Can PacSun Surf Back To Profitability In Its Competition With Zumiez?

| About: Pacific Sunwear (PSUN)

Action-sports themed youth retailer Zumiez (ZUMZ) reported same-store sales April 4 for the five-week period ended April 2. Net sales increased 23.5% to $50.9 million, and same-store sales increased 14.1% compared to the same period last year. Additional information available from the company's prerecorded sales message referred to in the report included quarter-to-date same-store sales that rose 14.1%, and sales were helped by an increase of Average Unit Retail, slightly offset by a decline in units per transaction.

Zumiez is one of a shrinking number of retailers that report monthly same-store sales. California-themed youth apparel retailer Pacific Sunwear (PSUN) stopped reporting monthly sales in the first quarter of 2009. Are increasing sales at Zumiez a sign it is stealing business from PacSun, or does the increase in AUR indicate that PacSun may also be improving?

Zumiez and PacSun both sell many of the same brands, in addition to private label brands. Popular brands sold at both stores include Nike (NKE) and its popular unit, Converse; DC Shoes, Quiksilver, and Roxy, all units of Quiksilver (ZQK); Billabong; and Vans, a unit of VF Corp (VFC). Zumiez's prerecorded sales call mentioned that men's footwear sales increased in March, which may be a good sign for some of these brands. It is also worth noting that PacSun's current CEO Gary Schoenfeld was the CEO of Vans prior to the company being taken over by VF Corp.

Zumiez trades at about 30 times trailing earnings and has a market capitalization of about $1.15 billion at the close of trading April 4. In contrast, PacSun closed April 4 with a market capitalization of about $116 million. The last fiscal year PacSun earned a profit from continuing operations was 2007, earning $40 million, according to the company's most recent 10-K (p.18). Zumiez was profitable for all of its last five fiscal years, according to its 10-K, earning over $37 million for the fiscal year ended Jan. 28, 2012.

It's worth noting that PacSun's 2007 profit was higher than any of Zumiez's last five fiscal years. Also, PacSun was the 12th best performing stock for the decade of 1996-2005, according to the Motley Fool, returning 3,055% during that time period.

Based on the recent losses, it would be tempting to conclude that PacSun is "out." However, teenagers and college students can be fickle. Is it possible that PacSun could come back?

Golden Gate Capital appears willing to take that bet, having funded a $60 million secured loan to PacSun, and being issued the right to purchase up to 19.9% of PacSun's stock on a non-diluted basis in a deal announced Dec. 7, 2011. PacSun also appointed two members of Golden Gate to PacSun's board. PacSun announced that on March 20, 2012, the board appointed Panayotis Constantinou. According to the company, "Mr. Constantinou has control over the investment decisions made by GI2 Ltd, an entity that beneficially owns approximately 30% of the common stock of the company."

But never mind what the big investors think; what do the potential customers think? In an article I wrote recently, I noted how social networks like Facebook (FB) and Internet sites like Alexa can give the public potential clues as to the popularity of a retailer. Information regarding PacSun's estimated web traffic according to Alexa is available here, and Zumiez is available here. Since writing that article, as companies have switched to Facebook's new Timeline, more information is available regarding the demographics of "likers" than on pre-timeline pages. Zumiez's Facebook "like" statistics are available here. PacSun's Facebook stats are here.

The table below compares some information available for the two companies. (Both companies' financial information are from their most recent 10-Ks.) Zumiez's store count is from its monthly sales report. Alexa and Facebook numbers are from the information available on those sites at the time of writing this article.



Number of Stores

733 as of March 12, 2012

449 as of March 31, 2012

Net sales most recent fiscal year

$833.8 million

$555.9 million

Earnings (Loss)

($106.4 million)

$37.3 million

Facebook Likes

Over 1.6 million

Approx 908,000

Most Popular Age Group of Facebook Likes



Percentage of Sales From Internet Most Recent Fiscal Year



Alexa Global Traffic Rank

Past 7 Days



Alexa Global Traffic Rank

Past Month



Alexa Global Traffic Rank

Past 3 Months



Most Popular Age Group of Alexa Visitors



We can see from this chart that, based on Alexa's estimates, Zumiez has seen its traffic rank relative to PacSun decline over the past week and month. Depending on the source, we can also see that PacSun seems to be most popular among an older audience, which could be an indication that it is successfully grabbing the attention of a greater college demographic, potentially putting it in less direct competition with Zumiez.

In PacSun's third quarter conference call Dec. 7, 2011, the company announced that by the end of the fiscal year (which ended Jan. 28, 2012) it would be closing approximately 200 stores. The company stated that the average sales per year at stores that were closing was $600,000, vs. $1.1 million at the stores remaining open. Historically, looking at PacSun's 2006 10-K (p. 13), we can see that the company was profitable at this kind of sales level in the years 2001 and 2002. Specifically, the company earned $49.7 million in fiscal year 2002 on average sales of $1.1 million per store, and $27.6 million in 2001 on 1 million per store. Obviously, better margins are necessary to return to profitability. However, with cotton prices currently at less than half of what they were a year ago, according to 24/7 Wall Street, perhaps PacSun's margins can improve.

It is possible that PacSun's improved Alexa -estimated web traffic ranking is in part due to customers who used to visit PacSun stores that have shuttered and are now visiting online. Conversely, Zumiez increased its store count from 404 last year to 449 this year, so a slight decline in web ranking could theoretically be in part due to a greater number of customers who used to shop online being able to shop in stores. Those who look at Alexa rankings should cautiously note from the graphs on the site that the rankings can fluctuate greatly over time, presumably in part due to seasonality in the case of retailers.

It is also possible that PacSun's web traffic is increasing due to the potential popularity of its current "Golden State of Mind" campaign, and perhaps a better focus by the company on engaging its users through social media.

Zumiez investors already know, despite a slight decline in estimated internet traffic ranking over the past month, that net sales, same-store sales, and comparable AUR rose year over year for March. Although PacSun did not perform well since the recession, investors who believe that the U.S. economy is improving might want to take a closer look at PacSun. Facebook and Alexa indicate that the company has a fan base, so investors may want to consider whether the company can return to profitability by increased sales and/or reduced costs. Given the company's recent history of losses the stock is obviously risky, as reflected by its current stock price.

Disclosure: I am long PSUN.

Disclaimer: The commentary expressed in this article is not legal advice, nor investment advice, and is subject to Seeking Alpha's Terms of Use, which is available here.

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