Wet Seal Inc. Reports Operating Results (10-Q)
Wet Seal Inc. is a nationwide specialty retailer of fashionable andcontemporary apparel and accessory items designed for consumers with a young active lifestyle. The company operates stores under the following names: Contemp Casual; Wet Seal; Arden B. ; and Limbo Lounge. The companyalso operates a catatlog and an e-commerce under Blue Asphalt brand name. Wet Seal Inc. has a market cap of $310 million; its shares were traded at around $3.2 with a P/E ratio of 10.3 and P/S ratio of 0.5. Highlight of Business Operations: Comparable store salesFor purposes of measuring comparable store sales, sales include merchandise sales as well as membership fee revenues recognized under our Wet Seal divisions 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 certain 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.
We currently operate in a challenging retail environment driven by several factors, including disruptions in the U.S. housing and financial markets, increasing unemployment rates across all regions of the U.S. and significant declines in consumer confidence and spending. During the first calendar quarter of 2009 and the fourth calendar quarter of 2008, U.S. gross domestic product decreased 5.7% and 6.3%, respectively, on a year-over-year basis, the fourth calendar quarter of 2008 representing the largest such quarterly decline in the last 26 years. Our operating performance is susceptible to the recent changes in the general economic conditions, which have impacted consumer confidence and discretionary consumer spending in the United States. If the conditions remain uncertain or continue to be volatile, our operating performance may be adversely affected.
Our comparable store sales decreased 7.3% for the 13 weeks ended May 2, 2009, driven by a 7.9% comparable store sales decline in our Wet Seal division and a 4.1% comparable store sales decline in our Arden B division. The Wet Seal division comparable store sales decline was primarily driven by transaction volume decline. Additionally, the Wet Seal division experienced a decline in its average unit retail prices, partially offset by an increase in its units purchased per customer. The Arden B division comparable store sales decline reflects improvement over recent trends as a result of significant merchandise mix changes and a late January 2009 pricing strategy change whereby we lowered price points approximately 20% to 25% across all product categories.
In the first quarter of fiscal 2009, based on historical analysis, we modified the estimated annual forfeiture rate used in recognizing stock-based compensation expense for our executives and other employees, from a 10% forfeiture rate to a 15% forfeiture rate. See Note 2 of the Notes to Condensed Consolidated Financial Statements for further information.
Section 382 contains provisions that may limit the availability of federal NOLs to be used to offset taxable income in any given year upon the occurrence of certain events, including significant changes in ownership interests of our common stock. Under Section 382, an ownership change that triggers potential limitations on NOLs occurs when there has been a greater than 50% change in ownership interest by shareholders owning 5% or more of a company over a period of three years or less. Our current expectations regarding the federal NOLs we may use annually in fiscal 2009 and thereafter are based on calculations made by management in April 2005 and December 2006, at which times the Company incurred Section 382 ownership changes. If we were to determine that we had incurred another ownership change at some time after December 2006, we would be required to re-calculate our annual federal net operating loss utilization limit, which could result in a decrease to NOLs annually available to offset taxable income.
Cost of sales decreased due primarily to the 7.3% decrease in net sales and a decrease in buying, planning and allocation costs primarily due to eliminated positions upon restructuring of the Arden B buying and design organization and favorable impacts on stock-based compensation from forfeitures from previously employed executives and a change in stock compensation forfeiture rate from 10% to 15% based on historical analysis, partially offset by an increase in distribution labor as a result of an increase in units processed and an increase in occupancy costs due to normal inflation in common area maintenance and other costs.
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