This summary is based on the third quarter fiscal 2007 earnings call conducted by Pacific Sunwear of California Inc. (PSUN: chart) on November 21, 2007.

Management:

Chairman and CEO: Sally Kasaks
VP and Controller: Mike Henry

Key Investors Issues

- EPS were a loss of 29 cents a share compared to earnings of 13 cents a share last year.
- The company lost $20 million compared to earnings of $9 million in the third quarter of 2006.
- Sales slipped 1 % to $373.1 million from $375.4 million a year ago.

Third Quarter Highlights

Sales were $373.1 million, decrease of 0.6% from total sales of $375.4 million for the third quarter of fiscal 2006.

- Same store sales increased 5%. PacSun comparable store sales were up 7.7%, while demo comparable store sales were down 18.3%.
- Total transactions for both total company and the PacSun division were up high single digits, partially offset by low single digit decreases in average unit retail and average items sold per transaction.

On a GAAP basis, total company gross margin including buying, distribution and occupancy cost increased 150 basis points to $111.1 million, or 29.8% of sales from $106.3 million, or 28.3% of sales in the third quarter last year.

- Merchandise gross margins increased 200 basis points, primarily due to decreased markdowns and improved IMUs.
- Non-merchandised margin categories, which include buying, distribution and occupancy costs, were up 50 basis points.
- Buying costs accounted for 40 basis points of the increase, and occupancy accounted for 20 basis points. Distribution costs were down 10 basis points.

On a GAAP basis, SG&A expenses, including asset impairment charges associated with the company''s 154 demo stores, increased 1,520 basis points to $148.8 million, or 39.9% of sales from $92.6 million, or 24.7% of sales in the third quarter last year.

- Asset impairment and other write-off charges contributed approximately $51 million, or 1,370 basis points towards the SG&A increase. This amount includes a $49 million charge attributable to the impairment of the demo stores. The remaining $2 million in asset write-offs were primarily attributable to ongoing store refresh program in PacSun.
- General and administrative expenses were up 120 basis points, primarily due to strategic consulting expenses and planned increases in home office payroll and e-commerce expenses. The remaining 30 basis point increase in SG&A was primarily attributable to depreciation.

On a GAAP basis, income tax rate increased to 46%.

- This increase was primarily due to lower net income for the year, due to the impairment charges incurred associated with demo.
- On a GAAP basis, the company incurred a net loss of $20 million, or 29 cents per share, compared to net income of $9 million, or 13 cents per share during third quarter last year.

Non-GAAP measures exclude the financial impact to both the current and prior year of the 74 demo stores closed earlier this year, and also exclude the impairment charges associated with the remaining 154 demo stores and 9 One Thousand Steps stores.

Operating results of the 154 demo stores and the 9 One Thousand Steps stores remain in the numbers for both the current and year ago periods for purposes of this discussion.

On a non-GAAP basis, net sales were $373.1 million, an increase of 2.8% over net sales of $363 million for the third quarter last year.

- Gross margins were $115.6 million versus $103.6 million in the third quarter last year. As a percent of sales, gross margins improved 240 basis points to 31% of sales versus 28.6% in the third quarter, last year.
- Merchandise margins increased 300 basis points, due to lower markdowns and higher IMUs.
- The company realized 10 basis points of freight savings due in part to Olathe, Kansas distribution center. Offsetting this improvement were 40 basis points, attributable to occupancy, and 30 basis points attributable to buying costs.

On a non-GAAP basis, SG&A expenses increased 230 basis points to $99.3 million, or 26.6% of sales for the third quarter this year, versus $88.4 million, or 24.3% of sales for the third quarter last year.

- General and administrative expenses were up 110 basis points, primarily due to strategic consulting expenses, and planned increases in home office payroll and e-commerce expenses.
80 basis points of the SG&A increase was due to asset write-offs and accelerated depreciation associated with store refresh programs. 40 basis points of the SG&A increase was attributable to store payroll.