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PacSun moving away from swimwear and board shorts

By Andrew Horan
May 21, 2009 4:01 PM

PacSun will carry less swimwear, shorts and boardshorts in favor of its private label denim, fashion tops and printed Ts from young brands, PacSun CEO Sally Frame Kasaks told analysts today during its Q1 conference call.

(Click here for our earnings story and the company's earnings release.)

Kasaks made a point of calling out poor sales performance - for the second year - by juniors swimwear and shorts and young mens boardshorts.

When questioned by Roth Capital Partners analyst Liz Pierce about how to reconcile PacSun's heritage and position as a "SoCal vibe" store with reductions in swimwear, Kasaks said the answer is simple: it hasn't been selling.

Sally Framke KasaksPacSun CEO Sally Frame Kasaks

"We're committed to swimwear, but it's going to be a smaller part of our assortment. Our customers are moving away from it - we're hearing Wal Mart and Target. Meanwhile, they're buying more denim and printable Ts.

"So, we're going to be less dependant on swim and seasonal categories like girls swim and boardshorts - both of which did not meet our conservative internal plan."

Kasaks said PacSun moved its orders and display of swimwear later in the quarter this year, to better align with spring break and warmer weather, but the categories still significantly underperformed.

She lamented that PacSun reduced its assortment of denim at the same time to follow historic trends of slowing denim sales by late March. This year, she said, PacSun was caught short as customers continued to purchase denim and printed Ts - the uniform of today's teen, she said.

She also said PacSun will be aggressive in its pricing in the coming quarter, with lower opening price points and promotions to move slow-selling merchandise. The goal is to keep the stores fresh, and to clear the way for back-to-school by July.

"Our goal to go into fall cleaner than last year," she said. "We see no value in holding onto any goods haven't sold in the spring/summer season." (Zumiez executives today discussed the impact of quick discounting by competitors. Click here to read that story.)

Other highlights from the Q1 conference call:

Financials

  • Reported an $8.7 million net loss, or 13 cents per diluted share, compared to a $12 million net loss for Q1 08.
  • Forecasts Q2 09 same store results of -17 percent to -20 percent, which would yield a similar loss as in Q1.

  • Same store sales dropped by -18 percent in Q1 09 compared to Q1 08, on volume of
    $223.5 million, compared to $266.9 million in 2008.

  • SG&A expenses improved, with a $19 million reduction compared to Q1 08.
  • Merchandise margins improved 140 basis points.
  • Inventory management tightened, with more than 80 percent of the inventory at the quarter-end on May 2 less than 90 days old.
  • E-commerce revenue grew by 17 percent compared to Q1 08.
  • Buying and distribution costs were down compared to Q1 08, by as much as 100 basis points.

Apparel overview

  • 88 percent of total sales, compared to 77% in Q1 08
  • 7 percent decline in comps, primarily due to lower average unit prices, which Kasaks said were driven by planned lower price points.

Juniors

  • 52 percent of sales, with sales of its private label Bullhead denim the main driver. Kasaks also said she was pleased by customer acceptance of fashion tops.
  • 6 percent decline in comps, with noted weaknesses in swimwear and shorts for the second consecutive year.

Young Mens

  • 8 percent decline in comps, with strong private label Bullhead denim sales offset by continued weakness in board shorts.
  • Over the course of the quarter, saw some sales grow in printable Ts in a mix of music, MMA, organic and action sports brands. "When you shop our stores, you'll notice a variety of these printable Ts across the country," Kaskas said. "I'm encouraged by the response to our expanded assortment."
  • Kasaks declined to name which young brands are performing well, saying that past references have "gotten us in trouble and them in trouble." Kasaks earlier this year told an investor conference that PacSun planned to take RVCA to all doors. Click here for a link to that story.

Accessories

  • Pushing to expand accessories mix on the floor, especially in jewelry and scarves for girls and in "tightly edited" young mens offerings, with goal of reaching 12 - 15 percent of total assortment.

Store mix

  • Developing a two-tiered approach, with 402 of the chain's 947 doors now considered "value" stores.
  • Merchandise mix is similar in value and core stores, but price points are aggressively lower in the value stores. "We found that in a number of malls, customers are more sensitive to price points than in others," Kasaks said. "This is a work in progress, and the assortments improve with each delivery."
  • Value stores located in areas with lower income demographics.
  • Aggressively renegotiating leases, especially in Tier 2 and lower malls, with the "opportunity" to make adjustments as 100 leases come up for renewal in each of the next three years.

Online

pacsun.comScreen grab from pacsun.com
  • Developing more robust pacsun.com as both an ecommerce and community-building platform.
  • Merging fashion, music and social media. "Style leaders" blog on Twitter and attended and blogged from recent Coachella and South-by-Southwest music festivals. Will continue to sponsor USA Junior Surf Team.

Future

  • Near term sales environment remains challenging, with limited visibility.
  • Expects margins to decline by 150 basis points in Q2 "due to necessary markdowns to clear spring and summer merchandise for back-to-school," CFO Michael Henry said.
  • Plans for -20 percent comps through the year, but still be able to build cash-on-hand by $1 million compared to the end of the 2008 FY.
  • Looking for expanded hoodie and fleece offerings in the fall, at $39.50 - $59.50 price points, along with more muted colorways in denim in the fall.

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