MARKET WATCH: PacSun Quarter Ended Nov. 1
Jeff Harbaugh
- December 18 2008
- 602 views
- 12 comments
PacSun has done a good job presenting their income statement so that it’s easy to isolate the impact of their discontinued operations. As you probably know, they’ve closed all their stores that aren’t branded as PacSun. They are now a one brand company with 938 stores. That resulted, in the quarter ended November 3, 2007, in a loss from discontinued operations, net of taxes, of $37.2 million.
So you can understand how this affects period to period comparisons. I’m recreating part of the income statement below. I’ve left out a few line items, so things don’t add up perfectly.
If you look at the net loss line, it looks like thing are improving. Their loss in the quarter, compared to the same quarter last year, fell from $20 million to $2.5 million. Still a loss, but a much reduced one.
I’m a big believer in focusing on the bottom line, but in this case you have to look up a bit, to the line called Net Income (Loss) from Continuing Operations. There you see that a profit of $17.1 million in the 2007 quarter has turned into a loss of $3.5 million in the same quarter this year. That’s quite a different picture. The difference results from the $37.2 million write off for closing down stores that they took last year.
So at the net income line, they are losing money, but apparently improving. At the continuing operations line, they have gone from a profit to a loss. Which is the right picture? The continuing operations line. That represents the business that they are continuing to run right now and in the future.
Sales fell because of a $22 million decline (7.0%) in comparable store sales and a $6 million decrease due to store closings. This was offset by a $10 million increase in stores not yet included in the comparable store calculation. They “expect total comparable store net sales to continue to be negative in the fourth quarter of fiscal 2008.”
Gross margin fell from 33.6% to 28.7%. 3.6% of the decline was due to increased markdowns. 1.6% was due to the deleveraging of costs as they had to spread those costs over a smaller sales base. They improved their margin by 0.3% due to reduced distribution expense. They expect more margin pressure in the 4th quarter for the same reasons.
They note in their business risks section that their proprietary brands accounted for 30% of net sales in fiscal 2007 and 37% for the first three quarters of 2008. They state that, “Our customers may not prefer our proprietary brand merchandise, which may negatively impact our profitability.” This is just one of the business risks they list, and every company has a similar list in its filings. You ought to read through a list once or twice just to get a feel for what’s included and to understand that just because they list them doesn’t mean it’s a current big problem. Speaking of which, here’s the link to the filing.
But I can’t help but remember that Abercrombie & Fitch announced that Hollister sales were down 18% for their quarter ended November 1st. I wonder if the recession isn’t going to put pressure on store brands.
Since Sally Frame Kasaks took over as Chairman and CEO, PacSun, in my opinion, has been doing the things it should be doing to address its issues. I’ve written that before, and still believe it. It’s too bad they have to deal with it during the worst recession any of us have ever seen. Their balance sheet isn’t quite as strong as it was a year ago and that makes carrying out a strategy, no matter how good, harder.
Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.
»
December 18th, 2008 at 9:57 am
900+ retail outlets. and no claim or loyalty to any industry. they are free to explore new trends and buy what sells in their retail store fronts.
so they trim the fat, reduce their buy and continue to push the products that sell.
Result:
Action Sports will get what the core or OG players want, a smaller cleaner industry and the major mall outlets will conitnue on to the next trend.
it was fun to pretend we were all corpo big wigs with red carpets at trade shows for the past 3 years. now its time to good old fashioned hard work and rather then crazy parties actually participating in the sports we love.
about time.
December 18th, 2008 at 10:15 am
In general, I’m not sure you need a claim or loyalty to any industry, though that’s certainly how we in action sports look at our world. What you need is a claim on a customer group that you’ve given a reason to shop at your stores, and I’m not sure they have that. If you haven’t, read what I wrote on Hot Topic’s quarter. They are all about figuring out what their target customer wants.
thanks,
j.
December 18th, 2008 at 1:25 pm
Good point. But the beauty of retail is that you are defined by the brands you purchase and the merchandising and POP you choose to display. If your target market is 12 - 22 year old mall shoppers you simply evolve.
The question is, what is the next big trend to spawn under the Pacific Sun?
December 18th, 2008 at 2:33 pm
I have written that a really good retailer gives credibility to the brand they carry- not just the other way around. Of course it’s not one or the other, but I believe that a retailer that relies too much on his brands to define him may be asking for trouble as those brands evolve.
J.
December 18th, 2008 at 7:27 pm
It’s like what I said in another post…Pac Sun is casualty of it own success. When you grow to a size you can’t offer anything unique, which is what their target market wants, this is because the brands that are unique can’t supply to them at volume they require or deliever on time. Once that brand x has the production capacity to meet pac sun’s demand that brand is no longer considered unique and another brands has come in to takes it’s place. I don’t want say PAc Sun is place where brands go to die, but it kind of feels that way when you walk in to one in some shitty mall in say up state NY.
This problem can also be applied to Quiks, Billabongs and Volcoms of the worlds. Their constant need for growth to please it’s share holders will in the end be all of their demise. They will have to find more and more retail locations outside ASI, because they can no longer provide the growth you require only maintain. Then you start selling direct online and open your own stores, because you have no where eles to go. Alienated you from you core dealer.
It like my dad said the other night when we were watching the economy go down the toilet on TV the other night, “This constant need and obsession we have with growth and a fast rate of return will be our demise. What ever happened to sustainable and stable business practices?” Stay true to your customers and they will stay loyal to you. You my not get your own jet and live in castle in Malibue, but at least you will be able to sleep nights.
December 18th, 2008 at 7:30 pm
man my spelling sucks
December 19th, 2008 at 8:32 am
The issue for PacSun is who is their target market? It doesn’t have to be the core market for them to be successful. I don’t think any retailer that I can think of stays focused on the core customer, whatever that means, once they get beyond a certain size. The issue is how you manage the transition. Nothing I’ve seen in PacSun’s reports makes me think they are very thoughtful about who their customers are and why they buy from them, and I see that as their major problem. That and sheer size.
Oh, and your spelling isn’t all THAT bad.
J.
December 21st, 2008 at 10:21 am
PacSun? Who cares!
They (PacSun) are exactly whats wrong with the “surf market”. Many of the “big” surf company’s have relied too much on the PacSun’s of the world.
Sales rep’s kiss the ass of the PacSun buyers. PacSun is a joke! It has absolutely nothing to do with the great sport of surfing.
Company’s like Quiksilver have forgotten long ago who helped make their success, (The small town hardcore surf shop)
QUIKSILVER IS THE “NEW OP”! …If it wasn’t for “savvy” marketing, they would have been dead long ago! …Most surfers don’t go out and buy Quiksilver for themselves. When you do get a Quiksilver product, it is usually something an Aunt or Grandma purchases for you. They should just change their name to “Kelly Slater”. I sure do hope they pay him lot’s of money! For Kelly is Quiksilver.
…Again, PacSun? Who cares!
Many Regards:
…erik!
December 21st, 2008 at 12:22 pm
Erik,
Relax! Brands evolve. Retailers evolve. Or they don’t, and then they go away or become irrelevant. I think you did a good thing by putting “surf market” in quotes. What exactly is the surf market these days? Most of the people who buy Quik product at retail don’t surf. What do you do when you’re a “surf” company (or a skate or snowboard based company) but most of your customers aren’t participants?. Maybe you aren’t a “surf” company any more? But is that a good or a bad thing? How do you evolve with your growth?
That may be the key strategic question any of these brands has to ask themselves. When times were good, they could avoid it. The consumer had a lot of money to spend and cash flow covers up a variety of sins. Now- well, I imagine the marketing and strategic planning people are working overtime.
Thanks for the comment.
J.
December 26th, 2008 at 5:06 pm
For me Pac Sun serves a purpose. It is a large retailer which in the end works with large brands (quik, hurley, etc) to fill its shelves with product. Larger retailers need large venders.
My retail operation would be considered to be a “mom and pop” type and as a small business I am putting my money behind smaller brands. Based on the sizes of both of our companies (small retailer and small brand) , we tend to be better business partners.
One of the biggest problems is that alot of small retailers want large brands represented in their stores. I think there are compatiblity issues here that are hard to be resolved when one business is so much larger than the other.
Obese people need big SUVs. 400 pound guys in yugos just don’t work as well. It’s just a matter of size.
December 26th, 2008 at 6:31 pm
that’s what she said !on the way out the door with a 400 pound man in yugo ! go figure ?
December 26th, 2008 at 8:18 pm
Aaron,
And large vendors also need larg retailers. I think you’re smart, in general, to be putting your money behind smaller brands-especially in the market that’s emerging now. But I also bet you don’t have a problem with a large brand that sells well at full margin. Especially if their terms and discounts are attractive. The smaller, harder to find, brands differentiate and distinguish you. But there’s still room for the larger brands to provide you with some cash flow.
Thanks,
J.