PacSun Oct. 31 Quarter Results: New Strategic Focus From New CEO

Okay, so I finally hold in my hand both the transcript of the conference call and the actual quarterly report filed with the Securities and Exchange Commission. I’ve read them and cogitated on their meaning and finally have a couple of things to say that maybe somebody besides me will find interesting.

The most interesting stuff is strategic in nature. A couple of years ago I wrote that PacSun’s biggest problem was their market positioning. Nobody knew what they stood for. I’m still not sure I know, but at least new CEO Gary Schoenfeld knows that’s a problem. Former CEO Sally Frame Kasak had her hands full just stabilizing the situation and cleaning up the mess, and perhaps that’s why she didn’t address it. Perhaps it’s also part of the reason she’s no longer CEO.

An analyst asked the following question:   “Looking at the strategies that have played out over the last two years, is it your position and the board’s position that you have sort of aggravated the effect of an already bad environment? I mean, you are reversing many of the things that were done under previous management, so can we take it that what has happened to your business is not just the environment but things that, strategies that you have pursued, that the company has pursued that have just been flawed?”
Gary Schoenfeld’s answer: “I’m not sure that I want to say it quite as blunt as you just did but your conclusions — you know, I can’t say are way off the mark…”
Which strategies are they talking about? CEO Schoenfeld says they have “four essential priorities.”
First is “people and culture.” They’ve got five senior positions they are looking to fill, and they want to affect “…a transformation in leadership, accountability, teamwork, and an absolute commitment to wow our customers every day…” I won’t be surprised if they take a page or two out of Zumiez’s handbook for this. I expect it to reach down to the sales associates on the floor. Good.
Second is product. They are bringing back footwear, though in a more limited way then before. They are going to shift to some lower price points. “…retailers like Target have become a leader amongst girls in this category and we are actively having conversations with our key heritage brands to recognize that there probably are some changes that need to further be made for all of us to regain this critical segment. “ They also need to be more fashion focused, he indicated. They expect to narrow some assortments and “…do a better job of bringing newness to a market where wear now has clearly become the mantra for teen shoppers.”
The third strategy is the customer connection, which is related to the people and culture issue. “…it is more important than ever that our store associates are able to communicate effectively about the brands and fashion that we carry and able to clearly articulate the latest promotions to customers looking for value. We believe that through improved education and training, and frankly more selective hiring and promotion, our store teams will become much more effective engaging with customers and the critical role that they play in driving sales.” Yup, a page out of Zumiez’s playbook for sure.
Fourth, they will “…move towards a much more thoughtful localized store assortment and allocation process in order to make this happen. We simply cannot be successful without a much deeper understanding of our different customers and how their style and brand preferences vary across 900 stores in 50 states. Simply put, we are missing sales, hurting our margins, and damaging the customer experience by having had too much of a one-size-fits-all approach to merchandising.”
I agree that one size fits all is a mistake. But when they talk about a “localized assortment strategy,” what exactly does that mean? Do you differentiate by store, by city, by region? Who does the buying? Would buying and merchandising for different categories or different brands be done differently by geography? Do the responsibilities of store or district managers change? Gary Schoenfeld says he expect to do it “without any major investment in systems.” I wonder. This is one of those issues where the devil’s in the details and the details can be as complex as you want to make them..
What’s the goal if they successfully implement those four strategies? CEO Schoenfeld puts it this way. “…at the moment, PacSun doesn’t offer a clear point of difference and that is what we need to go about addressing and when I talk about becoming their [teens] favorite place to shop, I choose those words particularly because I think that’s what we need to do. We need to be a place where they are excited to go, they love the brands that we carry, the marketing that the brands do and the excitement that creates in our stores complemented by things that we can design and develop ourselves that gives us the flexibility to move quicker and to hit key price points that may be dictated by our competitors.”
The last thing I found interesting was the following statement by Gary: “I don’t know that the world ever needed 900 domestic PacSun stores and if you had a perfect sheet of paper, that number might be closer to 600, 700 stores. I think we will end this year under 900 and as we look at 30 to 40 leases coming up over each of the next three years, it probably puts us to where we are — in three years time we are probably somewhere in 750 to 800, and that probably puts us in a pretty good position.”
I think he’s right, and that a smaller number of stores is consistent with the strategy he’s outlined. I wonder, though, if you’re an analyst interested in the price of the stock what you thought of that. With fewer stores, lower inventory per square foot, and reduced consumer spending, where does the growth come from? Right now, that’s not where the focus is, and nobody asked that question. Let’s hope things improve enough so that they are focused on growth.
On to the numbers starting with the balance sheet. Total assets are down from a year ago 25% from $713 to $537 million. $111 of this drop was in property, plant and equipment. Current assets fell 36% or $112 million to $200 million. Cash rose by $10 million, while inventories were way down (which you would expect). Other current assets, which includes stuff like prepaid expenses, income taxes receivable, and non-trade accounts receivable, declined from $74 to $16 million.
Current liabilities are down by almost half from $204 to $103 million. That includes paying off $43 million of their line of credit, which is now at zero.    Long term liabilities, which include things like deferred lease incentives and deferred rents and the mysterious “other” long term liabilities fell a bit from $111 to $92 million.
Total equity is down from $398 to $341 million. The current ratio improved from 1.53 to 1.93, and total equity improved from 0.79 to .059. So the balance sheet is smaller, as expected, but stronger by both measures. Remember all these balance sheet numbers compare the October 31, 2009 balance sheet with the one at November 1, 2008- a year ago.
Sales for the quarter were down 17% to $268 million compared to the same quarter the prior year. This was mostly due to an 18% decline in comparable store net sales. For nine months, sales fell from $903 to $734 million, or 19%.  Gross margin percentage for the quarter fell from 28.7% to 27.4% and for nine months, from 29.2% to 26.2%. The merchandise margin for the quarter actually improved by 1.7%, but the need to spread occupancy costs over a smaller sales base cost them 3%. 
Selling, general and administrative expenses were down 6.2% for the quarter to $89.4 million, but as a percentage of net sales, they rose from 29.5% to 33.4%. For nine months they fell 12.8% to $245 million, but rose as a percentage of sales from 31.1% to 33.4%. The loss for the quarter grew from $2.5 to $10.9 million. For nine months, it fell from $36.8 to $33.8 million. Total stores were 904 compared to 940 at the end of the quarter last year.
The four strategies seem right to me but the issue of what PacSun stands for in the market and why it should be a destination for teens isn’t clear right now. Maybe with the implementation of these strategies, it will become clear.