PacSun’s Shares Take a 10% Dive

Shares of Pacific Sunwear of California Inc. fell to a three-year low Friday, a day after the surf and skate apparel retailer filed a glum second-quarter earnings report and lowered expectations for the third quarter.

Contributing to the downturn was a report from A.G. Edwards & Sons analyst Robert Buchanan, who downgraded his rating on the Anaheim company to a “sell” from a “hold.”

PacSun shares fell 10%, or $1.53, to $13.62. It was the weakest finish for the retailer since May 19, 2003, when its shares closed at $13.23.

Buchanan said PacSun, which operates about 1,130 PacSun and d.e.m.o. stores, is in “the early innings of a shakeout in the teen space” that’s tied partly to a pullback in spending on teenagers.

Burdened by financial demands linked to a slumping housing market, rising interest rates and higher minimum monthly credit card payments, many parents are being forced to “hunker down with regard to their level of spending, even with regard to their beloved teen offspring,” Buchanan said.

He also cited PacSun’s “repeated fashion misses” and said the retailer had taken too long to get key styles onto the selling floor.

JPMorgan analyst Brian Tunick said in a report that PacSun’s cash position was precariously low. The company’s cash and cash equivalents dwindled to $11.8 million at the end of the second quarter, from $92.2 million in the same period last year.

PacSun executives could not be reached for comment.

Shares of other teen retailers also fell Friday, including Zumiez Inc., which dropped $1.27 to $24.71, and Abercrombie & Fitch Inc., which closed at $55.47, down 40 cents.

PacSun is at “a critical point in its maturity,” having expanded from its West Coast roots to more than 800 sites nationwide, said analyst Jeffrey Klinefelter of Piper Jaffray & Co. in a report Friday.

Given its scale and product mix, the chain competes with more mainstream retailers such as Aeropostale Inc. and Abercrombie & Fitch, Klinefelter said, as well as with “core board-sport” retailers, such as Zumiez, which sells many of the same surf and skate apparel brands.

PacSun’s shares probably will remain under pressure until investors get a better read on back-to-school sales and other matters, he said. Klinefelter has a “market perform” rating on the stock.

PacSun said Thursday that second-quarter profit fell 54% to $9.7 million, or 14 cents a share, compared with $21.1 million, or 28 cents, a year earlier. Sales rose 1.5% to $313.7 million. Sales at stores open a year or more fell 5.5%.

The company said it expected third-quarter earnings to be 22 cents to 30 cents, well below the 49 cents that Wall Street had estimated.

PacSun Chief Executive Seth Johnson told analysts Thursday that it was very difficult to predict when business would start to improve.

Johnson said he believed that the company was taking the right steps to “build and reposition the business.”

He also said PacSun was not planning to shift its business away from surf and skate apparel brands.