Pacific Sunwear’s Profit Climbs 30% as It Strikes Right Chord With Teens

Pacific Sunwear of California Inc.’s profit jumped 30% in the third quarter as teens across the nation snapped up surf and skateboard wear.

Net income was $31.9 million, or 42 cents a share, compared with $24.5 million, or 31 cents a share, in the same quarter last year. Analysts polled by Thomson First Call had expected earnings to come in at 40 cents a share.

Sales jumped 17% to $329.1 million. Anaheim-based Pacific Sunwear owns 977 PacSun and d.e.m.o. stores.

“They’re on a roll,” said Jeffrey Van Sinderen, an analyst with B. Riley & Co. “It’s really having the right stuff at the right price.”

The retailer’s hot streak has been fueled in large part by clothes designers and manufacturers in Southern California that have become adept at tweaking their fashions to suit fast-shifting trends, analysts said. They cited the Quiksilver, Billabong, Hurley and Volcom brands, which Pacific Sunwear stores stock; the retailer also makes private-label clothes.

“They’re strong brands that can interpret a preppy, cleaned-up look,” Van Sinderen said.

These companies have spiffed up their denim lines with trendy finishes, for example, and are turning out long-sleeve woven shirts.

“The vendors have now become some of the leading fashion companies in the business,” said Mitch Kummetz, an analyst with D.A. Davidson & Co.

Pacific Sunwear also has shown that it knows which brands to hold and which to fold, analysts said. The urban-themed d.e.m.o. chain added Apple Bottoms, a line for women launched last year by hip-hop artist Nelly, and dumped JLo, a brand that analyst Adrienne Tennant at Wedbush Morgan Securities said “just died.”

“That’s one of the beauties of being a manager of brands -- you’re not stuck with any one,” Van Sinderen said. “You can make adjustments.”

Timothy Harmon, the retailer’s president, said that Pacific Sunwear hadn’t “overnight become preppy,” which is the current favorite fashion trend among teenagers. But the company does interpret trends for its customers, he said in an interview. For instance, it has beefed up its offerings of long-sleeve, button-up shirts for guys over the last year.

“That was a business that didn’t really exist last year that has become a fashion driver this year,” Harmon said.

In the quarter, Pacific Sunwear continued to benefit from the growing number of youth nationwide who’ve taken to surfwear brands without ever seeing a wave.

“More and more kids are getting turned on to the whole action-sports lifestyle, so they’ve sort of broadened their audience,” Kummetz said.

The fact that cold weather is coming bodes well for the company in the current quarter, Tennant said. “The sweaters, the hoodies, the denim, the fleece, those are all kind of staples of the business,” she said. “As we get colder weather, their merchandise tends to resonate with the customer.”

Pacific Sunwear said that in this quarter, earnings should be 52 cents a share, just as analysts were expecting. For the year, it expects profit of $1.36, a penny more than anticipated.

For the future, the smaller d.e.m.o. chain could offer an opportunity for growth. In a conference call with analysts, executives said they would launch the division’s first advertising campaign since 1999, shortly after the first d.e.m.o. store opened. The ads are likely to run in magazines such as “Seventeen” and “Teen Vogue” beginning in March, Harmon said.

For its part, the PacSun chain is trying to lure more girls by adding feminine merchandise to its tomboyish offerings.

The company is looking at other ways to expand, with plans to open four extra-large PacSun stores next year to test new products.

Longtime Chief Executive Greg Weaver announced this year that he would relinquish that title and his day-to-day duties in April to help steer the company’s growth. As executive chairman, Weaver said, he would continue working a couple of days a week.

Seth Johnson -- who became Pacific Sunwear’s chief operating officer Monday and will move into the chief executive’s office in April -- told analysts during the conference call that he was still getting his bearings.

One of his first jobs will be to help select a new chief financial officer.

Johnson, who was previously Abercrombie & Fitch Co.’s chief operating officer, didn’t indicate that he had specific plans for Pacific Sunwear, which he called a “very well-disciplined, tightly run business.”

“They have a great track record,” Johnson said. “It’s not in need of any fixing.”

The third-quarter earnings were released after the market closed. Pacific Sunwear’s stock, up 13% for the year, closed at $23.90, down 10 cents, on Nasdaq.