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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended: August 4, 2007
 OR
 o
    
    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.)
 
 
 
    
    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 þ No o
    
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ      Accelerated Filer o      Non-Accelerated Filer o
    
    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ




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##### 



PACIFIC SUNWEAR OF CALIFORNIA, INC.
FORM 10-Q
For the Quarter Ended August 4, 2007
 Index
 Page #PART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets August 4, 2007 and February 3, 2007
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive (Loss)/Income Second quarter (13 weeks) and first half (26 weeks) ended August 4, 2007 and July 29, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows First half (26 weeks) ended August 4, 2007 and July 29, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-13Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14-24Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25-29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults upon Senior Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    31SIGNATURE PAGE
    
    
    32EXHIBIT 31.1EXHIBIT 32.1
  2




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, all amounts in thousands except share amounts)
 August 4, 2007
    
    
    February 3, 2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    26,264
    
    
    $
    52,267Marketable securities
    
    
    16,000
    
    
    
    31,500Merchandise inventories
    
    
    256,084
    
    
    
    205,213Other current assets
    
    
    56,954
    
    
    
    46,255Total current assets
    
    
    355,302
    
    
    
    335,235PROPERTY AND EQUIPMENT, NET:Gross property and equipment
    
    
    744,233
    
    
    
    708,774Less accumulated depreciation and amortization
    
    
    (309,633
    )
    
    
    (287,888
    )Total property and equipment, net
    
    
    434,600
    
    
    
    420,886Other Assets
    
    
    43,418
    
    
    
    17,122TOTAL ASSETS
    
    $
    833,320
    
    
    $
    773,243LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    114,120
    
    
    $
    66,581Other current liabilities
    
    
    80,470
    
    
    
    73,952Total current liabilities
    
    
    194,590
    
    
    
    140,533LONG-TERM LIABILITIES:Deferred lease incentives
    
    
    81,283
    
    
    
    89,371Deferred rent
    
    
    29,158
    
    
    
    30,619Other long-term liabilities
    
    
    35,831
    
    
    
    9,367Total long-term liabilities
    
    
    146,272
    
    
    
    129,357Commitments and contingencies (Note 13)SHAREHOLDERS EQUITY:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 170,859,375 shares authorized; 69,756,883
and 69,560,077 shares issued and outstanding, respectively
    
    
    698
    
    
    
    696Additional paid-in capital
    
    
    11,069
    
    
    
    5,783Retained earnings
    
    
    480,691
    
    
    
    496,874Total shareholders equity
    
    
    492,458
    
    
    
    503,353TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    833,320
    
    
    $
    773,243
  3




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS)/INCOME
(unaudited, all amounts in thousands except share and per share amounts)
 For the Second Quarter Ended
    
    
    For the First Half EndedAugust 4, 2007
    
    
    July 29, 2006
    
    
    August 4, 2007
    
    
    July 29, 2006Net sales
    
    $
    344,218
    
    
    $
    313,682
    
    
    $
    664,803
    
    
    $
    613,570Cost of goods sold, including
buying, distribution and occupancy
costs
    
    
    253,198
    
    
    
    216,257
    
    
    
    490,914
    
    
    
    418,862Gross margin
    
    
    91,020
    
    
    
    97,425
    
    
    
    173,889
    
    
    
    194,708Selling, general and administrative
expenses
    
    
    109,606
    
    
    
    82,855
    
    
    
    201,642
    
    
    
    162,794Operating (loss)/income
    
    
    (18,586
    )
    
    
    14,570
    
    
    
    (27,753
    )
    
    
    31,914Interest income, net
    
    
    541
    
    
    
    1,090
    
    
    
    1,510
    
    
    
    2,885(Loss)/Income before income tax
(benefit)/expense
    
    
    (18,045
    )
    
    
    15,660
    
    
    
    (26,243
    )
    
    
    34,799Income tax (benefit)/expense
    
    
    (7,543
    )
    
    
    5,950
    
    
    
    (10,683
    )
    
    
    13,223Net (loss)/income
    
    $
    (10,502
    )
    
    $
    9,710
    
    
    $
    (15,560
    )
    
    $
    21,576Comprehensive (loss)/income
    
    $
    (10,502
    )
    
    $
    9,710
    
    
    $
    (15,560
    )
    
    $
    21,576Net (loss)/income per share, basic
    
    $
    (0.15
    )
    
    $
    0.14
    
    
    $
    (0.22
    )
    
    $
    0.30Net (loss)/income per share, diluted
    
    $
    (0.15
    )
    
    $
    0.14
    
    
    $
    (0.22
    )
    
    $
    0.30Wtd. avg. shares outstanding, basic
    
    
    69,692,827
    
    
    
    71,335,467
    
    
    
    69,635,543
    
    
    
    72,239,872Wtd. avg. shares outstanding, diluted
    
    
    69,692,827
    
    
    
    71,866,482
    
    
    
    69,635,543
    
    
    
    72,783,954
  4




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 First Half EndedAug. 4, 2007
    
    
    July 29, 2006CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)/income
    
    $
    (15,560
    )
    
    $
    21,576Adjustments to reconcile net (loss)/income to net cash provided by operating activities:Depreciation and amortization
    
    
    38,027
    
    
    
    34,385Stock-based compensation
    
    
    3,023
    
    
    
    3,573Tax benefits related to stock-based compensation
    
    
    369
    
    
    
    1,479Excess tax benefits related to stock-based compensation
    
    
    (344
    )
    
    
    Loss on disposal/impairment of property and equipment
    
    
    12,197
    
    
    
    158Change in operating assets and liabilities:Merchandise inventories
    
    
    (50,871
    )
    
    
    (71,526
    )Other current assets
    
    
    (10,699
    )
    
    
    (2,384
    )Other assets
    
    
    (2,996
    )
    
    
    439Accounts payable
    
    
    47,539
    
    
    
    34,083Other current liabilities
    
    
    5,799
    
    
    
    (21,754
    )Deferred lease incentives
    
    
    (8,088
    )
    
    
    2,851Deferred rent
    
    
    (1,461
    )
    
    
    1,270Other long-term liabilities
    
    
    2,538
    
    
    
    (5,605
    )Net cash provided by/(used in) operating activities
    
    
    19,473
    
    
    
    (1,455
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (63,175
    )
    
    
    (62,675
    )Purchases of available-for-sale marketable securities
    
    
    (122,400
    )
    
    
    (201,900
    )Sales of available-for-sale marketable securities
    
    
    137,900
    
    
    
    262,200Purchases of held-to-maturity marketable securities (Note 12)
    
    
    (23,300
    )
    
    
    Maturities of held-to-maturity marketable securities
    
    
    
    
    
    
    14,611Net cash (used in)/provided by investing activities
    
    
    (70,975
    )
    
    
    12,236CASH FLOWS FROM FINANCING ACTIVITIES:Borrowing under long-term financing obligation (Note 12)
    
    
    23,300
    
    
    
    Proceeds from exercise of stock options
    
    
    1,896
    
    
    
    5,454Excess tax benefits related to stock-based compensation
    
    
    344
    
    
    
    Principal payments under capital lease obligations
    
    
    (41
    )
    
    
    (290
    )Repurchase and retirement of common stock
    
    
    
    
    
    
    (99,347
    )Net cash provided by/(used in) financing activities
    
    
    25,499
    
    
    
    (94,183
    )NET DECREASE IN CASH AND CASH EQUIVALENTS:
    
    
    (26,003
    )
    
    
    (83,402
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    52,267
    
    
    
    95,185CASH AND CASH EQUIVALENTS, end of period
    
    $
    26,264
    
    
    $
    11,783SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    4
    
    
    $
    3Cash paid for income taxes
    
    $
    11,167
    
    
    $
    28,200SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Increase in non-cash property and equipment accruals
    
    $
    760
    
    
    $
    8,815Capital lease transaction for property and equipment
    
    $
    3
    
    
    $
    
  5




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the quarterly period ended August 4, 2007
(unaudited, all amounts in thousands except share and per share amounts unless otherwise indicated)
 1. NATURE OF BUSINESS
 www.pacsun.com www.demostores.com
 2. BASIS OF PRESENTATION
 10-Q
  3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  New Accounting Pronouncements
 6




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##### Table of Contents



Marketable Securities
 4. CLOSURE OF UNDERPERFORMING DEMO STORES
   1st
    
    2nd
    
    1stFiscal 2007
    
    Quarter
    
    Quarter
    
    HalfNet sales
    
    $
    11,269
    
    
    $
    2,072
    
    
    $
    13,341Gross margin, including occupancy
    
    
    (339
    )
    
    
    (14,912
    )
    
    
    (15,251
    )Selling, general &
administrative expenses
    
    
    2,902
    
    
    
    1,413
    
    
    
    4,315Pre-tax operating loss
    
    
    (3,241
    )
    
    
    (16,325
    )
    
    
    (19,566
    )
 7




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1st
    
    2nd
    
    3rd
    
    4thFiscal 2006
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterNet sales
    
    $
    12,538
    
    
    $
    9,324
    
    
    $
    12,452
    
    
    $
    16,545Gross margin, including occupancy
    
    
    2,507
    
    
    
    (365
    )
    
    
    2,377
    
    
    
    2,582Selling, general &
administrative expenses
    
    
    3,618
    
    
    
    3,662
    
    
    
    3,878
    
    
    
    26,683Pre-tax operating loss
    
    
    (1,111
    )
    
    
    (4,027
    )
    
    
    (1,501
    )
    
    
    (24,101
    )
  5. ONE THOUSAND STEPS ASSET IMPAIRMENT
  6. SEGMENT REPORTING
  8




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OneFirst Half Ended
    
    
    
    
    
    
    
    
    
    ThousandAugust 4, 2007:
    
    PacSun
    
    demo
    
    Steps
    
    Corporate
    
    TotalNet Sales
    
    $
    579,830
    
    
    $
    82,347
    
    
    $
    2,626
    
    
    
    n/a
    
    
    $
    664,803% of Total Sales
    
    
    87
    %
    
    
    12
    %
    
    
    0
    %
    
    
    n/a
    
    
    
    100
    %Comparable Store Sales %
    
    
    1.9
    %
    
    
    (11.5
    )%
    
    
    (4.2
    )%
    
    
    n/a
    
    
    
    0.4
    %Income/(Loss) before
Income Taxes
    
    $
    84,194
    
    
    $
    (21,291
    )
    
    $
    (13,157
    )
    
    $
    (75,989
    )
    
    $
    (26,243
    )Total Assets
    
    $
    482,943
    
    
    $
    90,058
    
    
    $
    2,943
    
    
    $
    257,376
    
    
    $
    833,320Number of Stores
    
    
    957
    
    
    
    152
    
    
    
    9
    
    
    
    n/a
    
    
    
    1,118Square Footage
    
    
    3,653
    
    
    
    435
    
    
    
    24
    
    
    
    n/a
    
    
    
    4,112
 OneFirst Half Ended
    
    
    
    
    
    
    
    
    
    ThousandJuly 29, 2006:
    
    PacSun
    
    
    demo
    
    
    Steps
    
    
    Corporate
    
    
    TotalNet Sales
    
    $
    528,192
    
    
    $
    84,180
    
    
    $
    1,198
    
    
    
    n/a
    
    
    $
    613,570% of Total Sales
    
    
    86
    %
    
    
    14
    %
    
    
    0
    %
    
    
    n/a
    
    
    
    100
    %Comparable Store Sales %
    
    
    (3.7
    )%
    
    
    (3.8
    )%
    
    
    n/a
    
    
    
    n/a
    
    
    
    (3.7
    )%Income/(Loss) before
Income Taxes
    
    $
    97,621
    
    
    $
    (2,511
    )
    
    $
    (1,101
    )
    
    $
    (59,210
    )
    
    $
    34,799Total Assets
    
    $
    484,592
    
    
    $
    108,052
    
    
    $
    10,066
    
    
    $
    156,957
    
    
    $
    759,667Number of Stores
    
    
    928
    
    
    
    201
    
    
    
    6
    
    
    
    n/a
    
    
    
    1,135Square Footage
    
    
    3,501
    
    
    
    561
    
    
    
    16
    
    
    
    n/a
    
    
    
    4,078
  7. STOCK-BASED COMPENSATION
  9




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##### Table of Contents



First Half2007

    
    2006Stock Awards
    
    ESPP
    
    Stock Awards
    
    ESPPExpected Life
    
    
    4 years
    
    
    0.5 years
    
    5 years
    
    0.5 yearsStock Volatility
    
    
    34.7% - 35.6
    %
    
31.9%
    
    
    44.1% - 48.7
    %
    
    
    35.4
    %Risk-free Interest Rates
    
    
    4.5% - 4.9%
    
    

    5.0%

    
    
    4.6% - 5.1%
    
    
    
    4.5
    %Expected Dividends
    
    None
    
    None
    
    
    None
    
    
    None
   Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicExercise
    
    
    Contractual
    
    
    ValueStock Options/SARs
    
    Shares
    
    
    Price
    
    
    Term (Yrs.)
    
    
    ($000s)Outstanding at February 3, 2007
    
    
    2,931,920
    
    
    $
    19.43Granted
    
    
    390,000
    
    
    
    20.87Exercised
    
    
    (48,469
    )
    
    
    11.96Forfeited or expired
    
    
    (89,215
    )
    
    
    24.08Outstanding at May 5, 2007
    
    
    3,184,236
    
    
    $
    19.59
    
    
    
    5.37
    
    
    $
    9,132Granted
    
    
    334,000
    
    
    
    19.16Exercised
    
    
    (86,047
    )
    
    
    9.83Forfeited or expired
    
    
    (161,790
    )
    
    
    23.62Outstanding at August 4, 2007
    
    
    3,270,399
    
    
    $
    19.61
    
    
    
    5.24
    
    
    $
    4,219Vested and expected to vest at
August 4, 2007
    
    
    2,720,701
    
    
    $
    19.28
    
    
    
    5.06
    
    
    $
    4,218Exercisable at August 4, 2007
    
    
    1,838,917
    
    
    $
    18.07
    
    
    
    4.60
    
    
    $
    4,217
  10




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Weighted-Average Grant-Non-vested Shares
    
    Shares
    
    
    Date Fair ValueOutstanding at February 3, 2007
    
    
    327,387
    
    
    $
    19.85Granted
    
    
    352,464
    
    
    
    21.00Vested
    
    
    
    
    
    
    Forfeited
    
    
    (21,240
    )
    
    
    19.95Outstanding at May 5, 2007
    
    
    658,611
    
    
    $
    20.47Granted
    
    
    34,450
    
    
    
    19.74Vested
    
    
    (35,615
    )
    
    
    20.05Forfeited
    
    
    (39,429
    )
    
    
    20.29Outstanding at August 4, 2007
    
    
    618,017
    
    
    $
    20.46
   8. NET (LOSS)/INCOME PER SHARE, BASIC AND DILUTED
  August 4, 2007
    
    July 29, 2006Net
    
    
    
    
    
    
    
    
    
    NetSecond Quarter Ended:
    
    (Loss)
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSBasic EPS:
    
    
    (10,502
    )
    
    
    69,692,827
    
    
    $
    (0.15
    )
    
    $
    9,710
    
    
    
    71,335,467
    
    
    $
    0.14Diluted EPS:Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    531,015
    
    
    
    (0.00
    )$
    (10,502
    )
    
    
    69,692,827
    
    
    $
    (0.15
    )
    
    $
    9,710
    
    
    
    71,866,482
    
    
    $
    0.14
 August 4, 2007
    
    July 29, 2006Net
    
    
    
    
    
    
    
    
    
    NetFirst Half Ended:
    
    (Loss)
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSBasic EPS:
    
    $
    (15,560
    )
    
    
    69,635,543
    
    
    $
    (0.22
    )
    
    $
    21,576
    
    
    
    72,239,872
    
    
    $
    0.30Diluted EPS:Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    544,082
    
    
    
    (0.00
    )$
    (15,560
    )
    
    
    69,635,543
    
    
    $
    (0.22
    )
    
    $
    21,576
    
    
    
    72,783,954
    
    
    $
    0.30
  11




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##### Table of Contents



9. OTHER CURRENT ASSETS
  August 4,
    
    
    February 3,2007
    
    
    2007Prepaid expenses
    
    $
    28,269
    
    
    $
    27,748Income taxes receivable
    
    
    14,110
    
    
    
    Deferred income taxes
    
    
    7,291
    
    
    
    7,291Non-trade accounts receivable
    
    
    7,284
    
    
    
    11,216Total other current assets
    
    $
    56,954
    
    
    $
    46,255
 10. OTHER CURRENT LIABILITIES
  August 4,
    
    
    February 3,2007
    
    
    2007Accrued compensation and benefits
    
    $
    15,752
    
    
    
    15,529Accrued capital expenditures
    
    
    14,562
    
    
    
    13,802Accrued gift cards
    
    
    9,026
    
    
    
    14,007Accrued lease terminations (Note 4)
    
    
    7,420
    
    
    
    Sales taxes payable
    
    
    5,408
    
    
    
    4,771Income taxes payable
    
    
    
    
    
    
    8,706Other
    
    
    28,302
    
    
    
    17,137Total other current liabilities
    
    $
    80,470
    
    
    $
    73,952
 11. INCOME TAXES
    12. INDUSTRIAL REVENUE BOND TRANSACTION  OLATHE, KANSAS
  12




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##### Table of Contents



13. COMMITMENTS AND CONTINGENCIES
 Litigation
 Letters of Credit
 13




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##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF CONSOLIDATED
OPERATIONS
  Cautionary Note Regarding Forward-Looking Statements
  
    
    forecasts of future store closures, including planned fiscal 2007 closures
    
    estimates of remaining lease termination charges associated with the recent closure of
74 demo stores
    
    the sufficiency of working capital and operating cash flows to meet our operating and
capital expenditure requirements without borrowing significantly under our credit facility
    
    the outcome of litigation matters
    
    expectations regarding future increases in CAM expenses
  Executive Overview
  Comparable (or same store) sales
 Net merchandise margins
 Operating margin
 14




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##### Table of Contents



Store sales trends
 Cash flow and liquidity (working capital)
 Critical Accounting Policies
  Recognition of Revenue
 Valuation of Inventories
 Determination of Stock-Based Compensation Expense
  15




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##### Table of Contents



Store Operating Lease Accounting
 Evaluation of Long-Lived Assets
  Evaluation of Insurance Reserves
 Evaluation of Income Taxes
 16




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##### Table of Contents



Evaluation of Litigation Matters
 Results of Operations
  Second Quarter Ended
    
    First Half EndedAug. 4,
    
    July 29,
    
    Aug. 4,
    
    July 29,2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold,
including buying,
distribution and occupancy
costs
    
    
    73.6
    
    
    
    68.9
    
    
    
    73.8
    
    
    
    68.3Gross margin
    
    
    26.4
    
    
    
    31.1
    
    
    
    26.2
    
    
    
    31.7Selling, general and
administrative expenses
    
    
    31.8
    
    
    
    26.4
    
    
    
    30.3
    
    
    
    26.5Operating (loss)/income
    
    
    (5.4
    )
    
    
    4.7
    
    
    
    (4.1
    )
    
    
    5.2Interest income, net
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.5(Loss)/Income before income
tax (benefit)/expense
    
    
    (5.2
    )
    
    
    5.0
    
    
    
    (3.9
    )
    
    
    5.7Income tax (benefit)/expense
    
    
    (2.1
    )
    
    
    1.9
    
    
    
    (1.6
    )
    
    
    2.2Net (loss)/income
    
    
    (3.1
    )%
    
    
    3.1
    %
    
    
    (2.3
    )%
    
    
    3.5
    %
  Aug. 4, 2007
    
    July 29, 2006PacSun stores
    
    
    840
    
    
    
    826Outlet stores
    
    
    117
    
    
    
    102demo stores
    
    
    152
    
    
    
    201One Thousand Steps stores
    
    
    9
    
    
    
    6Total stores
    
    
    1,118
    
    
    
    1,135Square footage (in 000s)
    
    
    4,112
    
    
    
    4,078
 The second quarter (thirteen weeks) ended August 4, 2007 as compared to the second quarter
(thirteen weeks) ended July 29, 2006
 17




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##### Table of Contents



Net Sales
  $millions
    
    Attributable to$
    19
    
    
    Net sales from stores opened in fiscal 2006 not yet included in the comparable store base16
    
    
    Other non-comparable sales (net sales from expanded or relocated stores not yet included
in the comparable store base and internet net sales)5
    
    
    1.8% increase in comparable store net sales in the second quarter of fiscal 2007
compared to the second quarter of fiscal 20061
    
    
    6 new stores opened in fiscal 2007 not yet included in the comparable store base(11
    )
    
    87 closed stores in fiscal 2007 and 6 closed stores in fiscal 2006$
    30
    
    
    Total
    Gross Margin
  %
    
    Attributable to(3.8
    )
    
    Lease termination and other occupancy costs associated with the
Companys closure of 74 underperforming demo stores ($13 million).(0.9
    )
    
    Decrease in merchandise margins as a percentage of net sales,
primarily due to an increased markdown rate.(0.2
    )
    
    Increase in buying costs as a percentage of net sales, primarily due
to planned increases in our merchandise design and planning
departments.(0.2
    )
    
    Increase in distribution costs as a percentage of net sales, primarily
due to the opening of our new distribution facility in Olathe, Kansas.(0.1
    )
    
    Increase in all other costs of goods sold as a percentage of net sales.0.5
    
    
    Decrease in occupancy expenses as a percentage of net sales, excluding
the demo closure lease termination expenses noted above.(4.7
    )
    
    Total
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##### Table of Contents



Selling, General and Administrative Expenses
  %
    
    Attributable to3.5
    
    
    Asset impairment and write-off charges of $12 million during the
second quarter of fiscal 2007, primarily due to $10 million in store
asset impairment charges attributable to the Companys One Thousand
Steps store concept (see Note 5 to the condensed consolidated
financial statements).1.6
    
    
    Increase in general and administrative expenses as a percentage of net
sales to 7.3% ($25 million) for the second quarter of fiscal 2007 from
5.7% ($18 million) for the second quarter of fiscal 2006. In absolute
dollars, these expenses were up primarily due to planned headcount
increases in the Companys home office and within its field management
team, strategic consulting expenses and previously disclosed
compensation arrangements for the Companys CEO and former COO.0.3
    
    
    Store payroll expenses as a percentage of net sales were 13.3% ($46
million) in the second quarter of fiscal 2007 as compared to 13.0%
($41 million) in the second quarter of fiscal 2006. In absolute
dollars, these expenses were up primarily due to minimum wage
increases in many states across the country and an increased emphasis
on the quality of our in-store merchandise presentation. As a
percentage of net sales, these expenses were up due to deleveraging
them against the low single digit same-store sales increase in the
second quarter of fiscal 2007.5.4
    
    
    Total
 Net Interest Income
  Income Tax Benefit/Expense
  The first half (26 weeks) ended August 4, 2007 as compared to the first half (26 weeks) ended
July 29, 2006
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##### Table of Contents



Net Sales
  $millions
    
    Attributable to$
    39
    
    
    Net sales from stores opened in fiscal 2006 not yet included in the comparable store base28
    
    
    Other non-comparable sales (net sales from expanded or relocated stores not yet included
in the comparable store base and internet net sales)2
    
    
    0.4% increase in comparable store net sales in the first half of fiscal 2007 compared to
the first half of fiscal 20062
    
    
    6 new stores opened in fiscal 2007 not yet included in the comparable store base(20
    )
    
    87 closed stores in fiscal 2007 and 6 closed stores in fiscal 2006$
    51
    
    
    Total
    Gross Margin
  %
    
    Attributable to(2.8
    )
    
    Decrease in merchandise margins as a percentage of net sales,
primarily due to an increased markdown rate (2.9% higher in the
current year) partially offset by higher initial markups (0.1% higher
in the current year).(2.4
    )
    
    Lease termination and other occupancy costs associated with the
Companys closure of 74 underperforming demo stores ($16 million).(0.3
    )
    
    Increase in buying costs as a percentage of net sales, primarily due
to planned increases in our merchandise design and planning
departments.(0.3
    )
    
    Increase in distribution costs as a percentage of net sales, primarily
due to the opening of our new distribution facility in Olathe, Kansas.0.1
    
    
    Decrease in all other costs of goods sold as a percentage of net sales.0.2
    
    
    Decrease in occupancy expenses as a percentage of net sales, excluding
the demo closure lease termination expenses.(5.5
    )
    
    Total
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##### Table of Contents



Selling, General and Administrative Expenses
  %
    
    Attributable to1.9
    
    
    Asset impairment and write-off charges of $12 million during the
second quarter of fiscal 2007, primarily due to $10 million in store
asset impairment charges attributable to the Companys One Thousand
Steps store concept (see Note 5 to the condensed consolidated
financial statements).0.9
    
    
    Increase in general and administrative expenses as a percentage of net
sales to 7.1% ($47 million) for the first half of fiscal 2007 from
6.2% ($38 million) for the first half of fiscal 2006. In absolute
dollars, these expenses were up primarily due to planned headcount
increases in the Companys home office and within its field management
team, strategic consulting expenses and previously disclosed
compensation arrangements for the Companys CEO and former COO.0.6
    
    
    Increase in store payroll expenses as a percentage of net sales to
13.5% ($90 million) in the first half of fiscal 2007 as compared to
12.9% ($79 million) in the first half of fiscal 2006. In absolute
dollars, these expenses were up primarily due to minimum wage
increases in many states across the country and an increased emphasis
on the quality of our in-store merchandise presentation. As a
percentage of net sales, these expenses were up due to deleveraging
them against the near flat same-store sales result in the first half
of fiscal 2007.0.4
    
    
    Increase in other direct store expenses as a percentage of net sales
to 7.9% ($53 million) in the first half of fiscal 2007 from 7.5% ($46
million) in the first half of fiscal 2006. In absolute dollars, these
expenses were up primarily due to $4 million in increased depreciation
expenses associated with new store openings and renovations during
fiscal 2006 and the first half of fiscal 2007 and $2 million in agency
fee expenses associated with the demo store closures.3.8
    
    
    Total
 Net Interest Income
  Income Tax Benefit/Expense
  Liquidity and Capital Resources
  21




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##### Table of Contents



Operating Cash Flows
  $millions
    
    Attributable to$
    34
    
    
    Increase in cash flows from accounts payable and inventory, due
to timing of payments and a 11% decrease in inventory per square
foot versus the second quarter last year.28
    
    
    Increase in cash flows related to current liabilities, primarily
due to increased payroll, freight and medical claim accruals and
the estimated lease termination liabilities associated with the
74 demo store closures which have not yet been negotiated and
paid.12
    
    
    Non-cash asset impairment charges, primarily due to the
impairment of the One Thousand Steps store concept (see Note 5
to the condensed consolidated financial statements).8
    
    
    Increase in cash flows related to long-term liabilities,
primarily due to reduced cash disbursements associated with
deferred compensation to former executives in the current year
as compared to the prior year.(37
    )
    
    Decrease in net income.(11
    )
    
    Decrease in cash flows related to deferred lease incentives due
to fewer new store openings in the first half of fiscal 2007 (6)
versus the first half of fiscal 2006 (33).(8
    )
    
    Decrease in cash flows from other current assets, primarily due
to increased accrued income tax receivables in the current year
as a result of the net loss sustained by the Company in the
current year.(5
    )
    
    Net decrease in cash flows from all other operating activities$
    21
    
    
    Total
 Working Capital
  $millions
    
    Description$
    195
    
    
    Working capital at February 3, 2007(42
    )
    
    Decrease in cash and marketable securities, primarily due to the net loss
sustained by the Company during the first half of fiscal 2007, among other
items (see cash flow statement).(15
    )
    
    Increase in other current liabilities, primarily due to increased payroll
accruals and estimated lease termination liabilities associated with the 74
demo store closures (see Note 4 to the condensed consolidated financial
statements).(4
    )
    
    Decrease in non-trade accounts receivable due to receipt of cash.3
    
    
    Increase in inventory, net of accounts payable.23
    
    
    Increase in net income tax receivables due to the net loss sustained by the
Company during the first half of fiscal 2007.1
    
    
    Net increase in working capital from all other current assets and liabilities$
    161
    
    
    Working capital at August 4, 2007
 Investing Cash Flows
  22




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##### Table of Contents



Financing Cash Flows
  Credit Facility
  Contractual Obligations
  Payments Due by PeriodContractual Obligations
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    More than(in $millions)
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating lease obligations
    
    $
    711
    
    
    $
    109
    
    
    $
    210
    
    
    $
    175
    
    
    $
    217Letters of credit
    
    
    25
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    Olathe lease obligation (see Note 12)
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Total
    
    $
    759
    
    
    $
    134
    
    
    $
    210
    
    
    $
    175
    
    
    $
    240
  Operating Leases
 23




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##### Table of Contents



Indemnifications
   New Accounting Pronouncements
  Inflation
  Seasonality and Quarterly Results
  24




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##### Table of Contents



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4  CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
 Item 1  Legal Proceedings
  
 Item 1A  Risk Factors
  Our comparable store net sales results will fluctuate significantly, which can cause volatility in
our operating performance and stock price.
 25




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##### Table of Contents



Our failure to identify and respond appropriately to changing consumer preferences and fashion
trends in a timely manner could have a material adverse impact on our profitability.
 We are currently evaluating store design alternatives for all of our retail concepts, which may not
result in improved operational performance.
 Our continued growth depends, in part, on our ability to develop new store concepts and/or open new
stores that achieve acceptable levels of profitability. Any failure to do so may negatively impact
our stock price and operational performance.
 We launched operations of a new retail concept, One Thousand Steps, in fiscal 2006, which could
divert attention from existing operations.
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##### Table of Contents



We face significant competition from both vertically-integrated and brand-based competitors that
are growing rapidly, which could have a material adverse effect on our business.
 Our customers may not prefer our proprietary brand merchandise, which may negatively impact our
profitability.
 Our current or prospective vendors may be unable or unwilling to supply us with adequate quantities
of their merchandise in a timely manner or at acceptable prices, which could have a material
adverse impact on our business.
 Our foreign sources of production may not always be reliable, which may result in a disruption in
the flow of new merchandise to our stores.
 27




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##### Table of Contents



The loss of key personnel could have a material adverse effect on our business at any time.
 Our information systems may not be adequate to support future growth, which could disrupt business
operations.
 Adverse outcomes of litigation matters could significantly affect our operational results.
 Any disruption of our distribution activities could have a material adverse impact on our business.
 Our stock price can fluctuate significantly due to a variety of factors, which can negatively
impact our total market value.
 Selling merchandise over the internet carries particular risks that can have a negative impact on
our business.
 28




---



##### Table of Contents



Any failure by us to maintain credit facility financial covenants could have a material adverse
impact on our business.
 The effects of terrorism or war could significantly impact consumer spending and our operational
performance.
   29




---



##### Table of Contents



Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
     VOTES
    
    VOTESDIRECTOR NAME
    
    CAST FOR
    
    WITHHELDPearson C. Cummin III
    
    
    54,836,870
    
    
    
    2,081,984Michael Goldstein
    
    
    54,609,071
    
    
    
    2,309,783Julius Jensen III
    
    
    54,831,910
    
    
    
    2,086,944Michael Weiss
    
    
    55,213,608
    
    
    
    1,705,246
   
 Item 5  Other Information
  30




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##### Table of Contents



Item 6  Exhibits
 Exhibit 10.1
    
    Employment Agreement, dated as of May 22, 2007, between the
Company and Sally Frame Kasaks (1)Exhibit 10.2
    
    Form of Stock Appreciation Rights Agreement between the
Company and Sally Frame Kasaks (1)Exhibit 10.3
    
    Form of Restricted Stock Unit Agreement between the Company
and Sally Frame Kasaks (1)Exhibit 10.4
    
    Employee Separation and General Release Agreement, dated June
19, 2007, between the Company and Wendy E. Burden (2)Exhibit 10.5
    
    Trust Indenture, dated as of July 17, 2007, between the City
of Olathe, Kansas and U.S. Bank National Association (3)Exhibit 10.6
    
    Lease Agreement, dated as of July 17, 2007, between the City
of Olathe, Kansas and Pacific Sunwear Stores Corp. (3)Exhibit 10.7
    
    Amendment No. 3 to Credit Agreement, dated as of July 27,
2007, with JPMorgan Chase Bank, N.A., as Administrative
Agent, and a syndicate of other lenders (4)Exhibit 31.1
    
    Written statements of Sally Frame Kasaks and Gerald M. Chaney
pursuant to section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Written statement of Sally Frame Kasaks and Gerald M. Chaney
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
 Note References:
 (1)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on May 23, 2007(2)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on June 22, 2007(3)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on July 23, 2007(4)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on August 1, 2007 31




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##### Table of Contents



SIGNATURES
  PACIFIC SUNWEAR OF CALIFORNIA, INC.
(Registrant)Date: September 10, 2007
    
    /s/ SALLY FRAME KASAKSSally Frame Kasaks
Chairman and Chief Executive Officer
(Principal Executive Officer)Date: September 10, 2007
    
    /s/ GERALD M. CHANEYGerald M. Chaney
Senior Vice President,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)
 32




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##### Table of Contents



Exhibit Index
 Exhibit 10.1
    
    Employment Agreement, dated as of May 22, 2007, between the
Company and Sally Frame Kasaks (1)Exhibit 10.2
    
    Form of Stock Appreciation Rights Agreement between the
Company and Sally Frame Kasaks (1)Exhibit 10.3
    
    Form of Restricted Stock Unit Agreement between the Company
and Sally Frame Kasaks (1)Exhibit 10.4
    
    Employee Separation and General Release Agreement, dated June
19, 2007, between the Company and Wendy E. Burden (2)Exhibit 10.5
    
    Trust Indenture, dated as of July 17, 2007, between the City
of Olathe, Kansas and U.S. Bank National Association (3)Exhibit 10.6
    
    Lease Agreement, dated as of July 17, 2007, between the City
of Olathe, Kansas and Pacific Sunwear Stores Corp. (3)Exhibit 10.7
    
    Amendment No. 3 to Credit Agreement, dated as of July 27,
2007, with JPMorgan Chase Bank, N.A., as Administrative
Agent, and a syndicate of other lenders (4)Exhibit 31.1
    
    Written statements of Sally Frame Kasaks and Gerald M. Chaney
pursuant to section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Written statement of Sally Frame Kasaks and Gerald M. Chaney
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
 Note References:
 (1)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on May 23, 2007(2)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on June 22, 2007(3)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on July 23, 2007(4)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on August 1, 2007