The Pacific Sunwear of California - Financial Analysis

TABLE OF CONTENTS

I.  Description of the Firm, its Products and its Competition ………………………………  2

II. Evaluation of the Company’s Financial Statements …………………………………….   4

A.        Analysis of Liquidity …………………………………………………………..  4

B.        Analysis of Financial Leverage ……………………………………………….. 6

C.        Operating Efficiency ……………………………………………………………7

D.        Profitability …………………………………………………………………….  9

E.        DuPont Analysis ………………………………………………………………  11

F.          Summary of the Firm’s Overall Performance ……………………………. .. 14

III. Assessment of Stock Performance ……………………………………………………....  15

IV. Appendices

V.  References

VI. Shareholders’ Annual Report OR 10-K Report

  I. Description of the Firm, its Products and its Competition

The Pacific Sunwear of California, Inc. (PSUN) falls under the SIC code of 5600 which is the retail-apparel and accessory stores. The sector will be service and the industry is apparel stores. Pacific Sunwear of California, Inc., shortly known as Pac Sun, is headquartered in Anaheim, California. It was incorporated in 1982. PSUN has leased and operated 618 stores as of  February 1, 2014 with approximately 10,300 employees in which, 8,250 were part - time, 540 were employed at the corporate headquarters and distribution centers. The current CEO is Gary H. Schoenfeld, who was appointed in June 2009. Amongst the retailers, Pac Sun focuses on sports, fashion, and music influences of the California style, which targets teens and young adults. It also focuses on the combination of branded and proprietary casual apparel, accessories, and footwear. These branded items generate 52% of the company’s revenue and the other 48% is generated by company’s proprietary private labels (Wikiinvest). Pac Sun sells branded merchandise from some big name companies such as Quicksilver and Hurley. As we can see the Pac Sun focuses on branded label more than their private label for their main source of revenue. The Pac Sun functions on two type of operation; mall-based chain and an e-commerce website at pacsun.com. According to Pac Sun’s sales of merchandise, the Young Mens Apparel counted for 46% of net sales, Juniors Apparel counted for 43% of net sales, and Accessories and Footwear counted for 12% of net sales (Wikinvest). Pac Sun’s financial records do not include disposable assets and are reported as discontinued operations. To finance its project, Pac Sun uses cash flows, working capital and liquidity.

The comparison company will be Aeropostale, Inc. (ARO). It is headquartered in New York City, New York. There are total of 3,931 full-time and 25,406 part-time employees and 230 stores nationwide. The CEO of the company is Thomas P. Johnson. Aero provides a variety of retail style ranging from graphic T-shirts, tops, bottoms, sweaters, jeans, outerwear, and accessories for teens between 14 to 17. The company also offers clothing brand for children between ages of 4 and 12. Similar to Pac Sun, it is a mall-based specialty retail shop, at the same time operates an e-commerce web site on aeropostale.com. Its own private label range in varieties of clothes and accessories from sunglasses, belts, to hats. In April of 2014, Aeropostale provided an update on strategic initiatives and announced a comprehensive cost reduction program as part of the company’s on-going turnaround plans (Bloomberg). Aeropostale strives to price their products lower than their competitors even though the quality is the same, if not better. It has high corporate responsibility for its designers and other employees who involved in making their clothes. The company ensures a safe and healthy working environment that meets legal requirements. The cash requirement is for working capital to construct and remodel stores and also improve its technology. It repurchases its common stock through the stock repurchase program. Preparation of financial statement is done with the Internationally Accepted Account Principles. Disclosure is also paramount. An internal audit is conducted according to the Public Accounting Oversight Board.

II. Evaluation of the Company’s Financial Statements

A. Analysis of Liquidity

        Pac Sun has seen decreasing current assets from 2011 to 2013. The current asset account has gone from $169.4 million in 2012 to $130.3 million which represents a decrease of 23%. This decrease can largely be due to the decrease in significant amount of cash. Cash slightly dropped from 2011 to 2012 from $50.3 million to $48.7 million but plunged to $27.8 million in 2013. This is largely in part to the company using cash generated to fund operations. From 2011 to 2013 the spread between cash used versus brought in grew tighter and tighter. Furthermore, PSUN used an abundant amount of cash in order to raise inventories from 2011 to 2012 ($88.7 million to $90.7 million). Other current assets make up an immaterial portion of the balance sheet and are near the $6 million range.

Pac Sun’s current ratio has also seen a consistent drop from approximately 1.6 in 2011 to 1.1 in 2013. This steady decline can be attributed to not only the decrease previously discussed in current assets but also to the consistent rise in current liabilities ($107.3 million to $114 million, or 6.3%). Other current liabilities is the only current liability account that has shown consistency in decreasing from 2011 to 2013 ($68.4 million to $37.3 million). Since sales were gradually increasing; this decrease could be contributed to the fact that more customers are redeeming their gift cards. Pac Sun records the sales of gift cards as a current liability and then recognizes the revenue once the card is redeemed or recovered. Management seems to have slipped in controlling account payables by allowing them to increase significantly from 2011 to 2012 ($38.9 million to 50 million) . They did a good job bringing it back down to $46 million in 2013 by using cash to pay down the account. Ultimately the increase sharpest increase in current liabilities came from deferred revenues and other accrued liabilities. These two accounts went from making 0% of current liabilities in 2011 to approximately 27% of current liabilities in 2013. Looking at Aeropostale’s current ratio, we see a similar trend to PSUN, where it has significantly decreased from 2.29 in 2011 to 1.57 in 2013. Aeropostale can also credit this downward trend to decreasing total current assets ($441.8 million in 2011 to $376.6 million in 2013), which was accredited to buying more inventories, at a time when current liabilities continue to rise significantly as a result of new store openings. The current ratio is useful when looking at the firm’s short term liquidity.

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