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PacSun Swats at Flies

By Rich Duprey - Updated Apr 5, 2017 at 8:00PM

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Teen retailer swats away latest PR salvo by Ilia Lekach.

In the hilarious Peter Sellers movie The Mouse That Roared, a tiny country wages war on the U.S. in hopes of losing the battle, but with the ultimate goal of winning foreign aid to repair its wrecked economy.

Ilia Lekach, and his tiny, three-store Adrenalina empire in Miami, has effectively declared war on teen retailer Pacific Sunwear (NASDAQ:PSUN). Lekach's company wants to buy out its 942-store rival in an unlikely merger bid. Although it recently withdrew the offer because of PacSun's depressed stock price, Lekach has said he wants to take the battle directly to the retailer's shareholders.

Like a gnat buzzing about its head, PacSun swatted away Lekach and his annoying little offer in a tartly composed letter highlighting Adrenalina's sorry financial state of affairs.In her letter to Lekach, CEO Sally Frame Kasaks noted that Adrenalina had less than $3.5 million in sales last year and only $4 million through the first nine months of 2008, while recording losses of $5.8 million and $6.2 million, respectively. In its most recent quarterly report, Adrenalina said it didn't think it would be able to generate any significant cash flow in the coming year, and its auditor has indicated it has substantial doubts about the company's continued viability.

Yet for all that, Lekach has supposedly rallied support from some of PacSun's biggest shareholders, and he's ready to mount a proxy fight to replace the retailer's board of directors.

You could almost hear Kasaks laughing as she penned her response, well aware that shareholders felt anything but enthusiasm for Lekach's efforts. It was unnecessary to even question how he would have been able to come up with the financing for his proposed $300 million buyout.

Even so, the teen retailer is in the midst of a turnaround plan that has gotten mired in the economic slump common to most retailers these days. It's expecting high single-digit declines in same-store sales, lumping it in with the likes of American Eagle (NYSE:AEO) and Gap Stores (NYSE:GPS), which saw comps fall 11% and 10% respectively in November, and Abercrombie & Fitch (NYSE:ANF), which is expecting to see 26% declines in comps for the holidays.

PacSun was able to narrow its loss in its most recent quarter, and it maintains a strong affinity with the surf-and-skate crowd. But the company has a lot of work to do to get itself back on track, so it certainly doesn't need to be distracted by quixotic endeavors like Lekach's.

Unlike the Duchy of Grand Fenwick, however, I don't foresee Adrenalina successfully boosting its own financial situation by winning the war to take over PacSun. Inevitably, the gnat will be squashed, and return to minding its own small fiefdom.

Related Foolishness:

Pacific Sunwear is a Motley Fool HG Pay Dirt selection. Gap is a Motley Fool Inside Value pick. Pacific Sunwear of California, Gap, and American Eagle Outfitters are Motley Fool Stock Advisor picks. The Fool owns shares of American Eagle Outfitters. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey owns shares of PacSun but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
GPS
$10.64 (2.50%) $0.26
American Eagle Outfitters, Inc. Stock Quote
American Eagle Outfitters, Inc.
AEO
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Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
ANF
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