Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Michael Henry - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Secretary

Craig Gosselin - Senior Vice President of Human Resources and General Counsel

Gary Schoenfeld - Chief Executive Officer, President and Director

Analysts

Lee Giordano - Imperial Capital

Dorothy Lakner - Caris & Company

Adrienne Tennant - Janney Montgomery Scott LLC

Betty Chen - Wedbush Securities Inc.

Charu Sharma - KeyBanc Capital Markets Inc.

Sean Naughton - Piper Jaffray Companies

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Marni Shapiro - The Retail Tracker

Andrew Burns - D.A. Davidson & Co.

David Griffith - Cobia Capital

Jeffrey Van Sinderen - B. Riley & Co., LLC

Janet Kloppenburg - JJK Research

Pacific Sunwear of California (PSUN) Q4 2010 Earnings Call March 15, 2011 4:30 PM ET

Craig Gosselin

Good afternoon and welcome to the Pacific Sunwear of California Conference Call announcing the company's fiscal fourth quarter and year end 2010 financial results. This 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 two hours after the call, through midnight on March 22, 2011. It can be accessed at (800) 642-1687 or (706) 645-9291, passcode 48775011. The call will also be archived on the PacSun website at www.pacsun.com through midnight on May 18, 2011.

The 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 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 2010 Form 10-K and in subsequent filings we made with the SEC, as well as in the earnings press release we issued today. These documents can be found in the Investor Relations section on our website at pacsun.com. All information discussed on the call is as of today, March 15, 2011. Pacific Sunwear undertakes no duty to update this information to reflect future events or circumstances. This call, the webcast and its replay are the property of PacSun. 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 Schoenfeld

Good afternoon and thank you for joining us today. I will cover some of the key points from our fourth quarter and then discuss our priorities for 2011 before turning the call over to Mike to review the financial details. Obviously, our fourth quarter results were very disappointing. After seeing the trend improvement in our business over the first three quarters of the year, with Men's turning to a positive comp and Women's improving from a trend perspective in the third quarter, we went into the fourth quarter believing we had a good shot at getting back to a positive comp. Yet, as we indicated in early January, while Men has achieved a low single-digit comp for the quarter and the year, Women's reverted to earlier trends with negative a 20% comp, resulting in total sales for the quarter of $263 million and a comp store sales decline of 7% for the fourth quarter. Our GAAP EPS loss was $0.53. On a comparable non-GAAP basis using a normalized tax rate, our EPS loss would've been $0.33, which was in line with our revised guidance of a loss of $0.31 to $0.34.

So as we begin 2011, regaining our position as the leading spring summer destination for college and high school, guys and girls is among our highest priorities. Importantly, this has been a critical piece to our strategy for the past year and is not just a knee-jerk reaction to a tough fourth quarter. PacSun, in conjunction with our key heritage brands, has to win at this time of the year. I believe our branded and proprietary assortment across a range of merchandise categories, including swim, shorts, sandals, tees, tanks, lace and summer dresses should be among the best in the mall. For our Women's business, we obviously don't expect to secure the top position in one season, but I do believe that all of the internal changes we've been making over the past 15 months will result in positive momentum for Women's in the first half of this year and the initial response to our new women's merchandising for spring has been very encouraging.

Other key priorities for the year include continuing to improve the connection with our existing customers, in store and online, and attracting new customers to PacSun. Having changed 100% of our field leadership team over the past year and more than 50% of our district managers, we remain deeply committed to shifting from a, what I used to call a fold-the-T-shirt culture, to one that truly eventually wakes up everyday passionate about our customers, our brands and our product. Customers are giving us positive feedback that they are noticing the difference. Yet, we still have a number of opportunities for further improvement with product knowledge and digital merchandising, two critical areas of focus for our team in 2011. Similarly, we have a number of key initiatives underway online, including the launch of our first mobile app and a significant refresh to our website, both targeted for completion by the end of the first quarter. Additionally, as the year unfolds, our customers will begin to see some more advertising from PacSun both online and through traditional media.

As we continue to work to turn this business around, the biggest challenges we see ahead lie in product cost pressures, particularly in the second half of the year, stemming the declines in denim that we experienced in 2010 and occupancy costs that are currently approaching 20% of sales. At this point, the anticipated margin pressure for the back half of the year has been well chronicled. Like every other retailer, we are taking steps to try to mitigate higher product costs. Yet, at this stage, it is hard to predict how consumers will respond to higher prices and how other retailers will react. Denim costs are increasing for all of us, which, combined with the lack of a dominant new trend or fit, in conjunction with the aggressive promotion that we saw this past back-to-school and holiday season, suggests another competitive year ahead for denim as we look to the back half of the year. While we have several strategic strategies for enhancing our business in 2011, we do not expect this to be the growth driver that it was three or four years ago, when PacSun was an early adopter of skinny jeans. Probably the last structural challenge still to fully tackle is our real estate portfolio. I said, when I joined, that at first glance we had probably about 200 stores that we didn't need. We have since closed nearly 100 stores and there are at least another 100 to 150 stores that we will likely close as leases expire over the next few years. Occupancy costs are our single highest expense in both dollars and as a percentage of sales. Rent and CAM currently account for almost 20% of sales, which simply isn't sustainable. Over the past 30 days, we have met with all of our tapped [ph] landlords about further addressing our portfolio, and we will continue to close stores as leases come up and/or look to find ways to help improve the profit potential of our marginal and underperforming stores. We've indicated before that 30 to 50 store closures a year is a realistic expectation and that would be our expectation for the next couple of years going forward as well, barring something more significant through our discussions with landlords.

So to sum up, when I joined PacSun a little more than a year and a half ago, our brand and customer relationships had been tarnished and we had a lot of work to do internally to attract and develop the necessary talent, develop a spirit of teamwork and attract the experience to be successful in this very competitive retail landscape. Today, I'm very confident in our team's ability to execute and once again, PacSun is becoming a store that our heritage brands, as well as emerging brands, are excited to be a part of. Customers have no shortage of choices for where they spend their dollars and the importance of being one of their favorite destinations, we believe, is more important than ever. As a team, we recognize that we still have a lot of work ahead of us, while firmly believing that we can reestablish our leadership position. Our Men's business got back to a positive comp in 2010 with a greater focus on our heritage brands, relaunch of footwear and the addition of more than a dozen new brands. As we head into spring and summer with our Women's business, we believe we have the products, merchandising and marketing strategies in place to start capturing a greater share of wallet with our existing customers and begin to attract new customers as well. I will now turn the call over to Mike and then we will open up the call for questions.

Michael Henry

Thanks, Gary and good afternoon, everyone. Our fiscal 2010 fourth quarter financial results were as follows:

Total sales were $263 million this year versus $293 million last year. Same-store sales declined 7%, largely due to a high teens comp decline in our Women's business. Our Men's business posted a positive comp for the third consecutive quarter. For the year, it's $5.00 [ph] last year. We ended the fiscal year with 852 stores versus 894 a year ago. Gross margins, including buying, distribution and occupancy costs, declined 440 basis points to 18.2% this year versus 22.6% last year. Merchandise margins declined 320 basis points due to higher markdowns associated with our sales miss and the promotional environment of the holiday season. Occupancy costs improve $3 million but deleveraged 90 basis points on the comp decline. Buying and distribution costs improved by $200,000 but also deleveraged 30 basis points to last year. SG&A expenses improved by 90 basis points to 31.3% of sales this year versus 32.2% last year. In dollars, SG&A declined $12 million to $82 million this year from $94 million last year. Of the $12 million in SG&A reductions, $6 million came from reduced payroll expenses and the remaining $6 million was due to lower non-cash store impairment and depreciation expenses. Our income tax expense for the quarter was just over $200,000 as a result of the continuing impact of valuation allowance against our deferred tax assets. Our GAAP net loss for the quarter was $35 million or $0.53 per share. On a comparable non-GAAP basis, using a normalized income tax rate of 38%, our net loss for the quarter was $22 million or $0.33 per share, which was in line with our revised earnings guidance from early January. We ended the quarter with cash of $64 million and no borrowings under our credit facility. Total inventories were up 7% to last year at the end of the fourth quarter, partially due to increase in transit inventories associated with the move to Chinese New Year to February 3 this year from February 14 last year.

Turning now to our earnings guidance for the first quarter of fiscal 2011. We're anticipating same-store sales to be in the range of minus 3% to plus 2% versus last year, with gross margin declines of approximately 200 to 400 basis points versus last year's 22.3%. We anticipate SG&A expenses to be in the range of $67 million to $69 million versus last year's $73 million. This translates to a GAAP net loss range of $0.46 to $0.55 per share, including the continuing impact of having a very low tax provision. On a comparable non-GAAP basis, using a normalized income tax rate of approximately 36% to 37%, this trend leads to a non-GAAP net loss range of $0.29 to $0.35 per share for the quarter.

Operator, we'll now take questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question is from the line of Paul Lejuez with Nomura Securities.

Unidentified Analyst

This is Tracy Kogan, filling in for Paul. First, I was wondering if you could give a little more detail. You mentioned the positive response to the women's assortment in spring. And then secondly, wondering what you're expecting for CapEx this year in '11. And in the few years beyond that, if there'll be any increase because of projects or investments that you put off up?

Gary Schoenfeld

Sure, so on Women's -- you all go into the store, as I think, the most pronounced change starts with swim, and all the indications we've had and research we've done says the leading category in our Women's business that -- she thinks about PacSun as swim. So we made a dramatic change in pricing and merchandising strategy and we've been able to do that through a mix of our own proprietary product, as well as branded. With opening price points in our proprietary product of $14.50 and $19.50. And then we were also able to move branded products from what was $34.50 opening a year ago on an individual item to a $24.50 opening price point. So along with that, you're going to see a much deeper presentation of product, a quicker flow of product and also a much greater assortment of it. So, add that all up, we've been committed to reclaiming our position in swim, losing market share there to the likes of Target or H&M or Forever 21. This was completely unacceptable to us and the response from consumers has been very encouraging on that front, off to quite a good start. In addition to that, our overall women's assortments in shorts and in dresses, and our fashion bare category has also been well received and we think our best assortment on Women's is still coming over the next few months. So we remain optimistic that we're going to shift from a business that's been on the decline to being able to end this first six months on the positive side of the ledger and anxious to get further into spring. As to your second question on CapEx. In 2010, our CapEx, we were able to reduce down to $17 million and we think that's probably a pretty indicative number for 2012. It would be premature to comment beyond that. Sorry, 2011 I meant.

Operator

Your next question is from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg - JJK Research

I wondered why the corresponding guidance was so low for the first quarter given that the comp guidance -- I thought you might have some occupancy rate improvement. And I was also wondering, I think, Mike, you said your inventory was up because of the Chinese New Year. Should we be expecting that it will be more in line with sales at the end of the second quarter? And I have a couple of follow-ons.

Gary Schoenfeld

Yes, so as we look at the inventory increase, what Mike said, certainly a portion of that is due to the two week shift of Chinese New Year. But a portion of that is just an increase in inventory. Given the sales miss in fourth quarter, we carry more holiday merchandise into Q1 than we would've ideally liked and that's frankly, part of the margin pressure in Q1, is as we still work through that. Secondly, we're beginning to see some IMU pressure as a result of increase in costs in Asia. So that's a piece of it as well. And then thirdly, as it relates to deleveraging versus occupancy, yes we've been able to close underperforming stores. We've also had renewals on good stores where we've had to accept increases. So, without growth, without material growth top line, we're not really achieving any benefit versus those occupancy cost figures.

Janet Kloppenburg - JJK Research

And then Gary, are you encouraged with your Men's business? Is it trending better than it was in the fourth quarter? And just on the outlook for the back half, should we be worried that probably, that those margin pressure could continue?

Gary Schoenfeld

So, I think at this stage, there is some risk of gross margin pressure in the back half. The more positive momentum that we can develop through the spring and summer, then I think that helps us in terms of our ability to pass through increases. And yet, given how important denim has been to this company over the last few years and given how promotional denim was in 2010, we're a bit cautious in that regard. So, we obviously are looking hard at what we can do to mitigate that IMU pressure in the second half of the year. But at this point, as we look at the year as a whole, that's one of the challenges that we see on the horizon.

Janet Kloppenburg - JJK Research

And the Guy's business?

Gary Schoenfeld

Guy's business, board shorts has been a little bit softer than what we would have liked to see at the beginning of the season. Offsetting that is the casual short part of our business, is off to a very good start. Footwear and accessories have been good. Denim and wovens, a year ago were strong businesses, not only in fall, but also going into first quarter. So there's a mix going on within the Guy's business. But in general, we expect the Guy's business to probably end up comparable to where it was in the fourth quarter.

Janet Kloppenburg - JJK Research

Did you say there's a miss going on in the Guys, is that what you just said?

Gary Schoenfeld

No. I'm sorry?

Andrew Burns - D.A. Davidson & Co.

What did you say about the guy's business? There's a something going on?

Michael Henry

He said there was a mix of different things going on by category.

Janet Kloppenburg - JJK Research

Your comps have gotten off to a slower start than they were trending in the fourth quarter?

Gary Schoenfeld

I'm not going to get into the specific comps in any one category or gender. In total, what I can say on comps is we're running consistent with the guidance that we've given and my expectation, at this point, for guidance is that we'll end up right comparable probably to where we were in the fourth quarter and I anticipate some improvement in Q2 as we move farther into spring summer assortments. Again, one of the unknowns for us, candidly, is the Easter shift and what effects that's having on business. Again, as I say, board shorts being off to a slower start. Is that indicative of how the season's going to unfold or is that indicative of Easter shifting? I don't think any of us know the answer to that yet.

Operator

Your next question is from the line of Dorothy Lakner with Caris and Company.

Dorothy Lakner - Caris & Company

Just wanted to ask about branded versus private proprietary brands. You said you were increasing some of that in swim to help with the price points. So I wonder where you ended up, as a percent of the business in 2010, proprietary versus branded. And should we assume that that's going to grow a bit in 2011?

Gary Schoenfeld

I mean, that continues to stay pretty even between proprietary and branded, as I'd indicated before. We see our Guy's business dominated by the branded piece. Conversely, on the Women's business, we do think, given the competitiveness of the vertical retailers in women's and the way that they shop for fashion and style. Then our proprietary will be the bigger part of our Women's business going forward. So blended together, we still expect that to be a fairly even mix. But also, with the view of we approach every category first with the idea of how can we maximize the branded presentation, and depth of that segment, where does the consumer really value and give the brands credit. Everywhere we have that opportunity, that's where we want to lead. But there are important categories importantly, where proprietary, it needs to play an important role. On women's swim, with price points where an item from other retailers is as low as $5, obviously, opening price points north of $30 wasn't sustainable and we think we've landed in a good place with both proprietary and branded women's swim off to a very good start.

David Griffith - Cobia Capital

Right, and on the other part of the women's assortment, you talked about a quicker flow for the Swim business. Are you doing that as well in the other kind of important parts of the Women's Apparel business?

Gary Schoenfeld

Yes and I think most of you would agree, we have to be competitive in getting back to having a winning business here. So being able to move quicker in the Women's business is critical.

Unidentified Analyst

Right, and then just lastly, you talked about cost pressures starting now and going into the second half. But obviously, everyone's anticipating an accelerated or worse situation in the second half of the year. I wonder if you could just give us a little bit more color on what you saw for spring and what you're seeing for fall.

Gary Schoenfeld

So, I think consistent with what you would've heard from others, which is that to a large degree, people were able to make fabric commitments and secure cotton back in 2010 without really experiencing the dramatic run-up and there's flexibility on the mills side, on the factory side. So, one way or another, keep prices fairly consistent. Not in all categories, but in general. But that's turned out not just to be a temporary spike but to be, at least through 2011, a clear imbalance between comp and supply and demand. There's no avoiding the increases. So, I think in general, what I've been reading the same as you've been reading in terms of 10% to 15% increases in cost is a reasonable expectation. Obviously, that's if the product stays the same to the extent that things can be done to modify a product and there's the opportunity to bring that down. But in general, the increases, ourselves and others are facing are real. I think there's a pretty wide agreement that there's going to be increased ticket prices going to the second half of the year. None of us know just how the consumer is going to respond to those, nor do we know exactly what other retailers are intending, in terms of promotional strategies. So, it's going to be a dynamic second half of the year. We're obviously thinking very hard about how we plan our business and what steps we take to mitigate those things. Importantly, we believe, is that we regain a significant momentum in the first half of the business, capture more customers, capture bigger share of their wallet so that we're more important to them as we go into back-to-school.

Operator

Your next question is from the line of Charu Sharma with Keybanc.

Charu Sharma - KeyBanc Capital Markets Inc.

My question was around comp. Gary, I just wanted to clarify, on the Men's business. Comp, you said, went from positive mid-single digits in 3Q to positive low-single digits in 4Q. So is the Men's business losing momentum and if you can just clarify what happened there?

Gary Schoenfeld

It really comes down to merchandise categories. So as denim becomes a bigger part in fourth quarter, even compared to third quarter, and this was actually true in both genders. In 2009, denim and wovens were both very strong categories. In 2010, they were very difficult categories, and significantly impacted the business. And certainly, in colder weather markets, those continue to be not as big but continue to be meaningful in Q1. So, we're still challenged in those two categories, in both genders in Q1, as well as frankly, having to move sell-through, a bit of fourth quarter inventory they fit in the first quarter as well. So, that's what's going on in terms of, kind of the slowdown, if you will. And, we do expect Q2 to see an acceleration in comp hopefully in both genders.

Charu Sharma - KeyBanc Capital Markets Inc.

Okay, that's helpful. And just a quick follow-up. On the women's side, you kind of alluded to a positive comp in the first quarter. What gives you confidence that you can achieve that? And also, just to follow up on that, can you also clarify when the full spring collection will be hitting the floor?

Gary Schoenfeld

So, as we roll through different floor sets, certainly over the next 30 days, you'll see the addition of spring products. So well before Easter, it will be unequivocally springtime at PacSun. So you'll see that take hold, as I say, over the next four weeks. And as to your question around confidence in Women's, I said back on our last call in November, that I felt we had the product strategies and made a number of important changes that I thought would get us back to growing that business. What we've seen so far indicates the customer is giving us credit for that. But again, it's with the caveat that Easter's later and spring hasn't really, really hit yet in a meaningful way. But flat out, I just think our products assortment is much more compelling than it's been with Christine and the team that she's building. I think we're going to show up a lot better and the good thing about the Girls business, they do like to shop. What we saw at holiday sign is tests very much done. When there's a lot of noise and therefore, they tend to go to the stores they already really know well. We're pretty optimistic that come spring/summer, they poke their head in to see what's going on at PacSun and we think we've made some important strides that they're going to give us credit for. But hope to tell you more about that as the first half of the year unfolds.

Operator

Your next question is from the line of Jeff Van Sinderen with B. Riley.

Jeffrey Van Sinderen - B. Riley & Co., LLC

Hi, Gary, not to harp on the Girls business, but just wondering if there was any more you can give us, in terms of maybe, an early read on metrics that are driving what it sounds like is improvement in that business. And I guess, how you would see that improvement playing out in Girls. Is it a situation where conversion is starting to improve, maybe the transaction count's improving? Is it a UPT thing? Any color you can give us on that? And then also, are you able to or have you been able to reduce the markdown rate in Girls? And beyond that, I guess the other point of question I would have on girls is the private label penetration and maybe how that could play into helping you offset some of the sourcing cost pressure in the branded business as we get into the second half. Any more detail on those would be helpful.

Gary Schoenfeld

Yes, I'm probably not able to share a lot more really, than what we've already talked about and it is a mix of price points, transactions, again just taking swim -- we've lowered AUR dramatically. So in that case, it is very much about increasing transactions at a much higher rate than the decline in AUR. And so, in other categories, we're seeing nice AUR increases in regular priced merchandise. At the same time, as we're moving through the misses of holiday. Frankly it's taking bigger markdowns to move through some of those misses. So I don't have a simple answer to be able to give you on that. As to your broader question around shifting into proprietary to offset increases, that's not our strategy. Will there be select items that warrant that? Yes, and it's nice having that flexibility. But again, where the customer really will value the branded piece of that, that continues to be our preference to drive the branded business, where we have those opportunities. So net net, we don't see a big shift in our mix of proprietary and branded versus what I already spoke to.

Jeffrey Van Sinderen - B. Riley & Co., LLC

Okay and then, any more color you can give us on how you're approaching -- I think you mentioned you met with your landlords recently. Just wondering if there's a different approach there? If maybe you feel more confident about actually being able to strike a deal for a package? Or if you think it's probably going to continue to be basically closing stores that are -- where the leases are coming up?

Gary Schoenfeld

The obvious answer is, we're probably 35, 40 days away from knowing the answer to that question. We've had good conversations with each of our top landlords over the last month. As I positioned it to them, essentially saying, kind of a last structural issue that we need to overcome. This company's gone through a lot of change over the last three, four years. Between closing prior formats, moving distribution center and other initiatives to get us back to being in a position where we can win. And the last, as I say, real structural issues sits with real estate. I think the landlords get it, in terms of -- we've got some stores where it's not hard to see that they're not going to be easily solved. But I honestly can't give you a good indication in terms of what the outcome of that will be. But I would expect by the next call to be able to comment further on that.

Operator

Your next question is from the line of Mitch Kummetz with Robert W. Baird.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

A few questions. First, Gary, on the Guys comp for Q4 you said, up low-single. I was hoping you could maybe be a little bit more specific on that.

Gary Schoenfeld

Well, I could be, but I don't if I have to be. All right, Mitch, it was 1%.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

1%. And then, so for Q1, you're seeing something comparable to that. So that would suggest that maybe the Girls business, you're expecting that to be down kind of low single-digit? Is that kind of how we should thinking about it given the overall comp guidance on Q1?

Gary Schoenfeld

I'm not sure. The overall guidance is what it is. I think that's why I don't get into the specifics. Then you ask me next question and next question. So note to self, I'm not doing that next time. The guidance we've given is right consistent with where we sit right now. And honestly, I think that the calendar shift is one that's going to play itself out. I can't comment any further than the guidance we've given. And we'll see. As I said, our internal thinking is that we think we see the opportunity hopefully to gain momentum as spring and summer unfolds in both genders. But I can't comment more specifically from, I think, what we've already said.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Sure. And then denim, you mentioned was a challenge in the fourth quarter. Is there any way to put some context behind that? Either, say, what percentage of your sales is denim in the fourth quarter and maybe how that denim business comped relative to the rest of the business?

Gary Schoenfeld

Yes. Denim as a whole -- go back to four, five years ago. Denim was a small part of PacSun's business and denim was a low double-digit part of the total business over the course of the year and footwear and accessories were closer to 30%. And those numbers have almost flipped over three, four years following that. So denim fourth quarter in '09 was a very substantial, well north of 20% of the total business. And as we indicated, it was off in Q3 and continued to be very challenging in Q4. In aggregate, down substantial double-digit declines in denim in both genders. So, a very big deal and I think denim for the year, in 2009, was more than 20% of our total business. That decline put us [ph] back in the mid- to high-teens and somewhere in that range is probably appropriate. And conversely, we're excited about building back the non-apparel part of our business in both genders.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

And maybe as a segue to my next question, because I think as of your 2009 10-K, footwear and accessories were 12% of sales. Do you happen to have or happen to know that was in 2010? And where you see that going in 2011?

Gary Schoenfeld

I think it's nudged up only a point in 2010 and I would sure expect it to grow significantly from there as we go forward. I couldn't tell you exactly what I think that number will be in 2011. But I think it'll grow certainly more than it did in 2010.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

More so in the back half? With back-to-school and holiday?

Gary Schoenfeld

Yes, Yes. And so, yes, so do see important growth there.

Mitchel Kummetz - Robert W. Baird & Co. Incorporated

Okay. And then last question. You mentioned closing 30 to 50 stores this year. I was hoping you might be -- should we be thinking more along the lines of 50 stores?

Gary Schoenfeld

I think we're still at too early of the stage in our landlord discussions to be able to be more specific. If it were purely up to us, it would be the higher number. On the other hand, landlords really aren't anxious to see stores close. So that's where the discussions get interesting. And so, in terms of an absolute number of just pure closures, can't be more specific because there's a trade-off in those discussions with landlords and we're only part way through those discussions.

Operator

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

Betty Chen - Wedbush Securities Inc.

Gary, I was wondering if you can shed a little light around the swim. It sounds like customers are reacting well to your new opening price points. I was just curious if you and the team sourced for that or is that occurring at the expense of merchandise margin dollars?

Gary Schoenfeld

No. The good news is no, we've been planning on this and working at it and so, we feel very good about the margin structure on swim and I'll reiterate what I said before, our opening price points are performing well. As it is, the branded business, and with the comment that price points on the branded are lower than they've been historically as well.

Betty Chen - Wedbush Securities Inc.

And then, I was wondering regarding inventory. I think Janet asked about this earlier. So I apologize if I missed it. But, I think you mentioned that inventory levels, partially due to the Chinese New Year, but also partially from the carryover. Can you tell us what is the percent of the carryover inventory year-over-year? And also, where did you want to be at Q1 end for inventory per square foot?

Gary Schoenfeld

So, not going to comment in terms of Q1 and again, we're looking at what the trends are in the business. I mean to Mitch's question a moment ago, I mean, obviously our hope is to end up in a positive comp situation on both Men's and Women's as we're looking at trends and reactions to certain product. On the Women's side, we still got some flexibility around product and what we can chase still for spring and summer, and then also just a question of when we take deliveries. So depending on sales trends, inventory ranges could move a fair bit. We went into second quarter last year, in terms of kind of May 1, very low on women's inventory compared to what it was on May 30. So, I can tell you know, women's inventory definitely will be up at quarter end. But part of that is a timing issue. We kind of got back into women's business over the ensuing few weeks. We were down dramatically on the opening day of Q2. So women's inventory will certainly be up and that's probably as much as I can share right now.

Betty Chen - Wedbush Securities Inc.

Is there anything you can share with us regarding the carryover inventory level?

Gary Schoenfeld

Yes, only to say that, I think our inventory was up 7%. And of that percentage increase, a portion, but less than half, was due to the Chinese New Year and the balance isn't. So, as that breaks out between carryover versus new merchandise, I'm not going to get that specific into it. As I've said and acknowledged, given the sales miss in Q4, the brunt of that is reflected in the Q4 financials. But obviously, some of that merchandise is carried over and has some adverse effect on margins in Q1. The good news to that is, frankly, what we're seeing is, a better response to new product and marked down product. So, over the long term, that's encouraging. But in the short term, we obviously got to get through that seasonal holiday merchandise as well.

Betty Chen - Wedbush Securities Inc.

Lastly, I was just curious. With swim doing well, and certainly I think that's one of your bread-and-butter categories for spring and summer. Can you remind us what that is as a percent of sales mix? And also how does shorts also play into percent of sales also?

Gary Schoenfeld

Sure. I don't think we've historically been that specific in terms of any one category and what it represents. Together, as you imagine, shorts and swim are a nice part of the business for us. So, I'm not going to get more specific. They don't dominate but they're meaningful.

Betty Chen - Wedbush Securities Inc.

Should we think about them being comparable to the denim business?

Gary Schoenfeld

It changes obviously, quarter-to-quarter and seasonally. But orders of magnitude, the two together, approximate what denim is in the first quarter. It's close.

Operator

Your next question is from the line of George Bozman[ph] with Goldman Sachs.

Unidentified Analyst

It's Rob Phillips [ph] from JM Capital Advisers. Gary, this question is for you. I've been listening to people ask you about very specific little things. But really, this is a pretty serious situation. I see here, in your cash flow statement, you burned almost $58 million of cash last year and with the success that you've given us, all due respect with your guidance, it hasn't panned out for quite some time. How should we look at cash flow this year? Are you going to produce cash flow? What's your liquidity going to be like this year? Do you think cash flow is important in running a business? Generating cash flow? And have you had any talks with restructuring firms? Either operational restructuring firms. Someone like Alvarez & Marsal or with financial restructuring firms? And have you modeled any bankruptcy scenarios?

Gary Schoenfeld

So, as to your first comment. We obviously take ownership of the fact that we missed our guidance for the fourth quarter. I don't think that, that's been our track record in the time I've been here prior to that. So the fourth quarter, as we've admitted, was obviously very disappointing from what we expected. In terms of the cash burn. Yes, quite cognizant of that and quite focused on what we need to do in terms of turning this business around and certainly have a sense of urgency around what it takes to make that happen. So, beyond anything else that we may be doing to try and tackle that, I'm not going to comment on other than we've got a very committed and experienced executive team. I'd say the same is true for our board. When I came on a year and a half ago, I knew this was going to be a serious challenge and we're quite serious about doing everything we need to turn the business around.

Unidentified Analyst

How do I look at the value of my stock when you can't generate cash flow and you can't tell me if you're going to generate cash flow? I mean, how does my stock have any value? And how are you helping me with that value if you can't tell me if you're going to generate cash flow? I mean, how should I look at value? Is there another way I should be looking at value? Are there free assets that you could sell? Tell me.

Gary Schoenfeld

We need to turn around the operating performance of the business. There is no substitute for that. As I alluded to on the call, probably the biggest structural issue that this company still faces is real estate and we're having very serious discussions on that front as I've already spoken to on the call.

Unidentified Analyst

Real estate? How is it real estate? I mean, anyone who does diligence at the store mall level knows that Zumiez is taking your sales. Why are they taking your sales? Because the kids that they have working at Zumiez are enthusiasts. The people in your stores are not enthusiasts. That means that from the ground up, all the way to corporate at Zumiez, those people know what the kids want. And that's not what's happening with you guys. You don't have the SKUs that kids want. Why that is, it could be the fact that you don't have the people who are enthusiasts. And the fact of the matter is that, last time I checked, I might be wrong, is that Zumiez people have weekly, monthly, quarterly, annual quotas for sales for their store, sales by the individual salesperson and there's a significant amount of sales training that happens at Zumiez. So people are brought up to the Pacific Northwest to have a lot of think sessions, a lot of training and I can tell you I walked in to your stores where the customer service isn't even close to Zumiez. And I've seen people wearing Gap clothes. I've seen young ladies wearing Gap clothes at your stores.

Gary Schoenfeld

So, I appreciate it. I'd be happy to have a conversation with you offline. I have a lot of respect for Zumiez. I used to do a lot of business with Zumiez as well as PacSun. I think it's been well chronicled, the changes in strategies and things that PacSun has done over the last several years, much of which you probably don't agree with, and there certainly are things that I happen to agreed with either. Over the last year and a half, we've made a lot of change to address what we think is the right strategic direction for PacSun going forward. Have we been able to effect all of the changes we needed to? Obviously, we haven't. But with the team that we've now been able to assemble, we are aggressively making important changes in merchandising. As I spoke to in my opening remarks, we changed 100% our field leadership team, more than half of our district managers. I'm not proud of what I refer to as the fold-the-T-shirt culture that I think existed in our stores a year and a half ago. And can we convert 11,000 people to have all the skills and passion as quickly as we'd like? That's what we're committed certainly to working towards. So, fair comments. But we are quite committed to fixing it and as to your question about why is real estate important. Real estate is flat out our single biggest cost item by far. And so, it absolutely is the critical item for us to tackle from a structural perspective and as to the merchandising and store execution and customer relevance pieces. Those are the things that we and everybody else in this building work very hard at every day. And as I continue to say, we're quite cognizant of -- we still have a lot of work to do to get that to really resonate. But I think it's starting to show up in the stores and the results in the next six months will tell us if we're making the kind of progress that we need to.

Operator

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

Lee Giordano - Imperial Capital

I was wondering if you could just update us on the strategy for footwear. How many stores are in full complement right now? And how is that going overall?

Gary Schoenfeld

About 450 stores on the Men's side. It's a smaller number of doors on the Women's side. And it continues to gain momentum. So, I'm pleased with how footwear is performing and look forward to that growing as the year unfolds.

Operator

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

Marni Shapiro - The Retail Tracker

I was going to open by saying, I think the swim looks outstanding. And in the last two weeks, I've shopped at Junior side of your store, sort of looked a lot better. So, I was going to say good luck with that continued improvement. Your things are actually selling out in the Junior side. It's pretty exciting if you actually poke through the items and don't just glance through the store. I'm curious about your marketing. You said you would eventually start spending a little bit on marketing, but I know from the stores that you changed the Pac Sock [ph]. I've heard from several women shopping the stores that they weren't thrilled with the changes you made to Pac Sock. So I was curious, why now make those changes? And I was curious what you were thinking on the marketing side. Away from the electronic stuff which you already referenced in the opening comments.

Gary Schoenfeld

Yes. So, the good news is on PacLoot. Making some changes. I mean, we have to improve our margins is one of the pieces here. And yes, it's been around for a long time. In its earlier iterations, it was an off-peak inducement to get people to come back. That has migrated to become much more of a peak time promotion. And frankly, the margins just don't warrant getting people 50% off at peak times. So, we're testing some different options and we'll learn from that testing and customer reaction and the good thing about retail is you can adjust accordingly. So, that's exactly what we're doing and we'll learn from this and we'll take that into consideration as we look at promotions in the back half of the year. To you other question with regards to marketing. Again, not interested in playing our hands prematurely. But we do have some, I think, pretty fun marketing initiatives that will unfold as the year progresses and I'm going to leave it at that. But we're certainly looking at, not just online, but looking at traditional media and what opportunities we have to retail our story.

Marni Shapiro - The Retail Tracker

And I just have one follow up on the Junior side. I know when I'm walking through the stores what I'm looking for to indicate improvement. I'm curious if you could outline for us, as a company, what do you think we should be looking for? Where did you move first? What should we be looking for to show the improvement? And I'm assuming we can start with swim as a good indication of where you'll be going. But could you just, even at the high-level, talk about what else you guys are doing that we should start to see coming through? Is it a change to core items? Is it change to pricing? Is it a more feminine look? Or is it a more beachy look? Just somewhat of a general feel.

Gary Schoenfeld

I think, at the highest levels, what's critically important is that we exist as one store. And we can't have a younger demographic, female consumer than our guys customers. So first and foremost, we're very committed to being a destination for guys and girls in college and high school. And therefore, having merchandising and visual that really supports that. Secondly, to be more specific as it relates to Women's, I mean, I think the things that hopefully see more and more is, frankly, cohesive merchandising execution. So, rather than just an items of, we got some branded T-shirts or we've got some swim or some sandals, that we really start to feel like a shop and a place that she starts to recognize as a retailer that's on trend, that has a point of view towards fashion. And that point of view is done through a casual California lifestyle filter. But still is on trend and trends can be, as you know, can range from color, to fit, to fabrication, to print, and brand. And just to think kind of at a high level, it's about moving from being a younger item driven business to being a much more cohesive well merchandised assortment of products that she wants to shop the store rather than just buy an item, and have reason to come back more frequently and see what's new and what's on trend. And with the feeling of, as I say, kind of the optimism and individuality and confidence that reflects California lifestyle.

Operator

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

Andrew Burns - D.A. Davidson & Co.

One question for you. Just hopefully you could comment on online store sales for 2010. And then prospects for growth on that channel in 2011.

Gary Schoenfeld

Online sales for 2010 remained about 5% of sales. And as I said, we're relaunching our website prior to the end of the quarter, getting our first mobile app going and starting to really tune into what are the things that drives online business. As well as, I think, starting to get the right attention to merchandising assortment online as well. So we hope to get our online business back on to a growth path and believe that over the next few years, there's a lot of growth opportunity for the online business.

Operator

Your next question is from the line of Sean Naughton with Piper Jaffray.

Sean Naughton - Piper Jaffray Companies

I know you don't want to get into the specifics around your marketing and advertising. But, can you talk about the timing and when we should see that sequence in throughout the year? And then secondly, is there anything in terms of new brands that you're working with? Maybe on the men's side of the business, in terms of new trends or are you strictly working with your national branded partners that you currently have today?

Gary Schoenfeld

So regrettably, I'm not going to comment further on our advertising plans. Appreciate the interest, but just not going to tip our hands in terms of what we're doing, but as to the second part of your question, as to additional Men's brands, yes, as I alluded to we've added a number of brands over this past year, emerging brands that go into our Printables business, additional brands giving us more depth in our Footwear business. And we're also excited about the relationship that we've entered into with Mossimo, with his Modern Amusement brand. We will be launching that brand in shorts later this month. Which we're quite excited about. And some of the other licensing opportunities that are being executed in other categories. I was with one of our prospective licensees this morning, on eyewear, which we hope to have in stores by 4th of July. So, we feel like the mix of brands that we have in PacSun is increasingly compelling and getting us back to the heritage of what made PacSun such a successful company for such a long period of time.

Andrew Burns - D.A. Davidson & Co.

Okay. And maybe, lastly, for the full-year on SG&A, obviously it looks like it's going to be down in the first quarter. Should we expect, for the full year that, that should decline with the store closures or are there additional levers that you can pull out of SG&A for the year?

Michael Henry

We continue to look at opportunities for reducing that, but not prepared to give any further guidance beyond kind of what you've indicated, which is, as stores close, that helps bring that number down and where we could find our incremental opportunities. But, there isn't a ton left to squeeze there outside of changing occupancy costs. That's the biggest opportunity. But there's still little ones to go after and we're going after those as well.

Operator

Your final question today will come from Adrienne Tennant with Janney Capital Markets.

Adrienne Tennant - Janney Montgomery Scott LLC

I just had a couple of follow-ups. Gary, how can you assess whether you are resonating with this older customer on the girls side? If you are resonating on the guys side, have you thought about shrinking, kind of the girls pieces of the business go forward? Can you give us the percent of sales that rented currently? And then out of the $17 million that's CapEx, what is that going to be used for and is there any area where you could actually reduce that CapEx even more?

Gary Schoenfeld

On CapEx, as you imagine, across 800, 850 stores and a distribution center that serves us all that. It is a range of items. There's maintenance CapEx in IT, there's store maintenance CapEx that falls in that. There's some fixtures, updates and improvements that get capitalized and a very, very small number of relocations that essentially we were required to do for various reasons that rolls into a CapEx number in the range that we've indicated. And I don't remember anything else that you asked about.

Adrienne Tennant - Janney Montgomery Scott LLC

It was really about on the girls business. How do you know it's resonating and have you thought about shrinking it? And then if you can give the rent as a percent of sales as it stands today.

Gary Schoenfeld

Rent, as a percent of sales, is approaching 20%. So 18%, 19% it's right in that range. And in terms of how do we know it's resonating? It's anecdotal, but it's anecdotal with quite a bit of feedback, ranging from our field leadership that's out in stores, our sales that are out in stores, what our merchants are seeing and hearing and our design team. And, then again, anecdotally, what we hear from customers. And frankly, it's important we see shopping in the stores. It's not a 12, 13-year-old girl that is dominating who's coming through the store with her mom, which I think is much more of what it felt like a couple of years ago. So, for all those reasons, we feel like we are resonating. But it needs to show up in turning the business and starting to deliver growth in the business. And we hope to really see that happen here in the next couple of quarters.

Operator

Thank you, everyone for joining today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Pacific Sunwear of California's CEO Discusses Q4 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts