Pacific Sunwear Profit Rises 79% on Girl Power

Teen apparel retailer Pacific Sunwear of California Inc. on Monday reported a 79% increase in third-quarter profit, as the Anaheim-based company continued to gain new ground with girls.

PacSun, which sells private label and brand-name surfing, skateboarding and snowboarding-style fashions, earned $15.9 million, or 48 cents a share, for the three months ended Nov. 2. That’s up from $8.9 million, or 27 cents a share, a year ago.

“It was an exceptional quarter, especially given how weak Generation Y apparel sales have been in general,” said Bob Buchanan of A.G. Edwards in St. Louis, who has a “buy” recommendation up to $32 a share and doesn’t own any PacSun stock.

Sales for the quarter rose 24.7% to $228.2 million, from $183 million a year ago. In stores open at least a year, sales were up 12%, with a 12% gain at PacSun stores and 13% same-store sales gain at its d.e.m.o. stores, which focus on urban street wear.

Last week, PacSun raised its third-quarter earnings fore- cast from 40 cents a share to 47 cents to 48 cents a share based on strong October sales.

So-called same-store sales, or sales from stores open at least a year, are a key measure of a retailer’s health because the figure excludes new and closed stores, which can skew results.

Those sales gains drove the company’s earnings increase, Chief Executive Greg Weaver said, as PacSun was able to better leverage expenses and improve operating margins.

“Girls was a huge contributor,” Jennifer Black of Wells Fargo Securities said. “They set out to expand their business in girls, and it was a smart goal, because girls shop more than guys.”

While the traditionally male-oriented stores gained 4% in its men’s business for the quarter, PacSun’s women’s business grew by 17% compared with the same period a year ago. Girls accounted for 42% of apparel sales at PacSun through the year’s first nine months, up from 38% a year earlier.

“A year ago, you had to be a tomboy to shop at PacSun, and now they’re doing a much better job of appealing to a broader range of girls,” Buchanan said. “The guy’s bottoms business remains in the dumpster. That’s being hurt across the industry by a lack of newness. Guys are wearing the same cargo pants they’ve been wearing now for a couple of years.”

During a conference call with analysts Monday, executives said they remained comfortable with fourth-quarter profit guidance of 50 cents a share, on same-store sales gains of 2% to 4%. For 2003, PacSun officials said, they expect to return to double-digit operating margins for earnings per share of $1.55 to $1.57.

“This whole company, in both divisions, is very fashion right,” Black said. “They don’t look like all the other teen retailers and that’s a good thing.”

Shares in PacSun, which reported results after the market closed, fell 99 cents to $24.82 on Nasdaq. PacSun shares are up 21.5% this year, compared with the S&P; small cap apparel index, which is down 4.8%.

PacSun also has benefited from slowing the company’s rate of expansion, Buchanan said.

At the end of this year, the company will have increased its total square footage by about 15% -- well below the rates of a few years ago. In January 2001, the company had increased square footage by 41%; as of last January, PacSun was up 31%.

“They made the wise choice last year to maximize the returns on what they’ve got now as opposed to remaining fixated on this physical growth mantra that is starting to do the rest of the industry in,” Buchanan said.

The company operates 607 PacSun stores, 71 PacSun outlet stores and 109 d.e.m.o. stores, which sell hip-hop and rap music-inspired clothing.