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PacSun Hopeful Despite Q4 Loss

Struggling retailer encouraged by flat comps, improved margins.

Pacific Sunwear of California Inc.’s extensive downsizing efforts bore some fruit in the fourth quarter, allowing the teen retailer to register a smaller-than-expected adjusted loss and improvement in gross margin.

Still, in the three months ended Jan. 28, the net loss expanded to $38.1 million, or 56 cents a diluted share, from a loss of $35.2 million, or 53 cents, a year ago. The loss from continuing operations, eliminating 87 store closures during the year’s final quarter, was trimmed to 45 cents from 46 cents. Further eliminating the effect of derivative liabilities resulting from its financing arrangements with Golden Gate Capital, the adjusted loss was 19 cents a diluted share, 3 cents better than the 22 cent loss expected, on average, by analysts.

Sales from continuing operations, again excluding closed stores, fell 1.4 percent to $234.2 million from $237.6 million in the 2010 quarter with comparable-store sales flat. Gary Schoenfeld, president and chief executive officer, said on a late afternoon conference call that men’s comps grew 1 percent, offset by a decline of 1 percent for women’s. Gross margin picked up about 100 basis points to 19.2 percent of sales from 18.2 percent in the year-ago period.

Schoenfeld reported that business improved throughout the holiday season, allowing the firm to reverse comp declines early in the quarter and finish with a flat result. “Given the highly promotional nature of the holiday season,” he said, “we were also encouraged by our 150 basis point improvement in merchandise margins, for continuing stores and the decline in non-GAAP net loss.”

He identified denim and footwear as strong performers for both males and females, while fleece, outerwear and women’s fashion tops “fell short of our expectations.”

Although the Anaheim, Calif.-based firm’s women’s business has been “slower than we’d like” so far in the first quarter, he said he was encouraged by positive reactions to the women’s assortment available online, which he said is indicative of the directions soon to be incorporated into the mix in its brick-and-mortar operations. “That gives us some confidence,” he noted.

In preliminary first-quarter guidance, the company projected an adjusted net loss of between 26 cents and 34 cents a share on comp performance of between minus 4 percent and plus 1 percent.

Updating information about store closures, the ceo noted that the company finished the year with 733 units following its 87 closures. An additional 110 stores are scheduled to be shuttered this year, the “vast majority” of them in the fourth quarter.

Shares of Pac Sun rose 28 cents, or 12.6 percent, to $2.51 during the trading day Tuesday and held steady in the initial phase of after-hours trading. The percentage pickup was the best since Dec. 9, following the receipt of a $60 million senior secured term loan from Golden Gate.

For the full year, PacSun’s net loss grew to $106.4 million, or $1.60 a diluted share, from $96.6 million, or $1.46, in 2010. Sales, excluding discontinued operations, were down 0.4 percent to $833.8 million from $837.1 million and off 1 percent on a same-store basis.