Pacific Sunwear (PSUN), operator of 729 California action sports style apparel, accessories, and footwear-selling stores, reported earnings for the first quarter ended April 28, 2012, on May 17, 2012, after the market close.
The company reported a non-GAAP loss of $13.7 million, or $0.20 per share, from continuing operations, compared to a loss of $18.1 million or $0.27 per share, from continuing operations in the comparable period a year ago. This was better than the company's guidance given on March 13, 2012, of a non-GAAP loss from continuing operations of $0.26 to $0.34 per share.
As I've previously written, PacSun was one of the 12 best performing stocks in the market for the decade of 1996 to 2005, according to statistics compiled by the Motley Fool. Further, PacSun has not had a profitable year from continuing operations since fiscal year 2007 and is in the process of closing its underperforming stores.
While PacSun has had its share of difficulties, rival action-sports apparel retailer Zumiez (ZUMZ), also reported its first quarter earnings after hours on May 17, reporting $4.5 million in earnings, which worked out to $0.14 per diluted share. Zumiez operated 444 stores in the U.S. and Canada as of the end of the quarter.
Since PacSun's fourth quarter earnings report, another PacSun competitor, Tilly's (TLYS) went public on May 4, 2012. Tilly's also sells action-sports and California themed apparel, footwear, and accessories. Tilly's operated 145 stores as of May 4, 2012, and had a market capitalization of $471 million at the time of writing this article, according to Yahoo Finance. In contrast, PacSun's market capitalization at the time of writing this article is about $101 million, according to Yahoo Finance. Tilly's has announced it will report its first quarter earnings on May 30, 2012. According to page 49 of Tilly's amended S-1 filed on May 3, 2012, Tilly's earned approximately $4.9 million during the first quarter of fiscal 2011.
PacSun's stock closed at $1.18 prior to announcing earnings and closed at $1.49 on May 21, 2012. PacSun had a short interest of about 7.7 million shares at April 30, 2012, according to NASDAQ, which would take approximately 21 days to cover, based on the average trading volume at that time. Is PacSun's recent share appreciation due to short covering, or did it have any positive news in the report that could also be contributing to the share price increase?
One positive is that the company's same store sales for the quarter increased one percent. This was at the top end of the range of -4% to +1% the company guided about midway through the quarter on March 13, 2012. During its March 13 conference call, the company stated that for the quarter, it was currently at the low end of that range. So, the fact that the company attained the high end of that range indicates that it was able to improve sales during the second half of the quarter.
For the second quarter of this year, the company provided guidance of same store sales in the -1% to + 4% range, and non-GAAP losses from continuing operations of $0.11 to $0.16. During the May 17 conference call, the company stated that it had positive same store sales for the combined March-April period, and also for the beginning of the second quarter in May.
As indicated in an earlier article I wrote on this web site, Facebook (FB) may provide potential clues as to retailers' same store sales. Specifically, clicking on the "Likes" portion of PacSun's Facebook page, at the time of writing this article, indicates that over 48,000 people were talking about PacSun on Facebook during the week ended May 19, 2012. We are also able to compare the change in likes of PacSun and its competitors, as outlined in the table below, using information from Tilly's Facebook page and Zumiez Facebook page.
Approximate Number of "Likes"
People Talking About This Week Ended May 19, 2012
New Likes Week Ended May 19, 2012
New Likes Week Ended May 12, 2012
New Likes Week Ended May 5, 2012
New Likes Week Ended April 28, 2012
New Likes Week Ended April 21, 2012
While Facebook likes may not necessarily translate into sales, as long as the likes are authentic, they do indicate that users are willing to express the fact they like a brand to their friends. Likes may be more valuable to brands if "likers" interact with the brand on its page, and read a brand's posts in their newsfeeds. As Zumiez and Tilly's have fewer stores, one might expect fewer people may be aware of their brands, although Zumiez' numbers indicate this may not always be the case with its high increase in likes at the end of April.
That said, likes have increased in the 10,000+ range on a weekly basis for PacSun since mid-April, and have escalated as May has progressed. Is it a coincidence that the company had positive comps during the beginning of May? Investors can draw their own conclusions.
Other positives from the earnings call include that the company expects declining cotton prices to be a good thing for the back half of the year, although perhaps not to the same extent as for other retailers. Further the company saw an increase in Average Unit Retail in the first quarter, and looks for that to continue into the second quarter. The company also stated that it is broadening its range of price points across different categories. Specifically, the company is selling Oakley sunglasses, a brand of Luxottica (LUX), at a $150 price point, and also intends to add higher-priced Nike (NKE) signature products for the back-to-school season. If PacSun is able to sell these items successfully at higher price points, this may be good news for those companies if other retailers are also able to sell more items at higher price points.
Selling items at a higher price point is an area in which PacSun CEO Gary Schoenfeld has experience. Specifically, he is the former president of Aritzia, a Canadian-based chain of women's apparel stores, that says it has one of the highest retail sales per square foot in North America. PacSun's Amended 10-K indicates that 37% of sales come from women's apparel, 49% from men's apparel, and 14% from footwear and accessories, so investors in PacSun may hope that Schoenfeld is using knowledge gained at Aritzia at PacSun.
All of this said, given the company's recent history of losses, and guidance of a loss in the second quarter, investors who intend to take a closer look at PacSun may want to consider the risks of past and potential future losses.
Disclosure: I am long PSUN.