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EXCEL - IDEA: XBRL DOCUMENT - PACIFIC SUNWEAR OF CALIFORNIA INC | Financial_Report.xls |
EX-31.1 - EX-31.1 - PACIFIC SUNWEAR OF CALIFORNIA INC | a58220exv31w1.htm |
EX-32.1 - EX-32.1 - PACIFIC SUNWEAR OF CALIFORNIA INC | a58220exv32w1.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: July 30, 2011
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 (State of incorporation) |
95-3759463 (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 þ 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 definition 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 a 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
September 2, 2011, the registrant had 66,759,942 shares of Common Stock outstanding.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended July 30, 2011
FORM 10-Q
For the Quarter Ended July 30, 2011
Index
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EX-31.1 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
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)
(unaudited, all amounts in thousands except share and per share amounts)
July 30, 2011 | January 29, 2011 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 13,252 | $ | 63,710 | ||||
Merchandise inventories |
163,332 | 95,701 | ||||||
Prepaid expenses |
16,893 | 11,669 | ||||||
Other current assets |
5,677 | 4,773 | ||||||
Total current assets |
199,154 | 175,853 | ||||||
PROPERTY AND EQUIPMENT, NET: |
||||||||
Gross property and equipment |
606,158 | 619,478 | ||||||
Less: Accumulated depreciation and amortization |
(435,279 | ) | (426,298 | ) | ||||
Total property and equipment, net |
170,879 | 193,180 | ||||||
Deferred income taxes |
6,243 | 6,243 | ||||||
Other assets |
25,876 | 26,000 | ||||||
TOTAL ASSETS |
$ | 402,152 | $ | 401,276 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | 97,411 | $ | 41,028 | ||||
Other current liabilities |
40,714 | 42,186 | ||||||
Total current liabilities |
138,125 | 83,214 | ||||||
LONG-TERM LIABILITIES: |
||||||||
Deferred lease incentives |
24,681 | 28,553 | ||||||
Deferred rent |
19,050 | 19,786 | ||||||
Mortgage debt, long-term portion |
28,828 | 29,093 | ||||||
Other long-term liabilities |
25,859 | 26,296 | ||||||
Total long-term liabilities |
98,418 | 103,728 | ||||||
Commitments and contingencies (Note 10) |
||||||||
SHAREHOLDERS EQUITY: |
||||||||
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued |
| | ||||||
Common
stock, $.01 par value; 170,859,375 shares authorized; 66,470,418
and 66,173,397 shares issued and outstanding, respectively |
665 | 662 | ||||||
Additional paid-in capital |
13,594 | 11,593 | ||||||
Retained earnings |
151,350 | 202,079 | ||||||
Total shareholders equity |
165,609 | 214,334 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
$ | 402,152 | $ | 401,276 | ||||
See accompanying footnotes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
(unaudited, all amounts in thousands except share and per share amounts)
AND COMPREHENSIVE OPERATIONS
(unaudited, all amounts in thousands except share and per share amounts)
For the Second Quarter Ended | For the First Half Ended | |||||||||||||||
July 30, 2011 | July 31, 2010 | July 30, 2011 | July 31, 2010 | |||||||||||||
Net sales |
$ | 214,898 | $ | 218,336 | $ | 400,652 | $ | 408,644 | ||||||||
Cost of goods sold, including buying,
distribution and occupancy costs |
165,418 | 167,578 | 315,682 | 315,421 | ||||||||||||
Gross margin |
49,480 | 50,758 | 84,970 | 93,223 | ||||||||||||
Selling, general and administrative expenses |
67,840 | 73,945 | 133,981 | 147,099 | ||||||||||||
Operating loss |
(18,360 | ) | (23,187 | ) | (49,011 | ) | (53,876 | ) | ||||||||
Other expense, net |
571 | 76 | 1,114 | 77 | ||||||||||||
Loss before income taxes |
(18,931 | ) | (23,263 | ) | (50,125 | ) | (53,953 | ) | ||||||||
Income tax expense |
328 | 202 | 604 | 540 | ||||||||||||
Net loss |
$ | (19,259 | ) | $ | (23,465 | ) | $ | (50,729 | ) | $ | (54,493 | ) | ||||
Comprehensive loss |
$ | (19,259 | ) | $ | (23,465 | ) | $ | (50,729 | ) | $ | (54,493 | ) | ||||
Net loss per share: |
||||||||||||||||
Basic and Diluted |
$ | (0.29 | ) | $ | (0.36 | ) | $ | (0.76 | ) | $ | (0.83 | ) | ||||
Weighted-average shares outstanding: |
||||||||||||||||
Basic and Diluted |
66,343,761 | 65,950,825 | 66,273,810 | 65,894,376 | ||||||||||||
See accompanying footnotes
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PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, all amounts in thousands)
(unaudited, all amounts in thousands)
For the First Half Ended | ||||||||
July 30, 2011 | July 31, 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (50,729 | ) | $ | (54,493 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: |
||||||||
Depreciation and amortization |
22,437 | 28,105 | ||||||
Asset impairment |
5,785 | 6,307 | ||||||
Loss on disposal of property and equipment |
63 | 632 | ||||||
Noncash stock-based compensation |
1,736 | 2,112 | ||||||
Change in operating assets and liabilities: |
||||||||
Merchandise inventories |
(67,631 | ) | (85,125 | ) | ||||
Prepaid expenses and other current assets |
(6,428 | ) | (237 | ) | ||||
Other assets |
124 | (196 | ) | |||||
Accounts payable |
56,383 | 49,712 | ||||||
Other current liabilities |
(573 | ) | 2,356 | |||||
Deferred lease incentives |
(3,872 | ) | (5,117 | ) | ||||
Deferred rent |
(736 | ) | (761 | ) | ||||
Other long-term liabilities |
(276 | ) | (571 | ) | ||||
Net cash used in operating activities |
(43,717 | ) | (57,276 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchases of property and equipment |
(6,938 | ) | (10,917 | ) | ||||
Proceeds from insurance settlement |
300 | | ||||||
Net cash used in investing activities |
(6,638 | ) | (10,917 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Principal payments under mortgage borrowings |
(248 | ) | | |||||
Proceeds from exercise of stock options |
314 | 303 | ||||||
Principal payments under capital leases |
(169 | ) | (160 | ) | ||||
Net cash (used in) provided by financing activities |
(103 | ) | 143 | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(50,458 | ) | (68,050 | ) | ||||
CASH AND CASH EQUIVALENTS, beginning of period |
63,710 | 93,091 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 13,252 | $ | 25,041 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||
Cash paid for interest |
$ | 1,047 | $ | 16 | ||||
Cash paid (refunded) for income taxes |
$ | 932 | $ | (272 | ) | |||
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS: |
||||||||
Property and equipment purchases accrued at period end |
$ | 345 | $ | 1,614 |
See accompanying footnotes
5
Table of Contents
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(unaudited)
1. NATURE OF BUSINESS
Pacific Sunwear of California, Inc. (together with its wholly-owned subsidiaries, the Company or
PacSun) is a leading specialty retailer rooted in the action sports, fashion and music influences
of the California lifestyle. The Company sells a combination of branded and proprietary casual
apparel, accessories and footwear designed to appeal to teens and young adults. It 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. The Company, a California corporation, was incorporated in August
1982. As of July 30, 2011, the Company leased and operated 821 stores in each of the 50 states and
Puerto Rico.
2. BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).
Accordingly, certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP) have been condensed or omitted. These Condensed Consolidated Financial Statements
should be read in conjunction with the Consolidated Financial Statements and notes thereto included
in the Companys Annual Report on Form 10-K for the fiscal year ended January 29, 2011 (fiscal
2010) filed with the SEC. The Condensed Consolidated Financial Statements include the accounts of
Pacific Sunwear of California, Inc. and its wholly-owned subsidiaries (Pacific Sunwear Stores
Corp., a California corporation (PacSun Stores) and Miraloma Borrower Corporation, a Delaware
corporation (Miraloma)). 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 Companys first half ended July 30, 2011 are not
necessarily indicative of the results that may be expected for the fiscal year ending January 28,
2012 (fiscal 2011).
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 2010. 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
(ASC 270) 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
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financial accounting standards, and the
likelihood of recovering deferred tax assets generated in the current fiscal
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.
Recent Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The ASU
requires the presentation of comprehensive income, the components of net income and the components
of other comprehensive income either in a single continuous statement of comprehensive income or in
two separate but consecutive statements. The new standard also requires presentation of adjustments
for items that are reclassified from other comprehensive income to net income in the statement
where the components of net income and the components of other comprehensive income are presented.
The updated guidance is effective on a retrospective basis for financial statements issued for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011.
Based on the Companys evaluation of this ASU, the adoption of this standard is not expected to
have a material impact on the Companys financial position or results of operation.
In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement
and Disclosure requirement in U.S. GAAP and IFRSs. The ASU provides additional guidance on fair
value measurements that clarifies the application of existing guidance and disclosure requirements,
changes certain fair value measurement principles and requires additional disclosures about fair
value measurements. The updated guidance is effective on a prospective basis for financial
statements issued for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2011. Based on the Companys evaluation of this ASU, the adoption of this standard is
not expected to have a material impact on the Companys financial position or results of operation.
4. IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. Based on reviews of the
operating performance and projections of underperforming stores, the Company determined that
certain underperforming stores would not be able to generate sufficient cash flows over the
remaining term of the related leases to recover the Companys investment in the stores. As a
result, the Company recorded noncash impairment charges of approximately $3.4 million and $5.8
million within selling, general and administrative expenses during the fiscal quarter and first
half ended July 30, 2011, respectively, in the accompanying Condensed Consolidated Statements of
Operations and Comprehensive Operations to write-down the carrying value of long-lived store assets
to their estimated fair values. Fair value is determined using a discounted cash flow model which
requires Level 3 inputs (as defined in ASC Topic 820, Fair Value Measurements and Disclosures).
The impairment charge reduced the carrying amount of the applicable long-lived assets as follows
(in millions):
For the Second Quarter Ended | For the First Half Ended | |||||||||||||||
July 30, | July 31, | July 30, | July 31, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Carrying value of long-lived assets |
$ | 5.0 | $ | 0.8 | $ | 8.6 | $ | 8.6 | ||||||||
Less: Impairment charge |
(3.4 | ) | (0.8 | ) | (5.8 | ) | (6.3 | ) | ||||||||
Fair value of long-lived assets |
$ | 1.6 | $ | | $ | 2.8 | $ | 2.3 | ||||||||
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 ($108 million at July 30, 2011), 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, 3.75% at July 30, 2011) or at optional interest rates that are primarily
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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, borrowing availability under the Credit Facility, and other available sources of financing
will be sufficient to meet its operating and capital expenditure needs for the next twelve months.
At July 30, 2011, the Company had no direct borrowings and $18 million in letters of credit
outstanding under the Credit Facility resulting in remaining availability of $90 million.
The Company is not subject to any financial covenant restrictions under the Credit Facility unless
total remaining borrowing availability under the Credit Facility falls below $15 million at any
point in time, or 10% of the aggregate lender commitments in the event the Credit 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):
July 30, | January 29, | |||||||
2011 | 2011 | |||||||
Accrued compensation and benefits |
$ | 10,846 | $ | 10,036 | ||||
Accrued gift cards |
8,218 | 12,046 | ||||||
Sales taxes payable |
4,418 | 4,120 | ||||||
Deferred tax liability |
2,147 | 2,147 | ||||||
Accrued capital expenditures |
345 | 1,298 | ||||||
Other |
14,740 | 12,539 | ||||||
Total other current liabilities |
$ | 40,714 | $ | 42,186 | ||||
7. MORTGAGE DEBT
On August 20, 2010, the Company, through its wholly-owned subsidiaries, Miraloma, and PacSun
Stores, executed two promissory notes pursuant to which borrowings in an aggregate amount of $29.8
million from American National Insurance Company (Anico) were incurred. The note executed by
Miraloma (the Miraloma Note) is in the amount of $16.8 million and bears interest at the rate of
6.50% per annum. Monthly principal and interest payments under the Miraloma Note commenced on
October 1, 2010, and are $113,435. The principal and interest payments are based on a 25-year
amortization schedule. The remaining principal balance of the Miraloma Note, and any accrued but
unpaid interest thereon (estimated to be $14.4 million), will be due in full on September 1, 2017.
The Miraloma Note is secured by a deed of trust on the building and land comprising the Companys
principal executive offices in Anaheim, California and is non-recourse to the Company. The Miraloma
Note does not contain any financial covenants. In connection with this transaction, the Company
transferred the building and related land securing the Miraloma Note to Miraloma and entered into a
lease for the building and land with Miraloma. Miraloma paid a prepayment fee to Anico equal to 1%
of the principal amount of the Miraloma Note on the closing date of the transaction. As a result,
Miraloma may prepay the Miraloma Note, in whole, but not in part, at any time without penalty upon
30 days prior written notice to Anico.
The note executed by PacSun Stores (the PacSun Stores Note) is in the amount of $13.0 million and
bears interest at the rate of 6.50% per annum. Monthly principal and interest payments under the
PacSun Stores Note commenced on October 1, 2010, and are $87,777. The principal and interest
payments are based on a 25-year amortization schedule. The remaining principal balance of the
PacSun Stores Note, and any accrued but unpaid interest thereon (estimated to be $11.2 million),
will be due in full on September 1, 2017. The PacSun Stores Note is secured by a mortgage on the
Companys leasehold interest in the building and land comprising the Companys distribution center
in Olathe, Kansas, and is unconditionally guaranteed by the Company. The PacSun Stores Note does
not contain any financial covenants. PacSun Stores paid a prepayment fee to Anico equal to 1% of
the principal amount of the PacSun Stores Note on the closing date of the transaction. As a result,
PacSun Stores may prepay the PacSun Stores Note, in whole, but not in part, at any time without
penalty upon 30 days prior written notice to Anico.
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These transactions generated net cash proceeds to the Company of approximately $28 million. As of
July 30, 2011, remaining aggregate principal payments required under these mortgage debt borrowings
are as follows (in thousands):
FISCAL YEAR ENDING: | ||||
January 28, 2012 |
$ | 257 | ||
February 2, 2013 |
539 | |||
February 1, 2014 |
576 | |||
January 31, 2015 |
614 | |||
January 30, 2016 |
655 | |||
Thereafter |
26,709 | |||
29,350 | ||||
Less: Current portion |
522 | |||
Mortgage debt, long-term |
$ | 28,828 | ||
Interest expense recorded on the mortgage debt was $1 million for the first half of fiscal 2011.
8. INCOME TAXES
The provisions codified within 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 fiscal quarter of 2009 and continues to be maintained
on all federal and the majority of state deferred tax assets. Remaining net state deferred tax
assets of $4 million were not reserved as the Company concluded it is more likely than not that
these net 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.
The Company is also currently evaluating whether an ownership change has occurred under Internal
Revenue Code Section 382. If the Company determines that an ownership change has occurred, its
ability to utilize federal net operating loss carryforwards may be limited. As reported in the
Companys 2010 Annual Report, tax effected federal net operating losses of $40.5 million were
carried forward to fiscal 2011 and will begin to expire in fiscal tax year 2029.
9. STOCK-BASED COMPENSATION
The Company maintains two stock-based incentive plans: (1) 2005 Performance Incentive Plan (2005
Plan) and (2) the amended and restated Employee Stock Purchase Plan (ESPP). The types of awards
that may be granted under the 2005 Plan include stock options, stock appreciation rights, and
restricted stock, or other forms of awards granted or denominated in the Companys common stock or
units of the Companys common stock. Persons eligible to receive awards under the 2005 Plan include
officers or employees of the Company or any of its subsidiaries, directors of the Company and
certain consultants and advisors to the Company or any of its subsidiaries. The vesting of awards
under the 2005 Plan is determined at the date of grant. Each award expires on a date determined at
the date of grant; however, the maximum term of options and stock appreciation rights under the
2005 Plan is ten years after the grant date of the award. As of July 30, 2011, the maximum number
of shares of the Companys common stock that was authorized for award grants under the 2005 Plan
was 3.9 million shares. Any shares subject to awards under prior stock plans that are canceled,
forfeited or otherwise terminate without having vested or been exercised, as applicable, will
become available for other award grants under the 2005 Plan. The 2005 Plan will terminate on March
22, 2015 unless terminated earlier by the Companys Board of Directors.
The Company accounts for stock-based compensation expense according to ASC Topic 718 (ASC 718).
The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value of
its stock-based compensation expense. Forfeitures are estimated at the date of grant based on
historical rates and reduce the compensation expense to be recognized during the vesting period.
The expected term of options granted is derived primarily from historical data on employee
exercises adjusted for expected changes to option terms, if any. The risk-free interest rate is
based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based
primarily on the historical volatility of the Companys stock. The Company records stock-based
compensation
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expense using the straight-line method over the vesting period, which is generally
three to four years. The
Companys stock-based awards generally begin vesting one year after the grant date and, for stock
options, expire in seven to ten years or three months after termination of employment with the
Company. The Companys stock-based compensation expense resulted from awards of stock options,
nonvested shares, and stock appreciation rights, as well as from shares purchased under the
Companys employee share purchase plan.
The fair value of the Companys stock-based compensation activity was determined using the
following weighted-average assumptions:
For the First Half Ended | ||||||||||||||||
July 30, 2011 | July 31, 2010 | |||||||||||||||
Stock Options | ESPP | Stock Options | ESPP | |||||||||||||
Expected life |
4 years | 0.5 years | 4 years | 0.5 years | ||||||||||||
Expected volatility |
82.9% 83.2 | % | 54.0 | % | 79.4% 80.0 | % | 73.4 | % | ||||||||
Risk-free interest rate |
1.2% 1.6 | % | 0.20 | % | 1.75% 2.0 | % | 0.38 | % | ||||||||
Dividend yield |
| | | |
Stock Options
Under the Companys stock option plans, incentive and nonqualified options have been granted to
employees and directors to purchase common stock at prices equal to the fair value of the Companys
shares at the respective grant dates. A summary of stock option activity for the first half of
fiscal 2011 is presented below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Stock Options | Shares | Price | Term (Yrs.) | ($000s) | ||||||||||||
Outstanding at January 29, 2011 |
3,253,554 | $ | 7.12 | |||||||||||||
Granted |
99,000 | 3.24 | ||||||||||||||
Exercised |
(70,825 | ) | 1.64 | |||||||||||||
Forfeited or expired |
(223,041 | ) | 11.54 | |||||||||||||
Outstanding at July 30, 2011 |
3,058,688 | $ | 6.80 | 4.8 | $ | 396 | ||||||||||
Vested and expected to vest at July 30, 2011 |
2,618,921 | $ | 7.27 | 4.7 | $ | 380 | ||||||||||
Exercisable at July 30, 2011 |
1,104,413 | $ | 11.83 | 3.6 | $ | 196 | ||||||||||
The weighted-average grant-date fair value per share of options granted during each of the first
half of fiscal 2011 and 2010 was $1.96 and $2.85, respectively.
Nonvested Share Awards
A summary of the status of the Companys nonvested share awards as of July 30, 2011 and
changes during the first half of the fiscal year is presented below. Nonvested share awards contain
a time-based restriction as to vesting. These awards generally vest over four years with 25% of the
grant vesting each year on the anniversary of the grant date.
Weighted-Average | ||||||||
Grant-Date | ||||||||
Nonvested Share Awards | Shares | Fair Value | ||||||
Outstanding at January 29, 2011 |
434,255 | $ | 6.56 | |||||
Granted |
648,125 | 3.53 | ||||||
Vested |
(105,684 | ) | 9.24 | |||||
Forfeited or expired |
(107,677 | ) | 4.63 | |||||
Outstanding at July 30, 2011 |
869,019 | $ | 4.22 | |||||
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Nonvested Share Units
A summary of nonvested share units activity under the Companys 2005 Plan for the first half of
fiscal 2011 is presented below. Nonvested share units contain a time-based restriction as to
vesting. These awards generally vest 100% on the first anniversary of the grant date.
Weighted- | ||||||||
Average | ||||||||
Grant-Date | ||||||||
Nonvested Share Units | Shares | Fair Value | ||||||
Outstanding at January 29, 2011 |
175,000 | $ | 3.68 | |||||
Granted |
150,000 | 3.19 | ||||||
Released |
(175,000 | ) | 3.68 | |||||
Forfeited |
| | ||||||
Outstanding at July 30, 2011 |
150,000 | $ | 3.19 | |||||
Stock-based compensation expense related to nonvested stock options, nonvested share awards and
nonvested share units for each of the second quarters of fiscal 2011 and 2010 was $0.7 million and
$0.9 million, respectively and $1.7 million and $2.0 million for the first half of fiscal 2011 and
2010, respectively.
At July 30, 2011 the Company had approximately $5 million of compensation cost related to nonvested
stock option, nonvested share awards and nonvested share units not yet recognized. This unearned
compensation expense is expected to be recognized over a weighted-average period of approximately
2.6 years.
Employee Stock Purchase Plan (ESPP)
The Company maintains an ESPP, which provides a method for Company employees to voluntarily
purchase the Companys common stock at a 10% discount from fair market value as of the beginning or
the end of each six-month purchasing period, whichever is lower. The ESPP covers substantially all
employees, excluding senior executives, who have three months of service with the Company. The ESPP
is intended to constitute an employee stock purchase plan within the meaning of Section 423 of
the Internal Revenue Code of 1986, as amended.
During the first half of fiscal 2011 and 2010, the Company issued 95,798, and 104,938 shares at an
average price of $2.35 and $2.89, respectively, under the ESPP. Related compensation expense was
$0.1 million and $0.1 million during the first half of fiscal 2011 and 2010, respectively.
10. COMMITMENTS AND CONTINGENCIES
Litigation
Charles Pfeiffer, individually and on behalf of other aggrieved employees vs. Pacific Sunwear of
California, Inc. and Pacific Sunwear Stores Corp., Superior Court of California, County of
Riverside, Case No. 1100527. On January 13, 2011, the plaintiff in this matter filed a lawsuit
against the Company alleging violations of Californias wage and hour, overtime, meal break and
rest break rules and regulations, among other things. The complaint seeks an unspecified amount of
damages and penalties. The Company has filed an answer denying all allegations regarding the
plaintiffs claims and asserting various defenses. As the ultimate outcome of this matter is
uncertain no amounts have been accrued by the Company as of the date of this report. Depending on
the actual outcome of this case, provisions could be recorded in the future which may have an
adverse effect on the Companys operating results and cash flows.
Phillip Gleason, on behalf of himself and others similarly situated vs. Pacific Sunwear of
California, Inc., Superior Court of California, County of Los Angeles, Case No. 457654. On March
21, 2011, the plaintiff in this matter filed a putative class action lawsuit against the Company
alleging violations of Californias wage and hour, overtime, meal break and rest break rules and
regulations, among other things. The complaint seeks class certification, the appointment of the
plaintiff as class representative, and an unspecified amount of damages and penalties. The
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Company
has filed an answer denying all allegations regarding the plaintiffs claims and asserting various
defenses.
As the ultimate outcome of this matter is uncertain, no amounts have been accrued by the Company as
of the date of this report. Depending on the actual outcome of this case, provisions could be
recorded in the future which may have an adverse effect on the Companys operating results and cash
flows.
Tamara Beeney, individually and on behalf of other members of the general public similarly situated
vs. Pacific Sunwear of California, Inc. and Pacific Sunwear Stores Corporation, Superior Court of
California, County of Orange, Case No. 30-2011-00459346-CU-OE-CXC. On March 18, 2011, the plaintiff
in this matter filed a putative class action lawsuit against the Company alleging violations of
Californias wage and hour, overtime, meal break and rest break rules and regulations, among other
things. The complaint seeks class certification, the appointment of the plaintiff as class
representative, and an unspecified amount of damages and penalties. The Company has filed an answer
denying all allegations regarding the plaintiffs claims and asserting various defenses. As the
ultimate outcome of this matter is uncertain, no amounts have been accrued by the Company as of the
date of this report. Depending on the actual outcome of this case, provisions could be recorded in
the future which may have an adverse effect on the Companys operating results and cash flows.
Since the allegations in all three of the above cases are substantially similar, the Company filed
a motion to coordinate the cases in the Los Angeles Superior Court on April 20, 2011. The motion
was granted on June 15, 2011. All discovery in the cases has been stayed pending the first status
conference hearing, which will be held on September 23, 2011.
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 and cash flows.
Letters of Credit
The Company has issued guarantees in the form of commercial letters of credit primarily as security
for merchandise shipments from overseas. The Company had approximately $18 million of such letters
of credit outstanding at July 30, 2011. All in-transit merchandise covered by letters of credit is
accrued for in accounts payable.
11. SEGMENT REPORTING
The Company operates exclusively in the retail apparel industry. 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
nature of products sold, production, merchandising and distribution processes involved, target
customers, and economic characteristics among the three operating segments.
12. EARNINGS PER SHARE
Basic earnings per common share is computed using the weighted-average number of shares
outstanding. Diluted earnings per common share is computed using the weighted-average number of
shares outstanding adjusted for the incremental shares attributed to outstanding options to
purchase common stock using the treasury stock method, if dilutive. In periods where a net loss is
reported, incremental shares are excluded as their effect would be anti-dilutive. In such
circumstances, the weighted-average number of shares outstanding in the basic and diluted earnings
per common share calculations will be the same. Anti-dilutive options and nonvested shares are
excluded from the computation of diluted earnings per share because either the option exercise
price or the grant date fair value of the nonvested share is greater than the market price of the
Companys common stock. Options to purchase 2,786,684 and 2,924,214 shares of common stock in the
second quarter of fiscal 2011 and 2010, respectively, and 2,774,762 and 3,039,451 shares of common
stock in the first half of fiscal 2011 and 2010, respectively, were excluded from the computation
of diluted earnings per share as their effect would have been anti-dilutive.
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13. SUBSEQUENT EVENTS
Subsequent
to July 30, 2011, the Company completed a series of negotiations with
certain of its landlords to modify the terms
of certain existing lease agreements, including the termination of five leases for underperforming stores that are now
scheduled to close prior to the end of fiscal 2011. In connection with the terminated leases, the Company will make
buy-out payments of $1.3 million, which will result in a net charge to the Companys third fiscal quarter results of
operations of approximately $0.9 million. The Company also executed agreements to reduce cash rents for the
second half of fiscal 2011 and most of fiscal 2012, and extended lease end dates at favorable terms for
approximately 95 stores. As a result, in the aggregate, cumulative net cash savings over the respective rent relief
periods are expected to be approximately $9.5 million, excluding the one-time buy-out payments. In addition, as
partial consideration for the execution of certain of the lease amendments, the Company will issue 900,000 shares of its common
stock with a fair value upon issuance of approximately $1.6 million, which will be amortized on a straight-line basis
over the rent relief period.
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 Report.
Cautionary Note Regarding Forward-Looking Statements
This Report 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 29, 2011 (the 2010 Annual Report), 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 2011, |
| potential recording of noncash impairment charges for underperforming stores in future quarters, |
| increases in product sourcing costs, |
| net cash savings as a result of the amendment or termination of certain leases, |
| forecasts of future store closures, expansions, relocations and store refreshes during fiscal 2011, and |
| future increases 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 the 2010 Annual Report, which are hereby incorporated by reference in this Report for a
discussion of these risks and uncertainties. We assume no obligation to
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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
fiscal month following the one-year anniversary of their opening or expansion/relocation. We
consider same-store sales to be an important indicator of the Companys current 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 usually generate greater operating
leverage of expenses while negative same-store sales results generally have a negative impact on
operating leverage. Same-store sales results also have a direct impact on our 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.
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 fiscal 2011, we believe that cash flows from operating activities, working capital,
borrowing availability under our Credit Facility, and other available sources of financing will be
sufficient to meet our operating and capital expenditure needs for the next twelve months. However,
if we were to experience a same-store sales decline similar to what occurred in fiscal 2010,
combined with further gross margin erosion, we may have to access some, if not all, of our Credit
Facility and potentially require other sources of financing to fund our operations, which might not
be available. At July 30, 2011, we had no direct borrowings under our Credit Facility. 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 the 2010 Annual Report.
Results of Operations
The following table sets forth selected income statement data expressed as a percentage of net
sales for the fiscal periods indicated. The discussion that follows should be read in conjunction
with the following table:
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For the Second Quarter Ended | For the First Half Ended | |||||||||||||||
July 30, 2011 | July 31, 2010 | July 30, 2011 | July 31, 2010 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold, including buying,
distribution and occupancy costs |
77.0 | 76.8 | 78.8 | 77.2 | ||||||||||||
Gross margin |
23.0 | 23.2 | 21.2 | 22.8 | ||||||||||||
Selling, general and administrative expenses |
31.6 | 33.9 | 33.4 | 36.0 | ||||||||||||
Operating loss |
(8.6 | ) | (10.7 | ) | (12.2 | ) | (13.2 | ) | ||||||||
Other expense, net |
0.2 | | 0.3 | | ||||||||||||
Loss before income taxes |
(8.8 | ) | (10.7 | ) | (12.5 | ) | (13.2 | ) | ||||||||
Income tax expense |
0.2 | | 0.2 | 0.1 | ||||||||||||
Net loss |
(9.0 | )% | (10.7 | )% | (12.7 | )% | (13.3 | )% | ||||||||
Number of stores open at end of period |
821 | 880 | ||||||||||||||
Total square footage (in 000s) |
3,200 | 3,411 |
The second quarter (thirteen weeks) ended July 30, 2011 as compared to the second quarter
(thirteen weeks) ended July 31, 2010
Net Sales
Net sales decreased to $215 million for the second quarter of fiscal 2011 from $218 million for the
second quarter of fiscal 2010. The components of this $3 million decrease in net sales are as
follows:
$ millions | Attributable to | |||
$ | (8 | ) | Decrease in net sales due to store closures. |
|
4 | Increase in other non-comparable sales including sales from new, expanded or
relocated stores not yet included in the comparable store base and e-commerce
sales. |
|||
1 | 1% increase in comparable store net sales in the second quarter of fiscal 2011
compared to the second quarter of fiscal 2010, due to a single digit percentage
improvement in total sales transactions, partially offset by a single digit
percentage decline in average sales transaction |
|||
$ | (3 | ) | Total |
|
For the second quarter of fiscal 2011, comparable store net sales of Womens product increased 1%
and Mens product was flat. Apparel represented 86% of total sales for the second quarter of fiscal
2011 versus 87% in the second quarter of fiscal 2010. Accessories and footwear represented a
combined 14% of total net sales for the second quarter of fiscal 2011 versus 13% in the second
quarter of fiscal 2010.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, was $49 million for the second
quarter of fiscal 2011 versus $51 million for the second quarter of fiscal 2010. As a percentage of
net sales, gross margin was 23.0% for the second quarter of fiscal 2011 compared to 23.2% for the
second quarter of fiscal 2010. The components of this 0.2% decrease in gross margin as a percentage
of net sales were as follows:
% | Attributable to | |||
(1.3 | ) | Decrease in merchandise margin as a percentage of sales. |
||
0.7 | Decrease in occupancy costs to $46 million in the second quarter of fiscal
2011 compared to $49 million in the second quarter of fiscal 2010. |
|||
0.4 | Decrease in buying and distribution costs to $8 million in the second quarter
of fiscal 2011 compared to $9 million in the second quarter of fiscal 2010. |
|||
(0.2 | ) | Total |
||
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Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) decreased to $68 million for the second
quarter of fiscal 2011 from $74 million for the second quarter of fiscal 2010, a decrease of $6
million, or 8%. These expenses decreased to 31.6% as a percentage of net sales in the second
quarter of fiscal 2011 from 33.9% in the second quarter of fiscal 2010. The components of this 2.3%
decrease in SG&A as a percentage of net sales were as follows:
% | Attributable to | |||
(1.8 | ) | Decrease in payroll and payroll-related expenses to $38 million in the second
quarter of fiscal 2011 compared to $43 million in the second quarter of fiscal
2010. |
||
(1.6 | ) | Decrease in depreciation expense to $10 million in the second quarter of
fiscal 2011 from $14 million in the second quarter of fiscal 2010. |
||
1.2 | Increase in noncash asset impairment charges to $3 million in the second
quarter of fiscal 2011 from $1 million in the second quarter of fiscal 2010. |
|||
(0.1 | ) | Decrease in all other SG&A expenses. In dollars, all other SG&A expenses were
$16 million in the second quarter of fiscal 2011 compared to $17 million in
the second quarter of fiscal 2010. |
||
(2.3 | ) | Total |
||
We evaluate the recoverability of the carrying amount of long-lived assets (primarily property and
equipment at the store level) whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For a discussion of impairment charges, see
Note 4 to the Condensed Consolidated Financial Statements included in this Report. Should
comparable store net sales and gross margin decline, we may record additional noncash impairment
charges within selling, general and administrative expenses for underperforming stores in future
quarters.
Other Expense, Net
Other expense was $0.6 million for the second fiscal quarter of 2011 primarily due to recording
interest expense related to the promissory notes for the mortgage transactions described in Note 7
to the Condensed Consolidated Financial Statements included in this Report.
Income Taxes
We recognized income tax expense of $0.3 million and $0.2 million for the second quarters of fiscal
2011 and 2010, respectively. For fiscal 2011, we expect to continue to maintain a valuation
allowance against deferred tax assets resulting in minimal income tax expense for the year. For
further information, see Note 8 to the Condensed Consolidated Financial Statements included in this
Report, which information is incorporated herein by reference.
Net Loss and Net Loss Per Share
On a GAAP basis, our net loss for the second quarter of fiscal 2011 was $19.3 million, or $(0.29)
per share, versus a net loss of $23.5 million, or $(0.36) per share, for the second quarter of
fiscal 2010. Amounts for the second quarter of fiscal 2011 include the continuing impact of a
valuation allowance against our deferred tax assets.
On a non-GAAP basis, excluding the impact of the valuation allowance and using a normalized annual
income tax rate of approximately 36%, our net loss for the second quarter of fiscal 2011 was $12.2
million, or $(0.18) per share, versus a non-GAAP net loss of $14.7 million, or $(0.22) per share
for the second quarter of fiscal 2010.
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 each of the second quarter of fiscal 2011 and 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
16
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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.
The first half (26 weeks) ended July 30, 2011 as compared to the first half (26 weeks) ended
July 31, 2010
Net Sales
Net sales decreased to $401 million for the first half of fiscal 2011 from $409 million for the
first half of fiscal 2010. The components of this $8 million decrease in net sales are as follows:
$ millions | Attributable to | |||
$ | (16 | ) | Decrease in sales due to store closures. |
|
6 | Increase in other non-comparable sales including sales from
new, expanded or relocated stores not yet included in the
comparable store base and e-commerce sales. |
|||
2 | 1% increase in comparable store net sales in the first half
of fiscal 2011 compared to the first half of fiscal 2010
due to a single digit percentage improvement in average
sale transactions. |
|||
$ | (8 | ) | Total |
|
For the first half of fiscal 2011, comparable store net sales of Womens product increased 3% and
Mens product decreased 1%. Apparel represented 85% of total net sales for the first half of fiscal
2011 versus 88% in the first half of fiscal 2010. Accessories and footwear represented a combined
15% of total net sales for the first half of fiscal 2011 versus 12% in the first half of fiscal
2010.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, was $85 million for the first half of
fiscal 2011 versus $93 million for the first half of fiscal 2010. As a percentage of net sales,
gross margin was 21.2% for the first half of fiscal 2011 compared to 22.8% for the first half of
fiscal 2010. The components of this 1.6% decrease in gross margin as a percentage of net sales were
as follows:
% | Attributable to | |||
(2.0 | ) | Decrease in merchandise margins as a percentage of sales. |
||
0.2 | Decrease in occupancy costs to $93 million in the first
half of fiscal 2011 compared to $96 million for the first
half of fiscal 2010. |
|||
0.2 | Decrease in buying and distribution costs to $17 million
in the first half of fiscal 2011 compared to $18 million
in the first half of fiscal 2010. |
|||
(1.6 | ) | Total |
||
Selling, General and Administrative Expenses
SG&A decreased to $134 million for the first half of fiscal 2011 from $147 million for the first
half of fiscal 2010, a decrease of $13 million, or 9%. These expenses decreased to 33.4% as a
percentage of net sales in the first half of fiscal 2011 from 36.0% in the first half of fiscal
2010. The components of this 2.6% decrease in SG&A as a percentage of net sales were as follows:
17
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% | Attributable to | |||
(1.5 | ) | Decrease in payroll and payroll-related expenses as a percentage of sales. In
dollars, payroll and payroll-related expenses were $76 million in the first
half of fiscal 2011 compared to $84 million in the first half of fiscal 2010. |
||
(1.3 | ) | Decrease in depreciation expense to $21 million in the first half of fiscal
2011 compared to $27 million in the first half of fiscal 2010. |
||
0.2 | Increase in all other SG&A expenses as a percentage of sales. In dollars, all
other SG&A expenses were $37 million in the first half of fiscal 2011 and
2010. |
|||
(2.6 | ) | Total |
||
We evaluate the recoverability of the carrying amount of long-lived assets (primarily property and
equipment at the store level) whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. For a discussion of impairment charges, see
Note 4 to the Condensed Consolidated Financial Statements included in this Report. Should
comparable store net sales and gross margin decline, we may record additional noncash impairment
charges within selling, general and administrative expenses for underperforming stores in future
quarters.
Other Expense, Net
Other expense was $1 million for the second half of fiscal 2011 primarily due to recording interest
expense related to the promissory notes for the mortgage transactions described in Note 7 to the
Condensed Consolidated Financial Statements included in this Report.
Income Taxes
We recognized income tax expense of $0.6 million and $0.5 million for the first half of fiscal 2011
and 2010, respectively. For fiscal 2011, we expect to continue to maintain a valuation allowance
against deferred tax assets resulting in minimal income tax expense for the year. For further
information, see Note 8 to the Condensed Consolidated Financial Statements included in this Report,
which information is incorporated herein by reference.
Net Loss and Net Loss Per Share
On a GAAP basis, our net loss for the first half of fiscal 2011 was $50.7 million, or $(0.76) per
share, versus a net loss of $54.5 million, or $(0.83) per share, for the first half of fiscal 2010.
Amounts for the first half of fiscal 2011 include the continuing impact of a valuation allowance
against our deferred tax assets.
On a non-GAAP basis, excluding the impact of the valuation allowance and using a normalized annual
income tax rate of approximately 36%, our net loss for the first half of fiscal 2011 was $32.0
million, or $(0.48) per share, versus a non-GAAP net loss of $34.2 million, or $(0.52) per share,
for the first half of fiscal 2010.
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 each of the first half of fiscal 2011 and 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.
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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 typically financed our operations primarily from internally generated cash flow, with
occasional short-term and long-term borrowings. Our primary cash requirements have been for the
financing of inventories and construction of newly opened, remodeled, expanded or relocated stores.
Based on current forecasts and plans for the year, we believe that cash flows from operating
activities, working capital, borrowing availability under our Credit Facility, and other available
sources of financing will be sufficient to meet our operating and capital expenditure needs for the
next twelve months. As a result of the back-to-school season starting
off slower than expected and with a higher degree of promotion in the
marketplace, our current forecasts anticipate same-store sales will be in the mid
to high negative single digits for the third quarter of fiscal 2011.
If these trends continue for an extended period of time, we may be required to access some, if not
all, of our Credit Facility and potentially require other sources of financing to fund our
operations, which might not be available. At July 30, 2011, we had no direct borrowings under our
Credit Facility.
For the First Half Ended | ||||||||
July 30, | July 31, | |||||||
(In thousands) | 2011 | 2010 | ||||||
Net cash used in operating activities |
$ | (43,717 | ) | $ | (57,276 | ) | ||
Net cash used in investing activities |
(6,638 | ) | (10,917 | ) | ||||
Net cash (used in) provided by financing activities |
(103 | ) | 143 | |||||
Net decrease in cash and cash equivalents |
$ | (50,458 | ) | $ | (68,050 | ) | ||
Operating Cash Flows
Net cash used in operating activities for the first half of fiscal 2011 was $44 million. We used
$21 million of cash in operations (net of noncash charges), before working capital changes. In
addition, cash decreased $18 million from changes in working capital items primarily due to
increases in merchandise inventories of $68 million, offset by increased accounts payable of $56
million due to the seasonal variation between the peak back-to-school selling season and the annual
low point for inventories at the end of the fiscal year. The remaining decrease in cash from
working capital items was attributable to an increase in other current assets of $6 million
primarily due to an increase in prepaid expenses of $5 million. Additional decreases in operating
cash flows were due to changes in other assets and liabilities of $5 million.
Net cash used in operating activities for the first half of fiscal 2010 was $57 million. We used
$17 million of cash in operations (net of noncash charges), before working capital changes. In
addition, cash decreased $33 million from changes in working capital items primarily due to
increases in merchandise inventories of $85 million, offset by increased accounts payable of $50
million due to the seasonal variation between the peak back-to-school selling season and the annual
low point for inventories at the end of the fiscal year. Additional decreases in operating cash
flows were due to changes in other assets and liabilities of $7 million.
Working Capital
Working capital at July 30, 2011 was $61 million compared to $93 million at January 29, 2011, a
decrease of $32 million. The changes in working capital were as follows:
$ millions | Description | |||
$ | 93 | Working capital at January 29, 2011 |
||
(50 | ) | Decrease in cash and cash equivalents. |
||
11 | Increase in merchandise inventories, net of accounts
payable, from fiscal year end due to planned receipt flows. |
|||
6 | Increase in other assets, primarily prepaid expenses. |
|||
1 | Decrease in other current liabilities. |
|||
$ | 61 | Working capital at July 30, 2011 |
||
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Investing Cash Flows
Net cash used in investing activities in the first half of fiscal 2011 was $7 million compared to
$11 million for the first half of fiscal 2010, a decrease in cash used of $4 million. Investing
cash flows for the first half of fiscal 2011 were comprised primarily of capital expenditures.
Investing cash flows for the first half of fiscal 2010 were comprised entirely of capital
expenditures. We expect total capital expenditures for fiscal 2011 to be approximately $15 to $17
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.
Mortgage Transactions
Information regarding our mortgage debt is contained in Note 7 to the Condensed Consolidated
Financial Statements included in this Report and is incorporated herein by reference.
Contractual Obligations
We have minimum annual rental commitments under existing store leases as well as collateralized
debt obligations related to our corporate headquarters and distribution center. In addition, at
any given time, we are contingently liable for commercial letters of credit with foreign suppliers
of merchandise. At July 30, 2011, 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 |
$ | 466 | $ | 91 | $ | 152 | $ | 111 | $ | 112 | ||||||||||
Mortgage debt |
29 | 1 | 1 | 1 | 26 | |||||||||||||||
Letters of credit |
18 | 18 | | | | |||||||||||||||
Guaranteed minimum royalties |
4 | 1 | 3 | | | |||||||||||||||
Total |
$ | 517 | $ | 111 | $ | 156 | $ | 112 | $ | 138 | ||||||||||
We have an aggregate of nearly 400 lease expirations for reconsideration through 2013. 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. Additionally, 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 January 2023. Substantially all of our retail store leases require us to pay
minimum rent, CAM charges, insurance, 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 related lease term. 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.
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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 31 stores in the first half of fiscal 2011.
We currently anticipate closing approximately 50 to 60 stores for all of fiscal 2011.
Subsequent
to July 30, 2011, the Company completed a series of negotiations with
certain of its landlords to modify the terms
of certain existing lease agreements, including the termination of five leases for underperforming stores that are now
scheduled to close prior to the end of fiscal 2011. In connection with the terminated leases, the Company will make
buy-out payments of $1.3 million, which will result in a net charge to the Companys third fiscal quarter results of
operations of approximately $0.9 million. The Company also executed agreements to reduce cash rents for the
second half of fiscal 2011 and most of fiscal 2012, and extended lease end dates at favorable terms for
approximately 95 stores. As a result, in the aggregate, cumulative net cash savings over the respective rent relief
periods are expected to be approximately $9.5 million, excluding the one-time buy-out payments. In addition, as
partial consideration for the execution of certain of the lease amendments, the Company will issue 900,000 shares of its common
stock with a fair value upon issuance of approximately $1.6 million, which will be amortized on a straight-line basis
over the rent relief period.
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. However, we are currently anticipating that product sourcing costs will continue to
increase during fiscal 2011 due to a combination of increases in cotton, labor, fuel and currency
costs. We currently estimate that these cost increases will adversely affect our net merchandise
margins in fiscal 2011. We intend to partially mitigate these increases through a combination of
initiatives such as better product assortments, refined pricing strategies, localization
initiatives, shipment consolidation and detailed reviews of product specifications.
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
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45% of our net sales have occurred in the first half of the fiscal year and 55% have occurred in
the second half. The six to seven week selling periods for each of the back-to-school and holiday
seasons together account for approximately 35% to 40% of our annual net sales and a higher
percentage of our operating results on a combined basis. Our quarterly results of operations may
also fluctuate significantly as a result of a variety of factors: including changes in consumer
buying patterns; fashion trends; the timing and level of markdowns; the timing of store closings,
expansions and relocations; competitive factors; and general economic conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to interest rate risk from our Credit Facility (see Note 5 to the Condensed
Consolidated Financial Statements included in this Report). Direct borrowings under the Credit
Facility bear interest at the administrative agents alternate base rate (as defined, 3.75% at July
30, 2011) or at optional interest rates that are primarily dependent upon LIBOR or the federal
funds effective rate for the time period chosen. At July 30, 2011 we had no direct borrowings
outstanding under our 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 to any 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 July 30,
2011.
No change in our internal control over financial reporting occurred during the most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
For information on legal proceedings see Litigation within Note 10 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 the 2010 Annual Report 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 2010 Annual
Report with respect to the Risk Factors, other than the item
discussed below. Investors should consider the Risk Factors prior to making
an investment decision with respect to the Companys stock.
Our failure to reverse declining sales and/or further
gross margin declines would have a material adverse impact on our business, profitability and liquidity. In fiscal
2010 and fiscal 2009, we experienced declines of 8% and 20%, respectively, in comparable store net sales. The failure to
reverse a similar negative trend in fiscal 2011 would have
a material adverse impact on our business, results of operations, financial condition, liquidity and stock price.
As a result of
the back-to-school season starting off slower than expected and with a higher degree of promotion in
the marketplace, our current forecasts anticipate same-store sales will be in the mid to high negative single digits for the
third quarter of fiscal 2011. If these trends continue for an extended period of time, we believe that our working
capital and cash flows from operating activities might not be sufficient to meet our operating requirements and we
may be required to access some, if not all, of our Credit Facility and potentially require other sources of
financing to fund our operations, which might not be available.
22
Table of Contents
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 W. Kaplan pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | |||||
32.1+
|
Written statement of Gary H. Schoenfeld and Michael W. Kaplan pursuant to section 906 of the Sarbanes-Oxley Act of 2002 | |||||
101.INS**
|
XBRL Instance Document | |||||
101.SCH**
|
XBRL Taxonomy Extension Schema Document | |||||
101.CAL**
|
XBRL Taxonomy Extension Calculation Linkbase Document | |||||
101.LAB**
|
XBRL Taxonomy Extension Label Linkbase Document | |||||
101.PRE**
|
XBRL Taxonomy Extension Presentation Linkbase Document |
+ | Filed herewith | |
** | These interactive files are deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and are otherwise not subject to liability under these sections. |
23
Table of Contents
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: September 6, 2011 | By: | /s/ GARY H. SCHOENFELD | ||
Gary H. Schoenfeld | ||||
President, Chief Executive Officer and Director (Principal Executive Officer) |
||||
Date: September 6, 2011 | By: | /s/ MICHAEL W. KAPLAN | ||
Michael W. Kaplan | ||||
Sr. Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
24