Foolish Forecast: PacSun's Not Packin' Heat Yet

Teen retailer Pacific Sunwear (Nasdaq: PSUN  ) will report first-quarter 2008 financial results tomorrow. We'll see whether the company can skate around the growing negative sentiment and post results that will bring back a ray of sunshine.

What analysts say:

  • Buy, sell, or waffle? Of the 18 analysts following PacSun, eight are riding the wave and calling it a buy. Nine say "steady as she goes" and recommend a hold, while one Citigroup (NYSE: C  ) analyst pirouetted with a change of opinion from "buy" to "sell."
  • Revenue. Sales are expected to fall just below 1% to $266.5 million. Same-store sales have fallen 1% for the first quarter because of a particularly weak March.
  • Earnings. Analysts have also ratcheted back their earnings projections over the past month, in light of PacSun's comps numbers and expectations that it would report a loss of about $0.17 to $0.18 per share. But that includes a $0.07-per-share loss related to closing a distribution center, so analysts predict a $0.10 loss this time out.

What management says:
As you know, I've had a sunny outlook on the company, despite its string of weak comps in recent months. Brighter days should be in the future for the company, now that management has closed its last of the "demo" stores and relocated its distribution center to remain focused on the core surfing and skating business that it's good at. The company should be poised for a killer comeback, now that it won't have to drown in demo's wiped-out results anymore.

While Aeropostale (NYSE: ARO  ) turned in 25% better comps for April and Abercrombie & Fitch (NYSE: ANF  ) saw them rise 6%, other teen retailers, such as American Eagle Outfitters (NYSE: AEO  ) and Gap (NYSE: GPS  ) , didn't look so hot. Notably, however, Abercrombie saw significant declines in virtually all of its ancillary lines of business, so it hasn't yet learned the lesson that PacSun did.

What management does:
Compressed margins have given rise to expectations that the business is faltering. But such doom-and-gloom scenarios ignore that PacSun is set to become a different company going forward. The company will still be weighed down for a bit as it works to right itself, but the market's failure to recognize the change provides investors with an opportunity.

Margin

2/07

5/07

8/07

11/07

2/08

Gross

41.4%

29.5%

28.5%

28.8%

39.1%

Operating

6.3%

2.4%

0.9%

1%

1.8%

Net

2.7%

1.5%

0.2%

(1.8%)

(2.1%)

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.

One Fool says:
I've been fairly bullish on Pacific Sunwear since it came to its senses, but in full recognition that the turnaround wasn't going to be swift. The decision to ax its quixotic journeys into women's footwear and urban-wear clothing were merely the initial spark for the catalysts that will drive the stock forward.

With PacSun's core-brand comps still coming in on the positive side, even as the economic mood seems to become more sour, I think investors will need to look past these changeable times and have a more forward focus. On a price-to-sales basis, many teen retailers look attractively priced, but it's also true that with a P/S ratio of 0.51 and a forward price-to-earnings ratio of 12, none looks so swimmingly eye-catching as does Pacific Sunwear.

Related Foolishness:

Gap is a Motley Fool Inside Value pick. Pacific Sunwear, Gap, and American Eagle Outfitters are Motley Fool Stock Advisor picks. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey owns shares of PacSun but has no financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool owns shares of American Eagle Outfitters and has a disclosure policy.


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