PacSun’s Quarterly Results: The Financial Statements Show Progress

The strategic issue hasn’t changed. As CEO Gary Schoenfeld put it in the conference call, “Regrettably, over the past several years, PacSun lost some of its identity as a brand and its relevance among target consumers…” If they can fix that, they can succeed. Gary Schoenfeld took the job because he thinks they can. 

You can see their 10Q here. The headline is that they cut their operating loss by 34%, from $27.8 million in the quarter ended April 28th to $18.3 million in the same quarter last year.
 
Their net loss fell by even more, from $31.5 million to $15.6 million. But last year in the quarter there was a $2.8 million loss on discontinued operations (none this year- see below). And this year they had a $6.3 million gain on derivative liability associated with the Golden Gate Capital loan and $3.3 million in other expenses below the operating line that didn’t show up in the quarter last year. That’s why I started with the operating numbers.   
 
Sales grew only slightly from $171.9 million to $173.8 million. Remember they are working with 729 stores at the end of the quarter compared to 827 a year ago.
 
They had a 1% increase in comparable store sales in both men’s and women’s. It’s the first time they’ve done that in a quarter since fiscal 2005, they reported.
 
Mostly, they improved their results by increasing their gross margin from 19.3% to 23.6%. 1.6% of the increase was from higher initial markups and a decrease in promotions. 2.2% was from leveraging occupancy costs over higher comparable store sales.
 
When you close 98 stores, you get rid of a lot of costs. But of course you also lose the sales associated with those stores. CEO Schoenfeld talked a bit about these stores during PacSun’s presentation at the Piper Jaffray Consumer Conference on June 6. He noted that many of these closed stores were low volume stores and that there was simply no way to fix them. You can click through from PacSun’s web site to listen to that presentation.
 
You can see the impact of these stores from a 10Q footnote on discontinued operations (number 12 if anybody cares). As defined, they didn’t have discontinued operations for the quarter ended this April (they only closed 5 stores and the cash flow implications weren’t “significant”).
 
But in the quarter ended April 30, 2011 they closed 25 stores. Those stores had revenue of $13.9 million and generated a net loss of $2.8 million on a gross profit margin of only 16.6%. Boy, you can really hear those dogs barking. PacSun will close another 100 stores this year- mostly after the holiday season, which makes sense, and you can imagine the positive impact that will have if their numbers are similar.
 
PacSun reduced its selling, general and administrative expenses from $61 million to $59.3 million. As a percent of sales it fell from 35.5% to 34.1%.
 
The balance sheet weakened, as you would expect with continuing losses and the loan from Golden Gate. But inventories were down a bit over 10%, which you’d expect with the store closings. They pointed out in the conference call that inventories fell 3% on a comparable store basis.
 
Implicit in some of the discussion in the conference call and the presentation was the way PacSun was thinking about brands and its mix of purchased and proprietary brands. What I heard was that they were being a little more thoughtful- maybe more purposeful is a good way to put it- about how the two work with each other. Proprietary brands are no longer just what you use to make some extra gross margin to the extent your store merchandising can stand it. They are being used in coordination with purchased brands to offer customers the best assortment of pricing, design, features, and merchandising they can. PacSun isn’t the only retailer thinking that way of course, but it’s an important change nevertheless.
 
Sitting in my ivory tower, I can make various pronouncements that PacSun needs to make its stores “cool” and a destination again. At the Piper Jaffray conference, Gary Schoenfeld reminded the audience (and me) that accomplishing that involves “…doing lots of blocking and tackling…” every day. “Cool” is the results is thousands of individual actions over an extended period of time. It’s a lot of work and takes a solid management team. In the case of PacSun, the management team underwent an almost complete change after Schoenfeld came in.
 
Making that change and then getting new ideas, processes, and attitudes to filter down to the rest of the organization takes a while. You can hear it’s getting some traction now.
 
It will also be interesting to see how PacSun performs a year or so from now when those last 100 stores are closed. You don’t celebrate having to do that, but the cost, management focus, perception of the company, and just having that hanging over you isn’t good. No positive energy there.
 
Hopefully, getting that done along with the impact of the new management team will do a lot for PacSun’s performance.