PSUN

Pacific Sunwear of California, Inc. (PSUN)

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Exchange: NASDAQ
Industry: Consumer Services
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Pacific Sunwear of California (PSUN)

Q3 2012 Earnings Call

November 29, 2012 4:30 pm ET

Executives

Craig E. Gosselin - Senior Vice President of Human Resources, General Counsel and Secretary

Gary H. Schoenfeld - Chief Executive Officer, President and Director

Michael W. Kaplan - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Analysts

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

David M. King - Roth Capital Partners, LLC, Research Division

Betty Y. Chen - Wedbush Securities Inc., Research Division

Dorothy S. Lakner - Caris & Company, Inc., Research Division

Marni Shapiro - The Retail Tracker

Andrew Burns - D.A. Davidson & Co., Research Division

Jane Thorn Leeson - KeyBanc Capital Markets Inc., Research Division

Janine M. Stichter - Telsey Advisory Group LLC

Presentation

Operator

Good afternoon. My name is Chanel, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2012 earnings conference call. [Operator Instructions] Mr. Gosselin, you may begin your conference.

Craig E. Gosselin

Thank you. Good afternoon, and welcome to the PacSun conference call announcing our fiscal third quarter 2012 financial results. I'm Craig Gosselin, Senior Vice President, General Counsel and Head of Human Resources. This call is being recorded, and the playback will be available starting today, approximately 2 hours after the call, through midnight on December 6, 2012. It can be accessed at (855) 859-2056 or (404) 537-3406, passcode 70398157. The call will also be archived on our website at pacsun.com through midnight on March 19, 2013.

Your speakers today are Gary Schoenfeld, Chief Executive Officer; and Michael Kaplan, Chief Financial Officer. [Operator Instructions]

Before I turn the call over to Gary, I'd like to note that statements and discussions during today's call will contain forward-looking information about our future financial performance and prospects. Our actual results could differ materially from those contained in our forward-looking statements. Risks and uncertainties that could cause our business and financial results to differ materially from those in the forward-looking statements are included in our fiscal 2011 Form 10-K and subsequent filings we made with the SEC, as well as in the earnings press release we issued today.

These documents can also be found in the Investor Relations section on our website, pacsun.com. All information discussed on the call is as of today, November 29, 2012. PacSun undertakes no duty to update this information to reflect future events or circumstances. This call, the webcast and its replay are the property of PacSun. It is not for rebroadcast or use by any other party without the prior written consent of PacSun.

With that said, I'll now turn the call over to Gary.

Gary H. Schoenfeld

Thank you, Craig. Good afternoon, everyone, and thanks for joining us on our Q3 earnings call. On our second quarter conference call, we talked about the progress we achieved in each of our key financial objectives: sales comps, merchandise margins, inventory management, operating expenses and pre-tax operating income. I'm pleased to say the business performed well against each of these key metrics again in the third quarter.

Michael will speak more to the financial details, but let me briefly touch on a few of the highlights. First, comparable store sales for Q3 were up 1%. The Women's business continued to show sustained momentum by driving a plus 2 comp, which marks the third straight quarter of positive Women's comps. Growth in bottoms continues to lead our Women's business, and we also capitalized on strong trends in wovens, along with growth in our essentials tops business.

In our Men's business, we had a flat sales comp. Strong growth continued with our emerging brands and in footwear, but was offset by declines in a couple of key heritage brands that in the prior 12 to 24 months had benefited greatly from energy drink collaborations, which have since largely gone away. Merchandise margins in Men's were up approximately 300 basis points, along with lower inventory and as both genders contributed positively to the quarter's substantial improvement in our pre-tax operating results.

Our e-com business also performed well with the 12% comp increase and the higher merchandise margins consistent with the rest of the business. Thus, overall, our non-GAAP merchandise margins, adjusted for a onetime store closure markdown allowance of $1.8 million, were up 260 basis points versus the same period a year ago, making this the third straight quarter with merchandise margin improvement greater than 150 basis points. In addition, the inventory at the end of the quarter was down 4% on a comp basis, and we're able to reduce other operating expenses and further improve our operating margin.

Our pre-tax operating results for the third quarter reflect a more than $10 million improvement over the same period a year ago, which helped translate to non-GAAP loss per diluted share from continuing operations of $0.03 versus a loss per diluted share of $0.11 for the same period last year.

During Q3, we launched our new Demandwear platform for our e-commerce business, which includes several improved features such as customer product reviews and ratings, side-by-side product comparisons, social login with your Facebook account, improved site navigation and product pages and a more streamlined checkout process. It's clear, during the week of Cyber Monday, just the impact that online retail continues to have, and we remain committed to be a very vibrant player throughout all of our multichannel touch points.

Additionally, we launched V.me, a new product launched by Visa, their digital wallet product. PacSun, we were quite excited to be the initial partner with Visa on this project as the first and only retail -- teen retailer to launch V.me.

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