Continued)

The “Corporate and Unallocated” column is presented solely to allow for reconciliation of segment contribution to consolidated operating (loss) income, interest income, interest expense and (loss) income before (benefit) provision 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.

Corporate expenses during the 13 and 26 weeks ended July 28, 2012, include $1.9 million of potential severance costs resulting from the departure of the Company’s previous chief executive officer (no severance agreement has yet been entered into).

Wet Seal operating (loss) income during the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, includes $7.9 million, $10.6 million, $0.6 million and $0.8 million, respectively, of asset impairment charges.

Arden B operating (loss) income during the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, includes $1.1 million, $2.0 million, $0.5 million and $0.5 million, respectively, of asset impairment charges.

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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 January 28, 2012, 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 from their early teens to 39 years old. We operate two nationwide, primarily mall-based, chains of retail stores under the names “Wet Seal” and “Arden B.” At July 28, 2012, we had 550 retail stores in 47 states and Puerto Rico. Of the 550 stores, there were 468 Wet Seal stores and 82 Arden B stores. Our merchandise can also be purchased online through the respective websites of each of our operating segments.

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—We view operating income as a key indicator of our financial success. The key drivers of operating income 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, Wet Seal and Arden B. E-commerce operations for Wet Seal and Arden B are included in their respective reporting segments. 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.

We maintain a Web-based store located atwww.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 atwww.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 of the notes to condensed consolidated financial statements for financial information regarding segment reporting, which information is incorporated herein by reference.

Current Trends and Outlook

The retail environment in the U.S. has shown slight improvement in the first half of 2012. However, only modest growth in the retail industry is expected for 2012 due to continued uncertainty regarding the global economy and the lack of significant improvement in the U.S. housing market and unemployment rates throughout the U.S. In addition, U.S. gross domestic product growth remains slow, further contributing to a volatile, and generally weak, retail environment. During the first half of fiscal 2012, we ran aggressive promotions and incurred high levels of clearance markdowns at both Wet Seal and Arden B to address product that was performing below expectations, primarily in the tops category. As a result, we experienced significant declines in our merchandise margin and comparable store sales. We expect continued weak performance in our merchandise margins in the near term as we aggressively promote our existing product in an effort to expeditiously re-merchandise our stores with product that will appeal to a broader demographic.

Our performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer spending. Consumer purchases of discretionary items, including our merchandise, generally decline during periods when disposable income is adversely affected or there is economic uncertainty. As a result of the continued difficult economic conditions, we may face risks that will impact many facets of our operations, including, among other things, the ability of one or more of our vendors to deliver their merchandise in a timely manner or otherwise meet their obligations to us. Although we believe we are sufficiently prepared and financially strong enough to endure poor economic conditions in the U.S. and world economic markets, if such conditions continue, or if they deteriorate further, our business, financial condition, and results of operations may be further materially adversely affected.

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Our comparable store sales decreased 11.1% during the 13 weeks ended July 28, 2012, driven by an 11.0% comparable store sales decrease in our Wet Seal division and an 11.6% comparable store sales decrease in our Arden B division. The Wet Seal division’s comparable store sales decrease was primarily driven by a decrease in transaction volume, partially offset by an increase in average dollar sales per transaction, which was driven by an increase in units purchased per customer, offset by a decrease in average unit selling price. At Wet Seal, we underperformed, we believe, as a result of shifting away from our core expertise of fast fashion merchandising which resulted in an assortment geared toward higher-priced product that was not well received by our target customers and a lack of compelling merchandise for the young teen customer during the beginning of the important back-to-school season. Our knit tops business declined significantly, while woven tops, denim bottoms, shoes, and outerwear sales increased. The Arden B division comparable store sales decrease was primarily driven by a decline in transaction volume and a decrease in average dollar sales per transaction, which was driven by a decrease in average unit selling price, partially offset by an increase in units purchased per customer. At Arden B, we under performed, we believe, as a result of too narrow of an assortment, leading to sales declines in all categories except bottoms. Our combined e-commerce sales declined 5% during the 13 weeks ended July 28, 2012, as compared to the prior year quarter, as a result of too narrow of an assortment and higher levels of promotional and clearance selling in an effort to sell product that was not well received by our target customers, consistent with the reception of product within our stores.

The end of the second quarter was the beginning of an important transition period for our Company as we made the decision to return to our core expertise of fast fashion merchandising. We began taking aggressive action to refocus our strategy in a way that we believe will address the issues that resulted in our disappointing fiscal 2012 second quarter, including, returning to merchandising to a broader demographic, including the young teen customer at Wet Seal, sourcing a broader variety of product more directly from fast fashion vendors, committing to merchandise purchases closer to time of need, and focusing our price points on our core customer, which long supported success for our Company. We expect it will take several months to begin to realize the impact of the transition in our merchandise and in-store marketing. Although we expect continued weak performance through the fiscal 2012 third quarter, we believe that this trend will bottom out in the coming months and that we will begin to see clear signs of improvement in the fiscal 2012 fourth quarter and will ultimately return to a level of sales and earnings that this strategy has driven for many years. As a result, we believe our Company will be positioned to stabilize the business during the holiday season of fiscal 2012 and fiscal 2013.

Employee Retention Plan

To retain the talent critical to executing upon our strategy and enhancing shareholder value, we have implemented an Employee Retention Plan for our senior leadership and certain other key team members. We believe it is critical to retain this talent base, and this Employee Retention Plan is designed to help provide stability and continuity for us during this important transition period. The Employee Retention Plan was approved by our Board of Directors effective August 19, 2012, and provides for a cash payment to each of the eligible employees, payable August 19, 2013, provided the employee is still employed by us, subject to acceleration upon certain terminations following a change in control. The total cost of the Employee Retention Plan is approximately $1.2 million and will be expensed over the one-year retention period.

In addition, effective August 19, 2012, our Board of Directors approved an amendment to our fiscal 2012 Management Bonus Plan to provide for a 25% payout of the annual bonus for fiscal 2012 for all eligible employees if we attain certain performance metrics in the fiscal 2012 fourth quarter. If achieved, the total cost of the fourth quarter bonus would be approximately $0.9 million and is payable in April 2013, contingent upon continued employment at that time.

Also effective August 19, 2012, our Board of Directors made grants of restricted stock to our senior leadership and certain other key team members in lieu of stock option grants typically made at this time each year. The aggregate grant was 196,300 shares with vesting to occur in equal amounts on the first and second anniversary dates of the grant. The grants are also subject to acceleration substantially as provided in the Company’s standard agreements, including upon a change in control.

As of the date of this report, no award under the Employee Retention Plan or grant of restricted stock, described above, has been made to Kenneth D. Seipel, our President and Chief Operating Officer, or Steven H. Benrubi, our Executive Vice President and Chief Financial Officer. Barbara Cook, our Senior Vice President of Store Operations, received an award under the Employee Retention Plan of $75,000 and a grant of 10,000 shares of restricted stock. Harriet Bailiss-Sustartic, our Chief Merchandise Officer, Wet Seal Division, received an award under the Employee Retention Plan of $75,000 and a grant of 10,000 shares of restricted stock.

Supplemental Director Compensation

In recognition of the significant additional duties being assumed by Hal Kahn, Chairman of the Board, and the three directors assigned to the Strategic Oversight Committee, established by the Board, the compensation of these directors has been increased for a six month period. The compensation will solely be in shares of restricted stock and was determined in consultation with an independent compensation consultant.

Under this program, Mr. Kahn has received a grant of restricted stock with a value of $500,000 to vest 70% on the three month anniversary of grant and 30% on the six month anniversary of grant. For this six month period, this stock grant to Mr. Kahn is in lieu of the cash stipend historically paid to him for service as Chairman of the Board ($75,000 per year). The members of the Strategic Oversight Committee each received a grant of restricted stock having a value of $90,000 to vest 50% on the three month anniversary and 50% on the six month anniversary of the date of grant. The grants are also subject to acceleration substantially as provided in the Company’s standard director stock award agreements, including upon a change in control.

Store Openings and Closures

As we focus on restoring our fast fashion merchandising strategy, we have deferred making additional new store opening commitments in our Wet Seal division through the remainder of fiscal 2012. Our real estate plan is now expected to total from two to four net store closings at Wet Seal for fiscal 2012, which is a decrease from our prior plan of 20 to 22 net store openings. At Arden B, our real estate plan remains unchanged from our prior plan, with 15 to 20 net store closings for fiscal 2012. As a result, we estimate we will end fiscal 2012 with 468 to 470 Wet Seal stores and 66 to 71 Arden B stores.

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At Wet Seal, we opened three new stores and closed four stores during the 13 weeks ended July 28, 2012. At Arden B, we closed two stores during the 13 weeks ended July 28, 2012.

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 (“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 GAAP for complete financial statements.

The preparation of financial statements in conformity with 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 of Notes to Consolidated Financial Statements 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 January 28, 2012.

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 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 January 28, 2012, except for the following updates for our critical accounting policies for long-lived assets and accounting for income taxes.

Long-Lived Assets

We evaluate the carrying value of long-lived assets for impairment 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 will be recognized, measured as the difference between the carrying value and the estimated fair value of the assets, based on discounted estimated future cash flows using our weighted average cost of capital. Forecasted earnings, growth rates and other assumptions used to estimate carrying value recoverability rely heavily upon estimates made by management, including continued declines in comparable store sales in the short term and modest growth in future periods, and the expected outcomes of strategic initiatives being implemented. If we are not able to achieve our projected growth rates and cash flows, and strategic initiatives currently being implemented do not result in significant improvements in our current financial performance trend, we would incur additional impairment of assets in the future. We have considered all relevant valuation techniques that could be applied without undue cost and effort and have determined that the discounted estimated future cash flow approach continues to provide the most relevant and reliable means by which to determine fair value in this circumstance.

Quarterly, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. During the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, we determined such events or changes in circumstances had occurred with respect to certain of our retail stores, and that operating losses or insufficient operating income would likely continue. As such, we recorded noncash charges of $9.0 million, $12.6 million, $1.1 million and $1.3 million, in our condensed consolidated statements of operations for the 13 and 26 weeks ended July 28, 2012, and July 30, 2011, respectively, to write down the carrying value of these stores’ long-lived assets to their estimated fair values.

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Accounting for Income Taxes

We have approximately $74.0 million of federal net operating loss (“NOL”) carry forwards available to offset taxable income in fiscal 2012 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code. This NOL balance reflects adjustments resulting from recently closed Internal Revenue Service (“IRS”) audits of our fiscal 2008 and 2009 tax years.

Our effective income tax rate for the 13 and 26 weeks ended July 28, 2012, was approximately 36.7% and 36.8%, respectively. We expect a 37.6% effective income tax rate for fiscal 2012. Our effective income tax rates reflect a $0.3 million write-off of certain deferred tax assets as a result of the IRS adjustments discussed above, which is discrete to the quarter ended July 28, 2012. We anticipate cash payment for income taxes for the fiscal year will be approximately $0.1 million, representing certain state income taxes. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash benefit for deferred income taxes.

Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted

In May 2011, the Financial Accounting Standards Board (the “FASB”) issued guidance on the application of fair value accounting where its use is already required or permitted by other standards within GAAP. This guidance changed the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Amendments include those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements, and change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements. This guidance became effective for interim and annual periods beginning after December 15, 2011. We adopted this guidance and it did not significantly impact our condensed consolidated financial statements.

In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. This guidance provided an entity with an option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance became effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, and is to be applied on a retrospective basis. We have adopted this guidance and have presented total comprehensive (loss) income, the components of net (loss) income and the components of other comprehensive (loss) income in two separate but consecutive statements within our condensed consolidated financial statements.

Results of Operations

The following table sets forth selected condensed consolidated statements of operations data as a percentage of net sales for the periods indicated. The discussion that follows should be read in conjunction with the table below:

	As a Percentage of Net Sales 13 Weeks Ended						As a Percentage of Net Sales 26 Weeks Ended
	July 28, 2012			July 30, 2011			July 28, 2012			July 30, 2011
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		77.2			69.0			73.7			67.3
Gross margin		22.8			31.0			26.3			32.7
Selling, general, and administrative expenses		30.6			28.0			28.9			26.8
Asset impairment		6.6			0.8			4.5			0.4
Operating (loss) income		(14.4	)		2.2			(7.1	)		5.5
Interest (expense) income, net		(0.0	)		0.0			(0.0	)		0.0
(Loss) income before (benefit) provision for income taxes		(14.4	)		2.2			(7.1	)		5.5
(Benefit) provision for income taxes		(5.3	)		0.7			(2.6	)		2.2
Net (loss) income		(9.1	)%		1.5	%		(4.5	)%		3.3	%

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Thirteen Weeks Ended July 28, 2012, Compared to Thirteen Weeks Ended July 30, 2011

Net sales

	13 Weeks Ended July 28, 2012		Change From Prior Fiscal Period					13 Weeks Ended July 30, 2011
			($ in millions)
Net sales	$	135.3	$	(13.5	)	(9.1	)%	$	148.8
Comparable store sales decrease						(11.1	)%

Net sales for the 13 weeks ended July 28, 2012, decreased primarily as a result of the following:

• A decrease of 11.1% in comparable store sales, resulting from an 11.4% decrease in comparable store average transactions, partially offset by a 0.1% increase in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction increased mainly due to a 1.4% increase in the number of units purchased per customer, partially offset by a 2.0% decrease in average unit retail prices; and

• A decrease of $0.4 million in net sales for our e-commerce business as compared to the prior year, which is not a factor in calculating our comparable store sales.

The decrease in net sales was partially offset by an increase in number of stores, from 542 stores as of July 30, 2011, to 550 stores as of July 28, 2012.

Cost of sales

	13 Weeks Ended July 28, 2012			Change From Prior Fiscal Period				13 Weeks Ended July 30, 2011
				($ in millions)
Cost of sales	$	104.5		$	1.8	1.7	%	$	102.7
Percentage of net sales		77.2	%			8.2	%		69.0	%

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 increased due primarily to a decrease in merchandise margin as a result of higher markdown rates in both the Wet Seal and Arden B divisions, as compared to the prior year, and the deleveraging effect on occupancy costs from the decline in comparable store sales.

Cost of sales dollars increased primarily due to higher markdowns, partially offset by the decline in sales, and an increase in occupancy cost as a result of the increase in number of stores.

Selling, general, and administrative expenses (SG&A)

	13 Weeks Ended July 28, 2012			Change From Prior Fiscal Period					13 Weeks Ended July 30, 2011
				($ in millions)
Selling, general, and administrative expenses	$	41.4		$	(0.3	)	(0.8	)%	$	41.7
Percentage of net sales		30.6	%				2.6	%		28.0	%

Our SG&A expenses are comprised of two components. Selling expenses include store and field support costs, including personnel, advertising, merchandise delivery, and transaction processing costs, as well as e-commerce processing and advertising 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, marketing, loss prevention, and other centralized services.

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Selling expenses decreased approximately $1.2 million from the prior year to $31.5 million. As a percentage of net sales, selling expenses were 23.3% of net sales, or 130 basis points higher than a year ago.

The following contributed to the current year decrease in selling expenses:

• A $1.1 million decrease in store payroll and benefits costs as a result of decreased sales volume and lower incentive bonuses;

• A $0.5 million decrease in credit card fees due to a decline in average processing fees as a percent to sales;

• A $0.3 million decrease in merchandise delivery costs due to merchandise handling efficiencies; and

• A $0.2 million decrease in store supplies as a result of decreased sales volume.

However, the decreases in selling expenses were partially offset by the following increases:

• A $0.6 million net increase in advertising and marketing expenditures;

• A $0.2 million net increase in travel and meeting costs associated with additional field employee training; and

• A $0.1 million net increase in other selling expenses.

General and administrative expenses increased approximately $0.9 million from the prior year, to $9.9 million. As a percentage of net sales, general and administrative expenses were 7.3%, or 130 basis points higher than in the prior year quarter.

The following contributed to the current year increase in general and administrative expenses:

• $1.9 million in potential severance costs resulting from the departure of our previous chief executive officer (no severance agreement has yet been entered into);

• A $0.4 million increase in corporate wages, primarily due to filled positions in various corporate functions;

• A $0.1 million increase in computer maintenance costs; and

• A $0.1 million increase in strategic consulting fees.

The increases in general and administrative expenses were partially offset by the following decreases:

• A $0.8 million decrease in corporate bonuses based on a shortfall in our financial performance relative to bonus targets;

• A $0.3 million decrease in stock based compensation;

• A $0.3 million refund from a factoring company for merchandise vendors for adjustments to prior years’ payments;

• A $0.1 million decrease in recruiting fees as the prior year included a portion of the costs for the relocation of our previous chief executive officer; and

• A $0.1 million decrease in legal fees associated with various legal matters.

Asset impairment

	13 Weeks Ended July 28, 2012			Change From Prior Fiscal Period				13 Weeks Ended July 30, 2011
	($ in millions)
Asset impairment	$	9.0		$	7.9	748.9	%	$	1.1
Percentage of net sales		6.6	%			5.8	%		0.8	%

Based on our quarterly assessments of the carrying value of long-lived assets, during the 13 weeks ended July 28, 2012, and July 30, 2011, 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 $9.0 million and $1.1 million, respectively.

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Interest (expense) income, net

	13 Weeks Ended July 28, 2012			Change From Prior Fiscal Period					13 Weeks Ended July 30, 2011
	($ in millions)
Interest (expense) income, net	$	(0.0	)	$	(0.0	)	(0.0	)%	$	0.0
Percentage of net sales		0.0	%				0.0	%		0.0	%

We generated interest expense, net, of less than $0.1 million in the 13 weeks ended July 28, 2012, primarily from the amortization of deferred financing costs, partially offset by earnings from investments in cash and cash equivalents, and we generated interest income, net, of less than $0.1 million in the 13 weeks ended July 30, 2011, primarily from earnings from investments in cash and cash equivalents and short-term investments, partially offset by amortization of deferred financing costs.

(Benefit) Provision for income taxes

	13 Weeks Ended July 28, 2012			Change From Prior Fiscal Period					13 Weeks Ended July 30, 2011
				($ in millions)
(Benefit) provision for income taxes	$	(7.2	)	$	(8.3	)	(725.1	)%	$	1.1

Our effective income tax rate for the 13 weeks ended July 28, 2012, was approximately 36.7%. We expect a 37.6% effective income tax rate for fiscal 2012. Our effective income tax rates reflect a $0.3 million write-off of certain deferred tax assets as a result of IRS adjustments from our recently closed IRS audits of our fiscal 2008 and 2009 tax years, which is discrete to the quarter ended July 28, 2012. We anticipate cash payment for income taxes for the fiscal year will be approximately $0.1 million, representing certain state income taxes. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash benefit for deferred income taxes.

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, 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)	13 Weeks Ended July 28, 2012			13 Weeks Ended July 30, 2011
Net sales	$	113,739		$	125,033
Percentage of consolidated net sales		84	%		84	%
Comparable store sales percentage (decrease) increase compared to the prior year fiscal quarter		(11.0	)%		6.2	%
Operating (loss) income	$	(8,579	)	$	10,280
Sales per square foot	$	58		$	65
Number of stores as of quarter end		468			460
Square footage as of quarter end		1,870			1,832

The comparable store sales decrease during the 13 weeks ended July 28, 2012, was due primarily to a decrease of 11.7% in comparable store average transactions, partially offset by an increase of 0.4% in comparable store average dollar sales per transaction. The increase in comparable store average dollar sales per transaction resulted from a 1.4% increase in units purchased per customer, partially offset by a 1.5% decrease in our average unit retail prices. The net sales decrease was attributable to the comparable store sales decline and a $0.5 million decrease in net sales in our e-commerce business, partially offset by the increase in the number of stores compared to the prior year.

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Wet Seal incurred an operating loss of 7.5% of net sales during the 13 weeks ended July 28, 2012, compared to operating income of 8.2% of net sales during the 13 weeks ended July 30, 2011. The decrease in operating income, as a percentage of sales, was due primarily to a decrease in merchandise margin as a result of higher markdown rates and an increase in occupancy costs, in dollars and as a percentage of sales, due to the deleveraging effect of the decline in comparable store sales, compared to the prior year. Additionally, during the 13 weeks ended July 28, 2012, and July 30, 2011, operating (loss) income included asset impairment charges of $7.9 million and $0.6 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.

Arden B:

(In thousands, except percentages, sales per square foot and number of stores)	13 Weeks  Ended July 28,��2012			13 Weeks Ended July 30, 2011
Net sales	$	21,522		$	23,737
Percentage of consolidated net sales		16	%		16	%
Comparable store sales percentage decrease compared to the prior year fiscal quarter		(11.6	)%		5.0	%
Operating (loss) income	$	(1,578	)	$	1,449
Sales per square foot	$	75		$	85
Number of stores as of quarter end		82			82
Square footage as of quarter end		254			253

The comparable store sales decrease during the 13 weeks ended July 28, 2012, was due to an 8.2% decrease in comparable store average transactions and a 3.7% decrease in comparable store average dollar sales per transaction. The decrease in the comparable store average dollar sales per transaction resulted from a 10.6% decrease in our average unit retail prices, partially offset by a 7.7% increase in units purchased per customer. The net sales decrease was attributable to the comparable sales decline, partially offset by a $0.1 million increase in net sales in our e-commerce business.

Arden B incurred an operating loss of 7.3% of net sales during the 13 weeks ended July 28, 2012, compared to operating income of 6.1% of net sales during the 13 weeks ended July 30, 2011. This decrease was due primarily to a decrease in merchandise margin as a result of higher markdown rates and an increase in occupancy costs, as a percentage of sales, due to the deleveraging effect of the decline in comparable store sales, compared to the prior year. Additionally, during the 13 weeks ended July 28, 2012 and July 30, 2011, operating loss included asset impairment charges of $1.1 million and $0.5 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.

Twenty-Six Weeks Ended July 28, 2012, Compared to Twenty-Six Weeks Ended July 30, 2011

Net sales

	26 Weeks Ended July 28, 2012		Change From Prior Fiscal Period					26 Weeks Ended July 30, 2011
			($ in millions)
Net sales	$	283.2	$	(21.6	)	(7.1	)%	$	304.8
Comparable store sales decrease						(9.3	)%

Net sales for the 26 weeks ended July 28, 2012, decreased primarily as a result of the following:

• A decrease of 9.3% in comparable store sales resulting from an 11.3% decrease in comparable store average transactions, partially offset by a 2.0% increase in comparable store average dollar sales per transaction. Comparable store average dollar sales per transaction increased mainly due to a 4.3% increase in the number of units purchased per customer, partially offset by a 2.6% decrease in average unit retail prices; and

• A decrease of $2.1 million in net sales for our e-commerce business as compared to the prior year, which is not a factor in calculating our comparable store sales.

The decrease in net sales was partially offset by an increase in number of stores open, from 542 stores as of July 30, 2011, to 550 stores as of July 28, 2012.

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Cost of sales

	26 Weeks Ended July 28, 2012			Change From Prior Fiscal Period				26 Weeks Ended July 30, 2011
				($ in millions)
Cost of sales	$	208.8		$	3.5	1.7	%	$	205.3
Percentage of net sales		73.7	%			6.4	%		67.3	%

Cost of sales as a percentage of net sales increased due primarily to a decrease in merchandise margin as a result of higher markdown rates in both the Wet Seal and Arden B divisions, as compared to the prior year, and the deleveraging effect on occupancy costs from the decline in comparable store sales.

Cost of sales dollars increased primarily due to higher markdowns, partially offset by the decline in sales, and an increase in occupancy cost as a result of the increase in number of stores.

Selling, general, and administrative expenses (SG&A)

	26 Weeks Ended July 28, 2012			Change From Prior Fiscal Period				26 Weeks Ended July 30, 2011
				($ in millions)
Selling, general, and administrative expenses	$	81.8		$	0.2	0.3	%	$	81.6
Percentage of net sales		28.9	%			2.1	%		26.8	%

Selling expenses decreased approximately $1.3 million from the prior year to $62.7 million. As a percentage of net sales, selling expenses were 22.1% of net sales, or 110 basis points higher than a year ago.

The following contributed to the current year decrease in selling expenses:

• A $1.0 million decrease in credit card fees due to a decline in average processing fees as a percent to sales;

• A $0.8 million decrease in store payroll and benefits costs as a result of decreased sales volume and lower incentive bonuses;

• A $0.3 million decrease in merchandise delivery costs due to merchandise handling efficiencies;

• A $0.2 million decrease in bags and boxes usage as a result of decreased sales volume;

• A $0.2 million decrease in security costs due to a decline in security system repairs; and

• A $0.1 million decrease in store supplies as a result of decreased sales volume.

However, the decreases in selling expenses were partially offset by the following increases:

• A $1.0 million net increase in advertising and marketing expenditures; and

• A $0.3 million net increase in travel and meeting costs primarily associated with additional field employee training.

General and administrative expenses increased approximately $1.5 million from the prior year, to $19.1 million. As a percentage of net sales, general and administrative expenses were 6.8%, or 100 basis points higher than a year ago.

The following contributed to the current year increase in general and administrative expenses:

• $1.9 million in potential severance costs resulting from the departure of our previous chief executive officer (no severance agreement has yet been entered into);

• A $0.8 million increase in corporate wages, primarily due to filled positions in various corporate functions;

• A $0.3 million increase in loss on asset disposals due to the disposition of software development costs related to an e-commerce platform and social media game which we are no longer pursuing;

• A $0.1 million increase in legal fees associated with various legal matters;

• A $0.1 million increase in audit fees due to the timing of services performed as compared to the prior year;

• A $0.1 million increase in computer maintenance costs; and

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• A $0.1 million increase in strategic consulting fees.

The increases in general and administrative expenses were partially offset by the following decreases:

• A $1.1 million decrease in corporate bonuses based on a shortfall in our financial performance relative to bonus targets;

• A $0.3 million refund from a factoring company for merchandise vendors for adjustments to prior years’ payments;

• A $0.3 million decrease in recruiting fees as the prior year included a portion of the costs for our searches and relocation costs for our previous chief executive office and our president and chief operating officer; and

• A $0.2 million net decrease in other general and administrative expenses.

Asset impairment

	26 Weeks Ended July 28, 2012			Change From Prior Fiscal Period				26 Weeks Ended July 30, 2011
	($ in millions)
Asset impairment	$	12.6		$	11.3	855.9	%	$	1.3
Percentage of net sales		4.5	%			4.1	%		0.4	%

Based on our quarterly assessments of the carrying value of long-lived assets, during the 26 weeks ended July 28, 2012, and July 30, 2011, 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 $12.6 million and $1.3 million, respectively.

Interest (expense) income, net

	26 Weeks Ended July 28, 2012			Change From Prior Fiscal Period					26 Weeks Ended July 30, 2011
	($ in millions)
Interest (expense) income, net	$	(0.0	)	$	(0.0	)	0.0	%	$	0.0
Percentage of net sales		(0.0	)%				(0.0	)%		0.0	%

We generated interest expense, net, of less than $0.1 million in the 26 weeks ended July 28, 2012, primarily from the amortization of deferred financing costs, partially offset by earnings from investments in cash and cash equivalents, and we generated interest income, net, of less than $0.1 million in the 26 weeks ended July 30, 2011, primarily from earnings from investments in cash and cash equivalents and short-term investments, partially offset by amortization of deferred financing costs.

(Benefit) Provision for income taxes

	26 Weeks Ended July 28, 2012			Change From Prior Fiscal Period					26 Weeks Ended July 30, 2011
				($ in millions)
(Benefit) Provision for income taxes	$	(7.4	)	$	(13.9	)	(213.4	)%	$	6.5

Our effective income tax rate for the 26 weeks ended July 28, 2012, was approximately 36.8%. We expect a 37.6% effective income tax rate for fiscal 2012. Our effective income tax rates reflect a $0.3 million write-off of certain deferred tax assets as a result of IRS adjustments from our recently closed IRS audits of our fiscal 2008 and 2009 tax years. We anticipate cash payment for income taxes for the fiscal year will be approximately $0.1 million, representing certain state income taxes. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash benefit for deferred income taxes.

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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, 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)	26 Weeks Ended July 28, 2012			26 Weeks Ended July 30, 2011
Net sales	$	239,914		$	256,086
Percentage of consolidated net sales		85	%		84	%
Comparable store sales percentage (decrease) increase compared to the prior year fiscal quarter		(8.9	)%		7.3	%
Operating income	$	745		$	29,094
Sales per square foot	$	122		$	134
Number of stores as of quarter end		468			460
Square footage as of quarter end		1,870			1,832

The comparable store sales decrease during the 26 weeks ended July 28, 2012, was due primarily to a decrease of 11.1% in comparable store average transactions, partially offset by an increase of 2.2% in comparable store average dollar sales per transaction. The increase in comparable store average dollar sales per transaction resulted from a 3.8% increase in units purchased per customer, partially offset by a 2.1% decrease in our average unit retail prices. The net sales decrease was attributable to the comparable store sales decline and a $1.3 million decrease in net sales in our e-commerce business, partially offset by the increase in the number of stores compared to the prior year.

Wet Seal’s operating income decreased to 0.3% of net sales during the 26 weeks ended July 28, 2012, from 11.4% of net sales during the 26 weeks ended July 30, 2011. The decrease in operating income, as a percentage of sales, was due primarily to a decrease in merchandise margin as a result of higher markdown rates and an increase in occupancy costs due to the deleveraging effect of the decline in comparable store sales. Additionally, during the 26 weeks ended July 28, 2012, and July 30, 2011, operating income included asset impairment charges of $10.6 million and $0.8 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.

Arden B:

(In thousands, except percentages, sales per square foot and number of stores)	26 Weeks  Ended July 28, 2012			26 Weeks Ended July 30, 2011
Net sales	$	43,292		$	48,724
Percentage of consolidated net sales		15	%		16	%
Comparable store sales percentage (decrease) increase compared to the prior year fiscal quarter		(11.5	)%		2.4	%
Operating (loss) income	$	(2,882	)	$	4,014
Sales per square foot	$	150		$	171
Number of stores as of quarter end		82			82
Square footage as of quarter end		254			253

The comparable store sales decrease during the 26 weeks ended July 28, 2012, was due to a 12.9% decrease in comparable store average transactions, partially offset by a 1.5% increase in comparable store average dollar sales per transaction. The increase in the comparable store average dollar sales per transaction resulted from a 9.0% increase in units purchased per customer, partially offset by a 6.8% decrease in our average unit retail prices. The net sales decrease was attributable to the comparable sales decline and a $0.8 million decrease in net sales in our e-commerce business, as compared to the prior year.

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Arden B incurred an operating loss of 6.7% of net sales during the 26 weeks ended July 28, 2012, compared to operating income of 8.2% of net sales during the 26 weeks ended July 30, 2011. This decrease was due primarily to a decrease in merchandise margin as a result of higher markdown rates and an increase in occupancy costs due to the deleveraging effect of the decline in comparable store sales. Additionally, during the 26 weeks ended July 28, 2012, and July 30, 2011, operating (loss) income included asset impairment charges of $2.0 million and $0.5 million, respectively, to write down the carrying value of long-lived assets that were identified during our quarterly impairment evaluations.

Liquidity and Capital Resources

Net cash provided by operating activities was $1.1 million for the 26 weeks ended July 28, 2012, compared to net cash provided by operating activities of $27.0 million for the same period last year. For the 26 weeks ended July 28, 2012, cash provided by operating activities was comprised of net non-cash charges and credits, primarily depreciation and amortization, asset impairment, stock-based compensation and benefit for deferred income taxes, of $17.1 million, and a nominal net source of cash from changes in other operating assets and liabilities, partially offset by a net loss of $12.6 million and an increase in merchandise inventories over the increase of merchandise payables of $3.4 million. For the 26 weeks ended July 28, 2012, net cash used in investing activities of $11.6 million was comprised of capital expenditures, primarily for the construction of new Wet Seal stores, remodeling of existing Wet Seal and Arden B stores upon lease renewals and/or store relocations, and investment in the network infrastructure within our corporate offices. Capital expenditures that remain unpaid as of July 28, 2012, have increased $2.3 million since the end of fiscal 2011. We expect to pay nearly all of the total balance of such amounts payable of $3.6 million during the third quarter of fiscal 2012.

We estimate that, in fiscal 2012, capital expenditures will be between $22 million and $24 million, of which approximately $16 million to $17 million is expected to be for the remodeling and/or relocation of existing Wet Seal and Arden B stores upon lease renewals and the construction of new Wet Seal stores. We anticipate receiving approximately $2 million in tenant improvement allowances from landlords, resulting in net capital expenditures of between $20 million and $22 million.

For the 26 weeks ended July 28, 2012, net cash used in financing activities was $0.2 million, comprised of $0.2 million used to repurchase 67,247 shares of our Class A common stock to satisfy employee withholding tax obligations, slightly offset by less than $0.1 million of proceeds from the exercise of stock options.

Total cash and cash equivalents at July 28, 2012, was $146.5 million compared to $157.2 million at January 28, 2012. Due to the timing of the second quarter end date, we had not yet paid $9.6 million of our August rents and other landlord costs at that time. Typically, we have made such payments as of the fiscal quarter-end date.

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 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 July 28, 2012, the amount outstanding under the Facility consisted of $3.8 million in open documentary letters of credit related to merchandise purchases and $1.5 million in outstanding standby letters of credit. At July 28, 2012, we had $29.7 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.

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We believe we will have sufficient cash and credit availability to meet our operating and capital 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.

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 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 as a result of rising commodity prices, primarily for cotton, increased labor costs, due to labor shortages in China, from which a majority of our merchandise is sourced, and volatile fuel costs. Our business could be affected by similar cost pressures in the future and 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 cost increases, we seek to leverage our large vendor base to lower costs and closely manage promotional strategies to mitigate the impact on merchandise margin levels. We will continue to diligently monitor our costs as well as the competitive pricing environment in order to control margin erosion and ensure we continue to offer fashion at a value. However, our margins have been and may continue to be adversely affected and we cannot be certain that our business will not be affected by inflation in the future.

Off-Balance Sheet Arrangements

As of July 28, 2012, we are not a party to any off-balance sheet arrangements, except for operating lease and purchase obligations as referenced in our Form 10-K for the fiscal year ended January 28, 2012, under “Commitments and Contingencies” and “Other Off-Balance Sheet Arrangements.”

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 July 28, 2012, no borrowings were outstanding under the Facility. At July 28, 2012, the weighted average interest rate on borrowings under the Facility was 1.333%. Based upon a sensitivity analysis as of July 28, 2012, if we had average outstanding borrowings of $1 million during second quarter of fiscal 2012, a 50 basis point increase in interest rates would have resulted in an increase in interest expense of approximately $1,250 for the second quarter of fiscal 2012.

As of July 28, 2012, 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 July 28, 2012, 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.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our co-principal executive officers and principal 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 co-principal executive officers and principal financial officer, in order to allow timely decisions regarding required disclosures. Based on this evaluation, our co-principal executive officers and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of July 28, 2012.

Changes in Internal Control Over Financial Reporting

During the fiscal quarter ended July 28, 2012, 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.

PART II. Other Information

Item 1. Legal Proceedings

On July 19, 2006, 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 that were employed and paid by us on an hourly basis during the four-year period from July 19, 2002, through July 19, 2006. We were named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and orders issued by the Industrial Welfare Commission. On November 30, 2006, we reached an agreement to pay approximately $0.3 million to settle this matter, subject to Superior Court approval. On September 27, 2010, the Superior Court granted final approval of the settlement agreement. An appeal was subsequently filed on January 26, 2011. On July 25, 2012, the Court of Appeals dismissed Plaintiffs’ appeal. Plaintiffs’ counsel has forty days from July 25, 2012, to file a petition for appeal to the California Supreme Court. As of July 28, 2012, we have accrued an amount equal to the settlement amount, plus $0.1 million in settlement administration fees, in accrued liabilities in our condensed consolidated balance sheet.

On May 22, 2007, a complaint was filed in the Superior Court of the State of California for the County of Orange on behalf of certain of our current and former employees who were employed and paid by us from May 22, 2003 through the present. We were named as a defendant. The complaint alleged various violations under the State of California Labor Code, the State of California Business and Professions Code, and Wage Orders of the Industrial Welfare Commission. On December 17, 2010, the court denied Plaintiffs’ Motion for Class Certification and Motion For Leave to File An Amended Complaint. Plaintiffs have appealed both orders. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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. On August 16, 2011, the court denied Plaintiffs’ Motion for Class Certification. Plaintiffs have appealed. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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 our employees. In the course of this investigation, the EEOC served a subpoena seeking information related to current and former employees throughout the United States. In April 2010, the EEOC filed an application to enforce the subpoena in the U.S. District Court for the Eastern District of Pennsylvania, and is in the process of a nationwide investigation. We are awaiting the results of the investigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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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. On February 3, 2012, the court granted our motion to transfer venue to the County of Orange. On July 13, 2012, the Court granted our motion to compel arbitration. 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 commencement with their employment with us. Plaintiffs allege that our arbitration agreements unlawfully compel employees to waive their rights to participate in class or representative actions against us. The NLRB is investigating these charges, however, the Court has already found that the arbitration agreements are enforceable and declined to follow the NLRB’s ruling inIn re D.R. Horton, Inc. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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. The complaint alleges various violations under the State of California Labor Code and the State of California Business and Professions Code. On April 2, 2012, the court granted our motion to compel arbitration and to enforce the class action waiver in the arbitration agreement between the Plaintiff and us. The Plaintiff filed a stipulated motion to amend her complaint and agreed to dismiss with prejudice all individual claims subject to arbitration. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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 alleges 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 are also alleging retaliation. Plaintiffs are seeking 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. We are vigorously defending this litigation and are unable to predict the likely outcome and whether such outcome may have a material adverse effect on our results of operations or financial condition. Accordingly, no provision for a loss contingency has been accrued as of July 28, 2012.

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, we have insurance to cover a portion of such losses. However, certain matters may exist or arise for which we do not have insurance coverage and which could have a material adverse effect on our results of operations or financial condition.

Item 1A. Risk Factors

The following risk factors represent additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended January 28, 2012.

We have recorded asset impairment charges in the past and we may record material asset impairment charges in the future.

At least quarterly, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. If we determine that the carrying value of long-lived assets is not recoverable, we will be required to record impairment charges relating to those assets. For example, our assessments during the 26 weeks ended July 28, 2012, indicated that operating losses or insufficient operating income existed at certain retail stores, with a projection that the operating losses or insufficient operating income for those locations would continue. As such, we recorded a non-cash charge of $12.6 million during the 26 weeks ended July 28, 2012 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 the future, we may determine that we are not able to achieve our projected growth rates and cash flows, strategic initiatives currently being implemented have not resulted in significant improvements to our performance, or the carrying value of our long-lived assets may not be recoverable, particularly in light of the recent declines in our comparable store sales and merchandise margin and our recent operating losses. As a result, we may determine that additional impairment charges are required. In the event we record impairment charges, this could have a material adverse effect on our results of operations.

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We may incur significant costs and face other risks associated with the departure of our former chief executive officer and our effort to attract a new chief executive officer for our company.

On July 23, 2012, we announced the departure of our former chief executive officer. We have accrued $1.9 million of potential severance costs resulting from the departure of our former chief executive officer. However, as of the date of this report, we have not entered into a severance agreement with her. If we enter into such an agreement, we may incur severance costs in excess of the amount of the accrual. In addition, our Board of Directors has hired a leading executive recruiter, Korn/Ferry International, to assist in its search for a new chief executive officer. We may incur significant costs to attract a new chief executive officer and we cannot assure you we will be able to appoint a new chief executive officer in a timely manner. If we appoint a new chief executive officer, we anticipate that we will experience a transition period before the new chief executive officer is fully integrated into his or her new roles. During the time we search for a new chief executive officer and the transition period after any such person is hired, we may experience a disruption to our customer relationships, employee morale and/or business.

We may continue to experience declines in comparable store sales, and there can be no guarantee that the strategic initiatives we are implementing to improve our results will be successful.

During the 13 and 26 weeks ended July 28, 2012, our comparable store sales declined by 11.1% and 9.3%, respectively. We are taking steps to return to our core expertise of fast fashion merchandising which long supported success at our Company in the past. See “Part I. Financial Information – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Current Trends and Outlook” and “Part I. Financial Information – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Employee Retention Plan.” However, there can be no guarantee that our financial results will improve and, if they do, there can be no guarantee as to the timing, duration or significance of such improvement.

We face risks related to claims and legal proceedings, which could have a material adverse effect on our results of operations or financial condition.

From time to time, we are subject to various claims and legal proceedings, including, without limitation, those arising or allegedly arising out of wage and hour claims, discrimination claims and other claims under labor laws. For example, we are currently subject to the legal proceedings described under “Part II. Other Information – Item 1. Legal Proceedings.” The claims and legal proceedings to which we are or may become subject could involve large damages or settlements and significant defense costs. We maintain insurance to cover a portion of the losses associated with settlements and adverse judgments, but those losses could exceed the scope of the coverage in effect, or coverage of particular claims or legal proceedings could be unavailable or denied. As a result, certain claims and legal proceedings may exist or arise for which we do not have insurance coverage and which could have a material adverse effect on our results of operations or financial condition.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) None.

(b) None.

(c) None.

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	Form of Restricted Stock Award Agreement for Directors.
31.1	Certification filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from The Wet Seal, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended July 28, 2012, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets (Unaudited), (ii) the Condensed Consolidated Statements of Operations (Unaudited), (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) (iv) the Condensed Consolidated Statements of Stockholders’ Equity (Unaudited), (v) the Condensed Consolidated Statements of Cash Flows (Unaudited), and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited), tagged as blocks of text. This exhibit will not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of 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 that 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)
Date: August 24, 2012	By:	/s/ Ken Seipel
		Ken Seipel
		President and Chief Operating Officer
Date: August 24, 2012	By:	/s/ Steven H. Benrubi
		Steven H. Benrubi
		Executive Vice President and Chief Financial Officer

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