Suddenly, Sailing's Not So Smooth at Pacific Sunwear

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Like the whims of fickle teenage kids,

Pacific Sunwear's

(PSUN)

fortunes turned on a dime Wednesday, when skittish investors shaved $91 million off its market capitalization.

That beating, which drove the stock down 16% to 23 3/8, comes a week after the company reported earnings for the second quarter that exceeded analysts' expectations by a penny. About 3.2 million shares, or 10 times the average daily volume, changed hands.

Reports that a large institutional investor was dumping shares is just part of the reason for the rout. One New York money manager who is short the stock is betting that investor's tolerance for risk has changed. "There's a shift to value away from aggressive growth," says the money manager.

That's why this manager is also short two other teen retailers,

Hot Topic

(HOTT)

and

American Eagle Outfitters

(AEOS)

, even though these companies recently reported strong second-quarter earnings. "The earnings were good," concedes the money manager, adding that people don't want to wait another three months until the next earnings release to see if business remains strong. "People have been valuing these

teen retailers off forward-earnings estimates that have substantial growth embedded in them," the money manager adds. "Is that growth rate sustainable -- especially in the teen market, which is a fashion-risky business?"

Pacific Sunwear is the latest retailer to check into the emergency room, following the gory dismemberment of

Delia's

(DLIA)

,

Gadzooks

(GADZ)

,

Liz Claiborne

(LIZ)

and

Jones New York

(JNY)

. "Retail stocks are blowing up every day," says Randall Haase, portfolio manager of the

(QUASX) - Get Report

Alliance Quasar

fund, which also owns PSUN. He says investors don't need much encouragement to take profits after the retail group's strong performance earlier in the year. (He declined to say what he was doing with his Pacific Sunwear position.)

The ferocity of Pacific Sunwear's decline, even though no analysts had downgraded the company or reduced earnings estimates as of Wednesday evening, may be a warning for other momentum plays. Are investors trading growth for value? Risk for safety?

"With troubles over the president and Asia, value plays may be a bit more popular now," says Jane Snorek, who manages the

Oberweis Emerging Growth

fund. Snorek owns Pacific Sunwear and considers the Anaheim, Calif.-based retailer, with 313 stores, a core long-term holding. The key to maintaining Pacific Sunwear's growth, she says, is playing into the wide-leg-pants trend, which is already a few years old.

Carl Womack, Pacific Sunwear's chief financial officer, agrees that carrying the right merchandise is crucial to the company's future. So far, Pacific Sunwear has been a favorite among the surf-and-skateboard crowd with its wide-leg pants. Womack says he expects the company's new concept,

d.e.m.o.

, with 15 stores, to be just as big a hit with urban club kids. Pacific Sunwear will make an announcement about d.e.m.o. sales-and-earnings potential in the next month, Womack says.

But critics, like the short-seller, point to several cracks in the facade. They hold up Pacific Sunwear's inventories, which climbed 51% in its most recent quarter to $47.8 million. While that's in line with sales, which grew 52% to $73.2 million for the period, shorts say the company will be left with a glut of merchandise if sales stumble. And they say that they're seeing such a deceleration. Same-store sales, which remained strong in July with a 13% gain, are down from the 24% increase in April.

"I'm not sure what will be driving comps in the future," the short-seller says, explaining that some of the same-store sales boost came as the company added shoes and more juniorwear to its stores. But that rollout is almost complete. Womack says that footwear sales have been gaining at 20% year-over-year for the last three months, but he adds that those sales account for only 10% of the company's total.

Then there's d.e.mo., the company's new concept. "Why do they come out with a new concept?" the short asks. "Because growth in the existing business is slowing."

Not so, replies Womack. "The surf-and-skate crowd and the urban kids are the two biggest pieces of the teen market. There's no merchandise overlap. No one on a national basis is serving this urban kid.

Merry Go Round

tried to do it before they failed." Comparisons to Merry Go Round, the one-time highflyer that went out of business, isn't going to win PSUN any converts among the short crowd. "People can wait and see our results," Womack continues. "If it wasn't working, would we be getting ready to make an announcement?"

Pacific Sunwear does have a history of beating expectations. For its second quarter, ended Aug. 2, the company earned $5 million, or 23 cents a share, compared with $2.9 million, or 14 cents a share, last year. Sales were $73.2 million, compared with $48.3 million a year ago. Going forward, analysts polled by

First Call

expect the company to earn $1.11 per share for the year ending January 1999, a 42% increase over last year.

Nevertheless, insiders have been selling shares recently, and Womack is among them. Along with two vice presidents, Robert Entersz and Gary Hunt, who sold their entire positions in July, Womack sold 10,000 shares at 35 3/4. He still owns 62,741 shares, according to

Federal Filings

.

If management is selling, "wouldn't you rather be on the same side?" asks the short-selling money manager.

For more info on institutional holders of this stock, as well as financial statements and earnings estimates, please see the

Thomson Company Reports.