This is a summary of the first quarter fiscal 2008 earnings call conducted by The Wet Seal Inc. (WTSLA) on May 29, 2008
Management:
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President and Chief Executive Officer Edmond Thomas
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Vice President of Financial Planning and Analysis Jennifer McEntee
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Chief Financial Officer Steve Benrubi
Key Investor Issues:
- Sales were $142.4 million compared to net sales of $138.0 million in 2007.
- Consolidated comparable store sales decreased 7.5%.
- Net income was $8.9 million, or 9 cents per diluted share, up 17% from $7.6 million, or 7 cents per diluted share, in the prior year.
First Quarter Highlights:
Net sales rose 3% to $142.4 million from $138.0 million in 2007 despite comparable store sales declining 7.5%.
- Comparable store sales declined 3.3% at Wet Seal and 21.6% at Arden B
- On a comparable store basis combined transaction comp per store decreased 4.5%, average unit retail decreased 5.4% to $11.56, while the average number of units per transaction increased 2.6%.
- Internet sales increased by 2.7% as compared to the same period last year.
- Net sales in the Wet Seal division increased 10.6% to $116.2 million compared to net sales of $105.1 million in the prior year first quarter.
Gross profit was $46.7 million, a rate of 32.8%, as compared to $48.3 million or a 35% rate in 2007
- The 220 basis point decrease reflected a 120 basis point decreased in merchandize margin and 190 basis point de-leveraging an occupancy cost, partially offset by a benefit to stock compensation of $400,000.
- Selling, general and administrative expense was $38 million or 26.7% of net sales, as compared to $41.6 million or 30.1% of net sales in the same period last year.
- The 250 basis points improvement in selling expenses was attributable to a decrease in advertising expense primarily at the Arden B division, a reduction in-store bonus expense and a reduction in benefits expense due to an unusual claim in last year’s Q1 expense.
- General and administrative costs decreased to $8 million or 5.6% of net sales as compared to $9 million or 6.5% of net sales 2007 due to a stock compensation benefit.
Operating income was $8.7 million or 6.1% of net sales compared to operating income of $6.6 million or 4.8% of net sales in the first quarter last year.
- Operating income in the Wet Seal division was $17.1 million in the quarter compared to operating income of $15.7 million for the same period last year.
- Operating margin at Wet Seal was 14.7% in the first quarter as compared to 14.9% in the same quarter last year.
- Lower operating margin was a result of lower merchandise margin and de-leveraging of occupancy cost partially offset by a reduction in selling expenses.
- Operating loss of the Arden B division was $800,000 compared to an operating loss of $700,000 for the same period last year.
- The Effect of negative comparable store sales in the Arden B division was offset by cost reduction from the January restructuring and a portion of the stock compensation benefit.
Net income was $8.9 million, or 9 cents per diluted share, up 17% from $7.6 million, or 7 cents per diluted share, in the prior year due to growth in revenues, inventory management and other cost cutting methods.
- The Company generated cash flows from operations of $10.8 million and ended the quarter with $109.7 million of cash and cash equivalents and $3.8 million of long-term debt, comprised of convertible notes, net of discount.
- As of the end of the prior year first quarter, the Company had cash, cash equivalents and marketable securities of $103.7 million and long-term debt, comprised of convertible notes, net of discount, of $2.9 million.
- Capital expenditures amounted to $2.8 million of which $2.5 million was for construction of new stores and remodels of existing stores.
- Depreciation totaled $3.6 million as compared to $3.1 million in 2007.
- Inventory totaled $34.4 million representing a decrease of 3.2% in spite of store comp growth during the year, which is due to improved inventory management and the plan to maintain conservative inventory position as the company entered into 2008.
Second quarter 2008 guidance
- Earnings per diluted share are expected to be in a range of 8 cents to 10 cents and net sales are expected to be between $149.3 million and $151.6 million.
- The gross margin rate is expected to be between 33.8% of net sales versus 34.7%.
- SG&A expense is expected to between 27.3% and 27.5% of net sales versus 30.6% in the prior year’s second quarter.
Forecasted operating income to be between $8 million and $9.8 million versus $5.8 million in the prior years second quarter.
- The company now expects a small increase in net new stores, with approximately 20 planned openings at Wet Seal offset by approximately four closings at Wet Seal and approximately nine closing that Arden B as leases expire.
- Capital expenditures for fiscal 2008 are expected to be between $26 million and $27 million, with offsetting landlord improvement allowances of approximately $4 million for a net cash impact of $22 million to $23 million.
Key questions and answers from the first quarter fiscal 2008 earnings call conducted by The Wet Seal Inc. on May 29, 2008]
Anna Andreeva: Do you think Wet Seal division can show merchandize margin improvements in the back half, especially in the third quarter?
Edmond Thomas: Yes, in the first half of last year and we are going up against, some relatively strong merchandize margin performance at Wet Seal, some of the regular price selling and some of the tops and dresses were fairly strong in the first half last year.
Anna Andreeva: On the inventories, how much of that decline is attributable to Arden B versus Wet Seal and how should we expect this fee to queue inventory on a preferred basis?
Edmond Thomas: Both divisions were significantly down year-over-year and as we go forward Q2, we anticipating them being down on a per square foot basis again but not as much as Q1.
Anna Andreeva: Could you talk about some of the opportunities on the merchandizing side at Wet Seal?
Steve Benrubi: The fashion denim part of our business continues to be very strong, in the dress category, screen tees continue to be pretty good and we’ve seen some pretty good falling and clubby fashion tops. We expect pretty much most of those categories to continue into back-to-school.
Nadeen Francis: Can you give us an update on the search for the GMM for the Wet Seal division?
Edmond Thomas: There is no new news there. The search has been underway for two weeks now and so there is a number of candidates that have showed interest in the job.
