A tough quarter for retailers

A challenging second quarter hammered earnings at two California-based teen retailers, while apparel giant Gap Inc. narrowly beat expectations with profit that was little changed from last year.

On Thursday, Pacific Sunwear of California Inc. reported a quarterly loss of $14.2 million; Wet Seal Inc. said its profit fell 69.3% compared with a year earlier; and Gap reported profit of $228 million, or 33 cents a share, compared with $229 million, or 32 cents, a year earlier.

The results for the companies’ fiscal second quarter ended Aug. 1 highlight the troubles still plaguing many retailers, especially those that sell apparel and accessories, which are easier to forgo during the recession.

“There’s lingering weakness from a fundamental perspective,” said Christine Chen, a retail analyst at Needham & Co. “I think things will improve in the second half, but the real turnaround doesn’t come until 2010.”


Profit at Gap, parent to the Gap, Banana Republic and Old Navy chains, beat analysts’ estimates of 32 cents a share. The San Francisco company has worked in recent years to reposition itself as a stylish, desirable brand amid a prolonged sales slump.

Analysts said they were encouraged by merchandise moves that Gap was making. Among them are trendier fashions at Old Navy and a line of affordable premium denim that officially launched at Gap stores last week.

Gap executives are hoping the line, called 1969 Premium Jeans, will help the retailer tap into the designer denim market, which includes high-priced labels such as 7 for All Mankind and Citizens of Humanity.

In a conference call Thursday, Chief Executive Glenn K. Murphy told analysts that the premium jeans were selling well in several markets including Los Angeles and said the company was closely watching the line’s performance.


“Denim is one of those loyalty categories, and people have habits that are deep-rooted, so it takes a while to convince people to change their current buying patterns,” he said. “We are going to be patient.”

Despite promising trends, sales at Gap still have a way to go.

The company said second-quarter sales were $3.25 billion, a 7% drop from $3.5 billion for the same period last year. Sales at stores open at least a year, called same-store sales and considered an important measure of a retailer’s health, decreased 8%.

Revenue also fell at surf-and-skate retailer Pacific Sunwear, which reported second-quarter sales of $242.8 million, a 22.4% drop compared with $312.7 million during the year-earlier period. Same-store sales declined 24%.

“Clearly, we have a lot of work to do to stem our decline in sales and ultimately return to profitability,” Chief Executive Gary Schoenfeld said in a statement. “I believe that in time we will once again make PacSun the favorite place to shop for 15- to 20-year-olds.”

The Anaheim company lost $14.2 million, or 22 cents a share, compared with a profit of $3.7 million, or 6 cents, for the second quarter last year.

Among the chain’s problems are a disproportionate number of stores on the West Coast, which was hit especially hard by the housing crisis, as well as heavy discounting and general weakness in the surf-and-skate category, Chen said. In particular, swimsuits and shorts haven’t sold well.

“It’s just the way the trends have played out,” she said. “Even though they’ve made improvement in merchandise, they’ve had to compete pretty heavily on price to get the customers into the stores, which eats into their margins.”


Wet Seal, another teen retailer, reported that profit for the second quarter was $3.1 million, or 3 cents a share, down 69.3% from $10.1 million, or 10 cents, a year earlier.

Same-store sales at the company, which sells trendy apparel and accessories to teens through its Wet Seal and Arden B chains, fell 10.6%. Revenue for the quarter totaled $136.4 million compared with $149.1 million in the year-earlier period.

CEO Ed Thomas said in a statement that although the Foothill Ranch retailer had made some progress in both divisions, “we are disappointed with our overall results for the second quarter.”

All three companies reported earnings after stock markets closed. During regular trading, Gap rose 24 cents, or 1.3%, to $18.85; Pacific Sunwear rose 20 cents, or 5.3%, to $3.99; and Wet Seal rose 5 cents, or 1.5%, to $3.32.

As retailers prepare for an industry recovery, Chen said some companies could have difficulty figuring out when to stock merchandise up to pre-recession levels.

“You have inventory levels extremely lean across the board; even the worst-managed companies now have pretty lean inventories,” she said. “That’s going to constrain top lines even if things come roaring back because there just won’t be enough merchandise.”