NEW YORK (TheStreet) -- Not all retailers are spiraling into the abyss: Pacific Sunwear of California (PSUN) managed to inspire a double-digit rally Friday after posting better-than-expected third-quarter results. By mid-afternoon, shares had soared 20.7% to $3.33.

The specialty sports wares retailer reported a net loss for the Nov. 2-ended quarter of 5 cents a share, compared to a loss of 2 cents a share in the year-ago quarter. Comparable-store sales came in 1% higher, despite the retailer having 87 fewer outlets than a year earlier. The bottom line was as expected, but revenue of $206.6 million exceeded Yahoo! Finance expectations by $1.59 million.

"The third quarter marks our seventh consecutive quarter of positive comparable store sales and had there not been the 53rd week calendar shift, our non-GAAP loss per diluted share would have been break-even compared to the 2-cent loss last year," said CEO Gary H. Schoenfeld in a statement.

Over November, the company said it has seen a 6% gain in comparable-store sales. For the fourth quarter, the Anaheim, Calif.-based business predicts a 17-cent to 12-cent loss, missing consensus by a penny, and comparable-store sales from 1% to 5%.

Despite a weaker fourth quarter, several positive ratings on the retailer kept shares buoyant.

Topeka Capital Markets kept its "buy" rating and price target of $4.50, admitting profitability was still a challenge but that it "continues to make strides in its business, offering differentiated brands that are bringing customers back."

D.A. Davidson & Co. also reiterated its "buy" rating, upgrading its price target to $5.50 from $5. Analyst Andrew Burns rationalized, "Steady progress continues, despite a difficult teen retail backdrop."

"We are encouraged that 3Q results were at the high-end of guidance, despite the difficult promotional environment. While 4Q EPS guidance will likely drive consensus numbers down slightly, the 6% November comp is a stand-out positive surprise. We continue to believe that quarter by quarter PSUN is improving the merchandise mix, drawing more people into its stores, and moving towards profitability. As this continues, we see potential for substantial share appreciation," he continued.

TheStreet Ratings team rates Pacific Sunwear of California Inc as a Sell with a ratings score of D-. The team has this to say about their recommendation:

"We rate Pacific Sunwear of California Inc (PSUN) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its unimpressive growth in net income, generally high debt management risk, disappointing return on equity, weak operating cash flow and poor profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Specialty Retail industry. The net income has decreased by 9.7% when compared to the same quarter one year ago, dropping from -$17.54 million to -$19.24 million.
  • The debt-to-equity ratio is very high at 3.57 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company. Along with this, the company manages to maintain a quick ratio of 0.15, which clearly demonstrates the inability to cover short-term cash needs.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Specialty Retail industry and the overall market, Pacific Sunwear of California Inc's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has decreased to $12.61 million or 29.16% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • The gross profit margin for Pacific Sunwear of California Inc is currently lower than what is desirable, coming in at 32.59%. Regardless of PSUN's low profit margin, it has managed to increase from the same period last year. Despite the mixed results of the gross profit margin, PSUN's net profit margin of -8.94% significantly underperformed when compared to the industry average.
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