Pity Pacific Sunwear
As readers of my work (feel the finger-quotes, all 10 of you) probably know by now, I'm the kind of investor who normally loves that kind of market action. Falling prices make me a lot happier than rising shares, because we make our money on the buy. I'm especially fond of retailers, because they have comps-induced freakouts all the time, owing to these goofy monthly sales reports.
That said, I don't see much to love in today's 11% drop in Pacific Sunwear. It's been a few months since I checked in on this California-beach-themed teentailer, a peer and competitor of outfits like Zumiez
Unfortunately, to me, things look too much now like they did back then. After a string of small successes, PacSun's stock climbed out of the teens and back toward $25 a share. But the bottom has fallen out again, and the plunge seems well-deserved.
Today's lowered earnings guidance is evidence that the firm is walking on the sharp edge of the lever, where small drops in sales will quickly beat down profits. Free cash flow continues to drop like a rock, falling from $75 million in the fiscal year that ended in early 2006, to last year's miserable $3.9 million.
As you might expect, investment returns are sour. Returns on equity of 7.5%, and lease-adjusted returns on capital slightly below that, don't exactly imply that PacSun's serving investors well. If this were any other retailer, I might suggest that shareholders wait for a few more months' worth of data, just to make sure that the company wasn't being beaten with the same stick that's clubbing the entire sector.
It gives me no particular thrill to have to write this, since the stock was picked by Fool co-founder Tom Gardner for Motley Fool Stock Advisor, but I think he had this one wrong. For a few years now, Pacific Sunwear has proven to me that it's worst-of-breed. It did poorly when consumers were dumping bucketloads of money on the local mall. I expect it will do much worse now that purse strings are knotting up.
I might be interested in PacSun somewhere down below a dozen dollars a share. Until then, there are far better bargains in today's choppy retailer market.
At the time of publication, Seth Jayson, a top-10 CAPS player, had no positions in any other company mentioned here. See his latest CAPS blog commentary here. View his stock holdings and Fool profile here. Fool rules are here.