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Debt Charges Sink Wet Seal

Nat Worden

Wet Seal (WTSLA Quote) served up another round of strong sales gains for its first quarter, but the retailer's losses widened on higher interest expenses related to convertible-note offerings.

The mall-based teen-apparel chain posted a loss Monday of $13.7 million for the first quarter, compared with a loss of $8.6 million, or 23 cents a share, a year earlier. The results included a bevy of charges related to the company's ongoing turnaround that has been financed by hedge fund SAC Capital. On a per-share basis, the loss narrowed to 22 cents from 23 cents due to a higher number of shares outstanding.

Minus the interest and debt-related charges, Wet Seal earned $8 million, or 9 cents a share. Analysts had an average estimate for earnings of 5 cents a share, according to Thomson First Call.

Shares of Wet Seal recently were down 57 cents, or 11%, to $4.63 in after-hours trading.

Wet Seal's sales rose 20.5% for the quarter to $125.1 million. Its same-store sales, or sales at stores open at least a year, jumped 20% on higher transaction counts and more products sold to each customer. Those improvements were partially offset by lower pricing. For the rest of the year, Wet Seal expects same-store sales to increase in the mid-single digits.

Meanwhile, investors converted $22.5 million in convertible notes to 14.99 million shares of common stock, diluting earnings per share. Wet Seal recorded a net-interest expense of $18.2 million for the current-year period, mostly consisting of a write-off on the notes, compared with $1.8 million for the year-ago period.

"If additional conversions of the convertible notes occur, the company would incur similar noncash charges in future periods," Wet Seal said in its press release.

Selling costs included a $4.1 million charge related to stock compensation for Michael Gold, a fashion consultant credited with engineering Wet Seal's sales turnaround with respect to its new merchandise. Also, the company recorded $1.3 million in expenses for stock options and restricted stock grants to its board and other employees.

For the full year, Wet Seal estimated charges related to "performance shares" will total $11 million, and charges for stock options and restricted stock will be $5.3 million.

"However, such charges may vary considerably as a result of changes in the company's stock price," the company said.

During the quarter, the retailer opened two Wet Seal stores and closed one Wet Seal store. It recently operated a total of 309 Wet Seal stores and 92 Arden B stores.

"Our operating-income rate substantially exceeded our expectations and resulted from growth in merchandise margins, leverage from additional sales and improvements in almost every component of our selling and general and administrative expenses," Wet Seal said. "Our operation is running smoothly, and we are continually finding ways to improve our efficiency and reduce costs. We are on track to open 20 to 25 stores this year with the full expectation we can accelerate square-footage growth beginning in 2007."