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Pacific Sunwear of California Inc. (PSUN - Snapshot Report) posted narrower-than-expected loss for first-quarter fiscal 2014. However, weakness in the women’s business and persistent tough promotional environment compelled Pacific Sunwear to issue cautious second-quarter fiscal 2014 guidance, dragging down the stock price by nearly 10% in the after market trading hours.

The quarterly adjusted loss from continuing operations came in at 11 cents per share, narrower than the Zacks Consensus Estimate of a loss per share of 13 cents, and a loss of 14 cents per share reported in the prior-year quarter.

On a reported basis, the company posted a loss of 15 cents per share from continuing operations, as against loss of 35 cents per share reported in the year-ago quarter.

Detailed Performance

This Anaheim, CA-based specialty retailer reported net sales of $171.1 million, which was almost in line with the Zacks Consensus Estimate of $171.0 million but grew 2.9% year over year.

Same-store sales for the quarter rose 3%, marking the 9th consecutive quarter of positive same-store sales. E-commerce sales grew 6.0% year over year and represented 7% of total sales in the first quarter.

Gross profit increased 6.9% to $44.7 million with the gross margin expanding 100 basis points to 26.0%. Margin expansion was driven by improvement in merchandise margins partly run down by deleveraging of buying an occupancy cost.  

Operating loss was $7.4 million compared with an operating loss of $11.0 million in the prior-year quarter.

Selling, general and administrative (SG&A) expenses in the reported quarter were approximately $52.0 million, down 1.4% from prior-year quarter.

Financial Update

Pacific Sunwear ended the quarter with cash and cash equivalents of nearly $20.0 million, long-term debt of $86.6 million and shareholders’ equity of $8.1 million. The company’s inventory position was down 7.5% year over year to $95.9 million, however, it has increased over 15.0% since Feb 2014.

Store Update

During the quarter, this sports and fashion retailer opened and closed 1 outlet each, taking the total number of outlets to 618 outlets as against 638 a year ago. Going ahead, management expects to shut down 10-20 stores in fiscal 2014 (with majority closures in the fourth quarter) while it expects to open 4 new stores in the year.

Going Forward

In the second quarter of fiscal 2014, the company expects to post loss between 2–8 cents as against earnings of 2 cents in the second quarter of fiscal 2013. Management projects revenues between $200 million and $210 million. Currently, the Zacks Consensus Estimate stands at earnings of 2 cents for the second quarter.

Moreover, management forecasts same-store sales in the band of negative 5% to flat. Gross margin (including buying, distribution and occupancy) is projected to be around 26%–29% and SG&A is expected to range from $56 million to $58 million in the coming quarter.

Pacific Sunwear currently has a Zacks Rank #3 (Hold).

Key Picks from the Sector

Better-ranked stocks in the retail sector include Citi Trends, Inc. (CTRN - Analyst Report), American Apparel, Inc. (APP - Snapshot Report) and Foot Locker, Inc. (FL - Snapshot Report). Citi Trends sports a Zacks Rank #1 (Strong Buy) while American Apparel and Foot Locker carry a Zacks Rank #2 (Buy).

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