The Wet Seal (WTSL) Posts Mixed Prelim. Q2 Results; Announces Exec., Board Changes

The Wet Seal, Inc. (Nasdaq: WTSL) announced changes to its management team and Board of Directors, and reported preliminary second quarter financial results.

Edmond Thomas is rejoining the Company as Chief Executive Officer and a member of the Board of Directors, starting on September 8, 2014. Mr. Thomas previously served as Chief Executive Officer and a Director of the Company from 2007 to 2011 and President and Chief Operating Officer and a Director of the Company from 1992 to 2000. The Board of Directors has mutually agreed with John D. Goodman for him to step down as Chief Executive Officer and a member of the Board of Directors, effective immediately.

Adam Rothstein, incoming Chairman of the Wet Seal Board of Directors, stated, “Ed has served in various leadership roles at the Company over nearly two decades, as recently as 2011. In addition to his background at Wet Seal, Ed has extensive experience working with other retail and consumer brands, including their omni-channel initiatives, making him uniquely qualified to lead Wet Seal and generate value for shareholders. The Board is pleased that Ed will lead the Company once again and we look forward to his impact at Wet Seal.” Commenting on Mr. Thomas’ appointment, Bryant Riley, Chairman of full-service investment bank B. Riley & Co., LLC stated, “We have had a strong relationship with Ed Thomas for many years and are pleased to support his efforts at The Wet Seal by advising on and leading the execution of the Company’s newly announced financing plan.”

Mr. Thomas stated, “I am excited to return to Wet Seal, where I have a deep knowledge of the business and strong working relationships with many team members and associates. I also look forward to working with Christine Lee as she now joins the Company as our Chief Merchandising Officer. While I understand fully the complexities of navigating today’s dynamic retail landscape, I am convinced there is an opportunity to strengthen the Wet Seal brand and look forward to sharing my vision for an improved Wet Seal with our shareholders, team members and customers.”

Mr. Thomas most recently served as a partner of KarpReilly, LLC, a private investment firm focused on small to mid-size growth companies, and is currently a member of the Board of Directors of New York & Company, Inc. (NYSE: NWY). In addition to his prior roles at Wet Seal, Mr. Thomas served as President and Co-Chief Executive of Tilly’s, Inc. (NYSE: TLYS) from 2005 to 2007. He holds a B.S. from Villanova University and is a Certified Public Accountant.

Lynda Davey, current Chairperson of the Board of Directors, stated, “Our Board of Directors thanks John for his dedication and meaningful contributions to the Company in the midst of a particularly challenging retail environment. We wish him well in his future endeavors.”

Board of Directors Changes

The Company also announced that Adam Rothstein has been appointed Chairman of the Board of Directors, effective October 1, 2014. Mr. Rothstein has served as a member of the Wet Seal Board of Directors since March 2014 and will replace Ms. Davey, who has resigned from the Board, effective October 1, 2014. Additionally, Gregory P. Taxin, President of Clinton Group, Inc., will join the Board of Directors, effective October 1, 2014.

Commenting on her departure from the Board, Ms. Davey stated, “I am extremely proud of the accomplishments we made over the last two years. I look forward to working with Adam, Ed and the Board over the next few weeks to ensure a successful transition for our management team, associates and Board.”

Mr. Rothstein stated, “We are grateful to Lynda for her leadership over the past two years as the Company navigated both internal changes and external challenges. On behalf of the entire Board of Directors, we wish her all the best both personally and in her professional pursuits.”

Gregory P. Taxin is the President of Clinton Group, Inc., an investment advisor that is beneficial owner of approximately 5.9 million shares of Wet Seal stock. Mr. Taxin previously served as Managing Member of Spotlight Advisors, LLC, and of activist fund manager Spotlight Capital, LLC. Prior to that, he was co-founder and Chief Executive Officer of Glass Lewis & Co., a leading independent governance analysis and proxy voting firm dedicated to the creation and preservation of long-term shareholder value. He has also held investment banking positions with Banc of America Securities, Epoch Partners and Goldman Sachs where he focused on M&A and financing transactions. Mr. Taxin started his career as a lawyer associated with Wachtell, Lipton, Rosen & Katz. He currently serves on the Board of Directors of Ionetix Corporation, a privately held medical devices company and the ProCure Cancer Foundation. Mr. Taxin holds an AB from University of California, Berkeley and a JD from Harvard Law School.

Preliminary Second Quarter Financial Results

The Company updated its previously announced financial guidance for the second quarter of fiscal 2014 ended August 2, 2014 and has provided, as Exhibit A to this release, preliminary condensed consolidated balance sheets, statements of operations and cash flows, and reconciliation of non-GAAP financial measures to the most directly comparable financial measures. Actual results may differ from current expectations upon completion of the Company’s accounting close for the quarter, including final review of its non-cash asset impairment analysis and valuations of its warrants and embedded derivatives liabilities.

Net sales for the quarter ended August 2, 2014 were $121.2 million compared to net sales of $137.2 for the quarter ended August 3, 2013.

*** The Street is at Q2 revs of $124.3 million.

Consolidated comparable store sales declined 12.4%, including a decline of 11.1% at Wet Seal and a decline of 22.8% at Arden B during the wind down of that business. Comparable store sales results include e-commerce, which alone increased 11.4%, including a 25.1% increase at Wet Seal, offset by a 24.6% decrease at Arden B during its wind down.

Gross profit is expected to be $26.4 million compared to $40.7 million in the second quarter of last year, which would yield gross margin of 21.8% versus 29.6%.

Operating loss is expected to be $23.3 million compared to operating income of $1.0 million in the second quarter of fiscal 2013. The current year and prior year quarters include $12.7 million and $0.3 million, respectively, of non-cash asset impairment charges. Operating loss in the 2014 period also includes a charge of $0.2 million for Arden B exit costs and a $0.7 million benefit for the settlement of the Company’s Supplemental Employee Retirement Plan (“SERP”) liability. Non-GAAP adjusted operating loss, excluding the effect of these charges and benefits, is expected to be $11.1 million in the second quarter of fiscal 2014 compared to Non-GAAP adjusted operating income of $1.2 million in the prior year period.

Net loss is expected to be $22.0 million, or $0.26 per diluted share, compared to net income of $1.0 million, or $0.01 per diluted share, in the prior year quarter. Non-GAAP adjusted net loss in the second quarter of fiscal 2014, excluding the items noted above and a benefit of $2.5 million for gain on warrants and embedded derivatives liabilities, is expected to be $12.3 million, or $0.15 per diluted share. This compares to previous guidance for a non-GAAP adjusted net loss in the range of $0.09 to $0.12 per diluted share. Non-GAAP adjusted net income in the second quarter of fiscal 2013, excluding the effect of asset impairment charges, was $1.2 million, or $0.01 per diluted share.

*** The Street sees Q3 loss of $0.10 per share.

The Company ended the second quarter with cash and cash equivalents of $40.3 million and no borrowings outstanding under its senior credit facility. Inventory levels were down approximately 6% versus a year ago as of the end of the period.

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