By Kerry Grace Benn
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Quiksilver Inc. (ZQK) and Pacific Sunwear of California Inc. (PSUN) shares took divergent paths Friday, highlighting the differences between the two casual-apparel retailers as Quiksilver moves toward a turnaround and Pacific Sunwear struggles to find its identity.
Both companies have been hurt by the weak economy in California and by sluggish consumer spending during the recession. And both retailers reported results late Thursday, with outdoor-sports apparel and accessories maker Quiksilver’s fiscal first-quarter loss narrowing sharply and beating expectations, while casual-apparel retailer PacSun’s fiscal fourth-quarter loss widened on weak sales.
Quiksilver’s shares were recently up 23% at $3.82, while PacSun’s were off 17% to $4.76. Both stocks have about quadrupled in the last 12 months, though so far this year Quiksilver has gained 90% compared with a 20% gain for PacSun.
PacSun Chief Executive Gary Schoenfeld said PacSun still has a tough road ahead in its juniors business, but he thinks the young men’s category may lead the company’s turnaround.
Though the companies sell some similar products, Quiksilver has exposure to the wholesale channel - selling its goods in department stores and even PacSun stores - and has stronger ties to the communities it serves, Wall Street Strategies analyst Brian Sozzi said. The company has strong ties to skateboarders with its DC Shoes brand and sponsors skateboarding and surfing events, as well as sponsoring athletes to wear its products, he said.
PacSun, on the other hand, has lost that connection with who it’s selling to, he said. The company has said it’s unsure of the age demographic it is targeting, he said, and it got so big it thought it didn’t need a strong connection with the consumer.
FBR Capital Markets analyst Adrienne Tennant cut her rating on PacSun to market perform from outperform on a "lack of near-term catalysts (and) lack of visibility on the turnaround."
Though PacSun management said it sees a return to positive same-store sales in the fourth quarter, "we would like to see evidence of product improvement in stores before we are more convinced the turn is at hand," she wrote in a note to clients.
Sozzi agreed, saying he’s skeptical of a late-2010 turnaround, and expects it to come more in spring or mid-2011.
Sozzi also said there are still concerns about cash for PacSun, while Quiksilver has finally seemed to turn the corner. The company said in its most recent conference call that it planned to reduce debt by $100 million a year over the next three years.
"That clarity was badly needed from them," he said.
FBR Capital Markets analyst Eric Tracy wrote in a note to clients that he still has questions about Quiksilver as top-line visibility is still muted. But the fact the company will likely start working on reducing its "sizable debt burden" is commendable, he wrote in a note to clients.
Sozzi said many of PacSun’s issues stemmed from prior management, which pulled footwear and accessories out of stores, disappointing consumers.
B. Riley analyst Jeffrey Van Sinderen wrote in a note to clients that PacSun as a lot of work to do, "but conceptually, we continue to like the direction the new CEO is taking the company" - going back to its roots in the guys business and evolving its juniors business to make it more relevant.
Quiksilver still faces pressure on its Roxy brand, he said, but its core Quiksilver brand and DC are stabilizing. Upside may be limited in the near term amid currency headwinds and conservative inventory planning, he said.
Shares of Volcom Inc. (VLCM), which also makes apparel for surfboarding, skateboarding and snowboarding, were down 5.7% at $18.28. Needham & Co. analyst Christine Chen said Volcom largest customer is PacSun, so analysts were likely making the derivative call that questions about PacSun business wouldn’t bode well for Volcom. Volcom has said PacSun slowing business is factored into its guidance, however, she said.
Another similar company, Zumiez Inc. (ZUMZ), saw its shares slide 7% to $18.83 as it issued a first-quarter view that badly missed analysts expectations. The retailer fiscal fourth-quarter profit increased 40% as it posted higher sales and improved margins.
-By Kerry Grace Benn, Dow Jones Newswires; 212-416-2353; .(JavaScript must be enabled to view this email address)
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