##### Table of Contents



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: November 3, 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
(State of incorporation)
    
    95-3759463
(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):
 þ o 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 November 3, 2007
 Index
  
 Page #PART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets November 3, 2007 and February 3, 2007
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive (Loss)/Income Third quarter (13 weeks) and three quarters (39 weeks) ended November 3, 2007 and October 28, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows Three quarters (39 weeks) ended November 3, 2007 and October 28, 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-13Item 2. Managements Discussion and Analysis of Financial Condition and Results of Consolidated Operations
    
    
    14-26Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27-31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31SIGNATURE PAGE
    
    
    32EXHIBIT 3.1EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 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)
 November 3,
    
    
    February 3,2007
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    37,179
    
    
    $
    52,267Marketable securities
    
    
    
    
    
    
    31,500Merchandise inventories
    
    
    242,210
    
    
    
    205,213Other current assets
    
    
    71,604
    
    
    
    46,255Total current assets
    
    
    350,993
    
    
    
    335,235PROPERTY AND EQUIPMENT, NET:Gross property and equipment
    
    
    692,070
    
    
    
    708,774Less accumulated depreciation and amortization
    
    
    (297,285
    )
    
    
    (287,888
    )Total property and equipment, net
    
    
    394,785
    
    
    
    420,886Other Assets
    
    
    43,515
    
    
    
    17,122TOTAL ASSETS
    
    $
    789,293
    
    
    $
    773,243LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    106,351
    
    
    $
    66,581Other current liabilities
    
    
    66,113
    
    
    
    73,952Total current liabilities
    
    
    172,464
    
    
    
    140,533LONG-TERM LIABILITIES:Deferred lease incentives
    
    
    78,201
    
    
    
    89,371Deferred rent
    
    
    28,408
    
    
    
    30,619Other long-term liabilities
    
    
    35,411
    
    
    
    9,367Total long-term liabilities
    
    
    142,020
    
    
    
    129,357Commitments and contingencies (Note 12)SHAREHOLDERS EQUITY:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 170,859,375 shares authorized; 69,809,959
and 69,560,077 shares issued and outstanding, respectively
    
    
    698
    
    
    
    696Additional paid-in capital
    
    
    13,457
    
    
    
    5,783Retained earnings
    
    
    460,654
    
    
    
    496,874Total shareholders equity
    
    
    474,809
    
    
    
    503,353TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    789,293
    
    
    $
    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 Third Quarter Ended
    
    
    For the Three Quarters EndedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    373,148
    
    
    $
    375,427
    
    
    $
    1,037,951
    
    
    $
    988,996Cost of goods sold, including
buying, distribution and occupancy
costs
    
    
    262,049
    
    
    
    269,085
    
    
    
    752,963
    
    
    
    687,947Gross margin
    
    
    111,099
    
    
    
    106,342
    
    
    
    284,988
    
    
    
    301,049Selling, general and administrative
expenses
    
    
    148,849
    
    
    
    92,562
    
    
    
    350,491
    
    
    
    255,355Operating (loss)/income
    
    
    (37,750
    )
    
    
    13,780
    
    
    
    (65,503
    )
    
    
    45,694Interest income, net
    
    
    652
    
    
    
    709
    
    
    
    2,162
    
    
    
    3,594(Loss)/Income before income tax
(benefit)/expense
    
    
    (37,098
    )
    
    
    14,489
    
    
    
    (63,341
    )
    
    
    49,288Income tax (benefit)/expense
    
    
    (17,061
    )
    
    
    5,506
    
    
    
    (27,744
    )
    
    
    18,729Net (loss)/income
    
    $
    (20,037
    )
    
    $
    8,983
    
    
    $
    (35,597
    )
    
    $
    30,559Comprehensive (loss)/income
    
    $
    (20,037
    )
    
    $
    8,983
    
    
    $
    (35,597
    )
    
    $
    30,559Net (loss)/income per share, basic
    
    $
    (0.29
    )
    
    $
    0.13
    
    
    $
    (0.51
    )
    
    $
    0.43Net (loss)/income per share, diluted
    
    $
    (0.29
    )
    
    $
    0.13
    
    
    $
    (0.51
    )
    
    $
    0.43Wtd. avg. shares outstanding, basic
    
    
    69,765,113
    
    
    
    69,344,402
    
    
    
    69,678,733
    
    
    
    71,274,716Wtd. avg. shares outstanding, diluted
    
    
    69,765,113
    
    
    
    69,561,420
    
    
    
    69,678,733
    
    
    
    71,657,385
  4




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, in thousands)
 Three Quarters EndedNov. 3, 2007
    
    
    Oct. 28, 2006CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss)/income
    
    $
    (35,597
    )
    
    $
    30,559Adjustments to reconcile net (loss)/income to net cash provided by operating activities:Depreciation and amortization
    
    
    58,295
    
    
    
    52,632Stock-based compensation
    
    
    5,119
    
    
    
    5,392Tax benefits related to stock-based compensation
    
    
    320
    
    
    
    1,556Excess tax benefits related to stock-based compensation
    
    
    (292
    )
    
    
    (963
    )Loss on disposal/impairment of property and equipment
    
    
    63,001
    
    
    
    373Change in operating assets and liabilities:Merchandise inventories
    
    
    (36,997
    )
    
    
    (37,540
    )Other current assets
    
    
    (25,349
    )
    
    
    12,237Other assets
    
    
    (3,093
    )
    
    
    8,668Accounts payable
    
    
    39,770
    
    
    
    30,361Other current liabilities
    
    
    (8,047
    )
    
    
    (18,879
    )Deferred lease incentives
    
    
    (11,170
    )
    
    
    4,937Deferred rent
    
    
    (2,211
    )
    
    
    1,969Other long-term liabilities
    
    
    2,115
    
    
    
    (6,687
    )Net cash provided by operating activities
    
    
    45,864
    
    
    
    84,615CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (94,939
    )
    
    
    (107,087
    )Purchases of available-for-sale marketable securities
    
    
    (171,400
    )
    
    
    (226,503
    )Sales of available-for-sale marketable securities
    
    
    202,900
    
    
    
    286,803Purchases of held-to-maturity marketable securities (Note 11)
    
    
    (23,300
    )
    
    
    Maturities of held-to-maturity marketable securities
    
    
    
    
    
    
    14,611Net cash used in investing activities
    
    
    (86,739
    )
    
    
    (32,176
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowing under long-term financing obligation (Note 11)
    
    
    23,300
    
    
    
    Proceeds from exercise of stock options
    
    
    2,237
    
    
    
    6,532Excess tax benefits related to stock-based compensation
    
    
    292
    
    
    
    963Principal payments under capital lease obligations
    
    
    (42
    )
    
    
    (319
    )Repurchase and retirement of common stock
    
    
    
    
    
    
    (99,347
    )Net cash provided by/(used in) financing activities
    
    
    25,787
    
    
    
    (92,171
    )NET DECREASE IN CASH AND CASH EQUIVALENTS:
    
    
    (15,088
    )
    
    
    (39,732
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    52,267
    
    
    
    95,185CASH AND CASH EQUIVALENTS, end of period
    
    $
    37,179
    
    
    $
    55,453SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    5
    
    
    $
    4Cash paid for income taxes
    
    $
    10,635
    
    
    $
    34,941SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Increase in non-cash property and equipment accruals
    
    $
    247
    
    
    $
    9,492Capital lease transaction for property and equipment
    
    $
    9
    
    
    $
    
  5




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the quarterly period ended November 3, 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 www.onethousandsteps.com
 2. BASIS OF PRESENTATION
   3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  New Accounting Pronouncements
 6




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4. PENDING DISPOSITION OF DEMO AND ONE THOUSAND STEPS STORES
    7




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##### Table of Contents



5. SEGMENT REPORTING
  OneThree Quarters Ended
    
    
    
    
    
    
    
    
    
    ThousandNovember 3, 2007:
    
    PacSun
    
    demo
    
    Steps
    
    Corporate
    
    TotalNet Sales
    
    $
    921,677
    
    
    $
    112,343
    
    
    $
    3,931
    
    
    
    n/a
    
    
    $
    1,037,951% of Total Sales
    
    
    89
    %
    
    
    11
    %
    
    
    0
    %
    
    
    n/a
    
    
    
    100
    %Comparable Store Sales %
    
    
    4.0
    %
    
    
    (13.7
    )%
    
    
    (14.4
    )%
    
    
    n/a
    
    
    
    2.0
    %Income/(Loss) before
Income Taxes
    
    $
    149,688
    
    
    $
    (80,821
    )
    
    $
    (14,066
    )
    
    $
    (118,142
    )
    
    $
    (63,341
    )Total Assets
    
    $
    489,597
    
    
    $
    40,916
    
    
    $
    1,621
    
    
    $
    257,159
    
    
    $
    789,293Number of Stores
    
    
    957
    
    
    
    154
    
    
    
    9
    
    
    
    n/a
    
    
    
    1,120Square Footage
    
    
    3,667
    
    
    
    439
    
    
    
    24
    
    
    
    n/a
    
    
    
    4,130
 OneThree Quarters Ended
    
    
    
    
    
    
    
    
    
    ThousandOctober 28, 2006:
    
    PacSun
    
    demo
    
    Steps
    
    Corporate
    
    TotalNet Sales
    
    $
    855,402
    
    
    $
    130,790
    
    
    $
    2,804
    
    
    
    n/a
    
    
    $
    988,996% of Total Sales
    
    
    87
    %
    
    
    13
    %
    
    
    0
    %
    
    
    n/a
    
    
    
    100
    %Comparable Store Sales %
    
    
    (4.6
    )%
    
    
    (6.9
    )%
    
    
    n/a
    
    
    
    n/a
    
    
    
    (4.9
    )%Income/(Loss) before
Income Taxes
    
    $
    148,341
    
    
    $
    (1,547
    )
    
    $
    (2,007
    )
    
    $
    (95,501
    )
    
    $
    49,288Total Assets
    
    $
    461,263
    
    
    $
    118,052
    
    
    $
    15,577
    
    
    $
    181,107
    
    
    $
    775,999Number of Stores
    
    
    945
    
    
    
    215
    
    
    
    9
    
    
    
    n/a
    
    
    
    1,169Square Footage
    
    
    3,582
    
    
    
    603
    
    
    
    24
    
    
    
    n/a
    
    
    
    4,209
  8




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6. STOCK-BASED COMPENSATION
  Fiscal Three Quarters2007
    
    2006Stock Awards
    
    ESPP
    
    Stock Awards
    
    ESPPExpected Life
    
    4 years
    
    0.5 years
    
    5 years
    
    0.5 yearsStock Volatility
    
    
    34.7% - 36.6
    %
    
    
    31.9
    %
    
    
    41.3% - 48.7
    %
    
    
    35.4
    %Risk-free Interest Rates
    
    
    4.3% - 4.9
    %
    
    
    5.0
    %
    
    
    4.6%  5.1
    %
    
    
    4.5
    %Expected Dividends
    
    None
    
    None
    
    None
    
    None
  9




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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
    
    
    $
    4,219Granted
    
    
    59,000
    
    
    
    14.68Exercised
    
    
    (50,763
    )
    
    
    6.72Forfeited or expired
    
    
    (125,894
    )
    
    
    23.76Outstanding at November 3, 2007
    
    
    3,152,742
    
    
    $
    19.56
    
    
    
    5.02
    
    
    $
    3,717Vested and expected to vest at
November 3, 2007
    
    
    2,636,355
    
    
    $
    19.34
    
    
    
    4.82
    
    
    $
    3,678Exercisable at November 3, 2007
    
    
    1,820,125
    
    
    $
    18.43
    
    
    
    4.32
    
    
    $
    3,638
   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
    
    
    $
    20.46Granted
    
    
    211,150
    
    
    
    16.28Vested
    
    
    (2,313
    )
    
    
    15.35Forfeited
    
    
    (38,092
    )
    
    
    20.18Outstanding at November 3, 2007
    
    
    788,762
    
    
    $
    19.37
  10




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7. NET (LOSS)/INCOME PER SHARE, BASIC AND DILUTED
  November 3, 2007
    
    October 28, 2006Net
    
    
    
    
    
    
    
    
    
    NetThird Quarter Ended:
    
    (Loss)
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSBasic EPS:
    
    $
    (20,037
    )
    
    
    69,765,113
    
    
    $
    (0.29
    )
    
    $
    8,983
    
    
    
    69,344,402
    
    
    $
    0.13Diluted EPS:Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    217,018
    
    
    
    (0.00
    )$
    (20,037
    )
    
    
    69,765,113
    
    
    $
    (0.29
    )
    
    $
    8,983
    
    
    
    69,561,420
    
    
    $
    0.13
 November 3, 2007
    
    October 28, 2006Net
    
    
    
    
    
    
    
    
    
    NetThree Quarters Ended:
    
    (Loss)
    
    Shares
    
    EPS
    
    Income
    
    Shares
    
    EPSBasic EPS:
    
    $
    (35,597
    )
    
    
    69,678,733
    
    
    $
    (0.51
    )
    
    $
    30,559
    
    
    
    71,274,716
    
    
    $
    0.43Diluted EPS:Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    382,669
    
    
    
    (0.00
    )$
    (35,597
    )
    
    
    69,678,733
    
    
    $
    (0.51
    )
    
    $
    30,559
    
    
    
    71,657,385
    
    
    $
    0.43
  8. OTHER CURRENT ASSETS
  November 3,
    
    
    February 3,2007
    
    
    2007Income taxes receivable
    
    $
    30,589
    
    
    $
    Prepaid expenses
    
    
    27,871
    
    
    
    27,748Deferred income taxes
    
    
    7,291
    
    
    
    7,291Non-trade accounts receivable
    
    
    5,853
    
    
    
    11,216Total other current assets
    
    $
    71,604
    
    
    $
    46,255
 11




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9. OTHER CURRENT LIABILITIES
  November 3,
    
    
    February 3,2007
    
    
    2007Accrued capital expenditures
    
    $
    14,049
    
    
    $
    13,802Accrued compensation and benefits
    
    
    10,974
    
    
    
    15,529Accrued gift cards
    
    
    8,644
    
    
    
    14,007Sales taxes payable
    
    
    3,943
    
    
    
    4,771Accrued lease terminations (Note 4)
    
    
    3,624
    
    
    
    Income taxes payable
    
    
    
    
    
    
    8,706Other
    
    
    24,879
    
    
    
    17,137Total other current liabilities
    
    $
    66,113
    
    
    $
    73,952
 10. INCOME TAXES
    11. INDUSTRIAL REVENUE BOND TRANSACTION  OLATHE, KANSAS
   12




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12. COMMITMENTS AND CONTINGENCIES
 Litigation
 Letters of Credit
 13




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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
 14




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Operating margin
 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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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
  Third Quarter Ended
    
    Three Quarters EndedNov. 3,
    
    Oct. 28,
    
    Nov. 3,
    
    Oct. 28,2007
    
    2006
    
    2007
    
    2006Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold,
including buying,
distribution and occupancy
costs
    
    
    70.2
    
    
    
    71.7
    
    
    
    72.5
    
    
    
    69.6Gross margin
    
    
    29.8
    
    
    
    28.3
    
    
    
    27.5
    
    
    
    30.4Selling, general and
administrative expenses
    
    
    39.9
    
    
    
    24.7
    
    
    
    33.8
    
    
    
    25.8Operating (loss)/income
    
    
    (10.1
    )
    
    
    3.6
    
    
    
    (6.3
    )
    
    
    4.6Interest income, net
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.4(Loss)/Income before income
tax (benefit)/expense
    
    
    (9.9
    )
    
    
    3.9
    
    
    
    (6.1
    )
    
    
    5.0Income tax (benefit)/expense
    
    
    (4.5
    )
    
    
    1.5
    
    
    
    (2.7
    )
    
    
    1.9Net (loss)/income
    
    
    (5.4
    )%
    
    
    2.4
    %
    
    
    (3.4
    )%
    
    
    3.1
    %
  November 3,
    
    October 28,2007
    
    2006PacSun stores
    
    
    838
    
    
    
    835Outlet stores
    
    
    119
    
    
    
    110demo stores
    
    
    154
    
    
    
    215One Thousand Steps stores
    
    
    9
    
    
    
    9Total stores
    
    
    1,120
    
    
    
    1,169Square footage (in 000s)
    
    
    4,130
    
    
    
    4,209
 17




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##### Table of Contents



The third quarter (thirteen weeks) ended November 3, 2007 as compared to the third quarter
(thirteen weeks) ended October 28, 2006
 Net Sales
  $millions
    
    Attributable to$
    (18
    )
    
    Decrease in other non-comparable sales, which include net sales from expanded or
relocated stores not yet included in the comparable store base, internet net sales, and
the impact of lost sales from our refreshed stores while the stores are closed for
renovation.(15
    )
    
    93 closed stores in fiscal 2007 and 6 closed stores in fiscal 2006.16
    
    
    5% increase in comparable store net sales in the third quarter of fiscal 2007 compared to
the third quarter of fiscal 2006.13
    
    
    Net sales from stores opened in fiscal 2006 not yet included in the comparable store base.2
    
    
    13 new stores opened in fiscal 2007 not yet included in the comparable store base.$
    (2
    )
    
    Total
    Gross Margin
  18




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##### Table of Contents



%
    
    Attributable to2.0
    
    
    Increase in merchandise margins as a percentage of net sales,
primarily due to a decreased markdown rate and improved initial
markups.(0.4
    )
    
    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 occupancy expenses as a percentage of net sales,
primarily due to common area maintenance expenses.0.1
    
    
    Decrease in distribution costs as a percentage of net sales.1.5
    
    
    Total
 Selling, General and Administrative Expenses
  %
    
    Attributable to13.7
    
    
    Asset impairment and write-off charges of $51 million during the
third quarter of fiscal 2007, primarily due to $49 million in store
asset impairment charges attributable to the Companys 154 demo
stores (see Note 4 to the condensed consolidated financial
statements).1.2
    
    
    Increase in general and administrative expenses as a percentage of
net sales to 6.8% ($25 million) for the third quarter of fiscal 2007
from 5.6% ($21 million) for the third quarter of fiscal 2006. In
absolute dollars, these expenses were up primarily due to strategic
consulting expenses and planned payroll increases in the Companys
home office and within its field management team. The Company also
incurred planned expense increases associated with its e-commerce
operation.0.3
    
    
    Increase in all other direct store expenses as a percentage of net
sales to 19.3% ($72 million) in the third quarter of fiscal 2007 as
compared to 19.0% ($71 million) in the third quarter of fiscal 2006.
The primary increase in other direct store expenses was attributable
to depreciation expenses associated with our PacSun store refresh
program.15.2
    
    
    Total
 Net Interest Income
  Income Tax Benefit/Expense
  19




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##### Table of Contents



Three quarters (39 weeks) ended November 3, 2007 as compared to the three quarters (39 weeks)
ended October 28, 2006
 Net Sales
  $millions
    
    Attributable to$
    53
    
    
    Net sales from stores opened in fiscal 2006 not yet included in the comparable store base18
    
    
    2.0% increase in comparable store net sales in the first three quarters of fiscal 2007
compared to the first three quarters of fiscal 200610
    
    
    Other non-comparable sales (net sales from expanded or relocated stores not yet included
in the comparable store base and internet net sales)3
    
    
    13 new stores opened in fiscal 2007 not yet included in the comparable store base(35
    )
    
    93 closed stores in fiscal 2007 and 6 closed stores in fiscal 2006$
    49
    
    
    Total
    Gross Margin
  20




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##### Table of Contents



%
    
    Attributable to(1.7
    )
    
    Lease termination and other occupancy costs associated with the
Companys closure of 74 underperforming demo stores ($18 million).(1.0
    )
    
    Decrease in merchandise margins as a percentage of net sales,
primarily due to an increased markdown rate (1.1% higher in the
current year) partially offset by higher initial markups (0.4%
higher in the current year). Other margin items were down 0.3% as a
percentage of net sales.(0.3
    )
    
    Increase in buying costs as a percentage of net sales, primarily due
to planned increases in our merchandise design and planning
departments.(0.1
    )
    
    Net increase in distribution expenses.0.2
    
    
    Decrease in occupancy expenses as a percentage of net sales,
excluding the demo closure lease termination expenses.(2.9
    )
    
    Total
 Selling, General and Administrative Expenses
  %
    
    Attributable to6.1
    
    
    Asset impairment and write-off charges of $64 million during the first
three quarters of fiscal 2007, primarily due to $59 million in store
asset impairment charges attributable to the Companys demo and One
Thousand Steps stores (see Note 4 to the condensed consolidated
financial statements).1.0
    
    
    Increase in general and administrative expenses as a percentage of net
sales to 7.0% ($72 million) for the first three quarters of fiscal
2007 from 6.0% ($59 million) for the first three quarters of fiscal
2006. In absolute dollars, these expenses were up primarily due to
planned payroll increases in the Companys home office and within its
field management team, strategic consulting expenses and other planned
expense increases in the Companys e-commerce function.0.5
    
    
    Increase in store payroll expenses as a percentage of net sales to
12.9% ($134 million) in the first three quarters of fiscal 2007 as
compared to 12.4% ($123 million) in the first three quarters 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 first three quarters of fiscal 2007.0.4
    
    
    Increase in other direct store expenses as a percentage of net sales
to 7.7% ($80 million) in the first three quarters of fiscal 2007 from
7.3% ($73 million) in the first three quarters of fiscal 2006. In
absolute dollars, these expenses were up primarily due to $5 million
in increased depreciation expenses associated with new store openings
and renovations, and $2 million in agency fee expenses associated with
the demo store closures.8.0
    
    
    Total
 Net Interest Income
  21




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##### Table of Contents



Income Tax Benefit/Expense
  Pending Disposition of demo and One Thousand Steps Stores
   1st
    
    2nd
    
    3rdFiscal 2007
    
    Quarter
    
    Quarter
    
    QuarterNet sales
    
    $
    52,507
    
    
    $
    32,470
    
    
    $
    31,297Gross margin, including
buying and occupancy
    
    
    7,672
    
    
    
    (10,826
    )
    
    
    (3,626
    )Selling, general &
administrative expenses
    
    
    15,332
    
    
    
    22,673
    
    
    
    60,442Pre-tax operating loss
    
    
    (7,660
    )
    
    
    (33,499
    )
    
    
    (64,068
    )After-tax operating loss
    
    
    (4,726
    )
    
    
    (19,496
    )
    
    
    (37,163
    )Loss per diluted share
    
    
    (0.07
    )
    
    
    (0.28
    )
    
    
    (0.53
    )
 1st
    
    2nd
    
    3rd
    
    4thFiscal 2006
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterNet sales
    
    $
    48,274
    
    
    $
    37,104
    
    
    $
    48,216
    
    
    $
    72,368Gross margin, including buying
and occupancy
    
    
    12,937
    
    
    
    2,478
    
    
    
    10,373
    
    
    
    13,099Selling, general &
administrative expenses
    
    
    12,196
    
    
    
    13,126
    
    
    
    14,351
    
    
    
    40,923Pre-tax operating income/(loss)
    
    
    740
    
    
    
    (10,648
    )
    
    
    (3,978
    )
    
    
    (27,825
    )After-tax operating income/(loss)
    
    
    459
    
    
    
    (6,602
    )
    
    
    (2,466
    )
    
    
    (16,893
    )Earnings/(Loss) per diluted share
    
    
    0.01
    
    
    
    (0.09
    )
    
    
    (0.04
    )
    
    
    (0.24
    )
  22




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##### Table of Contents



Liquidity and Capital Resources
  Operating Cash Flows
  $millions
    
    Attributable to$
    (66
    )
    
    Decrease in net income. This amount includes $47 million (after
taxes) in store asset impairments, lease termination and other
charges related to demo and One Thousand Steps in the first
three quarters of fiscal 2007.(38
    )
    
    Decrease in cash flows from non-inventory current assets,
primarily due to accrued income tax receivables of approximately
$31 million in the current year versus approximately $3 million
in the prior year as a result of the net loss sustained by the
Company in the current year and the timing of the payment of
fiscal November store rent expenses. November rents were paid
in fiscal October in the current year versus in fiscal November
in the prior year due to the different quarter-end date
(November 3 this year versus October 28 last year).(16
    )
    
    Decrease in cash flows related to deferred lease incentives due
to fewer new store openings in the first three quarters of
fiscal 2007 (13) versus the first three quarters of fiscal 2006
(67).63
    
    
    Non-cash asset impairment charges, primarily due to the
impairment of the demo and One Thousand Steps stores (see Note 4
to the condensed consolidated financial statements).10
    
    
    Increase in cash flows related to accounts payable, net of
inventories, primarily due to a 2% reduction in inventory per
square foot and an improved inventory aging position as of the
end of the third quarter of fiscal 2007 as compared to the third
quarter of fiscal 2006.9
    
    
    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.(1
    )
    
    Net decrease in cash flows from all other operating activities$
    (39
    )
    
    Total
 23




---



##### Table of Contents



Working Capital
  $millions
    
    Description$
    195
    
    
    Working capital at February 3, 2007(47
    )
    
    Decrease in cash and marketable securities, primarily due to the
net loss sustained by the Company during fiscal 2007, among
other items (see cash flow statement).(5
    )
    
    Decrease in non-trade accounts receivable due to cash receipts
and fewer landlord allowances in the current year as a result of
lower new store openings.(3
    )
    
    Increase in accounts payable, net of inventory.39
    
    
    Increase in net income tax receivables due to the net loss
sustained by the Company during fiscal 2007.$
    179
    
    
    Working capital at November 3, 2007
 Investing Cash Flows
  Financing Cash Flows
  Credit Facility
  Contractual Obligations
  24




---



##### Table of Contents



Payments Due by PeriodContractual Obligations
    
    
    
    
    
    Less than
    
    
    
    
    
    
    
    
    
    
    More than(in $millions)
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsOperating lease obligations
    
    $
    720
    
    
    $
    107
    
    
    $
    211
    
    
    $
    176
    
    
    $
    226Letters of credit
    
    
    27
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    Olathe lease obligation (see Note 11)
    
    
    23
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23Total
    
    $
    770
    
    
    $
    134
    
    
    $
    211
    
    
    $
    176
    
    
    $
    249
  Operating Leases
  Indemnifications
   25




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##### Table of Contents



New Accounting Pronouncements
  Inflation
  Seasonality and Quarterly Results
  
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4  CONTROLS AND PROCEDURES
   26




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##### Table of Contents



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.
 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 continue to modify our existing store design model for our PacSun stores, which may not result
in improved operational performance.
 27




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##### Table of Contents



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 are in the process of seeking strategic alternatives for our demo stores and plan to close our
One Thousand Steps stores as soon as is practical. These processes could divert significant
attention from our more successful PacSun and PacSun Outlet operations and we are likely to incur
related cash and non-cash charges, the amount of which is not currently known.
 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.
 28




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##### Table of Contents



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.
 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.
 29




---



##### Table of Contents



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.
 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.
  30




---



##### 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
  
 Item 5  Other Information
  
 Item 6  Exhibits
 Exhibit 3.1
    
    Third Amended and Restated Bylaws of the Company, as amended +Exhibit 10.1
    
    Pacific Sunwear of California, Inc. Executive Severance Plan +*Exhibit 10.2
    
    Amendment No. 1 to Employment Agreement between the Company and Thomas Kennedy +*Exhibit 10.3
    
    Retention Bonus Agreement between the Company and Lou Ann Bett (1) *Exhibit 10.4
    
    Amendment No. 4 to Credit Agreement, dated as of October 31, 2007, with JPMorgan Chase Bank, N.A., as
Administrative Agent, and a syndicate of other lenders (2)Exhibit 31.1
    
    Written statements of Sally Frame Kasaks and Michael L. Henry pursuant to section 302 of the Sarbanes-Oxley Act of
2002Exhibit 32.1
    
    Written statement of Sally Frame Kasaks and Michael L. Henry 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 October 30, 2007(2)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on November 7, 2007+
    
    Filed herewith*
    
    Management contract or compensatory plan or arrangement 31




---



##### Table of Contents



SIGNATURES
  PACIFIC SUNWEAR OF CALIFORNIA, INC.
(Registrant)Date:  November 30, 2007
    /s/  SALLY FRAME KASAKSSally Frame KasaksChairman and Chief Executive Officer
(Principal Executive Officer)Date:  November 30, 2007
    /s/  MICHAEL L. HENRYMichael L. HenryInterim Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer) 32




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##### Table of Contents



EXHIBIT INDEX
 Exhibit 3.1
    
    Third Amended and Restated Bylaws of the Company, as amended +Exhibit 10.1
    
    Pacific Sunwear of California, Inc. Executive Severance Plan +*Exhibit 10.2
    
    Amendment No. 1 to Employment Agreement between the Company and Thomas Kennedy +*Exhibit 10.3
    
    Retention Bonus Agreement between the Company and Lou Ann Bett (1) *Exhibit 10.4
    
    Amendment No. 4 to Credit Agreement, dated as of October 31, 2007, with JPMorgan Chase Bank, N.A., as
Administrative Agent, and a syndicate of other lenders (2)Exhibit 31.1
    
    Written statements of Sally Frame Kasaks and Michael L. Henry pursuant to section 302 of the Sarbanes-Oxley Act of
2002Exhibit 32.1
    
    Written statement of Sally Frame Kasaks and Michael L. Henry 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 October 30, 2007(2)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed
with the Securities and Exchange Commission on November 7, 2007+
    
    Filed herewith*
    
    Management contract or compensatory plan or arrangement