Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
PSUN > SEC Filings for PSUN > Form 10-Q on 6-Sep-2013All Recent SEC Filings

Show all filings for PACIFIC SUNWEAR OF CALIFORNIA INC

Form 10-Q for PACIFIC SUNWEAR OF CALIFORNIA INC


6-Sep-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management's discussion and analysis of financial condition and results of operations ("MD&A") should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Report.
Cautionary Note Regarding Forward-Looking Statements This Report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and we intend that such forward-looking statements be subject to the safe harbors created thereby. In Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended February 2, 2013 (our "2012 Annual Report"), we provide cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in the forward-looking statements contained herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always, identifiable by the use of words or phrases such as "will result," "expects to," "will continue," "anticipates," "plans," "intends," "estimated," "projects" and "outlook") are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Examples of forward-looking statements in this Report include, but are not limited to, the following categories of expectations about:
the sufficiency of operating cash flows, working capital and available credit to meet our operating and capital expenditure requirements;

our capital expenditure plans for fiscal 2013;

potential recording of non-cash impairment charges for underperforming stores in future quarters; and

the impact of the 53rd week retail calendar shift during the second half of fiscal 2013 as compared to the second half of fiscal 2012.

All forward-looking statements included in this Report are based on information available to us as of the date hereof, and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. See Item 1A, Risk Factors, in our 2012 Annual Report, which are hereby incorporated by reference in this Report for a discussion of these risks and uncertainties. We assume no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. Executive Overview
We consider the following items to be key indicators in evaluating our performance:
Comparable (or "same-store") sales
Stores are deemed comparable stores on the first day of the fiscal month following the one-year anniversary of their opening or expansion/relocation. We consider same store sales to be an important indicator of current Company performance. Same store sales results are important in achieving operating leverage of certain expenses such as store payroll, store occupancy, depreciation, general and administrative expenses and other costs that are somewhat fixed. Positive same store sales results usually generate greater operating leverage of expenses while negative same store sales results generally have a negative impact on operating leverage. Same store sales results also have a direct impact on our net sales, cash and working capital. Net merchandise margin
We analyze the components of net merchandise margins, specifically initial markups, discounts and markdowns as a percentage of net sales. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of discounts or markdowns could have an adverse impact on our gross margin results and results of operations.
Operating margin
We view operating margin as a key indicator of our success. The key drivers of operating margins are comparable store net sales, net merchandise margins, and our ability to control operating expenses. For a discussion of the changes in the components comprising operating margins, see "Results of Operations" in this section.
Store sales trends
We evaluate store sales trends in assessing the operational performance of our stores. Important store sales trends include average net sales per store, average net sales per square foot and number of transactions.


Table of Contents

Cash flow and liquidity (working capital) We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs. Although we made progress with respect to our comparable store net sales and gross margins in fiscal 2012, if we were to experience a substantial decline in same-store sales and gross margins in the future, we may be required to access most, if not all, of the Wells Credit Facility and would potentially require other sources of financing to fund our operations, which sources might not be available. Based on current forecasts, we believe that cash flows from operations and working capital will be sufficient to meet our operating and capital expenditure needs for the next twelve months.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2012 Annual Report.
Results of Operations
Continuing Operations
The following table sets forth selected income statement data from our continuing operations expressed as a percentage of net sales for the fiscal years indicated. The table excludes discontinued operations and the discussion that follows should be read in conjunction with the table:

                                            For the Second Quarter Ended          For the First Half Ended
                                          August 3, 2013     July 28, 2012    August 3, 2013     July 28, 2012
Net sales                                      100.0  %            100.0  %        100.0  %            100.0  %
Cost of goods sold, including buying,
distribution and occupancy costs                70.4                72.6            72.4                74.4
Gross margin                                    29.6                27.4            27.6                25.6
Selling, general and administrative
expenses                                        27.1                30.5            29.1                32.3
Operating income (loss)                          2.5                (3.1 )          (1.5 )              (6.7 )
Loss on derivative liability                     9.8                 4.2             7.9                 0.5
Interest expense, net                            1.6                 1.7             1.8                 1.9
Loss before income taxes                        (8.9 )              (9.0 )         (11.2 )              (9.1 )
Income tax expense                                 -                 0.1             0.1                 0.1

Loss from continuing operations (8.9 )% (9.1 )% (11.3 )% (9.2 )%

53rd Week Calendar Shift
Our fiscal 2012 annual reporting period included a 53rd week. Due to the inclusion of a 53rd week in fiscal 2012, there is a one-week calendar shift in the comparison of the second quarter of fiscal 2013 ended August 3, 2013, to the second quarter of fiscal 2012 ended July 28, 2012. The second quarter and first half of fiscal 2013 included a higher volume back-to-school week as a result of the 53rd week retail calendar shift compared to the second quarter and first half of fiscal 2012. This resulted in an approximately $9 million increase in net sales, a 1.2% improvement in gross margin, and a $0.06 per share improvement to our loss from continuing operations per share for the second quarter of fiscal 2013, compared to the second quarter of fiscal 2012, and an approximately $14 million increase in net sales, a 1.4% improvement in gross margin, and an $0.11 per share improvement to our loss from continuing operations per share for the first half of fiscal 2013, compared to the first half of fiscal 2012. We expect that the one-week calendar shift will result in a similar decrease in sales and gross margin, and will negatively impact our operating results on a per share basis during the second half of fiscal 2013 as compared to the second half of fiscal 2012.


Table of Contents

The second quarter (13 weeks) ended August 3, 2013 as compared to the second quarter (13 weeks) ended July 28, 2012
Net Sales
Net sales increased to $215.2 million for the second quarter of fiscal 2013 from $197.3 million for the second quarter of fiscal 2012. The components of this $17.9 million increase in net sales are as follows:

$ millions                                Attributable to
$         8.7   The 53rd week retail calendar shift which resulted in the inclusion
                of a higher volume week at the end of our second quarter of fiscal
                2013 versus a lower volume week at the beginning of our second
                quarter of fiscal 2012.
          6.6   Increase in comparable store sales.
          2.6   Increase in non-comparable sales.
$        17.9   Total

For the second quarter of fiscal 2013, comparable store net sales increased 3%, average sales transactions increased 2% and total transactions increased 1%, as compared to the same period a year ago. The comparable store net sales increase was due to an 11% increase in Women's while Men's decreased 2%. The increase in Women's was driven by tops, bottoms and other apparel. The decrease in Men's was driven primarily by tops and bottoms. Apparel represented 83% of total Men's sales for the second quarter of fiscal 2013 versus 85% in the second quarter of fiscal 2012, while Women's apparel was 87% of total Women's sales for the second quarter of fiscal 2013 versus 85% of total Women's sales for the second quarter of fiscal 2012. Total accessories and footwear was flat at 15% of total sales for the second quarters of fiscal 2013 and fiscal 2012. Gross Margin
Gross margin, after buying, distribution and occupancy costs, was $63.7 million for the second quarter of fiscal 2013 versus $54.1 million for the second quarter of fiscal 2012. As a percentage of net sales, gross margin was 29.6% for the second quarter of fiscal 2013 compared to 27.4% for the second quarter of fiscal 2012. The components of this 2.2% increase in gross margin as a percentage of net sales were as follows:

    %                                 Attributable to
     1.4   Increase in merchandise margin to 52.9% in the second quarter of
           fiscal 2013 from 51.5% in the second quarter of fiscal 2012.
           Approximately 0.2% of this increase was due to the 53rd week retail
           calendar shift.
     0.8   Occupancy, distribution costs and all other non-merchandise margin
           costs decreased as a percentage of sales as compared to the second
           quarter of fiscal 2012. However, adjusting for the 53rd week retail
           calendar shift, there was deleveraging of buying and occupancy costs
           of 0.2% primarily due to prior year rent relief that did not
           anniversary in the second quarter of fiscal 2013.
     2.2   Total

Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses were $58.4 million for the second quarter of fiscal 2013 compared to $60.3 million for the second quarter of fiscal 2012. As a percentage of net sales, these expenses decreased to 27.1% in the second quarter of fiscal 2013 from 30.5% in the second quarter of fiscal 2012. The components of this 3.4% decrease in SG&A as a percentage of net sales were as follows:
% Attributable to (1.7 ) Decrease in store payroll and payroll-related expenses as a percentage of net sales.
(1.4 ) Decrease in depreciation expense to $6 million in the second quarter of fiscal 2013 from $8 million in the second quarter of fiscal 2012 due primarily to recent store closures.
(0.7 ) Decrease in non-cash asset impairment charges and store closure related charges to $1 million in the second quarter of fiscal 2013 from $2 million in the second quarter of fiscal 2012.
0.4 Increase in all other SG&A expenses as a percentage of sales. (3.4 ) Total

We assess long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets (or asset group) may not be recoverable. Based on management's review of the historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of our stores, we determined that certain stores would not be able to generate sufficient cash flows over the remaining term of the related leases to recover our investment in the respective stores. As a result, we recorded non-cash impairment charges from continuing operations of approximately $1 million during each of the second quarters of fiscal 2013 and 2012, respectively, to write-down the carrying value of certain long-lived store assets to their estimated fair values.


Table of Contents

Loss on Derivative Liability
We recorded a non-cash loss of approximately $21 million related to our derivative liability in the second quarter of fiscal 2013, compared to a non-cash loss of approximately $8 million for the second quarter of fiscal 2012. A key driver used in determining the fair value of the derivative liability each quarter is our stock price. As the stock price increases, the fair value of the derivative liability generally will also increase. Our stock price as of the end of the second quarter of fiscal 2013 ended August 3, 2013, and the first quarter of fiscal 2013 ended May 4, 2013, was $4.47 and $2.81, respectively. See Note 10 to the Condensed Consolidated Financial Statements "Fair Value Measurements - Recurring Fair Value Measurements-Derivative Liability" for further discussion of the derivative liability.
Interest Expense, Net
Interest expense, net, was approximately $3 million for each of the second quarters of fiscal 2013 and 2012. Interest expense, net, from the second quarters of fiscal 2013 and 2012 was primarily related to interest expense associated with the Term Loan described in Note 7 to the Condensed Consolidated Financial Statements.

Income Taxes
We recognized an income tax benefit of $0.1 million for the second quarter of fiscal 2013 and income tax expense of $0.2 million for the second quarter of fiscal 2012. For fiscal 2013, we expect to continue to maintain a valuation allowance against deferred tax assets resulting in minimal income tax expense for the year. Information regarding the realizability of our deferred tax assets and our assessment of a need for a valuation allowance is contained in Note 8 to the Condensed Consolidated Financial Statements. Loss from Continuing Operations
Our loss from continuing operations for the second quarter of fiscal 2013 was approximately $19 million, or $(0.28) per diluted share, versus a loss from continuing operations of approximately $18 million, or $(0.27) per diluted share, for the second quarter of fiscal 2012. Our loss for the second quarter of fiscal 2013 included a loss on our derivative liability of approximately $21 million, or $(0.31) per diluted share, as discussed in Note 10 to the Condensed Consolidated Financial Statements. The 53rd week retail calendar shift described above resulted in a $0.06 improvement in loss per diluted share in the second quarter of fiscal 2013.
The first half (26 weeks) ended August 3, 2013 as compared to the first half (26 weeks) ended July 28, 2012
Net Sales
Net sales increased to $385.1 million for the first half of fiscal 2013 from $359.6 million for the first half of fiscal 2012. The components of this $25.5 million increase in net sales are as follows:

$ millions                                Attributable to
$        14.3   The 53rd week retail calendar shift which resulted in the inclusion
                of a higher volume week at the end of our first half of fiscal 2013
                versus a lower volume week at the beginning of our first half of
                fiscal 2012.
          9.3   Increase in comparable store sales.
          1.9   Increase in non-comparable sales.
$        25.5   Total

For the first half of fiscal 2013, comparable store net sales increased 3%, average sales transactions increased 2% and total transactions increased 1%, as compared to the same period a year ago. The comparable store net sales increase was due to a 9% increase in Women's while Men's decreased 2%. The increase in Women's was driven by tops, bottoms and accessories. The decrease in Men's was driven primarily by tops and bottoms. Apparel represented 82% of total Men's sales for the first half of fiscal 2013 versus 85% in the first half of fiscal 2012, while Women's apparel represented 86% of total Women's sales for the first half of fiscal 2013 versus 85% in the first half of fiscal 2012. Total accessories and footwear represented a combined 16% of total sales for the first half of fiscal 2013 versus 15% in the first half of fiscal 2012.


Table of Contents

Gross Margin
Gross margin, after buying, distribution and occupancy costs, was $106.4 million
for the first half of fiscal 2013 versus $92.3 million for the first half of
fiscal 2012. As a percentage of net sales, gross margin was 27.6% for the first
half of fiscal 2013 compared to 25.6% for the first half of fiscal 2012. The
components of this 2.0% increase in gross margin as a percentage of net sales
were as follows:
    %                                 Attributable to
     1.6   Increase in merchandise margin to 52.9% in the first half of fiscal
           2013 from 51.3% in the first half of fiscal 2012. Approximately 0.4%
           of this increase was due to the 53rd week retail calendar shift.
     0.4   Occupancy, distribution costs and all other non-merchandise margin
           costs decreased as a percent of sales compared to the first half of
           fiscal 2012. However, adjusting for the 53rd week retail calendar
           shift, there was deleveraging of buying and occupancy costs of 0.6%
           primarily due to prior year rent relief that did not anniversary in
           the first half of fiscal 2013.
     2.0   Total

Selling, General and Administrative Expenses SG&A expenses were $112.2 million for the first half of fiscal 2013 compared to $116.2 million for the first half of fiscal 2012. As a percentage of net sales, these expenses decreased to 29.1% in the first half of fiscal 2013 from 32.3% in the first half of fiscal 2012. The components of this 3.2% decrease in SG&A as a percentage of net sales were as follows:
% Attributable to (1.4 ) Decrease in store payroll and payroll-related expenses as a percentage of net sales.
(1.3 ) Decrease in depreciation expense to $12 million in the first half of fiscal 2013 from $16 million in the first half of fiscal 2012 due primarily to recent store closures.
(0.5 ) Decrease in non-cash asset impairment charges and store closure related charges to $2 million in the first half of fiscal 2013 from $3 million in the first half of fiscal 2012. (3.2 ) Total

We assess long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets (or asset group) may not be recoverable. Based on management's review of the historical operating performance, including sales trends, gross margin rates, current cash flows from operations and the projected outlook for each of our stores, we determined that certain stores would not be able to generate sufficient cash flows over the remaining term of the related leases to recover our investment in the respective stores. As a result, we recorded non-cash impairment charges from continuing operations of approximately $1 million during the first half of fiscal 2013 and approximately $3 million during the first half of fiscal 2012, to write-down the carrying value of certain long-lived store assets to their estimated fair values.
Loss on Derivative Liability
We recorded a non-cash loss of approximately $30 million related to our derivative liability in the first half of fiscal 2013, compared to a non-cash loss of approximately $2 million in the first half of fiscal 2012. See Note 10 to the Condensed Consolidated Financial Statements "Fair Value Measurements - Recurring Fair Value Measurements-Derivative Liability" for further discussion of the derivative liability.
Interest Expense, Net
Interest expense, net, was approximately $7 million for the first half of fiscal 2013 and 2012. Interest expense, net, from the first half of fiscal 2013 and 2012 was primarily related to interest expense associated with the Term Loan described in Note 7 to the Condensed Consolidated Financial Statements.

Income Taxes
We recognized income tax expense of $0.2 million and $0.5 million for the first half of fiscal 2013 and 2012, respectively. For fiscal 2013, we expect to continue to maintain a valuation allowance against deferred tax assets resulting in minimal income tax expense for the year. Information regarding the realizability of our deferred tax assets and our assessment of a need for a valuation allowance is contained in Note 8 to the Condensed Consolidated Financial Statements.
Loss from Continuing Operations
Our loss from continuing operations for the first half of fiscal 2013 was approximately $43 million, or $(0.64) per diluted share, versus a loss from continuing operations of approximately $33 million, or $(0.49) per diluted share, for the first half of fiscal 2012. Our loss for the first half of fiscal 2013 included a loss on our derivative liability of approximately $30 million, or $(0.45) per


Table of Contents

diluted share, as discussed in Note 10 to the Condensed Consolidated Financial Statements. The 53rd week retail calendar shift described above resulted in a $0.11 improvement in loss per diluted share in the first half of fiscal 2013. Liquidity and Capital Resources
We have historically financed our operations primarily from internally generated cash flow and with short-term and long-term borrowings. Our primary cash requirements have been for the financing of inventories and construction of newly opened, remodeled, expanded or relocated stores. Although we made progress with respect to our comparable store net sales and gross margins in fiscal 2012, if we were to experience a substantial decline in same-store sales and gross margins in the future, we may be required to access most, if not all, of the Wells Credit Facility and would potentially require other sources of financing to fund our operations, which sources might not be available. Based on current forecasts, we believe that cash flows from operations and working capital will be sufficient to meet our operating and capital expenditure needs for the next twelve months.

                                                For the First Half Ended
                                           August 3, 2013      July 28, 2012
                                                     (In thousands)
Net cash used in operating activities     $     (17,090 )     $      (13,549 )
Net cash used in investing activities            (4,484 )               (227 )
Net cash used in financing activities              (291 )             (1,700 )
Net decrease in cash and cash equivalents $     (21,865 )     $      (15,476 )

Operating Cash Flows
Net cash used in operating activities in the first half of fiscal 2013 was $17.1 million, compared to $13.5 million for the first half of fiscal 2012. This decrease of $3.6 million was due primarily to decreases in accounts payable and other current liabilities and an increase in other current assets, partially offset by lower merchandise inventories, higher sales and improved margins. Our primary use of cash in the first half of fiscal 2013 and 2012 was to purchase merchandise inventories. Non-cash adjustments to reconcile our net loss to net cash used in operating activities were approximately $48 million in the first half of fiscal 2013 and $26 million in the first half of fiscal 2012, respectively, and were primarily related to depreciation expense, asset impairment charges and the loss on our derivative liability in both periods. Working Capital
Working capital at August 3, 2013, was $9 million compared to $42 million at February 2, 2013, a decrease of $33 million. The changes in working capital were as follows:

 $ millions                               Description
$      42     Working capital at February 2, 2013.
      (22 )   Decrease in cash and cash equivalents.
       15     Increase in inventories, net of accounts payable.
      (26 )   Increase in other current liabilities, net of other current assets.
$       9     Working capital at August 3, 2013.

The primary driver of the increase in other current liabilities, net of other current assets is our derivative liability, described in Note 5 to the Condensed Consolidated Financial Statements. As of August 3, 2013, and February 2, 2013, the fair value of our derivative liability was approximately $51 million and $20 million, respectively. In the event that all or a portion of our derivative liability is extinguished due to the conversion of the Series B Preferred, we will be required to issue shares of our common stock in an amount to be determined and will not require a future cash outflow.

Investing Cash Flows
Net cash used in investing activities in the first half of fiscal 2013 was $4.5 million compared to $0.2 million used in investing activities for the first half of fiscal 2012, a decrease in cash outflow of $4.3 million. Investing cash outflows in the first half of fiscal 2013 and 2012 were comprised primarily of capital expenditures for refreshing existing stores and information technology investments at the store level. We expect total capital expenditures for fiscal 2013 to be approximately $10 million to $15 million. Investing cash inflows of $8 million in the first half of fiscal 2012 were primarily related to the receipt of restricted cash that was used as collateral to fund letters of credit outstanding under the Former Credit Facility.


Table of Contents

Financing Cash Flows
Net cash used in financing activities in the first half of fiscal 2013 was $0.3 million compared to $1.7 million for the first half of fiscal 2012. The primary use of cash for financing activities in the first half of fiscal 2013 was principal payments under our mortgage borrowings and under capital lease obligations. The primary use of cash for financing activities in the first half of fiscal 2012 was principal payments under the Wells Credit Facility. . . .

  Add PSUN to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for PSUN - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.