WET SEAL INC – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto. The following discussion and analysis contains forward-looking statements. Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, and/or which include words such as "believes," "plans," "intends," "anticipates," "estimates," "expects," "may," "will," or similar expressions. In addition, any statements concerning future financial performance, ongoing strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about the Company, economic and market factors and the industry in which we do business, among other things. These statements are not guarantees of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.  Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. Factors that could cause our actual performance, future results and actions to differ materially from any forward-looking statements include, but are not limited to, those discussed in "Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011, and elsewhere in this Quarterly Report of Form 10-Q.  

All references to "we," "our," "us," and "the Company" in this Quarterly Report on Form 10-Q mean The Wet Seal, Inc. and its wholly owned subsidiaries.

Executive Overview

  We are a national specialty retailer operating stores selling fashionable and contemporary apparel and accessory items designed for female customers aged 13 to 35 years old. We operate two nationwide, primarily mall-based, chains of retail stores under the names "Wet Seal" and "Arden B." As of October 29, 2011, we operated 550 retail stores in 47 states and Puerto Rico. Our products can also be purchased online through the websites of each of our operating segments, Wet Seal and Arden B.  

We consider the following to be key performance indicators in evaluating our performance:

  Comparable store sales-For purposes of measuring comparable store sales, sales include merchandise sales as well as membership fee revenues recognized under our Wet Seal division's frequent buyer program during the applicable period. Stores are deemed comparable stores on the first day of the month following the one-year anniversary of their opening or significant remodel/relocation, which we define to be a square footage increase or decrease of at least 20%. Stores that are remodeled or relocated with a resulting square footage change of less than 20% are maintained in the comparable store base with no interruption. However, stores that are closed for four or more days in a fiscal month, due to remodel, relocation or other reasons, are removed from the comparable store base for that fiscal month as well as for the comparable fiscal month in the following fiscal year. Comparable store sales results are important in achieving operating leverage on expenses such as store payroll, occupancy, depreciation and amortization, general and administrative expenses, and other costs that are at least partially fixed. Positive comparable store sales results generate greater operating leverage on expenses while negative comparable store sales results negatively affect operating leverage. Comparable store sales results also have a direct impact on our total net sales, cash, and working capital.  Average transaction counts-We consider the trend in the average number of sales transactions occurring in our stores to be a key performance metric. To the extent we are able to increase transaction counts in our stores that more than offset the decrease, if any, in the average dollar sale per transaction, we will generate increases in our comparable store sales.  Gross margins-We analyze the components of gross margin, specifically cumulative mark-on, markups, markdowns, shrink, buying costs, distribution costs, and store occupancy costs. Any inability to obtain acceptable levels of initial markups, a significant increase in our use of markdowns or in inventory shrink, or an inability to generate sufficient sales leverage on other components of cost of sales could have an adverse impact on our gross margin results and results of operations.  Operating income-We view operating income as a key indicator of our financial success. The key drivers of operating income are comparable store sales, gross margins, and the changes we experience in operating costs.  Cash flow and liquidity (working capital)-We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs.                                           21 

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Business Segments

  We operate two nationwide, primarily mall-based, chains of retail stores under the names "Wet Seal" and "Arden B." Although the two operating segments have many similarities in their products, production processes, distribution methods, and regulatory environment, there are differences in most of these areas and distinct differences in their economic characteristics. As a result, we consider these segments to be two distinct reportable segments.  

Wet Seal. Wet Seal is a junior apparel brand for teenage girls who seek fashionable clothing at a value, with a target customer age range of 13 to 19 years old. Wet Seal seeks to provide its customer base with a balance of fashionable and fashion basic apparel and accessories that are affordably priced.

Arden B. Arden B is a fashion brand at value price points for the contemporary woman. Arden B targets customers aged 25 to 35 years old and seeks to deliver unique contemporary fashion and fashion basic separates and accessories for various aspects of the customers' lifestyles.  We maintain a Web-based store located at www.wetseal.com, offering Wet Seal merchandise comparable to that carried in our stores, to customers over the Internet. We also maintain a Web-based store located at www.ardenb.com, offering Arden B merchandise comparable to that carried in our stores, to customers over the Internet. Our online stores are designed to serve as an extension of the in-store experience and offer a wide selection of merchandise, with the goal of expanding both online and in-store sales. We continue to develop our Wet Seal and Arden B websites to increase their effectiveness in marketing our brands. We do not consider our Web-based business to be a distinct reportable segment. The Wet Seal and Arden B reportable segments include, in addition to data from their respective stores, data from their respective Internet operations.  

See Note 7 of the notes to condensed consolidated financial statements for financial information regarding segment reporting, which information is incorporated herein by reference.

Current Trends and Outlook

  Our third quarter financial results were comparable with the prior year. The overall retail environment continues to be volatile, driven by several factors, including uncertainty regarding the economy, the lack of significant improvement in the U.S. housing market and high unemployment rates across all regions of the U.S. Gross domestic product growth in the U.S. has been modest, unemployment rates remain high in the teen segment and throughout the U.S. overall, and we continue to experience a volatile, and generally weak, retail environment. As a result, the third quarter of fiscal 2011 represented a very aggressive promotional environment with consumer spending heavily focused on promotion and clearance buying, which contributed to a slowdown in our rate of merchandise margin improvement as compared to the first half of this year. In addition, we began to experience increased sourcing costs in the fourth quarter of fiscal 2010 and have seen further cost increases through third quarter of fiscal 2011 as a result of rising commodity prices, primarily for cotton, increased labor costs due to labor shortages in China, from which a majority of our merchandise is sourced, and increased fuel costs. We expect these sourcing cost pressures to continue in the fourth quarter of fiscal 2011. The rising value of the currency in China relative to the U.S. dollar may also have a further impact on future product costs.  Our performance is subject to general economic conditions and their impact on levels of consumer confidence and consumer spending. Consumer purchases of discretionary items, including our merchandise, generally decline during periods when disposable income is adversely affected or there is economic uncertainty. As a result of the continued difficult economic conditions, we may face risks that will impact many facets of our operations, including, among other things, the ability of one or more of our vendors to deliver their merchandise in a timely manner or otherwise meet their obligations to us. Although we believe we are sufficiently prepared and financially strong enough to endure continued poor economic conditions in the U.S. and world economic markets, if such conditions become more volatile, or if they deteriorate further, our business, financial condition, and results of operations may be adversely affected.  Our comparable store sales decreased 0.9% during the 13 weeks ended October 29, 2011, driven by a 0.1% comparable store sales decrease in our Wet Seal division and a 6.3% comparable store sales decrease in our Arden B division. The Wet Seal division's comparable store sales decrease was primarily driven by an decrease in transaction volume, partially offset by an increase in average dollar sales per transaction, driven by an increase in units purchased per customer, partially offset by a decrease in average unit selling price. At Wet Seal, after positive momentum continued in our business through the back-to-school shopping period through August and into early September, business became more challenging as we transitioned to fall, as our merchandise assortment for the season did not perform to our expectations. We also eliminated Halloween costumes and related merchandise from our Wet Seal stores this year, which we believe was an appropriate strategic decision to allow us to maintain a more brand-right fashion assortment in the stores, but also challenged sales results in October. The                                           22 

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  Arden B division comparable store sales decrease was primarily driven by a decline in transaction volume and units purchased per customer, partially offset by an increase in its average dollar sales per transaction, driven by an increase in average unit selling price. At Arden B, our dress and jewelry businesses were strong, but performance was below our expectations in other apparel and accessory categories. Our combined online sales declined 23% and 9% during the 13 and 39 weeks ended October 29, 2011, respectively, from the prior year as we continued an initiative to reduce promotional levels and rebalance inventories more toward regular price versus clearance items in the online channel in an effort to better align online presentation with that of the stores.  We made progress on several key initiatives during the third quarter of fiscal 2011. We continued to drive merchandise margin improvement versus the prior year in both the Wet Seal and Arden B divisions, despite increasing merchandise costs and the promotional competitive environment in the third quarter of fiscal 2011, by effectively planning and managing the level and depth of promotional markdowns. We also remained focused on providing clearer promotional messaging in the stores.  Our top near-term strategic priority is to drive sales productivity improvement in our stores. To support sales productivity growth, we have established specific initiatives, including developing a culture of customer obsession, understanding and redefining our brands, evaluating our store designs to support our brands and enhance our customers' shopping experience and focusing on increasing store personnel productivity through new training programs and streamlined operational tasks. Higher store productivity would allow us to attain higher positive comparable store sales growth. Other strategic priorities include continuing to improve upon Wet Seal merchandise margins, building upon the Arden B business to allow it to reach its full potential, and expanding our existing retail store base and online businesses. We are also focused on improving gross margins by optimizing sourcing of merchandise, enhancing our inventory planning and allocation functions and improving supply chain efficiency through better coordination among and within our vendor base, internal distribution and store operation organizations. Although we have embarked on the strategic initiatives and priorities above, there is much work ahead of us to ensure the successful implementation of our strategy and to realize significant benefits to the business.  

Store Openings and Closures

  We continued to execute our store growth strategy by opening 19 new Wet Seal stores and closing five Wet Seal stores, and opening four new Arden B stores and closing one Arden B store, during the 39 weeks ended October 29, 2011. We currently plan to open a total of 28 Wet Seal stores in fiscal 2011 with a focus on malls and to a lesser extent, off-mall power center locations, and plan to close a total of six Wet Seal stores in fiscal 2011 upon certain lease expirations.  

We also currently intend to continue growing the Arden B store base conservatively, with approximately four new stores and one store closure planned in fiscal 2011.

Critical Accounting Policies and Estimates

  Our condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  The preparation of financial statements in conformity with GAAP requires the appropriate application of accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our condensed consolidated financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.  We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 of Notes to Consolidated Financial Statements and in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.  The policies and estimates discussed below involve the selection or application of alternative accounting policies that are material to our condensed consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.  We have certain accounting policies that require more significant management judgment and estimates than others. These include our accounting policies with respect to revenue recognition, merchandise inventories, long-lived assets, stock-                                           23 

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  based compensation, accounting for income taxes and insurance reserves. There have been no significant additions to or modifications of the application of the critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011. The following updates the Form 10-K discussions of our critical accounting policies for short-term and long-term investments, long-lived assets and accounting for income taxes.  

Short-Term and Long-Term Investments

  Our short-term investments consist of interest-bearing corporate bonds that are guaranteed by the U.S. Government under the Temporary Liquidity Guarantee Program, have maturities that are less than one year and are carried at amortized cost plus accrued income. Our short-term investments are carried at amortized cost due to our intent to hold to maturity. Short-term investments on the condensed consolidated balance sheet were $25.1 million and $25.4 million at October 29, 2011 and October 30, 2010, respectively. Long-term investments on the condensed consolidated balance sheet were $25.9 million at October 30, 2010. Any unrealized gains or losses on held-to-maturity investments are considered temporary and are not recorded unless an other than temporary impairment has occurred. Factors considered that could result in the necessity to impair include intention to sell, more likely than not being required to sell the security before recovery of the security's amortized cost basis and whether we expect to recover the entire amortized cost basis of the security. We have considered all impairment factors and have determined that an other than temporary impairment has not occurred as of October 29, 2011.  

Long-Lived Assets

  We evaluate the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors that are considered important that could result in the necessity to perform an impairment review include a current-period operating or cash flow loss combined with a history of operating or cash flow losses and a projection or forecast that indicates continuing losses or insufficient income associated with the realization of a long-lived asset or asset group. Other factors include a significant change in the manner of the use of the asset or a significant negative industry or economic trend. This evaluation is performed based on estimated undiscounted future cash flows from operating activities compared with the carrying value of the related assets. If the undiscounted future cash flows are less than the carrying value, an impairment loss is recognized, measured by the difference between the carrying value and the estimated fair value of the assets, based on discounted cash flows using our weighted average cost of capital. We have considered all relevant valuation techniques that could be obtained without undue cost and effort and have determined that the discounted cash flow approach continues to provide the most relevant and reliable means by which to determine fair value in this circumstance.  At least quarterly, we assess whether events or changes in circumstances have occurred that potentially indicate the carrying value of long-lived assets may not be recoverable. Our evaluations during the 13 and 39 weeks ended October 29, 2011, and October 30, 2010, indicated that operating losses or insufficient operating income existed at certain retail stores, with a projection that the operating losses or insufficient operating income for those locations would likely continue. As such, we recorded non-cash charges of $0.7 million, $2.0 million, $1.6 million and $2.7 million during the 13 and 39 weeks ended October 29, 2011, and October 30, 2010, respectively, within asset impairment in the condensed consolidated statements of operations, to write down the carrying values of these stores' long-lived assets to their estimated fair values.  The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales growth and gross margin performance. If our sales growth, gross margin performance or other estimated operating results are not achieved at or above our forecasted level, or inflation exceeds our forecast and we are unable to recover such costs through price increases, the carrying value of certain of our retail stores may prove to be unrecoverable and we may incur additional impairment charges in the future.  Accounting for Income Taxes  We began fiscal 2011 with approximately $93.5 million of federal net operating loss ("NOL") carry forwards available to offset taxable income in fiscal 2011 and thereafter, subject to certain annual limitations based on the provisions of Section 382 of the Internal Revenue Code.  Our effective income tax rate for the 39 weeks ended October 29, 2011, was approximately 39%, which reflects our expected effective income tax rate for fiscal 2011. Due to our expected utilization of federal and state NOL carry forwards during fiscal 2011, we anticipate cash payment for income taxes for the fiscal year will be approximately 4.8% of pre-tax income, representing the portion of federal and state alternative minimum taxes and state regular income taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash provision for deferred incomes taxes.                                           24

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Recently Adopted Accounting Pronouncements and New Accounting Pronouncements Not Yet Adopted

  In January 2010, the Financial Accounting Standards Board (the "FASB") issued guidance and clarifications for improving disclosures about fair value measurements. This guidance requires enhanced disclosures regarding transfers in and out of the levels within the fair value hierarchy. Separate disclosures are required for transfers in and out of Level 1 and 2 fair value measurements, and the reasons for the transfers must be disclosed. In the reconciliation for Level 3 fair value measurements, separate disclosures are required for purchases, sales, issuances, and settlements on a gross basis. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which were effective for interim and annual reporting periods beginning after December 15, 2010. Effective January 31, 2010, we adopted the new and updated guidance for disclosures, aside from that deferred to periods after December 15, 2010, and this did not significantly impact our consolidated financial statements. We adopted the remaining guidance on disclosures effective January 30, 2011, and this did not significantly impact our consolidated financial statements.  In May 2011, the FASB issued guidance on the application of fair value accounting where its use is already required or permitted by other standards within GAAP. The amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Amendments include those that clarify the FASB's intent about the application of existing fair value measurement and disclosure requirements, and change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For many of the requirements, the FASB does not intend for the amendments to result in a change in the application of the requirements. This guidance is effective during interim and annual periods beginning after December 15, 2011. We do not believe the adoption of this guidance will have any effect on our consolidated financial statements.  In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The amendments provide an entity with an option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance is effective for fiscal years, and interim periods within those years beginning after December 15, 2011 and should be applied on a retrospective basis. We have not yet selected which presentation option we will apply. The adoption of this guidance will effect the presentation of our consolidated financial statements.  

Results of Operations

The following table sets forth selected condensed consolidated statements of operations data as a percentage of net sales for the periods indicated. The discussion that follows should be read in conjunction with the table below:

                                             As a Percentage of Net Sales                As a Percentage of Net Sales                                                 13 Weeks Ended                              39 Weeks Ended                                       October 29,            October 30,          October 29,            October 30,                                          2011                   2010                 2011                   2010 Net sales                                    100.0 %                100.0 %              100.0 %                100.0 % Cost of sales                                 69.5                   69.6                 68.1                   69.2  Gross margin                                  30.5                   30.4                 31.9                   30.8 Selling, general, and administrative expenses                       26.0                   25.8                 26.5                   25.9 Asset impairment                               0.5                    1.1                  0.4                    0.7  Operating income                               4.0                    3.5                  5.0                    4.2 Interest income (expense), net                 0.0                    0.0                  0.0                   (0.6 )  Income before provision for income taxes                                   4.0                    3.5                  5.0                    3.6 Provision for income taxes                     1.5                    1.8                  1.9                    1.8  Net income                                     2.5 %                  1.7 %                3.1 %                  1.8 %                                             25 

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  Thirteen Weeks Ended October 29, 2011, Compared to Thirteen Weeks Ended October 30, 2010  Net sales                                               13 Weeks                                                  13 Weeks                                             Ended                    Change From                      Ended                                        October 29, 2011          Prior Fiscal Period             October 30, 2010                                                                    ($ in millions) Net sales                             $            152.1      $     5.7              3.9 %      $            146.4 Comparable store sales decrease                                             

(0.9 )%

Net sales for the 13 weeks ended October 29, 2011, increased primarily as a result of an increase in number of stores open, from 522 stores as of October 30, 2010, to 550 stores as of October 29, 2011.

However, the increase in net sales was partially offset by:

• A decrease of 0.9% in comparable store sales resulting from a 7.9%

decrease in comparable store average transactions, partially offset by an

8.1% increase in comparable store average dollar sales per transaction.

Comparable store average dollar sales per transaction increased mainly due

         to a 13.1% increase in the number of units purchased per customer,          partially offset by a 5.1% decrease in average unit retail prices; and    

• A decrease of $2.5 million in net sales for our internet business compared

          to the prior year, which is not a factor in calculating our comparable          store sales.   Cost of sales                                               13 Weeks                                                   13 Weeks                                             Ended                     Change From                      Ended                                        October 29, 2011           Prior Fiscal Period             October 30, 2010                                                                     ($ in millions) Cost of sales                         $            105.8       $     3.9              3.8 %      $            101.9 Percentage of net sales                             69.5 %                           (0.1 )%                   69.6 %   Cost of sales includes the cost of merchandise; markdowns; inventory shortages; inventory valuation adjustments; inbound freight; payroll expenses associated with buying, planning and allocation; processing, receiving and other warehouse costs; rent and other occupancy costs; and depreciation and amortization expense associated with our stores and distribution center.  Cost of sales as a percentage of net sales slightly decreased due primarily to (i) an increase in merchandise margin as a result of higher initial markup rates and favorable inventory shrink estimates in the Wet Seal division, partially offset by higher markdown rates in the Wet Seal division and slightly higher inventory shrink estimates in the Arden B division, and (ii) a decrease in distribution costs due to a decrease in temporary labor as a result of efficiencies gained from a merchandise sorting system installed in fiscal 2010. This decrease was offset by an increase in occupancy costs due to the deleveraging effect of negative comparable store sales as well as an increase in rent and common area maintenance for newly opened stores, partially offset by a reversal of a reserve for prior year common area maintenance adjustments upon conducting an annual review of such balances.  

Cost of sales increased primarily due to the 3.9% increase in net sales and an increase in occupancy cost as a result of the increase in number of stores.

Selling, general, and administrative expenses (SG&A)

                                              13 Weeks                                                  13 Weeks                                              Ended                     Change From                     Ended                                        October  29, 2011           Prior Fiscal Period           October  30, 2010                                                                      ($ in millions) Selling, general, and administrative expenses               $              39.5       $     1.6             4.3 %     $              37.9 Percentage of net sales                              26.0 %                           0.2 %                    25.8 %   Our SG&A expenses are comprised of two components. Selling expenses include store and field support costs, including personnel, advertising and merchandise delivery costs as well as online sales order fulfillment costs. General and administrative expenses include the cost of corporate functions such as executives, legal, finance and accounting, information systems, e-commerce management, human resources, real estate and construction, loss prevention and other centralized services.                                           26 

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  Selling expenses increased approximately $2.3 million from the prior year to $32.3 million. As a percentage of net sales, selling expense was 21.3% of net sales, or 80 basis points higher than a year ago.  

The following contributed to the current year increase in selling expenses:

• A $2.8 million increase in payroll and benefits costs as a result of

increased sales volume and an increase in number of stores open, from 522

          stores as of October 30, 2010, to 550 stores as of October 29, 2011;         •    A $0.1 million increase in store supplies due to increased sales volume

         and replenishment of low store stock levels; and    

• A $0.1 million net increase in advertising and marketing expenditures

driven by a market research study being conducted to gain a better

understanding of the Wet Seal and Arden B customer, offset by a decrease

in internet marketing expenditures.

However, the increases in selling expenses were partially offset by the following decreases:

       •    A $0.4 million decrease in internet production costs as a result of          decreased internet sales volume;    

• A $0.2 million decrease in merchandise delivery costs due to a decrease in

average product weight and lower air shipment costs, compared to the prior

         year; and       •   A $0.1 million decrease in other selling expenses.  

General and administrative expenses decreased approximately $0.7 million from the prior year to $7.2 million. As a percentage of net sales, general and administrative expenses were 4.7%, or 60 basis points lower than a year ago.

The following contributed to the current year decrease in general and administrative expenses:

• A $1.5 million reversal in corporate incentive bonuses due to a decline in

estimated annual operating results, relative to incentive targets, during

         the quarter;    

• A $0.3 million decrease in legal fees associated with various legal matters;

• A $0.2 million decrease in recruiting fees as the prior year included fees

          related to a search for our new chief executive officer; and         •    A $0.2 million increase in other income due to the receipt of insurance

proceeds from a flooded Wet Seal store.

However, the decreases in general and administrative expenses were partially offset by the following increases:

• A $0.6 million increase in corporate wages, primarily due to a new chief

operating officer position and an increased wage base for our newly

appointed chief executive officer, and an increase in internet wages due

to growth in our internet infrastructure to support efforts to increase

          sales volume;         •    A $0.4 million increase in stock compensation expense, primarily due to an

         increase in executive stock compensation;       •   A $0.2 million increase in computer maintenance costs;    

• A $0.2 million increase in depreciation due to our recently implemented

         retail merchandising system; and       •   A $0.1 million net increase in other general and administrative expenses.   Asset impairment                                              13 Weeks                                                  13 Weeks                                             Ended                    Change From                      Ended                                       October  29, 2011          Prior Fiscal Period            October  30, 2010                                                                     ($ in millions) Asset impairment                     $               0.7       $    (0.9 )        (54.0 )%     $               1.6 Percentage of net sales                              0.5 %                         (0.6 )%                     1.1 %   Based on our quarterly assessments of the carrying value of long-lived assets, during the 13 weeks ended October 29, 2011, and October 30, 2010, we identified certain retail stores with carrying values of their assets, including leasehold improvements, furniture, fixtures and equipment, in excess of such stores' respective forecasted undiscounted cash flows. Accordingly, we reduced their respective carrying values to their estimated fair market values, resulting in non-cash charges of $0.7 million and $1.6 million, respectively.                                           27

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  Table of Contents  Interest income, net                                              13 Weeks                                                 13 Weeks                                             Ended                    Change From                     Ended                                       October  29, 2011          Prior Fiscal Period           October  30, 2010                                                                    ($ in millions) Interest income, net                 $               0.0       $    (0.1 )         71.9 %     $               0.1 Percentage of net sales                              0.0 %                          0.0 %                     0.0 %   We generated interest income, net, of less than $0.1 million in the 13 weeks ended October 29, 2011, primarily from investments in cash, cash equivalents and short-term investments, and we generated interest income, net, of $0.1 million in the 13 weeks ended October 30, 2010, primarily from cash and cash equivalents, and short-term and long-term investments.  Provision for income taxes                                               13 Weeks                                                 13 Weeks                                              Ended                   Change From                      Ended                                        October  29, 2011         Prior Fiscal Period            October  30, 2010                                                                    ($ in millions) Provision for income taxes            $               2.4      $    (0.2 )         (6.4 )%     $               2.6   Our effective income tax rate for the 13 weeks ended October 29, 2011, was approximately 39%, which approximates our expected effective rate for fiscal 2011. Due to our expected utilization of federal and state NOL carry forwards during fiscal 2011, we anticipate cash payment for income taxes for the fiscal year will be approximately 4.8% of pre-tax income, representing the portion of federal and state alternative minimum taxes and state regular income taxes that cannot be offset by NOLs. The difference between the effective income tax rate and the anticipated cash income taxes is recorded as a non-cash provision for deferred income taxes.  In the third quarter of fiscal 2010, we incurred a 50% effective income tax rate, which was significantly higher than the rate in fiscal 2009 primarily as a result of the reversal of our deferred tax asset valuation allowance at the end of fiscal 2009. In addition, this rate was higher than that expected for future periods due to a $0.5 million non-cash deferred income tax charge in the third fiscal quarter due to a tax method change that resulted in the reduction of deferred tax assets related to charitable contribution carry forwards.  

Segment Information

  The following is a discussion of the operating results of our business segments. We consider each of our operating divisions to be a segment. In the tables below, Wet Seal and Arden B reportable segments include data from their respective stores and internet operations (internet operations is excluded from comparable store sales). Operating segment results include net sales, cost of sales, asset impairment and other direct store and field management expenses, with no allocation of corporate overhead or interest income or expense.