Pacific Sunwear of California, Inc. reported comparable store sales increased 3 percent in the second quarter ended Aug. 2, marking its sixth consecutive quarter of comp store growth as its emphasis on brands inspired by the streets, beaches, skate parks and culture of California helped it outperform other teen retailers at the mall.
CEO Gary Shoenfeld said the company’s continuing turn around validates its strategy of curating “the creativity, diversity and optimism of California” by working with great brands to bring trendy fashion and a sense of style to girls and guys in their late teens and early 20s.
“The old PacSun was a short, board short, basic denim and T-shirt business,” said Schoenfeld. “I think we're getting back to being the kind of specialty retailer that people expect from us.”
Comparable store sales growth was again driven by the Women’s business, where comps grew 11 percent. Schoenfeld attributed the acceleration to newer California-inspired lifestyle brands, such as Kendall & Kylie and Brandy Melville, which are attracting more fashion-savvy, older teen and early-20 consumer to PacSun stores.
On the Men’s side, comps declined 2 percent as softness in summer seasonal categories such as shorts and board shorts, more than offset strong performances by emerging brands, footwear and accessories. With denim margins under pressure, PSUN hopes to build traffic in the back half on the strength of its chinos business, Nike and Vans footwear and newer brands such as Neff. The company will also seek unique collaborations with companies such as Been Trill or Modern Amusement.
The company reported sales increased 9.1 percent to $215.2 million, up 9.1 percent from the second quarter ended July 28, 2012, despite the closing of 90 stores during the interim. About half the gain came from the 53-week calendar shift, which added a peak BTS week in early August to the quarter. E-commerce sales increased 4 percent, but yielded better margins. Gross margins improved 220 bps to 30 percent, reflecting a 140 basis point increase in merchandise margins and 120 bps bump from the calendar shift. Operating income swung to $5.3 million from an operating loss of $6.1 million in the second quarter of 2012. SG&A expenses of $58.4 million were 27 percent of net sales, down 400 basis points compared with the same period a year ago.
On a GAAP basis, the company reported a loss from continuing operations of $19.2 million, or 28 cents per diluted share, compared to a loss from continuing operations of $18.0 million, or 27 cents per diluted share. Ironically, the loss was attributed to a sharp rise in the value of the retailer’s stock over the last year, which forced it to take a much larger non-cash charge to reflect the derivative liability associated with preferred stock it issued as part of a term loan financing completed in December 2011. Excluding that and the cost of store closures, and assuming an annual income tax rate of 37 percent, income from continuing operations was approximately $1 million, or 2 cents per share, versus a loss of approximately $6 million, or 10 cents per share, in the year earlier quarter.
PSUN ended the quarter with 637 core and outlet stores compared with 727 a year earlier. Adjusted for the impact of the 53rd week calendar shift, total inventory was up approximately 3 percent on a comparable store basis. It plans to close another 20 to 30 stores during the fiscal year.
The retailer expects the shift of a week of peak BTS sales from the third to second quarter will trim about $13 million in sales from the third quarter, when it expects to report a 300 bps drop in gross margin and a non-GAAP loss per diluted share of between 4 and 9 cents. The guidance assumes comps store sales of -1 to 3 percent and a gross margin rate, including buying, distribution and occupancy of 25 to 27 percent compared to 28 percent in the third quarter of 2012.
