SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 4, 2001
OR
[ ] 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.
CALIFORNIA 95-3759463
(State of Incorporation) (I.R.S Employer Identification No.)
5200 EAST LA PALMA AVENUE
ANAHEIM, CALIFORNIA 92807
(Address of principal executive offices) (Zip code)
(714) 693-8066
(Registrant's telephone number, including area code)
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 [X] NO [ ]
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share, at December 7, 2001, was 32,742,148.
PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 4, 2001
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of November 4, 2001 (unaudited) and
February 4, 2001 ............................................................ 3
Consolidated Statements of Income and Comprehensive Income (unaudited) for
the third quarter and nine months ended November 4, 2001 and October 29, 2000 4
Consolidated Statements of Cash Flows (unaudited) for the nine months ended
November 4, 2001 and October 29, 2000 ..................................... 5
Notes to Consolidated Financial Statements ................................... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................................... 9-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................. 16
Item 2. Changes in Securities and Use of Proceeds ...................................... 16
Item 3. Defaults Upon Senior Securities ................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders ............................ 16
Item 5. Other Information .............................................................. 16
Item 6. Exhibits and Reports on Form 8-K ............................................... 16
SIGNATURE PAGE ................................................................. 17
2
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
NOVEMBER 4, FEBRUARY 4,
2001 2001
------------- -------------
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 3,284,677 $ 28,971,240
Accounts receivable 4,599,434 2,754,119
Merchandise inventories 124,970,712 82,692,992
Prepaid expenses, includes $7,995,096 and $6,663,284 of prepaid rent, respectively 10,560,446 10,187,317
Deferred taxes 2,991,765 2,991,765
------------- -------------
Total current assets 146,407,034 127,597,433
PROPERTY AND EQUIPMENT:
Land 12,156,221 12,156,221
Construction in progress -- new corporate office and distribution center 26,371,667 705,501
Leasehold improvements 98,080,115 83,770,420
Furniture, fixtures and equipment 105,627,530 91,703,631
------------- -------------
Total property and equipment 242,235,533 188,335,773
Less accumulated depreciation and amortization (67,687,818) (52,553,794)
------------- -------------
Net property and equipment 174,547,715 135,781,979
OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,529,848 and $1,296,325,
respectively 6,569,917 6,803,440
Deferred compensation and other assets (Note 3) 7,689,805 7,269,727
------------- -------------
Total other assets 14,259,722 14,073,167
------------- -------------
Total assets $ 335,214,471 $ 277,452,579
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit (Note 4) $ -- $ --
Current portion of long term debt 8,093 --
Current portion of capital lease obligations 544,447 488,472
Accounts payable 38,954,564 31,631,805
Accrued liabilities (Note 5) 16,709,430 13,251,419
Income taxes payable 5,209,815 2,427,165
------------- -------------
Total current liabilities 61,426,349 47,798,861
Long-term debt (Note 4) 23,616,186 --
Long-term capital lease obligations 660,832 1,102,857
Deferred compensation 7,139,805 7,268,377
Deferred rent 8,312,683 7,210,923
Deferred taxes 912,012 912,012
Other long-term liabilities 28,316 28,316
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01; authorized, 5,000,000; none issued and outstanding -- --
Common stock, par value $.01; authorized 75,937,500 shares; issued and outstanding,
32,737,173 and 32,441,435 shares, respectively 327,372 324,414
Additional paid-in capital 87,736,885 81,161,034
Retained earnings 145,054,031 131,645,785
------------- -------------
Total shareholders' equity 233,118,288 213,131,233
------------- -------------
Total liabilities and shareholders' equity $ 335,214,471 $ 277,452,579
============= =============
See accompanying notes
3
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(UNAUDITED)
FOR THE THIRD QUARTER ENDED FOR THE NINE MONTHS ENDED
------------------------------ ------------------------------
NOVEMBER 4, OCTOBER 29, NOVEMBER 4, OCTOBER 29,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales $183,028,431 $163,733,234 $477,235,105 $408,264,409
Cost of goods sold, including buying,
distribution and occupancy costs 122,242,313 108,745,739 326,314,563 271,597,812
------------ ------------ ------------ ------------
Gross margin 60,786,118 54,987,495 150,920,542 136,666,597
Selling, general and administrative expenses
(Note 8) 46,464,965 34,792,054 129,503,696 95,439,897
------------ ------------ ------------ ------------
Operating income 14,321,153 20,195,441 21,416,846 41,226,700
Net interest income 103,538 309,191 350,400 815,694
------------ ------------ ------------ ------------
Income before income tax expense 14,424,691 20,504,632 21,767,246 42,042,394
Income tax expense (Note 6) 5,540,000 7,956,000 8,359,000 16,318,000
------------ ------------ ------------ ------------
Net income $ 8,884,691 $ 12,548,632 $ 13,408,246 $ 25,724,394
============ ============ ============ ============
Comprehensive income (Note 1) $ 8,884,691 $ 12,548,632 $ 13,408,246 $ 25,724,394
============ ============ ============ ============
Net income per share, basic
(Notes 7, 8) $ 0.27 $ 0.39 $ 0.41 $ 0.81
------------ ------------ ------------ ------------
Net income per share, diluted
(Notes 7, 8) $ 0.27 $ 0.39 $ 0.41 $ 0.79
------------ ------------ ------------ ------------
Weighted average shares outstanding, basic (Note 7) 32,736,544 32,005,598 32,658,255 31,763,001
============ ============ ============ ============
Weighted average shares outstanding, diluted
(Note 7) 32,900,753 32,429,520 33,092,030 32,438,384
============ ============ ============ ============
See accompanying notes
4
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------------
NOVEMBER 4, OCTOBER 29,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,408,246 $ 25,724,394
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 19,894,841 14,148,307
Loss on disposal of equipment (Note 8) 4,179,336 --
Change in operating assets and liabilities:
Accounts receivable (1,845,315) (2,328,789)
Merchandise inventories (42,277,720) (31,652,705)
Prepaid expenses (373,129) (938,271)
Deferred compensation and other assets (295,999) (3,992)
Accounts payable 7,322,759 8,581,885
Accrued liabilities 3,458,011 (1,732,377)
Income taxes and deferred taxes 5,276,658 5,286,004
Deferred rent 1,101,760 1,000,891
------------ ------------
Net cash provided by operating activities 9,849,448 18,085,347
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (62,544,607) (36,040,856)
------------ ------------
Net cash used in investing activities (62,544,607) (36,040,856)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under long term debt obligations 23,600,000 --
Principal payments under capital lease obligations (386,050) --
Proceeds from exercise of stock options 3,794,646 3,864,457
------------ ------------
Net cash provided by financing activities 27,008,596 3,864,457
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS: (25,686,563) (14,091,052)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 28,971,240 32,416,794
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,284,677 $ 18,325,742
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 328,688 $ 1,404
Income taxes $ 3,082,342 $ 11,031,996
Supplemental disclosures of non-cash transactions: During the nine months ended
November 4, 2001 and October 29, 2000, the Company recorded an increase to
additional paid-in capital of $2,494,008 and $3,574,379, respectively, related
to tax benefits associated with the exercise of non-qualified stock options. In
addition, during each of the nine months ended November 4, 2001 and October 29,
2000, the Company recorded an increase to additional paid-in capital of $290,155
related to the issuance of restricted stock to satisfy certain deferred
compensation liabilities. During the third quarter of fiscal 2001, the Company
financed the purchase of a vehicle for $24,279.
See accompanying notes
5
PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited except
for the February 4, 2001 balance sheet. These statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The consolidated financial statements include the accounts of
Pacific Sunwear of California, Inc. and its wholly owned subsidiaries (the
"Company"). All significant inter-company transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to
the current year presentation.
The Company's fiscal year is the 52- or 53-week period, which ends on
the Saturday or Sunday closest to the end of January. "Fiscal 2001" is a 52-week
period that ends on Saturday, February 2, 2002. "Fiscal 2000" was a 53-week
period that ended on Sunday, February 4, 2001.
In the opinion of management, all adjustments consisting only of normal
recurring entries necessary for a fair presentation have been included. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles necessarily requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and reported expenses during the reported
period. Actual results could differ from these estimates. The results of
operations for the third quarter and nine months ended November 4, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 2, 2002. For further information, refer to the financial
statements and notes thereto as of and for the years ended February 4, 2001,
January 30, 2000 and January 31, 1999.
NOTE 2 - CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and marketable securities
with original maturities of three months or less.
NOTE 3 - DEFERRED COMPENSATION AND OTHER ASSETS
Deferred compensation and other assets consist of the following:
NOVEMBER 4, FEBRUARY 4,
2001 2001
---------- ----------
Deferred compensation $7,443,659 $6,994,045
Other assets 246,146 275,682
---------- ----------
$7,689,805 $7,269,727
========== ==========
NOTE 4 - DEBT
The Company has a total credit facility of $55.0 million with a bank,
which provides for a $30.0 million line of credit (the "Credit Line") to be used
for cash advances, commercial letters of credit and shipside bonds, and an
additional $25.0 million line of credit (the "Construction Facility") that can
be used to finance the construction of the Company's new corporate office and
distribution center. The Credit Line expires March 31, 2004. Upon completion of
the new facilities, the Company can, at its option, convert any outstanding
borrowings under the Construction Facility to a term loan. Interest on each of
the credit facilities is payable monthly at the bank's prime rate (5.50% at
November 4, 2001) or at optional interest rates that are primarily dependant
upon the London Inter-bank Offered Rates for the time period chosen. The
Company's weighted average interest rate on its outstanding borrowings was 5.08%
at November 4, 2001. At November 4, 2001, the Company had no borrowings
outstanding under the Credit Line and $23,600,000 outstanding under the
Construction Facility. Additionally, the Company
6
had $7.8 million in letters of credit outstanding at November 4, 2001. The
credit facility subjects the Company to various restrictive covenants, including
maintenance of certain financial ratios, and prohibits payment of cash dividends
on common stock. At November 4, 2001, the Company was in compliance with all of
its covenants.
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
NOVEMBER 4, FEBRUARY 4,
2001 2001
----------- -----------
Accrued compensation and benefits $ 6,674,592 $ 3,816,279
Sales tax payable 2,004,125 1,284,465
Accrued gift certificates and store merchandise credits 2,073,784 2,997,512
Accrued employee medical plan expenses 1,435,266 514,880
Accrued freight costs 475,786 544,144
Reserve for store expansion/relocation and closing 288,666 1,489,943
Reserve for corporate rent expenses (Note 8) 700,000 --
Other accrued liabilities 3,057,211 2,604,196
----------- -----------
$16,709,430 $13,251,419
=========== ===========
NOTE 6 - FEDERAL AND STATE INCOME TAX EXPENSE
The combined federal and state income tax expense was calculated using
estimated effective annual tax rates.
NOTE 7 - NET INCOME PER SHARE, BASIC AND DILUTED
The following table summarizes the computation of EPS:
THIRD QUARTER ENDED: NOVEMBER 4, 2001 OCTOBER 29, 2000
----------------------------------------- ---------------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
BASIC EPS:
$ 8,884,691 32,736,544 $ 0.27 $12,548,632 32,005,598 $ 0.39
DILUTED EPS:
Effect of dilutive stock options 164,209 423,922
$ 8,884,691 32,900,753 $ 0.27 $12,548,632 32,429,520 $ 0.39
NINE MONTHS ENDED: NOVEMBER 4, 2001 OCTOBER 29, 2000
---------------------------------------- ---------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------- ---------- --------- ----------- ---------- ---------
BASIC EPS:
$13,408,246 32,658,255 $0.41 $25,724,394 31,763,001 $0.81
DILUTED EPS:
Effect of dilutive stock options 433,775 675,383
$13,408,246 33,092,030 $0.41 $25,724,394 32,438,384 $0.79
Options to purchase 2,225,728 and 1,066,795 shares of common stock in
the third quarter of fiscal 2001 and fiscal 2000, respectively, and 1,053,665
and 856,168 in the first nine months of fiscal 2001 and fiscal 2000,
7
respectively, were not included in the computation of diluted earnings per
common share because the option exercise price was greater than the average
market price of the common stock.
NOTE 8 -- CORPORATE MOVE-RELATED CHARGES
During the first quarter of fiscal 2001, the Company recorded a one-time
non-cash charge of $2.5 million after tax ($4.2 million pre-tax), or $.08 per
basic and diluted share, related to the disposal of most of the existing
materials handling equipment in its current distribution center as part of its
relocation to a new distribution facility in Anaheim, California scheduled for
January 2002. The $4.2 million pre-tax charge is included in selling, general
and administrative expenses.
During the third quarter of fiscal 2001, the Company recorded a $.7
million charge to reserve for rent expense associated with the Company's current
corporate offices, which will be unused when the Company moves into its new
corporate offices and distribution center in January 2002. The reserve
encompasses rent expense from February 2002 through August 2002, after which
time the Company currently believes a tenant will be identified to sublease the
premises. To the extent management's estimates relating to their ability to
sublease these premises during this time frame change, additional charges may be
recorded in the future. As of February 2, 2002, the aggregate net remaining
obligation under this lease is approximately $7,500,000.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
RESULTS OF OPERATIONS
The thirteen weeks ended November 4, 2001 (third quarter) as compared to the
thirteen weeks ended October 29, 2000 (third quarter)
Net Sales
Net sales increased to $183.0 million for the third quarter of fiscal
2001 from $163.7 million for the third quarter of fiscal 2000, an increase of
$19.3 million, or 11.8%. Of this $19.3 million increase, $22.6 million was
attributable to net sales generated by 124 new stores opened in fiscal 2001 and
not yet included in the comparable store base, $5.8 million was attributable to
net sales generated by 26 new stores opened in fiscal 2000 and not yet included
in the comparable store base, $2.2 million was attributable to other
non-comparable store net sales, offset by a $7.7 million decrease in net sales
attributable to a one week shift in the fiscal calendar, a $3.1 million decrease
in net sales attributable to a 2.2% decrease in comparable store net sales in
the third quarter of fiscal 2001 and a $.5 million decrease in net sales
attributable to the closing of five and two stores during fiscal 2001 and fiscal
2000, respectively. Fiscal 2000 was a fifty-three week period ended February 4,
2001 and fiscal 2001 will be a fifty-two week period ending February 2, 2002.
The extra week in the prior fiscal year caused a change in the measurement
period used in making period-to-period comparisons. The decrease in comparable
store net sales was primarily attributable to decreases in sales of young men's
merchandise offset by increases in sales of girls' merchandise, accessories and
footwear. Other non-comparable store net sales consist of sales from stores that
have been expanded or relocated and not yet included in the comparable store
base as well as merchandise sold over the internet. Stores are deemed comparable
stores on the first day of the first month following the one-year anniversary of
their opening or expansion/relocation. Retail prices of the Company's
merchandise remained relatively unchanged in the third quarter of fiscal 2001
compared to the third quarter of fiscal 2000 and had no significant impact on
the net sales increase for the third quarter of fiscal 2001.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $60.8 million for the third quarter of fiscal 2001 from $55.0 million for the
third quarter of fiscal 2000, an increase of $5.8 million, or 10.5%. As a
percentage of net sales, gross margin was 33.2% for the third quarter of fiscal
2001 compared to 33.6% for the third quarter of fiscal 2000. Of this .4%
decrease, occupancy costs increased 1.8% as a percentage of net sales compared
to the third quarter of fiscal 2000, which was related to lower comparable store
net sales in the third quarter of fiscal 2001 as well as opening 124 new stores
in the first nine months of fiscal 2001. Occupancy costs as a percentage of net
sales for new stores are generally higher than for mature stores. Offsetting the
increase in occupancy costs was a 1.4% increase in net merchandise margins,
primarily due to a lower markdown rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $46.5 million
for the third quarter of fiscal 2001 from $34.8 million for the third quarter of
fiscal 2000, an increase of $11.7 million, or 33.6%. As a percentage of net
sales, these expenses increased to 25.4% from 21.2%. Of this 4.2% net increase
as a percentage of net sales, 2.4% was due to an increase in store payroll and
other store selling expenses as a result of lower comparable store net sales in
the third quarter of fiscal 2001 as well as opening 124 new stores in the first
nine months of fiscal 2001. Store payroll and other store selling expenses as a
percentage of net sales for new stores are generally higher than for mature
stores. Of the remaining increase of 1.8%, 1.3% resulted from an increase in
general and administrative expenses, primarily due to a difficult comparison
from the third quarter of last year when year to date bonus expenses were
reversed. In addition, .5% was due to the Company's reserving of rent expense
for its current corporate offices, which will be unused when the Company moves
into its new corporate offices and distribution center in January 2002. See Note
8 to the consolidated financial statements.
9
Income Tax Expense
Income tax expense was $5.5 million for the third quarter of fiscal 2001
compared to $8.0 million for the third quarter of fiscal 2000. The effective
income tax rate was 38.4% for the third quarter of fiscal 2001 as compared to
38.8% for the third quarter of fiscal 2000.
The thirty-nine weeks ended November 4, 2001 (nine months) as compared
to the thirty-nine weeks ended October 29, 2000 (nine months)
Net Sales
Net sales increased to $477.2 million for the first nine months of
fiscal 2001 from $408.3 million for the first nine months of fiscal 2000, an
increase of $68.9 million, or 16.9%. Of this $68.9 million increase, $39.6
million was attributable to net sales generated by 124 new stores opened in
fiscal 2001 and not yet included in the comparable store base, $37.5 million was
attributable to net sales generated by 26 new stores opened in fiscal 2000 and
not yet included in the comparable store base, $6.5 million was attributable to
other non-comparable store net sales, $2.4 million was attributable to a one
week shift in the fiscal calendar, offset by a $15.6 million decrease
attributable to a 4.2% decrease in comparable store net sales in the first nine
months of fiscal 2001 and a $1.5 million decrease attributable to the closing of
five and two stores during fiscal 2001 and fiscal 2000, respectively. Fiscal
2000 was a fifty-three week period ended February 4, 2001 and fiscal 2001 will
be a fifty-two week period ending February 2, 2002. The extra week in the prior
fiscal year caused a change in the measurement period used in making
period-to-period comparisons. The decrease in comparable store net sales was
primarily attributable to decreases in sales of young men's merchandise and, to
a lesser extent, girls' merchandise, offset by increases in sales of accessories
and footwear. Other non-comparable store net sales consist of sales from stores
that have been expanded or relocated and not yet included in the comparable
store base as well as merchandise sold over the internet. Stores are deemed
comparable stores on the first day of the first month following the one-year
anniversary of their opening or expansion/relocation. Retail prices of the
Company's merchandise remained relatively unchanged in the first nine months of
fiscal 2001 compared to the first nine months of fiscal 2000 and had no
significant impact on the net sales increase for the first nine months of fiscal
2001.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $150.9 million for the first nine months of fiscal 2001 from $136.7 million
for the first nine months of fiscal 2000, an increase of $14.2 million, or
10.4%. As a percentage of net sales, gross margin was 31.6% for the first nine
months of fiscal 2001 compared to 33.5% for the first nine months of fiscal
2000. Of this 1.9% decrease, occupancy costs increased 1.6% as a percentage of
net sales compared to the first nine months of fiscal 2000, which was primarily
related to lower comparable store net sales as well as opening 124 new stores in
the first nine months of fiscal 2001. Occupancy costs as a percentage of net
sales for new stores are generally higher than for mature stores. In addition,
net merchandise margins decreased .2% as a percentage of net sales, primarily
due to a higher markdown rate, and buying costs increased .1% as a percentage of
net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $129.5 million
for the first nine months of fiscal 2001 from $95.4 million for the first nine
months of fiscal 2000, an increase of $34.1 million, or 35.7%. As a percentage
of net sales, these expenses increased to 27.1% from 23.4%. Of this 3.7% net
increase as a percentage of net sales, 2.0% was due to an increase in store
payroll and other store selling expenses, primarily as a result of lower
comparable store net sales as well as opening 124 new stores in the first nine
months of fiscal 2001. Store payroll and other store selling expenses as a
percentage of net sales for new stores are generally higher than for mature
stores. In addition, .8% was due to a one-time non-cash charge of $4.2 million
related to the disposal of most of the existing materials handling equipment as
part of the Company's relocation to a new distribution facility scheduled for
January 2002. Of the remaining increase of .9%, .5% was due to an increase in
general and administrative expenses, .2% was due to an increase in advertising
costs and .2% was due to the Company's
10
reserving of rent expense for its current corporate offices, which will be
unused when the Company moves into its new corporate offices and distribution
center in January 2002. See Note 8 to the consolidated financial statements.
Income Tax Expense
Income tax expense was $8.4 million for the first nine months of fiscal
2001 compared to $16.3 million for the first nine months of fiscal 2000. The
effective income tax rate was 38.4% for the first nine months of fiscal 2001 as
compared to 38.8% for the first nine months of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations from internally generated cash
flow, short-term borrowings and equity financing. The Company's primary capital
requirements have been for the construction of new stores, remodeling,
expansion, or relocation of selected stores and financing of inventories. In
December 2000, the Company purchased an undeveloped 19-acre parcel of land in
close proximity to its current corporate office and distribution center for
$12.2 million. The Company is constructing a new corporate office and
distribution center on this property and anticipates the facilities will be
ready for occupancy in January 2002. The Company believes the new facilities
will be capable of servicing at least 1,200 stores. The Company intends to
sublease its existing corporate offices and distribution center for the
remainder of the lease (see Note 8 to the consolidated financial statements).
Net cash provided by operating activities for the first nine months of
fiscal 2001 was $9.8 million as compared to $18.1 million for the first nine
months of fiscal 2000. This $8.3 million decrease in cash provided by operations
was attributable to a decrease in net income of $12.3 million and an increase in
inventories net of accounts payable of $11.9 million, offset by an increase in
depreciation and amortization of $5.7 million, an increase in accrued
liabilities of $5.2 million, a $4.2 million one-time non-cash charge and other
items netting to an increase of $.8 million. Working capital at November 4, 2001
increased $5.2 million to $85.0 million compared to $79.8 million at February 4,
2001. Inventories at November 4, 2001 were $125.0 million compared to $82.7
million at February 4, 2001, an increase of $42.3 million. This increase was
primarily related to opening 119 net new stores and expanding/relocating 31
stores in the first nine months of fiscal 2001 with in excess of 50% larger
average square footage than their previous locations. The Company's average
store inventories vary throughout the year and increase in advance of the peak
selling periods of spring break, back-to-school and Christmas.
Net cash used in investing activities was $62.5 million for property and
equipment for the first nine months of fiscal 2001 compared to $36.0 million for
property and equipment for the first nine months of fiscal 2000. Of the $62.5
million of net cash used for investment in property and equipment in the first
nine months of fiscal 2001, $34.6 million was used for new and existing stores,
$25.7 million was used for costs related to the construction of the new
corporate office and distribution center and $2.2 million was used for other
capital expenditures including computer hardware and software.
Net cash provided by financing activities was $27.0 million for the
first nine months of fiscal 2001 as compared to $3.9 million for the first nine
months of 2000, an increase of $23.1 million. This $23.1 million increase in
cash provided was primarily due to $23.6 million in borrowings under the
Company's construction facility. This increase was offset by $.4 million of
principal payments under capital lease obligations and a decrease of $.1 million
in proceeds received from the exercise of stock options.
The Company has a total credit facility of $55.0 million with a bank,
which provides for a $30.0 million line of credit (the "Credit Line") to be used
for cash advances, commercial letters of credit and shipside bonds, and an
additional $25.0 million line of credit (the "Construction Facility") that can
be used to finance the construction of the Company's new corporate office and
distribution center. The Credit Line expires March 31, 2004. Upon completion of
the new facilities, the Company can, at its option, convert any outstanding
borrowings under the Construction Facility to a term loan. Interest on each of
the credit facilities is payable monthly at the bank's prime rate (5.50% at
November 4, 2001) or at optional interest rates that are primarily dependant
upon the London Inter-bank Offered Rates for the time period chosen. The
Company's weighted average interest rate on its outstanding borrowings was 5.08%
at November 4, 2001. At November 4, 2001, the Company had no borrowings
outstanding under the Credit Line and $23.6 million outstanding under the
Construction Facility. Additionally, the Company
11
had $7.8 million in letters of credit outstanding at November 4, 2001. The
credit facility subjects the Company to various restrictive covenants, including
maintenance of certain financial ratios, and prohibits payment of cash dividends
on common stock. At November 4, 2001, the Company was in compliance with all of
its covenants.
The Company plans to open approximately 11 new stores, of which
approximately 6 will be PacSun stores, approximately 1 will be a PacSun Outlet
store and approximately 4 will be d.e.m.o. stores during the remainder of fiscal
2001. The Company also plans to expand or relocate approximately 4 existing
smaller stores to larger locations during the remainder of fiscal 2001. The
Company estimates that capital expenditures during the remainder of fiscal 2001
will be approximately $31.1 million, of which approximately $13.1 million will
be to construct the new corporate offices and distribution center and install a
materials handling system, approximately $14.2 million will be for opening,
expanding, and relocating stores, and approximately $3.8 million will be used
for other capital expenditures, including computer hardware, software and
furniture. The Company plans to open approximately 75 net new stores during the
year ending February 1, 2003 ("fiscal 2002"), of which approximately 58 will be
PacSun stores, approximately 7 will be PacSun Outlet stores and approximately 10
will be d.e.m.o. stores.
The Company reviews the operating performance of its stores on an
ongoing basis to determine which stores, if any, to expand, relocate or close.
The Company closed three stores in fiscal 2000 and anticipates closing
approximately 1 more store during the remainder of fiscal 2001.
Management believes that the Company's working capital, credit facility
and cash flows from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements for the next twelve
months.
INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141 ("SFAS No. 141"), "Business Combinations," and Statement No. 142 ("SFAS
No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business combinations
initiated after June 30, 2001. Effective for fiscal years beginning on or after
January 1, 2002, SFAS No. 142 requires companies to cease amortizing goodwill
that existed at June 30, 2001, and, therefore, the Company's amortization of
existing goodwill will cease on February 2, 2001. In addition, under SFAS No.
142, any goodwill resulting from acquisitions completed after June 30, 2001 will
not be amortized. SFAS No. 142 also includes requirements to test goodwill and
indefinite lived intangible assets for impairment beginning in fiscal 2002. As
of the date hereof, the Company is not a party to any agreement or understanding
with respect to any prospective acquisition and does not anticipate any
impairment on its existing goodwill. In the absence of any impairment issues,
the Company expects the impact of these statements to increase pre-tax income by
approximately $.3 million per year through 2022.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is seasonal by nature, with the Christmas and
back-to-school periods historically accounting for the largest percentage of
annual net sales. The Company's first quarter historically accounts for the
smallest percentage of annual net sales. In each of fiscal 2000 and fiscal 1999,
excluding sales generated by new and relocated/expanded stores, the Christmas
and back-to-school periods together accounted for approximately 33% of the
Company's annual net sales and a higher percentage of the Company's operating
income. In fiscal 2000, excluding net sales generated by new and
relocated/expanded stores, approximately 46% of the Company's annual net sales
occurred in the first half of the fiscal year and 54% in the second half. The
Company's quarterly results of operations may also fluctuate significantly as a
result of a variety of factors, including the timing of store openings; the
amount of revenue contributed by new stores; the timing and level of markdowns;
the timing of store closings, expansions and relocations; competitive factors;
and general economic conditions.
12
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This report on Form 10-Q contains "forward-looking statements" within
the meaning of Sections 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. The
Company is hereby providing cautionary statements identifying important factors
that could cause the Company's actual results to differ materially from those
projected in forward-looking statements of the Company herein. Any statements
that express, or involve discussions as to expectations, beliefs, plans,
objectives, assumptions, future events or performance (often, but not always
through 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. Such uncertainties include, among others, the
following factors:
MERCHANDISING/FASHION SENSITIVITY. The Company's success is largely
dependent upon its ability to gauge the fashion tastes of its customers and to
provide merchandise that satisfies customer demand in a timely manner. The
Company's failure to anticipate, identify or react appropriately in a timely
manner to changes in fashion trends could have a material adverse effect on the
Company's business, financial condition and results of operations. Misjudgments
or unanticipated fashion misjudgments could have a material adverse effect on
the Company's image with its customers.
PRIVATE LABEL MERCHANDISE. Sales from private label merchandise
accounted for approximately 36% of net sales in each of fiscal 2000 and fiscal
1999. The Company may increase the percentage of net sales in private label
merchandise in the future, although there can be no assurance that the Company
will be able to achieve increases in private label merchandise sales as a
percentage of net sales. Because the Company's private label merchandise
generally carries higher merchandise margins than its other merchandise, the
Company's failure to anticipate, identify and react in a timely manner to
fashion trends with its private label merchandise, particularly if the
percentage of net sales derived from private label merchandise increases, may
have a material adverse affect on the Company's business, financial condition
and results of operations.
FLUCTUATIONS IN COMPARABLE STORE NET SALES RESULTS. The Company's
comparable store net sales results have fluctuated significantly in the past, on
a monthly, quarterly and annual basis, and are expected to continue to fluctuate
in the future. A variety of factors affect the Company's comparable store net
sales results, including changes in fashion trends, changes in the Company's
merchandise mix, calendar shifts of holiday periods, actions by competitors,
weather conditions and general economic conditions. The Company's comparable
store net sales results for any particular fiscal month, fiscal quarter or
fiscal year in the future may decrease. As a result of these or other factors
the Company's future comparable store net sales results are likely to have a
significant effect on the market price of the Company's common stock.
EXPANSION AND MANAGEMENT OF GROWTH. PacSun's continued growth depends to
a significant degree on its ability to open and operate stores on a profitable
basis and on management's ability to manage the Company's planned expansion.
During the remainder of fiscal 2001, the Company plans to open approximately 11
new stores, of which approximately 6 will be PacSun stores, approximately 1 will
be a PacSun Outlet store and approximately 4 will be d.e.m.o. stores. In
addition, the Company plans to open approximately 75 net new stores during
fiscal 2002, of which approximately 58 will be PacSun stores, approximately 7
will be PacSun Outlet stores and approximately 10 will be d.e.m.o. stores. The
Company's planned expansion is dependant upon a number of factors, including the
ability of the Company to locate and obtain favorable store sites, negotiate
acceptable lease terms, obtain adequate supplies of merchandise and hire and
train qualified management level and other employees. Factors beyond the
Company's control may also affect the Company's ability to expand, including
general economic and business conditions affecting consumer spending. There can
be no assurance that the Company will achieve its planned expansion or that such
expansion will be profitable. As the Company's operations grow, there could be
increasing strain on the Company's resources, and the Company could experience
difficulties relating to a variety of operational matters, including hiring,
training and managing an increasing number of employees, having sufficient
working capital, bank line of credit and cash flow from operating activities for
the Company's future operating and capital requirements, obtaining sufficient
quantities of merchandise from
13
its preferred vendors, obtaining sufficient materials and contract manufacturers
to produce its private brand products and enhancing its distribution, financial
and operating systems. There can be no assurance that the Company will be able
to manage its growth effectively. Any failure to manage growth could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RELIANCE ON KEY PERSONNEL. The continued success of the Company is
dependant to a significant degree upon the services of its key personnel,
particularly its executive officers. The loss of the services of any member of
senior management could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's success
in the future will also be dependent upon the Company's ability to attract and
retain qualified personnel. The Company's inability to attract and retain
qualified personnel in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON SINGLE DISTRIBUTION FACILITY AND PLANNED RELOCATION. The
Company's distribution functions for all of its stores and for internet sales
are handled from a single, leased facility in Anaheim, California. The Company
is currently constructing a new corporate office and distribution center in
Anaheim, California, which it anticipates will be ready for occupancy in January
2002. The distribution center will handle distribution functions for all of its
stores as well as shipments of merchandise sold over the internet. Any
significant interruption in the operation of the distribution facility due to
natural disasters, accidents, system failures, relocation difficulties or other
unforeseen causes would have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance that the Company's new corporate office and distribution center will
be completed by January 2002, or that the facilities will be adequate to support
the Company's future growth. The Company will incur significant costs and
expenditures to build its new facilities, which could have an impact on the
Company's financial condition and results of operations. The actual cost of
completing these facilities may be greater than the Company's current estimates.
STORES IN THE D.E.M.O. FORMAT. The Company opened its first d.e.m.o.
store in April of fiscal 1998 and as of November 4, 2001 operated 97 d.e.m.o.
stores. There can be no assurance that the Company's d.e.m.o. stores will
achieve sales and profitability levels that justify the Company's investment in
this new retail format. Expansion of the d.e.m.o. format involves risks that
could have a material adverse effect on the Company, including (i) diversion of
management's attention from the Company's core business, (ii) difficulties with
hiring, retention and training of key personnel for the d.e.m.o. stores, (iii)
risks associated with new vendors and (iv) difficulties with locating and
obtaining favorable store sites and negotiating acceptable lease terms.
INTERNET SALES. The Company began selling merchandise over the internet
in June 1999. The Company's internet operations are subject to numerous risks,
including unanticipated operating problems, reliance on third party computer
hardware and software providers, system failures and the need to invest in
additional computer systems. There can be no assurance that the internet
operations will achieve sales and profitability levels that justify the
Company's investment therein. The internet operations also involve other risks
that could have a material adverse effect on the Company, including (i) the
failure to reach profitability within the foreseeable future, (ii) difficulties
with hiring, retention and training of key personnel to conduct the Company's
internet operations, (iii) diversion of sales from PacSun stores, (iv) rapid
technological change, (v) liability for online content and (vi) risks related to
the failure of the computer systems that operate the web site and its related
support systems, including computer viruses, telecommunication failures and
electronic break-ins and similar disruptions. In addition, the internet
operations involve risks which are beyond the Company's control that could have
a material adverse effect on the Company, including (i) price competition
involving the items the Company intends to sell, (ii) the entry of the Company's
vendors into the internet business, in direct competition with the Company,
(iii) the level of merchandise returns experienced by the Company, (iv)
governmental regulation, (v) online security breaches, (vi) credit card fraud
and (vii) competition and general economic conditions and economic conditions
specific to the internet, online commerce and the apparel industry.
VOLATILITY OF STOCK PRICE. The market price of the Company's common
stock has fluctuated substantially in the past and there can be no assurance
that the market price of the common stock will not continue to fluctuate
significantly. Future announcements or management discussions concerning the
Company or its competitors, internet sales results, d.e.m.o. sales and
profitability results, quarterly variations in operating results or comparable
store net sales, changes in earnings estimates by analysts or changes in
accounting policies, among other factors,
14
could cause the market price of the common stock to fluctuate substantially. In
addition, stock markets have experienced extreme price and volume volatility in
recent years. This volatility has had a substantial effect on the market prices
of securities of many smaller public companies for reasons frequently unrelated
to the operating performance of the specific companies.
ECONOMIC IMPACT OF RECENT TERRORIST ATTACKS. The majority of the
Company's stores are located in regional shopping malls. In response to the
terrorist attacks of September 11, 2001, security is being heightened in public
areas. Any further threat of terrorist attacks or actual terrorist events,
particularly in public areas, could lead to lower customer traffic in regional
shopping malls. In addition, local authorities or mall management could close
regional shopping malls in response to any immediate security concern. For
example, on September 11, 2001, a substantial number of the Company's stores
were closed early due to closure of the malls in response to the terrorist
attacks. Mall closures as well as lower customer traffic due to security
concerns could result in decreased sales that would have a material adverse
affect on the Company's business, financial condition and results of operations.
*************
The Company cautions that the risk factors described above could cause
actual results or outcomes to differ materially from those expressed in any
forward-looking statements of the Company made by or on behalf of the Company.
Further, management cannot assess the impact of each such factor on the
Company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To the extent the Company borrows under its credit facility, the Company
is exposed to market risk related to changes in interest rates. At November 4,
2001, $23.6 million in borrowings were outstanding under the Company's credit
facility. Based on the weighted average interest rate of 5.08% on the Company's
credit facility during the thirty-nine weeks ended November 4, 2001, if interest
rates on the credit facility were to increase by 10%, and to the extent
borrowings were outstanding, for every $1,000,000 outstanding on the Company's
credit facility, net income would be reduced by approximately $3,000 per year. A
discussion of the Company's accounting policies for financial instruments and
further disclosures relating to financial instruments is included in the Summary
of Significant Accounting Policies and Nature of Business in the Notes to
Consolidated Financial Statements in the Company's Form 10-K for the year ended
February 4, 2001. The Company is not a party with respect to derivative
financial instruments.
15
PART II-OTHER INFORMATION
Item 1 - Legal Proceedings - On September 17, 2001, a former Pacific Sunwear
employee filed a putative class action lawsuit which alleges that
Pacific Sunwear has not properly paid wages to its California-based
store managers, co-managers and assistant managers. The action, Auden
v. Pacific Sunwear of California, Inc., Case No. 01CC00383, was filed
in the California Superior Court for the County of Orange. The
complaint in the action seeks both monetary and injunctive relief.
Pacific Sunwear has filed an answer in the action denying the
allegations and raising affirmative defenses. No class has been
certified at this time.
Pacific Sunwear is party to other litigation matters, none of which
is material.
Item 2 - Changes in Securities and Use of Proceeds - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders - None
Item 5 - Other Information - Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
No reports were filed on form 8-K during the quarter for which
this report is filed.
16
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: December 10, 2001 /s/ GREG H. WEAVER
-----------------------------------------
Greg H. Weaver
Chairman of the Board
and Chief Executive Officer
Date: December 10, 2001 /s/ CARL W. WOMACK
-----------------------------------------
Carl W. Womack
Senior Vice President, Chief
Financial Officer and Secretary
17