Investors have responded favorably to an aggressive operations overhaul announced by Pacific Sunwear of California (NASDAQ: PSUN), pushing shares to the 1.70 – 1.75 range, well above the specialty retailer’s 50-day moving average of 1.31 while closing in on the 200-day moving average of 2.44. Obviously there is a lot of work to be done before the teen clothier passes that mark but with plans to close underperforming stores and the security of a $100 million credit facility from Wells Fargo coupled with $60 million from Golden Gate Capital there are plenty of investors who now see PSUN as a potential long-term play.
That potential certainly isn’t based on PSUN’s recent third quarter performance as the company reported a 7% slide in revenue from the same period last year, dropping down to $242 million while accumulating a loss of $17.6 million compared to a $7 million loss reported one year ago. While a significant portion of the most recent losses has been attributed to store-closure-related expenses which, along with other items, led to an adjusted net loss of $7.1 million, the figure is still ominous.
In an effort to reverse their fortunes PSUN has announced that they will close nearly 200 stores that have posted a 9% drop in sales or greater over the past year compared to the previous 12 months; opting to concentrate their efforts on their remaining 550-600 stores that have fared better.
Eliminating underperforming stores will solve some of PSUN’s operational problems but the question is will it solve the company’s biggest problem, establishing themselves as a relevant outlet for the teen market they target? Clothing retailers like Abercrombie & Fitch, Gap, and Aeropostale have all enjoyed moments as the preferred choice of teenagers only to see that designation replaced by another, more trendy outlet. For PSUN the competition isn’t getting any easier as they have seen a chunk of their target market turn to rivals like Zumiez which has expanded its presence in the surf and skate-inspired clothing arena.
Despite the falling numbers many investors see hope in PSUN and that hope is based on the five-year, $60 million senior secured term loan funded by private equity firm Golden Gate Capital. The track record of Golden Gate Capital is what has inspired investors, having found success in their dealings with other retailers like Eddie Bauer, J. Jill and Express.
In addition to Golden Gate Capital’s experience, investors appear excited about the details of the $60 million loan which gives the financier the option to buy up nearly 20% of PSUN shares at a price of $1.75 per share while also giving them two seats on the company’s board. For shareholders of PSUN an active participation by Golden Gate in the company’s governance is an indication that the operation issues that have stymied business will be addressed in proper fashion.
PSUN will be using their newly secured loans to, in part, fund the lease terminations for a number of underperforming stores while also investing in operational and technological improvements along with improvements at their remaining stores.
This redirected effort was announced on December 7, 2011 following the day’s trading session in which PSUN closed at 1.35. Upon learning of the news investors pushed shares as high as 1.93 on December 8, 2011 before closing the day at 1.49 and it has been a steady climb since that date. That climb is also due in part to the bright outlook expressed by company President and CEO Gary H. Schoenfeld who stated “now to the fourth quarter, we were encouraged by double-digit positive comps on Black Friday and a particularly strong response to our new strategies for women’s holiday merchandising.”
Of course that line from Schoenfeld was followed immediately with “Yet seasonal categories in both genders have started off slower than we would have expected resulting in quarter-to-date comp trends similar to the -3% we achieved in Q’3” which ultimately proves that no matter the effort PSUN, or any retailer for that matter, can’t define what teens want, they can only hope that they are offering what’s trendy today.
This is an important issue for investors to consider before taking a position because even with the financing in place and strong indicators that operational problems will be resolved ultimately it comes down to betting that PSUN will be the preferred outlet for teen fashion and the reign on top is never as long as the retailer wants.