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Executives

Craig E. Gosselin - Senior Vice President of Human Resources, General Counsel and Secretary

Gary H. Schoenfeld - Chief Executive Officer, President and Director

Michael W. Kaplan - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Gabriella Carbone - Janney Montgomery Scott LLC, Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

David M. King - Roth Capital Partners, LLC, Research Division

Dorothy S. Lakner - Topeka Capital Markets Inc., Research Division

Marni Shapiro - The Retail Tracker

Andrew Burns - D.A. Davidson & Co., Research Division

Dana Lauren Telsey - Telsey Advisory Group LLC

Lee J. Giordano - Imperial Capital, LLC, Research Division

Pacific Sunwear of California (PSUN) Q2 2013 Earnings Call August 29, 2013 4:30 PM ET

Operator

Good afternoon. My name is Molly and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2013 earnings conference call. [Operator Instructions] I would now like to turn the call over to Craig Gosselin. You may begin your conference.

Craig E. Gosselin

Good afternoon, and welcome to the Pacific Sunwear of California conference call announcing our fiscal second quarter 2013 financial results. My name is Craig Gosselin, Senior Vice President, General Counsel and Head of Human Resources.

This call is being recorded and the playback will be available starting today, approximately 2 hours after the call through midnight on September 5, 2013. It can be accessed at (855) 859-2056, or (404) 537-3406, passcode 33306159. The call will also be archived on the PacSun website at pacsun.com through midnight on December 4, 2013.

The speakers today are Gary Schoenfeld, Chief Executive Officer; and Michael Kaplan, Chief Financial Officer. [Operator Instructions]

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 about our future financial performance and prospects. Our actual results could differ materially from those contained in our forward-looking statements. Risks and uncertainties that could cause our business and financial results to differ materially from those in the forward-looking statements are included in our Fiscal 2012 Form 10-K and the subsequent filings we made with the SEC, as well as in the earnings press release we issued today. These documents can also be found in the Investor Relations section on our website, pacsun.com.

All information discussed on the call is as of today, August 29, 2013. PacSun 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 PacSun.

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

Gary H. Schoenfeld

Thank you, Craig. Good afternoon, everyone and thanks for joining us on our Q2 earnings call. I'm pleased to say that the second quarter of 2013 has continued to build on the progress that we achieved last quarter and throughout 2012. We've achieved our sixth straight quarter of positive comps, better margins, improved inventory productivity and operating expenses and increased non-GAAP EPS, all of which are fundamental to our long-term success.

Total sales for the quarter were $215 million, driven by a comp store sales increase of 3%. We generated improved gross margins of 220 basis points, leading to positive Q2 2013 operating income of $5.3 million compared to an operating loss of $6.1 million a year ago. Non-GAAP EPS for the quarter was a positive $0.02 versus a loss of $0.10 last year. Michael will get into more of the details including the impact of the 53rd week calendar shift versus last year, which contributed approximately 120 basis points to our gross margin improvement and $0.03 to our non-GAAP EPS during the quarter.

We believe our positive financial results are the direct result of our focused execution on the strategic goals and initiatives that we established for the overall PacSun business and continue to demonstrate the traction we are gaining within a competitive marketplace. Let me again state the 4 key drivers of our strategy: First is our commitment to showcasing the distinct personality and merchandising talents from the best of brands that are inspired by the streets, the beaches, the skate parks, music, art and culture that lives across the state of California; second, is to be a leader in anticipating and recognizing the fashion trends that emerged from our backyard and translate these to the marketplace with the expediency that today's digital world now requires; third, is to bring the creativity, diversity and optimism that is quintessentially Californian to every consumer touch point through our Golden State of Mind brand identity; and fourth, is to continue to build a top talent organization across the country that similarly drives on creativity, passion and a relentless desire to be the best. I believe we are executing on these 4 pillars and I'm energized by the way guys and girls in their late teens and early 20s are rediscovering the new PacSun everyday.

Turning more to our second quarter financial results, our Women's business continued to thrive with an 11% comp which, as we discussed in our last call, is due to a variety of factors. We have made speed-to-market a focus that we believe is critical to anticipating and reacting to fashion trends closer in season. We're continuing to see excitement connected to our some of our newer brands, which includes Kendall & Kylie and Brandy Melville. We based up our merchandise to attract a more fashion-savvy, older teen and early-20 consumer, which we believe is our core customer in PacSun today.

During the second quarter, Kendall & Kylie generated considerable buzz with the girls making 3 in-store appearances, including a visit to our pop-up SoHo store where fans camped out overnight and by the morning, lines were blocks long for a late afternoon opportunity to meet with both Kendall and Kylie. Brandy Melville likewise continues to be a very strong brand for our Women's business and we've expanded the most recent collection that we went out with at the end of July to all of our corridors, with more deliveries planned for the remainder of the year. For our Men's business, emerging brands, footwear and accessories continued to perform well, yet this has been offset by softness in summer seasonal categories such as shorts and board shorts, resulting in a minus 2% comp for the second quarter.

Lack of newness in basic denim is similarly stifling the Men's business as we transition to fall, yet I continue to be confident in the overall positioning of our Men's business and the growth of our emerging brands, as well as footwear and accessories. During the second quarter, Nike continued to be a very strong performer and immediately stepped up to be part of our summer pop-up store in SoHo. And similarly, Diamond Supply Co. continues to do exciting things with us, which included an exclusive collab projects with the new brand that we've now brought to PacSun called Been Trill that has also created a lot of excitement since launching in our stores in the last 45 days.

During the second quarter, I think we also raised the bar in showcasing the best of our industry at our summer pop-up store in SoHo. Our primary objective with that store was to showcase the best of PacSun litho our brands at one of the world's most influential fashion and shopping destinations and, in many ways, the experience exceeded our expectations.

As I now turn the call over to Michael, I will just conclude by saying we continue to be encouraged by our results and the progress we are making everyday, hopefully in every store, in reestablishing PacSun's distinct positioning in the minds of our customers.

Michael W. Kaplan

Thanks, Gary and good afternoon, everyone. Today, I will discuss our Q2 2013 operating results, the impact of the 53rd week calendar shift on our quarterly results and then close with comments on our Q3 2013 financial outlook.

Our fiscal 2013 second quarter financial results were as follows: Total net sales from continuing operations were $215 million for the second quarter versus $197 million for the same period last year; primarily driven by a plus 3% same-store sales increase. We estimate that the 53rd week calendar shift resulted in an increase in Q2 '13 net sales of approximately $9 million as we gained a peak back-to-school week in early August versus a nonpeak week in May. E-commerce sales increased 4% in the second quarter of '13 versus the second quarter of '12. Gross margins as a percentage of net sales was approximately 30% compared to 27% for the same period last year, which marked approximately a 220 basis point improvement over the same period a year ago. Contributing to the improvement in gross margin was 140 basis point increase in merchandise margin. Adjusted for the 53rd week calendar shift, gross margin improved 100 basis points, which included approximately 120 basis point improvement in merchandise margin partially offset by deleveraging buying and occupancy cost of 20 basis points due to prior-year rent relief that did not anniversary in Q2 2013. Adjusted for the impact of the 53rd week calendar shift, total inventory was up approximately 3% on a comparable store basis.

SG&A expenses were approximately $58 million or 27% of net sales for the second quarter, which decreased from 31% as compared to the same period a year ago. Approximately 70 basis points were attributable to the 53rd week calendar shift. We recorded an income tax benefit of $0.1 million for the quarter.

On a GAAP basis, we reported a loss from continuing operations for the quarter of $19 million or $0.28 -- or negative $0.28 per diluted share. This compares to a loss from continuing operations of $18 million or negative $0.27 per diluted share for the same period a year ago. Included in the loss from continuing operations for the second quarter of 2013 was a non-cash loss of $21 million or $0.31 per diluted share related to our derivative liability compared to a loss of $8 million or $0.12 for the same period a year ago. A key driver to used in determining the fair value of the derivative liability each quarter is our stock price. As the stock price increases, the fair value of the derivative liability generally will also increase. For example, our stock price was $4.47 at the end of the second quarter of 2013 compared with $2.81 at the end of the first quarter of 2013, representing an increase of approximately 60% and resulting in a non-cash loss of $21 million in the second quarter.

On a non-GAAP basis, excluding the financial impact of the derivative liability and onetime store closure charges, and using a normalized annual income tax rate of approximately 37%, income from continuing operations was approximately $1 million or $0.02 per diluted share versus a loss of approximately $6 million or $0.10 per diluted share on a similar basis last year. The number of weighted shares used to calculate the $0.02 on a diluted basis is approximately $76 million. The 53rd week calendar shift contributed approximately $0.03 of the $0.12 per share improvement compared to last year. We ended the quarter with a total of 637 core and outlet stores versus 727 a year ago. As previously communicated, we plan to close approximately 20 to 30 stores during fiscal 2013.

I will now shift gears and talk about the financial outlook for the third quarter of 2013. Our guidance range for Q3 '13 contemplates a non-GAAP loss per diluted share from continuing operations of between a negative $0.09 and a negative $0.04 and includes the negative impact of the 53rd week retail calendar shift, which we estimate represents a decrease in projected Q3 net sales of approximately $13 million, an approximate 300 basis point decrease in gross margin and a decrease of approximately $0.06 per diluted share. This is due to the loss of a peak back-to-school week in early August and mirrors the benefit of the shift that we highlighted in the first half.

Taking into consideration the 53rd week calendar shift, the low end of our guidance range for EPS aligns with our Q3 2012 non-GAAP loss per share of $0.02. We also expect a negative impact associated with the calendar shift in the fourth quarter as there will be 1 week less of selling as compared to fiscal 2012. We'll discuss the fourth quarter impact in more detail next quarter when we issue our Q4 guidance. Our forecasted third quarter non-GAAP guidance range is based on the following assumptions: Comparable store sales from negative 1% to plus 3%, net sales from $202 million to $209 million; a gross margin rate, including buying, distribution and occupancy of 25% to 27% compared to 28% last year; SG&A expenses in the range of $55 million to $57 million; and applicable non-GAAP adjustments or tax effected using a normalized tax rate of approximately 37%. Our guidance for non-GAAP loss per share from continuing operations also excludes the quarterly impact of any change in the fair value of the derivative liability due to the inherently variable nature of this financial instrument.

Operator, we will now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Jane Thorn Leeson with KeyBanc.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

The first question was did you make any strategic changes to the assortment in Q2 that allowed you to capture any opportunistic sale similar to what you did in Q1 with the swim in bottoms and tops?

Gary H. Schoenfeld

No, I think that was a really important readdressing of how we approach the swim business. No, I think the 4 pillars of our strategy that we've been consistently outlining around brands, speed to market and then really embracing what California lifestyle means is an influence. I think those are the underpinnings of our merchandising in Q2 that will continue to be true through the back half of the year.

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Okay. And then also just on the men's side, what -- how should we -- how are you planning to drive the men's momentum in the face of a sort of challenging retail environment and no real fashion trend in that particular category or space?

Gary H. Schoenfeld

If we took basic denim out of our Men's business just for a moment, the rest of our Men's business, I believe, is on track for growth in the back half of the year. So we can't fix the basic denim and the reality of how competitive that category is in the malls today. So the answer to your question is we're going to focus on the rest of it where we believe we can win and that's the emerging brands that we work with, the strong footwear brands, Nike and Vans in particular and brands that are bringing excitement and accessories, like Neff and some of the other brands that you'll see in our stores as we get closer to holiday.

Operator

Your next version comes from the line of Adrienne Tennant with Janney Capital Market.

Gabriella Carbone - Janney Montgomery Scott LLC, Research Division

This is actually Gabriella Carbone calling in for Adrienne Tennant. I was wondering if you could give us some color regarding the comp guidance throughout the quarter. Did you see any sort of drop off in July as we've heard from some of the retailers? And then if you could just remind us what the comp cadence was last year in 3Q?

Gary H. Schoenfeld

We don't get into monthly discussions about comps. Obviously we're pleased where Q2 came out if you were to surmise that we aren't all that different in terms of generating traffic versus other retailers, you probably wouldn't be wrong to think that July was a little softer than the other couple of months but that's probably as much I'm going to comment from a monthly perspective.

Gabriella Carbone - Janney Montgomery Scott LLC, Research Division

I just have 1 more question real quick. I was wondering if you can talk more about the response you received regarding the Been Trill brand and if you have any future plans regarding that new brand?

Gary H. Schoenfeld

Yes, it's a talented group of guys, super creative. They comes from a strong background in music. They're really connected to youth culture. So Matt and Virgil and the other guys behind Been Trill, we got some fun things planned with them going forward. So we launched the brands, as you said, in July. We then worked Nick Diamond at Diamond Supply Co. to do a collab with them, that was really positively received as well and, yes, you'll see us do more things with Been Trill going forward. And those kinds of opportunities where we can be the unique destination at the mall to work with a brand like that or work with Modern Amusement or some of the other cool brands that you see in our stores today, that's an important part of our strategy as we continue to move forward.

Operator

Your next question comes from the line of Betty Chen with Wedbush.

Betty Y. Chen - Wedbush Securities Inc., Research Division

I was wondering if you can talk a little bit more about Brandy Melville. I think, Gary, you mentioned earlier that it may be expanded into core doors or more core doors. Could you remind us how many doors it's currently being sold into? And then in terms of the Q3 guide, I don't know if you can share with us what you've seen so far in early August and whether that's kind of running in line with your comp guidance.

Gary H. Schoenfeld

So yes, what we've seen so far in Q3 is consistent with our guidance and obviously it's my hope that we can knock out our seventh quarter of positive comps but we'll see what the next 2 months bring. With regards to Brandy Melville, we've really enjoyed working with them. They're a great example of what's California lifestyle really stands for. Even though they originate from Italy, you walk into a Brandy Melville store and you feel the creativity and the optimism that I like to say is quintessential California. And I don't think it's a coincidence that they chose to open their first store about a block from UCLA when they came to the U.S. about 4 years ago. So we really enjoy working with them. We got huge admiration for their brands. Customers obviously have a strong affinity and it's now an all-door brand for us and we look forward to continuing to work with them.

Operator

Your next question comes from the line of Steph Wissink with Piper Jaffrey.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Just a follow up, Michael, on the gross margin guidance for the third quarter, 300 basis points. Can you give us a sense of the merchandise margin versus the deleverage in that assumption? And then just generally, on your rebuilding of your merchandise margin, where are you relative to where you think this business should yield on a margin basis from-based product level standpoint?

Gary H. Schoenfeld

Sure, I love to talk about margins. So I think -- we believe we continue to enhance our margins and we've made big strides in that regard over the last 18 months. So as I cautioned before, I don't think we can necessarily continue to assume that we can achieve the same kinds of increases that you've seen over the last 6 quarters but it's something that we have to take seriously and remain focused, not just on top line growth but on merch margin improvement.

Michael W. Kaplan

So in terms of the 53rd week impact at the higher end of our guidance, there'll be a slight improvement versus last year in merch margins. At the low end of the guidance, there'll be some shortfall versus last year.

Operator

Your next question comes from the line of Dave King with Roth Capital.

David M. King - Roth Capital Partners, LLC, Research Division

I guess the follow-up to the question on the start of the third quarter, sounds like it's been going pretty well at this point. I'm just wondering if you can elaborate at all, just on back-to-school, whether -- where you're at in terms of what inning you're in, in back-to-school. And then whether there are any stand-outs by category, either positive, negative, et cetera. It sounds like Men's kind of more of the same versus last quarter but just curious about some of the other areas.

Gary H. Schoenfeld

I would say, we're like everybody else. We're about to finish the 4th week of the quarter and eager to get into this Labor Day weekend. As I alluded to, basic denim in both Men's and Women's has become somewhat of a commoditized category across the mall but importantly, I think we're continuing to have success in high-waisted denim in Women's and capitalizing on that trend. And on the Men's side, we continued to expand on the strength of our Chinos business last year. I honestly think we have the best Chinos assortment in the mall for guys today. So those are keys in terms of our bottoms business. And then tops within both genders, it's a combination of brands and we've already spoken to several of those key brands that are driving our business, but also supplementing that with our own proprietary brands. In both Men's and Women's, we're seeing some positive response to what we're doing there. So our On The Byas knits in Men's continues to get a strong response and there's a number of good programs that are occurring within LA Hearts and Nollie and what we do on women's proprietary as well.

David M. King - Roth Capital Partners, LLC, Research Division

Okay, that's helpful. And it sounds like the footwear, kind of what you see on footwear side from Nike, Vans, et cetera, is kind of continued into the at least start of this quarter, is that fair to say?

Gary H. Schoenfeld

Yes. I mean, they remain two very strong brands in the marketplace.

David M. King - Roth Capital Partners, LLC, Research Division

And then in terms of -- I guess another follow-up on the Brandy Melville, Kendall & Kylie, it sounds like you can see really good traction with both of those and I think, to Betty's question, you talked about just where you guys are at in terms of core stores at this point, can you just remind us where they are in terms of percentage of revenue or percentage of juniors revenue just for us to kind of reference and frame it please.

Gary H. Schoenfeld

I would remind you -- if I have shared that with you before, but I think I haven't, we really choose not to get into specific on brands both as it relates to our business but, frankly, as it relates to their business as well. So suffice to say, those are 2 exciting brands within our Women's business. I think the most important thing is the way that they marry up to our overall strategy, which is our commitment to be a destination for great brands that are inspired and reflect the California lifestyle and then fit with the overall dual-gender approach to what PacSun stands for and we're excited about the total brand mix that you find in the PacSun store, girl or guy, that exists today.

Operator

Your next question comes from the line of Dorothy Lakner with Topeka Capital Markets.

Dorothy S. Lakner - Topeka Capital Markets Inc., Research Division

Also, just on the pop-up store, it really looked terrific and just wondering if you have any thoughts of doing it anywhere else or what plans you might have there. And then just, Gary, obviously we've heard a lot of earnings reports over the past few weeks and they haven't been particularly pretty especially in the teen sectors. So you're a bit of a bright spot here. I wonder what your view is of what's going on in the mall and what your view of the consumer, your consumer is right now.

Gary H. Schoenfeld

Well, I think from a PacSun perspective, we think we're seeing validation of the strategy that our team's been working hard to deliver. When I joined PacSun, I believed that, notwithstanding a very crowded retail landscape, that this is a company that had great heritage and had the opportunity to redefine a unique position in the mall. So we know that's not an easy task. We think we're making progress. But as I say, we know we still got work to do to keep getting better. But I think customers are giving us positive validation that, again, our unique lens on the creativity, diversity and optimism of California, what that means and how we then interpret that by working with great brands and bringing the kind of trend-right fashion and sense of style to girls and guys in their late teens and early 20s, I think we're getting back to being the kind of specialty retailer that people expect from us. And hopefully we can continue to build on the progress that we've achieved over the last several quarters.

Dorothy S. Lakner - Topeka Capital Markets Inc., Research Division

Yes, certainly seems that way. And on the pop-up store, any thoughts of doing that anywhere else?

Gary H. Schoenfeld

I think the best way I'll sum it up is the pop-up store, I think was a great stamp of our creativity and belief in what we're doing and we're going to continue to look for opportunities to creatively deliver on our brand promise. So I'm not going to be more specific than that and I can't say that I know exactly what's coming next, but I continue to challenge our team to think creatively and help really lead the marketplace. So we'll see what that leads us to, but the SoHo experience was certainly a really positive one for us and, I think, for our industry.

Operator

Your next question comes from the line of Marni Shapiro with The Retail Tracker.

Marni Shapiro - The Retail Tracker

I'm curious about -- obviously we know traffic has been an issue but I'm guessing conversion was probably pretty healthy at your store. And I'm wondering if it was a combination of conversion, and where was your AUR and UPTs in the quarter, if you can give us any direction, any insight there. And I'm guessing, based on the numbers, that you saw the improvement on the junior side and maybe less so on the Men's side, is that about right?

Gary H. Schoenfeld

Yes, that's an accurate picture. I mean, overall, we're encouraged by progress in each of those metrics that you outlined. And obviously, it led by the Women's side of the business.

Marni Shapiro - The Retail Tracker

Excellent. And then Gary, just sort of a bigger-picture question but there are a lot of new brands in this space, and -- well, brands that have been around but are maybe growing a little bit faster and becoming a little bit more mainstream, be it net for the [ph] hundreds or there are several of them out there. Could you talk a little bit about maybe this space? And is it maybe time for skate and surf to ride into sort of being a cyclical business in the past? Is it coming into what should be a strong cycle? Because it's been out of favor for a little while.

Gary H. Schoenfeld

So I've been a passionate advocate for the surf and skate industry for now almost 20 years and I love the energy that the brands you mentioned and the other brands that define the industry, what they bring in terms of creativity and inspiration to the market. Importantly though, when we think about California lifestyle, that's a significant pillar but we don't limit ourselves to that. And there's a diverse and evolving sense of style and fashion and inspiration that emerges from our backyard daily and inspires both brands, as well as fashion. So all that tied together says, yes, I continue to believe in the energy and inspiration and the authenticity that skate and surf brands bring. And so whether that's a Diamond or a Volcom or Hurley or Vans, they'll continue to be an important part. At the same time, we also appreciate truly new brands, like Been Trill and others that just are creatively inspired and quickly have the ability to create relevance with consumers.

Operator

Your next question comes from the line of Andrew Burns with D.A. Davidson.

Andrew Burns - D.A. Davidson & Co., Research Division

I had a 2-part question on denim. First, in the short term, can anything be done to help change that trend in season, adjusting the promotions or anything of that nature? And secondly, longer term, it seems like denim has been a commoditized category for the last few seasons now. What's your view on the category long-term, is there opportunities on the margin to shift the mix to more differentiated categories.

Gary H. Schoenfeld

It's a really good question and there isn't just a simple silver bullet or short answer to it because it's such an important category. So -- but I'll attempt to answer it in the following way: #1 is, for as long as I can envision, we'll continue to make denim a very important foundation of PacSun's business. I love the denim business, grew up in the denim business with my father and, more importantly, our customers expect PacSun to be on the forefront of both fashion and basics with denim and we intend to continue to fulfill that. Second, in terms of is there an opportunity to affect it, I can assure you, every merchant and designer in our building with responsibility for that category is challenging themselves with that everyday and there's always the opportunity to think about newness and bring new things to the market. So again, we think that we've done that well with high wasted as part of our assortment in Women's. We maintained color in our Women's assortment, when a lot of people moved away from it this back-to-school. And in Men's, we made a much bigger commitment to Chinos this back-to-school and that has served us well also. So I think we have to be realistic in terms of recognizing the competitive nature and, frankly, the pricing with which some pretty good product is available in the mall. But I can assure you, we're going to stay committed to the category and committed to challenging ourselves on how do we bring the best of that category to the marketplace.

Andrew Burns - D.A. Davidson & Co., Research Division

It sounded like, if I heard correctly, e-commerce grew 4% in the quarter, if I heard that correctly. What can be done to accelerate the growth on the online platform?

Gary H. Schoenfeld

One of the things that lies beneath that was a pretty significant improvement in margin as well and a lot less markdowns within our e-comm channel as we're managing the merchandising better there. So that kind of understates what I believe has kind of been the real growth of that business. But I think as we look farther out over the next 18 to 24 months, clearly, the people that are really winning in online business today are embracing Omni-channel technology. Most of them have a pretty good depth and history of direct-to-retail catalog businesses. But it's definitely a priority for us to not only further strengthen margins but to drive more topline through Omni-channel and I think we're as beginning to put the strategies in place that over the medium term, you'll see that accelerate.

Operator

Your next question comes from the line of Dana Telsey with Telsey Advisory Group.

Dana Lauren Telsey - Telsey Advisory Group LLC

Certainly, it sounds as if -- and I've seen it in the store -- the pop-up store looks great in SoHo, the customer's transitioning to an older teen, young 20s. As you think about the guys business, the girls business, obviously the Brandy Melville, Kendall & Kylie, you've brought in new customers, attracted existing customers. What are the drivers that can help do something similar on the Men's side?

Gary H. Schoenfeld

Again, I think they're largely the things that we've outlined, which is continuing to grow and expand with the current emerging brands we work with, as well as selectively looking for new opportunities. Secondly, continuing to strengthen what we're doing in footwear and accessories, and then third is to continue to get credit for the elevated fashion that we bring and I think that's increasingly becoming a point of difference for us as well. So the Men's business is transitioning. The old PacSun was a short, board short, basic denim and T-shirt business, and I think we're going through what I believe will ultimately be a healthy transition to a new group of brands, to further growth in footwear and accessories but also further recognition for us as a leader in style and again, taking our inspiration from what we see coming from our backyard here in California.

Dana Lauren Telsey - Telsey Advisory Group LLC

And then just one last thing on the holiday season, with 6 fewer days, any plan -- how are you planning holiday whether it's events, whether it's brand introduction, what should we be looking for?

Gary H. Schoenfeld

Ask me in January, what we did. Surely you don't want me to answer that right now but I think most important is the core parts of what we deliver at retail, which is the merchandise, the brands and the experience we deliver in our stores and online. And obviously, we're focused on winning this holiday season with those as the key drivers.

Operator

Your next question comes from the line of Lee Giordano with Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Can you just provide an update on the marketing strategy and how you're you thinking about new campaigns going into the second half of the year.

Gary H. Schoenfeld

Yes, our primary focus for connecting with our customers is in our stores. We pay a hell of a lot of rent, and part of that is because that's where the customer is. So we put a huge priority, frankly, on the in-store experience and the messaging that goes on within our stores, and I think that we're getting credit from showing up better and better and communicating in interesting ways. And then second is the obvious need to continue to engage and become even more relevant in today's social and digital marketplace and I think we do a decent job of that. I'd like to see us do more and get better as that becomes even more important as we move forward.

Operator

[Operator Instructions] Your next question comes from the line of Betty Chen with Wedbush.

Betty Y. Chen - Wedbush Securities Inc., Research Division

Just a quick follow-up for Michael. Looks like in terms of the SG&A guidance, Michael, that on the sales number, it might be sort of nearing flattish or slightly less leverage than we've seen in prior quarters. Is it really just a matter of the calendar shift that we're seeing that happen? And how should we think about opportunity for SG&A leverage going forward?

Michael W. Kaplan

Yes, there is a slight calendar shift impact there and we're continuing to achieve some SG&A leverage as we have been over the last 2 years or so. But we don't -- we're not expecting any major SG&A opportunities down the road. It's just continuing to have leverage as we have top line sales that goes along with that.

Betty Y. Chen - Wedbush Securities Inc., Research Division

And then I guess, the final question maybe back for Gary, not to harp on the basic denim again, in terms of that business, how do you feel about the inventory position, whether is that something that you feel comfortable about going into the back half and then and I don't know if you said this earlier but can you share with us what percent of the business basic denim might be.

Gary H. Schoenfeld

So to the second part, no, I'm not going to get into the details but it's an important category for us. And from an inventory perspective, we're comfortable with where our inventory sits as we go into the back half of the year. To what I've said for quite some time now, we've made speed a real priority for us and importantly, I think we are, as a team, interestingly adept at having the flexibility and nimbleness to see trends in the marketplace and adjust. So on balance, I'm comfortable with where we sit today and we will move forward accordingly.

Well, appreciate everybody joining us for the call. If you're a regular on CNBC, you're going to have the opportunity to seen me in about 20 to 25 minutes I believe. But more importantly, appreciate the continued interest and we'll look forward to sharing our results with you on our next conference call together at the end of the third quarter. Thank you very much.

Operator

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

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Source: Pacific Sunwear of California Management Discusses Q2 2013 Results - Earnings Call Transcript
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