Pacific Sunwear Of California Q1 2010 Earnings Call Transcript

Pacific Sunwear of California Q1 2010 Earnings Call Transcript
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Pacific Sunwear of California (PSUN)

Q1 2010 Earnings Call

May 20, 2010 4:30 pm ET

Executives

Craig Gosselin - Senior Vice President of Human Resources and General Counsel

Gary Schoenfeld - Chief Executive Officer, President and Director

Michael Henry - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Secretary

Analysts

Stacy Pak - Prudential

Paula Torch - Needham & Company, LLC

Ali Mogharabi - B. Riley

Lizabeth Dunn - Thomas Weisel Partners Equity Research

Dana Telsey - Telsey Advisory Group

Presentation

Operator

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Good afternoon. My name is Jamica, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Craig Gosselin. You may begin your conference.

Craig Gosselin

Good afternoon, everyone. Welcome to the Pacific Sunwear of California conference call announcing our fiscal first quarter 2010 financial results. This is 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 two hours after the call through midnight on May 27, 2010. It can be accessed at (800)642-1687 or (706)645-9291, pass code 74311650. The call will also be archived on the PacSun website at www.pacsun.com through midnight on August 18, 2010.

Your speakers today are Gary Schoenfeld, President and Chief Executive Officer; and Mike Henry, Senior Vice President, 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 2009 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 section on our website, www.pacsun.com. All information discussed on the call is as of today, May 20, 2010. Pacific Sunwear undertakes no duty to update this information to reflect future events or circumstances. This call, the webcast and this 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 Schoenfeld

Thank you, Craig. Good afternoon, and thank you all for joining us. I will start with a few comments about our Q1 results and then update you on a couple of other topics. Michael will then provide you with more of the first quarter financial details and our guidance for the second quarter of 2010. On our last earnings call, we shared our goals for how we would hope to progress through 2010, targeting sequential improvement in our comp sales results from quarter to quarter with the goal of returning to positive comps by Q4 of this year.

Our first quarter results and second quarter guidance are both in line with our expectations when we started the year, so we feel we are off to a good start and continue to be optimistic about the prospects for further improvements as we progress.

Turning to some specifics on Q1. Total sales for the first quarter were $190 million. Our comp decline of 15% was consistent with our expectations and the 16% reduction in inventory with which we entered the quarter.

Highlights during the quarter were the continued improvement in the trending of our Young Men's business, favorable reaction to some of our initial newer women's products and merchandise margins above our expectations. The stronger-than-expected merchandise margins, together with expenses coming in as planned, results in us in exceeding our earnings guidance for the first quarter.

Leading our Young Men's business was our shift in strategy to embrace our heritage brands, which included leading the market with the best assortment of boardshorts. We aggressively went after the higher end and more technical products led by Hurley, Volcom, O'Neill and Billabong and eliminated any private label products from this category.

Additionally, we tested our first shop in shops with Hurley and Benz as we move to reestablish PacSun as the destination for great brands. Overall, our Young Men's business continued to improve with an almost flat comp for the first quarter compared to a low double-digit negative comp in Q4 of 2009.

With respect to our Juniors business, on our last call, I said that we had made the decision to dramatically cut back our Juniors inventory, having concluded last November that we do not have the right leadership or strategy in place, and that we were going to fix those things and then build the business back up as the year progressed. I felt that we were skewing too young, too basic and increasingly dependent upon promotionally priced proprietary products. Consequently for the first quarter, our Juniors comps were down in the high 20s on a more than 30% decrease in average store inventory and in line with our expectations.

Historically, I'm not sure that PacSun has ever had a sustainable year-round Girls business. Certainly, there was a time when brands like Roxy and Billabong new and hot in the market place resulting in a lot of hoodies and tees and bathing suits being sold at PacSun. And then more recently, a couple of years ago, we've gotten out in front of the new trend for skinny denim. Yet in neither case did PacSun establish the kind of foundation and destination like we have in Young Men's. So with our Young Men's strategy and execution soundly in place, we look to create a similar sustainable Girls business at PacSun based upon four key elements.

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