'We will continue to closely monitor inventory levels' - Wet Seal
29 May '09
7 min read
Capital Transactions During the first quarter, the Company did not repurchase shares and does not have an existing share repurchase program. There were no conversions of Secured Convertible Notes or Convertible Preferred Stock in the quarter. As of May 2, 2009, Secured Convertible Notes and Convertible Preferred Stock remain outstanding that are convertible into approximately 3.1 million shares and 537,000 shares, respectively, of the Company's Class A Common stock.
During the quarter, investors exercised warrants that resulted in issuance of 100,000 shares of the Company's Class A common stock, generating approximately $0.3 million in proceeds to the Company. As of May 2, 2009, warrants exercisable into approximately 10.6 million shares of the Company's Class A common stock remain outstanding. Exercise of all remaining outstanding warrants via cash payment by the warrant holders would result in proceeds to the Company of $39.3 million. The average exercise price on the outstanding warrants is $3.69, with approximately 7.8 million of such warrants having an exercise price in excess of the Company's closing Class A Common Stock price as of May 27, 2009.
Income Taxes The Company began fiscal 2009 with approximately $117.9 million of federal net operating loss ("NOL") carry forwards available to offset taxable income in fiscal 2009 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code. Subject to potential further adjustment, the Company believes NOL carry forwards available will be sufficient to offset any possible federal regular taxable income in fiscal 2009.
Accordingly, if the Company generates taxable income in Fiscal 2009, the Company expects it would report an effective income tax rate of approximately 3.3% related to a limited portion of federal alternative minimum taxes that cannot be offset by NOL carry forwards, and income taxes in the State of California, which cannot be offset by NOL carry forwards, and certain other state income taxes.
Second Quarter Fiscal 2009 Guidance For the second quarter of fiscal 2009, earnings are estimated in the range of $0.02 to $0.05 per diluted share. The guidance is based on the following major assumptions: • Total net sales between $135 million and $140 million versus $149.1 million in the second quarter of fiscal 2008. • Comparable store sales decline between 7% and 10% versus a 4.4% decrease in the prior year second quarter. • Five net new store openings, with six net openings at Wet Seal and 1 net closing at Arden B. In the prior year second quarter, the Company opened one net new store. • Gross margin rate between 28.6% and 30.1% of net sales versus 34.9% in the prior year second quarter, with the decrease driven mainly by a deleveraging effect on occupancy costs due to the forecasted comparable store sales decline and a decrease in merchandise margin versus a comparatively strong prior year second quarter result. • SG&A expense between 26.3% and 26.9% of net sales versus 26.8% in the prior year second quarter. • Operating income between $2.3 million and $5.3 million versus operating income of $11.8 million in the prior year second quarter. • Interest expense of $0.1 million versus interest expense of $1.5 million in the prior year second quarter. The prior year second quarter included $1.9 million in non-cash interest charges associated with conversion of $3.4 million of the Company's secured convertible notes into Class A common stock. • Income tax expense of between $0.1 million and $0.2 million versus income tax expense of $0.2 million in the prior year second quarter.
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