Pacific Sunwear of California, Inc. announced net sales from continuing
operations for the third quarter of fiscal 2013 ended Nov. 2, were
$206.6 million versus net sales from continuing operations of $215.5
million a year ago. Comparable store sales for the third quarter of
fiscal 2013 increased 1 percent, the seventh straight quarter of
positive comparable store sales.

The 53rd week retail calendar shift resulted in a decrease in net sales of approximately $11 million for the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012.  The Company ended the third quarter of fiscal 2013 with 635 stores versus 722 stores a year ago.

On a GAAP basis, the Company reported income from continuing operations of $17.2 million, or $0.23 per diluted share, for the third quarter of fiscal 2013, compared to income from continuing operations of $3.4 million, or $0.05 per diluted share, for the third quarter of fiscal 2012. Income from continuing operations for the Company's third quarter of fiscal 2013 included a non-cash gain of $23.4 million, or $0.31 per diluted share, compared to a non-cash gain of $5.6 million, or $0.08 per diluted share, for the third quarter of fiscal 2012 related to the 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 the non-cash gain on the derivative liability and store closure related charges, 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 2013 of $3.6 million, or $(0.05) per diluted share, as compared to a loss from continuing operations of $1.4 million, or $(0.02) per diluted share, for the same period a year ago.

“The third quarter marks our seventh consecutive quarter of positive comparable store sales and had there not been the 53rd week calendar shift, our non-GAAP loss per diluted share would have been break-even compared to the $0.02 loss last year,” said Gary H. Schoenfeld, President and Chief Executive Officer. “As we transition into the peak holiday season, we have had a strong start in November with comparable store sales up 6 percent driven by a number of factors including: strength in our emerging brands and unique product assortment, colder weather, and strong Black Friday performance. Overall, we believe our results continue to validate the unique positioning we are establishing for PacSun as we strive to become the leading specialty retailer for great brands and on-trend fashion and fashion basics.”

Financial Outlook for Fourth Fiscal Quarter of 2013

The Company's guidance range for the fourth quarter of fiscal 2013 contemplates a non-GAAP loss per diluted share from continuing operations of between negative $0.17 and negative $0.12 and includes the impact of the 53rd week retail calendar shift.

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

  •     Comparable store sales from 1 percent to 5 percent;
  •     An estimated $9 million reduction in revenue, a nearly 150 basis point decrease in gross margin, and a corresponding reduction of approximately $0.03 per diluted share as a result of the 53rd week retail calendar shift;
  •     Revenue from $216 million to $225 million;
  •     Gross margin rate, including buying, distribution and occupancy, of 21 percent to 24 percent;
  •     SG&A expenses in the range of $61 million to $63 million; and
  •     Applicable non-GAAP adjustments are tax effected using a normalized annual income tax rate of approximately 37 percent.

The Company's fourth fiscal quarter of 2013 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 2012 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 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). A key driver used in determining the fair value of the derivative liability each quarter is the Company's stock price. As the stock price decreases, the fair value of the derivative liability generally will also decrease. For example, the Company's stock price for the third quarter of fiscal 2013 ended November 2, 2013, was $2.59 compared to $4.47 for the second quarter of fiscal 2013 ended August 3, 2013, which resulted in a non-cash gain of $23.4 million in the third quarter.

As of December 5, 2013, Pacific Sunwear operates 635 stores in all 50 states and Puerto Rico. \