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PacSun's, Like, Totally Awesome

By Jeremy MacNealy – Updated Nov 16, 2016 at 1:13PM

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Pacific Sunwear pulls off another solid quarter.

If you're surfing the youth casual apparel market for possible investment opportunities, you'll find plenty to scope out. With so many marquee names like Abercrombie & Fitch (NYSE:ANF), Gap (NYSE:GPS), and Guess? (NYSE:GES), it can be difficult to determine the best wave to ride toward totally gnarly profits. Among the teen-clothes crowd, Pacific Sunwear (NASDAQ:PSUN) looks like it's got some truly stylin' moves.

The company posted some wicked results in the third quarter. Same-store sales were solid, growing by 4.6% year over year. PacSun's comps helped add 13.6% to its top line. However, the primary growth driver was an almost 10% increase in store openings.

It's nice to see that PacSun isn't piling on debt to pay for growth, instead using existing cash flow to help pay for expansion. It maintains a clean balance sheet, with $121 million in cash, marketable securities, and manageable long-term liabilities.

Its cash position will enable the company to continue adding to its more than 1,000 retail units. PacSun gears its products to more adrenaline-driven teens, including surfers, rockers, and boarders. Given its niche style of clothing, one may question whether PacSun will ever reach the level of market penetration that Gap has achieved with its 3,000-plus units. It's a legitimate concern, but the solid same-store sales growth PacSun has achieved at its present size bodes well.

Holding down costs has let the company increase its free cash flow by 7% over the past year. The cost of products sold as a percentage of revenue declined to 61.7%, compared to 62.5% from the year-ago period, improving the company's gross margin by 80 basis points.

Increasing sales and profit margins led to a righteous increase of 22.7% in earnings per diluted share. The company anticipates the good times will keep rolling into the fourth quarter, with estimates of 19%-21% EPS growth. Assuming it meets its full-year target, the company's recent $26.85 share price represents a reasonable 16 times current-year earnings.

I know it can seem a bit hairy to consider a stock that has risen 28% since its recent September lows. It might make sense to hold out for a pullback before you jump onto this investment wave. Then again, waiting too long and missing a major opportunity could be a real bummer.

Further totally tubular Foolishness:

Gap is a Motley Fool Stock Advisor selection.

Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.

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Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$8.47 (-4.40%) $0.39
Urban Outfitters, Inc. Stock Quote
Urban Outfitters, Inc.
URBN
$21.00 (-1.46%) $0.31
Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
ANF
$15.88 (1.73%) $0.27
The Buckle, Inc. Stock Quote
The Buckle, Inc.
BKE
$32.24 (-0.80%) $0.26
Guess?, Inc. Stock Quote
Guess?, Inc.
GES
$15.07 (-3.58%) $0.56

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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