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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: May 1, 2010
 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). Yes o     No o
    
    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
 Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company o(Do not check if smaller reporting company)
 
    
    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 May 1, 2010
 Index
 Page #PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited)
    
    
    3Condensed Consolidated Balance SheetsMay 1, 2010 and January 30, 2010
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive OperationsFirst
quarters ended May 1, 2010 and May 2, 2009
    
    
    4Condensed Consolidated Statements of Cash FlowsFirst quarters ended May 1, 2010 and
May 2, 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Reserved
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20EX-31.1EX-32.1
  2




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PART I  FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS.
 PACIFIC SUNWEAR OF CALIFORNIA, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, all amounts in thousands except share and per share amounts)
 May 1, 2010
    
    
    January 30, 2010ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    56,632
    
    
    $
    93,091Merchandise inventories
    
    
    106,622
    
    
    
    89,665Prepaid expenses
    
    
    12,148
    
    
    
    10,801Other current assets
    
    
    3,482
    
    
    
    5,365Total current assets
    
    
    178,884
    
    
    
    198,922PROPERTY AND EQUIPMENT, NET:Gross property and equipment
    
    
    631,849
    
    
    
    641,127Less accumulated depreciation and amortization
    
    
    (398,623
    )
    
    
    (392,127
    )Total property and equipment, net
    
    
    233,226
    
    
    
    249,000Deferred income taxes
    
    
    4,024
    
    
    
    4,024Other assets
    
    
    25,073
    
    
    
    25,272TOTAL ASSETS
    
    $
    441,207
    
    
    $
    477,218LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    42,885
    
    
    $
    38,481Other current liabilities
    
    
    36,763
    
    
    
    43,742Total current liabilities
    
    
    79,648
    
    
    
    82,223LONG-TERM LIABILITIES:Deferred lease incentives
    
    
    36,386
    
    
    
    39,207Deferred rent
    
    
    20,974
    
    
    
    21,396Other long-term liabilities
    
    
    27,516
    
    
    
    27,714Total long-term liabilities
    
    
    84,876
    
    
    
    88,317Commitments and contingencies (Note 9)SHAREHOLDERS EQUITY:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 170,859,375 shares authorized; 65,887,264
and 65,748,069 shares issued and outstanding, respectively
    
    
    659
    
    
    
    657Additional paid-in capital
    
    
    8,325
    
    
    
    7,294Retained earnings
    
    
    267,699
    
    
    
    298,727Total shareholders equity
    
    
    276,683
    
    
    
    306,678TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    441,207
    
    
    $
    477,218
  3




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PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE OPERATIONS
 (unaudited, in thousands except share and per share amounts)
 First Quarter EndedMay 1, 2010
    
    
    May 2, 2009Net sales
    
    $
    190,308
    
    
    $
    223,465Cost of goods sold, including buying, distribution and occupancy costs
    
    
    147,842
    
    
    
    162,191Gross margin
    
    
    42,466
    
    
    
    61,274Selling, general and administrative expenses
    
    
    73,154
    
    
    
    76,769Operating loss
    
    
    (30,688
    )
    
    
    (15,495
    )Other expense, net
    
    
    2
    
    
    
    229Loss before income taxes
    
    
    (30,690
    )
    
    
    (15,724
    )Income tax provision/(benefit)
    
    
    338
    
    
    
    (6,981
    )Net loss
    
    $
    (31,028
    )
    
    $
    (8,743
    )Comprehensive loss
    
    $
    (31,028
    )
    
    $
    (8,743
    )Net loss per share:Basic
    
    $
    (0.47
    )
    
    $
    (0.13
    )Diluted
    
    $
    (0.47
    )
    
    $
    (0.13
    )Weighted average shares outstanding:Basic
    
    
    65,837,928
    
    
    
    65,207,991Diluted
    
    
    65,837,928
    
    
    
    65,207,991
  4




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PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 First Quarter EndedMay 1, 2010
    
    
    May 2, 2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (31,028
    )
    
    $
    (8,743
    )Adjustments to reconcile net loss to net cash from operating activities:Depreciation and amortization
    
    
    14,029
    
    
    
    17,099Asset impairment and loss on asset disposals
    
    
    5,522
    
    
    
    1,992Non-cash stock based compensation
    
    
    1,171
    
    
    
    955Tax benefit deficiencies related to stock-based compensation
    
    
    
    
    
    
    (1,297
    )Change in operating assets and liabilities:Merchandise inventories
    
    
    (16,957
    )
    
    
    (8,313
    )Other current assets
    
    
    536
    
    
    
    9,342Other assets
    
    
    199
    
    
    
    4,750Accounts payable
    
    
    4,404
    
    
    
    8,650Other current liabilities
    
    
    (6,909
    )
    
    
    (8,263
    )Deferred lease incentives
    
    
    (2,821
    )
    
    
    (3,158
    )Deferred rent
    
    
    (422
    )
    
    
    (278
    )Other long-term liabilities
    
    
    (136
    )
    
    
    (128
    )Net cash (used in)/provided by operating activities
    
    
    (32,412
    )
    
    
    12,608CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (3,960
    )
    
    
    (8,813
    )Proceeds from sale of property and equipment
    
    
    
    
    
    
    3,705Net cash used in investing activities
    
    
    (3,960
    )
    
    
    (5,108
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments under capital lease and long-term debt obligations
    
    
    (87
    )
    
    
    (2
    )Net cash used in financing activities
    
    
    (87
    )
    
    
    (2
    )NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (36,459
    )
    
    
    7,498CASH AND CASH EQUIVALENTS, beginning of period
    
    
    93,091
    
    
    
    24,776CASH AND CASH EQUIVALENTS, end of period
    
    $
    56,632
    
    
    $
    32,274SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    12
    
    
    $
    Cash refunded for income taxes
    
    $
    (182
    )
    
    $
    (198
    )SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Decrease in non-cash property and equipment accruals
    
    $
    (183
    )
    
    $
    (147
    )
  5




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. NATURE OF BUSINESS
  2. BASIS OF PRESENTATION
   3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Income Taxes
  6




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Recent Accounting Pronouncements
  4. FAIR VALUE OF LONG-LIVED ASSETS
  
    
    Level 1: Quoted market prices in active markets for identical assets or liabilities
    
    Level 2: Observable market based inputs that are corroborated by market data
    
    Level 3: Unobservable inputs that are not corroborated by market data
  May 1, 2010
    
    January 30, 2010Significant
    
    
    
    
    
    SignificantUnobservable
    
    
    
    
    
    UnobservableInputs
    
    
    
    
    
    InputsTotal
    
    (Level 3)
    
    Total
    
    (Level 3)Long-lived assets held and used
    
    $
    233
    
    
    $
    233
    
    
    $
    249
    
    
    $
    249
  7




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5. CREDIT FACILITY
   6. OTHER CURRENT LIABILITIES
  May 1,
    
    
    January 30,2010
    
    
    2010Accrued compensation and benefits
    
    $
    9,794
    
    
    $
    12,362Accrued gift cards
    
    
    9,776
    
    
    
    12,617Sales taxes payable
    
    
    2,416
    
    
    
    4,444Accrued capital expenditures
    
    
    1,619
    
    
    
    1,802Other
    
    
    13,158
    
    
    
    12,517Total other current liabilities
    
    $
    36,763
    
    
    $
    43,742
 7. INCOME TAXES
  8. STOCK-BASED COMPENSATION
  8




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Stock Options
  For the First Quarters EndedMay 1, 2010
    
    May 2, 2009Expected life
    
    4 years
    
    4 yearsExpected volatility
    
    
    79.4
    %
    
    
    69.4
    %Risk-free interest rate
    
    
    2.0
    %
    
    
    1.5
    %Dividend yield
    
    
    
    
    
    
    
 Non-vested Stock Awards
   9. COMMITMENTS AND CONTINGENCIES
 Litigation
 Ned Nelson, as an individual and on behalf of others similarly situated, vs. Pacific Sunwear of
California, Inc., Los Angeles Superior Court Case No. BC 436947.
  Letters of Credit
  10. SEGMENT REPORTING
  9




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11. EARNINGS PER SHARE
  10




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  Cautionary Note Regarding Forward-Looking Statements
  
    
    the sufficiency of operating cash flows, working capital and available credit to meet our
operating and capital expenditure requirements
    
    our capital expenditure plans for fiscal 2010
    
    forecasts of future store closures for fiscal 2010, and
    
    future changes in occupancy expenses.
  Executive Overview
  Comparable (or same store) sales
 Net merchandise margins
 11




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Operating margin
 Store sales trends
 Cash flow and liquidity (working capital)
 Critical Accounting Policies
  Results of Operations
  First Quarters EndedMay
1, 2010
    
    

May 2, 2009Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, including buying, distribution and occupancy costs
    
    
    77.7
    
    
    
    72.6Gross margin
    
    
    22.3
    
    
    
    27.4Selling, general and administrative expenses
    
    
    38.4
    
    
    
    34.4Operating loss
    
    
    (16.1
    )
    
    
    (7.0
    )Other expense, net
    
    
    0.0
    
    
    
    0.1Loss before income taxes
    
    
    (16.1
    )
    
    
    (7.1
    )Income tax expense/(benefit)
    
    
    0.2
    
    
    
    (3.1
    )Net loss
    
    
    (16.3)
    %
    
    
    (4.0)
    %Numbers of stores open at end of period
    
    
    883
    
    
    
    927Total square footage (in 000s)
    
    
    3,421
    
    
    
    3,578
 The first quarter ended May 1, 2010 as compared to the first quarter ended May 2, 2009
 Net Sales
  $ millions
    
    Attributable to$(30)
    
    15% decline in comparable store net sales in the first quarter of fiscal
2010 compared to the first quarter of fiscal 2009 due a decline in total
transactions.(5)
    
    Store closures.2
    
    Non-comparable sales from new, expanded or relocated stores not yet included
in the comparable store base and e-commerce net sales.$(33)
    
    Total
  12




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Gross Margin
  %
    
    Attributable to(3.8)
    
    Deleverage of occupancy costs as a result of the negative 15% same-store sales results
for the first quarter of fiscal 2010. Occupancy costs were $47 million in both years.(1.3)
    
    Decrease in merchandise margin rate due to increased markdowns as a percentage of sales.(5.1)
    
    Total
 Selling, General and Administrative Expenses
  %
    
    Attributable to2.0
    
    Increase in non-cash asset impairment charges of $3 million.1.7
    
    Increase in payroll and payroll-related expenses as a percentage of sales
due to deleveraging these expenses against the negative 15% same-store sales
result. In dollars, payroll and payroll-related expenses declined $3
million.0.3
    
    Increase in other SG&A expenses as a percentage of sales due to deleveraging
these expenses against the negative 15% same-store sales result. In dollars,
other SG&A expenses declined $4 million primarily due to lower depreciation.4.0
    
    Total
  Income Taxes
  13




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Net Loss and Net Loss per Share
  About Non-GAAP Financial Measures
   Liquidity and Capital Resources
  (In thousands)
    
    May 1,
    
    
    May 2,FIRST QUARTER ENDED
    
    2010
    
    
    2009Net cash (used in)/provided by operating activities
    
    $
    (32,412
    )
    
    $
    12,608Net cash used in investing activities
    
    
    (3,960
    )
    
    
    (5,108
    )Net cash used in financing activities
    
    
    (87
    )
    
    
    (2
    )Net (decrease)/increase in cash and cash equivalents
    
    $
    (36,459
    )
    
    $
    7,498
 Operating Cash Flows
   14




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Working Capital
  $ millions
    
    
    Description$
    117
    
    
    Working capital at January 30, 2010(36
    )
    
    Decrease in cash and cash equivalents (see Condensed Consolidated Statements of Cash Flows).12
    
    
    Increase in inventories, net of accounts payable.6
    
    
    Decrease in other current liabilities, net of other current assets.$
    99
    
    
    Working capital at May 1, 2010
 Investing Cash Flows
  Credit Facility
  Contractual Obligations
  Payments Due by Period (in $ millions)Less
    
    
    
    
    
    
    
    
    
    
    Morethan 1
    
    
    1-3
    
    
    3-5
    
    
    than 5Contractual Obligations
    
    Total
    
    
    year
    
    
    years
    
    
    years
    
    
    yearsOperating lease obligations
    
    $
    517
    
    
    $
    94
    
    
    $
    163
    
    
    $
    122
    
    
    $
    138Capital lease obligations
    
    
    <1.0
    
    
    
    <1.0
    
    
    
    <1.0
    
    
    
    
    
    
    
    ASC 740 (FIN 48) obligations
including interest and
penalties
    
    
    <1.0
    
    
    
    
    
    
    
    <1.0
    
    
    
    
    
    
    
    Letters of credit
    
    
    17
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    Guaranteed minimum royalties
    
    
    4.0
    
    
    
    <1.0
    
    
    
    2.0
    
    
    
    <1.0
    
    
    
    Total
    
    $
    539
    
    
    $
    112
    
    
    $
    166
    
    
    $
    123
    
    
    $
    138
    15




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Indemnifications
   Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  Inflation
  16




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Seasonality and Quarterly Results
  17




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
   
 ITEM 4. CONTROLS AND PROCEDURES.
   18




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Reserved.
 
 Item 5. Other Information.
  
 Item 6. Exhibits.
 Incorporated byReferenceExhibit #
    
    Exhibit Description
    
    Form
    
    Filing Date3.1
    
    Third Amended and Restated Articles of Incorporation of the Company
    
    10-Q
    
    8/31/043.2
    
    Certificate of Determination of Preferences of Series A Junior
Participating Preferred Stock of the Company
    
    8-K
    
    12/24/983.3
    
    Fifth Amended and Restated Bylaws of the Company
    
    8-K
    
    4/3/0931.1+
    
    Written statements of Gary H. Schoenfeld and Michael L. Henry
pursuant to section 302 of the Sarbanes-Oxley Act of 200232.1+
    
    Written statement of Gary H. Schoenfeld and Michael L. Henry
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
 +
    
    Filed herewith 19




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SIGNATURES
  PACIFIC SUNWEAR OF CALIFORNIA, INC.
(Registrant)Date: June 4, 2010
    By:
    /s/ GARY H. SCHOENFELDGary H. SchoenfeldPresident, Chief Executive Officer and Director
(Principal Executive Officer)Date: June 4, 2010
    By:
    /s/ MICHAEL L. HENRYMichael L. HenrySr. Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 20