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The Wet Seal, Inc. (NASDAQ:WTSL)

Q4 2013 Earnings Conference Call

March 21, 2014 8:00 am ET

Executives

Christine Greany - The Blueshirt Group

John D. Goodman - CEO

Steven H. Benrubi - EVP and CFO

Analysts

Edward J. Yruma - KeyBanc Capital Markets

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

Stephanie S. Wissink - Piper Jaffray

Jeremy Hamblin - Dougherty & Company

Eric Beder - Brean Capital

Elizabeth O. Pierce - Ascendiant Capital Markets

Marni Shapiro - The Retail Tracker

Operator

Greetings, and welcome to The Wet Seal, Inc. Fiscal Fourth Quarter 2013 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christine Greany of The Blueshirt Group. Thank you, ma'am, you may now begin.

Christine Greany

Good morning, 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 we begin, I would like to remind you that today's call may contain forward-looking statements. Information and factors that could cause our actual results to differ materially from the forward-looking statements, as well as reconciliations of non-GAAP to GAAP financial measures, are included in yesterday's press release as well as our most recent annual report on Form 10-K. These documents are available on our corporate Web-site, wetsealinc.com. The Company assumes no obligation to publicly update or revise our forward-looking statements to reflect subsequent events or circumstances.

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

John D. Goodman

Good morning, everyone. Thanks for joining us today. We appreciate your participation on short notice and apologize for any inconvenience. The need to reschedule this call was driven by our work to finalize the $27 million convertible notes placement we announced yesterday afternoon. Combined with our year-end cash and investments position of $46 million, this placement further strengthens our financial condition and provides us with added flexibility to drive future growth.

After a strong start to the year, we concluded fiscal 2013 with a difficult fourth quarter. As we all know, there were several external factors that contributed to the tough times most retailers are facing. Soft mall traffic, a highly promotional environment and severe weather are among just a few of the challenges. To that end, I think it's important to discuss our fourth quarter results within the context of the full year and note that we were on a positive trajectory for the first eight months of 2013, until the external environment started to shift.

For perspective, I'll begin with a brief high-level recap for the year. We made progress in many areas of our turnaround, which makes us confident that we can stabilize and grow the business again. We initially focused on three key initiatives that enabled us to quickly regain relevance with our core 16-year-old customer and deliver positive comp store sales performance sooner than we anticipated.

First, we became intensely focused on product. Second, we implemented strict inventory management practices. We operated lean which helped us reduce markdown levels and generate significant improvement in merchandise margin through the first three quarters of the year. Next, we clarified our brand messaging and engaged the customer through targeted promotions, key influencers and social media.

At Arden B, we brought in new talent with expertise in the women's contemporary market, refocus the brand and improve merchandise quality to become more aspirational. We replaced our Head of Store Operations with a retail veteran who has brought new energy, creativity and discipline to our stores organization. And at the beginning of the year, we also took out $5.5 million of costs out of the business and flattened our management structure.

In the latter half of the year, as part of our strategy to increase Wet Seal's presence outside the mall, we opened 20 outlet stores where traffic is typically higher and the active [elements] (ph) are more powerful. On the e-commerce front, we upgraded our platform to Demandware in November, and after recently going live with the system's remaining tools, we are now beginning to see the benefits of having a more responsive design, enhanced functionality and robust marketing capabilities.

Lastly, we developed a presence in the Junior Plus category, first launching on wetseal.com and then rolling out in shops within the 36 Wet Seal stores, followed by the opening of our first [indiscernible] Wet Seal Plus store, all to positive customer response.

In the first three quarters, we saw a significant improvement in results. Comp store sales turned positive, merchandise margins strengthened by 270 basis points and gross margin improved 360 basis points. We lowered cost and maintained lean inventory levels, and in both the first and second quarters we achieved profitability. After a strong start to the third quarter, the environment began to shift in September with mall traffic softening considerably and the promotional environment starting to escalate.

Although we entered the fourth quarter with lean inventories and had the benefit of strong Black Friday results, a combination of occurrences pressured our sales and margin. In addition to the challenges presented by soft traffic, the promotional environment became more intense than anyone could have predicted.

From an internal perspective, we had some product trends that underperformed and we did not have enough dressing merchandise for the holiday selling period. At the same time, our e-commerce sales were impacted by transition work subsequent to the launch of our new e-commerce platform. However, I'm pleased to note that with these issues largely behind us, our e-commerce sales are in positive territory thus far in the first quarter.

Additionally, we ended this year with inventories down 7.6%. In a clean position for spring, for the full year we're now at, our comp store sales declined to 4.1% and improved merchandise margin by 180 basis points. This is not the level of improvement we expected at the outset of the year, but in the context of the macro and competitive environment, we did make progress.

The challenges of the past several months have largely informed our direction for the future. In response to the transformation we're seeing within the retail environment, we developed a four-point strategic plan to build upon the change that we made last year, with the goals of driving comp store sales growth, strengthening our market position and restoring profitability. Our plan includes driving improvement in the core Wet Seal business, substantially growing e-commerce, pursuing the opportunity we see in the plus-size business and transforming our real estate portfolio. I'll discuss each of these in detail.

Today, our chief priority is to deliver improvement in the core Wet Seal business. We believe there are significant opportunities to drive sales per square foot by making strategic changes to our merchandising, marketing, pricing and promotional cadence. The great news is that our nimble structure and short lead times enable us to enact change immediately. Our specific initiatives are as follows.

First, we are evolving our merchandise mix to emphasize key anchor businesses that carry higher margins and are less subject to fashion volatility. At the same time, we are reducing the scope of our lower margin denim business which has diminished as a category in recent years. While the business will be smaller, we expect to maintain an authoritative presence and anticipate that Wet Seal will remain a denim destination for our core customer.

In fact, our improved e-commerce capabilities will allow us to offer an expanded assortment and size range beyond the four walls. If you look at the stores today, we're emphasizing more key items and giving the customer a greater number of options that she can mix and match, while incorporating footwear and accessories into those looks. We believe this will enable us to broaden the appeal in certain higher-margin categories and drive additional units per transaction.

Our second key initiative is to implement a high/low pricing strategy which will enable us to increase our average unit retail and drive merchandise margin growth without compromising quality. We're doing this on a select basis to ensure that we protect critical price points. Most importantly, this pricing model will enable us to engage our customers for targeted promotions while still preserving margin. In short, we'll be better positioned to withstand the type of competitor pressures we experienced during the fourth quarter.

Also essential to improving the core business is our ability to connect with our customer and deliver an effective marketing message. We know she wants to be inspired and she is not loyal to any one brand. So it's imperative that we engage her with the right product, speak to her in the right voice, and reach her through both physical and digital channels.

Moving now to our e-commerce growth strategy, in 2013, 6% of our sales were generated through our online channel, which presents a tremendous opportunity that we are now fully prepared to seize. Increasing the capabilities and effectiveness of our e-commerce platform has been a key priority and we've made a great deal of progress in recent months. We successfully launched our new Demandware platform in November and now have a site with responsive design that is optimized for mobile and tablets.

Importantly, we've had a team reorganization underway. We've eliminated certain management level positions and replaced them with associates in critical areas such as social media, Web analytics and marketing program analysts. This is enabling us to gain greater insight into shopping behavior and implement strategies around retargeting, texting and e-mailing, that can have an immediate impact on traffic and conversion.

Most recently, we added three new members to our Board of Directors who bring a wealth of experience in social, digital and e-commerce. We're excited to have them involved and know they will provide a great deal of guidance at this critical time in our e-commerce lifecycle. We believe our current positioning and capabilities will allow us to grow e-commerce to 10% of our total sales relatively quickly. Thus far in Q1, we are seeing positive e-commerce sales growth.

In order to help drive traffic to both our Web-site and stores, we are implementing expanded and refocused marketing efforts that include several key initiatives. First, brand marketing and partnerships will continue to be a critical element of our strategy. We are successfully using pop culture the celebrity tie-ins to reinforce the association between Wet Seal and the latest trends.

Social media is beginning to take on epic proportions and we are seeing Wet Seal's presence grow dramatically on sites like Twitter, Instagram and Wanelo. We're leveraging the visibility from our alliance with Crush by ABC Family and doing more product integrations and social media promotions. And AwesomenessTV continues to be a home run for us, offering a tremendous amount of engagement with our core customer. We will also be doing more frequent promotions and store events that tie-in to our partnerships with musical artists.

Turning to mobile, we are utilizing the internal capabilities we now have announced to rebuild our subscription base, offer more frequent text and e-mail promotions and engage the customer with a more direct called action, both in-store and online. Lastly, we are investing greater resources in digital marketing initiatives, including SEO DOAs and blogger partnerships. We will be investing wisely, shifting our spending as needed to ensure we are properly funding critical marketing tactics that will help us drive traffic and engage the customer.

Moving to the opportunity in plus-size market, we are pleased with the results we are seeing in our existing Wet Seal Plus business and have made the determination to grow this segment to an expanded online assortment and additional new store openings over the next several years. Our near-term plans include two new store openings in fiscal 2014. The customer response to this concept has been positive and statistics surrounding this demographic are compelling, with the plus-size apparel market expected to reach close to $10 billion by 2017. Also noteworthy, as it relates to the Wet Seal customer, social media engagement is much stronger in the plus segment among our core demographics.

Finally, I'll talk about our real estate strategy, which calls for a transformation of the existing store portfolio over the next five years. In 2012, approximately 92% of our store base was in the traditional mall. Today that number is 88%. We expect to continue to evolve the mix in the coming years by selectively closing stores upon lease expiration and diversifying our presence to include a greater number of outlet, off-mall and plus locations.

In today's environment where the mall is losing some ground, outlet centers and off-mall sites continue to generate traffic. In addition to a stronger store economic model, we believe outlet and off-mall locations will provide an opportunity for us to capture new customers. In 2014, we plan to close approximately 17 Wet Seal stores and open 10 new locations, comprised of six outlet stores, two off-mall and two Wet Seal Plus stores.

Turning now to Arden B, fourth quarter results were certainly impacted by the environment, but at the same time, our inventories were too lean going into the period. We are pleased with the way the stores look for spring, the positioning is aspirational and the product is on trend, with [indiscernible] bottoms, dresses and knit tops. Following the difficult fourth quarter, we are focused on stabilizing business as quickly as possible.

Before turning the call over to Steve, I'd like to provide some perspective on the first quarter guidance we're issuing today. We had a slow start to the year and we're not pleased with the comp store sales, margin and earnings guidance we're providing. Nevertheless, we do have a strong sense of optimism about the balance of the year for several reasons, and our guidance reflects trend improvement in the latter part of the quarter.

Inventory levels in the mall have come down from the elevated levels we saw in Q4, which should release some of the promotional pressure of recent months. On top of the nationwide weather challenges in December and January, February came in with a record number of storms. When spring weather eventually arrives, w believe there will be pent-up demand, and after a lack of fashion newness in third and fourth quarters, we are beginning to see some exciting trends emerge. We think our stores reflect this great look for spring and are well-positioned in key categories, including dresses, skirts, shorts, graphic tees, footwear and accessories. The positive trend we are seeing in the e-commerce business is an encouraging indicator for us as well.

We've already begun executing against our new strategic plan, we're confident about our ability to change the trajectory of the business quickly, we have additional capital resources and we have a team that is energized and ready to win. Now, I'll ask Steve to review the financials.

Steven H. Benrubi

Thanks, John, and good morning everyone. Net sales for the fourth quarter were $124.8 million. That's down 22.8% versus a year ago and down approximately 18% versus the comparable 13 week period a year ago. Consolidated comparable store sales decreased 16.5%, reflecting the factors John discussed earlier, including mall traffic, promotional levels, response to certain merchandise assortments and weather.

On a comp store basis, combined average unit retail declined 5.3% to $9.23. Transactions per store were down 9.6% and units per transaction declined 3.2%. Combined e-commerce sales in the fourth quarter were down 25.3% from a year ago. That's down approximately 20% versus the comparable 13 week period from last year. As John noted, we're beginning to see the benefits of our e-commerce capabilities and anticipate that ongoing initiatives and marketing and customer targeting will drive continued momentum.

In the Wet Seal division, fourth quarter net sales were $111.5 million, down 18.8% versus last year and down approximately 14% versus the comparable 13 week period a year ago, while comparable store sales declined 15.4%. E-commerce sales decreased 19.2% to $6.8 million in the fourth quarter, reflecting a decrease of approximately 13% versus the comparable 13 week period a year ago. On a comp store basis, AUR decreased 4.5% to $8.52, transactions per store were down 8.7%, and UPT was down 3.6%.

At Arden B, net sales were $13.3 million. That's down 45.6% versus last year and primarily reflects having 24 fewer stores in operation, to difficult retail environment and lean inventory levels going into the quarter. Comparable-store sales were down 25% and e-commerce sales declined 46.2% to $1.3 million. Versus the comparable 13 week period a year ago, e-com sales declined approximately 43%. And on a comp store basis, AUR decreased 2.8% to $28.26, transactions were down 21.1%, and UPT was down 2.2%.

Now turning to the income statement, fourth quarter gross profit came in at $23.4 million compared to $40.1 million a year ago, while gross margin was 18.8% versus 24.8%. The year-over-year decline primarily reflects a decrease of 180 basis points in merchandise margin as well as the deleveraging of occupancy costs by 390 basis points. Additionally, buying, distribution, planning and allocation and other costs deleveraged by 30 basis points combined.

Fourth quarter selling, general and administrative expense was $42.7 million or 34.2% of sales. That's down 25.8% on a dollar basis and 140 basis points as a percentage of sales compared to the prior year. Selling expense totaled $32.9 million, reflecting a year-over-year decline of 13.3% on a dollar basis, due primarily to lower store wages and benefits. As a percent of sales, selling expense was up 280 basis points, driven mainly by the overall deleveraging effect of our comp store sales decline.

Fourth quarter G&A expense totaled $9.8 million or 7.9% of sales, which compares to $19.6 million or 12.1% of sales a year ago. Most of the year-over-year delta can be traced to several items that impacted the fourth quarter of last year. Those include approximately $1.5 million in incremental legal fees, primarily related to employment litigation, a $6.6 million charge to accrued loss contingencies for several litigation matters, a $500,000 early termination fee for investment banker agreements, and $1.3 million in severance costs.

Operating loss for the period came in at $27.3 million compared to $25.5 million last year. The results include non-cash asset impairment charges of $8 million in both this year's and last year's fourth quarters. The '12 period also included the factors I referenced in G&A expense. Non-GAAP adjusted operating loss, which excludes the asset impairment charge, was $19.3 million in the fourth quarter of 2013. Last year's non-GAAP adjusted operating loss, which excludes the impairment charge and the adjustments I just noted, was $9.3 million.

Provision for income tax was $243,000 compared to $60 million last year. As a reminder, we ceased recording benefits for income taxes on pre-tax losses upon establishing a valuation allowance against our deferred tax assets at the end of fiscal 2012.

Net loss in the fourth quarter was $27.5 million or $0.33 per diluted share, which compares to net loss of $85.8 million or $0.97 per diluted share in the prior year period. On a non-GAAP basis, which excludes the after-tax effect of the asset impairment charges, adjusted net loss was $19.6 million or $0.23 per diluted share. That compares to a non-GAAP adjusted net loss of $4.8 million or $0.06 per diluted share in the fourth quarter of 2012.

Moving now to the balance sheet, inventories at year-end stood at $31.2 million, down 7.6% versus a year ago. This was in line with our expectations and reflects our strategy to ensure the Company was in a clean position entering fiscal 2014. Inventory per square foot was down 9.3% versus a year ago, with Wet Seal down 9.6% and Arden B down 5.9%.

The Company ended the quarter with $46 million of cash and cash equivalents and short-term investments, no debt, and a $35 million revolving credit facility. With the completion of the offering we announced yesterday, we expect to end the first quarter with a cash position ranging from $53 million to $56 million, which further enhances our flexibility as we implement the strategic actions John described.

Capital expenditures totaled $5.6 million in the fourth quarter, which includes spending related to 13 new store openings during the period. Our capital spending plans for fiscal 2014 are conservative and reflect our decision to take a more prudent approach to investments until the business regains strength. Net capital expenditures are expected to be in the range of $10.5 million to $11.5 million, with approximately $6 million to $7 million of our planned expenditures being store related.

Now, I'll turn to our financial guidance for the first quarter of 2014. Our expectations are as follows. The comparable store sales decrease, which includes e-commerce, in the negative mid to high-teens and we expect the net loss in the range of $0.16 to $0.19 per diluted share.

Thanks for your time today. Now I'll ask the operator to begin the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Edward Yruma with KeyBanc Capital Markets. Please proceed with your question.

Edward J. Yruma - KeyBanc Capital Markets

Specifically on real estate, I know you indicated an openness to closing stores as they come up for lease renewal, I guess with this infusion of cash, are you taking a more open view against opportunistically closing out of performing doors, particularly as it relates to Arden B?

John D. Goodman

This is John. So in terms of the real estate, we are looking at our real estate and making sure we're making the right decisions regarding both brands. Clearly we are looking at leases that are coming due but also looking at opportunities to continue to grow the business where a good lease – lease term. So, to answer your question, we're looking at both brands pretty much in terms of what is working, what isn't working and then making the right decisions around it.

Steven H. Benrubi

Yes, I mean we have a plan, I think as we called out, we're looking at about 17 Wet Seal closures and around 13 Arden B for the year. That is primarily or almost entirely made up of upon these expirations.

Edward J. Yruma - KeyBanc Capital Markets

Got it. With the Arden B closures, does that business have sufficient scale to warrant kind of out of your attention or kind of continue to expense dollars put against it?

John D. Goodman

We are definitely looking at it in terms of the expenses that we are doing in Arden B, and we look for a turnaround in the business but we're obviously looking at the real estate and the scope of how many stores we have and making sure that we can run it appropriately.

Edward J. Yruma - KeyBanc Capital Markets

Got it. And a final question, in terms of the focus on key items, I guess when should we expect that you'll have kind of sufficient or targeted inventory in some of these key items and I guess when will we expect to kind of retail merchandise with lower lines and denim will be in place?

John D. Goodman

So, we really are – we're pleased with what the merchants were able to do since January. We got the approval of our strategic plan in January and the merchants went out the next day. We bought the key items, we're in the business right now, we're starting to see it coming in early March and by mid-April you should see all the key items in place in terms of what we are buying and the strategy go forward. So, you should see a change right now in the stores. We start to build up in the first week of March. That will keep continuing and really be fully in place around the key items and some of the pricing strategies by mid-April.

Edward J. Yruma - KeyBanc Capital Markets

Great, thanks so much.

Operator

The next question is coming from the line of Jeff Van Sinderen with B. Riley and Company. Please proceed with your question.

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

Good morning and congratulations on your deal. I wonder if you can just talk a little bit more about the digital business, the comps you were running in first quarter of last year, and then maybe if you can delve a little bit more into the initiatives that you're working on to grow the digital e-commerce business this year, how we should think about that in terms of impacting SG&A, and then I know your CapEx spend, how much we should think about for digital initiatives in CapEx?

John D. Goodman

So with regards to last year, we were up 6 comp in Q1 for e-commerce. So we are pleased that we are actually comping on top of the comp from last year. We feel very strong about now that our Demandware has been implemented, the ability for us to drive the business. We talked about today that it's 6% of our business, we know we need to get to 10% sooner than later. We believe now having the right system, we can get there. It is a big initiative for us, we certainly see our girl moving towards online a little bit more every quarter. So it's imperative that we continue to have this growth that we're starting to see. Clearly we were disappointed in third and fourth quarter around putting the system in and getting it up and running, but we feel like we've got the glitches out of the system.

With regards to your question about expenses around the e-commerce business, we will invest in this business in terms of really making sure we have the right strategies or the right what we need to do to drive that performance. That being said, we'll also look where we can divest in certain areas of the Company to invest, but also spend where we need to in terms of additional investment into e-commerce.

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

Okay. And then maybe you can talk just a little bit more about the real estate. I know you mentioned most of the stores you are planning to close for Wet Seal are normal lease expirations, but as you look at this fleet longer-term and consider closure plans, maybe you can just touch on how many stores within the Wet Seal fleet are negative four-wall contribution and how you're thinking about that in longer-term mall store closures?

Steven H. Benrubi

Jeff, it's Steve. Looking at the fleet today, with the performance that we've had here over the last two years, there's about 20% of the fleet that is negative four-wall at the moment. Our history, we typically see that less than 10% in stores kind of move in and out of that as there's management changes in stores and so forth, and we were seeing in the first half of last year, just with the rebound in the business and margin improvement in first half of 2013, that quickly we've gotten back down to that neighborhood. So, we're hopeful of seeing that kind of mix move about to that place going forward.

We will evaluate in cases where we have stores that have multiple years of cash flow declines and even when the business overall has been stronger, if there's been some struggle in the store, we'll evaluate and look for opportunities to move out of it early, but frankly that's a pretty small population. We'll continue to monitor that quarter-to-quarter but we still believe that most of the leasing actions going forward are going to be a by-product of lease expirations where we maybe rebalance the portfolio out of the mall and build outside of it and in outlet centers over the next few years.

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

Okay. And then Steve, just a housekeeping question, all-in, if we look at it on a fully diluted basis, if all the converts convert associated with the deal and the warrants exercise, how many shares will we be adding to the share count?

Steven H. Benrubi

We'd be adding for the convert by itself, it's just under 14.7 million shares and then the warrants would be 8.8 million, although there would be proceeds of almost $19 million coming in if the warrants do exercise and those 8.8 million come in. Before all of this, we had 84.7 million shares. So if you just take the convertible notes and add those, you'd be at about 99 million shares, and then if you assume more in exercise, you'd be at 108 million roughly, but with an additional it's actually $18.7 million of proceeds.

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

Got it. Thanks very much and good luck.

Operator

The next question is coming from the line of Steph Wissink with Piper Jaffray. Please proceed with your question.

Stephanie S. Wissink - Piper Jaffray

We've got a few questions. John, just a couple for you. I think you talked very eloquently about the merchandise trend you referenced in kind of the bottoms category, dresses, skirts, shorts, tees, are you seeing anything in tops outside of the graphic tee business that has you excited about the trend currently? And then if you could talk a little bit more about your high/low strategy? I think Steve mentioned the average retail was right around $8. Where does that need to go to support the profitability targets that you have?

John D. Goodman

So, with regards to trends, we are encouraged by some of the trends that we are seeing, specifically in fashion in tops. It's been a very difficult couple of years in fashion in tops in that category and we are starting to see some daylight around that. So we're pleased and it's been a long time coming, so we are starting to see some positive momentum there, to answer that question there.

Steven H. Benrubi

I mean on the high/low strategy, and as you called out a little under $9 AUR, we're being selective about places where we're moving ticket on average, we may be taking ticket up in the Wet Seal store by about $0.75, but we'll do it in areas where it's going to be combined with compelling promotional messages, be they '2 For' promotions or BOGO promotions where the customers become accustomed to seeing those as great deals, and if there's a little bit of move in the ticket and the combination get us some more out-the-door AUR from the transaction, that's where we see the best use of that strategy.

John D. Goodman

And we started to put that in place and we haven't seen any pushback from our customers so far.

Stephanie S. Wissink - Piper Jaffray

That's helpful, thank you. Just one final question on the scale of the investments that you anticipate. So now it's roughly kind of $50 million at quarter end in cash. Help us understand the timing of some of the investments that you anticipate over the next few years related to e-commerce specifically?

John D. Goodman

We put together a strategy, so we feel like we've got what we need to do to drive that business, but we're certainly looking at other opportunities to invest in that. So as we would lay out the plan for the balance of this year, we'll certainly make the appropriate investments and let you know where we stand on that, but we are definitely going to be investing in that business, but as I said earlier, really balancing where we invest as well as where we divest as businesses start to shift and change.

Operator

Our next question is coming from the line of Jeremy Hamblin with Dougherty & Company. Please proceed with your question.

Jeremy Hamblin - Dougherty & Company

Wanted to just come back to the financing transaction, so if you can provide a little bit of color on why you chose to go this particular direction with the convertible notes, which seems fairly dilutive to existing shareholders? Was there kind of extraordinary rates that you would need to pay on a normal line of credit or maybe just a little color on why you chose this path in particular for the financing?

Steven H. Benrubi

I guess I would just say, we worked with our banker and evaluated the markets for various forms of financing, ranging from straight debt to straight equity and found overall that convertible note deal struck an appropriate balance in cost of funds and level of raise that we thought would be a prudent insurance policy for the Company.

Jeremy Hamblin - Dougherty & Company

Okay. And then let me just ask another a fairly global question. So we've had most of the companies, your peers and competitors, report results and clearly it's been a fairly staggering six months period in the teen and fast fashion space. Do you sense – because everybody is really comping down at least mid-single digits and up to and exceeding 20%, is there something structural that is happening that should have us concerned longer-term or does the comps with everybody being down suggests that there is just a lack of differentiation for your customer base and that literally everybody was really wrong on the fashion, that they weren't able to find compelling items that are driving customers into the stores?

John D. Goodman

I think as we called out earlier, there are macro issues that are facing the teen growth today, whether it's teen unemployment or other things that are out there. That being said, what we really feel like we're doing is, we've got to put aside the macro for a second and say, what can we do to get business for ourselves and what are the strategies we need to put in place to really turn the tide, and the macro issues are out there but how do we get our share of the business in a very difficult environment. We believe by what we've done with our four-step plan here or our four key initiatives within the plan, that will start to do that.

As I said earlier, we don't think that promotional levels are going to be going down to where they were a year ago. So we had to adjust and we think our strategic plan around pricing and product and key items will do that. We've got to get that girl a compelling reason to do either coming to the store or go online with us. So the omni-channel piece is very, very important for us.

There's clearly some changes that have taken place in the past six months, but we do believe we are better suited now, specially around the inventory levels, how to manage the business appropriately, how to manage the promotions, how to manage the presentation within the store. Those are all key things that should hopefully really turn the tide in terms of our business in the upcoming months.

Jeremy Hamblin - Dougherty & Company

Right, and then just one last follow-up on the e-commerce. It's really actually very encouraging to hear that you're seeing that positive quarter-to-date, and when you talk about going from 6% to 10% of sales in e-commerce channel, is the timeframe for that kind of two to three year period or do you think that's something where it's even possible you could do it more quickly than that?

John D. Goodman

We really believe that now we have our system in place and we're investing wisely in terms of the e-commerce space. We are prepared to start to get there by the end of the year. We think by the end of the year, we should be at 10% of our business being e-commerce. So there's no reason to think we can't get there, and then clearly, if you think about it from a productivity and profitability standpoint, it's double what is the stores' profitability. So, for us, the quicker we get there, the more profitable we look.

So, it is imperative that we really drive the business in e-commerce. We think we've got the tools to do it and the team to really push us. Certainly with the additional three Board members that just joined, they have a wealth of knowledge around that, will be so helpful for us and they were here this week and really started to give us great feedback and some guidance about how to really get there and what are we doing right and what are we doing wrong. So they've already made an instant impact and I think we're prepared to really move this business forward in e-commerce.

Jeremy Hamblin - Dougherty & Company

That's great to hear. Thanks for taking my questions and good luck.

Operator

The next question is coming from the line of Eric Beder with Brean Capital. Please proceed with your question.

Eric Beder - Brean Capital

Could you talk a little bit about a little more on the plus-size as you're going to open some more stores with that? What does there has to be to start having a real impact on the Company and is that a better or worse margin business once it gets kind of critical mass?

John D. Goodman

The good news is, and we talked about that we're pleased with where we are from the beginning stages having the shop in shops, the freestanding store and e-commerce, our e-commerce business is significant right now in terms of our increases in Junior Plus. So really now that we're a year into it, it's amazing how fast this thing is taking off. So we're really getting some good traction around it, we've got a really strong team that from a merchant standpoint that is really starting to put this together.

So as we look going forward, we think this could be a sizable part of our business over the next few years. We certainly think by giving that girl that assortment she wants in Wet Seal and making for her, for Wet Seal Plus, it's very important. So we're laying the foundation, we're seeing some good success, specifically also online, it continues to grow, and we believe that there is an opportunity over time to open, as we've talked about earlier, there's 40 or 50 store opportunity that we see for this business. So, it's just the beginning stages, but we feel like the investment is not that significant in terms of what we need to do to drive the performance of Junior Plus.

Eric Beder - Brean Capital

Okay. And when you look at this business, you had the issues with the Internet being last year, what is the biggest change in the new software lets you do this year that you could not do last year in terms of – just what's the biggest change that it brings through?

John D. Goodman

The first thing I would say is, our mobile, the ability to convert her on mobile is huge. 40% of our conversions are coming through mobile today. So if you think about mobile this time last year, if you wanted to convert or check out on your iPad or your phone or your Android, you wouldn't be able to do that. So having that ability as we know how important her mobile phone, you've heard me say it before, that phone is a weapon. So now, at least we have the tools to get to her to convert her and we are seeing that specifically in, as we talked about earlier, the conversion in mobile and tablet is significant already. So, we know that that is a key part of what we need to do.

We're also – one of the things we do in our stores and we'll look to even enhance this further is, each store has two iPads in their store. It's for store employees today to do their work and whatnot, but we also have that ability to start really working with her online within the store in terms of how she checks out and how she has access to our Junior Plus assortment she might not see in the store and other things. So, as we looked this year, that really complements the mobile strategy we've put in place as we launched Demandware. That's the key thing from Demandware, it gives us the ability to communicate and convert her on mobile.

Operator

The next question is coming from the line of Liz Pierce with Ascendiant Capital Markets. Please proceed with your question.

Elizabeth O. Pierce - Ascendiant Capital Markets

John, you had said in the holiday season that your supply chain kind of didn't work like you thought it should work. Can you just address maybe some of the changes that you've done in the supply chain so that you can really leverage your whole fast fashion strategy?

John D. Goodman

I don't think it was supply chain, I think the one thing it was, just the ability for us from an inventory standpoint how we manage the business during the holiday season and how the promotional cadence really stepped up and how we had to adjust accordingly, so in terms of selling out of more seasonal products pretty quick in that December timeframe and leaving us with a lot of spring or early spring product going into that January and February timeframe. So, in terms of that, I don't – there was just more macro conditions and internal around product didn't perform or whatnot.

I mean the biggest supply-chain issue we had was really around the Demandware and the implementation there, but that was more of how do we integrate that and how does the system work, all the way through holiday up to a couple of weeks ago. So we really feel like we've fixed the glitches there, but in terms of supply-chain, we're really pleased. I mean we have such a fast supply chain in terms of getting the goods in, you've heard me say, goods come in one day, they leave the next. It's a very fluid supply-chain that we have here.

So, we feel good about what that is, our ability to get resource quickly, and also as I talked about earlier, the ability for our merchants to go out in January 15 and to really make the changes in the past six weeks to get us to a place where we have the right strategies around product, price and promotion, and put that in place getting ready for Easter.

Elizabeth O. Pierce - Ascendiant Capital Markets

Okay. And then in terms of Arden B, I mean at what point, I guess kind of piggybacking on an earlier question, if you're going to be at 44 stores if you close, what is it, 10, 13 stores this year, how do the economics work of having the infrastructure that you are paying to support 44 stores?

John D. Goodman

We're clearly looking at Arden B and certainly we talked about it before in terms of some of the rent obligations and different things we have with Arden B. We really are making sure that it's not a diversion to the main business and fixing the core business of Wet Seal. So we got to balance that with the team in Arden B and making sure we are doing inappropriate things for both brands.

Steven H. Benrubi

It's a business that for us, for fiscal 2013 we [lost a little] (ph) about $1 million of cash flow related to it. So that's not a significant burden by any means on the Company and something that we just continue to manage risk as we have cameras working through the merchandising strategy there, still with an effort to turn the business around and put it in a position to grow at some point. But in the meantime, we're obviously being very careful about the commitments that we're making to it.

Elizabeth O. Pierce - Ascendiant Capital Markets

And how would you qualify the merchandising strategy at Arden B?

John D. Goodman

Just what do you mean qualify in terms of? I'm just trying to understand the question a little bit better.

Elizabeth O. Pierce - Ascendiant Capital Markets

I mean if you had to put it in a category and position it in terms of what you think the end strategy would be, is this going to be fast fashion for the contemporary customer, is it going to be a key item strategy, and how do you see it playing out?

John D. Goodman

I think as we look at the strategy today, we clearly are going after a 28-year-old woman, that's our target, 23 to 33, in that range. She definitely is more social, more going out at night. So we focused it on that and having that casual element to the store where some dress she often sees is a very important part of her nightlife so to speak. So as we think about that, that's how it categorises in terms of the price points and some of the key items. We've done work on the price point, key item on certain things but we continue to raise the bar in terms of quality.

The average unit retail in Arden B is roughly $28. So it's significantly different than Wet Seal. So we really feel like balancing key items with the appropriate fashion, with also making sure we have the right amount of dresses and that assortment are very important part. So that's really what the strategy began last fall and will continue at this point.

Elizabeth O. Pierce - Ascendiant Capital Markets

Okay. And then, again a question I had is on social media, as you think about this Junior Plus customer, is it going to be a separate platform targeted to that customer or is it going to be just all one and then she can go in and figure out her size needs, et cetera?

John D. Goodman

Today, it's all one but we are building a separate platform around that for Junior Plus because we do see the opportunity there to really explore this business. So right now we're all together. It will continue to be together but we are certainly looking at how do we break that off in terms of really maximizing that opportunity. I mean the bloggers that we've worked with on Junior Plus have been phenomenal and just really partnering with them and building this wealth of information around this woman or this girl and how do we maximize it going forward is critical. So, today it's together. As we start to grow and even more so online, it becomes separate.

Elizabeth O. Pierce - Ascendiant Capital Markets

But when you say that sometimes she might be a plus on the top and not on the bottom or vice versa, so I mean how do you manage that?

John D. Goodman

They'll always be – I mean they are always going to be integrated, there's no question about it. So whether it's Wet Seal or Wet Seal Plus, you're always going to have that integration that you're going to have. What we're seeing – and you are 100% right, because there's accessories and different things we want to get to her that don't have to be plus sizes. So we're really focused right now on obviously the tops, the bottoms, the dresses and the footwear which we're doing very well in the extended sizes online with footwear. So, we feel like we're in the right place for that.

We're going to work during the course of the year to find the right balance, but certainly it's always going to be part of the Wet Seal brand and whether the accessories we have in Wet Seal go on to Wet Seal Plus, where they stay together, we're working that all out. It will still be Wet Seal, it will still have that feel of Wet Seal. That's what's going to differentiate us from others and it's really not going to be a separate brand or a different company, it's really having the essence of the Wet Seal customer that gives her the ability to have that styling for her size.

Elizabeth O. Pierce - Ascendiant Capital Markets

And did you say only 40 to 50 stores, is that just your initial take on it?

John D. Goodman

That's our initial take. We want to be smart about how we open. Obviously as we start to open more stores and see some good traction, we can take off. The average square footage of those stores is roughly 2,000 square feet or less. So we have the ability to really maximize where we're opening stores, testing them right now. For right now, we want to make sure we know exactly where we want to put these stores, do the analysis and strategic plan about what makes sense from off-mall, mall, et cetera, and do the right things for us as we grow.

Elizabeth O. Pierce - Ascendiant Capital Markets

Okay, great. Thanks and best of luck, guys.

Operator

The next question is coming from the line of Marni Shapiro with The Retail Tracker. Please proceed with your question.

Marni Shapiro - The Retail Tracker

Good news, it is not supposed to snow this weekend in the Northeast.

John D. Goodman

That is good news.

Marni Shapiro - The Retail Tracker

It is very good news. So can you just talk about a couple of quick things? We know traffic was tough in the malls, everyone's being talking about it, but once you had the girl in the store, did you see and can you measure conversion? Obviously it's tough to get her in the first place, but once she was there, were you able to convert her a little bit more easily? And if you could just talk a little bit about the outlet business, I know it's new for you guys, but from what we understand across the field, the outlet business was also tough this holiday and particularly January, February with the weather, if you could just touch a little bit on how it started in spite of that bad news?

John D. Goodman

So in terms of the traffic, it's interesting because as I talked about, we were a little bit more spring forward, and certainly as you called out the weather, it's not the best place to be. If it was one, we'd be doing much better I believe. But we did see in the warmer climates, where there wasn't snow, which wasn't in a lot of places, we did see some improvement compared to the stores that had the increment weather. So, we felt like we were getting at least that in that respect the traffic there and converting her.

In terms of converting in the stores that were affected by weather, we were able to convert where we could. I mean traffic was just very anemic we found in the January and February timeframe. So that's kind of where we see – we are starting to see a pickup in terms of traffic. So that's encouraging. Certainly with better weather, we feel like we're well-positioned, especially with the new strategy.

With regards to the outlet business, we opened it up in the holiday timeframe and we got out the gates fast than most stores because we opened up right before Black Friday. So, as you know, outlets do a lot of business during the holiday timeframe, around holidays, whether it's Memorial Day, Labor Day, where people travel. So, we feel like we've learned a lot.

Traffic, we did see some – was not as strong as we would have liked in certain centers during the holiday season. We are starting to see that pick up, as I was talking about with top stores, and there was places where it's seasonally appropriate with the outlet stores we opened up, we are seeing encouraging signs. So, the traffic is there when it's holidays or when the customers are traveling somewhere. So we feel like we are starting to see that and we certainly learned a lot during the holiday timeframe that will educate us going forward.

Marni Shapiro - The Retail Tracker

Great. And then if you could talk very quickly about whether it's Facebook or even more importantly it seems Pinterest, are you guys selling – I mean I see your pins constantly on Pinterest but I haven't noticed, are they live pins, like can I click on them and buy it, are you going to move – do you have the technology to move that way now with all the upgrades you've done?

John D. Goodman

We will have that technology and that's where we're at, that's the last phases of what we're doing. So, we now have the ability to do a lot more than we did two weeks ago, four weeks ago. So that will continue to be the case, Pinterest, different things that we're looking at that have been very strong for us, and certainly Facebook and different things as well. So, we feel like we're on the right track, we now have the system to do it and we will keep upgrading it during the course of the year, and that's why it's so important with the three Board members that bring that wealth of experience that will really help us to get this a lot quicker than we could have ever done before.

Marni Shapiro - The Retail Tracker

All right, you know that could be really big because your customers are already there pinning everything or whatever it is, so she could just, her friend could just then click and buy right there.

John D. Goodman

Exactly.

Marni Shapiro - The Retail Tracker

Fantastic. Okay, great. I'll take the rest of them off-line. Thanks guys.

Operator

Thank you. This does conclude the question-and-answer session. I would like to turn the floor back over to management for any concluding remarks.

John D. Goodman

I would like to thank everybody for attending this morning and we understand we had to reschedule the call and we appreciate your flexibility and we will talk to you soon. Have a good day.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation and you may disconnect your lines at this time.

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