Market's Dozing With PacSun

Recs

3

You don't expect the market to like dour earnings news, but Wall Street is putting on its best Rip Van Winkle act and is acting astonished -- shocked!, I tell you -- that Pacific Sunwear (Nasdaq: PSUN) is having a rough go of it.

The teen retailer recorded a loss of $0.10 per share (excluding one-time items) on revenue of $266.9 million for the first quarter. Had this news and the market's reaction occurred in a vacuum, it would be understandable. Considering that analysts have been expecting a worsening outlook and PacSun itself announced anticipated results when it updated same-store sales numbers, it's beginning to look like the Street is overreacting.

The quarter marked the start of PacSun's shortened version of a 12-step program. It ended its misguided attempts at urban wear and shoes: It's selling off and consolidating its distribution centers; and the surf, skate, and snowboard retailer is getting rid of footwear from its namesake stores. In short, PacSun is focusing on what it does best -- selling clothes to teens.

Compared with Aeropostale (NYSE: ARO), which also put out an earnings report Thursday, PacSun's results were threadbare, but even with all the doom and gloom, it was able to post gross margins that crept incrementally higher. That suggests that it's heading in the right direction. It has discussed opening up rack space for its own branded tees that carry higher margins, along with its Bullhead jeans.

Of course, it's navigating in difficult markets. With exposure to California, Florida, Nevada, and Arizona -- which have been hit hard by the housing crisis -- it's going to have weaker results.

PacSun is not alone in its weakened state, with both Gap (NYSE: GPS) and Abercrombie & Fitch (NYSE: ANF) reporting weaker comps. But brand partner Volcom (Nasdaq: VLCM) had a surprisingly strong quarter, as did Zumiez (Nasdaq: ZUMZ). Because both target a similar clientele, I think the market is overlooking PacSun's potential for the rest of the year.

Pack it in with these related Foolish articles:

Closed for 15 months – opening 10 days only! Get notified ahead of time as our expert portfolio manager invests $1 MILLION in the best opportunities from across The Motley Fool’s premium investment services. This is the first open since August 2008, by invitation only. Enter email below.

Zumiez and Volcom are Motley Fool Hidden Gems recommendations. Pacific Sunwear of California and American Eagle Outfitters are Stock Advisor picks. The Fool owns shares of American Eagle Outfitters. Gap is recommended by both Stock Advisor and Inside Value. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey owns shares of PacSun but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

TD AMERITRADE
more info
ShareBuilder
more info
Power E*Trade

more info
Scottrade
more info
Fool Disclosure

DocumentId: 651621, ~/Articles/ArticleHandler.aspx, 11/8/2009 7:54:27 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

The Must-Read Story on Fool.com
Which Companies Can Buy It Like Buffett?

Related Tickers

11/6/2009 4:01 PM
ANF $35.01 Down -0.11 -0.31%
Abercrombie & Fitc… CAPS Rating: **
ARO $33.70 Up +0.23 +0.69%
Aeropostale, Inc. CAPS Rating: **
GPS $23.03 Up +0.17 +0.74%
The Gap, Inc. CAPS Rating: **
PSUN $5.09 Down +0.00 +0.00%
Pacific Sunwear of… CAPS Rating: **
VLCM $16.53 Down -0.21 -1.25%
Volcom, Inc. CAPS Rating: ****
ZUMZ $12.84 Up +0.35 +2.80%
Zumiez, Inc. CAPS Rating: ***

Community: Investing Wiki

Term Of The Hour

Rate base: The rate base is the amount of assets a utility is allowed to include in the calculation of the rates charged to users. Rate increases must be approved by a state utility board. The approved rate is normally based on a target return on the allowed rate base.

Want to learn more or edit this definition?
Click here to read more!