This summary is based on the second quarter fiscal 2007 earnings call conducted by Wet Seal Inc. (WTSLA) on August 25, 2007.
Key Investors Issues
- The earnings per share rose to 7 cents from 4 cents in the prior year quarter.
- Quarterly revenue grew from $129.5 million in last year to $143 million.
- The projected sales for Q3 are in the range of $157 million to $161 million.
Second Quarter Fiscal 2007 Financial Highlights
In the second quarter, the firm achieved earnings of $6.8 million or 7 cents per diluted share.
These results compare well to its original guidance that called for earnings in the range of 5 cents to 8 cents. Although sales were below the original guidance, the firm was able to deliver earnings toward the upper end of the originally estimated range. Compared to the second quarter last year, there was an over 50% increase in GAAP net income. Adjusted for certain credits recorded in the second quarter last year, net income increased nearly 250%. The dramatic quarter-over-quarter improvements in income, demonstrates the success the firm has had in improving merchandise margins, opening profitable new stores, achieving better productivity from the company’s inventory investments and tightly controlling overheads.
Net sales for the quarter were a $143 million compared to net sales of $129.5 million for the prior year quarter.
In the second quarter last year, the firm revised its Arden B customer loyalty program and added an additional $1.4 million in sales and gross profit to give effect to the changes made to the program. Before giving effect to this prior year adjustment, net sales increased 11.9%.
Comparable store sales for the thirteen-week period ended August 4th 2007, decreased 1.7%. In determining the change in same store sales, the calendars were aligned so that the second quarter comparison is against the same thirteen-week period in the prior year. An absolute comparison of the same store sales change to the change in total net sales is not entirely appropriate, given the different periods used in measuring the two. However, the direction of the same store change is meaningful in understanding the total change in net sales.
- Also contributing to the increase in net sales were sales for new stores, with an increase in the average number of stores by 12.5%.
- Internet sales increased 96% or $2.9 million from last year’s second quarter, and were up 4.2% of total sales.
The firm saw a 7.5% decrease in the combined transaction count per store.
Average unit retails in the second quarter increased 11.3% to $11.45. The AUR increase was partially offset by a reduction in the average number of units per transaction by 5.5% to $2.40 for the quarter. The increase in AURs was primarily driven by increases at the Wet Seal division. The firm also benefited this year from a relative increase in the sales of higher ticket items such as dresses, shoes and denim. In addition, more tightly controlled inventories are allowing the firm to be less promotional.
Planned average unit increases mostly offset the traffic declines. The traffic in July was adversely impacted by the shift into August of Tax free Holiday, and back-to-school days in some of the key markets. Additionally, the firm believes that to some extent back-to-school shopping will happen later this year, and at least some of the same store sale decreases in July will be recovered in August and September. So far, the firm has seen an improving comparable store sales trend in both the first and second week of August. At the Arden B division, achieving sales goals has proven more challenging. Arden B performance has been affected by inventory issues. The firm will continue to be adversely affected by these issues through August, but should see improved inventory position beginning in September.
The gross profit rate for the quarter at 34.7% of sales compares to 32.8% rate in last year’s second quarter.
The $1.4 million increase in gross profit for the customer loyalty program adjustment in the prior year’s second quarter, resulted in a 70 basis point increase in the second quarter gross profit rate last year. As adjusted, the prior year gross profit rate was 32.1%.
The 260 basis point improvement in the gross profit rate is a result of the 210 basis point improvement in merchandise margins, with the remaining 50 basis points difference from reductions across several cost categories including buying, planning and allocation and distribution.
Selling expenses was $34.9 million in the second quarter or 24.4% of net sales versus $30.8 million or 24.1% of adjusted sales in last year’s second quarter.
Increased advertising, internet production and internet for filming costs, driven primarily from higher volumes, added 40 basis points to the rate. The costs with opening 10 additional new stores in this year’s second quarter added another 20 basis points, and the company estimates a lack of leverage caused by a reduction in same store sales, increased other selling expenses by an additional 10 basis points. These increases were only partially offset by a 40 basis point reduction in the rate per store wages. With tighter inventory and lower transaction count, the firm saw an improvement in store labor productivity.
The General and Administrative costs were $8.9 million or 6.2% of net sales versus $7.9 million or 6.2% of adjusted net sales in last year’s second quarter.
Included in G&A expense in last year’s second quarter, was a reduction to expense of $1.1 million due to a reduction in the value of performance shares awarded to an outside consultant, is adjusted to eliminate the effect of this credit from last year. The 2006 second quarter G&A was $9 million or 7% of adjusted net sales. The 80 basis point improvement in rate is from lower bonus expenses and reduced legal fees offset by higher benefit costs, and costs associated with additional recruiting fees. In general, the firm has held costs for G&A expenses constant with last year, and it was able to leverage rate on the 11.9% increase in sales between the periods. As the firm is at essentially full staffing in its G&A functions, it should continue to see leverage in these costs as its gross sales through same store increases and through opening new stores.
