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Wet Seal (NASDAQ:WTSL)

Q1 2013 Earnings Call

May 28, 2013 4:30 pm ET

Executives

Christine Greany

John D. Goodman - Chief Executive Officer and Director

Steven H. Benrubi - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Corporate Secretary

Analysts

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Eric M. Beder - Brean Capital LLC, Research Division

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

Marni Shapiro - The Retail Tracker

Operator

Greetings, and welcome to the Wet Seal Incorporated Fiscal First Quarter 2013 Earnings Results Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Christine Greany of The Blueshirt Group. Thank you. Ms. Greany, you may begin.

Christine Greany

Good afternoon, everyone. Thank you for joining us today. Presenting on today's call will be John Goodman, Chief Executive Officer; and Steve Benrubi, Chief Financial Officer.

Before they proceed, please note that certain statements during this call may contain forward-looking information. 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 conditions in market sectors and the industry in which Wet Seal does business, among other things.

These statements are not guarantees of future performance, and the company undertakes 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 from those expressed in any forward-looking statements due to a number of factors. Factors that could cause 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 within Wet Seal's Form 10-K for the fiscal year ended February 2, 2013.

On today's call, management will make references to operating income and loss, net income and loss and income and loss per diluted share for the first quarter of both fiscal 2013 and 2012 before certain charges and benefits. These non-GAAP financial measures are provided to facilitate meaningful year-over-year comparisons. An explanation of why these non-GAAP financial measures are useful and how they are used by management can be obtained from the company's corporate website, wetsealinc.com.

With that, I will now turn the call over to John to begin.

John D. Goodman

Thanks, Christine, and good afternoon, everyone. Today, I'll discuss the progress we've made since I joined the company in January, the initiatives we're working on to continue driving traffic and sales and the strategies we're implementing to build a foundation for strong and consistent performance going forward.

Following my remarks, I'll turn things over to Steve to review the financials.

Our first quarter results came in better than we originally expected, reflecting the initial progress we're making across all aspects of the business from product, merchandising and marketing to brand awareness and our entrepreneurial culture. During the quarter, we stabilized the business, generating positive comps in the combined March-April period, including mid-single-digit increases in both divisions in April alone. We also improved our merchandise margins, tightly managed inventories and achieved a profit of $0.01 per share on a non-GAAP basis.

As you'll hear from Steve shortly, we are forecasting healthy positive comp store sales performance in the second quarter of this year. We are returning Wet Seal to its fast fashion roots and reengaging our core 16-year-old customer more quickly than we anticipated. We're certainly encouraged by the progress we're making, but we know there's more work to be done. We're executing against a number of key operating strategies with the goal of delivering progressive improvement and consistent performance over the long term. However, our most important areas of focus is product. We have an exceptional team of merchants at Wet Seal led by Kim Bajrech and Debbie Shinn, who have been with Wet Seal since 2009 and were recently promoted to GMMs. They're in the market with their teams every week to ensure that we're on top of emerging trends and the stores consistently reflect newness. The organization is agile and fast, and we watch the business closely every day. We're able to leverage our short lead times to read and react and test and reorder, which allows us to stay on trend well carefully managing inventories.

In the first quarter, we saw strong performance in leggings, dresses, shorts, graphic tees and accessories, and we're continuing to ride strong trends in those categories. In our fashion knit tops business, we're beginning to make some improvement and believe we'll be better positioned as this becomes a more important category for the sector headed into the second half of the year. We are pleased with how the stores look today and believe they reflect one of our core tenets, which is to listen closely, be authentic and stay true to the Wet Seal girl. We're delivering the fashion she wants in an environment she views as cool, and we're doing it in a great value.

To that end, I'll now turn to merchandising and marketing. The visual presentation in our stores, the windows, sight lines, in-store collateral and promotional signage, all look significantly better and are beginning to capture the attention of our customers and the girl who is consistently walking the mall. We recently conducted focus groups in 17 markets, which provided us with terrific insight into perceptions and trends. We're also hearing from our customers and seeing in our performance trend that she is returning to the brand. From a social media perspective, we're seeing positive feedback on Twitter and Instagram around our Saturday Steals promotion. This is a creative concept and has proven to be a highly effective way for us to engage a customer and drive traffic and conversion.

Additionally, we plan to leverage the success of our Wet Seal "Wanna Be Next?" Model Search. Our near-term plans include the introduction of social sharing concepts, which we'll begin rolling out this week. Most recently, we launched partnership programs with emerging musical artists who resonate with the teen consumer. These are mutually supportive programs that allow us to incubate trending artists, such as Olly Murs and Emblem3, and in turn, have the Wet Seal brand featured across their social media networks. We're also integrating a social media monitoring platform, which will provide us with insight into key performance indicators, including share of voice, sentiment, customer service and the influencers. The Wet Seal girl is social. She's on her mobile; she's in the mall. We have to be aware of how the brand is perceived at all times, select search engine needs, be on trend and speak to her with the right voice and through the right channels.

In mobile, we recently engaged an agency to help us establish a more relevant mobile presence through targeted programs, including contests, partnerships and in-store promotions. In the coming months, we'll also be upgrading our e-commerce platform with the implementation of Demandware and expect to have this completed in early fall. At that time, we'll have one integrated platform that can be accessed from any device, providing a seamless experience for the customer while also enhancing our ability to talk to her from a mobile perspective.

Now let's take a look at Arden B. During the past few months, we've been focusing more on aspirational positioning and building on our strength in club tops and club dresses. We're pleased to have achieved a positive comp in the first quarter with improved merchandise margin and believe there's an opportunity to meaningfully grow the business over time. We are particularly excited to have Tamara Chamberlain on board as our new GMM. She's been with us for 6 weeks and brings the experience and perspective needed to help us develop an appropriate strategy for the brand.

Lastly, I want to highlight the entrepreneurial culture we're creating and thank all of our associates for their hard work over the past 5 months. We have to be nimble and quick to be successful in this business, so we're creating an environment where people can act fast, make decisions and be aligned to common goals. Our teams are empowered and are beginning to see some successes. I believe this will be one of the single biggest factors that allow us to win in the competitive, fast fashion space.

As we approach the back half of the year, you can expect us to see us continuing strengthening our product assortments and improving our visual presentation of brand messaging. We'll also be going live with the upgrade to our e-commerce platform, including new market partners for back-to-school and more actively engaging with the Wet Seal girl on her mobile device.

We're on track with our plans to open up 19 new Wet Seal stores, primarily in high-performing outlet centers, and we'll begin to look opportunistically at growing the portfolio in traditional, outlet and off-mall locations. Thank you for listening in today.

Now I'll turn the call over to Steve to review the first quarter financials and discuss our outlook for the second quarter.

Steven H. Benrubi

Thanks, John, and good afternoon, everyone. We're pleased with our first quarter financial results, which, as John mentioned, exceeded our prior guidance and reflect the traction we're gaining with new product, merchandising and marketing initiatives. Net sales for the first quarter came in at $140.4 million, down about 5% versus a year ago, and consolidated comparable store sales declined 2.9%. In the first quarter of last year, consolidated comp store sales declined 7.7%. John talked to you about the strength of key product categories in the first quarter. From a regional perspective, we experienced stronger performance in warmer climates, while the Northeast, Midwest and mid-Atlantic proved more challenging, especially early in the quarter, as a result of inclement weather that negatively impacted mall traffic. On a comp store basis, combined average unit retail was down less than 1% to $9.84. Transactions per store were also down just under 1%, and units per transaction declined 1.7%. Combined e-commerce sales in the first quarter increased 4.6% versus a year ago. In the Wet Seal division, first quarter net sales were $122.8 million, down 2.7% versus last year, while comparable store sales declined 3.4%. E-commerce sales increased 6.8% to $6.5 million. On a comp store basis, AUR declined 1.1% to $8.97, and transaction count and UPT were both down 1.3%. At Arden B, net sales were $17.6 million. That's down 18.9% versus last year and primarily reflects the fact that we had 22 fewer stores in operation versus a year ago. Comparable store sales were up almost 1%.

On a comp store basis, AUR increased about 1% to $32.04. Transactions were up 9.3%, and UPT was down 8.4%. Returning to the income statement, first quarter gross profit came in at $42.2 million compared to $43.6 million last year, while gross margin improved 60 basis points to 30.1% versus 29.5% a year ago. The year-over-year improvement reflects a slight increase of approximately 10 basis points in merchandise margin, as well as 60 basis points of occupancy leverage. This includes the benefit of 80 basis points from reduction in the depreciation expense run rate, which resulted from store asset impairments recorded in the prior fiscal year. For further perspective, our buying, distribution and planning and allocation costs were essentially flat.

Selling, general and administrative expense for the quarter was $37.4 million, or 26.7% of sales, compared to $40.4 million or 27.4% of sales a year ago. Although the company incurred incremental legal costs of approximately $1.7 million in the first quarter of 2013, this was offset by a $3.5 million benefit to adjust the loss contingency related to legal matters.

Selling expense came in at $30.1 million or 21.4% of sales, which compares to $31.2 million or 21.1% of sales last year. G&A expenses for the quarter totaled $7.3 million or 5.2% of sales. That's down from $9.2 million or 6.2% of sales in the first quarter of 2012 and primarily reflects the year-over-year decline in legal costs I just mentioned. First quarter operating income was $3.2 million compared to an operating loss of $400,000 last year. The results include noncash asset impairment charges of $1.6 million this year and $3.6 million in the 2012 quarter. The 2013 period also includes the benefit of $3.5 million to adjust the loss contingency.

Net income in the first quarter was $3.1 million or $0.03 per diluted share, which compares to net loss of $300,000 or $0.00 per diluted share in the prior year period. On a non-GAAP basis, which excludes the loss contingency benefit and the asset impairment charges, adjusted net income in the first quarter of 2013 was $1.3 million or $0.01 per diluted share. In the first quarter of 2012, on a non-GAAP basis, adjusted net income was $1.9 million or $0.02 per diluted share.

Now moving to the balance sheet. Inventories at quarter end stood at $36.3 million, down 9.3% versus last year. This was in line with our expectations and reflects our strategy to ensure the company is consistently positioned to chase into emerging trends. Inventory per square foot was down 7.7% versus a year ago, with Wet Seal down 7.6% and Arden B down 6.3%. The company remains in strong financial condition and ended the quarter with $112 million of cash and cash equivalents and short-term investments and no debt.

During the period, we generated strong cash flow from operations of $9.1 million. Under our $25 million common stock repurchase program, we repurchased 1.2 million shares of Wet Seal stock at an average price of $3 per share for a total cost of approximately $3.6 million. We also repurchased just under 100,000 shares of Wet Seal stock to satisfy employee tax obligations upon restricted stock vesting, for a total of approximately $200,000. Capital expenditures totaled $3.6 million in the first quarter and are tracking to our plan for full year spending in the range of $22 million to $24 million. Approximately 3 quarters of our anticipated spending is store related, and we continue to anticipate the majority of that will be deployed in the back half of the year, when our new stores are planned to open. Depreciation expense totaled $3.3 million in the first quarter.

Now I'll turn to our financial guidance for the second quarter of 2013. Our expectations are as follows: net sales in the range of $138 million to $141 million; a comparable store sales increase in the mid-single digits; gross margin in the range of 29% to 30.2%; SG&A expense between 28.8% and 28.9% of sales; and operating income ranging from $100,000 to $2.1 million. And we expect earnings to be in the range of $0.00 to $0.02 per diluted share.

With that, I'll ask the operator to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Edward Yruma with KeyBanc Capital Markets.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

I guess the first question I have, John, at this stage, what percentage of the product would you say that you've kind of touched and that you and your team have impacted versus maybe what the legacy team have put into place? And I guess, if there is still some left, how do we think about the progression going forward?

John D. Goodman

Well, I think, in terms of that the impact that I've made with the merchants -- and certainly what the merchants have done here with Kim and Debbie has been exceptional right now. If you think about where the business was roughly 10 weeks ago in terms of the assortment, I think we were probably 30% there in terms of where we needed to be, just based upon some of the previous strategy and some other things. I think right now, we're probably closer to 75% to 80%. We're never going to be at 100%, but certainly, we've made good progress in terms of the assortments and with the merchants, and we feel really comfortable where our inventory levels are, where the product is today and where the trends are going forward.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

And how should we think about your ability to return back to kind of previous or maybe more recent peak gross margins? Based on the guidance, it looks like you're getting part of the way there but not quite back to more recent peaks for gross. So I guess, how do we think about the longer-term opportunity to get back to those margin levels?

John D. Goodman

I think that's the most important thing. Steve can take the back half of that question, but I think really, that's what our goal is so that we get back those levels of '11 and really look at last year as kind of an anomaly. So we certainly are working towards that. We are seeing some margin improvement, as we showed in terms of the narrowing the gap in Q1 and certainly going to Q2 where we are guiding at this point. So we feel direction, we're in the right direction. I don't know if Steve wants to add some.

Steven H. Benrubi

Yes. I mean, I think as you can see, in Q1, a little bit better overall gross margin than LY. And then in Q2, significantly -- several hundred basis points better year-over-year. Getting to that next up -- I'll tell you, one, it's a reflection of the merchandise margin strength having come back pretty strong and anticipated to stay so in Q2. But the next step is really getting sales productivity to continue to grow. When you look at our history, when we've been more around $270 a foot or a little higher, which was the case in '09 through '11, the leveraging of occupancy cost there combined with margin strength is what allowed us to get beyond that 30% and into the low 30s more so, so that's where our focus is.

Operator

Our next question comes from the line of Jeff Van Sinderen with B. Riley.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

My first question, really, is on your comp guidance for the quarter. Just wondering if that's basically a reflection of the current comp rate that you're experiencing -- or that you have experienced in the last few weeks?

Steven H. Benrubi

It is. And then, Jeff, how we typically -- we'll look at where we're performing into the quarter at a certain stage, and a lot of it's based on that.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay, good. And then, I noticed you leveraged the occupancy in the quarter. And I would think, on a mid-single-digit positive comp, you should get some pretty good leverage there.

Steven H. Benrubi

Yes. I mean, our depreciation expense, as we called out, is down year-over-year. It was down about 80 basis points within the occupancy, driven off of -- we had some impairment charges last year that eliminated some go-forward depreciation. Taking that out of the equation, we're leveraging occupancy essentially at a flat comp or at a very low positive comp. We're able to start gaining that, so you're correct that, that mid-single digit would translate to some good leverage.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

And then your inventory per foot, I think it's worthwhile to point out, is running negative while your comps are running positive. And that's usually a pretty good sign. I'm just wondering how should we should think about quarter-end inventory per foot.

John D. Goodman

Jeff, if you think about where we are, it is right now in a virtuous cycle, which is good. Comps are going up, margins are improving, and inventory is going down. So the product has been very well received, and we're turning the inventory pretty quickly now, which we're happy with as well. As we guided to the end of the quarter, it's right where we wanted to be in terms of our inventory levels.

Steven H. Benrubi

And I'm sure you recall, Jeff, we were starting to build some inventory in the latter -- the first half of last year that didn't end too well in terms of margin performance as we got into Q3 and beyond. So we had planned to come out of Q1 really right where we ended up, which was this down high single digits, and we're mindful of last year, when we went into the back-to-school, ultimately we saw that we were a little heavy. So we're going to be careful, be able to chase into trends as opposed to getting too far end of things.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

And then just one final, on Tamara at Arden. Just want -- I know she's only been there a really short time, but just wondering if there's anything you can point to in terms of areas of focus that she'll be heading up.

John D. Goodman

I think the key thing is, as we've focused in on, Wet Seal is all about the product. And I think you'll see some in-roads in terms of the product categories. We're looking at the assortment and what we need to round out the assortment. Certainly, dresses and club tops have been very good for us, going back to that Arden B 28-year-old woman. So I think we're addressing the right direction. We're going to be concentrating on accessories, other categories that go with that. And so you'll see some of that starting in the next 4 weeks or so.

Operator

Our next question comes from the line of Steph Wissink of Piper Jaffray.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Just a couple of questions for us. Curious, Steve, what structurally you think would prevent you from getting back to prior peak growth margins if there was some reason that you were not able to. And then I would love to hear, John, a few more additional insights from your focus group study, if you're willing to share. And then last, another one for you, Steve. If you could just talk about the calendar shift for back-to-school in the second quarter guidance.

Steven H. Benrubi

I'll try to cover the couple of questions you sent my way, Steph, and then John will go from there. But structurally, there's really not anything that impedes us from getting back to our historical gross margin performance. It's a combination of merchandise margin strength and sales productivity. And then, granted, we have some ground to make up on productivity. We were at $245 a foot at Wet Seal last year. We need to grow that by about 10% to get back to that $270 neighborhood I talked about earlier that translated to a pretty healthy leveraging of occupancy cost. And then merchandise margin has come a long way in a short time. And it's really just about staying relevant with the assortment. We've had some good early indications that she likes the product. And the full price selling or the more profitable promotional selling has come back to us quickly, and we just have to sustain that. On the shift, it's not a real significant factor for us. If you're talking about the one week falling out of the front end of the quarter and then picking up the first week of back-to-school or August, it's about $2 million to $3 million impact on our sales. We had about that similar amount of impact on our sales in terms of a positive in Q1 as well, and so we have a further $2 million to $3 million in Q2. And then you start to give it back in the back half of the year. But overall, not a big factor.

John D. Goodman

And then with regards to the focus groups, they were very enlightening. We had 7 focus groups throughout the country the past pretty much month. And one of the things we've heard is, obviously, that her mobile is her weapon of choice, and that's how we need to communicate with her, our 16-year-old girl. Very important, where she is today is -- Facebook, as we've heard loud and clear from every focus group, that's where my parents are, I'm not there. So in terms of where she's looking, it's Instagram, Tumblr, those kinds of sites that are very important to her snapshot. Interesting enough, and one of the things as I started with the company was really, "How will we get the girl back into our store?" I think that was the most important thing. And hearing the focus groups, I guess, the good news for us in turning this business around pretty quickly is that she's not loyal. I guess, the bad news is, she's not loyal, so we really have to work hard every day to keep her coming back to our store, which is very important.

Operator

Our next question comes from the line of Eric Beder with Brean Capital.

Eric M. Beder - Brean Capital LLC, Research Division

Could you talk about -- you talked a lot about mobile. And this upgrade you have set up for back-to-school seems like a very large change. What is the consumer going to see in that change -- or what is going to happen internally that they're not, that they didn't have before?

John D. Goodman

The system we had was from 2004, and it really wasn't up to speed in terms of all the changing technology that's happened. So what you would've seen is, as you look at our site today, it basically takes your desktop and puts it on a mobile or your iPad device. What that will give us is much more options, working with Demandware, in terms of the technology, what our customer sees on the site, especially mobile and the iPad, in terms of how she sees it, how she can scroll, how the products look online. So a lot of that will be changing, and as we said, we'll roll that out in September. It's very exciting for us because we really haven't upgraded the technology from our site since 2004.

Steven H. Benrubi

And we're also, Eric, capturing a lot more text address or number information from our customers. That way, enabled to communicate with her in a much more relevant way than e-mail going forward. So that's another element of the social strategy that we're building upon.

Eric M. Beder - Brean Capital LLC, Research Division

Okay. And for Arden B, you've closed stores, now you've hired a new GMM. It seems like a little bit of a turn. How should we think about Arden B beyond maybe stabilizing this year and other pieces in terms of the business?

John D. Goodman

We're encouraged by the results of Arden B. And certainly, we're going to be watching very closely the next months as we look and see where the business goes. Certainly, the trajectory has continued into May. So we're excited about that. I think as we look at it, we really want to make sure that the stabilization's happened. And then potentially, if the business warrants it, to grow again. But for right now, we're in the fix-it mode of Arden B, and we're certainly going to be looking at different strategies for that business. But we're encouraged by the early results that we've seen.

Eric M. Beder - Brean Capital LLC, Research Division

And finally, a question for Steve. How should we think about the share repurchase, and what are the share count we should use going forward?

Steven H. Benrubi

I guess I would say, in the first quarter, as you know, we entered it with definitely an eye in 2 directions. We wanted to get started on the share repurchase program, and we were also focused at, really, priority one: on getting stability in the operating cash flow of the business. And we feel a lot better about that latter point now, clearly, with how we performed and what our outlook is for second quarter. And with that in mind, we'll continue into the share repurchase using the same method, anyway, that we have up to now in open market. But we certainly believe that even where we are today, it's appropriate and a good use of company's capital, or at least a portion of it, to continue that program.

Eric M. Beder - Brean Capital LLC, Research Division

And the share count for Q2, in your estimate?

Steven H. Benrubi

I guess I don't want to get too much into what kind of volume we anticipate in the buyback program. So I'm going to be -- I'm going to hold off a little bit on where we're at. I mean, we're at roughly 89 million shares today. Suffice it to say, we're looking to take shares out as we go here.

Operator

Our next question comes from the line of Liz Pierce with Ascendiant Capital Markets.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

John, just kind of dovetailing off Steph's question on back-to-school, do you anticipate that you'll accelerate any kind of receipts because of the shift?

John D. Goodman

We're not anticipating at this point. Our lead times are very, very quick. So in terms of looking at the inventory levels, we are clearly in a chase mode today, which we will continue, and certainly being opportunistic about certain categories. We're not anticipating moving up significant amount of receipts because of the weak shift.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

And then in your comment on the knit tops, I think you had mentioned last quarter that both fashion and basics were still somewhat of a work in progress. And you feel, you mentioned, that they are improving. Where do you think you see it? Are you on the 50-yard line here?

John D. Goodman

I think it is interesting because the woven tops businesses, we were in the market last month and talking to the vendors and certainly go forward, but woven tops are starting to get a little softer in business right now, and fashion knits are finally coming back. From a category, they're coming back, but also from a Wet Seal where we did have missteps and mistakes around that product. So I feel like we're definitely past the 50-yard line. One of the issues we had, and which is the right way to handle it, we really kind of starved the fashion knit tops business until we felt there was momentum and we had the right products. So from an inventory level, they've been significantly down in inventory, but we're starting to feed them back some open buy dollars, and we're starting to see some benefits by doing that. The good news about fashion knit tops is that it's much more agile and fast, and it's also higher margins than woven tops. So we're encouraged that direction, that's where the trend is headed, and we should see some benefits around that.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

And in terms of that inventory spread, is that something that we should anticipate, given the fact that you can chase and you're in the market actively on a regular basis? Do you think that's a sustainable way to look at the business?

John D. Goodman

I think, as we look at the business right now, it's sustainable that way. I think it's a healthier way to be. It also gives us the opportunity to have less clearance inventory on the floor and turn our goods faster. I mean, we already turn the goods 7 times a year. For us, it's about turning 7x more profitable right now, and that's kind of where we're focused on. So the inventory will reflect that. Quarter-to-quarter's change based upon some of the lead times, with sweaters and outerwear going to the fall, holiday -- or fall/winter season. So we'll continue to look at it, and obviously also denim being a big component of back-to-school and certainly in the fall season.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

And in your focus groups, did you get any indication of where you're -- who you might be taking market share from, even if you don't want to elaborate or say specifically?

John D. Goodman

We really didn't, and we just sort of listened to our customer around where she shops today and what people are on top of her mind, who our competitors are, where she thinks they do well and where we do well as a business and where we need improvement. So It was one of those things where we got a lot of good insight about our competitors, what they're doing, but really, that's pretty much it.

Elizabeth O. Pierce - Ascendiant Capital Markets LLC, Research Division

If you had to say like the top 2 kind of takeaways from that, would it be product and how you communicate?

John D. Goodman

Yes, I think product is certainly #1. And I think product, store experience, and obviously, how we communicate. Those 3 things are very important for her right now.

Operator

Our next question comes from the line of Marni Shapiro with The Retail Tracker.

Marni Shapiro - The Retail Tracker

Could you talk about some of the physical aspects about the store and what can we can expect to see at Wet Seal? I'm already seeing certain things, like I think I saw some new bags. You guys aren't merchandising the product for sale up to the ceiling, and I'm curious about new prototypes and things like that, if you could talk about how should we think about that over the next year, even.

John D. Goodman

I think as you think about the store, we're definitely cleaning up the experience. Certainly, the windows are a big part of it. I don't know if you were in the store this weekend, but we introduced the new Saturday Steals sign, which is pretty much like life-sized. And it was very compelling, and we certainly drew with the attention of our customer. I think from a sight line standpoint, you call it, where we are lowering or where we have lowered, in most stores, the product down so that customers aren't using the stick anymore to get the product, which is very important. I think you'll continue to see that. The imagery, we really -- you're about to see the next image coming in, which is really just a step up where we've been from colors and just the product and how we show the product. So you'll start to see more of that. In terms of layout in the store, certainly, merchandising it by trend is very important, but also by category. So if leggings, as they are right now, are really hot for us, we're going to have leggings throughout the store, but also inside a whole leggings shop where it's appropriate. We'll also be going out and putting in the windows as a key category for us. So you'll see categories that are important, but also the trends that really make it, and you'll see much more statements around the accessory business going forward into the back half of the year. So those are the key category components. Also, you should feel, definitely, that as I was saying to Liz, less clearance, much more regular price or promotional selling, and a lot less of the clearance and penny inventory that we've had in the past.

Operator

[Operator Instructions] Our next question comes from the line of Jeff Feinberg [ph] of Feinberg Investments [ph].

Unknown Analyst

Couple of quick questions. The first is following up on the discussion earlier about sales productivity and potential margins. Just wanted to make sure that I understand correctly. To the extent that we get back to this $270 per foot plus, is it possible to get back to these 5% to 6% operating margins that we have achieved historically?

Steven H. Benrubi

Yes. It's really a combination of getting to that sales level and also having the merchandise margin strength, which we're well on our way or saw good progress there. But those things, hand-in-hand, that's the formula for getting us to the mid-single operating margin as a step.

Unknown Analyst

The second question is, can you update us on how your business has been in the first month of the quarter here, for the month of May?

Steven H. Benrubi

I would just say that we guided to a mid-single-digit comp for the quarter, and that's -- it's always heavily informed by how we see business performing in the early weeks of the quarter. I guess I'll just leave it at that.

Unknown Analyst

And then finally, with some of the optimism you have about the outlet stores and the returns on those outlets, can you give us a sense, longer term, for the type of square footage growth as a company that might be an opportunity for you?

John D. Goodman

Yes, I think we think about it in terms of there's some opportunity for us to continue growing, whether it'd be outlets, which we have announced, the 19 to 20 stores for the fourth quarter that we'll be opening, as well as next year looking at additional outlets, as well as off-mall opportunities. So we still see significant runway for the brand, specifically Wet Seal here, to continue to grow. And certainly looking at real estate, opportunistically, to grow that.

Unknown Analyst

So if I understand correctly, between that and Arden B. being improved, it sounds like you intend to have positive footage growth, prospectively.

Steven H. Benrubi

Yes, this year is essentially flat. We're replacing just some normal closures with what John talked about. But we'd expect, if we continue with the performance course we're on, that we'd be looking to grow starting next year.

Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. Goodman for closing comments.

John D. Goodman

I'd like to thank everybody for being on the call today, and we will talk to you next quarter. Have a good day. Thanks.

Operator

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

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Source: Wet Seal Management Discusses Q1 2013 Results - Earnings Call Transcript

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