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Press release from Business Wire

The Wet Seal, Inc. Announces Second Quarter Fiscal 2011 Results

<p class='bwalignc'> <b>Introduces Third Quarter 2011 Guidance</b> </p>

Thursday, August 18, 2011

The Wet Seal, Inc. Announces Second Quarter Fiscal 2011 Results16:00 EDT Thursday, August 18, 2011 FOOTHILL RANCH, Calif. (Business Wire) -- The Wet Seal, Inc. (Nasdaq:WTSLA), a leading specialty retailer to young women, announced results for its fiscal second quarter ended July 30, 2011, and introduced guidance for the third quarter of fiscal 2011. For the second quarter: Net sales were $148.8 million compared to net sales of $131.5 million for the prior year second quarter. Consolidated comparable store sales increased 6.0%. Comparable store sales for Wet Seal increased 6.2% and for Arden B increased 5.0%. Operating income was $3.3 million, or 2.2% of net sales, compared to $2.6 million, or 2.0% of net sales, in the prior year second quarter. The current year quarter included $1.1 million in non-cash asset impairment charges and the prior year quarter included $1.0 million in non-cash asset impairment charges. Net income was $2.2 million, or $0.02 per diluted share, as compared to $1.6 million, or $0.02 per diluted share, in the prior year quarter. Excluding the after-tax effect of the non-cash asset impairment charges, net income would have been $2.8 million, or $0.03 per diluted share, in the current year quarter, and would have been $2.2 million, or $0.02 per diluted share, in the prior year quarter. As of quarter-end, the Company's inventory per square foot was up 2% versus the prior year quarter, with Wet Seal up 1% and Arden B up 7%. The Company generated cash flows from operations of $9.5 million during the second quarter, and ended the quarter with $147.8 million of cash, cash equivalents and short-term investments, and no debt. Ms. Susan McGalla, chief executive officer of The Wet Seal, Inc., commented, “We were pleased with continued momentum in our business through the second quarter as we entered the back-to-school selling season. We generated our strongest second quarter comparable store sales results since 2005, reflecting continued strength and balance in our merchandise assortments, a clarified message of unique fashion at a value in our Wet Seal stores, and a strengthening of the business trend in our Arden B stores. “We also ended the second quarter comfortable with the level and overall content of our inventories.” Ms. McGalla continued, “In the first half of August, during important early weeks of the back-to-school season, we have been encouraged by continued mid-single digit positive comparable store sales on a consolidated basis.” Store Openings and Closings The Company had eight store openings and two store closings at Wet Seal and no store openings or closings at Arden B during the second quarter. At July 30, 2011, the Company operated 542 stores in 47 states and Puerto Rico, including 460 Wet Seal stores and 82 Arden B stores. Capital Expenditures and Depreciation During the second quarter, the Company incurred capital expenditures of $8.1 million, of which $6.8 million was for construction of new stores and remodels of existing stores. The Company recognized tenant improvement allowances of $1.1 million associated primarily with new store construction, resulting in net capital expenditures for the quarter of $7.0 million. Depreciation in the second quarter totaled $4.8 million as compared to $4.0 million in the prior year second quarter. Capital Transactions Under a $56.7 million stock repurchase program approved by its Board of Directors, during the second quarter the Company repurchased 8,778,525 shares of its Class A common stock at a total cost of $39.4 million. Under this program, through July 30, 2011, the Company had repurchased 10,660,825 shares of its Class A common stock at a total cost of $46.1 million. Subsequent to July 30, 2011, the Company repurchased an additional 2,314,957 shares of its Class A common stock at a total cost of $10.6 million, which completed the $56.7 million stock repurchase program. Upon completion of the stock repurchase program on August 15, 2011, the Company had 90,511,267 shares of its Class A common stock outstanding. Income Taxes The Company incurred a provision for income taxes of $1.1 million for the quarter, bringing its year-to-date effective income tax rate to 39%, which is the expected effective rate for the fiscal year. Due to its expected utilization of federal and state net operating loss (“NOL”) carry forwards during fiscal 2011, the Company anticipates cash income taxes for the year will only be approximately 4.5% of pre-tax income, representing the portion of federal and state alternative minimum taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash provision for deferred incomes taxes. During the third quarter of fiscal 2010, the Company determined it previously had interpreted federal tax rules incorrectly pertaining to expiration of charitable contribution carry forwards available to offset future taxable income. The Company also identified certain other minor errors in its deferred income taxes. As a result, the Company had overstated its net deferred tax assets and stockholders' equity by approximately $6.6 million as of the end of fiscal 2009 and the first two quarters of fiscal 2010. The accompanying condensed consolidated balance sheet as of July 31, 2010, reflects correction of this overstatement. Third Quarter Fiscal 2011 Guidance For the third quarter of fiscal 2011, earnings are estimated in the range of $0.05 to $0.06 per diluted share. The guidance is based on the following major assumptions: Total net sales between $159 million and $161 million versus $146.4 million in the third quarter of fiscal 2010. Comparable store sales increase in the mid-single digits versus a 0.1% decrease in the prior year third quarter. Gross margin rate between 31.5% and 32.1% of net sales versus 30.4% in the prior year third quarter, with expectations of an increase in merchandise margin. SG&A expense of 26.7% of net sales versus 25.9% in the prior year third quarter, with the increase mainly driven by increased stock compensation for stock awards granted upon hire of the Company's chief executive officer and chief operating officer and increased incentive compensation expense. Operating income between $7.6 million and $8.8 million versus operating income of $5.1 million in the prior year third quarter. The prior year third quarter operating income included $1.6 million in non-cash asset impairment charges. Interest income of less than $0.1 million versus interest income of less than $0.1 million in the prior year third quarter. Income tax expense of between $3.0 million and $3.4 million versus income tax expense of $2.6 million in the prior year third quarter. In the prior year third quarter, the Company elected a tax method change, upon filing its 2009 federal tax return, that resulted in the reduction of deferred tax assets related to its charitable contribution carry-forwards of $0.5 million. This decrease was recorded as a non-cash deferred income tax charge and increased the effective tax rate for the quarter. Net new store openings of 2 stores at Wet Seal and 4 stores at Arden B. Weighted-average diluted shares outstanding of between 90 million and 91 million shares. For all of fiscal 2011, the Company now expects to have 20 net Wet Seal store openings and 3 net Arden B store openings. The Company forecasts fiscal 2011 net capital expenditures will be approximately $22 million to $23 million, of which approximately $17 million to $18 million will be for construction of new stores or remodeling of existing stores upon lease renewals and/or store relocations. Conference Call The Company will host a conference call and question and answer session at 1:30 p.m. Pacific Time today. To participate in the conference call, please dial 888-609-5667 and provide ID number 9072841. A broadcast of the call will also be available on the Company's website, www.wetsealinc.com. A replay of the call will be available through August 25, 2011. To access the replay, please call (888) 203-1112 or (719) 457-0820 and provide the ID number above. About The Wet Seal, Inc. Headquartered in Foothill Ranch, California, The Wet Seal, Inc. is a leading specialty retailer of fashionable and contemporary apparel and accessory items. As of July 30, 2011, the Company operated a total of 542 stores in 47 states and Puerto Rico, including 460 Wet Seal stores and 82 Arden B stores. The Company's products can also be purchased online at www.wetseal.com or www.ardenb.com. For more company information, visit www.wetsealinc.com. Safe Harbor SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This news release contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements that relate to the Company's guidance for its third quarter of fiscal 2011 and its store opening and capital spending plans for all of fiscal 2011, or any other statements that relate to the intent, belief, plans or expectations of the Company or its management. All forward-looking statements made by the Company involve material risks and uncertainties and are subject to change based on factors beyond the Company's control. Accordingly, the Company's future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, those described in the Company's filings with the Securities and Exchange Commission. This news release contains results reflecting partial year data and non-fiscal data that may not be indicative of results for similar future periods or for the full year. The Company will not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized. Exhibit A       The Wet Seal, Inc.Condensed Consolidated Balance Sheets (000's Omitted) (Unaudited)     July 30,2011January 29,2011   July 31,2010 ASSETS Cash and cash equivalents $ 109,566 $ 125,362 $ 165,516 Short-term investments 38,230 50,690 - Merchandise inventories 43,176 33,336 39,285 Other current assets 17,620 14,592 13,531 Deferred taxes   19,649   19,649     19,600   Total current assets 228,241 243,629 237,932 Net equipment and leasehold improvements 93,164 88,720 87,029 Deferred taxes 27,516 33,255 40,349 Other assets   3,034   2,928     2,560   Total assets $ 351,955 $ 368,532   $ 367,870     LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable – merchandise $ 29,287 $ 20,455 $ 21,970 Accounts payable – other 14,221 11,571 15,665 Income taxes payable - 60 - Accrued liabilities 26,248 24,752 24,561 Current portion of deferred rent   3,435   3,338     2,876   Total current liabilities 73,191 60,176 65,072 Deferred rent 31,800 30,900 28,988 Other long-term liabilities   1,700   1,763     1,707   Total liabilities 106,691 92,839 95,767 Total stockholders' equity   245,264   275,693     272,103   Total liabilities and stockholders' equity $ 351,955 $ 368,532   $ 367,870     Exhibit A (Continued)     The Wet Seal, Inc.Condensed Consolidated Statements of Operations (000's Omitted, Except Share Data) (Unaudited)     13 Weeks Ended   26 Weeks EndedJuly 30, 2011   July 31, 2010   July 30, 2011   July 31, 2010 Net sales $148,770   $131,541 $304,810   $269,303 Gross margin 46,077 38,382 99,522 83,505 Selling, general & administrative expenses 41,695 34,737 81,555 69,801 Asset impairment 1,057   1,041   1,316   1,131   Operating income 3,325 2,604 16,651 12,573 Interest income (expense), net 22   60   51   (2,833 ) Income before provision for income taxes 3,347 2,664 16,702 9,740 Provision for income taxes 1,149   1,049   6,491   4,983   Net income $2,198   $1,615   $10,211   $4,757   Weighted average shares, basic 95,731,926 100,257,750 97,324,336 98,756,560 Net income per share, basic (1) $0.02 $0.02 $0.10 $0.05 Weighted average shares, diluted 95,835,044 100,556,634 97,399,349 99,414,245 Net income per share, diluted (1) $0.02 $ 0.02 $0.10 $0.05   (1) Calculation of the Company's earnings per share requires the allocation of net income among common shareholders and participating security holders. The net income available to common shareholders used to calculate basic and diluted earnings per share, respectively, was $2,139, $2,139, $9,962 and $9,962 for the 13 and 26 weeks ended July 30, 2011, and $1,592, $1,592, $4,630, and $4,631 for the 13 and 26 weeks ended July 31, 2010.     Exhibit A (continued)   The Wet Seal, Inc.Consolidated Statements of Cash Flows (000's Omitted) (Unaudited)     26 Weeks EndedJuly 30,July 31,2011   2010   CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 10,211 $ 4,757 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,481 7,988 Amortization of premium on investments 460 - Amortization of discount on secured convertible notes - 2,083 Amortization of deferred financing costs 52 145 Amortization of stock payment in lieu of rent 31 49 Adjustment of derivatives to fair value - (20 ) Interest added to principal of secured convertible notes - 35 Asset impairment 1,316 1,131 Conversion inducement fee - 700 Loss on disposal of equipment and leasehold improvements 46 537 Deferred income taxes 5,739 4,804 Stock-based compensation 1,960 619 Changes in operating assets and liabilities: Other receivables (599 ) (902 ) Merchandise inventories (9,840 ) (10,126 ) Prepaid expenses and other assets (2,481 ) (1,356 ) Other non-current assets (106 ) 24 Accounts payable and accrued liabilities 9,841 7,628 Income taxes payable (60 ) (47 ) Deferred rent 997 302 Other long-term liabilities (66 ) (66 ) Net cash provided by operating activities 26,982   18,285     CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment and leasehold improvements (14,096 ) (13,040 ) Proceeds from sale of marketable securities 12,000   -   Net cash used in investing activities (2,096 ) (13,040 )   CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 495 206 Conversion inducement fee - (700 ) Repurchase of common stock (41,177 ) (5,199 ) Proceeds from exercise of common stock warrants -   4,271   Net cash used in financing activities (40,682 ) (1,422 )   (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,796 ) 3,823 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 125,362   161,693   CASH AND CASH EQUIVALENTS, END OF PERIOD $ 109,566   $ 165,516       Exhibit B   Segment Reporting (Unaudited) The Company operates exclusively in the retail apparel industry in which it sells fashionable and contemporary apparel and accessories 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 30, 2011, and July 31, 2010, for the two reportable segments is set forth below (in thousands, except store counts and sales per square foot):                         Thirteen Weeks Ended July 30, 2011     Wet Seal       Arden B       Corporate       Total Net sales $ 125,033 $ 23,737 n/a $ 148,770 % of total sales 84 % 16 % n/a 100 % Comparable store sales % increase 6.2 % 5.0 % n/a 6.0 % Operating income (loss) $ 10,280 $ 1,449 $ (8,404 ) $ 3,325 Interest income, net $ - $ - $ 22 $ 22 Income (loss) before provision for income taxes $ 10,280 $ 1,449 $ (8,382 ) $ 3,347 Depreciation $ 3,929 $ 504 $ 381 $ 4,814 Number of stores as of period end 460 82 n/a 542 Sales per square foot $ 65 $ 85 n/a $ 67 Square footage as of period end 1,832 253 n/a 2,085   Thirteen Weeks Ended July 31, 2010     Wet Seal       Arden B       Corporate       Total Net sales $ 108,875 $ 22,666 n/a $ 131,541 % of total sales 83 % 17 % n/a 100 % Comparable store sales % decrease (4.3 )% (4.5 )% n/a (4.3 )% Operating income (loss) $ 6,219 $ 2,676 $ (6,291 ) $ 2,604 Interest income, net $ - $ - $ 60 $ 60 Income (loss) before provision for income taxes $ 6,219 $ 2,676 $ (6,231 ) $ 2,664 Depreciation $ 3,398 $ 370 $ 226 $ 3,994 Number of stores as of period end 432 76 n/a 508 Sales per square foot $ 61 $ 84 n/a $ 64 Square footage as of period end 1,709 230 n/a 1,939   Twenty-Six Weeks Ended July 30, 2011     Wet Seal       Arden B       Corporate       Total Net sales $ 256,086 $ 48,724 n/a $ 304,810 % of total sales 84 % 16 % n/a 100 % Comparable store sales % increase 7.3 % 2.4 % n/a 6.5 % Operating income (loss) $ 29,094 $ 4,014 $ (16,457 ) $ 16,651 Interest income, net $ - $ - $ 51 $ 51 Income (loss) before provision for income taxes $ 29,094 $ 4,014 $ (16,406 ) $ 16,702 Depreciation $ 7,713 $ 1,044 $ 724 $ 9,481 Sales per square foot $ 134 $ 171 n/a $ 139   Twenty-Six Weeks Ended July 31, 2010     Wet Seal       Arden B       Corporate       Total Net sales $ 222,786 $ 46,517 n/a $ 269,303 % of total sales 83 % 17 % n/a 100 % Comparable store sales % (decrease) increase (1.4 )% 0.1 % n/a (1.1 )% Operating income (loss) $ 20,548 $ 5,913 $ (13,888 ) $ 12,573 Interest expense, net $ - $ - $ (2,833 ) $ (2,833 ) Income (loss) before provision for income taxes $ 20,548 $ 5,913 $ (16,721 ) $ 9,740 Depreciation $ 6,764 $ 743 $ 481 $ 7,988 Sales per square foot $ 126 $ 172 n/a $ 131     The “Corporate” column is presented solely to allow for reconciliation of store contribution amounts to consolidated operating income, interest income or expense, net, and income before 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.   Wet Seal operating segment results during the 13 and 26 weeks ended July 30, 2011, and July 31, 2010, include $0.6 million, $0.8 million, $1.0 million and $1.1 million, respectively, of asset impairment charges.   Arden B operating segment results during the 13 and 26 weeks ended July 30, 2011, include $0.5 million and $0.5 million, respectively, of asset impairment charges.   Corporate expenses during the 26 weeks ended July 31, 2010, include non-cash interest expense of $2.1 million as a result of accelerated write-off of remaining unamortized debt discount and deferred financing costs upon conversions of Secured Convertible Notes and $0.7 million of cash interest expense for a conversion inducement associated with conversions of Secured Convertible Notes and Convertible Preferred Stock.     Exhibit C   Reconciliation of Non-GAAP Financial Measures to Most Directly Comparable Financial Measures Included within this press release are references to net income and earnings per diluted share excluding the effect of certain charges, which are measures not in compliance with accounting principles generally accepted in the United States of America, or “non-GAAP financial measures.” The following is a reconciliation of these non-GAAP financial measures to the applicable GAAP financial measures for the 13 week periods ended July 30, 2011, and July 31, 2010 (in millions, except for earnings per diluted share):           13 Weeks Ended 13 Weeks Ended July 30, 2011 July 31, 2010 Net Income   Earnings PerDilutedShare   Net Income   Earnings PerDilutedShare       Financial measure before certain charges (non-GAAP) $ 2.8 $ 0.03 $ 2.2 $ 0.02   Charges: Non-cash asset impairment charges, net of income taxes (0.6 ) (0.01 ) (0.6 ) -               GAAP financial measure $ 2.2     $ 0.02     $ 1.6     $ 0.02     From time to time, the Company determines the carrying values of certain of its long-lived assets are not supported by their anticipated future cash flows and, as a result, must record non-cash charges to impair these assets. The timing and magnitude of these charges can be sporadic, thus significantly affecting the reported financial results of the fiscal period in which they are recorded. Given the unique nature and sporadic timing of these charges, the Company consistently presents these charges as a separate line item within its statements of operations and, similarly, believes the presentation of its historical financial information excluding these non-cash charges to be beneficial to its investors. The Wet Seal, Inc.Steven H. Benrubi, 949-699-3947