Aero, PacSun: Two Coasts, Two Directions

NEW YORK – Aeropostale and Pacific Sunwear of California released fourth-quarter results after the close of the markets Thursday, and the distance between them was as great as the separation between their headquarter cities.

New York-based Aeropostale beat analysts’ estimates by a penny as it posted a 37% increase in net income, a 16.5% increase in sale, a 2.2% increase in same-store sales and a pick-up in gross margin to 37.2% of sales from 33.5% a year ago.

Meanwhile, Anaheim, Calif.-based PacSun reported an 80.7% drop in fourth-quarter net income, coupled with a 4.3% drop in same-store sales and a nearly 500 basis point evaporation in gross margin – to 31.5% of sales in last year’s quarter from 36.3% in the 2005 period. PacSun’s sales were up 7.8% and much of the erosion in earnings was attributable to charges associated with the firm’s decision to close underperforming Demo stores.

Like another California-based chain, Hot Topic, which reported lower sales and comps on Wednesday, PacSun has been battling not only aggressive competitors but also a changing fashion picture. Where Hot Topic is trying to regain the traction it once had with music-oriented young customers, whose tastes ran towards heavy metal and gothic rock, PacSun is trying to find the right formula for its similarly youthful devotees of surfwear and skatewear, if not necessarily surfing and skating.

And both Hot Topic and PacSun carry a multitude of brands, as opposed to the single-brand, vertically integrated approach embraced by Aeropostale and the two other A’s of teen retailing, Abercrombie & Fitch and American Eagle Outfitters. Just two years ago, the multi-brand approach was listed as one of the reasons that PacSun and Hot Topic were performing even better than their competitors, but that’s not the case today.

Aeropostale

Aeropostale posted net income of $57.3 million, or $1.08 per diluted share, for the three months ended Feb. 3, 37% ahead of the $41.8 million, or $0.76, tallied during the final quarter of 2005. Excluding extraordinary items, EPS was $1.00, 1 cent above consensus estimates.

Net sales were up 16.5% to $506.8 million during the more recent 14-week quarter versus $435.2 million in the 13-week year-ago period. Same-store sales rose 2.2% from the comparable 14 weeks of 2005.

Gross margin accelerated to 37% of sales from 33.5% in the year-ago period.

“We regained balance in our merchandise assortment, delivered excitement with our brand building initiatives and improved our planning processes,” said Julian Geiger, chairman and chief executive officer. “As a result, we achieved double-digit annual sales growth and earnings per share growth in excess of 25% over the previous year.

“We ended the year with strong momentum and we believe that the Aeropostale brand is recognized, respected and effectively positioned for a strong 2007.”

Aeropostale expects earnings per diluted share of $0.19 to $0.21 during the first quarter, up from $0.15 in last year’s comparable period. For the full year, the company is projecting EPS growth of approximately 20%, placing guidance at about $2.26.

The firm ended 2006 with 728 Aeropostale units and 14 stores operating under the Jimmy’Z banner. Approximately 85 Aeropostale stores, including the first 10 stores in Canada, are slated for the new fiscal year.

Net income for the full year reached $106.6 million, or $1.98 a diluted share, 27% above last year’s mark of $84 million, or $1.50. One-time gains added $0.10 to 2006 EPS. Net sales were up 17.4% to $1.41 billion from $1.20 billion. Same-store sales rose 2%.

Directors of Aeropostale added $100 million to its share repurchase program, lifting the balance available for stock buys to $150 million.

Pacific Sunwear

During the three months ended Feb. 3, net income plummeted 80.7% to $9.1 million, or $0.13 a diluted share, from $47 million, or $0.63, a year ago. Without $16.6 million 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 $458.2 million from $424.9 million 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, 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 $39.6 million, or $0.56 a diluted share, 68.6% below the year-ago result of $126.2 million, or $1.67. Sales rose 4% to $1.45 billion during the more recent 53-week year from $1.39 billion 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.