Market's Dozing With PacSun

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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:

• Foolish Forecast: PacSun's Not Packin' Heat Yet
• PacSun Regaining Its Balance
• This Just In: Upgrades and Downgrades