Teen-oriented retailer Pacific Sunwear (Nasdaq: PSUN) posted results that look like a wipeout but really find it riding in the barrel of a wave.
To get the right picture of PacSun, you pretty much have to ignore the failed shoe stores and graciously forget that a surf-and-skate shop ever thought it could make a go of it in urban wear. You need to remember just three things: juniors, jeans, and Ts.
Junior achievement award
Female customers have been the reason for much of PacSun's resurgence. You're not going to see it in the stock price (yet), but you'll find it in the details. The retailer's juniors apparel business saw sales surge by $76 million in 2007 on the strength of a 20% increase in comps. That can grow even higher because, where competitors have juniors representing some 60% of total sales, PacSun's penetration is only 46% of the total.
That's bull
Pushing that will be PacSun's proprietary line of denim, Bullhead. While the Motley Fool Stock Advisor recommendation does do some business with Levi's, on both the juniors' and guys' side of the aisle it's Bullhead that PacSun is selling -- at better margins, as it does on many of its proprietary lines of clothing. With the brand representing about 20% of volume, PacSun should be earning some decent returns from growth here.
For its female customers, fashion is more of a priority than brand, so it aims to keep the blend at 50-50 between brand-name lines and proprietary lines. For guys, brand tends to be more important, so the mix will be about 70% to 75% branded goods. Guys are essentially clueless when it comes to fashion, so we'll look for a brand to tell us what looks good.
To a T
That's why PacSun's partnership with Volcom (Nasdaq: VLCM), for example, is one which the company wants to nurture. The trendy brand signifies "style" for guys. PacSun will keep its brands limited to a favorite few, such as the names we've come to associate with the surf-and-skate crowd: Volcom, Hurley, Vurt, and Element. PacSun plans to introduce some smaller, regional brands, but only on a limited basis, which should keep costs down and limit inventory.
The first quarter will look a little rough around the edges. It will contain some one-time costs that will make it seem equal to or slightly worse than what we saw the year before. However, it's a great sign that PacSun realized what its problems were and has taken steps to correct them. Of course, it's not the only retailer facing problems. Aeropostale (NYSE: ARO) is facing inventory troubles, Quiksilver (NYSE: ZQK) is trying to unwind its Rossignol acquisition, and American Eagle Outfitters (NYSE: AEO) was seeing profits slide.
The market generally liked what it saw in PacSun's report, and shares are trading higher than yesterday's close. Like a surfer who bottom-turns after dropping in, there's still plenty of time to position yourself for your next maneuver on this wave.
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