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Still Dreary at Pacific Sunwear

By Mike Cianciolo – Updated Nov 15, 2016 at 12:11AM

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The surf and skate retailer posts a loss in the quarter but indicates there may finally be a clearing ahead.

You call this a turnaround, Pacific Sunwear (NASDAQ:PSUN)? By now, we're all aware of the teen surf- and skateboard-oriented retailer's efforts to fight through the clouds that have been lingering overhead for several quarters. Management has revamped its offerings, reduced inventory buildup, and shuttered 74 of its demo locations, which turned out to be no match for the likes of Urban Outfitters (NASDAQ:URBN). Yet in its most recent quarter, PacSun wiped out, reporting a loss to start 2007.

It obviously hasn't shown up yet, but will the next wave be the one that finally gets Pacific Sunwear riding high, or will it lead to another mouthful of sand and saltwater for the turbulent retailer? Ever the optimists, investors seem to think it's the former, pushing the stock price higher after seeing its latest results. They clearly weren't responding to PacSun's most recent showing, which left much room for improvement. Rather, they feel like there may finally be a bit of light just ahead.

In the first quarter, Pacific Sunwear lost $5.1 million, or $0.07 per share. Although sales jumped 6.9% to $320.6 million, comps fell 1.2% in the quarter thanks to a 16.5% crash in April. The retailer's inventory reductions continued into the quarter, decreasing 5.4%, but its cash seems to have gone out the door with it.

For the second quarter, the retailer stood firmly by its expectations of earnings of $0.18 to $0.20 per share, which would represent an increase of 29% to 43% over the second quarter of last year. Ah, so that's what everybody's getting so excited about. Yeah, I'm still not psyched yet.

Perhaps I'm being overly cautious, but I'd rather see a quarter or two of strong performances before diving in. With tough competition from fellow board retailer Zumiez (NASDAQ:ZUMZ) as well as the plethora of other retailers vying for the attention of teens, including Abercrombie & Fitch (NYSE:ANF), American Eagle Outfitters (NYSE:AEO), and Aeropostale (NYSE:ARO), I think a company should have more to show than the potential of one quarter of good earnings and low-single-digit comps growth. By then, of course, PacSun's stock price may have already soared, but I won't risk a face plant with little basis for the decision.

For more on the turnaround efforts at PacSun, check out:

Pacific Sunwear and American Eagle are Stock Advisor recommendations. You can get the Gardner brothers' most recent picks free with a 30-day trial. Zumiez is a Hidden Gems recommendation.

Fool contributor Mike Cianciolo welcomes feedback and doesn't own any of the companies in this article. The Fool's disclosure policy is currently filming a surfing flick with Matthew McConaughey.

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Stocks Mentioned

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
Aeropostale, Inc. Stock Quote
Aeropostale, Inc.
AROPQ
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.

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