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Executives

Michael Kaplan - Chief Financial Officer and Senior Vice President

Gary Schoenfeld - Chief Executive Officer, President and Director

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

Analysts

Stacy Pak - Barclays Capital

Dana Telsey - Telsey Advisory Group LLC

Adrienne Tennant - Janney Montgomery Scott LLC

Betty Chen - Wedbush Securities Inc.

Pamela Quintiliano - Oppenheimer & Co. Inc.

Marni Shapiro - The Retail Tracker

Tracy Kogan - Nomura Securities Co. Ltd.

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

Janet Kloppenburg - JJK Research

Pacific Sunwear of California (PSUN) Q2 2011 Earnings Call August 23, 2011 4:30 PM ET

Operator

Good afternoon. My name is Icy and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2011 Earnings Conference Call. [Operator Instructions] Mr. Craig Gosselin, you may begin your conference.

Craig Gosselin

Thank you. Good afternoon, and welcome to the Pacific Sunwear of California Conference Call announcing our fiscal second quarter 2011 financial results. I'm 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 August 29, 2011. It can be accessed at (855) 859-2056 or (404) 567-3406, passcode 90182379. The call will also be archived on the PacSun website at pacsun.com through midnight on November 28, 2011.

Your speakers today are Gary Schoenfeld, Chief Executive Officer; and Michael Kaplan, 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 also be found in the Investor Relations website on our website at pacsun.com. All information discussed on the call is as of today, August 23, 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's 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. Looking at our operating results for the second quarter of 2011, we continued to make progress on several important fronts. We had our second consecutive quarter of positive comp store sales for the first time since 2007. Gross margins were better than expected as a number of strategies helped to mitigate cost pressure from Asia. Operating expenses came down by $6 million at 32% of sales versus 34% last year, and our inventory was down by 7%, even with the move-up of some of our back-to-school receipts into the second quarter. As an aggregate, we ended up with sales of $214.9 million and a plus one comp, GAAP EPS of a $0.29 loss versus $0.36 last year, and on a pro forma basis, assuming a 36% tax rate, this would equate to an $0.18 loss for the quarter compared to $0.22 loss last year. Comp store sales during Q2 for Women's was a plus one. Our Men's business was running at similar plus one comp until literally the last day or 2 at the end of July when the default headlines out of Washington were nearing their peak and some aggressive early promotion on denim from a few key retailers brought us down to a flat comp in Men's. With respect to our recent marketing initiatives, during the second quarter, we launched our Dress Irresponsibly campaign that featured all of our key brands. The campaign consisted of 30-second and 60-second TV spots broadcast on major cable networks, 15-second video clips and banner ads on select websites, 15-second video clips that ran on mobile handsets and a print campaign, in particular women's oriented magazines, including Teen Vogue, Cosmopolitan and Nylon. We believe this campaign has been a positive first step in reintroducing PacSun as a unique destination for great style, aspirational brands and with PacSun as the champion for individuality and self-expression.

In that vein and with our continued focus on improving in-store customer experience, we launched another new initiative during Q2, which included the rollout of Apple iPads to approximately 300 PacSun stores. The iPads are preloaded with PacSun proprietary software that enables our team members to quickly search for in-demand styles and sizes on a realtime basis to help drive customer throughput, tell more stories about our brands and our fashion and create a more dynamic overall customer experience and engagement with our brand reps. I believe we are one of the first specialty apparel retailers to take advantage of this capability, and we are very encouraged by the initial response we've experienced.

One of our other areas of focus continues to be real estate. During the quarter, we completed negotiations involving approximately 80 stores to reduce occupancy cost and improve operating cash flow, which will begin to take effect in this third quarter. We believe that the cumulative result of these negotiations will produce net cash savings of approximately $9 million during fiscal 2011 and 2012.

Turning to Q3, similar to what others have indicated, we have experienced a tougher start to back-to-school. We believe the primary drivers included declining consumer confidence and a highly competitive promotional environment. Mike will speak more to our Q3 outlook shortly, but in light of what we have seen over the past few weeks, we have revised downward our internal expectations to negative comps for the quarter and plan to continue to take a cautious inventory position as we look ahead to holiday. Between the 2 genders, the overall response to our Men's merchandising continues to be encouraging. Within Women's, compelling fashion is generally doing well, while basics have become increasingly sensitive to pricing competition.

To sum up, we have made progress in the first half of the year in a number of critical areas, including both Men's and Women's merchandising, in-store experience, brand relevance, real estate, cost reduction and inventory management. Yet clearly, we have much more that we need to accomplish. The economy is not getting better and competition remains fierce for a limited amount of discretionary spending. As a team, we remain committed to our turnaround strategy that includes a long-term focus on delivering trend-right products and creating a distinctive PacSun brand identity and experience tied to our unique California heritage. I would now like to turn the call over to Michael, who will speak more to our Q2 results and Q3 guidance.

Michael Kaplan

Thanks, Gary, and good afternoon, everyone. Our fiscal 2011 second quarter financial results were as follows: total net sales were $215 million this year versus $218 million last year; same-store sales increased 1%, following a 1% same-store sales growth in the first quarter; e-commerce sales grew at 16% in Q2 versus last year. We ended the quarter with 821 stores versus 880 a year ago. Gross margin, including buying, distribution and occupancy costs, came in better than expected at $49.5 million in the second quarter versus $50.8 million last year and was flat as a percentage of net sales at 23%. We have been able to hold our IMUs to offset recent increases in commodity costs. Merchandise margin was down 130 basis points from last year, which was better than expected and was offset by occupancy and distribution costs, which improved by approximately 110 basis points as compared to last year. Buying and other related costs were effectively flat in dollars and as a percentage of sales.

Switching to SG&A. Our SG&A expenses declined to $67.8 million or 31.6% of net sales this year from $73.9 million or 33.9% of net sales last year. The reduction in SG&A expenses was primarily attributable to a decrease in store payroll and depreciation savings in alignment with store closures. We view this decrease as especially favorable as it also includes a non-cash impairment charge of $3.4 million in Q2. Excluding the impact of this impairment charge, SG&A expenses would have been $64.4 million or 30% of net sales. Income tax expense was $328,000 for the quarter as a result of the continuing impact of a valuation allowance against our deferred tax assets. Our net loss for the quarter was $19.3 million or $0.29 per share versus our guidance of a loss of $0.36 to $0.46 per share. On a non-GAAP basis, using a normalized annual income tax rate of approximately 36%, our net loss for the quarter was $12.2 million or $0.18 per share versus our non-GAAP guidance of a loss of $0.22 to $0.29 a share.

Actively managing our inventory has been a significant strategic focus for our business. Inventory is down approximately 7% at the end of Q2 as compared to last year, which includes some early deliveries for the back-to-school season. Excluding the impact of these early back-to-school inventories, we are actually down approximately 10%. We ended the quarter with $13.3 million in cash and no borrowing base debt. Based on the current financial outlook, we do not anticipate a need to borrow under our line of credit during the third fiscal quarter.

Switching now to our earnings guidance for Q3. We are encouraged by the progress reflected in our positive sales comps for the first half of 2011. However, as Gary has mentioned, back-to-school has started slower than expected due to a combination of factors. As a result, our sales guidance for Q3 will be a mid- to high-negative single-digit comps. We are targeting gross margin rate, including buying and distribution and occupancy to be in the range of 22% to 24%, which is consistent with the 23% realized in Q2. Projected gross margins consider the benefits associated with the recent lease renegotiations and better inventory management, both in-season and preseason; however, also reflect the competitive promotional environment that may lead to increased markdowns. To provide some additional color with respect to the lease negotiations, we recently secured temporary rent relief and extended the lease end dates at favorable terms for approximately 80 stores, which will benefit us from a cash flow perspective starting in Q3. In connection with the rent relief agreements, we will be issuing 900,000 shares of PacSun common stock to the landlords under the agreements. The net impact to our statement of operations during the rent relief period is expected to be approximately $2.8 million and $5.8 million during fiscal 2011 and fiscal 2012.

Moving to our operating costs, we expect SG&A expenses to be in the range of $66 million to $68 million. We continue to effectively manage our SG&A cost base. And assuming no significant changes in asset impairments, we are expecting to leverage our operating SG&A in relation to sales. This all translates to a projected GAAP net loss range of $0.16 to $0.29 per share, including the continuing impact of having a very low tax provision. On a comparable non-GAAP basis, using a normalized annual income tax rate of approximately 36%, this translates to a non-GAAP net loss range of $0.10 to $0.18 per share for the quarter.

Operator, we will now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Betty Chen of Wedbush Securities.

Betty Chen - Wedbush Securities Inc.

Gary, I was wondering if you can talk a little bit more about the current trends you're seeing, in particular, any color around what the comp run rate might be by the Women's business versus the Men's, as the Q3 guidance that you've issued does seem like it's showing a pretty big deceleration from the trends we've seen in the first half. And also, related to that, the gross margin guidance that you have given of 22% to 24%, is that also still showing some merchandise margin improvement or are we assuming that there might be some merchandise margin degradation due to the promotional environment?

Gary Schoenfeld

The margin guidance, I mean, the fixed cost portion of that isn't going to fluctuate a lot. So the movement in there reflects what in reality is, I think, hard for any of us to know how the balance of the quarter is going to unfold. Clearly, back-to-school is promotional. We've made the assumption therefore that September and October are going to continue at a pretty promotional rate. Fortunately, we entered the quarter with a pretty clean and conservative inventory position, so we think we're able to withstand the promotion and work through the quarter in still a pretty effective way. In terms of the trends between the 2 genders, that was the first part of your question, I think we're seeing the Men's business continue at a pretty consistent rate and the Women's is where we're seeing even more of an impact in terms of price pressure and promotion from other retailers. And with fashion selling through, but basics being quite competitive out there.

Betty Chen - Wedbush Securities Inc.

And can you just remind us what was your inventory plan in terms of the unit, the inventory buys for Q3 or Q4?

Gary Schoenfeld

I'm not going to get that specific, but just to reiterate on an apples-to-apples basis, we came in the quarter minus 10 on an inventory position, and we think that, that has positioned us well given the current environment.

Operator

Your next question comes from the line of Stacy Pak of Barclays Capital.

Stacy Pak - Barclays Capital

I guess the drop that you guys are seeing in the business now, can you comment where you're seeing it? Is it all traffic or sort of what is it? I guess more broadly, Gary, what's the thought about the Women's business? I mean, it clearly looks better in-store. What are you doing to get the word out? I heard the advertising, but I guess it's not enough or I don't know. I mean, where do you kind of go from here? And then can you give us more details on the leases? What did you have to give up and are you keeping some more stores open that you didn't want to, and are there more opportunities there? I guess those would be my key questions.

Gary Schoenfeld

We'll take them in reverse order. On the real estate front, we're not willing to keep open bad stores that continue to lose money. And with some of our bigger landlords, as you'd imagine, we've continued to have some flexibility in terms of low volume stores if there's a nominal rent that at least gets it to cash flow breakeven. We've shown some flexibility on a short-term basis to keep some of those stores open, giving them more time to find other tenants. So that is and was part of the package, and will continue to be. But fundamentally, we realize we can't be hamstrung by bad stores. We need to continue to get out of those low-volume locations and focus on the 600 to 700 core stores that really are going to drive the business. On the details, as Michael alluded to, in aggregate, there's about 900,000 shares of stock that have been issued and there was approximately about $1 million of cash payment in consideration for some portion that we anticipate, it's not finalized but anticipate. And that will add to some of the savings. So we're nearing completion on some other deals as all that gets done. But in total, it's been largely about working with landlords and then recognizing we got problem leases, many of which do come up for expiry, not all of them expiration, not all of them. And we need to work through them. In terms of coming back to your questions around Women's and back-to-school, I think that stepping back, our view is we made progress this spring and summer, which is when we're a more natural destination, and we need to continue to really win during those 6 months. And I think we made a good step forward this spring, summer and look forward to building on that and improving upon that in 2012. Denim is a key franchise for us in the back half of the year and I think it isn't hard to walk through the mall and just see how competitive denim has become and how many choices she has. I think the same is true when you look at basic tops. So we're modifying things, we think, from a trend perspective. We're certainly seeing there's been quite a shift in terms of shape. There continues to be kind of the bohemian influence, and what you're seeing in terms of lace and other treatments. The customer is responding well to that. At the same time, I think it's going -- it will take some time and be a process in terms of us really becoming one of her favorite year-round destinations. So progress, but we're not fully aware. We hope to get to over time.

Stacy Pak - Barclays Capital

So the drop, though, Gary, was it traffic or was it conversion when things really fell off here at the end?

Gary Schoenfeld

Well, we don't have traffic counters, I think, but my view is she was shopping a lot of places and then making a determination on where does she think was the best opportunity to buy denim at a pretty low price. We shifted some promotion and have seen some good results from that. So in aggregate, our denim as a whole, I believe will be up and fashion is performing. It's probably more in basic tops where we're realizing we've still got more to learn to really win in that part of the business.

Stacy Pak - Barclays Capital

Okay. And last follow-up. Is there some plan, Gary? How do you get the word out and what do you do?

Gary Schoenfeld

Honestly, I think the best word is word of mouth and store experience. Yes, we continue to do things in print, online, through blogs. There will be other things that we do in the future to continue to "get the word out." But we also know our store gets shopped, but we've got to move higher up. There's 8, 10, 12 good choices for her in the mall. And where you sit in that pecking order is pretty important. So we're primarily focused on continuing to elevate our merchandising execution and our in-store visual merchandising and level of engagement and product knowledge and the ability to sell outfits and fashion and accessorize. And as we get better at that, I think we'll see the results will follow.

Operator

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

Adrienne Tennant - Janney Montgomery Scott LLC

Gary, I guess my question for you is what's working? So categorically speaking, what categories are comping positive? What categories are disappointing and comping negative? And then secondly, are there any ongoing shifts with regard to fall season, third quarter, fourth quarter then into holiday? Are we going to see any more of these inventory shifts? And if so, how might they impact the end of third quarter inventory? And then for Michael, can you just talk about the cadence of the comp during the second quarter? Were comps positive in each of the 3 months? It sounded like you had a drop-off in Men's toward the end of July. Doesn't sound like that happened for Women's. So can you give us a little bit more color there? And then are we to assume that you're currently running at the negative high single digit end of the range currently? So if you can give us any color about how the comps would progress in the third quarter, if you can.

Gary Schoenfeld

Adrienne, if this was just a phone call with financial analysts and didn't go any further, we'd probably answer more of your questions. But as we all recognize, that's not the reality. So we're not going to share a lot more information than what we've already shared in terms of trends, performance, subcategories or anything else.

Adrienne Tennant - Janney Montgomery Scott LLC

Okay, fair enough.

Gary Schoenfeld

The information we've given you is what it is. It's not a secret that people had a tough beginning of August. I think, as you have commented, traffic sure seems to have picked up and back-to-school seems to be happening later and maybe the distraction from Washington DC isn't stinging quite as hard as it was at the beginning of the month. And I will say that, that's consistent with what we're seeing, but not going to comment much further. Our guidance is our best view in trying to anticipate what we believe is still going to be a) a promotional fall because there have been awfully good deals in August, and hard to see where that just disappears over the next 60 days. And b), I think it's going to be a very selective consumer over the next 60 days. So we think we're appropriately giving our guidance. Some have opted not to give any guidance given the uncertainty and volatility. We think we've got pretty good visibility on the business. And from an inventory perspective, as I said, we made, I think, some smart adjustments coming in to back-to-school. We think we can have our inventory be more productive. One of our objectives is clearly to get overall margin improvement. And against the backdrop of all the margin pressure in cotton prices and inflation out of Asia, we think we're managing that pretty effectively, and inventory management is fundamental to turning this business around. So that's probably about as much as we can share with you at this time.

Adrienne Tennant - Janney Montgomery Scott LLC

Okay. And then -- so then, Michael, can I just ask you a question about the share compensation for the rent relief? As we're modeling the third and fourth quarter of 2011, should we assume that the entire $1 million cash payment and the $2.8 million, like how should we spread those over the quarters? Should we just -- I mean, obviously, they're one-time, but are they embedded in the third quarter guidance? And if so, how should we kind of think about that?

Michael Kaplan

The $2.8 million, I would think of that as 60-40, third and fourth quarter, and the $1 million cash payment, still to be determined Q3 or Q4.

Adrienne Tennant - Janney Montgomery Scott LLC

Okay. Actually one last one, sorry. You had an initiative to stores into your promotions. Is that showing up in current flows as we speak? So sourcing into desired promotional levels?

Gary Schoenfeld

Directionally, yes, but I wouldn't say that we've mastered that. So I think that's something is part of our overall inventory management, promotions management and margin improvement, that's one element to it. Do you see it pervasively right now in the stores? I would say probably not and they'll probably be more evident in the fourth quarter and frankly, as we move beyond that.

Operator

Your next question comes from the line of Paul Lejuez of Nomura Securities.

Tracy Kogan - Nomura Securities Co. Ltd.

It's Tracy Kogan filling in for Paul. I wanted to follow up on the promotional start to back-to-school, and I was just wondering, with your expectation of a negative mid- to high-single digit comps, is it that you're finding your promotions have not been effective versus the other promotions out there? Do you think it's more of a product issue in your stores or is it that your inventory units are too low that you sort of planned on being less promotional now you don't have the units to promote, to compete?

Gary Schoenfeld

So again, I appreciate the questions. First off, I think it's been pretty well demonstrated we're not alone in terms of, the reality is just back-to-school in total velocity I think has been challenging out there and promotions then do bring it down. To just the question that was asked before and as part of the question you're asking that yes, adjusting the units to match promotions is an opportunity for us to get better. I wouldn't say that, that's really changing our August results, or short-term outlook. But yes, we look at the back half as a whole and recognizing how promotional it is, a small piece of it is we could benefit from some depth in units. Beyond that, seeing denim at 50% off in some awfully good retailers at the start of the season, we anticipated promotion. We didn't anticipate it that aggressive, that early and that, along with other factors, I think did have some impact on beginning of the month. And a combination of things have adjusted to where we've seen some improvement. But again, we're not going to get more specific.

Operator

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

Janet Kloppenburg - JJK Research

Gary, I was just wondering if you could comment a little bit about the success that you've had in the Women's business in the second quarter. Do you feel like the team has found the right balance, understands what the customer wants and that aside from this promotional activity, that they understand and can execute a consistent repositioning in the Women's business sect? Something I'm curious about because there's something that seems to be taking hold, but I wonder if the vision is there and if you think going forward into the spring that you can gain some progress, even more progress and productivity on that side of the business. And then secondly, with respect to what's happening now and the weakness in basics, I'm wondering if you have the flexibility and the nimbleness to be able to reposition your assortment and perhaps your promotional and marketing plans to be better equipped in the fourth quarter when I assume it will be just as promotional.

Gary Schoenfeld

So, yes, our assumption is like yours. The fourth quarter will remain promotional. And we think we've improved our flexibility and nimbleness and rest assured are making some adjustments where we can. And yet, still not going to take an overly aggressive view on holidays, I mentioned, with regards to inventory and be in a position to really build the business and continue the momentum in spring and summer in 2012. So the first part of your question. So to build on that, yes, I do have a lot of confidence in the leadership of our Women's business. I think we learned a lot. We've set out on a very different path in swim, put a real stake in the ground and that certainly works and shorts business and other tops part of the business. But as whole, our swim and bottoms business in particular, we're very pleased with that this spring, summer. I'd say one of the other things that has become apparent to us is distinctions in the opportunities for localization in our merchandising. Again for competitive reasons, I'm not going to get into the specifics as to where those distinctions occur. But we clearly recognize there's a bit of different shopping and a bit of a different customer in certain areas versus others and we definitely see an opportunity in spring/summer next year to adapt to that. Thirdly, I think the buy-now-wear-now just continues, and we feel like there's more opportunity to address that deeper into the summer. So I think we've learned a lot. I think we've taken several positive steps forward, but I think we've still got more to learn and more to accomplish to really get to a top tier positioning in Women's, but that's where we expect to get to.

Janet Kloppenburg - JJK Research

You once said to me that you do really well in the spring and summer and that's what you're known for. So I guess that part of the equation has been worked out. Do you think that it will -- if the learnings from this fall will help you be able to get the fall season in better shape next year or how are you thinking about that seasonality, Gary?

Gary Schoenfeld

Yes, I do. I think it's a couple of things. One, as I say, is acknowledging kind of the buy-now-wear-now and how that fits into assortment and how and when do you appropriately transition summer into fall. Second is, we really look to lead with denim in going in to back-to-school. The response to our assortment has been quite encouraging. As I have said, I expect our denim business to be up for the quarter. And yet when some other good retailers got very aggressive and very promotional very early in the season, it sucked a bit of wind out of the launch. So one for them and 0 for some of us at the beginning of back-to-school, but we're responding to that part of the business. So yes, there's some things that we'll learn and take away and do a little bit differently next year. The other part of the business though is in the tops business, we need to continue to be nimble and on trend, on the fashion tops. And that I think we continue to improve. We've modified our sourcing base significantly, changed our calendar and doing some other things to give us that flexibility. And additionally, recognizing just how competitive the basics business is. So there's some things that we will modify going forward to further grow that business.

Operator

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

Marni Shapiro - The Retail Tracker

So I have a couple of quick questions. The first is just some details, can you talk about any differences regionally or shopping patterns between the outlets versus dotcom versus the stores as far as traffic and the fall-off that you saw in Men's, did you see it across all different areas? And then Gary, just a follow-up on some things that you've been saying about the Junior shopper. I'm in your stores all the time and I thought the swimwear had a real pow and a real ownership and a sort of take no prisoners attitude. And I guess I didn't feel like the denim presentation had quite as impactful point of view. I also feel like some of the fashion in the store is very good and is obviously selling, but doesn't feel like it's getting the highlight maybe that it should. And I was wondering if that's because the inventory is not owned deep enough to really make that presentation or if you were trying to also at the same time move through the basics to really clean the store out. Just help me understand the difference between the spring assortment with that swim and how we transition into fall?

Gary Schoenfeld

So spring, summer again being a more natural time, not only for us but also for our heritage brands and again, a further point of difference for us. So I think we got a lot of positive feedback on the cohesiveness with which we merchandised spring and summer, with swim integrated with shorts and fashion tops and coverups along with that and then complemented by dresses and a few other smaller categories. As we went into the back-to-school, we actually have felt good about the impact of denim, but I respect your comments, and I'm not disagreeing. We always look at what we do and certainly see opportunities for improvement. But in general, where I would agree with you even more is the impact of tops and how we merchandise that within what is admittedly a pretty small box. So we continue to look at how do we do a better job in our visual merchandising and also what's the lifestyle and PacSun messaging that comes across, and therefore as I talk just kind of the end around brand, identity and experience, we feel like we're continuing to elevate that and excited about the approach we're taking in terms of holiday to further reinforce the total brand identity of PacSun. The ad campaign around Dress Irresponsibly I think was a first step to try and move us beyond sort of that stereotype serve store, and we need to continue to reinforce that in-store, not with that creative but with other creative that starts to really create a clear point of view of what does PacSun stand for as a brand and then how does our merchandising reflect that. And lastly, yes, we'd acknowledge there are some categories where our unit inventory was light and wouldn't -- don't want to overweight that point. But yes, as we refine our inventory management and get to where we're optimally assorting and doing store clustering, yes, we still see opportunities to do that better going forward.

Marni Shapiro - The Retail Tracker

Great. And then just on the differences regionally or by outlets or dotcom, anything that you can help us understand. Was this really mall based or did you see the same fall-off at the outlets and online?

Gary Schoenfeld

Again, I mean, don't take it out of context. My point was that basically, both Men's and Women's were running essentially a one comp for the quarter. And literally, it was the last 48 hours where Men's by a hair fell below it. If anybody remembers the end of July, we were dominated by what was going on in Washington DC, and that's when a couple of other retailers broke some very aggressive denim. So my only point was we thought all along both genders were delivering a positive comp. Men's missed it by a hair literally in the last 48 hours. But as I've also indicated, we continue to see good things happening in our Men's business and a very solid positioning there, and overall like what we think continues to be ahead for us with our Men's business.

Operator

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

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

I wonder if you can just give us a little more color, if there's any preponderance in A, B or C malls in the 80-store deal that you struck. And then any sense you can give us of how many of the 80 were not natural lease expirations coming up?

Gary Schoenfeld

So, you could pretty much make the assumption that they were pretty bad stores or what one would call C mall. I don't know that any landlord brands their malls as A, B and C malls. But low volume, underperforming stores that we're getting out of is the preponderance of what's captured there and we have more still to tackle.

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

Okay. And then any sense you can give us on where you think cash would be at the end of Q3? And then also, can you remind us what -- well, just looking at the balance sheet, what does other long-term assets consist of on the balance sheet?

Gary Schoenfeld

Well, I might miss that point. I haven't looked at the other long-term assets for a while. But in terms of cash, I think what Michael indicated in his remarks is that we don't anticipate any drawing on the line. What our actual cash balance is, I don't know.

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

Okay. And then finally, I thought it was interesting that you're deploying the iPads, maybe you can just touch a little bit more on that? Any more color there?

Gary Schoenfeld

Yes, it's pretty fun. Again, we know one of the things we need to do is redefine the PacSun brand and the in-store experience. Paula, who leads our field team, has led truly a transformation in people talent and focus within the stores. And I think that, that experience continues to improve. And as part of that, our IT team felt like there was a real opportunity to get out in front of what the technology of iPads could be. So we piloted it in a few stores and quickly got it out to 300 stores before back-to-school and we have the ability to walk and talk at the same time and engage with customers, bring brands to life. It's also a tool where we're communicating to our brand reps more directly and sharing more brand knowledge and product knowledge. It saves us costs in other things that we communicate to stores and things that we would send to stores. But obviously, the most exciting piece is the customer engagement, the ability to show outfit, show different looks, ship them sizes if we don't have their size in that particular store and do it in a very quick and convenient way and in a way that this generation expects to be engaged with. So that's been a fun initiative and a productive one.

Operator

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

Dana Telsey - Telsey Advisory Group LLC

Can you talk a little bit about the Guys business and the Girls business, brands versus private label? Are you seeing the same level of promotions in each and are you seeing the same reaction in each? And just lastly, on the gross margin guidance in the third quarter of 22%, that reduction from last year, is it promotions that are in there? Is it any of the cost of goods? Can you flesh out the components of that?

Gary Schoenfeld

So again, on margins we gave a range. We're not conceding it down to 22% just yet. We gave a range of 22% to 24%, which we think is an appropriate range and it's consistent with where we were in Q2. On the brand versus proprietary part of the business, not a significant change in terms of Q2. The branded piece continued to lead the Guys business with proprietary leading the Women's business. And from a promotional standpoint, I would say we end up being more promotional on the proprietary part of the business.

Operator

Your next question comes from the line of Pamela Quintiliano of Oppenheimer Fund.

Pamela Quintiliano - Oppenheimer & Co. Inc.

Just had a few questions for you. Can you talk a bit about the input costs for the back half and into 1Q and what you're seeing, and how or if that differs with the third party versus the private label? And also just the timing of the back-to-school flows this year versus last year?

Gary Schoenfeld

So input costs, you mean sourcing costs?

Pamela Quintiliano - Oppenheimer & Co. Inc.

Yes.

Gary Schoenfeld

So obviously, the peak of that, I think, affected us and others in Q2 and Q3 depending though, on how far out people go as it relates to us. We think we've been pretty pleased with our ability to mitigate that through a variety of different initiatives. We've modified different sourcing countries of origin. We've opened up in areas such as Pakistan and Bangladesh. We've reengineered some product. We've changed pricing strategies on other products. And obviously, that was a huge headwind that I think we were all concerned about, and I'm proud of the team and the steps we took to mitigate that. And that pressure is waning as we look to Q4 and into Q1. Year-over-year, it still is a negative in Q4. And it's probably not until Q1 where you see the year-over-year start to move the other direction.

Pamela Quintiliano - Oppenheimer & Co. Inc.

And then following up on that, are you looking to take pricing at all on any categories?

Gary Schoenfeld

Take price, you mean take pricing up?

Pamela Quintiliano - Oppenheimer & Co. Inc.

Yes.

Gary Schoenfeld

I think we're all -- but I'll speak for us, I won't speak for everybody else. We're looking at, and we have, and will continue to review pricing in all categories, up, down, sideways. It clearly is a competitive pricing promotion and an important aspect to the business.

Pamela Quintiliano - Oppenheimer & Co. Inc.

And then just the timing of the back-to-school flows?

Gary Schoenfeld

As we indicated, we moved some inventory up to summer seats earlier into the end of July. And that's why we reported inventories down 7%. That's why we've alluded to kind of apples-to-apples closer to 10%. Having said that, there's some flow that always comes in this time of year. There's some women's fashion that we've been chasing a bit that's literally kind of hitting stores as we speak, both in tops. There's some additional women's fashion, bottoms that flows back into stores in another 4 to 6 weeks and continues to be nimble. But at an aggregate level, not profound differences in an aggregate level.

Pamela Quintiliano - Oppenheimer & Co. Inc.

And then just a final question. When I try to wrap my head around Women's, is it taking, understanding that it's all about spring, summer, is it taking more time than you initially thought for the Women's business to gain traction? Or is it pretty much in line with your expectations?

Gary Schoenfeld

I obviously would like to be sitting here today saying we're continuing positive comps into Q3. So I was certainly encouraged with the progress we made in the first half of the year, at least on a short-term basis, to take a half a step back in Q3 isn't what I'd ideally like to -- where I'd like to be. So I guess the short answer is I was pretty realistic about what it would take. So I don't know if it's shorter or longer, but I know I would like it to be better. And 30 days ago, I would have thought it would be stronger in the short term. But I still like where we're headed and I like the planning that we're starting to put in place for 2012.

Pamela Quintiliano - Oppenheimer & Co. Inc.

So you -- would you say it's more of an impact of the environment? I mean, obviously, you said more of the basics as well weren't working. But as you look at 3Q, it seems you keep on bringing up the promotional environment out there overall. So do you think that's the broader reason why Girls is perhaps not getting as much traction?

Gary Schoenfeld

That and selectivity of spending and who would have thought that she'd have opportunities to buy great denim in aggregate -- -- for $20, $25, she can buy a good pair of denim in a lot of places. That's pretty remarkable that at the beginning of back-to-school, just how prevalent that was.

Operator

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

Betty Chen - Wedbush Securities Inc.

I just had a quick follow-up, Gary or Michael. What should we expect for inventory position at the end of Q3 and if you can remind us whether we should continue to expect the CapEx plan this year to be $17 million and what was the depreciation that we should look for this year now that you've kind of renegotiated some of your leases?

Michael Kaplan

So for Q3, end of Q3, we're looking at a negative low-double digit comp in inventory. And CapEx, I would say in the $15 million to $17 million range. And what was your last question?

Betty Chen - Wedbush Securities Inc.

About depreciation, Michael. What should we look for now?

Michael Kaplan

For the full year?

Betty Chen - Wedbush Securities Inc.

Yes, four or Q3.

Michael Kaplan

Yes I'd like to -- we'll keep it to Q3 right now. I would say in the 7% to 8% range.

Operator

At this time, there are no further questions.

Michael Kaplan

Thank you.

Gary Schoenfeld

Very good. Well, I thank you all for joining us on the call. Just recapping, we've made I think some important strides in the first half of the year. We're dealing with a pretty dynamic back-to-school period, and I think making the right adjustments to the business and we will certainly look forward to reporting our progress on our next call. Thank you very much.

Operator

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

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