Friday, August 11, 2006

Calls of Note Part 4

- Prudential has some harsh things to say about Pacific Sunwear of California (NASDAQ:PSUN) following disappointing results and guidance issued last night. PSUN reported Q2/06 EPS of $0.14, in line with firm's estimate, at the low end of guidance of $0.14 to $0.15, and below consensus of $0.15. Management guided to Q3/06 EPS of $0.22 to $0.30. Firm has lowered their 2006 estimate to $1.00 from $1.47 and their 2007 estimate to $1.15 from $1.65. Firm is reducing their price target to $15 from $16.

They note that PSUN's negative flow through margin on their miss to sales truly does astound them. Firm is are hitting their numbers hard - $1.00 estimate for 2006 and $1.15 for 2007 assume an 8% operating margin versus the company's five year average of about 12%. The average low multiple of the last 3 years is 12.6x, implying a $15 price target, but they can't say they have a lot of confidence in it and they have no desire to step up to the shares here. The inventories are still high, and it didn't sound like management is at all in an expense cutting mode; on the contrary, the firm heard a lot about investing in One Thousand Steps and the new store prototype. More importantly, though, it doesn't sounds like management has the pulse on the positioning of either the PacSun or the d.e.m.o business. For that reason, they think it is likely the earnings will remain under pressure through at least the second half of 2006.

Maintains Neutral Weight.

Noteablecalls: Not actionable but very entertaining! Hope PSUN management gets to read the note.

No comments: