Pacific Sunwear to Close 74 demo Shops, Lowers Q4 Guidance

Pacific Sunwear of California, Inc. plans to close 74 “underperforming demo stores.” The company also reported sales for the month of January 2007 and updated its financial outlook for the fourth quarter of fiscal 2006.

Restructuring demo Real Estate Portfolio

The company today announced that it intends to close 74 underperforming demo stores that have not met the company's financial operating criteria.

“We have conducted an extensive review of our demo division with the objective of improving the profitability of this business,” commented Sally Frame Kasaks, Interim Chief Executive Officer of Pacific Sunwear. “We believe that demo remains a viable concept. However, we have determined that 74 stores, which in total generated a pre-tax operating loss of approximately $9 million in the 2006 fiscal year, are not performing satisfactorily for a variety of reasons, including mall demographics, store layouts and store economics. Exiting the stores now will allow us to focus our efforts on our better performing locations which we believe will improve our future financial results. As we make this transition, the demo management team will continue to refine the new demo store prototype with plans to convert approximately 20-25 of the remaining demo stores into this new format during fiscal 2007,” Kasaks concluded.

As a result of this action, the company expects to record a pre-tax non-cash charge of approximately $25 million to $27 million related to asset impairment and inventory write down costs in the fourth quarter of 2006. The company also expects to incur cash charges during fiscal 2007 of approximately $10 million to $15 million attributable to lease termination, severance and contingent agency fee costs. The company anticipates the overall impact of the store closings, net of expected inventory liquidation results and tax benefits to be realized during 2007, will be cash flow positive. The company expects to begin closing these underperforming demo doors during the first half of fiscal 2007 and has selected Hilco Merchant Resources, LLC and Hilco Real Estate, LLC to manage the closing process.

January Sales Results

The company also reported that total sales for the five weeks of fiscal January ending February 3, 2007 were $96.9 million. This compares to sales of $75.2 million during January of fiscal 2005, which was a four-week period. Total company same-store sales for the five-week period decreased 7.7% when compared to the same five-week period last year, which includes week one of February of fiscal 2006 for year-over-year comparison purposes. By concept, PacSun same-store sales decreased 7.3% and demo same-store sales decreased 9.5% compared to the same five-week period last year.

Total sales for the 14-week, fourth quarter period of fiscal 2006, were $458.2 million, compared to total sales of $425.0 million during the fourth quarter of fiscal 2005, which was a 13-week period. Total company same-store sales decreased 4.3% during the 2006 14-week period, which includes week one of February of fiscal 2006 for year-over-year comparison purposes. By concept, PacSun same-store sales decreased 3.4% and demo same-store sales decreased 9.6% compared to the same 14-week period last year.

Total sales for the 53 weeks of fiscal 2006 were $1.45 billion, an increase of 4.0% over total sales of $1.39 billion during the 52 weeks of fiscal 2005. Total company same-store sales decreased 4.7 percent during the same 53-week period, which includes week one of February of fiscal 2006 for year-over-year comparison purposes. By concept, PacSun same-store sales decreased 4.2 percent and demo same-store sales decreased 7.9 percent compared to the same 53-week period last year.

Guidance Update

Due to weaker than expected sales in January, resulting in higher than expected markdowns during the period, and excluding the estimated 22 cents to 24 cents per diluted share fourth quarter impairment charge associated with closing the 74 underperforming demo doors, the company anticipates fiscal 2006 fourth quarter earnings in the range of 36 cents to 38 cents per diluted share and earnings per share for fiscal year 2006 to be in the range of 78 cents to 80 cents per diluted share.