Surf and Turf Retailer Pacific Sunwear Wipes Out -- Again

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PacSunTeens can be fickle, and Pacific Sunwear of California (PSUN) knows that all too well.

The retailer, which specializes in surf and skate apparel for the active youth, saw its shares wipe out on Wednesday after it posted disappointing results for the holiday quarter. Revenue dipped slightly to $234.2 million, but analysts were expecting a small gain. The struggling specialty retailer did manage to post a narrower loss than Wall Street was targeting, but a deficit is still a deficit.

The red ink comes naturally here. PacSun has now posted a loss in 13 consecutive quarters.

How did the once trendy PacSun get here, and will the undertow be forgiving?

Hang 10

Investors can't blame CEO Gary Schoenfeld for the entire streak of misery. He came on board just two years ago, well into the chain's downward spiral.

Several years ago, PacSun was doing well under Seth Johnson, a 12-year veteran of the surprisingly timeless Abercrombie & Fitch (ANF). After he resigned for "personal reasons," Sally Kasaks took over as CEO.

Sensing weakness at some of the retailer's smaller concepts, Kasaks shuttered the money-munching d.e.m.o. and One Thousand Steps stores. Getting rid of distractions can be a good thing for a multiconcept operator, but it also means putting all of your eggs in one basket.

Unfortunately for PacSun, the strategy shift came at a time when surfers and shredders were moving away from the trendy brands that the retailer was stocking.

Former Vans helmsman Schoenfeld seemed like the right choice to lead the company. He saw that Forever 21, H&M, Zumiez (ZUMZ), and Aeropostale (ARO) were eating its lunch. He was dismayed to find PacSun lacking brand authenticity. The excessive discounting and cluttered selling space didn't help, either.

Bringing back classic surf and skate brands for the guys and improving girl fashions to halt the Forever 21 exodus was a reasonable one-two punch, but it's just not working.

There may be some relief to find comps during the fiscal fourth quarter clocking in flat, but that's after a 7% decline a year earlier and a whopping 19% slide the year before that. If we keep going back -- before Schoenfeld's watch -- holiday quarter comps fell by 10% and 8% during the two prior years. Put another way, the average store is selling less than two-thirds as much as it was five years ago.

Not Even a Skateboarding Dog Can Save You Now

PacSun is in retreat.

It closed 119 stores during fiscal 2011, leaving it with 733 stores. The shredding will continue. PacSun is targeting another 110 stores to close this year, and even then the company will keep backpedaling. There will be more units shuttered in 2013 as PacSun works its way down to between 550 and 600 stores.

As you can imagine, it probably isn't easy working under this kind of environment. Employees wonder if their store will be next. Shoppers see the concept close down and assume the worst for the other locations in neighboring malls.

There seemed to be a glimmer of hope during the holiday quarter. The company proudly proclaimed that comps that began the fourth quarter with a decline of 3% were flat by the end of the period. Could it be? Was momentum finally coming around after years of going in the wrong direction?

Well, PacSun's guidance for the current quarter calls for same-store sales to clock in between a decline of 4% and a gain of 1%. Things aren't getting any better on the bottom line, as the company's looking at a wider loss than analysts were forecasting.

PacSun won't provide guidance beyond the current quarter, but the trend is not its friend. PacSun will continue to diminish in scope and rentable mall space. By the time it hits 550 stores, don't be surprised if the target is whittled away to an even lower number.

That's assuming that PacSun even gets that far. You can't keep posting consistent quarterly losses for three years and expect to stick around forever.

There's always the chance that PacSun catches a break and its extreme sports theme catches fire.

It can happen. Hot Topic (HOTT) seemed left for dead as emo and goth fashions faded away, but then the Twilight movies made dark clothing and counterculture clothing and accessories popular again. So, yes, PacSun has a shot, but the smart money has to be on it running out of money before a chance at redemption.

The sun sets. Killer waves crash.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Aeropostale.

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