Please ensure Javascript is enabled for purposes of website accessibility

Sun Sets on the Pacific

By Seth Jayson – Updated Nov 15, 2016 at 6:23PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Pacific Sunwear's mediocre sales growth highlights a mediocre stock.

Retail is a tough place to invest if you get seasick, and shareholders in Pacific Sunwear (NASDAQ:PSUN) are sliding into a watery trough the likes of which they haven't seen for years. Well, a year at least.

Sure, a general market swoon is upping the demand for Dramamine, but Pacific Sunwear's languishing at a 52-week low, not exactly the happiest of circumstances for this Motley Fool Stock Advisor recommendation.

May sales numbers, released last week, weren't exactly terrible, but they weren't anything to write your broker about, either. Overall, sales increased 5%, but same-store sales dropped 2.6%, led by a 5% decline at the hip-hop wannabe, d.e.m.o., and a less-scary 2.2% decline at PacSun stores. That helped Pacific Sunwear finish the entire quarter with a 6.8% revenue increase on a 2% comps decrease. Come on, PacSun, this is no time to pull a Gap (NYSE:GPS) on us.

Lukewarm sales don't doom a retailer, but Pacific Sunwear's lackluster performance has come as competitors like Abercrombie & Fitch (NSYE: ANF) have done better, even when doing their worst. American Eagle Outfitters (NASDAQ:AEOS) is posting solid double-digit gains, while young chains with more street cred, such as Zumiez (NASDAQ:ZUMZ), are putting up high double-digit comps gains. (And yeah, Zumiez's 18.2% comps gain was nice, but it's still not up to the 20% at Guess? (NYSE:GES).)

But getting back to the Sun -- with a trailing P/E around 11, are we looking at value time? My answer is a big fat "no." I'm not so sure Pacific Sunwear has what it takes to live up to the current price, which is why I sold my shares a while back for a tidy gain. And I'm not jumping back in now.

While earnings have increased steadily at Pacific Sunwear for quite a while, free cash flow (FCF) has been sinking for two years (my structural free cash flow numbers show a one-year dive), and fiscal 2007 has started off behind the eightball. Even if I'm kind to the company and pretend it's got better cash earnings than it has, Pacific Sunwear needs to jack up the bottom line by more than 23% a year to look like a bargain to me.

Do you believe in 23% growth for the next five years? If so, knock yourself out. For my part, that's simply not an assumption I'm ever willing to make with a retailer in the hypercompetitive teen market. If I dial in a more doable 17%, I gauge the stock to be fairly valued at $19.50 a share.

Shaky consumer confidence and a panicked market have a way of sending mediocre retail shares into the bargain bin. Provided things haven't completely fallen apart, I'll start sniffing around PacSun when it sees $17 a share.

Pacific Sunwear is a Stock Advisor recommendation. If you want to see why a proven market-beater, Fool co-founder Tom Gardner, thinks it's got the goods to float your board, a free trial is available.

Seth Jayson has never earned the nickname "Sunshine." At the time of publication, he had shares of American Eagle and Guess?, but no positions in any other stock mentioned. View his stock holdings and Fool profile here. Gap is both a Motley Fool Inside Value and a Stock Advisor recommendation. Fool rules are here.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$8.47 (-4.40%) $0.39
Guess?, Inc. Stock Quote
Guess?, Inc.
GES
$15.07 (-3.58%) $0.56
Zumiez Inc. Stock Quote
Zumiez Inc.
ZUMZ
$21.88 (1.02%) $0.22

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.