Industry Analysis
Jun 09, 1999
Other: Pacific Sunwear Sell-Off Creates Buying Opportunity
David Peltier (6/9/99)
Pacific Sunwear of California (NASDAQ:PSUN - news) recently announced May same-store sales of 5.8% -- and the stock dropped 14%, to $33.13 per share on the news.
Anything wrong with this picture? You betcha.
For a company that has seen its sales double in the last two years, investors actually saw this number as a sign that the business is slowing down. Before this recent price setback, the stock had enjoyed a nice run this year. In fact, shares are up 101% year-to-date, and the company has more strategic plans in the works. The stock was recently at $32.88.
Despite this, analysts remain rather bullish on the prospects for Pacific Sunwear, and in our opinion it is for good reason. According to Bloomberg, all 12 analysts that follow the company maintain a 'buy' rating on Pacific Sunwear.
Joseph Grillo, an analyst at BT Alex Brown noted, 'people's expectations got above where the company's original plan was.' Some analysts raised their expectations for the company to show a 7% year-over-year growth, which overshadowed Pacific Sunwear's success.
Pacific Sunwear retails casual clothing for teens and young adults in its chain of over 380 stores. Stores feature popular brands such as Quicksilver, Billabong and Rusty-- and are targeted towards the beach-frequenting crowd.
Primarily focusing on young men's clothing, Pacific Sun has been shifting its mix to include more women's apparel and footwear. The new mix has proved successful so far, as the company has put together a string of 11 consecutive quarters of earnings growth.
The first quarter (April) brought more good news from Pacific Sunwear. The company reported $0.19 per share in net income, a 46% year-over-year increase. Total sales rose 33% to $61.2 million, and same store sales showed a 7.2% (year-over-year) improvement.
The company recently announced pacsun.com, Pacific Sunwear's version of e-commerce. The site will be operational by the end of June, and is slated to offer a broad selection of the apparel that can be found at Pacific Sunwear stores. The company reportedly invested an initial $500,000 to launch the site, and is expected to be profitable by the end of the year.
Pacific Sun has also announced a 3-for-2 split of its shares, payable June 21st.
The company has no plans on slowing down the expansion of its stores. Currently with 384 stores, mainly located in shopping malls, the company has plans to open a total of 108 stores for fiscal 1999 (44 still to be opened). An additional 125 new stores are projected to open in 2000, which would bring the total number of stores to 548.
In addition to its core outlets, Pacific Sunwear introduced new d.e.m.o. stores last April. While results are still subject to seasonality, the 22 d.e.m.o. stores have consistently posted better-than-expected operating results. The stores offer a more 'urban' line of clothes, and are subsequently should not cannibalize sales at the core outlets. If the results continue to be positive, the company has plans to eventually open over 200 d.e.m.o. outlets.
For a company with a recent trend towards expansion, Pacific Sunwear retains a strong balance sheet. At the end of the first quarter, the company had $11.3 million in cash, or $0.55 per share and no debt. Inventories did increase 37% (year-over-year), but were in line with sales growth. Shareholder's equity improved to $123.3 million or 6 bucks per share.
The question is, will customers be as enthusiastic as management is about Pacific Sunwear's expansion? To date, the company has enjoyed great success by expanding on the popularity of its fashions. Teenagers and young adults, the company's target market, can be notoriously fickle in their fashion preferences however. Pacific Sunwear has showed that it can react to market changes, by opening its d.e.m.o. stores and diversifying its line from young men's apparel. As the company continues to grow, its success will be dependent on keeping in tune with its consumer base.
With shares recently trading at $32.88, Pacific Sunwear is trading at 22.7 times the consensus FY 2000 earnings estimate of $1.45 per share. With 28% EPS growth projected for 2001, the company is trading at a forward discount.
Bottom Line:
We agree with the sell-side analysts on this one. The recent pullback on Pacific Sunwear shares was an overreaction to a slight deceleration in same-store sales, and makes the shares attractive given the growth possibilities. The company has lofty plans of continued expansion, but has the momentum and the resources to accomplish their goals.
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