Pacsun Trims Q1 Loss

Pacific Sunwear of California, Inc. reported that its loss narrowed slightly from continuing operations in the first quarter. Comparable store sales grew 3 percent. Gross margin were up 100 basis points.

Sales from continuing operations for the first quarter of fiscal 2014 ended May 3,, were $171.1 million versus net sales from continuing operations of $166.4 million.

The company ended the first quarter of fiscal 2014 with 618 stores versus 638 stores a year ago.

On a GAAP basis, the company reported a loss from continuing operations of $10.4 million, or 15 cents per diluted share, for the first quarter of fiscal 2014, compared to a loss from continuing operations of $24.1 million, or 35 cents per diluted share, for the first quarter of fiscal 2013.

The loss from continuing operations for the company's first quarter of fiscal 2014 included a non-cash gain of $1.2 million, or 2 cents per diluted share, compared to a non-cash loss of $9.3 million, or 13 cents per diluted share, for the first quarter of fiscal 2013 related to the derivative liability that resulted from the issuance of the Convertible Series B Preferred Stock (the "Series B Preferred") in connection with the term loan financing the Company completed in December 2011.

On a non-GAAP basis, excluding the non-cash gain (loss) on the derivative liability, and assuming a tax benefit of approximately $3.8 million, the Company would have incurred a loss from continuing operations for the first quarter of fiscal 2014 of $7.4 million, or 11 cents per diluted share, as compared to a loss from continuing operations of $9.5 million, or 14 cents per diluted share, for the same period a year ago.

"I believe that in a tough marketplace we are continuing to attract new customers and great brands to PacSun, which has been key to achieving our ninth straight quarter of positive comparable store sales," said Gary H. Schoenfeld, president and chief executive officer. "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."

Financial Outlook for Second Fiscal Quarter of 2014

The company's guidance range for the second quarter of fiscal 2014 contemplates a non-GAAP loss per diluted share from continuing operations of between $(0.08) and $(0.02), compared to $0.02 in the second quarter of fiscal 2013.

The forecasted second quarter non-GAAP loss from continuing operations per diluted share guidance range is based on the following assumptions:

• Comparable store sales from -5 percent to flat;
• Revenue from $200 million to $210 million;
• Gross margin rate, including buying, distribution and occupancy, of 26 percent to 29 percent;
• SG&A expenses in the range of $56 million to $58 million; and
• Applicable non-GAAP adjustments are tax effected using a normalized annual income tax rate.
• The company's second fiscal quarter of 2014 guidance range excludes the quarterly impact of the change in the fair value of the derivative liability due to the inherently variable nature of this financial instrument.

Discontinued Operations

In accordance with applicable accounting literature and consistent with the company's financial statement presentation in its fiscal 2013 annual report, the Company has reclassified the results of operations of its closed stores as discontinued operations for all periods presented, as applicable.

Derivative Liability

In fiscal 2011, as a result of the issuance of the Series B Preferred in connection with the company's $60 million senior secured term loan financing with an affiliate of Golden Gate Capital, the company recorded a derivative liability equal to approximately $15 million, which represents the fair value of the Series B Preferred upon issuance. In accordance with applicable U.S. GAAP, the Company has marked this derivative liability to fair value through earnings and will continue to do so on a quarterly basis until the shares of Series B Preferred are either converted into shares of the Company's common stock or until the conversion rights expire (December 2021).

As of May 29, 2014, the company operates 619 stores in all 50 states and Puerto Rico.


By press release.


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