This summary is based on the second quarter fiscal 2007earnings call conducted by Pacific Sunwear of California, Inc. (PSUN: chart) on August 23, 2007.

Chairwoman of the Board, Chief Operating Officer: Sally F Kasaks
Chief Financial Officer: Gerald M Chaney

Key Investors Issues

- EPS were a loss of 15 cents a share compared to a profit of 14 cents a share last year.
- The company reported net loss of $10.5 million from net earnings of $9.71 million during the year-ago period.
- Revenue rose to $344.2 million from $313.7 million a year ago.

Second Quarter Highlights

Net sales were $344.2 million, an increase of 9.7% over total sales of $313.7 million during the second quarter last year.

- Same store net sales were up 1.8%. PacSun comparable store sales were up 3% while demo comparable store sales were down 10.7%.
- Total transactions were up mid single-digits, partially offset by low single-digit decreases and average unit retail and average item sold per transaction. The decrease in average unit retail was primarily due to negative comparable store sales in the footwear business.
- On a GAAP basis, gross margins including buying, distribution and occupancy costs decreased 460 points to $91 million, or 26.4% of sales, from $97.4 million, or 31% of sales, in the second quarter last year.
- Merchandise gross margins decreased 90 basis points primarily due to increased markdowns as a percent of sales. Nine merchandise margin categories, which include buying, distribution and occupancy costs, were down 370 basis points.

Lease termination and other occupancy charges of approximately $13 million, or 380 basis points, associated with the 74 demo store closures, contributed to the gross margin decline.

- Exit the demo charges, occupancy was down 50 basis points.
- Buying costs were up 20 basis points, primarily due to planned increases in Design and Allocation departments.
- Distribution costs were up 20 basis points due to the opening of new Olathe, Kansas distribution centre.

On a GAAP, SG&A expenses increased 540 basis points to $109.6 million, or 31.8% of sales, from $82.9 million for 26.4% of sales in the second quarter last year.

- Asset write-off, or impairment charges of $11.8 million, or 350 basis points, were the leading cause of the SG&A increase. This amount includes a $9.9 million charge, attributable to the impairment of the One Thousand Steps store concept. The remaining $1.9 million in asset write-offs were primarily attributable to on-going store Refresh program.
- General and Administrative expenses were up 160 basis points, primarily due to increases in home office pay roll and strategic consulting expenses.
- Included in the home office expenses, were $1.7 million, or 50 basis points, attributable to the previously disclosed compensation arrangements for CEO and former COO. The remaining 30 basis points increase in SG&A, was attributable to store payroll as a result of deleveraging these expenses on the old single digit comparable store sales.

Income tax rate increased to 41.8%.

This increase was primarily due to lower net income for the year, and certain executive compensation arrangements.

- On a GAAP basis, the company incurred a net loss of $10.5 million, or 15 cents per share, compared to net income of $9.7 million, or 14 cents per share during the second quarter of last year. A primary negative factor in quarterly earnings results was due to underestimating the impact of the sales shift created by the late back-to-school starts in Florida and Texas.
- Entering the month, the company had expected the final two weeks of fiscal July to generate approximately $76 million in net sales. Actual sales for the final two weeks were approximately $63 million. For the month of July, same store sales for the total PacSun chain were down 5% and Florida down 34%, Texas down 20%. The balance of the PacSun chain was flat.

In an effort to provide clear comparison on existing businesses, the company provides certain non-GAAP measures, which exclude the financial impact of the 74 demo store closures, in both years, and also exclude the impairment charges associated with One Thousand Steps.

- On the non-GAAP basis, net sales were $342.1 million, an increase of 12.4% over net sales of $304.4 million for the second quarter last year.
- Gross margins were $105.9 million year, versus $97.8 million in the second quarter last year. As a percent of sales, gross margins were down 110 basis points, to 31% of sales, versus 32.1% in the second quarter last year.
- Merchandise margins decreased 70 basis points, primarily due to markdown activity.
- Buying and distribution costs increased 20 basis points each, as previously noted.

- SG&A expenses increased 270 basis points to $98.3 million or 28.8% of sales year, versus $79.2 million or 26% of sales for the second quarter last year.
- General and Administrative expenses were up 140 basis points, primarily due to the planned home office head count increases and strategic consulting expenses.
- Included in the home office expenses were $1.7 million or 50 basis points attributable to the previously disclosed executive compensation. 60 basis points of the SG&A increase is attributable to store payroll, another 60 points of the SG&A increase is due to asset write-offs associated with store Refresh programs. The remaining 10 basis point increase in SG&A is due to deleveraging of depreciation expense.

- Net income was $4.8 million, or 7 cents per share, compared to $12.2 million, or 17 cents per share, during the second quarter last year.
- Excluding the direct financial impact associated with the demo and One Thousand Steps businesses as a whole, the company’s net income would have been approximately $8.8 million or 13 cents per share.
- The company ended the quarter with $160 million in working capital, including $42 million in cash and investments.
- Inventory per square foot was down 11% versus the second quarter last year.
- Total square footage decreased 1% versus the second quarter last year.

- Payables were $114 million, a 40% increase over last year, primarily due to a $34 million back-to-school receipts received in the last two weeks of the month, and reflecting the improved aging of inventory versus last year.
- The company had 2 new store openings and 7 closings.
- At quarter end, store base was 1118 stores, covering 4.1 million square feet and consisting of 840 PacSun stores, representing approximately 3.2 million square feet, 117outlet stores representing approximately 475,000 square feet and 152 demo stores representing approximately 435,000 square feet, nine One Thousand Steps stores representing approximately 24,000 square feet.

The positive momentum that began in spring continues with PacSun Junior’s apparel business, which the company believes is primary productivity and comparable store sales driver going forward.