Pacific Sunwear of California, Inc. plans to close its remaining 154 demo stores. The company expects to incur aggregate pre-tax charges in the range of approximately $35 million to $50 million for anticipated lease terminations, employee severance charges, inventory reserves, and agency fees.
The decision followed a review of strategic alternatives for its demo division, announced in October 2007. In February 2007, the company announced the planned closure of 74 underperforming demo stores, all of which were closed as of the end of May 2007.
“As we previously announced, we strongly believe that the best course for enhancing shareholder value is to focus our attention and resources on the PacSun business,” said Pacific Sunwear's chairman and CEO Sally Frame Kasaks. “We engaged an outside financial advisor to help us carefully evaluate strategic alternatives for demo and have determined on the basis of this review that it is in the best interests of our investors to close our remaining demo stores and concentrate our efforts on our core business.”
Regarding the charges, approximately $3 million to $4 million of such charges are expected to be incurred during the fourth quarter of fiscal 2007 ending February 2, 2008. These charges were not reflected in the company's previously given GAAP earnings guidance for the fourth quarter of fiscal 2007. The remainder of such charges is expected to be incurred during the first quarter of fiscal 2008 ending May 3, 2008, by which time the company currently expects that all 154 demo stores will be closed. Upon the completion of the inventory liquidation and lease termination negotiations, together with anticipated income tax benefits expected to be realized, the company expects the net cash outflow of the demo store closings to be in the range of near neutral to approximately $10 million. The company intends to engage the Gordon Brothers Group, LLP and its subsidiary, DJM Realty, LLP, to assist in the demo store closing effort.
Separately, the company also announced that, following a review of its supply chain operations, it will relocate all of its distribution activities to its distribution center in Olathe, Kansas, and close its distribution center in Anaheim, California.
Kasaks added, “In analyzing our operations, it became clear that we can better leverage our existing capacity at our Olathe distribution center to improve the efficiency of our supply chain, better service our stores and reduce certain costs. We regret the impact on our associates of both of these decisions, but recognize these actions are necessary in order to improve our financial performance and best position the company for future growth.”
The relocation of the Anaheim distribution operations is expected to result in pre-tax charges of approximately $3 million, of which approximately $1 million is expected to be incurred during the fourth quarter of fiscal 2007 and approximately $2 million is expected to be incurred during the first quarter of fiscal 2008. These charges were not reflected in the company's previously given GAAP earnings guidance for the fourth quarter of fiscal 2007. The company plans to gradually phase down its operations in the Anaheim distribution center and expects the facility to close by the end of April 2008. The company is currently evaluating sale or lease alternatives for the Anaheim distribution center, which are expected to generate cash flow in excess of the current net book value of those asset