THE UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

  For the quarterly period ended November 1, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-18632

THE WET SEAL, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	33-0415940
(State of Incorporation)	(I.R.S. Employer Identification No.)

26972 Burbank Foothill Ranch, California	92610
(Address of principal executive offices)	(Zip code)

(949) 583-9029

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of HR Exchange Act)    Yes  x    No  ¨

The number of shares outstanding of the registrant’s Class A Common Stock and Class B Common Stock, par value $.10 per share, at December 9, 2003 was 25,530,528 and 4,502,833, respectively. There were no shares of Preferred Stock, par value $.01 per share, outstanding at December 9, 2003.

THE WET SEAL, INC.

FORM 10-Q

Index

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated condensed balance sheets (unaudited) as of November 1, 2003 and February 1, 2003	3-4
	Consolidated condensed statements of operations and comprehensive income (loss) (unaudited) for the quarter and nine months ended November 1, 2003 and November 2, 2002	5
	Consolidated condensed statements of cash flows (unaudited) for the nine months ended November 1, 2003 and November 2, 2002	6
	Notes to consolidated condensed financial statements (unaudited)	7-13
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23-25
PART II.	OTHER INFORMATION	26-27
SIGNATURE PAGE		28
EXHIBIT 31.1		29-30
EXHIBIT 31.2		31-32
EXHIBIT 32.1		33
EXHIBIT 32.2		34
EXHIBIT 99.1		35-42

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THE WET SEAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS)

	November 1, 2003			February 1, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,305		$	21,969
Short-term investments		47,432			39,237
Income tax receivable		18,662			11,561
Other receivables		2,403			3,906
Merchandise inventories		53,356			31,967
Prepaid expenses		3,405			11,992
Deferred tax charges		2,472			2,472
Total current assets		129,035			123,104
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Leasehold improvements		132,471			127,792
Furniture, fixtures and equipment		89,953			86,062
Leasehold rights		2,350			2,350
		224,774			216,204
Less accumulated depreciation		(121,065	)		(106,423	)
Net equipment and leasehold improvements		103,709			109,781
LONG-TERM INVESTMENTS		20,547			33,639
OTHER ASSETS:
Deferred taxes and other assets		8,325			11,778
Goodwill		6,323			6,323
Total other assets		14,648			18,101
TOTAL ASSETS	$	267,939		$	284,625

See accompanying notes to unaudited consolidated condensed financial statements.

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THE WET SEAL, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)

	November 1, 2003		February 1, 2003
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable - merchandise	$	38,994	$	22,248
Accounts payable - other		10,297		13,827
Accrued liabilities		21,950		22,520
Total current liabilities		71,241		58,595
LONG-TERM LIABILITIES:
Deferred rent		9,641		9,315
Other long-term liabilities		3,192		5,392
Total long-term liabilities		12,833		14,707
Total liabilities		84,074		73,302
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred Stock, $.01 par value, authorized 2,000,000 shares; none issued and outstanding at November 1, 2003 and February 1, 2003, respectively		—		—
Common Stock, Class A, $.10 par value, authorized 60,000,000 shares; 25,325,078 and 24,836,386 shares issued and outstanding at November 1, 2003 and February 1, 2003, respectively		2,533		2,484
Common Stock, Class B Convertible, $.10 par value, authorized 10,000,000 shares; 4,502,833 and 4,804,249 shares issued and outstanding at November 1, 2003 and February 1, 2003, respectively		450		480
Paid-in capital		61,027		59,036
Retained earnings		119,855		149,323
Total stockholders’ equity		183,865		211,323
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	267,939	$	284,625

See accompanying notes to unaudited consolidated condensed financial statements.

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THE WET SEAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

	Quarter Ended						Nine Months Ended
	November 1, 2003			November 2, 2002			November 1, 2003			November 2, 2002
SALES	$	136,133		$	144,538		$	385,787		$	447,316
COST OF SALES (including buying, merchandise planning, distribution and occupancy costs)		107,657			104,797			314,289			310,796
GROSS MARGIN		28,476			39,741			71,498			136,520
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		40,420			44,427			118,022			123,291
OPERATING INCOME (LOSS)		(11,944	)		(4,686	)		(46,524	)		13,229
INTEREST INCOME, NET		364			688			1,189			2,591
INCOME (LOSS) BEFORE INCOME TAXES		(11,580	)		(3,998	)		(45,335	)		15,820
PROVISION (BENEFIT) FOR INCOME TAXES		(4,053	)		(1,499	)		(15,867	)		5,933
NET INCOME (LOSS)	$	(7,527	)	$	(2,499	)	$	(29,468	)	$	9,887
COMPREHENSIVE INCOME (LOSS)	$	(7,527	)	$	(2,499	)	$	(29,468	)	$	9,887
NET INCOME (LOSS) PER SHARE, BASIC	$	(0.25	)	$	(0.08	)	$	(0.99	)	$	0.33
NET INCOME (LOSS) PER SHARE, DILUTED	$	(0.25	)	$	(0.08	)	$	(0.99	)	$	0.32
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC		29,770,915			30,147,834			29,651,479			30,206,909
WEIGHTED AVERAGE SHARES OUTSTANDING, DILUTED		29,770,915			30,147,834			29,651,479			31,344,273

See accompanying notes to unaudited consolidated condensed financial statements.

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THE WET SEAL, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS)

	Nine Months Ended
	November 1, 2003			November 2, 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(29,468	)	$	9,887
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		19,728			16,207
Loss on disposal of equipment and leasehold improvements		467			587
Stock compensation		806			—
Changes in operating assets and liabilities:
Income tax receivable		(7,101	)		—
Other receivables		1,503			(3,987	)
Merchandise inventories		(21,389	)		(16,096	)
Prepaid expenses		8,587			(3,733	)
Other assets		3,453			(406	)
Accounts payable and accrued liabilities		12,646			2,652
Income taxes payable		—			(3,834	)
Deferred rent		326			103
Other long-term liabilities		(2,200	)		574
Net cash provided by (used in) operating activities		(12,642	)		1,954
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(12,662	)		(36,237	)
Investment in marketable securities		(16,122	)		(52,982	)
Proceeds from sale of marketable securities		19,558			65,248
Net cash used in investing activities		(9,226	)		(23,971	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit borrowings		9,830			—
Repayments of line of credit borrowings		(9,830	)		—
Purchase of treasury stock		(854	)		(8,215	)
Proceeds from issuance of stock		2,058			4,416
Net cash provided by (used in) financing activities		1,204			(3,799	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(20,664	)		(25,816	)
CASH AND CASH EQUIVALENTS, beginning of period		21,969			34,345
CASH AND CASH EQUIVALENTS, end of period	$	1,305		$	8,529
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest - credit facility	$	14		$	15
Income taxes, net	$	—		$	12,900

See accompanying notes to unaudited consolidated condensed financial statements.

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THE WET SEAL, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1 – Basis of Presentation and significant accounting policies:

Basis of Presentation

The information set forth in these consolidated condensed financial statements is unaudited. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain reclassifications have been made to 2002 financial statements to conform with the 2003 presentation.

In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation have been included. The results of operations for the quarter ended November 1, 2003 are not necessarily indicative of the results that may be expected for the year ending January 31, 2004. For further information, refer to the consolidated financial statements and notes thereto included in the Annual Report of The Wet Seal, Inc. (the Company) for the year ended February 1, 2003.

New Accounting Pronouncements

In November 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143 “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In July 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized

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when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No.(FIN) 45, “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FIN 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 while the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of this interpretation did not have a material impact on the Company’s results of operations or financial position.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51. FIN 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure requirements will apply in all financial statements issued after January 31, 2003. The Company believes the adoption of FIN 46 will have no impact on its results of operations or financial position, as the Company has no interests in variable interest entities.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may

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have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is generally effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS No. 150 will have a significant impact on its results of operations, financial position or cash flows.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years ending after December 15, 2002. The Company determined not to adopt the fair value based method of accounting for stock-based employee compensation, but did adopt the additional disclosure requirements of SFAS 148 in fiscal 2002.

Stock Based Compensation

The Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. Accordingly, no compensation expense has been recognized in the consolidated financial statements for employee incentive stock options or nonqualified stock options.

SFAS No. 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values.

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The Company’s calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions:

	Quarter Ended				Nine Months Ended
	November 1, 2003		November 2, 2002		November 1, 2003		November 2, 2002
Dividend Yield	0.00	%	0.00	%	0.00	%	0.00	%
Expected Stock Volatility	69.16	%	70.85	%	69.16	%	70.85	%
Risk-Free Interest Rate	3.27	%	3.02	%	3.27	%	3.02	%
Expected Life of Option following vesting (in months)	60		60		60		60

The Company’s calculations are based on a valuation approach and forfeitures are recognized as they occur. If the computed fair values of the stock option awards had been amortized to expense over the vesting period of the awards, net income (loss) (in thousands) and earnings (loss) per share would have been changed to the pro forma amounts indicated below:

	Quarter Ended						Nine Months Ended
	November 1, 2003			November 2, 2002			November 1, 2003			November 2, 2002
Net Income (loss):
As reported	$	(7,527	)	$	(2,499	)	$	(29,468	)	$	9,887
Expense determined under fair value approach		(540	)		(1,691	)		(3,604	)		(5,137	)
Pro forma	$	(8,067	)	$	(4,190	)	$	(33,072	)	$	4,750
Net Income (loss)
Per Share, Basic:
As reported	$	(0.25	)	$	(0.08	)	$	(0.99	)	$	0.33
Expense determined under fair value approach		(0.02	)		(0.05	)		(0.13	)		(0.20	)
Pro forma	$	(0.27	)	$	(0.14	)	$	(1.12	)	$	0.16
Net Income (loss)
Per Share, Diluted:
As reported	$	(0.25	)	$	(0.08	)	$	(0.99	)	$	0.32
Expense determined under fair value approach		(0.02	)		(0.05	)		(0.13	)		(0.16	)
Pro forma	$	(0.27	)	$	(0.14	)	$	(1.12	)	$	0.16

The above pro forma adjustments may not be indicative of future period pro forma adjustments.

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NOTE 2 - Revolving Credit Arrangement:

Under an amended secured revolving line-of-credit arrangement with Bank of America, N.A., the Company may borrow up to a maximum of $50.0 million on a revolving basis through July 1, 2004. The cash borrowings under the arrangement bear interest at the bank’s prime rate or, at the Company’s option, LIBOR plus 1.5%.

The credit arrangement imposes quarterly and annual financial covenants requiring the Company to maintain certain financial ratios. In addition, the credit arrangement requires that the bank approve the payment of dividends and restricts the level of capital expenditures. At November 1, 2003, the Company was in compliance with these covenants and the Company had no borrowings outstanding under the credit arrangement. There were $18.6 million in open letters of credit related to imported inventory orders as well as standby letters of credit totaling $0.9 million, yielding availability under the line of credit of $30.5 million, as of November 1, 2003.

NOTE 3 – Net Income (Loss) Per Share:

Net income (loss) per share, basic, is computed based on the weighted average number of shares of Class A and Class B common stock outstanding for the period.

Net income (loss) per share, diluted, is computed based on the weighted average number of shares of Class A and Class B common stock and potentially dilutive common stock equivalents outstanding for the period. Stock options were not included in the computation of diluted net loss per share for the quarter and nine months ended November 1, 2003, because to do so would have been antidilutive.

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A reconciliation of the numerators and denominators used in basic and diluted net income (loss) per share is as follows:

(In thousands, except share and per share data)	Quarter Ended						Nine Months Ended
	November 1, 2003			November 2, 2002			November 1, 2003			November 2, 2002
Net income (loss)	$	(7,527	)	$	(2,499	)	$	(29,468	)	$	9,887
Weighted average Number of common shares:
Basic		29,770,915			30,147,834			29,651,479			30,206,909
Effect of dilutive Securities – stock options		—			—			—			1,137,364
Diluted		29,770,915			30,147,834			29,651,479			31,344,273
Net income (loss) per Share:
Basic	$	(0.25	)	$	(0.08	)	$	(0.99	)	$	0.33
Effect of dilutive Securities – stock options		—			—			—			0.01
Diluted	$	(0.25	)	$	(0.08	)	$	(0.99	)	$	0.32

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NOTE 4 – Treasury Stock:

On October 1, 2002, the Company’s Board of Directors authorized the repurchase of up to 5,400,000 of the outstanding common stock of the Company’s Class A Common shares. This amount includes the remaining shares previously authorized for repurchase by the Company’s Board of Directors. All shares repurchased under this plan will be retired as authorized by the Company’s Board of Directors. During fiscal 2002, the Company repurchased 947,400 shares for $8.2 million and retired these shares. An additional 124,500 shares were repurchased for $0.9 million in the first quarter of fiscal 2003 and these shares were retired. As of November 1, 2003, there were 4,328,100 shares remaining that are authorized for repurchase.

NOTE 5 – Litigation:

The Company has been served with a lawsuit by previously employed store managers alleging non-exempt status under California state labor laws. The case is currently scheduled for non-binding mediation in January 2004.

From time to time, the Company is involved in litigation relating to claims arising out of our operations in the normal course of business. The Company’s management believes that, in the event of a settlement or an adverse judgment of any of the pending litigations, the Company is adequately covered by insurance. As of November 1, 2003, the Company was not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company.

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated condensed financial statements and the notes thereto.

We are one of the largest national mall-based specialty retailers focusing primarily on young women’s apparel and accessories. We currently operate 622 retail stores in 47 states, Washington D.C. and Puerto Rico. Of the 622 stores, 466 are Wet Seal stores, 19 are Contempo Casuals stores, 106 are Arden B. stores and 31 are Zutopia stores. We opened 41 stores and closed 30 stores during the period from November 2, 2002 to November 1, 2003.

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Critical Accounting Policies and Estimates

Our consolidated condensed financial statements were prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.

The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies, some of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements. Since future events and their impact cannot be determined with absolute certainty, the actual results will inevitably differ from our estimates.

Our accounting policies are generally straightforward, but inventory valuation requires more significant management judgments and estimates.

Merchandise inventories are stated at the lower of cost (first in, first out) or market. Cost is calculated using the retail inventory method. The retail inventory method is used to estimate the ending inventory at cost by employing a cost to retail (selling price) ratio. The ending inventory is first determined at selling price and then converted to cost. Purchases, sales, net markdowns (less mark-ups), charitable donations of merchandise, discounts and estimated shrink are considered in arriving at the cost to retail ratio. Inventories include items that have been marked down to management’s best estimate of their fair market value. Management’s decision to mark down merchandise is based on maintaining the freshness of our product offering. Markdowns are taken regularly to effect the rapid sale of slow moving inventory and to make room for new merchandise arriving daily to the stores.

To the extent that management’s estimates differ from actual results, additional markdowns may be required that could reduce our gross margin, operating income and the carrying value of inventories. Our success is largely dependent upon our ability to anticipate the changing fashion tastes of our customers and to respond to those changing tastes in a timely manner. If we fail to anticipate, identify or react appropriately to changing styles, trends or brand preferences of our customers, we may experience lower sales, excess inventories and more frequent and extensive markdowns, which would adversely affect our operating results.

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable. Our

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accounting policies and estimates are reevaluated on an ongoing basis, and adjustments are made when facts and circumstances dictate a change. Our accounting policies are more fully described in Note 1 to the consolidated financial statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, respectively, included in our Annual Report for the fiscal year ended February 1, 2003.

Current Trends and Outlook

We reported a comparable store sales decline of 10.2% for the third quarter, but are encouraged by the sequential quarterly sales trend improvement this year.

For the Wet Seal division, the third quarter results reflect continued improvement in the “bottoms” business, complemented by other well-positioned items such as sweaters, track jackets and corduroy. The relative strength in these areas was tempered by continued weakness in the “tops” business.

The Arden B. division achieved positive same store sales growth in all three months of the third quarter. We believe that these results reflect, in part, the refocusing on the target customer with a more sophisticated offering. We are seeing strong sales in coats, outerwear and cashmere sweaters. Arden B. has also delivered a fresh new gift-giving assortment of handbags and accessories that is adding to the complete wardrobe of their target customer.

The gradual month-to-month improvement in our comparable store sales trends that we experienced during the third quarter has continued into November. November’s comparable store sales declined 6.7% compared to a decline of 9.7% in the prior year. Arden B. remains the strongest performer with the Wet seal division continuing their trend improvement.

Results of Operations:

The quarter ended November 1, 2003 as compared to the quarter ended November 2, 2002.

Sales for the quarter ended November 1, 2003 were $136.1 million compared to sales for the prior year third quarter of $144.5 million, a decrease of $8.4 million or 5.8%. The decrease in sales was due to the comparable store sales decline of 10.2% for the quarter, partially offset by a net increase of 22 equivalent stores compared to the third quarter in the prior year. In the same quarter last year, comparable store sales decreased 9.6%.

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Net Sales for the third quarter of this year reflect an increase in transaction counts compared to last year’s third quarter. However, this increase was more than offset by deterioration in the initial markup (IMU) after allowances, as well as aggressive markdowns on back to school merchandise. The negative IMU trend was driven by the Wet Seal chain, which led to a lower average transaction value for the Company as a whole.

The cost of sales (including buying, merchandise planning/allocation, distribution and occupancy costs) was $107.7 million for the quarter compared to $104.8 million for the same quarter last year, an increase of $2.9 million or 2.8%. As a percentage of sales, the cost of sales was 79.1% for the third quarter this year compared to 72.5% for the same quarter last year, an increase of 6.6%. The increase in cost of sales as a percentage of sales was the result of several factors. The initial mark-up decreased, contributing to a drop in the cumulative mark-on over the prior year’s third quarter, which translated into more merchandise cost for the quarter. Markdowns continued to be heavy this quarter to clear out pockets of aging goods at the Wet Seal division. The cost of sales as a percentage of sales was also significantly impacted by the loss of leverage for occupancy, buying, and merchandise planning/allocation costs as a result of lower sales.

Selling, general and administrative expenses (“SG&A”) were $40.4 million for the third quarter compared to $44.4 million for the third quarter last year, a decrease of $4.0 million. As a percentage of sales, SG&A expenses were 29.7% for the quarter this year compared to 30.7% for the same quarter last year, a decrease of 1.0%. While store payroll as a percentage of sales increased, there were actually less payroll dollars spent per store during the third quarter of this year than in the third quarter of last year due to the tightening of store payroll hours in concert with lower sales per store. The SG&A costs as a percentage of sales decreased primarily due to not distributing a catalog this year, lower advertising expenditures, and lower merchandise delivery costs in this year’s third quarter compared to the same quarter of last year. Additionally, there were lower employee benefit costs associated with reductions in retirement plan costs and in accrued bonus expenses compared to last year.

Interest income, net, was $0.4 million for the third quarter compared to $0.7 million for the third quarter of last year. This decline was due to a lower invested balance compared to the same period in the prior year as well as to a reduction in market interest rates on the invested balance.

There was an income tax benefit of $4.1 million for the quarter ended November 1, 2003 compared to a $1.5 million benefit for the quarter ended November 2, 2002. The effective income tax rate for the third quarter of 35.0% has been in effect since the end of the last fiscal year.

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Based on the factors noted above, the net loss was $7.5 million or $0.25 per share for the quarter ended November 1, 2003 compared to a net loss of $2.5 million or $0.08 per share for the quarter ended November 2, 2002, a decrease of $5.0 million. This is a net loss of 5.5% of sales for the third quarter this year compared to a net loss of 1.7% of sales for the same quarter last year.

The nine months ended November 1, 2003 as compared to the nine months ended November 2, 2002.

Sales for the nine months ended November 1, 2003 were $385.8 million compared to sales for the prior year nine months of $447.3 million, a decrease of $61.5 million or 13.8%. The decrease in sales was due to the comparable store sales decline of 18.7% for the nine months, partially offset by a net increase of 24 equivalent stores over the same nine months last year. This compares to a comparable store sales decrease of 0.2% last year.

The cost of sales (including buying, merchandise planning/allocation, distribution and occupancy costs) was $314.3 million for the nine months compared to $310.8 million for the same nine months last year, an increase of $3.5 million or 1.1%. As a percentage of sales, cost of sales was 81.5% for the nine months this year compared to 69.5% for the same nine months last year, a 12.0% increase. This increase was driven by the loss of leverage for occupancy, buying and merchandise planning/allocation costs due to lower sales per store and the significant increase in markdowns over the prior year in our continued efforts to clear slow-moving merchandise. The drop in the initial mark-up compared to the nine month period last year was primarily due to a drop in the initial mark-up at the Wet Seal division in the third quarter. The increase in cost of sales was partially offset by a decrease in distribution center costs, reflecting greater efficiencies developed over the past year.

Selling, general and administrative expenses (“SG&A”) were $118.0 million for the nine months compared to $123.3 million for the nine months last year, a decrease of $5.3 million. As a result, SG&A expenses were 30.6% of sales for the nine months this year compared to 27.6% of sales for the same nine months last year, an increase of 3.0%. Store payroll as a percentage of sales contributed 2.3% of the 3.0% increase, again a reflection of sales de-leverage over the nine months of this year, as stores could only reduce payroll to threshold minimal staffing levels. However, there were major savings in SG&A versus last year for the nine months of this year in catalog fulfillment costs, advertising costs, and merchandise delivery costs offset partially by higher field management expenses. Dollar savings in general and administrative expenses were due to substantial

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reductions in accrued bonuses and retirement plan costs. Additionally, there were payroll savings resulting from the temporary CEO vacancy and the elimination of other administrative positions.

Interest income, net, was $1.2 million for the nine months compared to $2.6 million for the same nine months of last year, a decrease of $1.4 million. This decrease was due mostly to a decrease in the invested balance compared to the same period in the prior year as well as to a reduction in market interest rates on the invested balance.

The income tax benefit of $15.9 million for the nine months ended November 1, 2003 compares to a $5.9 million provision for the nine months ended November 2, 2002, reflecting a benefit on pre-tax losses this year compared to a provision on pre-tax income year-to-date last year. The effective income tax rate for the nine months of this year was 35%, the effective rate used starting at the end of the last year.

Based upon the factors noted above, the net loss was $29.5 million, or $0.99 per diluted share for the first nine months of this year compared to net income of $9.9 million, or $0.32 per diluted share for the comparable prior year period, a decrease of $39.4 million. This represents a net loss of 7.6% of sales this year compared to a net income of 2.2% of sales last year.

Liquidity and Capital Resources

Working capital at November 1, 2003 was $57.8 million compared to $64.5 million at February 1, 2003, a decrease of $6.7 million. This decrease in working capital was primarily due to an increase in merchandise payables, net of an increase in inventory, a decrease in cash and cash equivalents, net of an increase in short-term investments, and a reduction in prepaid expenses, partially offset by an increase in the income tax receivable.

Net cash used in operating activities for the first nine months of fiscal 2003 was $12.6 million, compared to $2.0 million net cash provided by operating activities for the same period last year. The $14.6 million swing reflects the impact of the $39.4 million year-over-year negative swing in earnings, partially offset by an increase of $3.5 million in non-cash depreciation expense, a reduction of $12.2 million in prepaid expenses (composed mostly of prepaid rents due to the month-end calendar timing of the rent check distribution), and an increase of $8.2 million in merchandise payables. Offsets were an increase in merchandise inventory of $5.3 million, as well as an incremental $7.1 million income tax receivable recorded this year, reflecting losses for the first nine months of the current fiscal year.

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The cash and investment balance at November 1, 2003 was $69.3 million, $25.5 million less than it was at February 1, 2003. This change resulted largely from the decline in sales and the resulting losses, and from expenditures for capital improvements.

Capital improvements totaled $12.7 million year-to-date through the third quarter, compared to $36.2 million year-to-date through the third quarter in the prior year. The expenditure of $12.7 million reflects costs for the 30 new stores and 20 remodels completed during the first nine months of the year, as well as 1 new store under construction for a fourth quarter opening. We expect capital improvements for the remainder of 2003 to be no more than $2.3 million.

In September 1998, our Board of Directors authorized the repurchase of up to 20% of the outstanding shares of our Class A common stock. From this authorized plan, 3,077,100 shares (split adjusted) were repurchased at a cost of $20.3 million. These repurchased shares were reflected as Treasury Stock in our consolidated balance sheets, until they were retired on December 2, 2002, as authorized by the Board of Directors. On October 1, 2002, our Board of Directors authorized the repurchase of up to 5.4 million shares of our outstanding Class A common stock. This amount included the remaining shares previously authorized for repurchase by the Board of Directors. During fiscal 2002, the Company repurchased 947,400 shares for $8.2 million and retired these shares. An additional 124,500 shares were repurchased for $0.9 million in the first quarter of fiscal 2003 and these shares were also retired. As of November 1, 2003, there were 4,328,100 shares remaining that are authorized for repurchase.

We have a revolving line-of-credit arrangement with Bank of America, N.A. under which we may borrow up to a maximum of $50 million on a revolving basis through July 1, 2004. At November 1, 2003, there were no outstanding borrowings under the credit arrangement. There were $18.6 million in open letters of credit related to imported inventory orders as well as standby letters of credit totaling $0.9 million. As of November 1, 2003, we were in compliance with all financial covenants of the credit arrangement. We invest our excess funds in short-term investment grade money market funds, investment grade municipal and commercial paper and U.S. Treasury and agency obligations. Assets listed as long-term investments on our balance sheet consist of high credit quality municipal and corporate bonds with maturities extending no further than three years out.

We believe that our working capital and cash flows from operating activities will be sufficient to meet our operating and capital requirements in the foreseeable future.

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Seasonality and Inflation

Our business is seasonal in nature with the Christmas season, beginning the week of Thanksgiving and ending the first Saturday after Christmas, and the back-to-school season, beginning the last week of July and ending the first week of September, historically accounting for a large percentage of sales volume. For the past three fiscal years, the Christmas and back-to-school seasons together accounted for an average of approximately 30% of our annual sales, after adjusting for sales increases related to new stores. We do not believe that inflation has had a material effect on the results of operations during the past three years. However, we cannot assure you that our business will not be affected by inflation in the future.

Commitments and Contingencies

Our principal contractual obligations consist of minimum annual rental commitments under non-cancelable leases for our stores, our corporate office, warehouse facility, automobiles, computer equipment and copiers. At November 1, 2003, our contractual obligations under these leases were as follows (in thousands):

Contractual Obligations	Payments Due By Period
	Total		Less Than 1 Year		1–3 Years		4–5 Years		After 5 Years
Operating leases	$	441,600	$	69,900	$	183,700	$	92,800	$	95,200

Our principal commercial commitments consist of open letters of credit, related primarily to imported inventory orders, secured by our revolving line-of-credit arrangement. At November 1, 2003, our contractual commercial commitments under these letters of credit arrangements were as follows (in thousands):

Other Commercial Commitments	Total Amounts Committed		Amount of Commitment Expiration Per Period
			Less Than 1 Year		1–3 Years	4–5 Years	Over 5 Years
Lines of credit	$	19,500	$	19,500	—	—	—

We do not maintain any long-term or exclusive commitments or arrangements to purchase merchandise from any single supplier.

Statement Regarding Forward-Looking Disclosure

Certain sections in this Quarterly Report on Form 10-Q, including the preceding “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may contain various forward-looking

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statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our expectations or beliefs concerning future events.

Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as “believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions. In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things. These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Actual events and results may differ 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 Exhibit 99.1 attached to this report and noted elsewhere in this report. We strongly urge you to review and consider the risk factors set forth in Exhibit 99.1.

New Accounting Pronouncements

In November 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material impact on our consolidated results of operations, financial position or cash flows.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that

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the liability should initially be measured and recorded at fair value. We adopted the provisions of SFAS 146 for exit or disposal activities initiated after December 31, 2002.

In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others,” an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FIN 34, “Disclosure of Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of such interpretation did not have a material impact on our results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of FASB Statement No. 123.” This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for fiscal years ending after December 15, 2002. We have determined not to adopt the fair value based method of accounting for stock-based employee compensation, but did adopt the additional disclosure requirements of SFAS 148 in fiscal 2002.

In January 2003, the FASB issued FIN 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB No. 51. FIN 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN 46 will apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements will apply to entities established prior to January 31, 2003 in the first fiscal year or interim period beginning after June 15, 2003. The disclosure

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requirements will apply in all financial statements issued after January 31, 2003. We believe the adoption of FIN 46 will have no impact on our results of operations or financial position, as we have no interests in variable interest entities.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is generally effective at the beginning of the first interim period beginning after June 15, 2003. We do not believe that the adoption of SFAS No. 150 will have a significant impact on our results of operations, financial position or cash flows.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

To the extent that we borrow under our credit facility, we are exposed to market risk related to changes in interest rates. At November 1, 2003, no borrowings were outstanding under our credit facility. We are not a party to any derivative financial instruments. However, we are exposed to market risk related to changes in interest rates on the investment grade interest-bearing securities in which we invest. If there are changes in interest rates, those changes would affect the investment income we earn on those investments.

Item 4 – Controls and Procedures

Disclosure Controls and Internal Controls

Our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) (“Disclosure Controls”) are controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our internal control over financial reporting (“Internal Controls”) is a process designed by, or under the supervision of, our Chief Executive Officer

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and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, with the objective of providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal Controls also include policies and procedures that:

1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of our company;

2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of our company are being made only in accordance with authorizations of management and directors of our company; and

3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the financial statements.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our Disclosure Controls or Internal Controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. Moreover, the design of any system of controls is also based in part upon certain assumptions about the likelihood of future events.

Not withstanding the foregoing limitations, we believe that our Disclosure Controls and Internal Controls provide reasonable assurances that the objectives of our control system are met.

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Quarterly Evaluation of the Company’s Disclosure Controls

As of November 1, 2003, the last day of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our Disclosure Controls. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded, subject to the limitations noted above, that the design and operation of our Disclosure Controls were effective to ensure that material information related to our company which is required to be disclosed in reports filed under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

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PART II – OTHER INFORMATION

Item 1 - Legal Proceedings.

We have been served with a lawsuit by previously employed store managers alleging non-exempt status under California state labor laws. The case is currently scheduled for non-binding mediation in January 2004.

From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. Our management believes that, in the event of a settlement or an adverse judgment of any of the pending litigations, we are adequately covered by insurance. As of November 1, 2003 we were not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on us.

Item 2 - Changes in Securities. Not Applicable

Item 3 - Defaults Upon Senior Securities. Not Applicable

Item 4 - Submission of Matters to a Vote of Security Holders. Not Applicable

Item 5 - Other Information.

On November 20, 2003, we issued a press release to announce the resignation of William B. Langsdorf, the Company’s Chief Financial Officer, effective in January of 2004.

Item 6(a) - Exhibits.

31.1 Certification of the Chief Executive Officer filed herewith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer filed herewith pursuant to Section 302 of the Sarbanes- Oxley Act of 2002.

32.1 Certification of the Chief Executive Officer furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of the Chief Financial Officer furnished herewith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1 Factors Affecting Future Financial Results

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Item 6(b) – Reports on Form 8-K.

On August 25, 2003, we filed a current report on Form 8-K reporting financial results for the second quarter of fiscal 2003. We also filed notes for a conference call that was held on August 21, 2003.

On October 14, 2003, we filed a current report on Form 8-K reporting that we issued a press release announcing the resignation of Walter Parks as Executive Vice President and Chief Administrative Officer.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	The Wet Seal, Inc.
	(Registrant)
Date: December 12, 2003	/S/ PETER D. WHITFORD
	Peter D. Whitford
	Chief Executive Officer (Principal Executive Officer)
Date: December 12, 2003	/S/ WILLIAM B. LANGSDORF
	William B. Langsdorf
	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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