If Pacific Sunwear's (NASDAQ:PSUN) CEO wants investors to curb their dim outlook on the company, she needs to focus on what works and jettison everything else. Sally Kasaks needs to get this company riding the right wave, and I think the only way to catch it is to get rid of its demo stores chain and promote the PacSun brand.
Similar to last month, when same-store-sales figures came out, the teen-targeted retailer reported strong gains in its eponymous brand stores. A 5.4% rise in comps indicated that the restructuring she undertook there is beginning to take hold. Kasaks cleared out the racks, brightened up the stores, and made a point of catering more to its female clientele. Apparently, the changes are working and customers are shopping there.
With other teen-oriented retailers such as American Eagle Outfitters (NYSE:AEO), Gap (NYSE:GPS), and Abercrombie & Fitch (NYSE:ANF) all reporting comps that were down anywhere from a little to a lot, PacSun's overall 2.7% showing is a standout.
Yet its demo stores, which specialize in urban apparel, were once again a dismal failure, with same-store sales there dropping more than 15%, on top of a 17% decline last month. While Kasaks is committed to closing underperforming demo stores, it's time to simply get rid of the whole line.
The demo line was introduced to break away from the surf and skate crowd, which had been PacSun's primary customer, and inject an urban, hip-hop flavor. It's turned out to be a flop instead and has hindered PacSun's overall results. In February, Kasaks put on her game face and announced the company would close 74 demo stores that generated a pre-tax operating loss of $9 million in 2006. For a company committed to turning itself around, it can't afford to allow such losses to continue and needs to stanch the flow of red ink.
The stores have the right brands for urban wear -- Akademiks, Baby Phat, G Unit, Rocawear, Sean John -- but it seems to be failing to attract its target audience.
The surf and skate niche remains hot, particularly as the third quarter's weather remained warm. Zumiez (NASDAQ:ZUMZ), for example, also reported a 13.9% increase in same-store sales. PacSun should commit to what it knows and does best.
I think PacSun is looking like a bargain here, particularly if it would shed demo. The stock trades at less than 0.9 times trailing-12-month sales, half the average of the figure at American Eagle, Aeropostale (NYSE:ARO), and Abercrombie. Zumiez trades more than four times higher.
PacSun's flagship stores show sales strength many of its rivals can't, and current estimates have PacSun earning $0.51 a share this year and $0.82 the year after. That would put it about where it was last year before the company wiped out. Like a well-designed surfboard, a streamlined PacSun might ride the wave even better than that, and it certainly could improve on results in the longer term.
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