Pacific Sunwear Announces Second Quarter Operating Results; Issues Third Quarter Guidance

Wed Aug 22, 2012 4:00pm EDT

* Reuters is not responsible for the content in this press release.

ANAHEIM, Calif., Aug. 22, 2012 (GLOBE NEWSWIRE) -- Pacific Sunwear of California, Inc. (Nasdaq:PSUN) (the "Company"), announced today that net sales for the second quarter of fiscal 2012 ended July 28, 2012, were $210.3 million versus net sales of $200.9 million for the second quarter of fiscal 2011 ended July 30, 2011.

On a GAAP basis, the Company reported a loss from continuing operations of $17.5 million, or $(0.26) per share, for the second quarter of fiscal 2012, compared to a loss from continuing operations of $17.5 million, or $(0.26) per share, for the second quarter of fiscal 2011. The loss from continuing operations for the Company's second quarter of fiscal 2012 included a non-cash loss of $8.2 million, or $0.12 per share, related to a derivative liability that resulted from the issuance of the Convertible Series B Preferred Stock (the "Series B Preferred") in connection with the term loan financing the Company completed in December 2011.

On a non-GAAP basis, excluding the non-cash loss on derivative liability and using a normalized annual income tax rate of approximately 37%, the Company's loss from continuing operations for the second quarter of fiscal 2012 would have been $5.8 million, or $(0.08) per share, as compared to a loss from continuing operations of $11.1 million, or $(0.17) per share, for the same period a year ago.

"Our 5% comparable store sales, 260 basis point increase in merchandise margins, and positive operating cash flow for the second quarter further demonstrate our belief that customers are beginning to rediscover PacSun, including our improved merchandising and brand mix, and our distinct Golden State of Mind brand identity," said Gary H. Schoenfeld, President and Chief Executive Officer. "Newer brands helped drive a 7% comp in our Men's business, which represents our biggest increase in Men's since 2004. Women's continued to improve as well with a 2% comp and higher margins, and we also achieved a 15% increase in online sales."

Financial Outlook for Third Fiscal Quarter of 2012

The Company's guidance range for the third quarter of fiscal 2012 contemplates a non-GAAP net loss per share from continuing operations of between negative 8 cents and flat.

The forecasted third quarter non-GAAP loss from continuing operations per share guidance range is based on the following assumptions:

  • Same-store sales of negative 2% to plus 2%;
  • Gross margin rate, including buying, distribution and occupancy, of 25% to 28%;
  • SG&A expenses in the range of $62 million to $64 million; and
  • A normalized annual income tax rate of approximately 37%.

The Company's third fiscal quarter of 2012 guidance range excludes the quarterly impact of the change in the fair value of the derivative liability due to the inherently variable nature of this financial instrument.

Discontinued Operations

In accordance with applicable accounting literature and consistent with the Company's financial statement presentation in its fiscal 2011 annual report, the Company has reclassified the results of operations of its closed stores as discontinued operations for all periods presented, as applicable.

Derivative Liability

In fiscal 2011, as a result of the issuance of the Series B Preferred in connection with the Company's $60 million senior secured term loan financing with an affiliate of Golden Gate Capital, the Company recorded a derivative liability equal to approximately $15.0 million, which represents the fair value of the Series B Preferred upon issuance. In accordance with applicable U.S. GAAP, the Company has marked this derivative liability to fair value through earnings and will continue to do so on a quarterly basis until the shares of Series B Preferred are either converted into shares of the Company's common stock or until the conversion rights expire (December 2021). The Company's third fiscal quarter of 2012 earnings guidance excludes the quarterly impact of the change in the fair value of the derivative liability due to the inherently variable nature of this financial instrument.

About Pacific Sunwear of California, Inc.

Pacific Sunwear of California, Inc. and its subsidiaries (collectively, "PacSun" or the "Company") is a leading specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. The Company sells a combination of branded and proprietary casual apparel, accessories and footwear designed to appeal to teens and young adults. As of August 22, 2012, the Company operates 727 stores in all 50 states and Puerto Rico. PacSun's website address is www.pacsun.com.

The Company will be hosting a conference call today at 4:30 p.m. Eastern time to review the results of its second fiscal quarter. A telephonic replay of the conference call will be available, beginning approximately two hours following the call, for one week and can be accessed in the United States and Canada at (855) 859-2056 or internationally at (404) 537-3406; passcode: 78167566. For those unable to listen to the live Web broadcast or utilize the call-in replay, an archived version will be available on the Company's investor relations website through midnight, November 28, 2012.

About Non-GAAP Financial Measures

This press release and the accompanying tables include non-GAAP financial measures. For a description of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles, please see the accompanying table titled "Reconciliation of Selected GAAP Measures to Non-GAAP Measures" and the section following such table titled "About Non-GAAP Financial Measures."

Pacific Sunwear Safe Harbor

This press release contains "forward-looking statements" including, without limitation, the statements made by Mr. Schoenfeld in the fourth paragraph and the statements made under the heading "Financial Outlook for Third Fiscal Quarter of 2012." In each case, these statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company intends that these forward-looking statements be subject to the safe harbors created thereby. These statements are not historical facts and involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Uncertainties that could adversely affect the Company's business and results include, among others, the following factors: increased sourcing and product costs; adverse changes in economic conditions generally; adverse changes in consumer spending; changes in consumer demands and preferences; adverse changes in same-store sales; higher than anticipated markdowns and/or higher than estimated selling, general and administrative costs; currency fluctuations; competition from other retailers and uncertainties generally associated with apparel retailing; merchandising/fashion risk; lower than expected sales from private label merchandise; reliance on key personnel; economic impact of natural disasters, terrorist attacks or war/threat of war; shortages of supplies and/or contractors as a result of natural disasters or terrorist acts, which could cause unexpected delays in store relocations, renovations or expansions; reliance on foreign sources of production; and other risks outlined in the Company's filings with the Securities and Exchange Commission ("SEC"), including but not limited to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2012, and subsequent periodic reports filed with the SEC. Historical results achieved are not necessarily indicative of future prospects of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company assumes no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this press release. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
         
  Second Quarter Ended First Half Ended
  July 28, 2012 July 30, 2011 July 28, 2012 July 30, 2011
       
Net sales $210,305 $200,915 $384,129 $372,796
Gross margin 57,799 47,337 98,785 80,529
SG&A expenses 63,508 63,842 122,774 124,798
Operating loss (5,709) (16,505) (23,989) (44,269)
Other expense, net 11,673 571 8,649 1,113
Loss before income taxes (17,382) (17,076) (32,638) (45,382)
Income taxes 156 376 523 726
Loss from continuing operations (17,538) (17,452) (33,161) (46,108)
Loss from discontinued operations, net of tax  (1,807) (4,621)
Net loss ($17,538) ($19,259) ($33,161) ($50,729)
         
Loss from continuing operations per share:        
Basic and Diluted ($0.26) ($0.26) ($0.49) ($0.70)
Loss from discontinued operations per share:        
Basic and Diluted $ — ($0.03) $ — ($0.07)
Net loss per share:        
Basic and Diluted ($0.26) ($0.29) ($0.49) ($0.77)
         
Weighted-average shares outstanding:        
Basic and Diluted 67,738 66,344 67,662 66,274
 
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
       
  July 28, 2012 January 28, 2012 July 30, 2011
       
ASSETS
Current assets:      
Cash and cash equivalents $34,830 $50,306 $13,252
Restricted cash 405 8,593
Inventories 144,797 88,740 163,332
Prepaid expenses 17,165 15,506 16,893
Other current assets 6,366 6,272 5,667
Total current assets 203,563 169,417 199,154
Property and equipment, net 137,440 149,716 170,879
Other long-term assets 35,130 35,998 32,119
Total assets $376,133 $355,131 $402,152
       
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:      
Accounts payable $85,852 $38,914 $97,411
Other current liabilities 74,891 68,369 40,714
Total current liabilities 160,743 107,283 138,125
Deferred lease incentives 16,728 17,681 24,681
Deferred rent 16,517 16,602 19,050
Long-term debt 74,414 73,910 28,828
Other long-term liabilities 26,201 26,558 25,859
Total liabilities 294,603 242,034 236,543
Total shareholders' equity 81,530 113,097 165,609
Total liabilities and shareholders' equity $376,133 $355,131 $402,152
 
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
     
  First Half Ended
  July 28, 2012 July 30, 2011
Cash flows from operating activities:    
Net loss ($33,161) ($50,729)
Depreciation and amortization 17,765 22,437
Asset impairment 3,540 5,785
Non-cash stock-based compensation 1,466 1,736
Loss on disposal of property and equipment 118 63
Amortization of debt discount 787
Loss on derivative liability 1,886
Changes in operating assets and liabilities:    
Inventories (56,057) (67,631)
Accounts payable and other current liabilities 52,500 55,810
Other assets and liabilities (2,393) (11,188)
Net cash used in operating activities (13,549) (43,717)
     
Cash flows from investing activities:    
Capital expenditures (9,068) (6,938)
Restricted cash 8,188  —
Proceeds from insurance settlements 653 300
Net cash used in investing activities (227) (6,638)
     
Cash flows from financing activities:    
Payments under credit facility borrowings (1,254)
Proceeds from exercise of stock options 181 314
Principal payments under capital lease obligations (362) (169)
Principal payments under mortgage borrowings (265) (248)
Net cash used by financing activities (1,700) (103)
     
Net decrease in cash and cash equivalents (15,476) (50,458)
Cash and cash equivalents, beginning of period 50,306 63,710
Cash and cash equivalents, end of period $34,830 $13,252
         
PACIFIC SUNWEAR OF CALIFORNIA, INC.
SELECTED STORE OPERATING DATA
         
  July 28, 2012 July 30, 2011
Stores open at beginning of year 733 852
Stores opened during the period 2
Stores closed during the period (8) (31)
Stores open at end of period 727 821
         
  July 28, 2012 July 30, 2011
    Square Footage   Square Footage
  # of Stores (000s) # of Stores (000s)
PacSun Core stores 607 2,351 700 2,712
PacSun Outlet stores 120 486 121 489
Total stores 727 2,837 821 3,201
 
PACIFIC SUNWEAR OF CALIFORNIA, INC.
RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES
(Unaudited, in thousands, except per share data)
         
  Second Quarter Ended First Half Ended
  July 28, 2012 July 30, 2011 July 28, 2012 July 30, 2011
         
GAAP SG&A expenses  $63,508 $63,842 $122,774 $124,798
Store closure charges:        
- Asset impairments  (133) (162)
- Lease terminations  (44) (138)
Non-GAAP SG&A expenses $63,331 $63,842 $122,474 $124,798
         
GAAP loss from continuing operations  ($17,538) ($17,452) ($33,161) ($46,108)
Store closure charges, net of tax:         
- Asset impairment 84 102
- Lease terminations 28 87
Derivative liability 8,219 1,886
Valuation allowance 3,457 6,356 11,620 16,958
Non-GAAP loss from continuing operations ($5,750) ($11,096) ($19,466) ($29,150)
         
GAAP loss from continuing operations per share ($0.26) ($0.26) ($0.49) ($0.70)
Store closure charges, net of tax:         
- Asset impairment
- Lease terminations
Derivative liability 0.12 0.03
Valuation allowance  0.05 0.09 0.17 0.26
Non-GAAP loss from continuing operations per share ($0.08) ($0.17) ($0.29) ($0.44)
         
Shares used in calculation 67,738 66,344 67,662 66,274

ABOUT NON-GAAP FINANCIAL MEASURES

The accompanying press release dated August 22, 2012, contains non-GAAP financial measures. These non-GAAP financial measures include non-GAAP SG&A expenses, non-GAAP loss from continuing operations and non-GAAP loss from continuing operations per share for the second quarters and first half of fiscal 2012 and 2011 and non-GAAP loss from continuing operations per share guidance for the third quarter of fiscal 2012. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same names and may differ from non-GAAP financial measures with the same or similar names that are used by other companies.  The Company computes non-GAAP financial measures using the same consistent method from quarter to quarter and year to year. The Company may consider whether other significant items that arise in the future should be excluded from the non-GAAP financial measures. The Company has excluded the following items from all of its non-GAAP financial measures:

  • Store closure charges
  • Derivative liability
  • Valuation allowance

The Company believes that these non-GAAP financial measures provide meaningful supplemental information regarding the Company's operating results primarily because they exclude amounts that are not considered part of ongoing operating results when planning and forecasting and when assessing the performance of the organization, individual operating segments or its senior management. In addition, the Company believes that non-GAAP financial information is used by analysts and others in the investment community to analyze the Company's historical results and in providing estimates of future performance and that failure to report these non-GAAP measures, could result in confusion among analysts and others and create a misplaced perception that the Company's results have underperformed or exceeded expectations.

CONTACT: Michael W. Kaplan
         Chief Financial Officer
         (714) 414-4003