I love The Motley Fool.
One of the great perks of writing for the Fool is that, perhaps because our articles reach millions of individual investors each day (by the way, thanks for reading), corporate CEOs are often willing to speak with us directly about the inner workings of their companies. Outside the recently diminished pages of The Wall Street Journal, it's hard to think of a medium through which company heads can more easily speak directly to their owners than via the virtual pages of the Fool.
Thanks to this open access, over the last several months I've had the pleasure of speaking with C-level execs from Apollo Group
That's a real pity -- not just for me, but for the thousands of PacSun shareholders who invested in the company primarily at the suggestion of the Fool's own Tom Gardner, who recommended the stock to Motley Fool Stock Advisor subscribers back in January 2006.
Next best thing
Stymied by investor relations, therefore, I sought out the next best thing to a first-person interview. Learning that PacSun had just finished presenting at the Ninth Annual ICR Xchange, I got hold of a copy of the transcript of CFO Gerry Chaney's talk and combed through it for information that might be of interest to Stock Advisor members. Here's what I found:
Knock, knock. Who's there? Nobody.
I suspect that a big part of the reason I've been unable to land a C-level interview with PacSun so far is the ongoing turmoil at the very top. The firm has gone through two "permanent" CEOs and is on its third (interim) CEO in as many years. Speaking of which, get ready for No. 4. According to CFO Chaney, current interim CEO Sally Kasaks, who grabbed the rudder when Seth Johnson left the company in October 2006, "hopes to be out by April."
And they all lived happily ever after
When investigating small-cap stocks such as PacSun, Fool co-founder Tom Gardner has a real bent toward finding growth stories. In PacSun, though, it sounds like this story may already be winding down. Updating Stock Advisor members on the company's progress back in November, Tom warned, "PacSun may have approached saturation for its mall-based flagship stores, but its One Thousand Steps footwear outlets still give this company a growth story."
PacSun's Chaney seemed to stomp on that sentiment last week, though. Noting that the company already has "a little over 850 Pac stores and another 120 so outlet stores," he confirmed that "in Pac actually there's not a lot of store growth left. I mean, with 850 stores we're in most places that we should be at." What's more, Chaney let on that at One Thousand Steps, "acceptance of the concept has been mixed, so we've had some really good store experiences in half of the stores and some that aren't so good." So it's not yet a growth story; Chaney confided that "the One Thousand Steps concept remains a test."
Investors can still expect some growth, however. I mean, even the world's biggest retailer, Wal-Mart
On a corollary note (and this is why it's nice to be able to interview execs, rather than just accept what the company wants to say and the analysts think to elicit), I'd expect the new distribution center will mean increased capital expenditures at PacSun, and likely a higher level of inventories. If it's going to build a big distribution center, chances are the company will also be stocking it with stuff to distribute. Both of which suggest we should expect diminished free cash flow over the next 18 months or so.
The sequel to growth
Does all of this mean it's time to bail on PacSun, though? That there's no more growth whatsoever to be had? Hardly. On the contrary, Chaney suggested a couple of ways that PacSun could keep its profits growing even if its store count were to stagnate. For instance, because private-label merchandise produces better margins for PacSun than does selling other firms' goods (Motley Fool Hidden Gems recommendation Volcom
In particular, Chaney noted that the firm's "juniors business" accounts for just 45% of PacSun's total sales -- a significantly smaller proportion than usual in the industry. What's more, "the girls' business is higher-margin because more of the girls' business is in [PacSun's] own proprietary brand. So as [PacSun increases the] percentage of girls' business in the business you should expect ... the opportunity to improve those margins."
The other growth driver that Chaney highlighted operates on a more micro level. By buying back "15% of the Company's stock" over the last three years, PacSun has helped to juice per-share profits for shareholders. The $51 million remaining in its share repurchase authorization offers the chance to boost per-share profits even further.
Want more insight into PacSun? We can't hook you up with the CEO yet -- and probably won't be able to until these guys settle down and choose a permanent one -- but we can let you listen in on Tom Gardner's private thoughts on the company. Click here to read his latest update.
For more Foolishness on PacSun, check out:
Fool contributor Rich Smith has no position in any of the companies mentioned in this article. If he did, The Motley Fool would require him to tell you so. We're sticklers about things like that. Garmin is a Stock Advisor recommendation, and Wal-Mart is an Inside Value pick.
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