Will PacSun Finally Turn Around Its Operations?

Pacific Sunwear of California (NAS: PSUN) , the specialty retailer, has been sailing through tumultuous times for the past three years. But the management seems to have finally woken up as they announced significant plans to overhaul the beleaguered company's operations. Besides this, the company also reported better-than-expected losses for the third quarter. Let's take a closer, Foolish look at what's cooking at PacSun.

Figuring it out
PacSun's third-quarter revenue dipped by 7% from the previous year's quarter, to $242 million, and saw a 3% fall in comparable-store sales. In addition, the company came out with a wider loss of $17.6 million compared to a $7 million loss in the year-ago quarter. But after making adjustments for other items, including store-closure-related expenses, PacSun's net loss totaled just $7.1 million, as against a $3.9 million loss in the year-ago quarter.

According to specialty retail analyst Pamela Quintiliano, the past few years have been rough for the Anaheim-based retailer as it sported a poor product mix and lost customers to savvier competitors. This seems to be a common theme in the clothing retail space as companies like Abercrombie & Fitch (NYS: ANF) , Gap (NYS: GPS) , and Aeropostale (NYS: ARO) , all struggle with relevance in the teen retail space.

PacSun's mix of private and third-party brands, such as Billabong and Roxy, failed to take off with the trendy young audience it targeted. On the other hand, rivals such as Zumiez (NAS: ZUMZ) have been successful with more relevant product offerings.

Turning over a new leaf
Nevertheless, PacSun is leaving its past behind and is preparing for a new beginning. As part of an overhaul, the teen retailer will close nearly 200 of its low performance stores across the country within the next 14 months. The company has also secured a $100 million credit facility from Wells Fargo (NYS: WFC) along with another $60 million from Golden Gate Capital. In exchange for the $60 million, Golden Gate would get an option to buy up 19.9% of PacSun's shares at a price of $1.75 and would also get two seats on the retail company's board.

While it may seem like Wells Fargo is propping up a dying company, the involvement of Golden Gate Capital is a valuable addition, and Wells can rest assured there are strong leaders at the helm. Golden Gate has a positive track record in the retail, restaurant, and consumer products space. The company bought Herbalife (NYS: HLF) in 2002, then brought the company public in 2004. Herbalife has returned almost 630% since then. Having members of Golden Gate Capital sit on the company board will likely be a positive force in corporate governance.

These funds would be used to fund the lease terminations for its unviable stores and would also be invested in operational and technological needs along with store refresh expenses. According to the company, the store closures and new financing would significantly improve its financial and operational position.

The Foolish bottom line
The market's reaction to PacSun's announcement was nothing short of overwhelming. That was evident from the fact that the company's shares shot up more than 40% in after-hours trading. Nevertheless, it remains to be seen how PacSun would be able to turn around the rest of its poorly performing operations.

It's great to see the company take significant steps to bail out its sinking operations. And if all goes according to plan, PacSun could very well be a good long-term play. What do you Fools think about this? Let us know by leaving your comments in the box below.

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Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of Wells Fargo, Gap, and Aeropostale. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Zumiez. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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