Shares of Pacific Sunwear of California (NASDAQ:PSUN) were down 5% after the company released first-quarter results on Thursday. After a string of fashion misses, the shares have oscillated around $23 for the past year. They traded as high as $28 last November, but currently slump near their 52-week low.
First-quarter sales came in at $300 million, an increase of 7.1% year over year. Earnings were reported at $0.16 per diluted share, including $0.03 for stock-based compensation. That compared to $0.20 in last year's quarter, also including stock option expense. Overall same-store sales for the quarter fell 1.8%.
The company announced the repurchase of 1.7 million shares, at an average cost of $22.45. The buyback was part of a $100 million repurchase authorization, of which $11.7 million remains.
For future guidance, management expects earnings of $0.26-$0.28 per share for the second quarter, including $0.03 of stock-option expenses, and predicts full-year earnings growth of 10%-15%.
Like Urban Outfitters (NASDAQ:URBN), Abercrombie & Fitch (NYSE:ANF), and American Eagle Outfitters (NASDAQ:AEOS), PacSun operates in the extraordinarily fickle teen segment of the apparel retail industry. It has more than 800 Pacific Sunwear namesake stores, almost 100 outlet stores, and 200 d.e.m.o. footwear-related stores as of this quarter. Its newest footwear concept is One Thousand Steps, and management projects it can open as many as 600-800 of those stores to ultimately fuel faster growth.
As Fool retail followers understand, buying a clothing retailer during a fashion miss is advisable as long as the longer-term outlook remains bright. PacSun has hit a rough patch for the time being, but it still has a fair amount of growth ahead of it. For the upcoming fiscal year, management pegs it in the low double digits, as mentioned above.
PacSun's trailing P/E is 14, while the forward full-year P/E is just less than 12. This compares to about 17 times trailing P/E for Abercrombie and American Eagle, and 27 times for Urban Outfitters. Given the uncertainty regarding near-term fashion misses, it appears that investors are also concerned about saturation of the PacSun concept throughout the malls of America. They have yet to be convinced about the long-term potential of One Thousand Steps.
PacSun is no longer growing sales by 20% per year, nor earnings 25% annually, as it has over the past five years. However, it should still be able to grow in the low double digits for at least the foreseeable future, especially if the One Thousand Steps concept proves successful. In addition, there is still sufficient growth in its current stores; investors tend to underestimate the successful retail concepts' growth potential. Other positives include strong cash flow from operations, topping net income levels, which implies that reported earnings are conservative. The company has no long-term debt, and both profitability and sales per square foot have increased markedly over the past five years.
PacSun's valuation looks compelling, since a certain amount of downside appears to be priced into the stock. I believe its investor demographic is shifting from the aggressive-growth crowd that expected 25% annual earnings expansion to encompass investors more comfortable with a maximum of mid-teens growth, including growth-at-a-reasonable-price investors like me.
Barring any unforeseen operational mishaps, look for at least a short-term pop in the stock price once PacSun catches the next fashion wave, and benefits farther out as management continues to grow its flagship stores. If its new stores experience a welcome reception from teens, PacSun should be able to coast to an even greater upside.
Pacific Sunwear is a Motley Fool Stock Advisor recommendation. To see why it made Tom and David Gardner's list of favorite stocks, try it free for 30 days.
Fool contributor Ryan Fuhrmann has no financial interest in any shares mentioned. Feel free to email him with feedback or to discuss the company further.
