##### 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: May 2, 2009
 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 definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
 Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company 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 May 2, 2009
 Index
 Page #PART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance SheetsMay 2, 2009 and January 31, 2009
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive OperationsFirst
quarters (13 weeks) ended May 2, 2009 and May 3, 2008
    
    
    4Condensed Consolidated Statements of Cash FlowsFirst quarters (13 weeks) ended May
2, 2009 and May 3, 2008
    
    
    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
    
    
    17Item 4. Controls and Procedures
    
    
    17PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18SIGNATURE PAGE
    
    
    19EX-31.1EX-32.1
  2




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited, all amounts in thousands except share and per share amounts)
 May 2, 2009
    
    
    January 31, 2009ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    32,274
    
    
    $
    24,776Merchandise inventories
    
    
    115,518
    
    
    
    107,205Other current assets
    
    
    49,601
    
    
    
    58,943Total current assets
    
    
    197,393
    
    
    
    190,924PROPERTY AND EQUIPMENT, NET:Gross property and equipment
    
    
    667,948
    
    
    
    665,236Less accumulated depreciation and amortization
    
    
    (355,052
    )
    
    
    (341,892
    )Total property and equipment, net
    
    
    312,896
    
    
    
    323,344Assets held for sale
    
    
    
    
    
    
    3,682Deferred income taxes
    
    
    21,984
    
    
    
    21,984Other assets
    
    
    24,825
    
    
    
    29,575TOTAL ASSETS
    
    $
    557,098
    
    
    $
    569,509LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    53,913
    
    
    $
    45,263Other current liabilities
    
    
    39,161
    
    
    
    47,564Total current liabilities
    
    
    93,074
    
    
    
    92,827LONG-TERM LIABILITIES:Deferred lease incentives
    
    
    49,155
    
    
    
    52,313Deferred rent
    
    
    22,730
    
    
    
    23,008Other long-term liabilities
    
    
    29,244
    
    
    
    29,374Total long-term liabilities
    
    
    101,129
    
    
    
    104,695Commitments and contingencies (Note 11)SHAREHOLDERS EQUITY:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 170,859,375 shares authorized; 65,261,125
and 65,174,144 shares issued and outstanding, respectively
    
    
    653
    
    
    
    652Additional paid-in capital
    
    
    1,956
    
    
    
    2,306Retained earnings
    
    
    360,286
    
    
    
    369,029Total shareholders equity
    
    
    362,895
    
    
    
    371,987TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    557,098
    
    
    $
    569,509
  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 2, 2009
    
    
    May 3, 2008Net sales
    
    $
    223,465
    
    
    $
    266,867Cost of goods sold, including buying, distribution and occupancy costs
    
    
    162,191
    
    
    
    191,402Gross margin
    
    
    61,274
    
    
    
    75,465Selling, general and administrative expenses
    
    
    76,769
    
    
    
    95,812Operating loss from continuing operations
    
    
    (15,495
    )
    
    
    (20,347
    )Other expense (income), net
    
    
    229
    
    
    
    (758
    )Loss from continuing operations before income taxes
    
    
    (15,724
    )
    
    
    (19,589
    )Income tax benefit
    
    
    (6,981
    )
    
    
    (7,620
    )Loss from continuing operations
    
    
    (8,743
    )
    
    
    (11,969
    )Loss from discontinued operations, net of tax
    
    
    
    
    
    
    (25,133
    )Net loss
    
    $
    (8,743
    )
    
    $
    (37,102
    )Comprehensive loss
    
    $
    (8,743
    )
    
    $
    (37,102
    )Loss from continuing operations per share:Basic
    
    $
    (0.13
    )
    
    $
    (0.17
    )Diluted
    
    $
    (0.13
    )
    
    $
    (0.17
    )Net loss per share:Basic
    
    $
    (0.13
    )
    
    $
    (0.53
    )Diluted
    
    $
    (0.13
    )
    
    $
    (0.53
    )Weighted average shares outstanding:Basic
    
    
    65,207,991
    
    
    
    69,915,802Diluted
    
    
    65,207,991
    
    
    
    69,915,802
  4




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, in thousands)
 First Quarter EndedMay 2, 2009
    
    
    May 3, 2008CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (8,743
    )
    
    $
    (37,102
    )Adjustments to reconcile net loss to net cash from operating activities:Depreciation and amortization
    
    
    17,099
    
    
    
    21,647Asset impairment
    
    
    1,992
    
    
    
    8,503Loss on disposal of property and equipment
    
    
    
    
    
    
    687Non-cash stock based compensation
    
    
    955
    
    
    
    1,289Tax benefit deficiencies related to stock-based compensation
    
    
    (1,297
    )
    
    
    (388
    )Change in operating assets and liabilities:Merchandise inventories
    
    
    (8,313
    )
    
    
    2,674Other current assets
    
    
    9,342
    
    
    
    (34,990
    )Other assets
    
    
    4,750
    
    
    
    15,660Accounts payable
    
    
    8,650
    
    
    
    10,362Other current liabilities
    
    
    (8,263
    )
    
    
    555Deferred lease incentives
    
    
    (3,158
    )
    
    
    (12,637
    )Deferred rent
    
    
    (278
    )
    
    
    (2,408
    )Other long-term liabilities
    
    
    (128
    )
    
    
    1,519Net cash provided by/(used in) operating activities
    
    
    12,608
    
    
    
    (24,629
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (8,813
    )
    
    
    (21,006
    )Proceeds from sale of property and equipment
    
    
    3,705
    
    
    
    Net cash used in investing activities
    
    
    (5,108
    )
    
    
    (21,006
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    
    
    
    
    944Principal payments under capital lease and long-term debt obligations
    
    
    (2
    )
    
    
    (3
    )Repurchase and retirement of common stock
    
    
    
    
    
    
    (10,248
    )Net cash used in financing activities
    
    
    (2
    )
    
    
    (9,307
    )NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    7,498
    
    
    
    (54,942
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    24,776
    
    
    
    97,587CASH AND CASH EQUIVALENTS, end of period
    
    $
    32,274
    
    
    $
    42,645SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    
    
    
    $
    Cash (refunded)/paid for income taxes
    
    $
    (198
    )
    
    $
    271SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Decrease in non-cash property and equipment accruals
    
    $
    (147
    )
    
    $
    (869
    )
  5




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the quarterly period ended May 2, 2009
 (unaudited, all amounts in thousands except share and per share
 amounts unless otherwise indicated)
 1. NATURE OF BUSINESS
  2. BASIS OF PRESENTATION
   3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Recent Accounting Pronouncements Interim Disclosures about Fair Value of Financial Instruments. Disclosures about Fair Value of Financial
Instruments Interim Financial
Reporting
 6




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4. DISCONTINUED OPERATIONS
  Net sales
    
    $
    27,051Loss before income tax benefit
    
    
    (40,447
    )Income tax benefit
    
    
    15,314Net loss
    
    
    (25,133
    )Net loss per share, diluted
    
    $
    (0.36
    )
 5. SEGMENT REPORTING
  6. STOCK-BASED COMPENSATION
  Fiscal First Quarters2009
    
    2008Stock Awards
    
    ESPP
    
    Stock Awards
    
    ESPPExpected Life
    
    4 years
    
    0.5 years
    
    4 years
    
    0.5 yearsStock Volatility
    
    
    69.4
    %
    
    
    106.4
    %
    
    
    40.3
    %
    
    
    45.4
    %Risk-free Interest Rates
    
    
    1.5
    %
    
    
    0.4
    %
    
    
    2.3
    %
    
    
    3.2
    %Expected Dividends
    
    None
    
    None
    
    None
    
    None
   7




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Weighted-Weighted-
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contractual
    
    
    IntrinsicStock Options/SARs
    
    Shares
    
    
    Price
    
    
    Term (Yrs.)
    
    
    Value ($000s)Outstanding at January 31, 2009
    
    
    2,219,248
    
    
    $
    18.57Granted
    
    
    1,034,400
    
    
    $
    1.64Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    (280,620
    )
    
    $
    23.05Outstanding at May 2, 2009
    
    
    2,973,028
    
    
    $
    12.26
    
    
    
    5.26
    
    
    
    2,654Vested and expected to vest at
May 2, 2009
    
    
    1,945,636
    
    
    $
    16.03
    
    
    
    4.55
    
    
    
    760Exercisable at May 2, 2009
    
    
    1,347,328
    
    
    $
    19.11
    
    
    
    3.85
    
    
    
    
   Weighted-AverageGrant-DateNon-vested Shares
    
    Shares
    
    
    Fair ValueOutstanding at January 31, 2009
    
    
    577,971
    
    
    $
    15.85Granted
    
    
    193,906
    
    
    $
    1.64Vested
    
    
    (91,804
    )
    
    $
    16.56Forfeited
    
    
    (39,453
    )
    
    $
    16.76Outstanding at May 2, 2009
    
    
    640,620
    
    
    $
    11.39
  7. EARNINGS PER SHARE
  8. OTHER CURRENT ASSETS
  May 2,
    
    
    Jan. 31,2009
    
    
    2009Income taxes receivable
    
    $
    35,737
    
    
    $
    30,251Prepaid expenses
    
    
    11,942
    
    
    
    25,573Non-trade accounts receivable
    
    
    1,922
    
    
    
    3,119Total other current assets
    
    $
    49,601
    
    
    $
    58,943
 8




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9. OTHER CURRENT LIABILITIES
  May 2,
    
    
    Jan. 31,2009
    
    
    2009Accrued gift cards
    
    $
    9,411
    
    
    $
    12,134Accrued compensation and benefits
    
    
    8,353
    
    
    
    13,584Sales taxes payable
    
    
    3,277
    
    
    
    5,177Accrued capital expenditures
    
    
    1,591
    
    
    
    1,737Deferred taxes
    
    
    1,218
    
    
    
    1,218Other
    
    
    15,311
    
    
    
    13,714Total other current liabilities
    
    $
    39,161
    
    
    $
    47,564
 10. CREDIT FACILITY
   11. COMMITMENTS AND CONTINGENCIES
 Litigation
 Letters of Credit
 12. FAIR VALUE MEASUREMENTS
  9




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
    
    Level 1: Observable inputs such as quoted prices (unadjusted) in active markets that
are accessible at the measurement date for identical, unrestricted assets or liabilities.
    
    Level 2: Inputs other than quoted prices that are observable for the asset or
liability, either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets and quoted prices for identical or similar assets or
liabilities in markets that are not active.
    
    Level 3: Unobservable inputs that reflect the reporting entitys own assumptions.
   Fair Value Measurements at May 2, 2009Quoted Prices
    
    Significantin Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Long-lived assets held and used
    
    $
    313
    
    
    $
    
    
    
    $
    
    
    
    $
    313
  10




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##### Table of Contents



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Cautionary Note Regarding Forward-Looking Statements
  
    
    forecasts of future store closures
    
    forecasts of future comparable store net sales, gross margins, inventory levels and
selling, general and administrative expenses
    
    the sufficiency of working capital, operating cash flows and available credit to meet
our operating and capital expenditure requirements
    
    expectations regarding our capital expenditure plans for fiscal 2009
    
    expectations regarding future borrowings and repayments under our credit facility
    
    expectations regarding future increases in common area maintenance (CAM) 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 2,
    
    
    May 3,2009
    
    
    2008Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, including buying, distribution and occupancy costs
    
    
    72.6
    
    
    
    71.7Gross margin
    
    
    27.4
    
    
    
    28.3Selling, general and administrative expenses
    
    
    34.4
    
    
    
    35.9Operating loss from continuing operations
    
    
    (7.0
    )
    
    
    (7.6
    )Other expense/(income), net
    
    
    0.1
    
    
    
    (0.3
    )Loss from continuing operations before income taxes
    
    
    (7.1
    )
    
    
    (7.3
    )Income tax benefit
    
    
    (3.1
    )
    
    
    (2.8
    )Net loss from continuing operations
    
    
    (4.0)
    %
    
    
    (4.5)
    %Numbers of stores open at end of period
    
    
    927
    
    
    
    942Total square footage (in 000s)
    
    
    3,578
    
    
    
    3,596
 The first quarter (thirteen weeks) ended May 2, 2009 as compared to the first quarter (thirteen
weeks) ended May 3, 2008
 Net Sales
  12




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$ millions
    
    
    Attributable to$
    (45
    )
    
    18% decline in comparable store net sales in the first quarter of fiscal
2009 compared to the first quarter of fiscal 2008 driven by a 19% decrease
in average unit retail.(2
    )
    
    Store closures.3
    
    
    Non-comparable sales from new, expanded or relocated stores not yet included
in the comparable store base and e-commerce net sales.$
    (44
    )
    
    Total
  Gross Margin
  %
    
    
    Attributable to(3.2
    )
    
    Deleverage of occupancy costs as a result of the negative 18% same-store
sales results for the first quarter of fiscal 2009.1.3
    
    
    Increase in merchandise margin due to increased initial markups.1.0
    
    
    Decrease in freight and distribution costs of $4 million primarily due to
the consolidation of our distribution function in the first quarter of
fiscal 2008.(0.9
    )
    
    Total
  Selling, General and Administrative Expenses
  %
    
    
    Attributable to(2.4
    )
    
    Decrease in non-cash asset impairment charges of $7 million.1.2
    
    
    Increase in payroll and payroll-related expenses as a percentage of sales
due to deleveraging these expenses against the negative 18% same-store sales
result. In dollars, payroll and payroll-related expenses were down $6
million.(0.3
    )
    
    Decrease in other SG&A expenses of $6 million primarily due to lower legal,
depreciation and consulting expenses, among other items.(1.5
    )
    
    Total
 13




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##### Table of Contents



Other expense (income), net
  Income Taxes
  Liquidity and Capital Resources
  Operating Cash Flows
  $ millions
    
    
    Attributable to$
    44
    
    
    Change in income tax receivable from prior year as a result of operating losses and the
closing of the discontinued demo concept in the first quarter of fiscal 2008.28
    
    
    Lower operating losses in the current year as a result of the closing of the discontinued
demo concept last year.(13
    )
    
    Increase in merchandise inventories versus the end of fiscal 2008, net of accounts payable.(11
    )
    
    Change in deferred tax assets associated with the discontinued demo concept.(7
    )
    
    Decrease in non-cash asset impairments.(5
    )
    
    Decrease in non-cash depreciation and amortization as a result of the closing of the
Anaheim distribution center, write-off of remaining goodwill and impairment of store
assets in fiscal 2008.2
    
    
    Other changes in working capital items.$
    38
    
    
    Total
 Working Capital
  14




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##### Table of Contents



$ millions
    
    
    Description$
    98
    
    
    Working capital at January 31, 2009(9
    )
    
    Increase in accounts payable due to timing of payments(9
    )
    
    Decrease in other current assets, primarily from a decrease in prepaid rent due to
timing of rent payments.9
    
    
    Decrease in other current liabilities, primarily from a decrease in accrued salaries
and benefits based on timing of payments.8
    
    
    Increase in merchandise inventories from fiscal year end due to planned receipt flows7
    
    
    Increase in cash and cash equivalents (see condensed consolidated cash flow statement).$
    104
    
    
    Working capital at May 2, 2009
 Investing Cash Flows
  Financing 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
    
    $
    439
    
    
    $
    91
    
    
    $
    147
    
    
    $
    106
    
    
    $
    95Capital lease obligations
    
    
    <0.1
    
    
    
    <0.1
    
    
    
    <0.1
    
    
    
    
    
    
    
    FIN 48 obligations including interest and penalties
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Letters of credit
    
    
    17
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    457
    
    
    $
    108
    
    
    $
    148
    
    
    $
    106
    
    
    $
    95
  15




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Operating Leases
    Indemnifications
   Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
  16




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Inflation
  Seasonality and Quarterly Results
  
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4  CONTROLS AND PROCEDURES
   17




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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  Submission of Matters to a Vote of Security Holders
  
 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 Sally Frame Kasaks and Michael L. Henry
pursuant to section 302 of the Sarbanes-Oxley Act of 200232.1+
    
    
    Written statement of Sally Frame Kasaks and Michael L. Henry
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
 
 +
    
    Filed herewith 18




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##### Table of Contents



SIGNATURES
  PACIFIC SUNWEAR OF CALIFORNIA, INC.
(Registrant)Date: June 4, 2009
    /s/ SALLY FRAME KASAKSSally Frame KasaksChairman and Chief Executive Officer

(Principal Executive Officer)Date: June 4, 2009
    /s/ MICHAEL L. HENRYMichael L. HenrySenior Vice President,

Chief Financial Officer and Secretary

(Principal Financial and Accounting Officer) 19