Pacific Sunwear: The Summer Is Over

| About: Pacific Sunwear (PSUN)

By Neal Rau

Retailers ranging from Wal-Mart Stores (NYSE:WMT) to Macy's, Inc. (M) have reported disappointing quarterly results or weak outlooks, as consumers become more careful about spending. Pacific Sunwear of California, Inc. (PSUN), the leading specialty teen retailer rooted in the California lifestyle, has seen its stock make a big run this year, but it is not sheltered from the concern. After reporting an unexpected loss in the recent quarter, and cutting its estimates for next quarter, the stock has fallen sharply. Is this recent pullback a buying opportunity?

The disappointing outlook for the third quarter was a surprise to most analysts. Pacific Sunwear said it expects an adjusted loss between 4 cents and 9 cents per share. Most analysts were expecting it to break even. One positive was that revenue at stores open for at least a year, a key measure of retailer health, rose 3 percent for the quarter. However, adding to concern is the fact that many teen retailers like Abercrombie & Fitch Co. (ANF) and American Eagle Outfitters (AEO) have seen their stocks fall 24% and 27% respectively, since the beginning of 2013.

Even worse has been the meltdown at clothing retailer, Billabong. Billabong said its 40-year-old surf brand was worthless this year after the company's losses tripled, and it can no longer pay its debts. Billabong has struggled with inventory issues, as the company has mainly focused on board shorts and swimwear. Billabong was buying many brands, and aggressively expanding in 2007, right before the financial crisis. Many of those brands that the company purchased lost much of their value when the economy crashed.

Pacific Sunwear seems to be aware of the trends, as the company has been making the transition away from board shorts and swimwear to fashion, and more towards women shoppers. On the men's side, to avoid the weakness in board shorts, the company is focusing more on men's shoes and accessories. By far, the company's best performing segment is its woman's apparel, as Q2 women's comps were up an impressive 11%. The company notes that many of the teens that shopped its stores a couple years ago have now moved to other retailers, but with the rebranding and new clothing lines, it hopes to rekindle its relationship with shoppers that are now in the 17- to 24-year-old range and have higher disposable income.

Nevertheless, more concerning than day-to-day news, or long-term trends in teen fashion, is the price of the stock. According to the real-time trading report by Stock Traders Daily, shares of PSUN have recently broken long-term support. Before the recovery in the stock in 2013, PSUN shares traded between $1.25 and $2.70 for most of 2012. Now, the stock is in danger of falling back down to those previous levels.

Pacific Sunwear has been a big winner this year as investors bought into its turnaround strategy, and shares were up as much as 169% from the beginning of the year, but the stock is now down over 30% from the highs in early August. After breaking lower, long-term support is now converted resistance, and as long as the stock remains below converted resistance, as defined in our real time trading report, we expect lower levels. That would make PSUN a sell/short at resistance, with risk controls in place if resistance breaks higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Neal Rau for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.