Surf-and-sun teen retailer Pacific Sunwear (Nasdaq: PSUN ) has seen the light and is carting its urban wear outfitter and shoe collection off to the Goodwill bin. Turns out that surfing apparel looks more flattering on the company, and management finally realized urban street wear just isn't its style.
I had suggested that PacSun stick to surfing when the teen retailer posted its September same-store sales numbers. Comps at its name-brand store posted respectable gains, with sales at stores opened for a year or more rising more than 5%. In contrast, rivals American Eagle Outfitters (NYSE: AEO ) , Abercrombie & Fitch (NYSE: ANF ) , and Gap (NYSE: GPS ) all reported declining comps.
It was actually an easy call to make. While PacSun stores were reporting 5% gains for the month, continuing a string of rising sales, its urban gear stores demo and shoe concept, One Thousand Steps, were once again reporting steep declines. The concepts have encountered impairment charges, which has been squeezing net margin and has generated $21 million in operating losses in fiscal 2007 already.
Since being permanently named top surfer at this Motley Fool Stock Advisor recommendation, Sally Kasaks has aggressively moved to turn the retailer around. Prior to the "strategic alternatives" announcement, Kasaks had committed to closing down underperforming stores with gusto. Of the 74 demo stores identified earlier in the year as marked for closure, 60 were closed in the third quarter alone. The company will try to find a buyer for what remains, at least partially recouping PacSun's cost.
One Thousand Steps was a folly from the beginning. Then-CEO Seth Johnson had said selling women's shoes would allow PacSun to tap an "underserved market," but that seemed little more than wishful thinking and hyperbole, as there is a glut of such stores. While forecasting that it could open hundreds of One Thousand Steps stores, the reality never got beyond the original nine. PacSun reported last quarter that the stores were so operationally poor they could not generate enough cash flow over the life of their leases even to cover the company's initial investment in property and equipment. Was there really any doubt these stores would go?
I said I liked PacSun's valuation two weeks ago, and would like it even more if it simply focused on selling the clothes that it knew so well. Now that Kasaks has made that crucial decision, I find PacSun's even lower price-to-sales ratio of 0.78 incredibly enticing. Abercrombie, American Eagle, and Aeropostale (NYSE: ARO ) sport ratios more than twice as expensive, while Zumiez (Nasdaq: ZUMZ ) is nearly five times greater. At these levels, I believe PacSun will soon be basking in the glow of investor love.
Related Foolish article: