- The inventories increased 5% per square foot year-over-year mainly due to the increased investment in denim.
- The company ended the quarter with $11 million in borrowings under the $150 million credit facility.
- The borrowings, which have been repaid, were used to finance a portion of the $43 million in share repurchases during the quarter.
- The company anticipates ending the year with about $50 million to $60 million in cash.
The year-to-date capital expenditures were $49 million and depreciation was $41 million.
- The company has reduced the planned capital expansion for the year by $10 million.
- This has resulted in a full year capital expectation of about $80 million to $85 million.
- The company opened six new stores and closed 10 stores in the quarter.
The apparel business recorded a solid 13% same-store sales increase during the quarter.
- The business now represents 81% of the total company sales.
- The management anticipates ending the year with apparel representing about 85% of the sales mix.
- By concentrating on apparel and reducing emphasis on lower margin footwear and accessories, the company hopes to improve merchandise margins over time.
Junior apparel achieved same-store sales growth of 26% during the quarter.
- It now represents 51% of the apparel sales.
- The company believes there is additional opportunity to grow juniors business.
- The management has set a target milestone of 55% of the apparel sales.
- However, the company would still be below many of the peer groups because junior mix is typically greater than 60% of sales.
- Within the junior category, Bullhead denim, tops and dresses were the primary drivers in the quarter partly offset by weakness in shorts.
- Despite the swimwear weakness, the company was able to liquidate the inventory through promotions at lower margins.
- The company ended the quarter with proprietary brands representing 50% of its juniors’ apparel sales.
The young men’s apparel business achieved 2% same-store sales growth in the quarter.
- Bullhead denim and tops were the primary drivers.
- The company ended the quarter with branded goods representing about 77% of the apparel assortment and management continues to believe that brands are the primary driver of the young men’s business.
- The Bullhead, Kirra and Vurt proprietary brands continue to provide opportunities.
The accessory same-store sales dropped 19% marking a disappointing quarter for the business.
- The accessory business represented about 14% of the sales mix.
- The management intends to continue reducing the accessory inventory.
- The expectation is to end the year with accessories representing a low double-digit percentage of the sales mix.
The footwear comps were down 56% and represented approximately 5% of Q2 sales.
- The company remains on plan with the sneaker liquidation and anticipates being out of this category by the end of the year.
- Upon completion of the sneaker liquidation, footwear will account for about 2% to 3% of the total business and will consist primarily of sandals.
Financial Outlook:
- In light of the economic challenges, the company is revising its outlook for the third and fourth quarter of fiscal 2008.
- Assuming same-store sales in the negative high-single digit range and year-over-year SG&A expense growth of not more than 5%, the company anticipates earnings from continuing operations of 0 cents to 5 cents per share for Q3 of 2008.
- The non-GAAP earnings from continuing operations are forecast to be 11 cents to 16 cents per share for Q4 of 2008.
- The earnings range for Q4 excludes the anticipated gain of about 23 cents per share from the sale of the company’s closed Anaheim distribution center, which is currently expected to close during Q4.
- On a GAAP basis, after giving effect to the anticipated gain associated with the sale of the Anaheim distribution center, the company anticipates earnings from continuing operations for Q4 of fiscal 2008 in the range of 34 cents to 39 cents per share.
Key questions and answers from the second quarter fiscal 2008 earnings call conducted by Pacific Sunwear of California Inc. on August 21, 2008.
Adrienne Tennant (Friedman, Billings): The comp trend for the back half of the year was a negative high single-digit. There is a shift going on in Q3 but then at the end of Q4 it still seems there is a big gap between where you are going to be comping? How should we think about that and if sales were just slow, how should we think about the additional margin head to liquidate that as we go into 2009?
Mike Henry: The guidance certainly contemplates that we’re anticipating a more promotional environment for the back half and at this sales level we certainly will have to promote our way through goods that do not sale. That being said, there are varieties of tactics that we’re taking; we’re re-looking at receipt flows, re-looking at orders and we’re taking a variety of steps to make sure we keep our inventories contained. We’ve demonstrated over the last year and a half to two years a strong ability to make sure that we do that and plan to continue those efforts throughout the back half.
Sally Frame Kasaks: Some of that inventory too is staying focused on a lot of our denim and certainly there’s a certain amount of size and backstop and fulfillment that needs to be done. We also look at what proportion would be in our denim business which is certainly one of the drivers of the business today.
Adrienne Tennant (Friedman, Billings): If comps through the back half are trending in the negative high single-digit range, one would think that as we go into 2009 they are trending negative mid-singles. At what point should we expect the inventory to be down in line with where the comps are trending?
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