PacSun And Tilly's Both Tumble After Earnings

Includes: PSUN, TLYS
by: Brett Moll


PacSun & Tilly's both saw 17% losses in share price following Q1 earnings.

Increased promotional spending from peer retailers is effecting both businesses.

Both companies warned of weaker than expected Q2 earnings.

Just last week, both Pacific Sunwear of California Inc. (NASDAQ:PSUN) and Tilly's, Inc. (NYSE:TLYS) reported earnings and by no means were they as pretty as the assortment of clothes they offer. The ensuing day following the reports resulted in each stock shedding approximately 17% of its market cap. It's not every day a stock sheds 1/6 of its value and it's because of this that we need to take a closer look at both PacSun and Tilly's. Besides for both companies being specialty apparel retailers and both getting destroyed after earnings, there are many other similarities these companies share.

For starters, PacSun and Tilly's are both headquartered in the sunny state of California and both use the "California lifestyle" as the backbone and fabric of each specific company. Naturally, they are both competitors. However, neither has been competing very well. The retail market is very competitive to begin with. Yet, there has been increased peer spending in promotions and it is difficult for smaller market cap companies like PacSun and Tilly's to compete. As of 6/5/14, PacSun and Tilly's market caps are 155 and 240 million respectively.

PacSun reported earnings on May 29th, and while they managed to beat on both top and bottom lines, the guidance that was provided for upcoming Q2 was not at all comforting or reassuring.

"While we anticipate continued growth in our Men's business, the promotional environment that we are seeing in the mall coupled with underperformance in a couple of categories in Women's is resulting in a more cautious outlook for the second quarter."

It was these words from Gary H. Schoenfeld, president and CEO, that sent the stock spiraling downward. The company is expecting a loss anywhere from $.02 to $.08 per share, compared to a gain of $.02 per share in the second quarter of 2013. PacSun also expects same store sales to fall in anywhere between -5% to flat. This is significant given the fact the PacSun just reported comparable same store sales of 3%, which marked the ninth straight quarter of comparable store sales growth.

Tilly's reported earnings on 5/28/14, and while they managed to post a profit there was a slew of bad news that came along side. Most notably, was the bleak outlook it provided for Q2. Management was quoted:

"We continue to experience weak traffic trends and a highly promotional environment in teen retail. If these trends continue, we would expect second quarter comparable store sales to decline in the high single digits."

This weak guidance is a troubling sign for investors. Tilly's estimates net income per diluted share to be in the range of $.03 to $.07 compared to $.15 in Q2 2013. While Tilly's is still anticipating a profit, they are eluding to the real possibility of profits being shed by 50-80%.

It is pretty clear to the see the common theme. Both PacSun and Tilly's are in a serious rut and competitors have stepped up their game via promotions and marketing. Just two years ago, both of these companies were in different directions. However, at this point, they look all too similar. Tilly's has tumbled from $18 to the $8 range. In the same two year span, PacSun has actually rallied 30% from $1.50 to the $2.25 range. Interestingly enough, less than a year ago PacSun saw its shares trading at $4.50, representing a 300% gain from its lows. At this point, the past is irrelevant and the future is a growing concern for both companies.

Can either one of these California inspired retailers turn it around? Truth be told, no one really knows. Both companies' outlook and guidance was poor enough to see losses upwards of 15%. Going forward, one can conclude that if either PacSun or Tilly's shows some financial improvements or manages to provide a couple strong quarters of earnings, they may not only gain back the 15% that was lost but serious gains may be in store.

Disclosure: I am long PSUN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.