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EX-32.1 - EX-32.1 - PACIFIC SUNWEAR OF CALIFORNIA INC | a56394exv32w1.htm |
EX-31.1 - EX-31.1 - PACIFIC SUNWEAR OF CALIFORNIA INC | a56394exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: May 1, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-21296
PACIFIC SUNWEAR OF CALIFORNIA, INC.
(Exact name of registrant as specified in its charter)
California | 95-3759463 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
3450 East Miraloma Avenue, Anaheim, CA 92806
(Address of principal executive offices and zip code)
(Address of principal executive offices and zip code)
(714) 414-4000
(Registrants telephone number)
(Registrants telephone number)
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o | |
| Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o | |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): |
Large Accelerated Filer o | Accelerated Filer þ | Non-Accelerated Filer o | Smaller Reporting Company o | |||
(Do not check if smaller reporting company) |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ |
On June 1, 2010, the registrant had 65,891,390 shares of Common Stock outstanding.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended May 1, 2010
Index
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Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS. |
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, all amounts in thousands except share and per share amounts)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, all amounts in thousands except share and per share amounts)
May 1, 2010 | January 30, 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 56,632 | $ | 93,091 | ||||
Merchandise inventories |
106,622 | 89,665 | ||||||
Prepaid expenses |
12,148 | 10,801 | ||||||
Other current assets |
3,482 | 5,365 | ||||||
Total current assets |
178,884 | 198,922 | ||||||
PROPERTY AND EQUIPMENT, NET: |
||||||||
Gross property and equipment |
631,849 | 641,127 | ||||||
Less accumulated depreciation and amortization |
(398,623 | ) | (392,127 | ) | ||||
Total property and equipment, net |
233,226 | 249,000 | ||||||
Deferred income taxes |
4,024 | 4,024 | ||||||
Other assets |
25,073 | 25,272 | ||||||
TOTAL ASSETS |
$ | 441,207 | $ | 477,218 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 42,885 | $ | 38,481 | ||||
Other current liabilities |
36,763 | 43,742 | ||||||
Total current liabilities |
79,648 | 82,223 | ||||||
LONG-TERM LIABILITIES: |
||||||||
Deferred lease incentives |
36,386 | 39,207 | ||||||
Deferred rent |
20,974 | 21,396 | ||||||
Other long-term liabilities |
27,516 | 27,714 | ||||||
Total long-term liabilities |
84,876 | 88,317 | ||||||
Commitments and contingencies (Note 9) |
||||||||
SHAREHOLDERS EQUITY: |
||||||||
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued |
| | ||||||
Common stock, $.01 par value; 170,859,375 shares authorized; 65,887,264
and 65,748,069 shares issued and outstanding, respectively |
659 | 657 | ||||||
Additional paid-in capital |
8,325 | 7,294 | ||||||
Retained earnings |
267,699 | 298,727 | ||||||
Total shareholders equity |
276,683 | 306,678 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 441,207 | $ | 477,218 | ||||
See accompanying footnotes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
(unaudited, in thousands except share and per share amounts)
First Quarter Ended | ||||||||
May 1, 2010 | May 2, 2009 | |||||||
Net sales |
$ | 190,308 | $ | 223,465 | ||||
Cost of goods sold, including buying, distribution and occupancy costs |
147,842 | 162,191 | ||||||
Gross margin |
42,466 | 61,274 | ||||||
Selling, general and administrative expenses |
73,154 | 76,769 | ||||||
Operating loss |
(30,688 | ) | (15,495 | ) | ||||
Other expense, net |
2 | 229 | ||||||
Loss before income taxes |
(30,690 | ) | (15,724 | ) | ||||
Income tax provision/(benefit) |
338 | (6,981 | ) | |||||
Net loss |
$ | (31,028 | ) | $ | (8,743 | ) | ||
Comprehensive loss |
$ | (31,028 | ) | $ | (8,743 | ) | ||
Net loss per share: |
||||||||
Basic |
$ | (0.47 | ) | $ | (0.13 | ) | ||
Diluted |
$ | (0.47 | ) | $ | (0.13 | ) | ||
Weighted average shares outstanding: |
||||||||
Basic |
65,837,928 | 65,207,991 | ||||||
Diluted |
65,837,928 | 65,207,991 |
See accompanying footnotes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
First Quarter Ended | ||||||||
May 1, 2010 | May 2, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (31,028 | ) | $ | (8,743 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: |
||||||||
Depreciation and amortization |
14,029 | 17,099 | ||||||
Asset impairment and loss on asset disposals |
5,522 | 1,992 | ||||||
Non-cash stock based compensation |
1,171 | 955 | ||||||
Tax benefit deficiencies related to stock-based compensation |
| (1,297 | ) | |||||
Change in operating assets and liabilities: |
||||||||
Merchandise inventories |
(16,957 | ) | (8,313 | ) | ||||
Other current assets |
536 | 9,342 | ||||||
Other assets |
199 | 4,750 | ||||||
Accounts payable |
4,404 | 8,650 | ||||||
Other current liabilities |
(6,909 | ) | (8,263 | ) | ||||
Deferred lease incentives |
(2,821 | ) | (3,158 | ) | ||||
Deferred rent |
(422 | ) | (278 | ) | ||||
Other long-term liabilities |
(136 | ) | (128 | ) | ||||
Net cash (used in)/provided by operating activities |
(32,412 | ) | 12,608 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment |
(3,960 | ) | (8,813 | ) | ||||
Proceeds from sale of property and equipment |
| 3,705 | ||||||
Net cash used in investing activities |
(3,960 | ) | (5,108 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Principal payments under capital lease and long-term debt obligations |
(87 | ) | (2 | ) | ||||
Net cash used in financing activities |
(87 | ) | (2 | ) | ||||
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS |
(36,459 | ) | 7,498 | |||||
CASH AND CASH EQUIVALENTS, beginning of period |
93,091 | 24,776 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 56,632 | $ | 32,274 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||
Cash paid for interest |
$ | 12 | $ | | ||||
Cash refunded for income taxes |
$ | (182 | ) | $ | (198 | ) | ||
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS: |
||||||||
Decrease in non-cash property and equipment accruals |
$ | (183 | ) | $ | (147 | ) |
See accompanying footnotes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. NATURE OF BUSINESS
Pacific Sunwear of California, Inc. and its subsidiaries (collectively, the Company) is a leading
specialty retailer rooted in the action sports, fashion and music influences of the California
lifestyle. The Company sells casual apparel with a targeted selection of accessories and footwear
designed to meet the needs of teens and young adults. The Company operates a nationwide, primarily
mall-based chain of retail stores, under the names Pacific Sunwear and PacSun. In addition, the
Company operates an e-commerce website at www.pacsun.com which sells PacSun merchandise online,
provides content and community for its target customers, and provides information about the
Company.
2. BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements are unaudited and have been prepared
in accordance with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and with the instructions to Form 10-Q and Rules 5-02
and 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by GAAP for complete financial statements. The Condensed Consolidated Financial
Statements include the accounts of Pacific Sunwear of California, Inc. and its subsidiaries
(Pacific Sunwear Stores Corp. and Miraloma Corp.). All intercompany transactions have been
eliminated in consolidation.
In the opinion of management, all adjustments consisting only of normal recurring entries necessary
for a fair presentation have been included. The preparation of Condensed Consolidated Financial
Statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the Condensed Consolidated Financial Statements as well as the reported
revenues and expenses during the reporting period. Actual results could differ from these
estimates. The results of operations for the first quarter ended May 1, 2010 are not necessarily
indicative of the results that may be expected for the fiscal year ending January 29, 2011 (fiscal
2010). For further information, refer to the Consolidated Financial Statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended January 30, 2010
(fiscal 2009).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Information regarding significant accounting policies is contained in Note 1, Nature of Business
and Summary of Significant Accounting Policies, of the Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for fiscal 2009. Presented below in the following notes is
supplemental information that should be read in conjunction with Notes to Consolidated Financial
Statements included in that Report.
Income Taxes
The Company calculates its interim income tax provision in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) Topic 270, Interim Reporting
and ASC Topic 740, Accounting for Income Taxes (ASC 740). At the end of each interim period,
the Company estimates the annual effective tax rate and applies that rate to its ordinary quarterly
earnings. The tax expense or benefit related to significant, unusual, or extraordinary items is
recognized in the interim period in which those items occur. In addition, the effect of changes in
enacted tax laws, rates or tax status is recognized in the interim period in which the change
occurs. The computation of the annual estimated effective tax rate at each interim period requires
certain estimates and significant judgment including the expected operating income for the year,
permanent and temporary differences as a result of differences between amounts measured and
recognized in accordance with tax laws and financial accounting standards, and the likelihood of
recovering deferred tax assets generated in the current year. The accounting estimates used to
compute the provision for income taxes may change as new events occur, additional information is
obtained or as the tax environment changes.
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Recent Accounting Pronouncements
The Company adopted the FASB Accounting Standard Update (ASU) 2010-06 in the first quarter of
fiscal 2010, which provides new guidance and clarifications for improving disclosures about fair
value measurements. This guidance requires enhanced disclosures regarding transfers in and out of
the levels within the fair value hierarchy. Separate disclosures are required for transfers in and
out of Level 1 and 2 fair value measurements, and the reasons for the transfers must be
disclosed. In the reconciliation for Level 3 fair value measurements, separate disclosures are
required for purchases, sales, issuances, and settlements on a gross basis. The new disclosures and
clarifications of existing disclosures are effective for interim and annual reporting periods
beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and
settlements in the roll forward of activity in Level 3 fair value measurements, which are effective
for interim and annual periods beginning after December 15, 2010. The adoption did not have a
material impact on the Companys financial statements.
4. FAIR VALUE OF LONG-LIVED ASSETS
The Companys long-lived assets (primarily property and equipment) are measured and reported on a
fair value basis in the period that the impairment is determined in accordance with ASC Topic 820, Fair Value Measurements and Disclosures
(ASC 820). ASC 820 defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosure about fair value measurements. ASC 820 enables the
reader of the financial statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the information used to
determine fair values. ASC 820 requires that assets and liabilities carried at fair value be
classified and disclosed in one of the following three categories:
| Level 1: Quoted market prices in active markets for identical assets or liabilities | ||
| Level 2: Observable market based inputs that are corroborated by market data | ||
| Level 3: Unobservable inputs that are not corroborated by market data |
The following table represents the fair value hierarchy for assets measured at fair value on a
non-recurring basis (in millions):
May 1, 2010 | January 30, 2010 | |||||||||||||||
Significant | Significant | |||||||||||||||
Unobservable | Unobservable | |||||||||||||||
Inputs | Inputs | |||||||||||||||
Total | (Level 3) | Total | (Level 3) | |||||||||||||
Long-lived assets held and used |
$ | 233 | $ | 233 | $ | 249 | $ | 249 |
The Company evaluates the recoverability of the carrying amount of long-lived assets for all stores
whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. As a result of continued declines in comparable store net sales and gross
margin the Company recorded non-cash impairment charges within selling, general and administrative
expenses for underperforming stores during the first quarter ended May 1, 2010. Long-lived store assets
with a carrying amount of $238 million at May 1, 2010 were written down to their fair value of
$233 million, resulting in a non-cash impairment charge of $5 million, which was included in the
operating results for the first quarter of fiscal 2010. Fair value is determined using a discounted
cash flow model. The estimation of future cash flows from operating activities requires significant
estimates of factors that include future sales and gross margin performance. If the Companys sales
or gross margin performance or other estimated operating results are not achieved at or above the
forecasted level, the carrying value of certain store assets may prove unrecoverable and the
Company may incur additional impairment charges in the future.
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5. CREDIT FACILITY
The Company has an asset-backed credit agreement with a syndicate of lenders (the Credit
Facility) which expires on April 29, 2013, and provides for a secured revolving line of credit of
up to $150 million that can be increased to up to $225 million subject to lender approval.
Extensions of credit under the Credit Facility are limited to a borrowing base consisting of
specified percentages of eligible categories of assets, primarily cash and inventory (generally,
75% of inventories). The Credit Facility is available for direct borrowing and, subject to
borrowing base availability ($126 million at May 1, 2010), up to $75 million is available for the
issuance of letters of credit and up to $15 million is available for swing-line loans. The Credit
Facility is secured by cash, cash equivalents, deposit accounts, securities accounts, credit card
receivables and inventory. Direct borrowings under the Credit Facility bear interest at the
administrative agents alternate base rate (as defined, 3.5% at May 1, 2010) or at optional
interest rates that are primarily dependent upon LIBOR or the federal funds effective rate for the
time period chosen. Based on current forecasts and plans for the
year, the Company believes that cash flows from operating activities, working capital, the Credit Facility and other available sources of financing will be
sufficient to meet its operating and capital expenditure needs for at least the next twelve months.
At May 1, 2010, the Company had no direct borrowings and $17 million in letters of credit
outstanding under the Credit Facility. The remaining availability at May 1, 2010 was $109 million.
The Company is not subject to any financial covenant restrictions under the Credit Facility unless
total remaining borrowing availability under the facility falls below $15 million at any point in
time, or 10% of the aggregate lender commitments in the event the facility is increased beyond
$150 million. The Company is restricted from incurring additional indebtedness or liens in excess
of certain levels specified by the Credit Facility. In general, the Company is not allowed to incur
additional secured indebtedness, but can obtain unsecured indebtedness outside of the Credit
Facility up to $150 million. Additionally, the Credit Facility contains specific limits on
particular kinds of indebtedness, as defined in the Credit Facility agreement, and such agreement
contains other typical affirmative and negative covenants, such as obligations to deliver financial
statements, provide certain notices, comply with laws, and not enter into certain transactions or
make certain payments without the consent of the lenders.
6. OTHER CURRENT LIABILITIES
As of the dates presented, other current liabilities consisted of the following (in thousands):
May 1, | January 30, | |||||||
2010 | 2010 | |||||||
Accrued compensation and benefits |
$ | 9,794 | $ | 12,362 | ||||
Accrued gift cards |
9,776 | 12,617 | ||||||
Sales taxes payable |
2,416 | 4,444 | ||||||
Accrued capital expenditures |
1,619 | 1,802 | ||||||
Other |
13,158 | 12,517 | ||||||
Total other current liabilities |
$ | 36,763 | $ | 43,742 | ||||
7. INCOME TAXES
The provisions codified within ASC Topic 740, Income Taxes (ASC 740), require companies to assess
whether valuation allowances should be established against their deferred tax assets based on
consideration of all available evidence using a more likely than not standard. In accordance with
ASC 740, a full valuation allowance was established during the fourth quarter of 2009 and continues
to be maintained on all federal and the majority of state deferred tax assets. Remaining state
deferred tax assets of $4 million were not reserved as the Company concluded it is more likely than
not that these deferred tax assets would be utilized before expiration. The Company has
discontinued recognizing federal and certain state income tax benefits until it is determined that
it is more likely than not that the Company will generate sufficient taxable income to realize the
deferred income tax assets.
8. STOCK-BASED COMPENSATION
Stock-based compensation expense for each of the first quarters of fiscal 2010 and 2009 was
included in cost of goods sold for buying and distribution employees ($0.3 million and $0.5
million, respectively) and in selling, general and administrative expenses for all other employees
($0.8 million and $0.4 million, respectively).
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Stock Options
The Company granted 341,500 and 1,034,400 shares underlying stock options under the 2005
Performance Incentive Plan during the first quarters of fiscal 2010 and 2009, respectively, at a
weighted average grant-date fair value of $3.00 and $0.85 per share, respectively. The Company
records compensation expense for employee stock options based on the estimated fair value of the
options on the date of grant using the Black-Scholes option-pricing model. The table below
summarizes the assumptions used in the valuation of stock options:
For the First Quarters Ended | ||||||||
May 1, 2010 | May 2, 2009 | |||||||
Expected life |
4 years | 4 years | ||||||
Expected volatility |
79.4 | % | 69.4 | % | ||||
Risk-free interest rate |
2.0 | % | 1.5 | % | ||||
Dividend yield |
| |
Non-vested Stock Awards
The Company granted 184,750 and 193,906 non-vested stock awards during the first quarters of each
of fiscal 2010 and 2009, respectively, at a weighted average grant-date fair value of $5.09 and
$1.64, respectively.
As of May 1, 2010, the Company had approximately $5.5 million of compensation expense related to
non-vested stock option and non-vested stock awards, net of estimated forfeitures, not yet
recognized. This compensation
expense is expected to be recognized over a weighted-average period of approximately 2.9 years. The
amount of unrecognized compensation expense noted above does not necessarily represent the amount
that will ultimately be recognized by the Company in its Condensed Consolidated Financial
Statements due to actual forfeitures.
9. COMMITMENTS AND CONTINGENCIES
Litigation
Ned Nelson, as an individual and on behalf of others similarly situated, vs. Pacific Sunwear of
California, Inc., Los Angeles Superior Court Case No. BC 436947. On April 30, 2010, the plaintiff
filed a putative class action lawsuit against the Company alleging various violations of
Californias wage and hour, overtime, meal break and rest break rules and regulations. The
complaint seeks class certification, the appointment of the plaintiff as class representative and
an unspecified amount of damages and penalties. The Company intends to file an answer denying all
of the allegations and asserting various defenses. As the ultimate outcome is uncertain, no amounts
have been accrued by the Company as of May 1, 2010. Depending on the actual outcome of this
litigation, provisions could be recorded in the future which may have an adverse effect on the
Companys operating results.
The Company is also involved from time to time in other litigation incidental to its business. The
Company believes that the outcome of such litigation will not likely have a material adverse effect
on its results of operations or financial condition and, from time to time, it may make provisions
for probable litigation losses. Depending on the actual outcome of pending litigation, charges in
excess of any provisions could be recorded in the future, which may have an adverse effect on the
Companys operating results.
Letters of Credit
The Company has issued guarantees in the form of commercial letters of credit, of which there were
approximately $17 million outstanding at May 1, 2010, as security for merchandise shipments from
overseas. All in-transit merchandise covered by letters of credit is accrued for in accounts
payable.
10. SEGMENT REPORTING
The Company operates exclusively in the retail apparel industry in which the Company distributes,
designs and produces clothing and related products catering to teens and young adults through its
primarily mall-based PacSun retail stores. The Company has identified three operating segments:
PacSun stores, PacSun Outlet stores and pacsun.com. The three operating segments have been
aggregated into one reportable segment based on the similar
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nature of products sold, production, merchandising and distribution processes involved, target
customers, and economic characteristics among the three operating segments.
11. EARNINGS PER SHARE
Basic earnings per common share is computed using the weighted-average number of shares outstanding
for the period. Diluted earnings per common share is computed using the weighted-average number of
shares outstanding for the period adjusted for the incremental shares attributed to outstanding
options to purchase common stock and non-vested stock awards. Options with an exercise price in
excess of the average market value of the Companys common stock during the period have been
excluded from the calculation as their effect would be antidilutive. Options to purchase 3,154,687
and 2,053,975 shares of common stock in the first quarter of fiscal 2010 and 2009, respectively,
were excluded from the computation of diluted earnings per share as their effect would have been
antidilutive. In periods when a net loss is reported, the weighted-average number of shares
outstanding in the basic and diluted earnings per common share calculations will be the same.
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ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following managements discussion and analysis of financial condition and results of operations
(MD&A) should be read in conjunction with our Condensed Consolidated Financial Statements and
notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act), and we intend that such forward-looking statements be
subject to the safe harbors created thereby. In Item 1A, Risk Factors, in our Annual Report on Form
10-K for the year ended January 30, 2010, we provide cautionary statements identifying important
factors that could cause our actual results to differ materially from those projected in the
forward-looking statements contained herein. Any statements that express, or involve discussions as
to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but
not always, identifiable by the use of words or phrases such as will result, expects to, will
continue, anticipates, plans, intends, estimated, projects and outlook) are not
historical facts and may be forward-looking and, accordingly, such statements involve estimates,
assumptions and uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements. Examples of forward-looking statements in this report
include, but are not limited to, the following categories of expectations about:
| the sufficiency of operating cash flows, working capital and available credit to meet our operating and capital expenditure requirements | |
| our capital expenditure plans for fiscal 2010 | |
| forecasts of future store closures for fiscal 2010, and | |
| future changes in occupancy expenses. |
All forward-looking statements included in this report are based on information available to us as
of the date hereof, and are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed in the forward-looking statements. See Item 1A, Risk
Factors, in our Annual Report on Form 10-K for the year ended January 30, 2010, which are hereby
incorporated by reference in this Quarterly Report on Form 10-Q, for a discussion of these risks
and uncertainties. We assume no obligation to update or revise any such forward-looking statements
to reflect events or circumstances that occur after such statements are made.
Executive Overview
We consider the following items to be key performance indicators in evaluating our performance:
Comparable (or same store) sales. Stores are deemed comparable stores on the first day of the
month following the one-year anniversary of their opening or expansion/relocation. We consider same
store sales to be an important indicator of current Company performance. Same store sales results
are important in achieving operating leverage of certain expenses such as store payroll, store
occupancy, depreciation, general and administrative expenses, and other costs that are somewhat
fixed. Positive same store sales results generate greater operating leverage of expenses while
negative same store sales results negatively impact operating leverage. Same store sales results
also have a direct impact on our total net sales, cash, and working capital.
Net merchandise margins. We analyze the components of net merchandise margins, specifically initial
markups and markdowns as a percentage of net sales. Any inability to obtain acceptable levels of
initial markups or any significant increase in our use of markdowns could have an adverse impact on
our gross margin results and results of operations.
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Operating margin. We view operating margin as a key indicator of our success. The key drivers of
operating margins are comparable store net sales, net merchandise margins, and our ability to
control operating expenses. For a discussion of the changes in the components comprising operating
margins, see Results of Operations in this section.
Store sales trends. We evaluate store sales trends in assessing the operational performance of our
stores. Important store sales trends include average net sales per store and average net sales per
square foot.
Cash flow and liquidity (working capital). We evaluate cash flow from operations, liquidity and
working capital to determine our short-term operational financing
needs. Based on current forecasts and plans for the year, we believe that
our cash flows from operating activities, working capital, credit facility availability and other
available sources of financing will be sufficient to meet our operating and capital expenditure
requirements for at least the next twelve months. For a discussion of the changes in operating cash
flows and working capital, see Liquidity and Capital Resources in this section.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates from the
information provided in Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January
30, 2010.
Results of Operations
The following table sets forth selected income statement data expressed as a percentage of net
sales for the fiscal quarters indicated. The discussion that follows should be read in conjunction
with the following table:
First Quarters Ended | ||||||||
May 1, 2010 | May 2, 2009 | |||||||
Net sales |
100.0 | % | 100.0 | % | ||||
Cost of goods sold, including buying, distribution and occupancy costs |
77.7 | 72.6 | ||||||
Gross margin |
22.3 | 27.4 | ||||||
Selling, general and administrative expenses |
38.4 | 34.4 | ||||||
Operating loss |
(16.1 | ) | (7.0 | ) | ||||
Other expense, net |
0.0 | 0.1 | ||||||
Loss before income taxes |
(16.1 | ) | (7.1 | ) | ||||
Income tax expense/(benefit) |
0.2 | (3.1 | ) | |||||
Net loss |
(16.3) | % | (4.0) | % | ||||
Numbers of stores open at end of period |
883 | 927 | ||||||
Total square footage (in 000s) |
3,421 | 3,578 |
The first quarter ended May 1, 2010 as compared to the first quarter ended May 2, 2009
Net Sales
Net sales decreased to $190 million for the first quarter of fiscal 2010 from $223 million for the
first quarter of fiscal 2009. The components of this $33 million decrease in net sales are as
follows:
$ millions | Attributable to | |
$(30)
|
15% decline in comparable store net sales in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 due a decline in total transactions. | |
(5)
|
Store closures. | |
2
|
Non-comparable sales from new, expanded or relocated stores not yet included in the comparable store base and e-commerce net sales. | |
$(33)
|
Total | |
Total comparable sales of Young Mens merchandise declined less than 1% compared to the first
quarter of fiscal 2009, continuing the sequential improvement in the trending of our Young Mens
business over the past three
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quarters driven by our renewed focus on featuring our heritage brands and certain other proprietary
and up-and-coming brands in a more prominent manner. Consistent with our expectations entering the
quarter, total comparable sales of Juniors merchandise declined 27% versus the first quarter of
fiscal 2009 on an inventory decline of approximately 30%. We chose to reduce our Juniors inventory
while we began shifting the strategic direction of Juniors in our efforts to capture a slightly
older and more fashion-driven teen customer.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, was $42 million for the first quarter
of fiscal 2010 versus $61 million for the first quarter of fiscal 2009. As a percentage of net
sales, gross margin was 22.3% for the first quarter of fiscal 2010 compared to 27.4% for the first
quarter of fiscal 2009. The components of this 5.1% decrease in gross margin as a percentage of net
sales were as follows:
% | Attributable to | |
(3.8)
|
Deleverage of occupancy costs as a result of the negative 15% same-store sales results for the first quarter of fiscal 2010. Occupancy costs were $47 million in both years. | |
(1.3)
|
Decrease in merchandise margin rate due to increased markdowns as a percentage of sales. | |
(5.1)
|
Total | |
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses decreased to $73 million for the first
quarter of fiscal 2010 from $77 million for the first quarter of fiscal 2009, a decrease of $4
million, or 4.7%. These expenses increased to 38.4% as a percentage of net sales in the first
quarter of fiscal 2010 from 34.4% in the first quarter of fiscal 2009. The components of this 4.0%
increase in selling, general and administrative expenses as a percentage of net sales were as
follows:
% | Attributable to | |
2.0
|
Increase in non-cash asset impairment charges of $3 million. | |
1.7
|
Increase in payroll and payroll-related expenses as a percentage of sales due to deleveraging these expenses against the negative 15% same-store sales result. In dollars, payroll and payroll-related expenses declined $3 million. | |
0.3
|
Increase in other SG&A expenses as a percentage of sales due to deleveraging these expenses against the negative 15% same-store sales result. In dollars, other SG&A expenses declined $4 million primarily due to lower depreciation. | |
4.0
|
Total | |
We evaluate the recoverability of the carrying amount of long-lived assets for all stores
(primarily property and equipment) whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. Should comparable store net sales and
gross margin continue to decline, we may record additional non-cash impairment charges within
selling, general and administrative expenses for underperforming stores in future quarters.
Income Taxes
We recognized income tax expense of $0.3 million and income tax benefit of $7 million for the first
quarters of fiscal 2010 and 2009, respectively. The effective income tax rate was (1.1)% in the
first quarter of fiscal 2010 versus 44.4% in the first quarter of fiscal 2009. The difference in
the effective income tax rate was primarily attributable to maintaining the valuation allowance
against our deferred tax assets in the first quarter of fiscal 2010. As a result of recording
income tax provisions for certain state and local tax jurisdictions against our pre-tax operating
losses, the effective income tax rate was negative in the first quarter of fiscal 2010. For further
information, see Note 7 to the Condensed Consolidated Financial Statements included in this
Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
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Net Loss and Net Loss per Share
Our net loss for the first quarter of fiscal 2010 was $31 million, or $(0.47) per share, versus a
net loss of $9 million, or $(0.13) per share, for the first quarter of fiscal 2009. Amounts for the
first quarter of fiscal 2010 include the continuing impact of a valuation allowance against our
deferred tax assets. On a non-GAAP basis, excluding the impact of this valuation allowance and
using a normalized 36.4% income tax rate, our net loss for the first quarter of fiscal 2010 was $20
million, or $(0.30) per share.
About Non-GAAP Financial Measures
The preceding paragraph contains non-GAAP financial measures, including non-GAAP net loss and
non-GAAP net loss per share for the first quarter of fiscal 2010. Non-GAAP financial measures
should not be considered as a substitute for, or superior to, measures of financial performance
prepared in accordance with GAAP. These non-GAAP financial measures do not reflect a comprehensive
system of accounting, differ from GAAP measures with the same names, and may differ from non-GAAP
financial measures with the same or similar names that are used by other companies. We compute
non-GAAP financial measures using a consistent methodology from quarter to quarter and year to
year. We may consider whether other significant items that arise in the future should be excluded
from the non-GAAP financial measures.
We excluded a deferred tax asset valuation allowance charge in presenting a non-GAAP net loss
amount and per share amount above under the caption Net Loss and Net Loss per Share. We believe
that these non-GAAP financial measures provide meaningful supplemental information regarding our
operating results primarily because they exclude amounts that are not considered part of ongoing
operating results when planning and forecasting and when assessing the performance of the
organization, individual operating segments or its senior management. In addition, we believe that
non-GAAP financial information is used by analysts and others in the investment community to
analyze our historical results and to provide estimates of future performance versus the results
and estimates of others. We believe that failure to report these non-GAAP measures excluding the
impact of the valuation allowance could result in confusion among investors and analysts by
creating a misplaced perception that our results have underperformed or exceeded expectations.
Liquidity and Capital Resources
We have historically financed our operations primarily from internally generated cash flow, with
occasional short-term borrowings. Our primary capital requirements have historically been for the
financing of inventories and store construction. Based on current
forecasts and plans for the year, we believe that our cash flows
from operating activities, working capital, credit facility availability and other available sources of financing
will be sufficient to meet our operating and capital expenditure requirements for at least the next
twelve months.
(In thousands) | May 1, | May 2, | ||||||
FIRST QUARTER ENDED | 2010 | 2009 | ||||||
Net cash (used in)/provided by operating activities |
$ | (32,412 | ) | $ | 12,608 | |||
Net cash used in investing activities |
(3,960 | ) | (5,108 | ) | ||||
Net cash used in financing activities |
(87 | ) | (2 | ) | ||||
Net (decrease)/increase in cash and cash equivalents |
$ | (36,459 | ) | $ | 7,498 | |||
Operating Cash Flows
Net cash used in operating activities for the first quarter of fiscal 2010 was $32 million. We used
$10 million of cash in operations (net of non-cash charges). In addition, cash decreased $19
million from changes in working capital items (primarily merchandise inventories) and $3 million
due to changes in other assets and liabilities.
Net cash provided by operating activities for the first quarter of fiscal 2009 was approximately
$13 million. We generated $10 million of cash from operations (net of non-cash charges). In
addition, we generated $1.4 million from changes in working capital items and $1.2 million due to
changes in other assets and liabilities.
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Working Capital
Working capital at May 1, 2010 was $99 million compared to $117 million at January 30, 2010, a
decrease of $18 million. The changes in working capital were as follows:
$ millions | Description | |||
$ | 117 | Working capital at January 30, 2010 |
||
(36 | ) | Decrease in cash and cash equivalents (see Condensed Consolidated Statements of Cash Flows). |
||
12 | Increase in inventories, net of accounts payable. |
|||
6 | Decrease in other current liabilities, net of other current assets. |
|||
$ | 99 | Working capital at May 1, 2010 |
||
Investing Cash Flows
Net cash used in investing activities in the first quarter of fiscal 2010 was $4 million compared
to $5 million for the first quarter of fiscal 2009, a decrease in cash used of $1 million.
Investing cash flows for the first quarter of fiscal 2010 and 2009 were comprised entirely of
capital expenditures. We expect total capital expenditures for fiscal 2010 to be approximately $20
to $30 million.
Credit Facility
Information regarding our credit facility is contained in Note 5 to the Condensed Consolidated
Financial Statements and is incorporated herein by reference.
Contractual Obligations
We have minimum annual rental commitments under existing store leases as well as a minor amount of
capital leases for computer equipment. We lease all of our retail store locations under operating
leases. We lease equipment, from time to time, under both capital and operating leases. In
addition, at any time, we are contingently liable for commercial letters of credit with foreign
suppliers of merchandise. At May 1, 2010, our future financial commitments under all existing
contractual obligations were as follows:
Payments Due by Period (in $ millions) | ||||||||||||||||||||
Less | More | |||||||||||||||||||
than 1 | 1-3 | 3-5 | than 5 | |||||||||||||||||
Contractual Obligations | Total | year | years | years | years | |||||||||||||||
Operating lease obligations |
$ | 517 | $ | 94 | $ | 163 | $ | 122 | $ | 138 | ||||||||||
Capital lease obligations |
<1.0 | <1.0 | <1.0 | | | |||||||||||||||
ASC 740 (FIN 48) obligations
including interest and
penalties |
<1.0 | | <1.0 | | | |||||||||||||||
Letters of credit |
17 | 17 | | | | |||||||||||||||
Guaranteed minimum royalties |
4.0 | <1.0 | 2.0 | <1.0 | | |||||||||||||||
Total |
$ | 539 | $ | 112 | $ | 166 | $ | 123 | $ | 138 | ||||||||||
Over the next three fiscal years through 2012, we will have approximately 45% of our store leases
reach the end of their original lease term. These leases will either be renewed or extended,
potentially at different rates, or be allowed to expire. As a result, depending on market
conditions, actual future rental commitments and the time frame of such commitments may differ
significantly from those shown in the table above.
The contractual obligations table above does not include common area maintenance (CAM) charges,
which are also a required contractual obligation under our store operating leases. In many of our
leases, CAM charges are not fixed and can fluctuate significantly from year to year for any
particular store. Total store rental expenses, including CAM, for fiscal 2009 were $164 million.
Total CAM expenses may continue to fluctuate significantly from year to year as long-term leases
come up for renewal at current market rates in excess of original lease terms and as we continue to
close stores.
We lease our retail stores and certain equipment under operating lease agreements expiring at
various dates through April 2021. Substantially all of our retail store leases require us to pay
minimum rent, CAM charges, insurance,
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property taxes and additional percentage rent based on sales
volumes exceeding certain minimum sales levels. The initial terms of such leases are typically 8 to
10 years, many of which contain renewal options exercisable at our discretion. Most leases also
contain rent escalation clauses that come into effect at various times throughout the lease term.
Rent expense is recorded under the straight-line method over the life of the lease. Other rent
escalation clauses can take effect based on changes in primary mall tenants throughout the term of
a given lease. Most leases also contain cancellation or kick-out clauses in our favor that relieve
us of any future obligation under a lease if specified sales levels are not achieved by a specified
date. None of our retail store leases contain purchase options.
We review the operating performance of our stores on an ongoing basis to determine which stores, if
any, to expand, relocate or close. We closed 13 stores in the first quarter of 2010. We currently
anticipate closing approximately 25 to 50 stores for all of fiscal 2010.
The ASC 740 (FIN 48) obligations shown in the table above represent uncertain tax positions related
to temporary differences. The years for which the temporary differences related to the uncertain
tax positions will reverse have been estimated in scheduling the obligations within the table.
Indemnifications
In the ordinary course of business, we may provide indemnifications of varying scope and terms to
customers, vendors, lessors, business partners and other parties with respect to certain matters,
including, but not limited to, losses arising out of our breach of such agreements, services to be
provided by us, or intellectual property infringement claims made by third parties. In addition, we
have entered into indemnification agreements with our directors and certain of our officers that
will require us, among other things, to indemnify them against certain liabilities that may arise
by reason of their status or service as directors or officers. We maintain director and officer
insurance, which may cover certain liabilities arising from our obligation to indemnify our
directors and officers in certain circumstances.
It is not possible to determine our maximum potential liability under these indemnification
agreements due to the limited history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement. Such indemnification agreements may not be
subject to maximum loss clauses. Historically, we have not incurred material costs as a result of
obligations under these agreements.
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities whereby we have financial
guarantees, subordinated retained interests, derivative instruments, or other contingent
arrangements that expose us to material continuing risks, contingent liabilities, or any other
obligation under a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk, or credit risk support to us.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 3 to the Condensed
Consolidated Financial Statements and is incorporated herein by reference.
Inflation
We do not believe that inflation has had a material effect on our results of operations in the
recent past. There can be no assurance that our business will not be affected by inflation in the
future.
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Seasonality and Quarterly Results
Our business is seasonal by nature. Our first quarter historically accounts for the smallest
percentage of annual net sales with each successive quarter contributing a greater percentage than
the last. In recent years, approximately 45% of our net sales have occurred in the first half of
the fiscal year and 55% have occurred in the second half, with the back-to-school and Christmas
selling periods accounting for approximately 30-35% of our annual net sales. Our quarterly results
of operations may also fluctuate significantly as a result of a variety of factors, including the
timing of store openings; the amount of revenue contributed by new stores; the timing and level of
markdowns; the timing of store closings, expansions and relocations; competitive factors; and
general economic conditions.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to interest rate risk from the Credit Facility (see Note 5 to the Condensed
Consolidated Financial Statements). Direct borrowings under the Credit Facility bear interest at
the administrative agents alternate base rate (as defined, 3.5% at May 1, 2010) or at optional
interest rates that are primarily dependent upon LIBOR or the federal funds effective rate for the
time period chosen. At May 1, 2010, we had no direct borrowings outstanding under the Credit
Facility.
A sensitivity analysis was performed to determine the impact of unfavorable changes in interest
rates on our cash flows. The sensitivity analysis quantified that the estimated potential cash flow
impact would be less than $10,000 in additional interest expense (for each $1 million borrowed) if
interest rates were to increase by 10% over a three-month period. Actual interest charges incurred
may differ from those estimated because of changes or differences in market rates, differences in
amounts borrowed, timing and other factors. We are not a party with respect to derivative financial
instruments.
ITEM 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated
under the Exchange Act. These disclosure controls and procedures are designed to provide reasonable
assurance that the information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commissions rules and forms. Our disclosure controls and
procedures are also designed to provide reasonable assurance that information required to be
disclosed in the reports that we file or submit under the Exchange Act is accumulated and
communicated to our management, including our principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosures. Based on this
evaluation, our principal executive officer and our principal financial officer concluded that our
disclosure controls and procedures were effective at a reasonable assurance level as of May 1,
2010.
No change in our internal control over financial reporting occurred during the first quarter of
fiscal 2010 that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
For information on legal proceedings see Litigation within Note 9 to the Condensed Consolidated
Financial Statements, which information is incorporated herein by reference.
Item 1A. Risk Factors.
We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended January
30, 2010 a description of certain risks and uncertainties that could affect our business, future
performance or financial condition (the Risk Factors). We believe there are no material changes
from the disclosure provided in the Annual Report on Form 10-K for the year ended January 30, 2010
with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an
investment decision with respect to the Companys stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Reserved.
Item 5. Other Information.
None.
Item 6. Exhibits.
Incorporated by | ||||||
Reference | ||||||
Exhibit # | Exhibit Description | Form | Filing Date | |||
3.1
|
Third Amended and Restated Articles of Incorporation of the Company | 10-Q | 8/31/04 | |||
3.2
|
Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock of the Company | 8-K | 12/24/98 | |||
3.3
|
Fifth Amended and Restated Bylaws of the Company | 8-K | 4/3/09 | |||
31.1+
|
Written statements of Gary H. Schoenfeld and Michael L. Henry pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | |||||
32.1+
|
Written statement of Gary H. Schoenfeld and Michael L. Henry pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
+ | Filed herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
PACIFIC SUNWEAR OF CALIFORNIA, INC. (Registrant) |
||||
Date: June 4, 2010 | By: | /s/ GARY H. SCHOENFELD | ||
Gary H. Schoenfeld | ||||
President, Chief Executive Officer and Director (Principal Executive Officer) |
||||
Date: June 4, 2010 | By: | /s/ MICHAEL L. HENRY | ||
Michael L. Henry | ||||
Sr. Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
20