Description

PSUN is a 550-store West Coast-inspired company that sells private-label merchandise (under names such as Bullhead, Breakdown, and Tilt) as well as popular apparel from trendsetting surfwear companies (such as Billabong, Quiksilver, Rusty, Roxy, and Stussy) in stores operating under two names: Pucific Sunwear and Pacific Sunwear Outlet. The company also has a chain of about 45 d.e.m.o. stores that cater to the more urban look (brands such as Tommy Hilfiger, FUBU, Mecca, and Wu Wear). PSUN's target customers are males and females between the ages of 12 and 24.

Since going public in 1993, PSUN has traded between 13x and 35x EPS (with a 22x average). It currently trades at 11.1x TTM earnings and at 8.7x next year's (1/2002) earnings estimate.

While there has been talk of PSUN's fall merchandising strategy being off the mark, frequent store visits prove otherwise; the six stores in Southern California that I've visited continue to be very crowded. The new fall lines have been very well accepted and appear to be selling very well. In fact, customer traffic is actually up, but with lower price points, margins have suffered slightly.

Long-term demographic and cultural trends point to PSUN's continued success. The teen/young adult sector of the market is growing at a very rapid rate, and its spending power is increasing as well.

A very important factor to consider is that PSUN offers private brand merchandise as well as third-party brands. This fact is monumentally important given the fickle nature of the teen market. While competitors may be stuck with private brand inventory, PSUN is free to change styles very quickly. The company tries to stay ahead of the competition by asking customers to fill out surveys of what they want to see in the stores.

The company's d.e.m.o. chain does not cannibalize the company's Pacific Sunwear stores at all. This is very important as the company expands its d.e.m.o. chain aggressively.

Putting his money where his mouth is, PSUN CEO Greg Weaver recently (early June 2000) bought 370,000 shares of PSUN at prices ranging from $12.50 to $13.50. This was an outright purchase using money ($4.8 million, to be exact) from his own pocket.

PSUN still has plenty of room to grow. It is a strong company that possesses an experienced management team and an excellent long-term outlook. The balance sheet is strong ($13 million in cash and no debt). Wall Street is nervous about specialty retail in general and PSUN's August comps (-2.5%) specifically. The bad news is priced in (and then some!). Management has a stellar record of turning the company around after fashion missteps; there's no reason to believe that this time is any different. PSUN has hit the floor and is dirt cheap.

Catalyst

In addition to sheer value serving as a major catalyst, PSUN should benefit from the following: increased focus on building its brand; introduction of PacSun credit card (which has already shown signs of great success); Pacsun.com (the company's Internet venture) is already doing incredible business and will likely enjoy tremendous growth; easier comps to beat going forward.