PacSun’s Annual Report and Quarter: Improvement, But More Needed

PacSun’s 2013 fiscal year ended February 1, 2014, and that’s the year we’re discussing here. You can review the 10K yourself here. I’d like to start with CEO Gary Schoenfeld’s mention in the conference call of the “…four key pillars of our overall strategy.” They are, he says: 

“…our commitment to showcasing distinct brand identities derived from the best of brands that are inspired by the streets, the beaches, the skate parks, music, art, and culture that lives across the state of California. Second is to be a leader in anticipating and recognizing the fashion trends that emerges from our backyard and translate them to the marketplace with the expediency that today’s digital world now requires.”
 
“Third is to bring the creativity, diversity and optimism that is quintessentially California to every consumer touch point through our Golden State of Mind platform. Fourth is to continue to build the top talent organization across the country that similarly thrives on creativity, fashion, and a relentless desire to be the best.”
 
I’m in favor of all of those but especially like number three- the Golden State of Mind- because it’s the only one of the four that might offer a point of differentiation from other retailers. The other three are what all retailers in this space are trying to achieve. Maybe PacSun will do them better than their competitors.
 
PacSun ended its fiscal year with 618 stores. It increased its sales for the year from $785 to $798 million. That’s up from $759 million and $756 million in the two years before that. The fact that there was one less week in fiscal 2013 compared to fiscal 2012 meant that they had $8 million less in revenue than they would otherwise have had.
 
Remember that over recent years their sales results were achieved while closing nearly three hundred stores. They closed 30 during the just completed fiscal year. At the end of the 2009 fiscal year they had 894 stores. They think they will close another 10-20 during this fiscal year. 
 
Comparable store sales were up 2% as they were the prior year and accounted for almost all of the sales increase. That number includes PacSun’s internet sales, which were 7% of total sales during each of the last two years. Men’s apparel fell from 48% to 46% of revenues. Women’s rose from 37% to 39% and footwear and accessories remained at 15%. As for most retailers, the denim category is tough. It fell from 17% to 13% of revenues during the year.
 
Nike, including Hurley, represented 10% of revenues during the year. More interesting to me was that their proprietary brands represented 49% of total net sales, up from 47% the previous year. There was a time some years ago when I would have said (did say) that was too big a percentage to get from their own brands. But times change, and some brands don’t have the pull they used to have with PacSun’s target customers. In addition, as PacSun notes, proprietary brands allow them to offer better value to the customers who are looking for that (there’s a lot of that going around), manage their inventory better and respond to fashion trends more promptly. And hopefully PacSun makes a few more points of margin.
 
The gross profit margin at 25% was the same as the prior year. SG&A expense as a percentage of sales fell from 29.9% to 27.7%. In dollars it fell from $235 to $221 million. Most of the decrease in SG&A was the result of lower depreciation and a decline in payroll and payroll related expenses.
 
The operating loss improved from $38.4 to $21.4 million. The net loss was $48.7 million compared to $52.1 million last year. I should point out that they booked a loss on their derivative liability of $10.6 million compared to almost nothing last year.
 
Sales for the fourth quarter were $218.6 million with a net loss of $22.5 million. In last year’s fourth quarter, sales were $222.9 million and the loss was $19.9 million. Remember that fourth quarter ended February 1.
 
The balance sheet continues to deteriorate, which is what can happen when you lose money. Total equity fell from $64.4 to $18.1 million. As a result, total liabilities to equity increased dramatically from 1.88 to 14 times. The current ratio declined from 1.37 to 1.14. Cash at year end fell from $48.7 to $27.8 million and we see on the cash flow that operations used $7.7 million in cash compared to generating $6.4 million the prior year.
 
I’m not prepared to blame all of PacSun’s problems on the economy but, like many retailers, their numbers have yet to recover from the economy cratering in 2007-8. Economic conditions still aren’t favorable, especially for the target customers of PacSun and similar retailers.
 
CEO Schoenfeld, responding to an analyst question talked about “…the reality of PacSun being I think pretty unique from just about any other retailer in the mall today.” I hope it’s true, because that kind of distinctiveness is what they need. Unfortunately, the analyst didn’t follow up and ask him to clarify that comment.
 
As I’ve said before, the balance sheet places some urgency under PacSun’s need to at least cut their losses significantly and pretty quickly. I agree with most of what they are doing but what they really need is for the youth employment situation to improve. I would not be surprised to see some kind of new financing arrangement in the fairly near future unless PacSun’s results improve dramatically.