Has the Tide Turned for Surf Style Apparel?

Warren Buffett once said, "Only when the tide goes out do you discover who's swimming naked." California-style apparel retailers Quiksilver (NYSE: ZQK  ) , Pacific Sunwear  (NASDAQ: PSUN  ) , and Abercrombie & Fitch's  (NYSE: ANF  )  Hollister brand are certainly swimming naked, reporting only modest improvements in sales numbers for the former two and a plunge for Hollister.

Billabong, the Australian surf-lifestyle brand pioneer and retailer, can only watch helplessly as the stock price sinks from the high teens to pennies after years of losses. The company finally decided to write off its namesake brand as a loss. It appears Billabong's troubles are not company specific, though, as the tide has turned for the entire California sportswear trend.

The tide has turned
Hollister, Abercrombie's surfer-lifestyle brand, had the worst performance of its branded stores, with same-store sales down 13% in the second quarter--more than twice the decrease in comps at  Abercrombie & Fitch brand stores. Yet the company plans to open 20 more Hollister stores internationally this year.

Based on Hollister's weakness, this would seem unwise. But the company justified international Hollister expansion on the conference call, noting its Hollister store in a Swedish mall is its best performer. International revenue, the lone bright spot in the second quarter, was up 15%, so this may yet be the redemption of Hollister.

Improving Hollister's performance is crucial, as the company has 594 Hollister stores, compared to 285 Abercrombie & Fitch stores, 150 abercrombie kids stores, and 28 Gilly Hicks stores. Thanks in part to Hollister's under-performance and a pinched teen shopper, the company lowered guidance for the third quarter.

Small cap sun and surf
The smallest cap of these at $209 million, Pacific Sunwear's earnings reports have had few bright spots. It reported non-GAAP earnings per share of $0.02in the second quarter.. But it was the guidance for the third quarter for a negative non-GAAP loss per diluted share in a range of $0.09 to $0.04 that was much worse than expected. Shares dropped 12% after second quarter earnings on Aug. 29 and continue to plunge, and are now down almost 30%. Meanwhile, the short interest of 22% is increasing..

Overall, things are slightly improving at this company, with gross-margin expansion of 220 basis points. Excluding the impact of a 53rd week of sales, there was a gain of $9 million in total net sales from continuing operations, up from $187 million for the same quarter year-over-year. Inventories were down 3% year-over-year, and CEO Gary Schoenfeld boasted on CNBC of six consecutive quarters of same-store sales increases.

The company is transitioning to an older customer, one who is in his or her late teens and early 20's. Pacific Sunwear  will increase offerings of popular Nike and Vans footwear brands and Neff accessories in time for the holidays. Schoenfeld called them "strong brands in the marketplace" that are "bringing excitement." . Both the transition from younger teens and pushing popular items are positive catalysts .

Treading water but keeping its head up
Rival Quiksilver reported a 6% decline in net revenue for the Americas, but like Abercrombie, international revenue (Europe, Middle East, and Africa) in the second quarter improved 6% from a first-quarter 16% EMEA revenue decline.

The company, however, surprised in the second quarter, beating analyst estimates with drastically reduced selling, general and administrative expenses, down $18 million, or 4%, and boasted a 33% increase in e-commerce.

Of note, the namesake Quicksilver brand, its most California-lifestyle oriented brand, posted a 10% revenue decline even as brands Roxy and DC, action sports and footwear brands, respectively, posted 1% revenue increases.

Although a small cap at $1.2 billion, the company sells in 90 countries and has a bigger global footprint than much larger Abercrombie & Fitch (market cap $2.7 billion), with a presence in some 20 countries.

Investors have been willing to give Quiksilver a lifeline and share price bump, believing CEO Andrew Mooney when he said on the call,

...Our new product development teams are on track to significantly improve the product offerings of all three brands. As a reminder, the earliest their efforts will bear fruit is fall 2014. And we're really looking at spring 2015 for the teams to hit full stride.

A strong swimmer
Things are going swimmingly at Zumiez (NASDAQ: ZUMZ  ) , which reported a second quarter net sales increase of 16.9% and same-store sales increase of 3% in August. Like Quicksilver, the company reduced SG&A expenses by 2% in the quarter. Zumiez has a less California-style based mix of active wear, which may account for its out-performance.

Despite calling for possible margin contraction going forward and not so robust same-store sales growth, the Street likes the company's planned expansion of 20 stores. This follows the 52 store openings in the last year. Website refreshes of its Zumiez.com and newly-acquired brand BlueTomato resulted in a 19%-plus rise in e-commerce sales.

The Foolish takeaway
Quicksilver and Pacific Sunwear are several quarters away from reporting great numbers, although the California sun is shining brighter on them. As for Abercrombie & Fitch, the company has other issues (reluctant teen consumers, headline risk) besides Hollister downtrends, as if that weren't enough.

Overall, Zumiez looks like it is the best positioned for upside, but the teen active-sportswear space is not going swimmingly. There are better retailers out there in the competitive teen retail space.

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