Pacific Sunwear Improving, but Not There Yet

Pacific Sunwear (NASDAQ: PSUN  ) faces the unfortunate reality of being a teen-oriented apparel retailer in today's extremely difficult retail environment. In recent periods, most retailers have suffered from extreme weather and consumers' ongoing reluctance to get in the mall and spend money. Pacific Sunwear has long been a troubled business, though, and today's conditions are not its biggest obstacle. Throughout the early 2000s, the company was an absolute winner with its California-themed clothing. Since its 2005 high, Pacific Sunwear has lost nearly all of its value, leaving a shell of its former self. Is there any hope for a return?

Surprisingly, yes!
In its fiscal fourth quarter, PacSun actually posted some positive news, though its earnings were still negative. The company lost more money than it had the year before ($22.5 million this time), according to generally accepted accounting principles standards. On an adjusted basis, which excluded some one-time charges, the company lost slightly less than $12 million, or $0.17 per share. Analysts expected a $0.19-per-share loss.

Revenue fell minimally and within expectations. Looking ahead to the fiscal first quarter of 2014, the company expects another $0.12-$0.17-per-share loss.

The quarter's headline results are neither compelling nor truly relevant to the story here -- that of a retailer that has for some time flirted with extinction. The one intriguing element to the company's results was a 2% gain in same-store sales. While Pacific Sunwear has seen very little in the way of good news on its top and bottom lines, same-store sales have climbed for two straight years. Considering the economic headwinds and consumer trends away from mall shopping, this is a confusingly bullish indicator.

Long road to go
There are some other bright spots in the business that suggest PacSun is reestablishing itself. In the women's segment, for example, full-year 2013 comps were up a hearty 6%.

The company continues to close stores and slim down the business. Management shuttered 30 locations last year and plans to close an additional 10 to 20 throughout 2014. While closing stores isn't a bullish indicator, it does reduce costs significantly and allows the locations that are posting those positive same-store sales to shine through in later earnings.

Still, Pacific Sunwear has a lot to accomplish before it should attract sincere investor interest. The company needs to put the pedal down on its e-commerce business and secure important partnerships with brands that the target demographic wants. The company had a great merchandising strategy early in the last decade, bringing California's beach-skater image to the rest of the nation. Today, though, instead of baggy sweatshirts and graffiti-inspired design, the "look" has shifted more toward hipster chic. Pacific Sunwear needs to align its brand along those terms in order to get back into the good graces of shoppers.

The company trades at some attractive levels, but there does not appear to be a significant discount to its intrinsic value. Furthermore, the stock does not give investors much in the way of downside protection. Until greater evidence surfaces regarding the reinvention of Pacific Sunwear, look elsewhere for your retail investing needs.

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