<PAGE> 1
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 OCTOBER 29, 2000
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 November 28, 2000 was 32,150,516.
<PAGE> 2
PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 29, 2000
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of October 29, 2000
(unaudited) and January 30, 2000............................... 3
Consolidated Statements of Income and Comprehensive Income
(unaudited) for the third quarter and nine months ended
October 29, 2000 and October 31, 1999.......................... 4
Consolidated Statements of Cash Flows (unaudited) for the
nine months ended October 29, 2000 and October 31, 1999........ 5
Notes to Consolidated Financial Statements.......................6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................8-13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 14
Item 2. Changes in Securities and Use of Proceeds......................... 14
Item 3. Defaults Upon Senior Securities................................... 14
Item 4. Submission of Matters to a Vote of Security Holders............... 14
Item 5. Other Information................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................. 14
SIGNATURE PAGE.................................................... 15
2
<PAGE> 3
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 29, JANUARY 30,
2000 2000
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $ 18,325,742 $ 32,416,794
Accounts receivable 4,506,894 2,178,105
Merchandise inventories 91,654,935 60,002,230
Prepaid expenses, includes $6,232,846 and
$4,874,867 of prepaid rent, respectively 7,981,699 7,043,428
Deferred taxes 2,541,765 2,541,765
------------- -------------
Total current assets 125,011,035 104,182,322
PROPERTY AND EQUIPMENT:
Leasehold improvements 80,312,108 66,998,372
Furniture, fixtures and equipment 83,006,183 63,992,331
------------- -------------
163,318,291 130,990,703
Less accumulated depreciation and amortization (47,941,340) (37,777,329)
------------- -------------
Net property and equipment 115,376,951 93,213,374
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $1,218,484 and $984,960, respectively 6,881,281 7,114,805
Deferred compensation and other assets (Note 6) 7,202,407 4,831,038
------------- -------------
Total other assets 14,083,688 11,945,843
------------- -------------
Total assets $ 254,471,674 $ 209,341,539
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,695,084 $ 20,113,199
Accrued liabilities (Note 5) 12,142,156 13,874,533
Income taxes payable 4,555,676 2,844,051
------------- -------------
Total current liabilities 45,392,916 36,831,783
Deferred compensation 6,551,502 4,436,776
Other long-term liabilities 28,316 28,316
Deferred rent 6,832,879 5,831,988
Deferred taxes 387,012 387,012
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 321,381 and
outstanding, 32,138,142 and 31,462,751
shares, respectively 321,381 314,628
Additional paid-in capital 77,341,610 69,619,372
Retained earnings 117,616,058 91,891,664
------------- -------------
Total shareholders' equity 195,279,049 161,825,664
------------- -------------
Total liabilities and shareholders' equity $ 254,471,674 $ 209,341,539
============= =============
</TABLE>
See accompanying notes
3
<PAGE> 4
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THIRD QUARTER ENDED FOR THE NINE MONTHS ENDED
-------------------------------- --------------------------------
OCTOBER 29, OCTOBER 31, OCTOBER 29, OCTOBER 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $163,733,234 $124,043,858 $408,264,409 $305,940,879
Cost of goods sold, including buying,
distribution and occupancy costs 108,745,739 78,507,789 271,597,812 199,460,975
------------ ------------ ------------ ------------
Gross margin 54,987,495 45,536,069 136,666,597 106,479,904
Selling, general and administrative expenses 34,792,054 25,873,696 95,439,897 68,605,981
------------ ------------ ------------ ------------
Operating income 20,195,441 19,662,373 41,226,700 37,873,923
Interest income 309,191 291,265 815,694 529,688
------------ ------------ ------------ ------------
Income before income tax expense 20,504,632 19,953,638 42,042,394 38,403,611
Income tax expense (Note 4) 7,956,000 7,689,000 16,318,000 14,796,000
------------ ------------ ------------ ------------
Net income $ 12,548,632 $ 12,264,638 $ 25,724,394 $ 23,607,611
============ ============ ============ ============
Comprehensive income (Note 1) $ 12,548,632 $ 12,264,638 $ 25,724,394 $ 23,607,611
============ ============ ============ ============
Net income per share, basic (Note 3) $ 0.39 $ 0.39 $ 0.81 $ 0.76
------------ ------------ ------------ ------------
Net income per share, diluted (Note 3) $ 0.39 $ 0.38 $ 0.79 $ 0.74
------------ ------------ ------------ ------------
Weighted average shares outstanding, basic
(Note 3) 32,005,598 31,181,415 31,763,001 30,946,578
============ ============ ============ ============
Weighted average shares outstanding,
diluted (Note 3) 32,429,520 32,303,781 32,438,384 32,069,043
============ ============ ============ ============
</TABLE>
See accompanying notes
4
<PAGE> 5
PACIFIC SUNWEAR OF CALIFORNIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------------
OCTOBER 29, OCTOBER 31,
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,724,394 $ 23,607,611
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 14,148,307 10,234,678
Change in:
Accounts receivable (2,328,789) (2,733,724)
Merchandise inventories (31,652,705) (24,161,065)
Prepaid expenses (938,271) (1,488,305)
Deferred compensation and other assets (3,992) (565,019)
Accounts payable 8,581,885 3,606,092
Accrued liabilities (1,732,377) 2,634,184
Income taxes and deferred income taxes 5,286,004 8,020,811
Deferred rent 1,000,891 809,532
------------ ------------
Net cash provided by operating activities 18,085,347 19,964,795
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (36,040,856) (29,668,391)
------------ ------------
Net cash used in investing activities (36,040,856) (29,668,391)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash paid in lieu of fractional shares due to
3-for-2 stock split -- (10,598)
Proceeds from exercise of stock options 3,864,457 2,805,233
------------ ------------
Net cash provided by financing activities 3,864,457 2,794,635
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS:
(14,091,052) (6,908,961)
CASH AND CASH EQUIVALENTS, beginning of period 32,416,794 19,031,738
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 18,325,742 $ 12,122,777
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,404 $ --
Income taxes $ 11,031,996 $ 6,775,189
</TABLE>
--------------------------------------------------------------------------------
Supplemental disclosures of non-cash transactions: During the nine months ended
October 29, 2000 and October 31, 1999, the Company recorded an increase to
additional paid-in capital of $3,574,379 and $4,002,454, respectively, related
to tax benefits associated with the exercise of non-qualified stock options. In
addition, during the nine months ended October 29, 2000 and October 31, 1999,
the Company recorded an increase to additional paid-in capital of $290,155 and
$290,354, respectively, related to the issuance of restricted stock to satisfy
certain deferred compensation liabilities.
See accompanying notes
5
<PAGE> 6
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 January 30, 2000 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 intercompany transactions have been eliminated in
consolidation.
The Company's fiscal year is the 52- or 53-week period which ends on
the Sunday closest to the end of January. "Fiscal 2000" is a 53-week period
which ends 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 October 29, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 4, 2001. For further information, refer to the financial
statements and notes thereto as of and for the years ended January 30, 2000,
January 31, 1999 and February 1, 1998.
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 - NET INCOME PER SHARE, BASIC AND DILUTED
The following table summarizes the computation of EPS:
<TABLE>
<CAPTION>
THIRD QUARTER ENDED: OCTOBER 29, 2000 OCTOBER 31, 1999
---------------------------------------- ----------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
$12,548,632 32,005,598 $0.39 $12,264,638 31,181,415 $0.39
DILUTED EPS:
Effect of dilutive stock options 423,922 1,122,366
----------- ---------- ----- ----------- ---------- -----
$12,548,632 32,429,520 $0.39 $12,264,638 32,303,781 $0.38
=========== ========== ===== =========== ========== =====
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
NINE MONTHS ENDED: OCTOBER 29, 2000 OCTOBER 31, 1999
---------------------------------------- ----------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET INCOME SHARES AMOUNT
----------- ---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS:
$25,724,394 31,763,001 $0.81 $23,607,611 30,946,578 $0.76
DILUTED EPS:
Effect of dilutive stock options 675,383 1,122,465
----------- ---------- ----- ----------- ---------- -----
$25,724,394 32,438,384 $0.79 $23,607,611 32,069,043 $0.74
=========== ========== ===== =========== ========== =====
</TABLE>
Options to purchase 1,066,795 and 3,253 shares of common stock in the
third quarter of fiscal 2000 and the third quarter of fiscal 1999, respectively,
and 856,168 and 153,097 in the first nine months of fiscal 2000 and the first
nine months of fiscal 1999, 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 4 - FEDERAL AND STATE INCOME TAX EXPENSE
The combined federal and state income tax expense was calculated using
estimated effective annual tax rates.
NOTE 5 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
OCTOBER 29, JANUARY 30,
2000 2000
----------- -----------
<S> <C> <C>
Compensation and benefits $ 3,835,107 $ 7,368,490
Sales tax payable 2,226,351 1,106,142
Reserve for store expansion/relocation and closing costs 1,205,591 1,045,797
Gift certificates and store merchandise credits 1,177,961 1,882,692
Other accrued liabilities 3,697,146 2,471,412
----------- -----------
$12,142,156 $13,874,533
=========== ===========
</TABLE>
NOTE 6 - DEFERRED COMPENSATION AND OTHER ASSETS
Deferred compensation and other assets consist of the following:
OCTOBER 29, JANUARY 30,
2000 2000
---------- ----------
Deferred compensation $6,929,807 $4,505,058
Other assets 272,600 325,980
---------- ----------
$7,202,407 $4,831,038
========== ==========
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF CONSOLIDATED OPERATIONS
RESULTS OF OPERATIONS
The thirteen weeks ended October 29, 2000 (third quarter) as compared to the
thirteen weeks ended October 31, 1999 (third quarter)
Net Sales
Net sales increased to $163.7 million for the third quarter of fiscal
2000 from $124.0 million for the third quarter of fiscal 1999, an increase of
$39.7 million, or 32.0%. Of this $39.7 million increase, $25.4 million was
attributable to net sales generated by 120 new stores opened in fiscal 2000 and
not yet included in the comparable store base, $7.7 million was attributable to
net sales generated by stores opened in fiscal 1999 and not yet included in the
comparable store base, $3.4 million was attributable to other non-comparable
store sales and $3.7 million was attributable to a 3.3% increase in comparable
store net sales in the third quarter of fiscal 2000. Offsetting these increases
was a $.5 million decrease in net sales attributable to the closing of four
stores during fiscal 1999 and two stores in fiscal 2000. Other non-comparable
store 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. Average retail prices of merchandise sold decreased
approximately 6.3% in the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999 primarily related to a higher markdown rate.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $55.0 million for the third quarter of fiscal 2000 from $45.5 million for the
third quarter of fiscal 1999, an increase of $9.5 million, or 20.9%. As a
percentage of net sales, gross margin was 33.6% for the third quarter of fiscal
2000 compared to 36.7% for the third quarter of fiscal 1999. Of this 3.1%
decrease, net merchandise margins decreased 2.3% as a percentage of net sales
for the third quarter of fiscal 2000 compared to the third quarter of fiscal
1999 primarily due to a higher markdown rate. In addition, occupancy costs for
the third quarter of fiscal 2000 increased .8% as a percentage of net sales
compared to the third quarter of fiscal 1999, which was primarily related to
opening 120 new stores in the first nine months of fiscal 2000. Occupancy costs
as a percentage of net sales for new stores are generally higher than for mature
stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $34.8 million
for the third quarter of fiscal 2000 from $25.9 million for the third quarter of
fiscal 1999, an increase of $8.9 million, or 34.4%. As a percentage of net
sales, these expenses increased to 21.2% from 20.9%. Of this .3% increase,
advertising as a percentage of net sales increased by 1.2% which was related to
the Company's increased marketing efforts, including its first national
television advertising campaign which commenced in February 2000. In addition,
store selling expenses increased .7% as a percentage of net sales, primarily due
to opening 120 new stores in the first nine months of fiscal 2000. Store payroll
and selling expenses as a percentage of net sales for new stores are generally
higher than for mature stores. Offsetting these increases, was a decrease of
1.6% in general and administrative expenses as a percentage of net sales, of
which 1.2% represents a decline in bonus expense and the remaining .4% was a
result of leveraging other general and administrative expenses over higher total
net sales.
Income Tax Expense
Income tax expense was $8.0 million for the third quarter of fiscal
2000 compared to $7.7 million for the third quarter of fiscal 1999. The
effective income tax rate was 38.8% for the third quarter of fiscal 2000 as
compared to 38.5% for the third quarter of fiscal 1999.
8
<PAGE> 9
The thirty-nine weeks ended October 29, 2000 (nine months) as compared to the
thirty-nine weeks ended October 31, 1999 (nine months)
Net Sales
Net sales increased to $408.3 million for the first nine months of
fiscal 2000 from $306.0 million for the first nine months of fiscal 1999, an
increase of $102.3 million, or 33.4%. Of this $102.3 million increase, $47.0
million was attributable to net sales generated by 120 new stores opened in
fiscal 2000 and not yet included in the comparable store base, $41.0 million was
attributable to net sales generated by stores opened in fiscal 1999 and not yet
included in the comparable store base, $7.9 million was attributable to other
non-comparable store sales and $7.6 million was attributable to a 2.7% increase
in comparable store net sales in the first nine months of fiscal 2000.
Offsetting these increases was a $1.2 million decrease in net sales attributable
to the closing of three stores during fiscal 1999 and two stores during fiscal
2000. Other non-comparable store 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. Average retail prices of merchandise sold
decreased approximately 7.8% in the nine months of fiscal 2000 compared to the
first nine months of fiscal 1999 primarily related to a higher markdown rate in
the second and third quarters of fiscal 2000.
Gross Margin
Gross margin, after buying, distribution and occupancy costs, increased
to $136.7 million for the first nine months of fiscal 2000 from $106.5 million
for the first nine months of fiscal 1999, an increase of $30.2 million, or
28.4%. As a percentage of net sales, gross margin was 33.5% for the first nine
months of fiscal 2000 compared to 34.8% for the first nine months of fiscal
1999. Of this 1.3% decrease, occupancy costs for the first nine months of fiscal
2000 increased .7% as a percentage of net sales compared to the first nine
months of fiscal 1999, which was primarily related to opening 120 new stores in
the first nine months of fiscal 2000. Occupancy costs as a percentage of net
sales for new stores are generally higher than for mature stores. In addition,
merchandise margins decreased .6% in the first nine months of fiscal 2000
compared to the first nine months of fiscal 1999 due to a higher markdown rate
offset by a higher initial markup rate.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $95.4 million
for the first nine months of fiscal 2000 from $68.6 million for the first nine
months of fiscal 1999, an increase of $26.8 million, or 39.1%. As a percentage
of net sales, these expenses increased to 23.4% from 22.4%. Of this 1.0% net
increase, 1.1% was due to an increase in advertising as a percentage of net
sales which was related to the Company's increased marketing efforts including
its first national television advertising campaign which commenced in February
2000. In addition, store selling expenses increased .9% as a percentage of net
sales, primarily related to opening 120 new stores in the first nine months of
fiscal 2000. Store payroll and selling expenses as a percentage of net sales for
new stores are generally higher than for mature stores. Offsetting these
increases was a decrease of 1.0% in general and administrative expenses, as a
result of leveraging these expenses over higher total net sales which includes a
decline in bonus expense.
Income Tax Expense
Income tax expense was $16.3 million for the first nine months of
fiscal 2000 compared to $14.8 million for the first nine months of fiscal 1999.
The effective income tax rate was 38.8% for the first nine months of fiscal 2000
as compared to 38.5% for the first nine months of fiscal 1999.
9
<PAGE> 10
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 expects to close escrow on a $12.1 million purchase
of an undeveloped 19 acre parcel of land in close proximity to its current
corporate office and distribution center. The Company intends to build a new
office and distribution center on this property to be ready for occupancy in
December 2001. The Company believes the new facilities are necessary to support
the Company's current growth plans.
Net cash provided by operating activities for the first nine-months of
fiscal 2000 was $18.1 million compared to $20.0 million for the first nine
months of fiscal 1999. This $1.9 million decrease was attributable to a decrease
in accrued liabilities of $4.4 million, a decrease in accrued income taxes and
deferred income taxes of $2.7 million and an increase in inventories net of
accounts payable of $2.5 million. These were offset by an increase in
depreciation and amortization of $3.9 million, an increase in net income of $2.1
million and a net increase in other items of $1.7 million. Working capital at
October 29, 2000 was $79.6 million compared to $67.4 million at January 30,
2000, an increase of $12.2 million. Inventories at October 29, 2000 were $91.7
million compared to $60.0 million at January 30, 2000, an increase of $31.7
million. This increase was primarily related to opening 120 new stores and
expanding/relocating 32 stores which have 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 $36.0 million for property
and equipment for the first nine months of fiscal 2000 compared to $29.7 million
for property and equipment for the first nine months of fiscal 1999. The
increase in property and equipment was primarily due to opening 120 new stores
in the first nine months of fiscal 2000 compared to opening 101 new stores in
the first nine months of fiscal 1999.
Net cash provided by financing activities, primarily proceeds received
from the exercise of stock options, for the first nine months of fiscal 2000 was
$3.9 million compared to $2.8 million for the first nine months of fiscal 1999.
The Company has a credit facility with a bank, which expires in August
2001. The credit facility provides for a $35.0 million line of credit, which can
be used for cash advances, commercial letters of credit and shipside bonds.
Interest on cash advances under the line of credit facility is payable monthly
at the bank's prime rate (9.5% at October 29, 2000). At October 29, 2000, the
Company had $9.0 million in letters of credit outstanding. The loan agreement
subjects the Company to various restrictive covenants, including maintenance of
certain financial ratios and prohibits payment of cash dividends on common
stock. At October 29, 2000, the Company was in compliance with all of its
covenants.
During the remainder of fiscal 2000, the Company plans to open
approximately 22 new stores, of which 9 will be PacSun stores, 3 will be PacSun
Outlet stores and 10 will be d.e.m.o. stores. The Company also plans to expand
or relocate 6 existing smaller stores during the remainder of fiscal 2000. The
Company estimates that capital expenditures during the remainder of fiscal 2000,
including the $12.1 million purchase of land, will be approximately $25 million.
In fiscal 2001, capital expenditures are expected to be $85-$90 million, of
which $49-$54 million will be for opening approximately 125 new stores and for
approximately 40 expansions/relocatons, and approximately $36 million to
construct a new corporate office and distribution center and install a materials
handling system.
The Company reviews the operating performance of its stores on an
ongoing basis to determine which stores, if any, to close and records closing
costs as stores are closed or identified to be closed. The Company closed two
stores during the second quarter of fiscal 2000 and expects to close one
additional store in the fourth quarter of fiscal 2000.
Management believes that the Company's working capital, bank line of
credit and cash flows from operating activities will be sufficient to meet the
Company's operating and capital expenditure requirements through the end of
fiscal 2001.
10
<PAGE> 11
INFLATION
The Company does not believe that inflation has had a material effect
on the results of operations during the past three years. There can be no
assurance that the Company's business will not be affected by inflation in the
future.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting for Derivatives and Hedging Activities -- In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities." The provisions of SFAS No. 133 are
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not believe that the adoption of SFAS. No. 133 will have
a significant impact on the Company's consolidated financial statements.
Revenue Recognition in Financial Statements -- In December 1999, the
Securities and Exchange Commission released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" "SAB No. 101." Management of the
Company has determined that the application of SAB No. 101 will not have any
material impact on the Company's consolidated financial statements.
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 fiscal 1999 and fiscal 1998,
excluding sales generated by new and relocated/expanded stores, the Christmas
and back-to-school periods together accounted for approximately 33% and 34%,
respectively, of the Company's annual net sales and a higher percentage of the
Company's operating income. In fiscal 1999, excluding net sales generated by new
and relocated/expanded stores, approximately 45% of the Company's annual net
sales occurred in the first half of the fiscal year and 55% 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.
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 affect the Company's business and results of operations and/or 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:
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.
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. Misjudgements
or unanticipated fashion misjudgements could have a material adverse effect on
the Company's image with its customers.
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PRIVATE LABEL MERCHANDISE. Sales from private label merchandise
accounted for approximately 36% of net sales in fiscal 1999 and fiscal 1998. 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.
RISKS OF NEW SPECIALTY STORE CONCEPT NAMED "D.E.M.O.". The Company
opened the first d.e.m.o. store in April 1998, and on October 29, 2000 operated
70 d.e.m.o. stores. The operation of its d.e.m.o. stores is subject to numerous
risks, including unanticipated operating problems, lack of experience, lack of
customer acceptance, new vendor relationships and competition from existing and
new retailers. 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 also involves other
risks that could have a material adverse effect on the Company, including (i)
the diversion of management's attention from the Company's core business, (ii)
difficulties with the 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 internet operations involve, among other things, internet web
site design activities, investment in new systems, distribution center
enhancements, training of personnel and hiring of additional personnel to handle
new functions. 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, lack of experience in managing the new internet
business, lack of customer acceptance and lack of experience in the fulfillment
and shipping of individual orders to customers. 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 diversion of management's attention from the Company's core business, (ii)
the failure to reach profitability within the foreseeable future, (iii)
difficulties with hiring, retention and training of key personnel to conduct the
Company's internet operations, (iv) diversion of sales from PacSun stores, (v)
rapid technological change, (vi) liability for online content and (vii) 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,
(vii) general economic conditions and economic conditions specific to the
internet, online commerce and the apparel industry and (viii) competition from
other internet web sites that may have significantly more capital resources and
experience in internet sales than the Company.
EXPANSION AND MANAGEMENT OF GROWTH. The Company'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 2000, the Company plans to open
approximately 22 new stores, of which 9 will be PacSun stores, 3 will be PacSun
Outlet stores and 10 will be d.e.m.o. stores. The Company also plans to expand
or relocate an additional 6 existing smaller stores in the remainder of fiscal
2000. The Company plans to open approximately 125 new stores in fiscal 2001 and
intends to construct a new corporate office and distribution center and install
a materials handling system. 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
merchandise supply 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
distribution facility, 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
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from 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. 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 intends to construct
a new office and distribution center in Anaheim, California to be ready for
occupancy in December 2001 which will handle distribution functions for all of
its stores as well as shipments related to sales of merchandise over the
internet. Any significant interruption in the operation of the distribution
facility due to natural disasters, accidents or system failures, 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 office
and distribution center will be completed by December 2001, or that it will be
adequate to support the Company's future growth. The Company will incur
significant costs and expenditures to build its new facility, which could have
an impact on the Company's financial condition and results of operations. The
actual cost of completing this facility may be greater than the Company's
current estimates.
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, could cause the market price of the
common stock to fluctuate substantially. For example, in May 2000 the Company's
stock price decreased dramatically after it was reported that the Company's
comparable store net sales for the month of April 2000 increased only 1.6%. 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 small public companies for reason frequently unrelated to
the operating performance of the specific companies.
The Company cautions that the risk factors described above could affect
the Company's business and results of operations and/or 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
The Company is exposed to market risk related to changes in interest
rates. 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 January 30, 2000. The Company monitors the risks
associated with interest rates and financial instrument positions.
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PART II-OTHER INFORMATION
Item 1 - Legal Proceedings - Not Applicable
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 - Not Applicable
Item 5 - Other Information - Not Applicable
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed on form 8-K during the quarter for which
this report is filed.
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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 5, 2000 /s/ GREG H. WEAVER
--------------------------------------
Greg H. Weaver
Chairman of the Board
and Chief Executive Officer
Date: December 5, 2000 /s/ CARL W. WOMACK
--------------------------------------
Carl W. Womack
Senior Vice President, Chief
Financial Officer and Secretary
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
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27 Financial Data Schedule
