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Pacific Sunwear Q2 Loss in Line with Estimates, Revenues Top

Zacks Equity Research

Pacific Sunwear of California Inc.’s (PSUN) adjusted loss from continuing operations in second-quarter fiscal 2014 came in line with the Zacks Consensus Estimate of a loss of 3 cents a share. The results highlight a considerable decline from the company’s year-ago earnings of 2 cents.

Meanwhile, on a reported basis, the company posted earnings of 10 cents per share from continuing operations, as against a loss of 27 cents per share reported in the year-ago quarter. The improvement can be attributed to a derivative liability-related non-cash gain against a non-cash loss in the comparable quarter last year.

Pacific Sunwear Of California, Inc - Earnings Surprise | FindTheBest

Detailed Performance

This Anaheim, CA-based specialty retailer reported net sales of $211.7 million, which grew 0.8% year over year and beat the Zacks Consensus Estimate of $207 million. Sales were driven by strength witnessed at the company’s Men’s business.

Comparable store sales (comps) for the quarter rose 0.3%. Also, e-Commerce sales grew 9% year over year and represented 6% of total sales in the second quarter.

Gross profit slipped 1.7% to $61.5 million with gross margin contracted 100 basis points to roughly 29%, owing to contraction in merchandise margins.

Selling, general and administrative (SG&A) expenses in the reported quarter totaled approximately $60.6 million, up 6.8% from the prior-year quarter.

Quick Look at First Half Fiscal 2014

For the six months ended Aug 2, 2014, the company’s adjusted loss from continuing operations came in at 13 cents a share, wider than the year-ago loss of 11 cents. On the other hand, the top line climbed 1.7% year over year to $382.9 million in the same period.

Financial Update

Pacific Sunwear ended the quarter with cash and cash equivalents of nearly $21.3 million along with long-term debt of $87.9 million and shareholders’ equity worth $16.3 million.

Store Update

During the quarter, this sports and fashion retailer opened and closed 1 outlet each, taking the total outlet count to 618 outlets as against 637 a year ago. Going ahead, management expects to shut down 10-20 stores in fiscal 2014 (with majority closures in the fourth quarter) while it expects to open 3 new stores in the year.

Going Forward

Despite witnessing weakness in the denim cycle, management is banking on favorable response to its fall products for future growth. Also, it believes that its key strategies are likely to drive more traffic and place Pacific Sunwear well in the market.
For the third quarter of fiscal 2014, the company expects to post adjusted loss between 4–9 cents, compared to a loss of 5 cents in the third quarter of fiscal 2013. Management projects revenues between $203 million and $208 million. Currently, the Zacks Consensus Estimate stands at a loss of 3 cents for the third quarter.

Moreover, management forecasts comps in the range of flat to a 3% growth. Gross margin (including buying, distribution and occupancy) is projected at around 25–27% while SG&A is anticipated to range from $54 million to $68 million in the coming quarter.

Key Picks from the Sector

Pacific Sunwear currently has a Zacks Rank #3 (Hold). However, other better-ranked stocks in the industry include Citi Trends, Inc. (CTRN), Abercrombie & Fitch Co. (ANF) and Foot Locker, Inc. (FL). While Citi Trends and Abercrombie & Fitch sport a Zacks Rank #1 (Strong Buy), Foot Locker carries a Zacks Rank #2 (Buy).

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