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Roth Capital Partners analyst Elizabeth Pierce is worried PacSun may have too much inventory in fleece after going on a store tour with Pacific Sunwear management.
She believes that combined with other issues will lead to even more PacSun price promotions for the rest of the year.
Here's what Liz wrote about inventory levels in a report this week:
"Ending Q3 inventory levels are expected to be up in the low double digit range on per square foot basis even though comps are forecasted to be down in the high single digit range. While some of the increase is due to the timing of receipts, in our opinion, this much of spread in this type of environment, is risky.
"While we believe some hefty discounting is factored into 2H estimates, based on the level of fleece that is going to be in the stores with the new floorset, based on the fact that consumers continue to buy closer and closer to need (i.e. when it gets a lot cooler) and based on our belief that mall traffic has not picked up in September, we are concerned that it will be tough to meaningfully lower inventory levels without some additional discounting."
While Liz is concerned with inventory, she thinks PacSun has done a good job with the assortment.
"Overall, our take on the product is that it is brand right, with a strong focus on beach/surf type of looks such as denim, long sleeve knits, screen tees, lots of newness in fleece in terms of prints, screens and colors as well as some fashion/trend right add-on pieces such as long bohemian scarves."
After taking the store tour, Liz kept her "hold" rating on the stock and a $5 price target. The stock closed at $6.90 Thursday.
Roth's "hold" rating is defined as an expectation of a total return between negative 10% and 10% over the next 12 months.