Should You Pack It in on Pacific Sunwear of California?

In the search for companies with sweet earnings, it can be somewhat depressing to read report after report that shows declines, warnings, and concerns. The most recent Pacific Sunwear of California (NASDAQ: PSUN  ) report feels like a breath of fresh air at first glance, but there appear to be little more than sour results underneath the hood. Pacific Sunwear of California is lagging behind rivals such American Eagle Outfitters (NYSE: AEO  ) and Ascena Retail Group (NASDAQ: ASNA  ) in one very important metric in particular.

Pacific Sunwear of California's results
Pacific Sunwear of California reported third-quarter fiscal results on Dec. 5. Total revenue slipped 4.1% to $215.5 million, in part due to the fiscal calendar shift. Same-store sales inched up 1%. Pacific Sunwear of California ended the quarter with 12% fewer stores than a year ago at 635. Adjusted net loss expanded 157% to $3.6 million or $(0.05) per share.

The results were far from exciting, but you wouldn't have expected that if you just looked at the top of the press release. Centered and bolded, Pacific Sunwear of California stated that same-store sales for November were up 6% and this was the seventh quarter in a row of same-store sales gains. It's less challenging for a company to show same-store sales growth when it closes the 12% of its stores that performed the worst.

While the November same-store sales figures are encouraging, CEO Gary H. Schoenfeld in part attributed the 6% gain to the cold weather, presumably benefiting the retailer's denim jeans, jackets, and sweaters. The company still forecast only a 1% to 5% same-store sales gain for the quarter, implying that post-November wasn't as strong.

Conference call
In the call, CFO Michael Kaplan mentioned that Pacific Sunwear of California plans to close an additional 15-20 stores during the holiday quarter and guidance calls for a net loss of between $0.12-$0.17 per share. It's rarely a good sign when a company plans to close 2%-3% of its stores during the all-important holiday quarter especially while losing money as a company overall. What was particularly startling was that during the Q&A session Schoenfeld said that e-commerce revenue "was only up modestly." This comes at a time when many other retailers are experiencing an explosion in online sales.

American Eagle Outfitters
For example, American Eagle Outfitters is getting beat up at the store, but its website still showed big gains. Last quarter American Eagle Outfitters saw a 6% dip in total revenue, a 5% dip in same-store sales, and a 54% crash in earnings per share. Yet, despite this weakness, American Eagle Outfitters reported a 17% gain in website sales. In fact, on Thanksgiving and Cyber Monday, American Eagle Outfitters saw a 45% explosion in sales above its prior peak. It's surprisingly disappointing that Pacific Sunwear of California posted only a "modest" gain in e-commerce sales. Where was Pacific Sunwear of California in this online party?

Ascena Retail Group
Meanwhile, unlike Pacific Sunwear of California and American Eagle Outfitters, Ascena Retail Group reported stronger results. Revenue was up 5%, same-store sales were up 4%, and earnings per share slipped a little but still came in strong at $0.36 as all five of the company's brands saw increases in sales. Just like American Eagle Outfitters, Ascena Retail Group saw very strong e-commerce sales which were up an astonishing 27% to $106 million. Ascena Retail Group's e-commerce sales are now 9% of total revenue compared to 7.5% last year. Unlike Pacific Sunwear of California, there's nothing "modest" about Ascena Retail Group's e-commerce sales.

Foolish final thoughts
With retailers of all kinds continuing to see surges in online demand even while posting weak brick-and-mortar results, the lack of similar strength at Pacific Sunwear of California may be a sign of trouble. Between the company's rapid store closures, large net losses, and lack of material e-commerce growth, cautious Fools should consider staying on the sidelines with this one.

For the cyclical nature of fashion retail
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  • Report this Comment On December 30, 2013, at 11:18 AM, gwconcord wrote:

    "It's rarely a good sign when a company plans to close 2%-3% of its stores during the all-important holiday quarter..."

    What? The holiday quarter seems like the best time to close stores to get the holiday sales and close before the slowest time for many retailers. Do you even know when the stores are closing? If they close in January, you know that still is the holiday quarter, right?

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