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Executives

Edmond Thomas - President and Chief Executive Officer

Steve Benrubi - Chief Financial Officer

Jennifer McEntee - Vice President of Financial Planning and Analysis

Analysts

Anna Andreeva - JP Morgan

Nadeen Francis - Roth Capital Partners

Jeff Klinefelter - Piper Jaffray

Stephanie Wissink - Piper Jaffray

Jeff Van Sinderen - B. Riley

Eric Beder - Brean Murray

Janet Kloppenburg - JJK Research

The Wet Seal, Inc. (WTSLA) F1Q08 Earnings Call May 29, 2008 4:30 PM ET

Operator

Welcome to the Wet Seal Incorporated first quarter 2008 earnings conference call. Today’s conference is being recorded. Now at this time, I’d like to turn the conference over to Ed Thomas, President and Chief Executive Officer; please go ahead.

Edmond Thomas

Thank you for joining us today to discuss our first quarter fiscal 2008 results. With me today are Steve Benrubi, our Chief Financial Officer and Jennifer McEntee, our Vice President of Financial Planning and Analysis. Before we begin, Jenn will provide our Safe Harbor statement. Jenn.

Jennifer McEntee

Thank you, Ed. 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 our company, economic conditions and market sectors in 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 it’s 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 our actual performance, future results and actions to differ materially from any forward-looking statements include, but are not limited to those discussed in the Risk Factors within our Form 10-K for the fiscal year ended February 02, 2008 that’s filed with Securities and Exchange Commission. Ed.

Edmond Thomas

Thank you, Jenn. I will begin today’s call by providing an overview of our first quarter results and priorities for the business as we head into the second quarter. Then Steve will review our financial highlights and I will provide closing comments and turn the call over to the operator to conduct the question-and-answer portion of the call.

We were pleased with our financial performance during the first quarter despite the challenging retail environment. We continue to make progress on numerous efficiency improvements and cost cutting initiative which we have spoken about extensively over the past several months. These efforts have enabled us to achieve improved operating income over the prior year despite a comparable store sales decline.

For the first quarter, our comparable store sales results decline 7.5%, which was inline with our expectations. Comparable store sales declined 3.3% at Wet Seal and 21.6% at Arden B. For the first quarter this year, operating income grew 32% to $8.7 million or 6.1% of net sales as compared to $6.6 million or 4.8% of net sales in the first quarter of 2007. We ended the first quarter with a 13% decrease in inventories per square foot as compared to the end of the first quarter last year reflecting a continuation of the inventory management disciplines implemented late last year in our cautious outlook on the macro environment.

Wet Seal division sales result during the quarter was affected by the unusually early Easter and a unseasonably cold March. In addition, due to the stronger than expected sales during the later holiday period in the fourth quarter, we enter the first quarter with lighter than planned inventories and certain Wet Seal fashion categories which we believe had some negative effect on sales early in the quarter.

Entering the second quarter, we believe that we are well positioned with Wet Seal inventory levels and merchandise mix. As expected Arden B sales were soft throughout this quarter. The merchandise assortment still contains some of the older merchandise content with the reflection of the division’s previous merchandising strategy. That said we are comfortable with our inventory levels at Arden B entering the second quarter.

In late April, we began to deliver merchandise to the Arden B stores that reflected changes in merchandising processes implemented by Sharon Hughes, since her arrival in early February. Under Sharon’s direction, initiatives were put into place to improve merchandise processes and prepare the division for a transition to a stronger presentation of fashion basic and wear-to-work product. Specifically the Arden B merchant organization has been streamlined and has been realigned to better engage our buyers earlier in the product design phase.

Inventory planning and allocation has been modify to reduce the depth to which certain styles are bought, which should reduce the markdown risks in Arden B inventories going forward. While only a small portion of the division’s inventories represented the new merchandize at the end of the first quarter, Sharon’s assortments will steadily follow into stores over the course of the second quarter. By the end of July, the merchandize assortment will be substantially all based on her direction.

At Wet Seal, during the first quarter we continue to execute on the strategy’s design to enhance sales productivity and increase operating efficiencies in the store. In March, we began a cast of four denim brands in 25 of our stores at a slightly higher price point in our private label denim. Today, we have seen solid performance on two of the brands and will expand inventory in those two brands to 100 Wet Seal stores for the back-to-school season.

In addition, we have an additional branded denim line that we have carried over for year’s and has proven to be a solid seller with our Wet Seal customer that will be expanded to 200 Wet Seal stores for the back-to-school season. We believe that these expansions combined with a strong commitment to our own private label denim will position us to outperform our bottom sales from last year’s back-to-school season and should drive stronger average dollar sales.

During the first quarter, we also made progress at Wet Seal in adding large and extra large sized merchandize in certain categories. Feedback from our customer shopping experience surveys collected over the past several months shows that our customer would like to see an increased assortment of larger sized merchandize in the stores. Overall the sales performance on what we’ve introduced thus far supports these findings. As we gather more data on sales performance across all size of rates we will utilize this information either late this year or sometime in fiscal 2009 to conduct size optimization analysis for Wet Seal.

We are pleased with the publicity and the customer reaction of our promotional tie-in with Ashley Simpson that launched in late April. The promotion receipt coverage in many of the celebrity publications from which we believe that Wet Seal customer drives our fashion inspiration and we will look into doing similar promotions with other orders in the future.

During the quarter, we also launched the outfitter, an online fashion community within the Wet Seal website. The community allows our online customers the ability to build, tag, share and purchase outfits and to build a fashion network by chatting with their friends and other designers in a message center. The outfitter is an example of our ongoing innovation we have brought to be here on a growing online business.

At Wet Seal, we experienced continued benefits from improved store labor productivity that we began to see during the 2007 holiday season with title focus on store labor management and modification of store incentive plans to include more challenging sales and labor management metrics. We have generated efficiencies in overall store labor cost, which contributed to our improved first quarter financial performance relative to initial guidance in the prior year period.

We expect to continue to experience year-over-year benefits from these actions through the second and third quarters. We are working forward to the opening of our first power center or off-mile Wet Seal store in Fresno, California this August and we are evaluating possibly two additional locations in Florida to open before holidays. Due to this modest task we will have the opportunity to evaluate the performance of the Wet Seal concept in this venue.

We also completed the development of a new Wet Seal store prototype during the first quarter that is designed to enhance the customer shopping experience. The prototype will be introduced in four of the new stores, we are opening in 2008. As part of this prototype we also have developed a new four fixture package, which will to be incorporated into many store remodels during the second half of the year.

We plan to have a small increase in store count in square footage in fiscal 2008 with the opening of approximately 20 new Wet Seal stores offset by approximately 13 combined closing for Wet Seal and Arden B stores upon leased expiration. Steve will speak in greater detail to our Q1 finding in our Q2 earnings expectations.

As we move into the second quarter, we continue to see indications of a soft retail environment. As we have been doing since the fourth quarter of last year, we continue to plan our business with the expectation that the environment will not be improving any time selling. That said, we are pleased with the progress we have made today in merchandising, inventory management, store productivity and expense controls and believe we are on-track to benefit from our efforts particularly once we see an improvement in the overall retail environment. Steve.

Steve Benrubi

Thanks, Ed. Consolidated sales for the first quarter ended May 3, 2008 were over $142.4 million compared to net sales of $138 million for the first quarter ended May 5, 2007. Comparable store sales declined 7.5% in the first quarter. We reported a 2.7% comparable store sales increase in the prior year first quarter. On a comparable store basis our first quarter combined transaction comp per store decreased 4.5%, average unit retail on the first quarter decreased 5.4% to $11.56, while our average number of units per transaction increased 2.6%.

During the first quarter, internet sales increased by 2.7% as compared to the same period last year. Net sales in the Wet Seal division increased 10.6% to $116.2 million in the first quarter compared to net sales of $105.1 million in the prior year first quarter. Comparable store sales decreased 3.3% in the first quarter. Comparable store sales in last year’s first quarter increased 3.8%.

Net sales in the Arden B division decreased 20.4% to $26.2 million in the first quarter, compared to net sales of $32.9 million for the prior year first quarter. Comparable store sales decreased 21.6% in the first quarter for Arden B. Comparable store sales in last year’s first quarter decreased 0.7%.

Gross profit was $46.7 million, a rate of 32.8%, as compared to $48.3 million or a 35% rate in last year’s first quarter. 220 basis point decrease reflected a 120 basis point decreased in merchandize margin and 190 basis point de-leveraging an occupancy cost, partially offset by a benefit to stock compensation of approximately $400,000 retaining to higher than previously estimated forfeitures of invested stock options and awards upon executive departures from the company.

Selling, general and administrative expense for the first quarter was $38 million or 26.7% of net sales, as compared to $41.6 million or 30.1% of net sales in the same period last year. Selling expenses one of two components of SG&A were $30 million in the first quarter or 21.3% of net sales as compared to $32.6 million or 23.6% of net sales in last year’s first quarter.

250 basis points improvement in selling expenses was primarily attributable to a decrease in advertising expense primarily at the Arden B division, a reduction in-store bonus expense as incentives were changed to be more inline with overall company objectives and a reduction in benefits expense due to an unusual claim in last year’s Q1 expense.

General and administrative costs for the first quarter totaled $8 million or 5.6% of net sales as compared to $9 million or 6.5% of net sales in last year’s first quarter. The decrease in G&A as a percent of sales was due to a benefit stock compensation of approximately $500,000 for reasons similar to those noted earlier as well as a decrease in payroll as a result of produced headcount from the January 1, 2008 restructuring.

Operating income for the quarter was $8.7 million or 6.1% of net sales compared to operating income of $6.6 million or 4.8% of net sales in the first quarter last year. Operating income in the Wet Seal division was $17.1 million in the quarter compared to operating income of $15.7 million for the same period last year. Operating margin at Wet Seal was 14.7% in the first quarter as compared to 14.9% in the same quarter last year.

Lower operating margin was a result of lower merchandise margin and de-leveraging of occupancy cost partially offset by a reduction in selling expenses. Operating loss of the Arden B division was 800,000 in the first quarter compared to an operating loss of 700,000 for the same period last year.

Effect of negative comparable store sales in the Arden B division was substantially offset by cost reduction from our January restructuring and unfortunate restructuring and a portion of the stock compensation benefit described earlier. Net interest income in the quarter was 393,000 as compared to $1.2 million in the same period last year.

Effective tax rate was 1.9% for the first quarter. We have a $138 million in net operating or carry forwards available for use; 2008 to 2025. Majority of these NOL’s are subject to annual limit; however we believe we will have sufficient NOL carry forwards available to us in fiscal 2008 to cover regular taxable income for the year. Similar to fiscal 2007 though, we will be subject to a minor amount of alterative minimum taxes in fiscal 2008. From the estimate our effective tax rate will be approximately 1.9%.

Net income in the first quarter was $8.9 million or $0.09 per diluted share based on 97.4 million weighted average shares outstanding. This compares to net income was $7.6 million or $0.07 per diluted share in the quarter of 2007, which was based on $105.2 million weighted average shares outstanding.

We ended the quarter with a strong balance sheet. At quarter-end we had cash and cash equivalent of $109.7 million, generated $10.8 million of cash from operations in the first quarter and incurred $2.8 million in capital expenditure, which includes $2.5 million on new store construction costs in the models of existing stores.

At the end of the first quarter inventory totaled $34.4 million representing a decrease of 3.2% as compared to end of the first quarter last year in spite of store comp growth during the year, which is due to improved inventory management and our plan to maintain conservative inventory position as we entered into 2008. Average inventory per square foot decreased 13.2% at the end of the first quarter as compared to the prior year first quarter.

Turning to our second quarter 2008 guidance, we estimated earnings per diluted share in a range of $0.08 to $0.10. This guidance is based on the following major assumption: total net sales between $149.3 million and $151.6 million versus $143.3 million in the prior year second quarter; the comparable store sales decline between 2% and 4% versus the 1.7% decrease in the prior year’s second quarter; net new store opening with one net opening at Wet Seal and one closing at Arden B. In the prior year second quarter, we opened 10 net new stores.

We expect a gross margin rate of between 33.8% of net sales versus 34.7% in the prior year second quarter, the decrease driven mainly by the de-leveraging effect on occupancy costs due to the forecasted comparable store sales decline and a decrease in merchandise margin versus a comparatively strong prior year second quarter result.

SG&A expense is expected to between 27.3% and 27.5% of net sales versus 30.6% in the prior year’s second quarter. We forecasted operating income to be between $8 million and $9.8 million versus $5.8 million in the prior years second quarter. We forecasted interest income of $400,000 versus $1.2 million in the prior years second quarter and income tax expense of $200,000 versus $200,000 as well in the prior years second quarter,

Finally, weighted average shares outstanding of 99.5 million; although it changed in the stock price, it could cause the weighted average share count to change significantly. For all of fiscal 2008, we now expect a small increase in net new stores, with approximately 20 planned openings at Wet Seal offset by approximately four closings at Wet Seal and approximately nine closing that Arden B as leases expire.

The number of net new store opening can fluctuate depending on the outcome of several store lease negotiations still in process. We estimate growth capital expenditures for all of fiscal 2008, as between $26 million and $27 million, with offsetting landlord improvement allowances of approximately $4 million for a net cash impact of $22 million to $23 million. This includes $19 million to $20 million of growth cost or $15 to $16 million that of the landlord improvement allowances associated with the opening of 20 new stores as well as for a modeling of its existing stores on lease renewals and old store relocations.

With that I will now turn the call over to the operator to begin our question-and-answer session

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Anna Andreeva with JP Morgan.

Anna Andreeva - JP Morgan

Hi great, thanks so much guys. I was wondering if you could talk about the decline in the merchandise margins at Wet Seal during the first quarter; was that primarily the thought comparison from last year and sounds like you are expecting a similar type of degree of decline in the second quarter, could you may be talk about that and do you think Wet Seal division can show merchandize margin improvements in the back half, especially in the third quarter, that’s my first question?

Edmond Thomas

Sure yes, in the first half of last year and we are going up against, some relatively strong merchandize margin performance at Wet Seal, some of the regular price selling and some of tops and dresses was fairly strong in the first half last year. So, this really came in line with our expectation which was to be off a little bit in Q1 and similarly show in Q2. I think that by virtual of having a weaker comparison in the back half of the year, there is opportunity relatively speaking there as opposed to what we saw in the first half.

Anna Andreeva - JP Morgan

Okay, that’s helpful and I just wanted to follow-up; on the inventories running down, 13 preferred I believe, how much of that decline is attributable to Arden B versus Wet Seal and how should we expect this fee to queue inventory on a preferred basis?

Edmond Thomas

Without breaking down between both divisions obviously they are both significantly down year-over-year and they are both in the place that we had planed them to be at the end of the first quarter and that as we go forward Q2, we do anticipating being down on a per square foot basis, again not as significantly possibly as where we are in Q1, but-none the-less down again.

Anna Andreeva - JP Morgan

Okay, that’s definitely helpful and could you talk about may be some of the opportunities on the merchandizing side of things at Wet Seal, some of the categories that you guys were happy with during the quarter and I guess as we look at back-to-school, I think in the past you talked about a fashion trend possibly emerging; is there anything that you are excited about for back-to-school?

Steve Benrubi

Well, I will talk about current business first. The fashion denim part of our business continues to be very strong, we’ve seen some come back in some categories, in the dress category, screen tees continue to be pretty good and we’ve seen some pretty good falling and clubby fashion tops. We expect pretty much most of those categories or all of those categories to continue into back-to-school. I think in the fashion denim category we’ve been still chasing a inventory in some of our key styles and I think we are going to be positioned very, very strongly inventory wise in some other style that have been strong sellers for us, that we have not been at the levels I would have liked.

Anna Andreeva - JP Morgan

Okay, so when I look at your guidance of comps running down two to four and first of all any granularity you can provide Wet Seal versus Arden B at this stage?

Edmond Thomas

No, we are not breaking out from our guidance standpoint the two division, but having said that obviously some improvement sequentially from the first quarter going from the overall down 7.5 to down 2 to 4 -- I mean some of it, is looking at the comps we are against in the second quarter versus the first being a little bit lighter and together with the fact that we are projecting an environmental change, certainly not in the second quarter or planning business beyond that right now for that matter for any kind of change in the environment.

Anna Andreeva - JP Morgan

Okay and any color you can give us on May, a month to date?

Edmond Thomas

We will provide that next Thursday.

Operator

And our next question is from [Nadeen Francis] with Roth Capital Partners.

Nadeen Francis - Roth Capital Partners

Hi yes, good afternoon and congratulations and can you give us an update on the search for the GMM for the Wet Seal division, any news there?

Edmond Thomas

There is no new news there. The search has been underway for two weeks now and so there’s a number of candidates that have surfed as to the lot of interest in the job, but there is no new news there and it’s obviously a priority for us to fill that position but we have got a pretty strong merchandizing team in place and then the interim period, two Vice Presidents of Merchandizing that are below the CMO position, they have been here for a while, very strong and they have a strong team below them. So, those two people along with our Vice President of Merchandize planning and allocation and myself will oversee that division on an interim period.

Nadeen Francis - Roth Capital Partners

Okay and then, in terms of performing did you see any material difference based on geographic locations specifically Florida and California whether at the Wet Seal or the Arden B?

Edmond Thomas

We did not see any material difference in any geographic region of the country, which is really a continuation of what we saw of the company in the fourth quarter. There are few pockets of the country like Arizona that has been soft since the fourth quarter but generally overall we are not seeing what we heard a lot of other retails have experienced. However, traffic is much more radix and unpredictable even within the week. In some cases the beginning of the week seems to be a little bit softer than the end of the week, and that could be a result of people consolidating the amount pf trips they are making to the mall.

Nadeen Francis - Roth Capital Partners

And finally, in terms of the sourcing at Arden B, I know you mentioned on the fourth quarter conference call that you will be partnering with domestic key vendors; any progress there where you are pleased with the designs that they have been providing, can you give us an update on that?

Edmond Thomas

Yes. I think the modern progress we have made going from where we were to where we are going to be in the next months, is significant. It was a significant change in our process itself by decreasing the amount of internal design and shifting more to a very talented buying team and I think it’s going very, very well. That has actually delivered better than I have expected and that merchandise will start to hit the stores -- it’s already started to hit the store, it’s a smaller amount of merchandised right now, will build during the month of June and by July a substantial portion of it will be under the new process and the new regime.

Operator

Our next question is from Jeff Klinefelter with Piper Jaffray.

Jeff Klinefelter - Piper Jaffray

Yes, thank you and congratulations guys on managing really well in this environment. In terms of -- thinking about the systems in place and the systems that you planned to continue implementing, whether they’ll be new applications or expanding further some of your initiatives that are already in place, and how those are effecting and how those you expect to effect your gross margins and your ability to leverage expenses? Trying to think about steady state margin potential, if you are in this current environment of a low single-digit comp versus flat versus when we get back up to a plus three to five range when traffic improves, what do you see as your margins potential given your current model for Wet Seal?

Edmond Thomas

Well I think that the big opportunity for us systems wise, which we talked about on the past, is in markdown optimization and size optimization. With markdown optimization my guess is we are pretty close to finalizing a deal related to that, but with markdown optimization my expectation will begin began to put that in place sometime in the first or second quarter of 2009 and the impact of that I think it’s hard to quantify at this point but, we have seen enough, we were seeing enough opportunities without that system in place to really take advantage of that. I think the bigger impact will be in size optimization and we actually could do that now but I elected not to do that because we are changing, we are adding larger sizes to the stores over the last couple of months and a continuation of that through the balance of the year. The data will be much more valid either late this year or into next year to really take advantage of the size optimization software and then lastly in terms of our general systems, our merchandize systems, we invested quite a bit of money in the late 90’s early 2000’s and we have pretty good merchandizing systems internally and really what we expect to get from an upgrade from that, I will expect to get efficiency improvements, but it’s a pretty expensive project even to upgrade what we’ve got and my guess is that it will take place -- the improvements we will see across the board will take place over a period of probably 12 to 15 months.

Stephanie Wissink – Piper Jaffray

Okay and then what would your -- expect your sort of run rate CapEx level to be then at this point. That will fluctuate across the store openings in future years but from a non-store opening just overall corporate expenses head count and IT will you expect that to be consistent with this year’s level?

Edmond Thomas

I think it would be somewhat similar with this year. I mean we laid out how much of our CapEx this year which is the vast majority really associated with the new stores or re modeled. It could pick up a little bit outside of those categories and some of the system upgrades that I was talking about that and some how also the distribution center, reconfiguration that we’ve discussed that becomes probably an ’09 initiative at this point, so nothing dramatic but a little bit more than the non store opening and remodel numbers that are in this years plan.

Steve Benrubi

The real and known for us is how many new stores we will open in 2009 and we know that the number of opportunities out there is significantly increased for us and our 200 store plus hit list of stores have models with that we want to be in, pretty attractive, but we are taking a pretty -- we are going to watch how the environment is over the next couple of months and then make a firmer determination in terms of the number of net stores we will do in 2009

Stephanie Wissink – Piper Jaffray

Okay. Last question, is another at the kind of margin trends. Now you are doing a great job at controlling your SG&A and just kind of curious at what level you see on an annual basis kind of a total SG&A spend? What level can you get to before you start really taking away what you consider more necessary expenses and then thinking about that in the context of top line volume? Where do you see your leverage points? So, if you had a negative comp in this 2% to 4% range, how much of a de-leverage do you see on an annual basis and at what point do you get that breakeven where you can leverage both SG&A and occupancy?

Steve Benrubi

Well, first on the SG&A I think you probably get a lot more visibility now to the run rate that we are seeing by looking at Q1 and also the Q2 guidance with this very similar on a percent of sales basis. I mean we feel we have taken much of the cost out of the SG&A area that was bull hanging if you will. There are some other opportunities to go further with some of our wage rates and things like that in the field, in the store side of the business. I think if you look at the numbers on the first half year, that probably helps give you some visibility there. Now obviously with going form ’07 to ’08 we are able to leverage if you will even as of negative comp level, but once you normalize it, your probably looking at about 3% comp level in order to be a leverage and much of that is driven by occupancy cost year-over-year.

Operator

We’ll take our next question from Jeff Van Sinderen with B. Riley

Jeff Van Sinderen - B. Riley

Let me add, nice work on the quarter. Ed, I wonder if you can -- or Steve, I wonder if you can talk a little bit more about the promotional cadence during the quarter, the markdown rate and then also kind of what we should expect this quarter in terms of those two metrics?

Steve Benrubi

Well, first of all, I think that promotional -- we’ll take it by division. In the Wet Seal division we really didn’t to anything unusual from what we normally or have been doing in the past several months. Being as low priced as we are, it is definitely a little bit more promotional environment out there, but the impact there, I don’t think we didn’t -- we expected for that to continue really going into back-to-school and whatever we are doing promotionally is pretty well planned internally from a margin perspective. In the Arden B division we still, we a re dealing with a carryover of quite a bit of merchandize from the prior design, methodology and team and so we were probably a little bit more promotional than what we normally would be, but as we move into the back half of the year, the opportunity from margin improvement as significant with in that division even in a difficult sales environment.

Jeff Van Sinderen - B. Riley

Okay, can you give us sense of what the earlier response has been to some of the new Arden product that’s rolling in and then when you think we could start to see that business trend a little bit better and do you think it takes a few months after the new stock rolls in or what are your thoughts there?

Edmond Thomas

Well the initial sought through is on -- particularly in the casual category have been very, very good and we are very encouraged was some of the results we’ve seen there in the early sales. We have really done no marketing for that division during the first few months of this year purposely because we did not want to market until we felt the merchandize was substantially right. So, I feel that south was a pretty good. We have our first direct mail piece kitting our consumer basis a next week and that’s really a substantial reduction against what we did marketing wise in the first half of last year and then in terms of a one -- when can we expect results, I’m expecting that gradually during the third quarter for sure and we should see improved result in by the fourth quarter and we should see even greater results in that division.

Jeff Van Sinderen - B. Riley

Okay, that’s good to here and then in terms of -- I know you touched a little bit on cost cutting, but I wonder if there is anything else some new that maybe you have identified that you see as an opportunity the reduce cost?

Edmond Thomas

I think its something that’s under constant review. I wouldn’t say at this point -- I think the two biggest projects that eventually will lead to a more efficiencies within the company relate to physical distribution and our systems themselves and the other area that we didn’t talk about is we still think that there is opportunity within our store operations area and I think they have done a phenomenal job of executing what they had to do to date, but certainly we are looking at ways to reduce the amount of taps in the stores and give the stores more time to sale and also in some cases reduce cost, so but there’s nothing materially different then what we’ve talked about in the past at this point.

Operator

Our next question is from Eric Beder with Brean Murray.

Eric Beder – Brean Murray

Could you talk a little bit about -- in terms of new part growing into Arden B, could you refresh it once again on what the differences are between what we are seeing in the stores in the next two or three months versus what we saw in the last year and half and kind of the focuses we should be looking for as we kind of see the new product?

Edmond Thomas

Sure. What you saw in the last several months was substantially much more dressy, what we call occasion category and much more fashion forward. I would say as substantial amount of the merchandise makes probably over 80% within that category. In terms of that new product we identified early on two real significant categories that we kind of walked away from and that being the casual part of our business and what we call everyday wear and also the fashion basics category where it really caters to more volume and also a little bit broader customer base. So, what you’ll start the see in the -- some of it in the stores now is a lot more of casual merchandise that is more trend right than fashion forward.

Eric Beder – Brean Murray

Okay. Secondly, you’ve talked last conference call at your shifting the shipments to a weekly basis, I see even to a daily basis and I’m curios of how -- what the result have been for that and kind of where you want to go with that next?

Edmond Thomas

The results of that have been great, because what’s it’s done is it’s s really enabled us to get fashion on the stores on a daily basis, which in the teen market it’s certainly not critical, but it’s important and secondly from our store efficiency standpoint it smoothes out the workflow in the stores and when you are operating a 4000 square foot box, you don’t have the flexibility in store payroll hours that you wouldn’t pay a 8000 square foot box. So, I think we are very pleased with the progress in the field and we are really excited about it. So, it’s working, we will continue that going forward.

Eric Beder – Brean Murray

I guess in Q3 and Q4 you start your anniversary -- your decisions are really going aggressively to reduce inventories. What should we be thinking of going to be -- should be the correct inventory levels for the second half of this year or for the company in general going forward?

Edmond Thomas

I think in Q3 we did take some action last year on the inventory valuation to a greater degree than we had previously. So, I think you will start to see in the anniversary, something where the levels were coming back closer to where we wanted them to be and then once you get to the end of the year, that as talked about earlier we had pretty strong sell through with late holiday, especially at Whitefield that brought some of our fashion related merchandise inventories down below where it would have been optimal I guess at the end of the January, so year-over-year once you get to Q4, I don’t know that you’ll necessarily see a significant difference or not. There’s a lot of time between now and then, but when you compare to where we were last year, that’s some of the things to think about.

Edmond Thomas

And the direction we are taking really is -- we remain on this a lot, and it’s a week-to-week basis in terms of forecasting and now it’s a pretty significant change to go from where we were to a more of a chase mode and I think the buying organizations both of them have adjusted really well to that. Some of its dictated by the environment but those that have a longer lead time, we’ve planned them accordingly and I don’t see any material change in what we are doing in those category.

Operator

Our next question is from might Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

I just wanted to touch back to school assortments and with Diane leaving, maybe you could talk a little bit about how much of those products she placed with the group and how much levy will be for the group after that and also Steve if you could talk a little bit about your clearance inventory levels right now versus the year at both brands and how that might effect the comps going forward. In other words give a lot less clearance versus last year and what should we be thinking about in that regard? Thanks.

Steve Benrubi

As far as back-to-school goes, we are in great shape for Wet Seal divisions. The category that we normally chase we’ll still chase and we are already working on fall and holiday and I feel pretty good about where we are really going into back-to-school both from a merchandize mix standpoint and from our marketing standpoint for the Wet Seal division and then in terms of the clearance levels in the stores I think they are pretty similar levels to what we were last year.

Janet Kloppenburg - JJK Research

So you feel like you are on good shape on that?

Steve Benrubi

Yes.

Operator

And with that this will conclude today’s question-and-answer session. We do thank everyone for your participation and wish everyone a good day.

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Source: The Wet Seal, Inc. F1Q08 (Qtr End 05/03/2008) Earnings Call Transcript
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