Throw This Stock Away

The house rules are simple in this weekly column.

  • I bash a stock that I think is heading lower.
  • I offset the sting by recommending three stocks as portfolio replacements.

Who gets tossed out this week? Come on down, Pacific Sunwear (Nasdaq: PSUN  ) .

Almost done with the tenth chapter  
Pacific Sunwear has gone from PacSun to Pack None, after posting yet another disappointing quarterly report last night.

Net sales for its fiscal second quarter fell 10%, to $218 million, weighed down by a sharp 10% drop in same-store sales.

Was it stacked up against a monster quarter last year? Hardly. Comps tanked a mind-numbing 24% during last year's second quarter. In other words, the average store's registers are ringing up about two-thirds of what they were selling two years ago. Operating losses widened year over year in 2010.

It's hard to judge a retailer based on a single quarter, even if we're talking about the telltale summer season for a company that earned its stripes selling boardshorts to surfer dudes and swimwear to dudettes before moving on to denim, hoodies, and other casual fashions.

Sadly, PacSun hasn't delivered an annual profit in a couple years. Yesterday marked the eighth consecutive quarterly deficit.

When CEO Seth Johnson stepped down a few years ago under waves of negative comps for "personal" reasons, investors figured a turnaround expert would come and save the day.

Well, that day is still there for the saving.  

A pair of CEOs have failed to do the trick. It seems as if Johnson -- a 12-year veteran at Abercrombie & Fitch before coming over -- wasn't the problem.

What's a rudderless company to do? PacSun's balance sheet isn't necessarily problematic (it has no debt), though the company went ahead and mortgaged its headquarters and distribution center for some extra pocket change.

Why would it need to raise money? Well, it could be that analysts see more red ink next fiscal year. But the company points to improving trends in its flagship young men’s line and a return to positive comps in this segment, but these gains are all stacked against sandbagged results.

Wait for the profits. Wait for the registers. Wait somewhere else.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave ho. Let's go over the three fill-ins.

  • lululemon athletica (Nasdaq: LULU  ) : You won't find $100 yoga pants at PacSun, but this is the specialty retailer to watch if you want to roll with a winner these days. The upscale chain of active wear for women is on fire. Net sales soared 69% in its latest quarter, as earnings more than tripled. Comps soared 35%. There's money to be made in athletic apparel if it either enhances performance -- hello, Under Armour (NYSE: UA  ) -- or if it's fashionable. How are you doing, Nike (NYSE: NKE  ) ? Shoppers at lululemon would argue that the chain delivers on both fronts.
  • Crocs (Nasdaq: CROX  ) : If you want a retail-oriented turnaround, check out Crocs. Yes, the rubber shoes seemed like a passing craze, but never underestimate ergonomics, comfort, and a company that can refresh its product lines. Revenue climbed 31% in its latest quarter. A healthy market-thumping profit reversed a year-ago loss. Crocs are a global sensation these days, as the company posted double-digit gains in Asia and the Americas -- and even a 7% uptick in iffy Europe.
  • Zumiez (Nasdaq: ZUMZ  ) : When it comes to extreme sports apparel, Zumiez was able to do what PacSun could not. Sure, Zumiez had a crummy fiscal second quarter a year ago -- like PacSun -- but there was a legitimate bounce here. Net sales during last week's quarterly report climbed 15%, fueled by a 9% surge in same-store sales. Oh, and there was an actual profit to report, too.

I'm sorry, PacSun. Maybe the sun won't come out tomorrow for you.

Under Armour is a Motley Fool Rule Breakers recommendation. Nike is a Motley Fool Stock Advisor selection. Under Armour and Zumiez are Motley Fool Hidden Gems picks. The Fool owns shares of Under Armour. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz wonders how denim and hoodies became sunwear? He does not own any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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