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Executives

Gar Jackson – Vice President of Investor Relations

Gary H. Schoenfeld – Chief Executive Officer

Michael L. Henry – Chief Financial Officer

Analysts

Paul Lejuez - Credit Suisse

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Janet Kloppenburg - JJK Research

Nick Genova for Jeff Van Sinderen - B. Riley & Company, Inc.

[Sean Naughton] – Piper Jaffray

Christine Chen - Needham & Company, LLC

Lizabeth Dunn - Thomas Weisel Partners

Janice Ong - UBS Investment Research

Alicia Reese for Betty Chen - Wedbush Morgan Securities

Pacific Sunwear of California, Inc. (PSUN) F2Q09 Earnings Call August 20, 2009 4:30 PM ET

Operator

Good afternoon. My name is [Julieann] and I will be your conference operator today. At this time I would like to welcome everyone to the Pacific Sunwear of California second quarter 2009 earnings conference call. (Operator Instructions) Thank you.

I would now like to turn the conference over to Mr. Gar Jackson, Vice President of Investor Relations. Please go ahead sir.

Gar Jackson

Thank you. Good afternoon and welcome to the Pacific Sunwear of California conference call announcing the company’s fiscal second quarter financial results. This is Gar Jackson, Vice President of Investor Relations. This call is being recorded and the playback will be available starting today approximately two hours after the call through midnight August 27, 2009. It can be accessed at 800-642-1687 or 706-645-9291, pass code 23201193. The call will also be archived on the PacSun website at www.pacsun.com through midnight November 16, 2009.

Your speakers today are Gary Schoenfeld, Chief Executive Officer and Mike Henry, Chief Financial Officer. Today’s call will be limited to one hour and questions will be limited to one per participant.

Before I turn the call over to Gary I’d like to note that statements and discussions during today’s call will contain forward-looking information including forecasts of future financial performance and statements about our future prospects and proposed developments or business strategies. Actual results could differ materially from those projected or reflected [audio impairment] forward-looking statements and reported results should not be considered an indication of future performance. The potential risks and uncertainties that could cause the company’s business and financial results to differ materially from those in the forward-looking statements are included in the company’s Form 10-K for the fiscal year ended January 30, 2009, as well as in the earnings press release included as an exhibit to the Form 8-K that we furnished to the SEC today. Both of these documents can also be found in the Investor Relations section of our corporate website at pacsun.com. All information discussed on the call is as of today, August 20, 2009. Pacific Sunwear does not intend and undertakes no duty to update this information to reflect future events or circumstances. This call, the webcast and its replay are the property of Pacific Sunwear. It is not for rebroadcast or use by any other party without the prior written consent of Pacific Sunwear.

With that said, I will now turn the call over to Gary.

Gary H. Schoenfeld

Thank you, Gar. Good afternoon everyone. It’s been a few years since I’ve done this and I know that the intro certainly has gotten a little bit longer, but it’s great to be here and I appreciate having the chance to speak with you all. What I’d like to do is take a few minutes and share with you some of my thoughts and early impressions about several aspects of our business.

But let me begin by I think talking about two of the biggest reasons why I’m excited to be here as the company’s new CEO. First as I’ve said to several of you, I’ve been a long time admirer of PacSun and as we said in the press release believe that we can truly once again become teens’ favorite place to shop. For many years PacSun championed the action sports market and brought a number of great brands to malls and consumers across the country. And I think over the last several years we’ve lost shares, vertical retailers have taken on a bigger part of the youth fashion market, but PacSun remains in this unique position of being able to compete both with our own proprietary product and at the same time once again be a champion for great brands.

Second, I believe the company’s win over the long term with a combination of distinctive strategy and just as importantly an empowering corporate culture. Internally I think it’s fair to say that PacSun has endured its fair share of challenges and hurdles over the past three, four, five years. And I’m equally excited about re-energizing the passion, creativity and a relentless customer focus within our team.

So with that let me talk a bit then about the question I think you’re all wanting to ask is really about how are we going to navigate our way through the current environment and turn around this business? First from a product standpoint, I think of our business in terms of really three distinct opportunities in terms of brands. Our heritage brands, which are those that I think PacSun is readily identified with, our own proprietary brands and then new and creative youth market brands that expand beyond what PacSun has historically been identified with perhaps here in Orange County and around action sports.

Let me start with what I like to call our heritage brands. One of the things that’s always drawn me to PacSun is that our stores carry a great branded assortment with a focus towards California lifestyle. Unfortunately it feels like we’ve lost our way with some of the heritage brands and a key ingredient to what made PacSun a leader for so many years. I can say over the past month I’ve had the opportunity to meet with teams at many of these brands and I’m delighted to say that their response has been very positive to the direction of where we want to go moving forward. I think it’s accurate to say they’re eager to work with us and reestablish these critical partnerships, both with great product as well as with great marketing support.

Second, as the marketplace has changed with the dominance of vertical retailers, we’ve had to adapt as well with further development of PacSun’s long time proprietary brands. And I think it’s important to recognize that for as long as I’ve known PacSun it’s had a proprietary part to its business. I think it has correctly taken on a bigger role and serves an important place in today’s market in terms of satisfying customers needs for certain price points and the ability to move perhaps even more quickly to chase trends, and also frankly build margin into the business.

Importantly I think our customers are beginning to recognize that we make truly some great clothes and I’m proud to say that’s been validated by Seventeen Magazine which I’m sure most all of you have seen, where the readers voted the Bullhead Solana Extreme the best Skinny jean in the magazine’s first ever denim awards. There’s lots of awards and lots of things out here, but I think this is significant and an important step forward internally continuing to channel energy towards developing that part of our business. But also the external recognition that without a doubt Skinny has been the most significant trend in denim going on and for us to get that recognition is I think a great testament to the progress that the team here has made. As we look forward in terms of building this part of our business, I think with an even clearer focus on who our customer is and our different customer segments that we have the scale and the talent to make this a valuable complement to our branded business.

The third part of the thinking of our products from a brand perspective and acknowledging that heritage brands and proprietary brands will continue to be the primary drivers for our company, we also can become a destination for up and coming youth lifestyle brands as well as a select number of probably what I would call more iconic brands. They want to maintain their relevance and authenticity yet rightfully see opportunities to gain access to distribution in the mall. Be candid and say there are some brands that we’d like to have right now that aren’t prepared to be in PacSun, but I believe we’ll overcome this in time and truly become a destination for great brands that are leaders in driving fashion and the youth lifestyle consistent with our California heritage.

Let me go on to talk about footwear and accessories, that are areas where in hindsight I think perhaps we’ve made some mistakes over the past year or two and where I think we have the opportunities going forward. Admittedly you know after years of success, this had definitely become an under performing category for our company. Yet at the same time I think when we exited footwear we walked away from one of a guys favorite product categories and unfortunately I believe gave him a reason to go to other stores first. The problem of course that when you begin to give them a reason to shop elsewhere for shoes, you also give him permission to shop for the rest of his apparel and accessories and I think lose an important connection with that customer. I believe there is an opportunity to grow our in-store footwear business, probably not in the way it was done before with hundreds of different styles and colors filling up the back rooms of 900 stores, but with an edited yet still impactful and relevant brand assortment as appropriately tiered across different volume levels of our stores.

Several great brands have already been in contact with us as you might imagine about reestablishing this aspect of our business. And while we haven’t ironed out all the details and I’m not prepared to share a lot more at this time, we look forward to this opportunity both within our stores as well as building within our PacSun.com business as well.

Building on that, I think accessories are also an important piece of our customers look and when you’re 15, 18 years old, accessories are significant both for girls and guys and that’s something we plan to put more emphasis on as a category as a relevant part of who PacSun is as we continue to rebuild our relationships with our customers, our end customers. I think its equally an opportunity with our branded partners to showcase some of the excitement that brands bring to categories ranging from belts or wallets to sunglasses or other things that we might well consider.

So I’d say overall my initial impressions are that assortments are looking better and better. I get excited as I go into the stores and I get even more excited as I did this morning when I look at what the next floor set’s going to be four weeks from now or eight weeks from now. And yet I think that as we enhance the way we convey our assortment, the way we merchandise ourselves in our visual execution, we can continue to drive progress in our business.

Focusing back on the theme that brands are a differentiating factor of our business, I think that the initial impression we create with customers when they walk by our stores and when they come in our stores can dramatically improve as we reengage with our branded partners and reestablish a connection in our stores that feels uniquely PacSun. This includes the visuals that we have in our windows and that we use to talk about product and promotion, but I think it’s even more opportunity about the overall customer experience and what we can do to engage the brand associates within our stores.

Historically I don’t believe that PacSun has enjoyed a great selling culture in our stores and that the emphasis really has been much more about standards which are important, but in my opinion can’t come at the expense of putting customers first. I’ve been in a bunch of our stores as of late and I’ll be in a lot more over this next weekend. And while cultures can’t change completely overnight, I think its fair to say that we are aggressively shifting towards a much more customer focused environment and I believe that this can and has an immediate impact on our results.

I mentioned briefly our dot com business and let me talk a bit more about that where without a doubt the online world continues to evolve on a daily basis and PacSun.com presents a number of opportunities for us as an organization. PacSun has created the beginnings of what I think is a successful online business but there’s a great deal more opportunity to create a greater connection with customers through both social networking as well as partnering with our brands. And I think equally exciting for us is we are about to embark upon bringing PacSun.com into our stores, which I think will be another important step in creating the kind of customer experience and customer connection that we’re absolutely committed to achieving.

With further regards to marketing beyond what I think we have the opportunity to do online, I think its fair to say that we need to interject more personality into our messaging. The teen customer today is not looking for just clean and orderly, but they’re very much about creativity and fun or what I’d say is promotion with style. There’s a big opportunity for us as I referred to to collaborate much more closely with our heritage brands and together I think this is an area that can help us bring our customers back to seeking out authentic lifestyle brands in our stores. I think we’ve taken some positive steps with our store visuals, this back-to-school, and as I just mentioned the online world is one we’re just scratching the surface of with some fun things to come. I think PacSun has lost some of its cachet and vitality as a destination for teens and we’re actually committed to getting that back.

Switching maybe briefly to real estate, during this first month-and-a-half I’ve had the opportunity to meet with most of our largest landlords. I think its fair to say in this environment landlords don’t want empty malls or stores that are closing. But as we look at the renewals that are coming up on our plate over the next three years, it’s also clear that we can’t continue to renew a large number of unprofitable stores. So the approach we’re taking is very much a portfolio approach rather than just looking at individual leases one by one. Those conversations are ongoing and timely, and there’s not a lot more I can share at this time but certainly will look forward to doing so on our next call.

More specifically to our value stores, we have in the neighborhood of 300 value stores today exclusive of outlets. We continue to evaluate the merits of these value stores with frankly much still to consider, including in no small part landlords desire to reset lease rates that reflect the reality of these locations. There’s a lot of work still to be done and we will update you on the progress of those developments.

I’ll sum up my comments and then I’ll turn it to Mike and then questions by saying I’m incredibly excited to be here and believe there are a number of areas we can improve upon. At the same time, there’s no secret that this is a turnaround and it will take time and I think we’re all still cognizant that while being hopeful we still live in somewhat of a challenging economic environment. But to be clear, our mission is to reclaim our position as the first place teens go for the products and the brands they identify with. Our objective is to provide a great customer experience both in store and online that makes them eager to return. And while this evolution isn’t going to take place overnight, we are committed to rebuilding the culture of PacSun, bringing our best effort to every facet of the business and obviously with an end objective of improving our financial performance.

I’ll now turn it to Mike and then look forward to your questions.

Michael L. Henry

Thanks, Gary. Total sales for the second quarter were $243 million this year versus $313 million last year. Same-store sales declined 24% with a 19% decrease in apparel sales and a 45% decrease in non-apparel sales. Sales of both young men’s and juniors merchandise declined 24%.

E-commerce revenues grew 11% to $9 million this year from $8 million last year. We ended the quarter with 916 stores versus 938 a year ago. Within apparel, the primary weaknesses were in the spring categories of swim and shorts. Although planned to decline for the quarter, these categories fell below expectations. Young men’s tees and juniors dresses were also disappointing.

Non-apparel was generally weak on significantly less inventory than a year ago. We are making adjustments within accessories for the back half of 2009, although we expect this category will remain negative.

Gross margin was $58 million or 23.8% of sales this year versus $95 million or 30.5% of sales last year. Occupancy costs increased $600,000 and de-leveraged 470 basis points on lower sales. Merchandise gross margin declined 220 basis points primarily due to increased markdowns that more than offset improved initial markups. Distribution costs improved by $2 million and 20 basis points. Buying costs improved by $1 million.

SG&A expenses declined to $79 million or 32.7% of sales this year from $90 million or 28.8% of sales last year. Of the $11 million improvement in SG&A expenses versus last year, $6 million was due to store payroll savings, $3 million was due to a combination of lower store depreciation, credit authorization and marketing expenses and $3 million was due to home office payroll and benefit expenses. Store asset impairment charges increased $1 million year-over-year. Our income tax rate for the quarter was 34.4%. Net loss for the quarter was $14.2 million or $0.22 per share versus net income from continuing operations of $3.7 million or $0.06 a share last year.

On the balance sheet we ended the quarter with $91 million in working capital, including $26 million in cash and no borrowing based debt. We have not accessed our credit facility for direct borrowing at any time during fiscal 2009 and do not currently anticipate borrowing during the third quarter. Our inventories are down 23% per square foot versus a year ago and remain highly current with 85% aged 90 days or less.

Now turning to our third quarter outlook, assuming same-store sales decline in the high teens to low twenties and estimating non-cash store asset impairment charges of approximately $10 million, we would expect to report a loss of $0.16 to $0.23 per share for the quarter. We currently expect SG&A dollars to be in the low $90 million range, inclusive of impairments, and our income tax rate to be approximately 37% for the quarter.

Operator, we’ll now take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Paul Lejuez - Credit Suisse.

Paul Lejuez - Credit Suisse

Just wondering, in terms of inventory it seems like you’ve been very conservative with your inventory management but there is still significant gross margin pressure. And I’m wondering if it’s a function of having too much of the wrong merchandise or not enough of the right merchandise. And then second, Gary, I’m just wondering if you have any thoughts about how you merchandise your core versus value stores in terms of the mix between branded and private label merchandise. Thanks.

Gary H. Schoenfeld

Okay. To the first part of your question, you know it’s not a simple answer in terms of right versus wrong merchandise per se. I think its been talked about on previous calls. There are certainly certain categories in the second quarter that significantly under performed around shorts and swim and I think we’re doing some of the right things to address those opportunities as we look ahead to those categories which are important for us as we look ahead to 2010.

As to the second part of your question in terms of merchandising between core and value, I think we’re doing a better job and will continue to do a better job as I say starting with the view of who is our customer and what’s different about a customer shopping in the core stores and the value stores. I can’t tell you that we have nailed all of that discussion as of yet, but I think that is a important component as we look at that store group. I feel very good about the direction we’re headed in our product assortments as it relates to core. Similarly I think that with subject to some fine tuning I think the value piece is getting better. But as I said in my comments, we’re looking at all aspects of the value store execution so I think in subsequent calls probably be in a better position to comment more specifically on that.

Paul Lejuez - Credit Suisse

But does your gut feel that branded merchandise is going to become a larger or smaller piece of the mix in core and value?

Gary H. Schoenfeld

You know I think if you could sense from my comments, I think that certainly from a projection standpoint we need to make the brands the bigger part of what we do in PacSun and I think as a critical point of difference. I think it’s too soon for me to say percentage wise how that might affect the business. I wouldn’t say I’m looking for a dramatic shift one way or the other, because I like what I see on the horizon in our proprietary products but at the same time I see opportunities in the branded piece. So I’m less focused on the percentage of sharing between brands and proprietary and I’d say the same thing internally, you know the mix between girls and guys, I want to grow all of it.

Operator

Your next question comes from Adrienne Tennant - Friedman, Billings, Ramsey & Co.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

My question is on some of these newer brands that we’re starting to see in the stores. I know we’ve been noticing some more of these USC, you know MMA type brands. They’ve been sort of tested up till now. Can you talk about any of the trends that you’re seeing there? And you know we haven’t seen Affliction so is that one of the brands that chose not to be in PacSun and if so why? What’s the reason for that?

Gary H. Schoenfeld

You know I think any of those categories, you know MMA has been certainly a trend that’s emerged and I think the company has taken some steps to address that. I don’t think that that’s a huge driver of our business or our strategy going forward that you know, and yet at the same time there are fashion brands that are doing interesting things that maybe aren’t all store programs but can be smaller store programs. We’re beginning to have some of those conversations. But you’re starting to see as I say iconic brands, Levi in some of our stores and that’s off to a fun start. I think there’s some neat things that we can do there.

And even brands like Nike that are getting much more serious about addressing the youth market from an additional perspective. Meaning not just the team sports and athletic part that they’ve dominated but after a lot of years of trying I think they’re starting to do some pretty interesting things that relates more to you know influences like what goes on in southern California in the action sports market.

Our heritage brands will continue to be important and I think even more visible as we go forward. But we also are going to embrace some brands that maybe traditionally haven’t always been in PacSun or in the past a customer hasn’t maybe expected to find at PacSun.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

What is the biggest hurdle to the brands that you want not getting into the distribution channel?

Gary H. Schoenfeld

Again to put it in context I’m not losing sleep over any one brand that we don’t have right now. I’m excited about the brands that we’re working with. There’s a couple of small fashion brands that are doing some pretty neat things right now that either don’t want to be in the mall or have partnered with a particular retailer in the mall and right now at least don’t want to extend their distribution. Candidly, PacSun hasn’t put its best forward. I think as people see what we do in the months ahead of us I think people are going to get more excited about what PacSun represents and we’ll have more opportunities as we go forward.

Adrienne Tennant - Friedman, Billings, Ramsey & Co.

And then Mike, really quickly does that cash balance include your income tax refund already?

Michael L. Henry

Yes it does.

Operator

Your next question comes from Janet Kloppenburg - JJK Research.

Janet Kloppenburg - JJK Research

I was wondering if you could spend a little bit of time talking about the heritage at PacSun, the surf and skate signature and whether or not that will in your mind remain an important singular focus or whether there may be some transition to that focus. And I was also wondering if you could just elaborate a little bit on your real estate discussion and whether or not we should expect some changes in the store base, like maybe a large number of store closings, some you think may not be appropriate and/or if you’re having any luck in [getting] to landlords in terms of reducing some of the [operational] expense.

Gary H. Schoenfeld

Sure. You know the first day I walked in here I talked about the term heritage brands that you’ve heard me speak of this afternoon. And I specifically chose that language because I think to have a discussion simply around the label of surf and skates, I think doesn’t acknowledge how the market has evolved. And what those brands are doing to develop themselves. As I think a lot of you know I used to be a part of the shoe company that for a long time fashion was a word we didn’t speak. But we began to speak that word and we began to do some things recognizing that and I’m pleased to say that company and that brand continues to do quite well, and that’s fun to see.

But I think more importantly that when you look at a lot of the brands that are based here in southern California where there’s a great deal of talent and inspiration. And whether that’s Volcom or Hurley or Billabong or Quiksilver or Volcom and the list is pretty extensive, I think a number of them are doing a great job at adapting from a strong heritage of surf and skate that is certainly the roots of where they come from, but how to recognize that the customer today is much more diverse, what inspires them, what influences them and how they connect through art, fashion, music and a number of other influences and how that relates to surf and skate heritage. I think they’re doing some really exciting things. I don’t think we at PacSun had totally taken advantage of what they’re doing, how they’re thinking and so from that aspect I remain very excited about working more closely with our heritage brands and having them be a very important part of our success in the future.

To your second question with regards to real estate, its premature for me to comment about those various discussions. I’ve been on some planes, been on some different cities and different parts of the country and I think it is fair to say that as I said in my opening remarks, they aren’t too anxious to see us close stores as leases come up. I do not envision at this time any substantial closure of stores other than the ordinary course of leases reaching expiration or kick-outs. And the flavor of our conversations is a very candid one of we have a number of stores that are under performing, whose leases or kick-out provisions are triggering over the next one, two, three years. And it’s a very open discussion about one of two alternatives, either we close under performing stores as those situations present themselves or we significantly you know modify the cost structure to turn those into viable stores that reflect you know the performance of those stores and those malls in the marketplace.

So hopefully that gives you a little bit more flavor and on our next call I’ll probably have more to say about that.

Operator

Your next question comes from Nick Genova for Jeff Van Sinderen - B. Riley & Company, Inc.

Nick Genova for Jeff Van Sinderen - B. Riley & Company, Inc.

I wanted to ask, you guys talked a little bit in your prepared remarks about the advertising strategy going forward. I wanted to ask though can you flush that out a little bit more for us, talking in terms of both strategy and if you plan on changing the way you present the brand? And maybe on how you plan on using the types of media if you plan on changing the mix of that.

Gary H. Schoenfeld

Yes, I’ll say a little bit. I’m not going to say a lot because it’s not just Wall Street that gets to listen to these calls and rather let people see it as we do it. But I’d say in short you know I think the key drivers of the PacSun brand experience and marketing in connection to customers will include things I’ve already spoken of. One will be a closer relationship to the marketing opportunities that our heritage brands I think for a long time have wanted PacSun to optimize and I can remember sitting on the other side of the table, wanting to talk about things about like Van’s Warped Tour and not being necessarily engaged in things like that. And I’ve heard the same from others.

So I think one aspect will certainly be tapping into things that our brands are doing that create excitement [audio impairment] customers in. A second will certainly be online where I think we have a lot of opportunities to expand on what we’re already doing. Third aspect will just be the in-store marketing and visuals and windows and what we do there to be more inspiring and speak more to kind of the creative dimension of what PacSun represents. And then I think fourth is a clearer overall positioning and strategy to make sure that there’s a consistent thread that runs through everything we do that speaks to our unique heritage here in California.

Operator

Your next question comes from [Sean Naughton] – Piper Jaffray.

[Sean Naughton] – Piper Jaffray

Are there any additional opportunities in terms of the SG&A line for additional operational efficiencies, whether they’re at headquarter or store payroll or have we kind of cut to the bone on G&A? And then secondly, was there any change in the comp cadence throughout the quarter? Did things start off bad and get a little better or was it consistently in the down low 20s throughout the quarter?

Gary H. Schoenfeld

As to the first part as a general comment I think there’s been a lot of good work that’s done before my getting here on addressing expenses. I would say the drivers of our success is going to be about reconnecting with customers and driving our top line and merchandise margin.

As to the second part, you know in terms of margin with spending comps within a quarter that’s not something that I’m probably going to elaborate a lot on extensively now or in the future. But I will given that you know shortly after being here we had to you know lower our guidance, I think that obviously gives you an indication that comps as the quarter progressed were obviously not meeting expectations.

[Sean Naughton] – Piper Jaffray

And then any change from a geographic perspective just throughout the quarter? You know not individually and individual months or anything, but in terms of geographic exposure throughout the quarter has there been any improvement in California? We’ve heard some things recently where it does sound like business has gotten a little bit better. Obviously your guidance with the deterioration in the two year comp trend may suggest that you’re still seeing some weakness there.

Gary H. Schoenfeld

I would respond this way and say that we’ve not seen any demonstrable trend in one region of the country versus another that’s dramatically affecting how we’re thinking about the business.

Operator

Your next question comes from Christine Chen - Needham & Company, LLC.

Christine Chen - Needham & Company, LLC

I was wondering, I’d like to explore a little deeper about the mix between your private label brands as well as the third party brands. How do you feel about the current mix when you look at it from a girl’s perspective versus a guy’s perspective? Because I know it’s kind of different where it currently stands.

Gary H. Schoenfeld

Yes I think you’re correct in your perception. It’s obviously accurate and I think that reflects the customer. That in the young men’s business brands will continue to be very important and I think that’s a great part about PacSun being able to differentiate is our ability to connect with the various brands to our customer. And then I think on the girl’s side of the business, I think fashion and trends and price point is playing a bigger role than brand is at this point in time. So I think that that difference in weighting will continue.

Operator

Your next question comes from Lizabeth Dunn - Thomas Weisel Partners.

Lizabeth Dunn - Thomas Weisel Partners

I guess my first question relates to the footwear strategy. You know as you’ve evolved from more of a skate destination to you know something that spans well beyond skate, how do you think about footwear? Because you know skate is really the only part of your business that has specific footwear. Will we be looking for an introduction of only skate footwear or more than that? And then I was also interested in whether or not you believe you have the right people in place to execute a turnaround. Are there any big holes that you see in the organization?

Gary H. Schoenfeld

As to the first question I think your question is an excellent one. And I think that speaks to some of the comments I made about the opportunity to execute it differently than what’s been done in the past. So where you’re going with your question is very consistent with our internal thinking, which is our footwear assortment should reflect [audio impairment] the overall presentation in merchandising of our store and who our customer is, which is a blend of California lifestyle and fashion. And therefore our footwear assortment should reflect that.

At the same time you know it’ll be significantly influenced by surf and skate branding and styling, but we won’t limit ourselves to that. Let me in the same breath be clear, you know this is something that is still evolving. We’re going to walk before we run. We don’t envision going back to the days of the huge slat wall of footwear but we do think that PacSun has great equity in footwear. We think our customers expect us to carry footwear. So again as that evolves we’ll certainly share more with you but in short to say it won’t be limited to just skate shoes and we probably will not be going six, eight, ten brands deep in just skate footwear.

Lizabeth Dunn - Thomas Weisel Partners

And then on the organization, the people?

Gary H. Schoenfeld

I don’t think that’s something that I’m prepared to speak about. You know I think suffice to say any new CEO part of the responsibility and opportunity is to evaluate the team but I don’t think its appropriate for me to comment any further than that.

Lizabeth Dunn - Thomas Weisel Partners

May I ask a quick point of clarification on the guidance? The $10 million impairment that’s included in the $90 million SG&A guidance, that’s $10 million total, right? Not incremental? Because there was $6 million last year. Is that right?

Michael L. Henry

That is just with respect to Q3 of this year.

Lizabeth Dunn - Thomas Weisel Partners

Yes, so $10 million in total not $10 million incremental.

Michael L. Henry

Yes. Correct.

Operator

Your next question comes from Janice Ong - UBS Investment Research.

Janice Ong - UBS Investment Research

Just a quick question on your e-commerce business, I believe you said it was about $9 million of sales for the second quarter. Just wondering where you see that going in the long run or if you have an internal plan on where that could go.

Gary H. Schoenfeld

I’m sorry I just didn’t hear the first part of the question.

Janice Ong - UBS Investment Research

Oh, I was just saying that I believe you said your e-commerce sales were $9 million for the quarter.

Gary H. Schoenfeld

Yes.

Janice Ong - UBS Investment Research

So that would be about 4% of sales. Just wondering where you see that going in the long term.

Gary H. Schoenfeld

You know long term I think there’s a tremendous opportunity there. As I mentioned we’re in the process of looking at how we can incorporate that into our stores and it’s something that we hope to have up and running in advance of holiday. And I think there’s so much happening in the online world that certainly excited about the growth that we think online represents. But not in a position to give you any benchmarks or guidance in terms of what that growth could be. But yes I think the company’s off to a good start, but I think we’re still in the early innings in terms of really developing what online can mean to the company.

Operator

Your next question comes from Alicia Reese for Betty Chen - Wedbush Morgan Securities.

Alicia Reese for Betty Chen - Wedbush Morgan Securities

Denim looks really lean in the stores right now and as you’d mentioned one of the Skinny fits was voted the best denim by Seventeen Magazine. Can you talk about it as a percentage of penetration of total sales and how you feel about the rest of the styles you have in the stores?

Gary H. Schoenfeld

You know denim has increased as part of our overall presentation versus where it was a year or two ago. And I think importantly the company’s made a lot of progress in truly becoming a credible destination for denim for girls and guys. I’m a big believer you’ve got to have some categories that you own and you lead and I’m super excited about what we’ve done so far and what I think is coming down the road to continue to move us forward as a great destination for denim.

As far as the assortments we have right now again Skinny continues to be very hot, Destructive denim is obviously very hot, Boyfriend continues to be very significant certainly on the junior side. And all three of those are trends that we expect to continue and are continuing to build our assortments around and I think will continue to create a lot of excitement in our denim presentations going forward.

Alicia Reese for Betty Chen - Wedbush Morgan Securities

Can you remind us of some of the product lead times to replenish key categories like denim versus maybe some of the more fashion basics?

Gary H. Schoenfeld

Yes, I don’t think that’s something I want to get into the specifics on right now.

Alicia Reese for Betty Chen - Wedbush Morgan Securities

Some of the retailers have talked about expected improvements in INU over the next six to nine months driven by improved product cost. Are you guys seeing the same potential savings and how far out have you bought inventory?

Gary H. Schoenfeld

Again some specifics that are probably more than I’d like to speak to. You know our lead times and how far out we’re buying you know isn’t dramatically different than the industry. There’s some that are a bit quicker than us, but I’d say in general you know we’re in line with where most of the industry is and you’ll be familiar with that.

In terms of INU opportunities, obviously I think anybody in today’s market is continuing to challenge themselves internally and in terms of design and development of products and in working with factories to bring great products at the best price points that we can. And I think our margin opportunities are as much about what we do after we land product, how we flow product, how we differentiate between stores in different markets around the country, localize assortments and how we handle promotions and markdowns. I think that’s a significant opportunity for us from a margin perspective and along with obviously the things I’ve said obviously about you know what you do on the front end and working on the sourcing front.

But overall I’d say you know I’ve been here all that long but I’ve been impressed by our sourcing team and their ability to respond to what we’re trying to accomplish.

Alicia Reese for Betty Chen - Wedbush Morgan Securities

Speaking of promotions can you give us anymore color on promotions? Beginning in the second quarter we noticed some new and different promotions throughout the quarter. Do you have any learnings on the customers and the changes he or she shops given the volatile environment?

Gary H. Schoenfeld

Again that’s maybe a longer conversation offline. I think in short I think PacSun has become a pretty promotionally oriented retailer over the last few years. And like any retailer I think certainly one of our objectives is going to be to get the customer excited about our brands and our merchandise and feel like our pricing is a good value and not be as promotionally dependent as I think we’ve been in the past. Not easy to make that shift but certainly something that is very much front and center for us.

Alicia Reese for Betty Chen - Wedbush Morgan Securities

Were there any geographical differences in performance?

Gary H. Schoenfeld

We have already spoken to that and the answer was not in a material way, no.

Operator

There are no further questions at this time. Mr. Jackson, do you have any closing remarks?

Gary H. Schoenfeld

This is Gary. I’ll just sum up by saying you know there’s a lot of good people in PacSun here in southern California and as I’ve been meeting people in the stores across the country. And you know the last little bit around here hasn’t been easy but I’m delighted with the level of commitment that’s here. We’re starting to bring back some of the creativity and some of the roots that make PacSun an exciting place to work and be a part of. So while at the same time being very cognizant of business remains challenging, it’s great to be here and be a part of this organization and we look forward to updating you all on our progress on these calls in the quarters ahead. So thank you very much for joining us.

Operator

Thank you all for participating in today’s conference call. You may now disconnect.

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Source: Pacific Sunwear of California, Inc. F2Q09 (Qtr End 08/01/09) Earnings Call Transcript
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