- The company opened four new PacSun stores and closed seven PacSun stores.
- The company launched the PAC Tour, a 26 in-store and club music tour allowing connecting with customers through music.
In terms of investments, store refresh program is the principal long-term driver for improving operating performance and productivity.
- The company has updated approximately 15% of the Pac-Sun fleet, including 75 refreshed stores in fiscal 2007. Investment in this program has created an enhanced store environment to improve lighting, fixtures, sitting rooms, and music, allowing for better merchandise presentation and an improved shopping experience for customer. Goal is to continue to refresh approximately 70 or 75 stores a year.
- A second area of capital investment is information technology. The company has operated with inadequate systems for the size and complexity of this business. Under new leadership, the goal of this team is to implement systems that provide more detailed merchandise information, improve store productivity, and provide operating efficiencies.
- Recent system implementations include TradeStone for merchandise sourcing, QuantiSense for business intelligence and data warehousing, and Lawson as the new backbone of financial systems.
Fiscal 2007 Highlights
- The company announced its intent to close Demo and One Thousand Steps divisions.
- The company announced that it would consolidate distribution operation to single existing facility in Olathe, Kansas during the first quarter of 2008.
- The company announced plan to exit the sneaker and fashion footwear business in order to provide an edited fashion right assortment in these categories.
- Juniors’ apparel business grew by $76 million over the prior year, an increase of 20% on a comparable basis. Although this is significant growth year over year, juniors’ penetration at 46% of total apparel sales for the year still remains far below that of competitive peer group that on average exceeds 60%.
- Young men’s business continues to show steady growth, although at a lesser comparable rate.
- Cash flows from operations were $116 million for the year. Capital expenditures were $106 million. Depreciation was $80 million.
- For the full year as a total company, the company opened 18 new stores and closed 110 stores, 76 of those were Demo and nine were One Thousand Steps.
Fiscal 2008 Outlook
- The company expects apparel will continue to be the primary growth driver and will account for approximately 80% of sales for the year. Objective is to have apparel growth for the year offset the sales declines caused by planned exit of sneakers and fashion footwear. February sales were an encouraging indicator as it delivered a strong comparable store sales result that more than offset the significant planned decreases in footwear and accessories.
- The company expects Demo to be designated as a discontinued operation during the first quarter of fiscal 2008. Therefore, these earnings ranges will not include any lease termination, severance, or other charges associated with the liquidation of the Demo business.
- For the full 2008 fiscal year, based on a 3% to 4% comparable increase scenario, the company would expect earnings from continuing operations in the range of 73 cents to 77 cents per share. The company expects to improve gross margins by approximately 100 to 150 basis points and to leverage SG&A by approximately 50 to 100 basis points at this comp level.
- In order to begin leveraging SG&A for the year, it would need a comprarison of approximately 5% to 6%.
- The company expects effective income tax rate to be 39% for the year.
- For the first quarter of fiscal 2008, also based on a 3% to 4% comparlable increase scenario, the company would expect to incur a loss from continuing operations in the range of 6 cents to 8 cents per share. At this comparable level, the company expects to improve gross margins for the first quarter by less than 100 basis points versus the first quarter last year due to specific charges it expects to incur.
- The company expects to incur additional footwear inventory reserves of approximately $2 million associated with pending reductions in this category. The company will incur approximately $1 million in severance and other transition charges associated with the pending consolidation of distribution function to existing Olathe, Kansas facility, which is expected to complete in April.
- Within SG&A, the company expects to deleverage for the quarter by approximately 250 to 300 basis points versus the first quarter last year.
- The company expects to incur approximately $2.5 million in increased depreciation versus last year’s first quarter, due primarily to ongoing store refresh program and accelerated depreciation associated with increased store closures.
- Other SG&A variances expected for the quarter include store payroll of approximately $2.4 million, due primarily to the impact of minimum wage increases and home office payroll of approximately $1.5 million, due to important investments the company has made over the past year in particular areas expected to help drive the business toward improved store productivity and operating efficiencies.
- The company expects total capital expenditures to be approximately $90 million to $95 million and depreciation to be approximately $75 million to $80 million. The company expects total square footage for the PacSun business to decline 1% to 2% over the course of the year due to closing approximately 35 stores in the normal course of business, opening approximately 15 to 20 new stores, and relocating or expanding approximately 15 to 20 stores.
- The company will also refresh approximately 60 to 70 stores this year, including 22 stores that will go dark in April to begin the refresh process.
- Expected closures by quarter are estimated to be 15, 10, 5, and 5.
Key questions from the fourth quarter earnings call conducted by Pacific Sunwear of California, Inc. on March 13, 2008.
Lauren Levitan (SG Cowen & Co.): Could you give your thoughts on the strategies that will enable you to drive the higher productivity target?
Sally Frame Kasaks: There are a couple of fronts we will be looking at. First of all, the issue of density is one that you will begin to see greater quantities, particularly as we have gotten more and more confident in the junior business but also in young men’s, so that is part of it. In addition, we will be expanding a category such as dorm wear, for example. During the holiday season we had some strong success there. We are not looking to add a lot of new categories but we think we have plenty of opportunity to build within our existing denim business, particularly in young men’s, where we left some money on the table. We also think in young men’s we may have been conservative in some of the fleece hoodie categories. We will see a greater emphasis on certain dimensions of outerwear in certain parts of the country, particularly in the November/December period, so we are looking at targeted opportunities over the next few months. We do see the junior business continuing to grow at a higher rate and there you will see a combination of price point discussion but more a matter of just density and the addition of a half a dozen styles. We are not talking about adding a lot of new categories to do this. We still feel we are under penetrated in those units.
Liz Pierce (Roth Capital): What things are you thinking about in terms of design and marketing talent?
Sally Frame Kasaks: Our young men’s design team has been well-established over the past year. We have now a new design director in juniors and we have begun to put some muscle behind the whole design talent for our proprietary brands. We also made some additions in our sourcing areas, so we are at least for that part of the business, which is our proprietary, we are in much better shape in terms of being more efficient, faster to market on new styles and so forth. That is where that effort is there. In fact, we are starting to build a space for our designers. In the past, they were sitting in cubicles that looked more like Mike’s accounting area, so what we are trying to do is give them the space and create an environment where the design talent can work. We are starting to add more to our marketing arena as well.
Liz Pierce (Roth Capital): Could you expand on the store organization?
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