Shares of clothier Pacific Sunwear
How far those fortunes have flagged was, however, the central story of Thursday's earnings release:
- Revenues declined 0.6%, comprising roughly 6.1% in sales from new stores and a 6.7% decline in same-store sales.
- Net profits fell 77%, and per-share profits fell 75% to $0.13. About 27 percentage points' worth of the decline came from inventory writedowns, severance expenses related to ex-CEO Seth Johnson's departure, stock-option expensing, and the cost of paying rent on stores before they opened for business. But even absent these "special" items, profits would have fallen by more than half.
- Free cash flow has already gone negative to the tune of $21.5 million this year; that's as opposed to $9.5 million in positive free cash flow generated by this time last year. Much of the blame for the cash-flow wipeout owes to the firm's rapid store expansion, which contributed to capital expenditures' $29.3 million increase year over year.
Aside from that, Mrs. Lincoln .
Clearly, PacSun's stock-price rally wasn't based on what the firm has done so far. Rather, the enthusiasm seems to have centered on interim CEO Sally Frame Kasaks and her plans to revive PacSun going forward. Most notably, Kasaks promised to reduce in-store inventory to make the stores look less cluttered (indeed, Kasaks says per-square-foot-inventories are already down 5.6%). She also promised to slow the pace of the firm's expansion, cutting new store openings to about 40 next fiscal year, relocating or remodeling another 35 -- and probably helping free cash flow in the process.
While I'm all in favor of slowing the expansion until PacSun figures out how to boost the sales of the stores it already has, I have my doubts about the inventory-cutting. Consider that in the firm's October sales report, PacSun said year-to-date same-store sales have been down 4.9%; Q3's number was negative 6.7%; and in October alone, the decline expanded to 7.1%. Finally, Kasaks is predicting continued negativity in same-store sales next quarter.
All of which makes this Fool wonder whether decluttering the stores is really the right trick to get sales rising again. Remember, Kasaks said that per-square-foot inventories were already down 5.6%. If inventories have already been cut back, but same-store sales are only getting worse -- well, you can do the math.
Of course, I'm not the guy who knows this company best -- that would be Tom Gardner, who recommended Pacific Sunwear to readers of our Motley Fool Stock Advisor newsletter. What does Tom think about PacSun's prospects? Funny you should ask, because he updated us on his thoughts just a few weeks ago. You can read Tom's update for free when you sign up for a free trial to the service. (Did I mention it's all free?)
Fool contributor Rich Smith does not own shares of any company named above.