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Tiffany Montgomery
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Shorts and swim weakness hurts PacSun

By Tiffany Montgomery
May 22, 2008 2:34 PM

PacSun CEO Sally Frame Kasaks said first quarter results released this afternoon were "disappointing."

The stores were hurt by a tough economic climate and weak sales in California, Florida, Nevada and Arizona, where combined same-store sales fell 8 percent. Softness in swim and shorts also hurt results.

Sales fell .4 percent to $266.9 million versus the same quarter last year. The company recorded a net loss of $12 million, excluding the discontinued demo chain. Same-store sales fell 1 percent, below expectations.

As a result, the company reduced its guidance for the year. PacSun's stock price was down nearly 7 percent to $9.42 in after hours trading.

Other details from the call:

Footwear: PacSun began clearing out the bulk of its footwear inventory, sending the merchandise to its outlet stores and select PacSun locations. Going forward, the company expects footwear to account for 6 to 8 percent of sales. Footwear comps for the remainder of the year are expected to be down 50 percent, pressuring total store same-store sales. The reduction is footwear has freed up space in store back rooms for more apparel, allowing stores to refresh product more quickly. It has also allowed employees to be more focused on customers, the company said.

Apparel: Same-store sales in apparel grew 13 percent, comprising 77 percent of total sales. PacSun wants to grow this number to 80 percent of total sales. Young mens and juniors apparel sales were split 50/50.

Young men: Comps rose 5 percent, led by T-shirts and Bullhead denim. Sales of swim and shorts were weak. Swim and shorts improved somewhat in April. Branded merchandise accounted for 75 percent of young men sales.

Juniors: Comps jumped 23 percent, led by Bullhead denim, tops and dresses. Swim and shorts were weak in March and April. Fashion, color and trend right merchandise sold well. The company chased Bullhead denim styles during the quarter. The juniors apparel mix was 50 percent branded and 50 percent proprietary brands.

Refreshed stores: The company refreshed 18 stores during the quarter, bringing the number of refreshed stores to 138, or 17 percent of the chain. PacSun will now focus on refreshing stores in the Northeast, Mid Atlantic and Midwest regions. For the year, 40 more stores will be refreshed.

Tightening expenses: The company is managing its payroll closely and reviewing its consulting agreements and its supply chain for ways to cut costs.

Back-to-school: PacSun believes it left business on the table by not having enough denim last year, so plans to offer a full array of fits and washes of Bullhead denim for juniors and young mens. "Denim is driving a lot of the business," Kasaks said. Skinny styles are still the most popular. "We've had no reaction to the wider leg," she said.

Swim: This category was weak, especially for juniors. The company will have a lot of markdowns in swim, which will hurt margins in the second quarter. Kasaks visited dozens of stores in the past several months asking employees what was wrong with the assortment. The response was it was the best PacSun every had. The unusual spring break calendar made it hard for PacSun to get any momentum. The company is also examining price points. "Swimwear just hasn't happened for us, especially in the juniors business," she said.

Shorts: The strongest performance came from proprietary brands. The fashion driver is shorter shorts, Kasaks said. "No brand outperformed our proprietary brands."

Ecommerce: PacSun improved the speed of its website, expanded the merchandise assortment and widened its online community. Online sales rose 60 percent to $8 million in the quarter.

Guidance: The company reduced its guidance for the second quarter and year. For the second quarter, PacSun anticipates earnings per share of 3 to 8 cents. For the year, earnings per share will range from 59 cents to 64 cents.

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