PacSun’s Quarterly Results: More of the Same

There wasn’t that much to say in either the 10-Q for May 2nd or the conference call. Bottom line is we’re all kind of hanging out waiting to see if PacSun can get further traction with its strategy before the continuing losses take too big a toll on the balance sheet and some more dramatic action is required.

Sales fell 2.7% from $171million in last year’s quarter to $167 million in this year’s. The west coast port slowdown had some impact there.

“For the first quarter of fiscal 2015, comparable store net sales decreased 2%, average sales transactions increased 13% and total transactions decreased 13%, as compared to the same period a year ago. E-commerce net sales decreased 3% for the first quarter of fiscal 2015 compared to fiscal 2014. Excluding the impact of e-commerce net sales, comparable retail store net sales for the first quarter of fiscal 2015 decreased 2% compared to fiscal 2014.”

The gross margin improved slightly from 26.1% to 26.8%. The merchandise margin rose form 54.3% to 55.6%. SG&A expenses were pretty much unchanged at $52.1 million, though as a percentage of sales they rose from 30.4% to 31.3%.

The operating loss, at $7.5 million was just slightly higher than the $7.4 million of the previous year. The net loss declined from $10 million to $2.6 million, but that’s due to the noncash gain on their derivative liability rising from $1.2 million $9.1 million. That moves around ever quarter.

PacSun ended the quarter with 605 stores, down from 618 a year ago. They expect to open 10 new ones during the balance of the year and close between 10 and 20. In discussing stores, CEO Gary Schoenfeld noted in the conference call that opening those 10 new stores is, “…the first for us in many years. I would add to that last week’s meeting with key landlords at ICSC [ph] in Las Vegas. The renewed enthusiasm for PacSun was quite different from years past and much of this year’s new store openings will be funded with TI dollars from landlords.”

I wonder how much of that enthusiasm is based on there being a lot of retail space available.

On the balance sheet, shareholders’ equity was a negative $12.7 million compared to $8.1 million a year ago. Cash fell by $4.7 million to $15.2 million and inventory was pretty much stable at $95.4 million. Current liabilities fell by about $5 million to $121.5 million. Long term liabilities rose around $8 million to $147.7 million in spite of the derivative liability falling by $10 million.

The 10Q disclosed that in the second quarter (the quarter we’re in now) PacSun “…borrowed $15 million on the Wells Credit Facility primarily for the purposes of financing inventory purchases in advance of the peak back-to-school selling season. The Company expects to repay such borrowings during the third quarter of fiscal 2015.” That borrowing does not show up on the most recent balance sheet.

PacSun also has a term loan with the principal plus accrued interest due on December 7, 2016. The principal balance due on that date is $75.6 million. I have a hard time imaging circumstances under which PacSun can make that payment and expect the debt to be restructured or refinanced.

CEO Schoenfeld tell us in the conference call that the goal is to establish “…PacSun as the number one specialty retailer on the most relevant Men’s and Women’s brands for 17 to 24 year old guys and girls.”

Among the strategies are “…not to let us [PacSun] fall back into that private label abyss that the company entered into many years ago.”

It was noted above that total transactions fell 13%, but the size of the average transaction was up 13%. Now, keep in mind that those don’t necessarily balance each other out, but in response to a question about it, Gary said, “…I think the bigger thing is more coveted products and brands that are going out with higher AURs [average unit retail]…”

You know I’m a big fan of retailers carrying “coveted” brands and products.

I think, and have said before, that the PacSun team has done most things right since Gary Schoenfeld became CEO. However, the positioning goal is a tough one given PacSun’s roots as a surf retailer, the economy, and generally difficult retail conditions.   They are taking PacSun into a difficult competitive space and, though I think it’s probably where they had to go, they don’t have endless time to translate it into profitability.