Pacific Sunwear of California, Inc. reported net sales for the third quarter of fiscal 2012 ended Oct. 27 were $228.4 million versus net sales of $226.8 million a year ago. Same-store sales increased 1 percent during the period.

On a GAAP basis, the company reported income from continuing operations of $0.9 million, or $0.01 per diluted share, for the third quarter of fiscal 2012, compared to a loss from continuing operations of $14.0 million, or $(0.21) per diluted share, for the third quarter of fiscal 2011. Income from continuing operations for the company's third quarter of fiscal 2012 included a non-cash gain of $5.6 million, or $0.08 per diluted share, related to a derivative liability that resulted from the issuance of the Convertible Series B Preferred Stock (the “Series B Preferred”) in connection with the term loan financing the company completed in December 2011.

On a non-GAAP basis, excluding store closure related charges of $1.7 million and the non-cash gain on derivative liability of $5.6 million, and using a normalized annual income tax rate of approximately 37 percent, the company would have incurred a loss from continuing operations for the third quarter of fiscal 2012 of $1.8 million, or $(0.03) per share, as compared to a loss from continuing operations of $7.1 million, or $(0.11) per share, for the same period a year ago.

“We continue to see evidence of our turnaround strategies taking hold with our third straight quarter of positive comparable store sales growth and a 260 basis point improvement in merchandise margins, on an adjusted basis,” said Gary H. Schoenfeld, President and Chief Executive Officer. “After a slow start to the first few weeks of back-to-school, we performed well during the peak of the selling season which translated to our first positive sales comp in the third quarter since 2007 and a more than $10 million improvement in our pre-tax operating results.”

Financial Outlook for Fourth Fiscal Quarter of 2012

The company's guidance range for the fourth quarter of fiscal 2012 accounts for a 53rd fiscal week and contemplates a non-GAAP loss per share from continuing operations of between negative $0.09 and negative $0.17, compared to negative $0.20 in the fourth quarter of fiscal 2011.

“With high single-digit comps on Black Friday, we finished the month of November at a 1 percent sales comp, similar to the third quarter,” Schoenfeld said.

The forecasted fourth quarter non-GAAP loss from continuing operations per share guidance range is based on the following assumptions:

  • Same-store sales of negative 1 percent to plus 3 percent;
  • Revenue from $225 million to $235 million;
  • Gross margin rate, including buying, distribution and occupancy, of 22 percent to 25 percent;
  • SG&A expenses in the range of $63 million to $65 million;
  • A normalized annual income tax rate of approximately 37 percent; and
  • Ending the period with approximately 645 stores.
  • The company's fourth fiscal quarter of 2012 guidance range excludes the quarterly impact of the change in the fair value of the derivative liability due to the inherently variable nature of this financial instrument.

Discontinued Operations

In accordance with applicable accounting literature and consistent with the company's financial statement presentation in its fiscal 2011 annual report, the company has reclassified the results of operations of its closed stores as discontinued operations for all periods presented, as applicable.

Derivative Liability

In fiscal 2011, as a result of the issuance of the Series B Preferred in connection with the company's $60 million senior secured term loan financing with an affiliate of Golden Gate Capital, the company recorded a derivative liability equal to approximately $15.0 million, which represents the fair value of the Series B Preferred upon issuance. In accordance with applicable U.S. GAAP, the company has marked this derivative liability to fair value through earnings and will continue to do so on a quarterly basis until the shares of Series B Preferred are either converted into shares of the company's common stock or until the conversion rights expire (December 2021). The company's fourth fiscal quarter of 2012 earnings guidance excludes the quarterly impact of the change in the fair value of the derivative liability due to the inherently variable nature of this financial instrument.