Declining same-store sales and weighty charges for the paring down of its troubled Demo unit combined for a more than 80% plunge in Pacific Sunwear's fourth-quarter profits.

During the three months ended 3 February, net income plummeted 80.7% to US$9.1m, or $0.13 a diluted share, from $47m, or $0.63, a year ago. Without $16.6m in after-tax impairment and writedown charges to close 74 underperforming Demo stores, quarterly EPS would have been $0.37.

Sales in the 14-week quarter rose 7.8% to $458.2m from $424.9m during the year-ago 13-week period. Same-store sales declined 4.3% from the comparable 14 weeks of 2005.
Gross margins fell to 31.5% of sales from 36.3% a year ago.

"Although fiscal 2006 was disappointing from an earnings standpoint, we have moved aggressively to get the company back on track and positioned for future growth," said Sally Frame Kasaks, interim chief executive officer.

"Key to this effort has been decreasing the inventory density in our stores to enable us to offer a clearer and more compelling merchandise presentation to our customers."

She added that there have been "encouraging initial responses" to new store designs for both its PacSun and Demo divisions.

The company said it expects to earn $0.23 to $0.27 per diluted share during the first half of 2007, about 80% of it during the second quarter. The estimate doesn't include the possible effects of termination and severance costs associated with its plans to cut back Demo.

However, the first-half estimate is based on the assumption of same-store sales that are flat to up in the low-single digits. Results were released after the close of the markets Thursday (15 March), but the projection of positive same-store sales results, following, as it did, lower results in recent months, helped send PacSun shares higher in after-hours trading.

For the full year, net income was $39.6m, or $0.56 a diluted share, 68.6% below the year-ago result of $126.2m, or $1.67. Sales rose 4% to $1.45bn during the more recent 53-week year from $1.39bn during its 52-week predecessor and same-store sales were off 4.7% when the effect of the extra week of selling was eliminated.

Pacific Sunwear currently operates 843 PacSun stores, 116 PacSun outlets, 151 Demo units and nine One Thousand Steps shops. The store count doesn't include Demo stores slated for closure.
By Arnold J Karr.