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Pacific Sunwear Announces Second Quarter Operating Results; Issues Third Quarter Guidance

ANAHEIM, Calif., Aug. 28, 2014 (GLOBE NEWSWIRE) -- Pacific Sunwear of California, Inc. (Nasdaq:PSUN) (the "Company"), announced today that net sales from continuing operations for the second quarter of fiscal 2014 ended August 2, 2014, were $211.7 million versus net sales from continuing operations of $210.1 million for the second quarter of fiscal 2013 ended August 3, 2013. Comparable store sales for the second quarter of fiscal 2014 were 0.3%. The Company ended the second quarter of fiscal 2014 with 618 stores versus 637 stores a year ago.

On a GAAP basis, the Company reported income from continuing operations of $7.5 million, or $0.10 per diluted share for the second quarter of fiscal 2014, compared to a loss from continuing operations of $18.6 million, or $(0.27) per diluted share for the second quarter of fiscal 2013. Income from continuing operations for the Company's second quarter of fiscal 2014 included a non-cash gain of $10.4 million, or $0.14 per diluted share, compared to a non-cash loss of $21.2 million, or $(0.31) per diluted share, for the second 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 on the derivative liability, and assuming a tax benefit of approximately $1.3 million, the Company would have incurred a loss from continuing operations for the second quarter of fiscal 2014 of $1.8 million, or $(0.03) per diluted share, as compared to income from continuing operations of $1.6 million, or $0.02 per diluted share, for the same period a year ago.

"As previously indicated, sales trends improved as the quarter progressed led by continued growth in our Men's business resulting in non-GAAP EPS at the higher end of our guidance," said Gary H. Schoenfeld, President and Chief Executive Officer. "For Q3, even in the face of a down-trending denim cycle we are encouraged by the positive response to the balance of our initial fall assortments. We continue to believe that our core strategies are attracting new customers and differentiating PacSun in this very competitive market."

Financial Outlook for Third Fiscal Quarter of 2014

The Company's guidance range for the third quarter of fiscal 2014 contemplates a non-GAAP loss per diluted share from continuing operations of between $(0.09) and $(0.04), compared to $(0.05) in the third quarter of fiscal 2013.

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

  • Comparable store sales from flat to +3%;
  • Revenue from $203 million to $208 million;
  • Gross margin rate, including buying, distribution and occupancy, of 25% to 27%;
  • SG&A expenses in the range of $54 million to $56 million; and
  • Applicable non-GAAP adjustments are tax effected using a normalized annual income tax rate.

The Company's third 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).

About Pacific Sunwear of California, Inc.

Pacific Sunwear of California, Inc. and its subsidiaries (collectively, "PacSun" or the "Company") is a leading specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. The Company sells a combination of branded and proprietary casual apparel, accessories and footwear designed to appeal to teens and young adults. As of August 28, 2014, the Company operates 618 stores in all 50 states and Puerto Rico. PacSun's website address is www.pacsun.com.

The Company will be hosting a conference call today at 4:30 p.m. Eastern time to review the results of its second fiscal quarter. A telephonic replay of the conference call will be available, beginning approximately two hours following the call, for one week and can be accessed in the United States and Canada at (855) 859-2056 or internationally at (404) 537-3406; passcode: 47110638. For those unable to listen to the live Web broadcast or utilize the call-in replay, an archived version will be available on the Company's investor relations website through midnight, December 3, 2014.

About Non-GAAP Financial Measures

This press release and the accompanying tables include non-GAAP financial measures. For a description of these non-GAAP financial measures and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance with Generally Accepted Accounting Principles, please see the accompanying table titled "Reconciliation of Selected GAAP Measures to Non-GAAP Measures" and the section following such table titled "About Non-GAAP Financial Measures."

Pacific Sunwear Safe Harbor

This press release contains "forward-looking statements" including, without limitation, the statements made by Mr. Schoenfeld in the fourth paragraph and the statements made by the Company under the heading "Financial Outlook for Third Fiscal Quarter of 2014." In each case, these statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company intends that these forward-looking statements be subject to the safe harbors created thereby. These statements are not historical facts and involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Uncertainties that could adversely affect the Company's business and results include, among others, the following factors: increased sourcing and product costs; adverse changes in U.S. and world economic conditions generally; adverse changes in consumer spending; changes in consumer demands and preferences; adverse changes in same-store sales; higher than anticipated markdowns and/or higher than estimated selling, general and administrative costs; currency fluctuations; competition from other retailers and uncertainties generally associated with apparel retailing; merchandising/fashion risk; lower than expected sales from private label merchandise; reliance on key personnel; economic impact of natural disasters, terrorist attacks or war/threat of war; shortages of supplies and/or contractors as a result of natural disasters or terrorist acts, which could cause unexpected delays in store relocations, renovations or expansions; reliance on foreign sources of production; and other risks outlined in the Company's filings with the Securities and Exchange Commission ("SEC"), including but not limited to the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2014, and subsequent periodic reports filed with the SEC. Historical results achieved are not necessarily indicative of future prospects of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company assumes no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made. Nonetheless, the Company reserves the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this press release. No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
For the Second Quarter Ended For the First Half Ended
August 2,
2014
August 3,
2013
August 2,
2014
August 3,
2013
Net sales $ 211,749 $ 210,054 $ 382,892 $ 376,406
Gross margin 61,539 62,586 106,202 104,367
SG&A expenses 60,563 56,684 112,589 109,450
Operating income (loss) 976 5,902 (6,387) (5,083)
(Gain) loss on derivative liability (10,434) 21,154 (11,659) 30,444
Interest expense, net 4,075 3,439 7,952 6,986
Income (loss) from continuing operations before income taxes 7,335 (18,691) (2,680) (42,513)
Income taxes (166) (87) 216 145
Income (loss) from continuing operations 7,501 (18,604) (2,896) (42,658)
Loss from discontinued operations, net of tax effects (640) (768)
Net income (loss) $ 7,501 $ (19,244) $ (2,896) $ (43,426)
Income (loss) from continuing operations per share:
Basic $ 0.11 $ (0.27) $ (0.04) $ (0.62)
Diluted $ 0.10 $ (0.27) $ (0.04) $ (0.62)
Loss from discontinued operations per share:
Basic $ — $ (0.01) $ — $ (0.01)
Diluted $ — $ (0.01) $ — $ (0.01)
Net income (loss) per share:
Basic $ 0.11 $ (0.28) $ (0.04) $ (0.63)
Diluted $ 0.10 $ (0.28) $ (0.04) $ (0.63)
Weighted-average shares outstanding:
Basic 69,070 68,464 68,990 68,353
Diluted 73,197 68,464 68,990 68,353
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)
August 2, 2014 February 1, 2014 August 3, 2013
ASSETS
Current assets:
Cash and cash equivalents $ 21,315 $ 27,769 $ 26,868
Inventories 130,938 83,073 140,324
Prepaid expenses 16,491 13,404 15,922
Other current assets 7,195 6,089 4,170
Total current assets 175,939 130,335 187,284
Property and equipment, net 93,775 96,797 102,161
Other assets 44,218 45,507 46,116
Total assets $ 313,932 $ 272,639 $ 335,561
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 92,145 $ 46,034 $ 84,986
Derivative liability 19,061 30,720 50,526
Other current liabilities 45,448 37,286 42,529
Total current liabilities 156,654 114,040 178,041
Deferred lease incentives 12,540 12,889 13,213
Deferred rent 14,960 15,440 15,858
Long-term debt 87,853 86,075 80,332
Other liabilities 25,655 26,046 25,586
Total liabilities 297,662 254,490 313,030
Total shareholders' equity 16,270 18,149 22,531
Total liabilities and shareholders' equity $ 313,932 $ 272,639 $ 335,561
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the First Half Ended
August 2, 2014 August 3, 2013
Cash flows from operating activities:
Net loss $ (2,896) $ (43,426)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 12,092 13,294
Asset impairment 1,663 1,431
Loss on disposal of property and equipment 106 42
(Gain) loss on derivative liability (11,659) 30,444
Amortization of debt discount 1,482 1,064
Non-cash stock-based compensation 837 1,716
Changes in assets and liabilities:
Inventories (47,865) (49,643)
Other current assets (4,193) (4,365)
Other assets (575) 713
Accounts payable 46,111 34,994
Other current liabilities 6,923 (1,863)
Deferred lease incentives (349) (1,188)
Deferred rent (481) (275)
Other long-term liabilities (91) (28)
Net cash provided by (used in) operating activities 1,105 (17,090)
Cash flows used for investing activities:
Purchases of property, equipment and intangible assets (7,919) (4,484)
Cash flows from financing activities:
Proceeds from mortgage borrowings 618
Principal payments under mortgage borrowings (293) (284)
Payments for debt issuance costs (116)
Principal payments under capital lease obligations (222) (240)
Proceeds from exercise of stock options 373 233
Net cash provided by (used in) financing activities 360 (291)
Net decrease in cash and cash equivalents (6,454) (21,865)
Cash and cash equivalents, beginning of period 27,769 48,733
Cash and cash equivalents, end of period $ 21,315 $ 26,868
PACIFIC SUNWEAR OF CALIFORNIA, INC.
SELECTED STORE OPERATING DATA
August 2, 2014 August 3, 2013
Stores open at beginning of year 618 644
Stores opened during the period 2 3
Stores closed during the period (2) (10)
Stores open at end of period 618 637
August 2, 2014 August 3, 2013
Square Square
Footage Footage
# of Stores (000s) # of Stores (000s)
PacSun Core stores 501 1,966 520 2,046
PacSun Outlet stores 117 473 117 474
Total stores 618 2,439 637 2,520
PACIFIC SUNWEAR OF CALIFORNIA, INC.
RECONCILIATION OF SELECTED GAAP MEASURES TO NON-GAAP MEASURES
(Unaudited, in thousands, except per share data)
For the Second Quarter Ended For the First Half Ended
August 2,
2014
August 3,
2013
August 2,
2014
August 3,
2013
GAAP income (loss) from continuing operations $ 7,501 $ (18,604) $ (2,896) $ (42,658)
Derivative liability (10,434) 21,154 (11,659) 30,444
Deferred tax valuation allowance 1,091 (910) 5,289 4,396
Non-GAAP income (loss) from continuing operations $ (1,842) $ 1,640 $ (9,266) $ (7,818)
GAAP income (loss) from continuing operations per share $ 0.11 $ (0.24) $ (0.04) $ (0.62)
Derivative liability (0.15) 0.27 (0.17) 0.45
Deferred tax valuation allowance 0.01 (0.01) 0.08 0.06
Non-GAAP income (loss) from continuing operations per share $ (0.03) $ 0.02 $ (0.13) $ (0.11)
Shares used in calculation 69,070 76,015 68,990 68,353

ABOUT NON-GAAP FINANCIAL MEASURES

The accompanying press release dated August 28, 2014, contains non-GAAP financial measures. These non-GAAP financial measures include non-GAAP loss from continuing operations and non-GAAP loss from continuing operations per share for the second quarters and first half of fiscal 2014 and 2013, respectively, and non-GAAP income (loss) from continuing operations per share guidance for the third quarter of fiscal 2014. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. These non-GAAP financial measures do not reflect a comprehensive system of accounting, differ from GAAP measures with the same names and may differ from non-GAAP financial measures with the same or similar names that are used by other companies. The Company computes non-GAAP financial measures using the same consistent method from quarter to quarter and year to year. The Company may consider whether other significant items that arise in the future should be excluded from the non-GAAP financial measures. The Company has excluded the following items from all of its non-GAAP financial measures:

  • Derivative liability
  • Deferred tax valuation allowance

The Company believes that these non-GAAP financial measures provide meaningful supplemental information regarding the Company's operating results primarily because they exclude amounts that are not considered part of ongoing operating results when planning and forecasting and when assessing the performance of the organization, individual operating segments or its senior management. In addition, the Company believes that non-GAAP financial information is used by analysts and others in the investment community to analyze the Company's historical results and in providing estimates of future performance and that failure to report these non-GAAP measures, could result in confusion among analysts and others and create a misplaced perception that the Company's results have underperformed or exceeded expectations.

CONTACT: Michael W. Kaplan Chief Financial Officer (714) 414-4003

Source:Pacific Sunwear of California, Inc.