Pacific Sunwear of California (PSUN)
Q2 2011 Earnings Call
August 23, 2011 4:30 pm ET
Michael Kaplan - Chief Financial Officer and Senior Vice President
Gary Schoenfeld - Chief Executive Officer, President and Director
Craig Gosselin - Senior Vice President of Human Resources, General Counsel and Secretary
Stacy Pak - Barclays Capital
Dana Telsey - Telsey Advisory Group LLC
Adrienne Tennant - Janney Montgomery Scott LLC
Betty Chen - Wedbush Securities Inc.
Pamela Quintiliano - Oppenheimer & Co. Inc.
Marni Shapiro - The Retail Tracker
Tracy Kogan - Nomura Securities Co. Ltd.
Jeffrey Van Sinderen - B. Riley & Co., LLC
Janet Kloppenburg - JJK Research
Previous Statements by PSUN
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Thank you. Good afternoon, and welcome to the Pacific Sunwear of California Conference Call announcing our fiscal second quarter 2011 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 August 29, 2011. It can be accessed at (855) 859-2056 or (404) 567-3406, passcode 90182379. The call will also be archived on the PacSun website at pacsun.com through midnight on November 28, 2011.
Your speakers today are Gary Schoenfeld, Chief Executive Officer; and Michael Kaplan, Chief Financial Officer. Today's call will be limited to one hour and questions will be limited to one per participant. 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 2010 Form 10-K and in 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 website on our website at pacsun.com. All information discussed on the call is as of today, August 23, 2011. Pacific Sunwear 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's 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.
Good afternoon, and thank you for joining us today. Looking at our operating results for the second quarter of 2011, we continued to make progress on several important fronts. We had our second consecutive quarter of positive comp store sales for the first time since 2007. Gross margins were better than expected as a number of strategies helped to mitigate cost pressure from Asia. Operating expenses came down by $6 million at 32% of sales versus 34% last year, and our inventory was down by 7%, even with the move-up of some of our back-to-school receipts into the second quarter. As an aggregate, we ended up with sales of $214.9 million and a plus one comp, GAAP EPS of a $0.29 loss versus $0.36 last year, and on a pro forma basis, assuming a 36% tax rate, this would equate to an $0.18 loss for the quarter compared to $0.22 loss last year. Comp store sales during Q2 for Women's was a plus one. Our Men's business was running at similar plus one comp until literally the last day or 2 at the end of July when the default headlines out of Washington were nearing their peak and some aggressive early promotion on denim from a few key retailers brought us down to a flat comp in Men's. With respect to our recent marketing initiatives, during the second quarter, we launched our Dress Irresponsibly campaign that featured all of our key brands. The campaign consisted of 30-second and 60-second TV spots broadcast on major cable networks, 15-second video clips and banner ads on select websites, 15-second video clips that ran on mobile handsets and a print campaign, in particular women's oriented magazines, including Teen Vogue, Cosmopolitan and Nylon. We believe this campaign has been a positive first step in reintroducing PacSun as a unique destination for great style, aspirational brands and with PacSun as the champion for individuality and self-expression.
In that vein and with our continued focus on improving in-store customer experience, we launched another new initiative during Q2, which included the rollout of Apple iPads to approximately 300 PacSun stores. The iPads are preloaded with PacSun proprietary software that enables our team members to quickly search for in-demand styles and sizes on a realtime basis to help drive customer throughput, tell more stories about our brands and our fashion and create a more dynamic overall customer experience and engagement with our brand reps. I believe we are one of the first specialty apparel retailers to take advantage of this capability, and we are very encouraged by the initial response we've experienced.
One of our other areas of focus continues to be real estate. During the quarter, we completed negotiations involving approximately 80 stores to reduce occupancy cost and improve operating cash flow, which will begin to take effect in this third quarter. We believe that the cumulative result of these negotiations will produce net cash savings of approximately $9 million during fiscal 2011 and 2012.