Pacific Sunwear of California, Inc. reported sales from continuing operation, gross margins and operating income declined in the third quarter, as another quarter of comparable store sales growth could not offset the impact of a shift in the retail calender.
The teen retailer’s sales from continuing operations reached $206.6 million during the quarter ended Nov. 2, down 4.3 percent from the $215.5 million reported in the quarter ended Oct. 27, 2012. 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 comopany reported comparable store sales increased 1 percent, marking the seventh straight quarter of positive comparable store sales. Women’s products comped up 5 percent while men’s comped down 1 percent as growth in emerging brands, footwear and accessories were more than offset by softness in denim.
Gross margins slipped 300 basis points to 25 percent of net sales, but would have fallen just 120 bps if not for the shift in the retail calendar. PSUN attributed the decline in gross margin to a “challenging and competitive back-to-school landscape, leading to higher promotional activity,” which contributed to thinner merchandise margins. Much of the discounting took place in the highly competitive denim category, which accounts for about 20 percent of PSUN’s revenue.
SG&A expenses were $54.0 million, or 26 percent of net sales for Q3, down approximately 200 bps from the same period a year ago, despite the calendar shift, which de-levered SG&A expenses as a percentage of sales by approximately 90 bps. The retailer lost twice as much in operating income but was able to report a quintupling of income from continuing operations thanks to non-cash adjustments to derivative liabilities that added $23.4 million in earnings compared to $5.56 million a year earlier. That enabled PSUN to report net income of $17.2 million, or 23 cents per diluted share compared with $948,000, or 5 cents per diluted share a year earlier.
PSUN ended the third quarter of fiscal 2013 with 635 stores versus 722 stores a year ago and the same dollar value of inventory as a year ago.
PSUN’s comp store sales rebounded to 6.0 percent in November, thanks to strong Black Friday sales, colder weather and the growing appeal of PSUN’s assortments, according to which President and CEO Gary H. Schoenfeld. Under Schoenfeld, PSUN has introduced more emerging brands, including Kendall & Kylie and Brandy Melville on the women’s side, and Diamond Supply, Crooks & Castles, Been Trill, Visual, Beats by Dre and Neff on the men’s side. The company has also reentered the footwear business in partnership with Nike and Vans while continuing to offer legacy brands such as Hurley, Roka, Volcom and Young & Reckless.
Schoenfeld said the strategy has helped PSUN “age up” its customer from the young teen demographic to older teens and early 20s.
In the fourth quarter, PSUN expects comp store sales growth will come in somewhere between 1 to 5 percent. However, the loss of a week of holiday shopping is expected to reduce sales by $9 million during the quarter and gross margins are expected to slip to 21 to 24 percent. According to guidance issued by the company last week, that will result in a non-GAAP loss per diluted share of between -12 to -17 cents.
