Foolish Forecast: PacSun Toweling Off, or All Wet?

After a brief dip in the "red" sea, Pacific Sunwear (Nasdaq: PSUN  ) emerged into profitability and toweled itself off last quarter. Will Tuesday's earnings news bask in the bright sun of continued profits, or will it take another dip?

What analysts say:

  • Buy, sell, or waffle? Twenty analysts remain PacSun worshipers, down two from last quarter. Eight of them still rate it a buy, 11 more say hold, and one counsels selling.
  • Revenues. On average, they're looking for less than a 1% sales decline, to $373.1 million.
  • Earnings. Profits are predicted to gain a penny to $0.14 per share.

What management says:
It's been a quarter of ebbs and flows at PacSun. The flows came from its eponymous stores where same-store sales have held up nicely; the ebbs cluster around PacSun's ill-considered demo and One Thousand Steps brands. Ultimately, the pain became too much to bear. As fellow Fool Rich Duprey describes in "A Ray of Sunshine at PacSun," management decided last month to throw in the towel on both concepts and stick to surfing instead.

What management does:
Adjusting our telescope to examine PacSun from a wider angle, we soon see the spots in this story. At every level -- gross, operating, and net -- PacSun's margins continue to decline. You have to walk long and far to find a clothier in more dire straits than PacSun, farther than a thousand steps, I'll wager. I checked Aeropostale (NYSE: ARO  ) , Zumiez (Nasdaq: ZUMZ  ) , and Abercrombie & Fitch (NYSE: ANF  ) -- they're earning double-digit operating margins. Gap (NYSE: GPS  ) , Wet Seal (Nasdaq: WTSLA  ) , and Hot Topic (Nasdaq: HOTT  ) -- just single digits, but they're still doing better than PacSun.

Margins

4/06

7/06

10/06

2/07

5/07

8/07

Gross

35.9%

34.9%

32.2%

30.9%

29.5%

28.5%

Operating

13.3%

12.0%

8.6%

4.3%

2.4%

0.9%

Net

8.5%

7.7%

5.5%

2.7%

1.5%

0.2%

Data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
In an attempt to move the margins upward again, PacSun's moves to "explore strategic alternatives" (corporate-speak for "sell or shutter") at its demo stores, and subject One Thousand Steps to closure promises to hurt these margins in the short term. Management told us to expect as much as $52 million in charges for its announced restructuring this quarter.

And the pain ain't over. Management further warned that it "may incur additional charges, both cash and non-cash, in the future related to potential lease terminations and related costs, inventory liquidation costs, employee retention and severance obligations, and/or agency fees associated with the evaluation or implementation of potential strategic alternatives."

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