Teen-focused retailer Pacific Sunwear (NASDAQ:PSUN) will report 2007 fourth-quarter financial results on Thursday, March 13. Will earnings catch the next wave or be pounded in the surf?

What analysts say:

  • Buy, sell, or waffle? Of the 19 surfer dudes covering PacSun, eight think it will hang 10 with a buy rating, 10 say to hold onto your surfboards, and one is expecting a wipeout. Gnarly.
  • Revenue. Sales are expected to fall 14% to $394.6 million.
  • Earnings. Profits are also expected to decline 19% to $0.30 per share.

What management says:
It finally became clear to PacSun management last year that its demo "urbanwear" stores and One Thousand Steps shoe stores were an abject failure. CEO Sally Frame Kasaks made the decision to retire the boards for those two concepts, focusing instead on nailing performance at its namesake stores. That was a smart move.

Analysts' revenue and profit projections for PacSun are off from the prior year because of the horrid underperformance of the demo and shoe stores. The company's namesake stores, on the other hand, have been catching waves consistently. As a result, the company will take charges related to closing up shop at its laggard brands, throwing off comparisons for a while.

What management does:
When the Motley Fool Stock Advisor recommendation sticks to selling surf and skate clothes, it does well. Over the past year, PacSun concept sales rose 6.7%, with a 3.4% jump in same-store sales. While the gross margin improved, net earnings still felt the pain from the company's failed ventures outside of the core market.

Margin

01/06

04/06

07/06

10/06

02/07

Gross

32.2%

30.9%

29.5%

28.5%

30.0%

Operating

8.5%

4.3%

2.4%

0.9%

2.2%

Net

5.5%

2.7%

1.5%

0.2%

-1.8%

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

What Fools Say
Here's how Pacific Sunwear stacks up against some of its peers and competitors at Motley Fool CAPS:

Company

Market Cap (billions)

PE Ratio

CAPS Rating

Pacific Sunwear

$0.78

NA

**

Aeropostale (NYSE:ARO)

$1.64

15.6

***

American Eagle Outfitters (NYSE:AEO)

$3.60

9.3

****

Wet Seal (NASDAQ:WTSLA)

$0.24

46.2

**

Abercrombie & Fitch (NYSE:ANF)

$6.30

13.4

**

Quiksilver (NYSE:ZQK)

$1.10

N/A

**

Gap (NYSE:GPS)

$14.5

18.6

*

One Fool says:
While closure costs from the demo and One Thousand steps stores will weigh down near-term results, Pacific Sunwear's new slimmer look will allow it to get back to doing what it does best. Earnings this time around will take a hit from the closing charges, which will likely mask the core brands' continued strong performance. PacSun is extending its brand to related businesses (e.g., snowboarding) while keeping its key constituency (women) uppermost in its marketing.

Despite a weak retail environment, Pacific Sunwear has performed well. As its financial statements become cleaner, its investment potential should grow even clearer. In the meantime, any dips in price -- heck, even its current price is a bargain -- ought to be a signal for investors to buy.

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