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Tiffany Montgomery
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PacSun increasing discounts to clear inventory

By Tiffany Montgomery
November 18, 2008 4:14 PM

PacSun said this afternoon in its third quarter earnings conference call that it is planning to significantly reduce inventory by year-end.

The company will raise its promotional level during the fourth quarter when mall traffic is high to clear merchandise.

Originally, PacSun had expected to end the year with its inventory levels flat to slightly up. Now, because the company believes the difficult economic environment will continue into next year, PacSun plans to end the year with its inventory per square foot down in the high single digits.

CEO Sally Frame Kasaks said the increased promotions will impact margins and earnings in the short term, but the company believes it is the right thing to do to position the stores for next year given the economic climate.

Sally said PacSun has cancelled a "significant" amount of product and has also shifted orders and reworked assortments.

Liquidity

The company ended the quarter with $5 million in cash. It had $43 million in borrowings against its $150 million credit facility. There is a 5-year term on the facility with no covenants unless the company draws down to the last 10 percent of availability.

The company expects the sale of its distribution center to close any day. The sale price has been reduced from $35 million to $26.5 million. PacSun now expects net proceeds of $24 million from the sale after selling expenses are deducted.

PacSun said it would end the year with $20 million in cash and no direct borrowings under its credit facility.

The company reduced its capital-spending budget for next year to $30 million from $80 million. The decreases are coming from deferring store openings and remodels and cutting expenditures on IT systems improvements.

PacSun expects to generate $45 million in cash flow next year.

Also of note

- Sales fell 5 percent to $324 million. Same-store sales fell 7 percent.

- The net loss from continuing operations was $3.5 million

- Transactions rose 3 percent while the average sale price fell 10 percent.

- One-third of PacSun stores are in regions where same-store sales fell 15 to 20 percent.

- Apparel comps rose 7 percent

- Junior's apparel comps rose 16 percent, led by Bullhead denim skinny and super skinny styles, and tops. Juniors private label accounted for 57 percent of the assortment.

- Young men's apparel comps declined slightly. Bullhead denim and knits were strong; T's and fleece weak. Branded apparel accounted for 71 percent of the assortment.

- Accessories comps fell 28 percent, below expectations.

- The company expects to be essentially out of footwear by year-end.

- Inventories at the end of the third quarter were up 12 percent per square foot vs. the same period last year.

Guidance

- In the first 16 days of November, same-store sales were down low double digits.

- The company is forecasting Q4 same-store sales to fall high single digits.

- The company expects a Q4 loss of 3 to 8 cents per diluted share.

 


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