Pacific Sunwear Is Still Shining Brightly

Looks like teen retailer Pacific Sunwear ( PSUN) will bring the year to a close with a rosy fourth quarter, extending an epic run of year-over-year increases in both profit and sales to all four quarters of 2003.

"PacSun executed well in a period when a lot of retailers weren't," said one buy-side analyst.

The consensus for fourth-quarter earnings is 42 cents a share, according to analysts polled by Thomson One Analytics. Results are expected to be at least in line with that estimate, compared to earnings of 31 cents a share last year. The company will report fourth-quarter and full-year earnings Tuesday when the market closes.

Indeed, it's hard to argue with a company that has had a 22.9% increase in full-year 2003 sales, with same-store sales up 13.1%. That compared favorably to a total sales increase of 23.6% in 2002, when same-store sales rose 9.7%.

But while there seems to be nothing standing in the way of the company's frequent double-digit increases in monthly same-store sales and quarterly surges in profit and revenue, analysts wonder if the company's commitment to specific clothing categories could hurt sales down the line.

One of the keys to PacSun's success is the fashionability of denim. In addition, sales in the men's category have picked up, while sales of T-shirts have been strong going into the spring season, according to Jeff Van Sinderen, an analyst who covers the company for B. Riley & Co.

The company's strength also comes from the variety of brands it sells. It has at least 10 brands in clothing, footwear and accessories, and PacSun's private label d.e.m.o stores have demonstrated strong sales. D.e.m.o.'s positive same-store sales in the last year had convinced the company to expand the store base this year, Sinderen said.

"All of their businesses -- it's hard to find a problem with them," said Sinderen.

Last year, total sales in the fourth quarter increased 28% to $265.6 million, with same-store sales in the period up 15.6%.

That success continued in the first quarter of 2003, when the company more than doubled its profit to $8 million, on a 23% increase in total sales. In the second quarter of last year, PacSun reported an 83% jump in net income to $13.4 million, while sales rose 23%. Third-quarter profit rose 48% to $24.5 million on a 23% jump in sales from a year ago.

"They have a lot of momentum in the business and they have the right mix of branding and private label," said the buy-side analyst. "Their stumble won't be anytime soon."

But if a decline in sales comes, the analyst believes it might be caused by a drop in surf clothing sales. He doesn't believe the category has the staying power to remain in style indefinitely. PacSun heavily caters its merchandise to the "extreme lifestyle" surf and skate crowd.

"There are guys that are out there that think this surf trend is about to end," the analyst said. "There has been a surf trend for so long that people take for granted that it's the new look. It's probably not going to last."

But B. Riley's Sinderen believes PacSun still could do well even if surf clothing fell out of favor.

"Their claim to fame has been managing brands. As surf or skate waxes and wanes, they can shift their business," he said. If skate became more popular, for example, they can reduce the amount of surf-related merchandise for sale.

Sinderen added: "What has made them so different is that they are differentiated in the mall space. For extreme sports brands, you're not going to find the brands they carry elsewhere."

But while Sinderen predicted a solid spring and summer for PacSun, the buy-side analyst noted that come June PacSun's monthly same-store sales will be up against two years of double-digit results. At that point, he predicted, same-store sales won't remain in the double digits, which would signal a deceleration. "Some investors might get off the train," he said.

Currently, the company's quarterly results are reflected in its stock price. At around $24.50, shares of PacSun are currently trading near their all-time high of $25.78 reached on Feb. 18.

The stock's rally began around October 2002 when most of the retail sector was in a slump. Richard Hastings, retail sector analyst at Bernard Sands, called this "a very good long-term signal," because the stock's rally preceded the broader market's rally, which began in March 2003.

"PacSun is still behaving like a growth stock. Yet logic will tell us at some point in the next 12 months, it will moderate -- the share performance and rate of growth of sales and earnings will moderate," Hastings said.

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