This summary is based on the first quarter fiscal 2007 earnings call conducted by The Wet Seal Inc. (WTSLA) on May 23, 2007.
President and Chief Executive Officer: Joel N. Waller
Vice President and Controller: Steve Benrubi
Executive Vice President and Chief Financial Officer: John Luttrell
Key Investors Issues
- Net earnings were 7 cents per share compared to net loss of 22 cents in prior year.
- Quarterly sales reached $138 million as against $125.1 million in last year.
- For Q2, the company expects net sales of between $147 million and $152 million, on low single digit same store sales.
First Quarter Fiscal 2007 Financial Highlights
Net income for quarter was $7.6 million, or 7 cents per diluted share.
Net income per diluted share was at the upper end of the company''s original guidance that indicated a range between 4 cents and 8 cents per diluted share. These results were driven by having the right fashions in the stores that allowed for a higher than planned merchandize margin rate, coupled with greater inventory productivity and tight cost management. The earnings compare to a net loss of $14 million, or 22 cents per diluted share in the prior year quarter. Included in the prior year first quarter was a non-cash interest charge of $18.1 million associated with the conversion of the company''s convertible notes, a non-cash stock compensation charge of $4.1 million associated with a consulting contract that has now expired, a $2.3 million increase in sales associated with changes made to a customer loyalty program, a $0.7 million employee severance charge, and a $0.4 million reduction to a store closure reserve. Before the effect of these items, net income for the first quarter of last year totaled $6.2 million, and adjusted operating income was $6.3 million, or 5.1% of adjusted net sales.
Net sales were $138 million compared with net sales of $125.1 million in the previous year.
In the first quarter last year, the firm revised its Arden B customer loyalty program and added in additional $2.3 million in sale and gross profit, to give effect to the changes made to the program. Before this prior year adjustment, net sales increased 12.3%.
Also contributing to the increase in total net sales were sales for new stores not included in the comparable store sales and over $4 million increase in Internet sales. Using the same periods as used for calculating the comparable store sales increase for the quarter, the firm saw a 2.1% decrease in the combine transaction of same store sales. Comparable store average unit retail in the first quarter increased 10.6% to $12.36. The AUR increase was partially offset by a reduction in the average number of units per transaction by 6.2% to 2.28. AUR’s increase for the first time in several quarters and this increase is a result of a major objective to grow AUR’s since the arrival of chief merchant at Wet Seal.
Comparable store sales for the 13-week period ended May 5, 2007 increased 2.7% compared to the 13-week period ended May 6, 2006.
The company reported a 20% increase in comparable store sales for its first fiscal quarter last year. Although the firm’s comparable store sales for April were down 9.6%, it followed a 10.9% increase in March. Easter was one week earlier this year and the shift in sales from April into March caused a distortion in reported comparable store sales in each of the months. For the combined two months period, comparable store sales increased 1.7%. The April results were somewhat impacted by poor weather conditions particularly in the Northeast and Midwest regions of the country. However, the firm still believes that the fashions offered by both brands in spring would trend right and allowed it to obtain its fair share of spring business at healthy margin.
The gross profit rate for the quarter at 35% of sales compares to 37.5% rate in last year’s first quarter.
The $2.3 million increase in sales and gross profits for the customer loyalty program adjustment in the prior year, resulted in a 120 basis points increase in gross profit rates. As adjusted, the prior year gross profit rate was 36.3%. Including calculating this year’s first quarter gross profit rate, it’s approximately $530,000 or 40 basis points in store preopening costs. These costs are recognized in the financial statements while the new locations are under construction and not open for business.
An improvement in the company’s shrink rate this year reduced cost of sales by about $800,000 and improved the 2007 first quarter gross profit rate by approximately 60 basis points. The firm is planning on achieving further improvements in shrink results in the rest of 2007. The firm recently renewed our distribution center and head quarter’s lease for an additional 10-year term and the new agreement resulted in an additional $250,000 of costs or profit with approximately 50% of the cost increase or 10 basis points included in the distribution cost category a component of the gross profit calculation. The remaining differences primarily relate to increases associated with full staffing and planning and buying functions and changes in merchandize margins. The merchandize margin change is attributable to a unique condition that impacted the rates this quarter but should have a minimal effect going forward.
The firm felt that it was over assorted last year in its Basics categories at Wet Seal. In this segment of retail, Basics carry a higher margin and this alone accounted for a substantial amount of the difference between the achieved margin rate for the quarterly period. The lack of fashion had a significant negative impact on the sales in Q2 last year and the firm adjusted its mix to provide the fashion the Wet Seal girl requires. Although basics in this business provided a marginal lift in the first quarter last year, the firm needed to adjust its inventory mix to reflect customer demand. The firm rectified this situation during the second quarter last year and it replaced the higher margin basic business with fashion products that turn more quickly.
SG&A expenses were $32.6 million in the first quarter or 23.6% of sales versus $28.6 million or 22.8% of sales in last year’s first quarter.
In this year’s first quarter, the firm incurred approximately $750,000 in unusual healthcare claim that it does not expect will recur. Additionally, the firm incurred approximately $460,000 in store pre-opening cost in this category in connection with the new stores added this quarter. With normalize for these costs, the selling expense rate was essentially flat with the rate in the first quarter last year.
