##### 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: August 2, 2008
 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, 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
    
    Smaller Reporting Company o(Do not Check if a 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 August 2, 2008
  
 Index
 Page #PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance Sheets August 2, 2008 and February 2, 2008
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive Operations Second quarter (13 weeks) and first half (26 weeks) ended August 2, 2008 and August 4, 2007
    
    
    4Condensed Consolidated Statements of Cash Flows First half (26 weeks) ended August 2, 2008 and August 4, 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    25Item 1A.
    
    Risk Factors
    
    
    25Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3.
    
    Defaults upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    29Item 6.
    
    Exhibits
    
    
    30SIGNATURE PAGE
    
    
    31EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 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 2, 2008
    
    
    February 2, 2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,560
    
    
    $
    97,587Merchandise inventories
    
    
    229,738
    
    
    
    170,182Other current assets
    
    
    83,288
    
    
    
    52,818Total current assets
    
    
    314,586
    
    
    
    320,587PROPERTY AND EQUIPMENT, NET:Gross property and equipment
    
    
    695,063
    
    
    
    688,241Less accumulated depreciation and amortization
    
    
    (322,018
    )
    
    
    (311,998
    )Total property and equipment, net
    
    
    373,045
    
    
    
    376,243Other Assets
    
    
    39,323
    
    
    
    55,313TOTAL ASSETS
    
    $
    726,954
    
    
    $
    752,143LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    131,990
    
    
    $
    62,349Short-term borrowings
    
    
    10,780
    
    
    
    Other current liabilities
    
    
    68,843
    
    
    
    71,107Total current liabilities
    
    
    211,613
    
    
    
    133,456Deferred lease incentives
    
    
    57,835
    
    
    
    74,012Deferred rent
    
    
    23,824
    
    
    
    27,669Other long-term liabilities
    
    
    34,487
    
    
    
    33,661Total liabilities
    
    
    327,759
    
    
    
    268,798Commitments 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; 64,954,322 and 70,026,510 shares issued and outstanding, respectively
    
    
    650
    
    
    
    700Additional paid-in capital
    
    
    
    
    
    
    16,761Retained earnings
    
    
    398,545
    
    
    
    465,884Total shareholders equity
    
    
    399,195
    
    
    
    483,345TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    726,954
    
    
    $
    752,143
  3




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##### Table of Contents



PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 AND COMPREHENSIVE OPERATIONS
 (unaudited, in thousands except share and per share amounts)
 For the Second Quarter Ended
    
    
    For the First Half EndedAugust 2, 2008
    
    
    August 4, 2007
    
    
    August 2, 2008
    
    
    August 4, 2007Net sales
    
    $
    312,726
    
    
    $
    311,775
    
    
    $
    579,592
    
    
    $
    579,881Cost of goods sold, including buying, distribution and occupancy costs
    
    
    217,468
    
    
    
    209,929
    
    
    
    408,869
    
    
    
    402,837Gross margin
    
    
    95,258
    
    
    
    101,846
    
    
    
    170,723
    
    
    
    177,044Selling, general and administrative expenses
    
    
    90,173
    
    
    
    86,933
    
    
    
    185,985
    
    
    
    163,638Operating income (loss) from continuing operations
    
    
    5,085
    
    
    
    14,913
    
    
    
    (15,262
    )
    
    
    13,406Interest income, net
    
    
    11
    
    
    
    541
    
    
    
    769
    
    
    
    1,510Income (loss) from continuing operations before income taxes
    
    
    5,096
    
    
    
    15,454
    
    
    
    (14,493
    )
    
    
    14,916Income tax expense (benefit)
    
    
    1,388
    
    
    
    6,196
    
    
    
    (6,232
    )
    
    
    5,996Income (loss) from continuing operations
    
    
    3,708
    
    
    
    9,258
    
    
    
    (8,261
    )
    
    
    8,920Loss from discontinued operations, net of tax effects
    
    
    (912
    )
    
    
    (19,760
    )
    
    
    (26,045
    )
    
    
    (24,480
    )Net income (loss)
    
    $
    2,796
    
    
    $
    (10,502
    )
    
    $
    (34,306
    )
    
    $
    (15,560
    )Comprehensive income (loss)
    
    $
    2,796
    
    
    $
    (10,502
    )
    
    $
    (34,306
    )
    
    $
    (15,560
    )Income (loss) from continuing operations per share:Basic
    
    $
    0.06
    
    
    $
    0.13
    
    
    $
    (0.12
    )
    
    $
    0.13Diluted
    
    $
    0.06
    
    
    $
    0.13
    
    
    $
    (0.12
    )
    
    $
    0.13Net income (loss) per share:Basic
    
    $
    0.04
    
    
    $
    (0.15
    )
    
    $
    (0.50
    )
    
    $
    (0.22
    )Diluted
    
    $
    0.04
    
    
    $
    (0.15
    )
    
    $
    (0.50
    )
    
    $
    (0.22
    )Weighted average shares outstanding:Basic
    
    
    66,664,245
    
    
    
    69,692,827
    
    
    
    68,290,024
    
    
    
    69,635,543Diluted
    
    
    66,704,159
    
    
    
    70,064,804
    
    
    
    68,290,024
    
    
    
    69,986,773
  4




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##### Table of Contents



PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, in thousands)
 First Half EndedAug. 2, 2008
    
    
    Aug. 4, 2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (34,306
    )
    
    $
    (15,560
    )Adjustments to reconcile net loss to net cash from operating activities:Depreciation and amortization
    
    
    40,685
    
    
    
    38,027Asset impairment
    
    
    11,705
    
    
    
    9,934Loss on disposal of property and equipment
    
    
    1,649
    
    
    
    2,263Non-cash stock based compensation
    
    
    2,463
    
    
    
    3,023Tax (deficiencies) benefits related to stock-based compensation
    
    
    (968
    )
    
    
    369Excess tax benefits related to stock-based compensation
    
    
    
    
    
    
    (344
    )Change in operating assets and liabilities:Merchandise inventories
    
    
    (59,556
    )
    
    
    (50,871
    )Other current assets
    
    
    (30,470
    )
    
    
    (10,699
    )Other assets
    
    
    15,990
    
    
    
    (2,996
    )Accounts payable
    
    
    69,641
    
    
    
    47,539Other current liabilities
    
    
    (4,296
    )
    
    
    5,799Deferred lease incentives
    
    
    (16,177
    )
    
    
    (8,088
    )Deferred rent
    
    
    (3,845
    )
    
    
    (1,461
    )Other long-term liabilities
    
    
    818
    
    
    
    2,538Net cash (used in)/provided by operating activities
    
    
    (6,667
    )
    
    
    19,473CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (48,836
    )
    
    
    (63,175
    )Purchases of available-for-sale marketable securities
    
    
    
    
    
    
    (122,400
    )Sales of available-for-sale marketable securities
    
    
    
    
    
    
    137,900Purchases of held-to-maturity marketable securities
    
    
    
    
    
    
    (23,300
    )Net cash used in investing activities
    
    
    (48,836
    )
    
    
    (70,975
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repurchases of common stock
    
    
    (52,911
    )
    
    
    Borrowings under credit facility
    
    
    43,099
    
    
    
    Principal payments under credit facility
    
    
    (32,319
    )
    
    
    Proceeds from exercise of stock options
    
    
    1,614
    
    
    
    1,896Principal payments under capital lease obligations
    
    
    (7
    )
    
    
    (41
    )Borrowing under long-term financing obligation
    
    
    
    
    
    
    23,300Excess tax benefits related to stock-based compensation
    
    
    
    
    
    
    344Net cash (used in)/provided by financing activities
    
    
    (40,524
    )
    
    
    25,499NET DECREASE IN CASH AND CASH EQUIVALENTS:
    
    
    (96,027
    )
    
    
    (26,003
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    97,587
    
    
    
    52,267CASH AND CASH EQUIVALENTS, end of period
    
    $
    1,560
    
    
    $
    26,264SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    1
    
    
    $
    4Cash paid for income taxes
    
    $
    311
    
    
    $
    11,167SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:Increase in non-cash property and equipment accruals
    
    $
    1,985
    
    
    $
    760Capital lease transaction for property and equipment
    
    $
    20
    
    
    $
    3
  5




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the quarterly period ended August 2, 2008
 (unaudited, all amounts in thousands except share and per share
amounts unless otherwise indicated)
 1. NATURE OF BUSINESS
 www.pacsun.com
 2. BASIS OF PRESENTATION
   3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  New Accounting Pronouncements
 6




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##### Table of Contents



4. DISCONTINUED OPERATIONS
  For the Second Quarter
    
    For the First HalfEnded:
    
    Ended:Aug. 2,
    
    Aug. 4,
    
    Aug. 2,
    
    Aug. 4,2008
    
    2007
    
    2008
    
    2007Net sales
    
    $
    
    
    
    $
    32,443
    
    
    $
    27,051
    
    
    $
    84,922Income (loss) before income tax benefit
    
    
    312
    
    
    
    (33,499
    )
    
    
    (40,135
    )
    
    
    (41,159
    )Income tax expense (benefit)
    
    
    1,224
    
    
    
    (13,739
    )
    
    
    (14,090
    )
    
    
    (16,679
    )Net loss
    
    
    (912
    )
    
    
    (19,760
    )
    
    
    (26,045
    )
    
    
    (24,480
    )Net loss per share, diluted
    
    $
    (0.02
    )
    
    $
    (0.28
    )
    
    $
    (0.38
    )
    
    $
    (0.35
    )
  7




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##### Table of Contents



5. SEGMENT REPORTING
  6. STOCK-BASED COMPENSATION
  First Half2008
    
    2007Stock Awards
    
    ESPP
    
    Stock Awards
    
    ESPPExpected Life
    
    4 years
    
    0.5 years
    
    4 years
    
    0.5 yearsStock Volatility
    
    40.3% - 41.4%
    
    45.4%
    
    34.7% - 35.6%
    
    31.9%Risk-free Interest Rates
    
    2.3% - 3.0%
    
    3.2%
    
    4.5% - 4.9%
    
    5.0%Expected Dividends
    
    None
    
    None
    
    None
    
    None
  8




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##### Table of Contents



Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicExercise
    
    
    Contractual
    
    
    ValueStock Options/SARs
    
    Shares
    
    
    Price
    
    
    Term (Yrs.)
    
    
    ($000s)Outstanding at February 2, 2008
    
    
    2,821,794
    
    
    $
    19.96Granted
    
    
    484,080
    
    
    
    13.19Exercised
    
    
    (98,764
    )
    
    
    9.55Forfeited or expired
    
    
    (391,652
    )
    
    
    20.98Outstanding at May 3, 2008
    
    
    2,815,458
    
    
    $
    19.02
    
    
    
    4.92
    
    
    $
    958Granted
    
    
    75,000
    
    
    
    9.49Exercised
    
    
    (27,734
    )
    
    
    9.29Forfeited or expired
    
    
    (281,168
    )
    
    
    20.52Outstanding at August 2, 2008
    
    
    2,581,556
    
    
    $
    18.69
    
    
    
    4.93
    
    
    $
    57Vested and expected to vest at August 2, 2008
    
    
    2,062,392
    
    
    $
    19.40
    
    
    
    4.62
    
    
    $
    57Exercisable at August 2, 2008
    
    
    1,479,741
    
    
    $
    20.05
    
    
    
    4.17
    
    
    $
    57
   Weighted-Average Grant-Non-vested Shares
    
    Shares
    
    
    Date Fair ValueOutstanding at February 2, 2008
    
    
    769,075
    
    
    $
    19.01Granted
    
    
    276,120
    
    
    
    13.19Vested
    
    
    (58,690
    )
    
    
    21.00Forfeited
    
    
    (169,018
    )
    
    
    19.16Outstanding at May 3, 2008
    
    
    817,487
    
    
    $
    16.86Granted
    
    
    21,907
    
    
    
    9.49Vested
    
    
    (40,225
    )
    
    
    20.05Forfeited
    
    
    (54,240
    )
    
    
    16.66Outstanding at August 2, 2008
    
    
    744,929
    
    
    $
    16.55
  7. EARNINGS PER SHARE
  9




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Second Quarter Ended:
 August 2, 2008
    
    August 4, 2007Income
    
    
    
    
    
    
    
    
    
    Income(loss) from
    
    
    
    
    
    
    
    
    
    (loss) fromcontinuing
    
    
    
    
    
    Per Share
    
    continuing
    
    
    
    
    
    Per Shareoperations
    
    Shares
    
    Amount
    
    operations
    
    Shares
    
    AmountBasic EPS:
    
    $
    3,708
    
    
    
    66,664,245
    
    
    $
    0.06
    
    
    $
    9,258
    
    
    
    69,692,827
    
    
    $
    0.13Effect of dilutive equivalents
    
    
    
    
    
    
    39,914
    
    
    
    (0.00
    )
    
    
    
    
    
    
    371,977
    
    
    
    (0.00
    )Diluted EPS:
    
    $
    3,708
    
    
    
    66,704,159
    
    
    $
    0.06
    
    
    $
    9,258
    
    
    
    70,064,804
    
    
    $
    0.13
 Net income
    
    
    
    
    
    Per Share
    
    Net income
    
    
    
    
    
    Per Share(loss)
    
    Shares
    
    Amount
    
    (loss)
    
    Shares
    
    AmountBasic EPS:
    
    $
    2,796
    
    
    
    66,664,245
    
    
    $
    0.04
    
    
    $
    (10,502
    )
    
    
    69,692,827
    
    
    $
    (0.15
    )Effect of dilutive equivalents
    
    
    
    
    
    
    39,914
    
    
    
    (0.00
    )
    
    
    
    
    
    
    
    
    
    
    (0.00
    )Diluted EPS:
    
    $
    2,796
    
    
    
    66,704,159
    
    
    $
    0.04
    
    
    $
    (10,502
    )
    
    
    69,692,287
    
    
    $
    (0.15
    )
 First Half Ended:
 August 2, 2008
    
    August 4, 2007Income
    
    
    
    
    
    
    
    
    
    Income(loss) from
    
    
    
    
    
    
    
    
    
    (loss) fromcontinuing
    
    
    
    
    
    Per Share
    
    continuing
    
    
    
    
    
    Per Shareoperations
    
    Shares
    
    Amount
    
    operations
    
    Shares
    
    AmountBasic EPS:
    
    $
    (8,261
    )
    
    
    68,290,024
    
    
    $
    (0.12
    )
    
    $
    8,290
    
    
    
    69,635,543
    
    
    $
    0.13Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    351,230
    
    
    
    (0.00
    )Diluted EPS:
    
    $
    (8,261
    )
    
    
    68,290,024
    
    
    $
    (0.12
    )
    
    $
    8,290
    
    
    
    69,986,773
    
    
    $
    0.13
 Net income
    
    
    
    
    
    Per Share
    
    Net income
    
    
    
    
    
    Per Share(loss)
    
    Shares
    
    Amount
    
    (loss)
    
    Shares
    
    AmountBasic EPS:
    
    $
    (34,306
    )
    
    
    68,290,024
    
    
    $
    (0.50
    )
    
    $
    (15,560
    )
    
    
    69,635,543
    
    
    $
    (0.22
    )Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    
    
    
    
    (0.00
    )Diluted EPS:
    
    $
    (34,306
    )
    
    
    68,290,024
    
    
    $
    (0.50
    )
    
    $
    (15,560
    )
    
    
    69,635,543
    
    
    $
    (0.22
    )
  8. OTHER CURRENT ASSETS
  August 2,
    
    
    February 2,2008
    
    
    2008Income taxes receivable
    
    $
    45,008
    
    
    $
    5,200Prepaid expenses
    
    
    23,337
    
    
    
    25,228Deferred income taxes
    
    
    9,547
    
    
    
    12,179Non-trade accounts receivable
    
    
    5,396
    
    
    
    10,211Total other current assets
    
    $
    83,288
    
    
    $
    52,818
 10




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##### Table of Contents



9. OTHER CURRENT LIABILITIES
  August 2,
    
    
    February 2,2008
    
    
    2008Accrued compensation and benefits
    
    $
    14,164
    
    
    $
    21,619Accrued gift cards
    
    
    9,471
    
    
    
    15,493Accrued lease terminations
    
    
    3,904
    
    
    
    3,958Accrued capital expenditures
    
    
    9,429
    
    
    
    7,444Sales taxes payable
    
    
    4,674
    
    
    
    3,024Other
    
    
    27,201
    
    
    
    19,569Total other current liabilities
    
    $
    68,843
    
    
    $
    71,107
 10. CREDIT FACILITY
   11. COMMITMENTS AND CONTINGENCIES
 Litigation
 Letters of Credit
 11




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##### Table of Contents



12. COMMON STOCK REPURCHASE AND RETIREMENT
  MaximumValue of# of Shares
    
    
    
    
    
    
    Shares thatPurchased
    
    
    
    
    
    
    May Yet beAverage
    
    
    as Part of
    
    
    Value of
    
    
    PurchasedPrice
    
    
    Publicly
    
    
    Shares
    
    
    Under the# of Shares
    
    
    Paid Per
    
    
    Announced
    
    
    Purchased
    
    
    PlanPeriod
    
    Purchased
    
    
    Share
    
    
    Plan
    
    
    ($000s)
    
    
    ($000s)$
    50,508April 2008
    
    
    799,010
    
    
    $
    12.83
    
    
    
    799,010
    
    
    $
    10,248
    
    
    $
    40,260May 2008
    
    
    1,280,000
    
    
    
    9.26
    
    
    
    1,280,000
    
    
    
    11,853
    
    
    $
    28,407June 2008(1)
    
    
    2,944,900
    
    
    
    9.64
    
    
    
    2,944,900
    
    
    
    28,384
    
    
    $
    23July 2008 (2)
    
    
    323,634
    
    
    
    7.50
    
    
    
    323,634
    
    
    
    2,427
    
    
    $
    47,597Total
    
    
    5,347,544
    
    
    $
    9.89
    
    
    
    5,347,544
    
    
    $
    52,912
 
 (1)
    
    In June 2008, we completed the remainder of our
$100 million stock repurchase program announced in May 2006, having
repurchased 5,023,910 shares at an average price of $10.05 per share, for approximately $51
million. This repurchase authorization expired when the funds were
fully expended.(2)
    
    As announced in July 2008, the Board of Directors has authorized us to repurchase up to $50 million of our
common stock. This repurchase authorization does not expire until all
authorized funds have been expended. 13. FAIR VALUE MEASUREMENTS
   
    
    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.
  12




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##### Table of Contents



Fair Value Measurements at August 2, 2008Quoted Prices
    
    Significantin Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Cash equivalents
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Deferred compensation assets
    
    
    7,051
    
    
    
    7,051
    
    
    
    
    
    
    
    Total Assets
    
    $
    7,051
    
    
    $
    7,051
    
    
    
    
    
    
    
    Liabilities:Deferred compensation liabilities
    
    $
    4,280
    
    
    $
    4,280
    
    
    
    
    
    
    
    Total Liabilities
    
    $
    4,280
    
    
    $
    4,280
    
    
    
    
    
    
    
    
 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 2008 closures
    
    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 2008
    
    expectations regarding future borrowings and repayments under
our credit facility and cash holdings at fiscal year-end
    
    the outcome of current and threatened litigation including
litigation relating to the demo store closures
    
    expectations regarding future increases in CAM expenses
  Executive Overview
  Comparable (or same store) sales
 Net merchandise margins
 14




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##### Table of Contents



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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##### 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. 2,
    
    Aug. 4,
    
    Aug. 2,
    
    Aug. 4,2008
    
    2007
    
    2008
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, including buying, distribution and occupancy costs
    
    
    69.5
    
    
    
    67.3
    
    
    
    70.5
    
    
    
    69.5Gross margin
    
    
    30.5
    
    
    
    32.7
    
    
    
    29.5
    
    
    
    30.5Selling, general and administrative expenses
    
    
    28.8
    
    
    
    27.9
    
    
    
    32.1
    
    
    
    28.2Operating income (loss) from continuing operations
    
    
    1.6
    
    
    
    4.8
    
    
    
    (2.6
    )
    
    
    2.3Interest income, net
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3Income (loss) from continuing operations before income taxes
    
    
    1.6
    
    
    
    5.0
    
    
    
    (2.5
    )
    
    
    2.6Income tax expense (benefit)
    
    
    0.4
    
    
    
    2.0
    
    
    
    (1.1
    )
    
    
    1.0Income (loss) from continuing operations
    
    
    1.2
    %
    
    
    3.0
    %
    
    
    (1.4
    )%
    
    
    1.5
    %
  August 2,
    
    
    August 4,2008
    
    
    2007PacSun stores
    
    
    815
    
    
    
    840Outlet stores
    
    
    123
    
    
    
    117Total stores
    
    
    938
    
    
    
    957Square footage (in 000s)
    
    
    3,596
    
    
    
    3,653
  17




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##### Table of Contents



The second quarter (thirteen weeks) ended August 2, 2008 as compared to the second quarter
(thirteen weeks) ended August 4, 2007
 Net Sales
  $ millions
    
    Attributable to$ 9
    
    Non-comparable sales from new, expanded or relocated stores not
yet included in the comparable store base and internet net sales(5)
    
    Decrease in sales due to store closures(3)
    
    (1.0)% decrease in comparable store net sales in the second
quarter of fiscal 2008 compared to the second quarter of fiscal
2007. In percentage terms, the average sale transaction in a
comparable store was down 4% partially offset by a 3% increase
in total transactions$ 1
    
    Total
  Gross Margin
  %
    
    Attributable to(1.9)
    
    Decline in merchandise margin due to increased markdowns associated with sales promotions(0.8)
    
    Deleverage of occupancy costs as a result of the negative one percent same-store sales
result for the second quarter of fiscal 20080.3
    
    Decrease in distribution expenses of $1 million due to the consolidation of our
distribution function in the first quarter of fiscal 20080.2
    
    Decrease in buying costs(2.2)
    
    Total
 Selling, General and Administrative Expenses
  %
    
    Attributable to0.8
    
    $3 million increase in depreciation expense, primarily due to the impact of accelerated
depreciation associated with store closures and relocations, and new depreciation on
existing stores from our refresh program0.7
    
    $2 million increase in store impairment charges(0.6)
    
    $2 million decrease in other SG&A expenses, primarily in payroll and payroll-related expenses0.9
    
    Total
 18




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##### Table of Contents



Net Interest Income
  Income Taxes
  The first half (26 weeks) ended August 2, 2008 as compared to the first half (26 weeks) ended
August 4, 2007
 Net Sales
  $ millions
    
    Attributable to$ 17
    
    Non-comparable sales from new, expanded or relocated stores not
yet included in the comparable store base and internet net sales(12)
    
    Decrease in sales due to store closures(5)
    
    (1.0)% decrease in comparable store net sales in the first half
of fiscal 2008 compared to the first half of fiscal 2007. In
percentage terms, the average sale transaction in a comparable
store was down 2% partially offset by a 1% increase in total
transactions$
    
    Total
  Gross Margin
  %
    
    Attributable to(1.0)
    
    Deleverage of occupancy costs as a result of the negative one percent same-store
sales result for the first half of fiscal 20080.2
    
    Increase in merchandise margins primarily due to increased higher initial markups(0.2)
    
    Increase in buying costs(1.0)
    
    Total
 19




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##### Table of Contents



Selling, General and Administrative Expenses
  %
    
    Attributable to1.8
    
    $11 million increase in asset impairment charges including $8 million
from the materials handling equipment in our closed Anaheim
distribution center and $3 million from store impairments0.9
    
    $5 million increase in depreciation expense, primarily due to the
impact of accelerated depreciation associated with store closures and
relocations and new depreciation on existing stores from our refresh
program0.8
    
    $4 million increase in payroll due to a $2 million increase in our home
office due to the carryover impact of prior year hires and a $2 million
increase in store payroll primarily due to the impact of minimum wage
increases enacted during fiscal 20070.2
    
    $1 million net increase in legal and related dispute settlement expenses0.2
    
    $1 million net increase in other SG&A expenses3.9
    
    Total
 Net Interest Income
  Income Taxes
  Liquidity and Capital Resources
  20




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##### Table of Contents



Operating Cash Flows
  $ millions
    
    Attributable to$ (20)
    
    Decrease in cash flows related to other current assets, primarily due to increased income
tax receivables attributable to the losses from continuing operations and discontinued
demo concept(19)
    
    Higher net loss due to losses from continuing operations and the discontinued demo concept19
    
    Increase in cash flows related to other assets, primarily due to a decrease in deferred
tax assets associated with the discontinued demo concept13
    
    Increase in cash flows from accounts payable, net of inventory, due to timing of payments
and reductions in overall inventory levels versus the second quarter of last year
primarily due to the closing of the demo concept(8)
    
    Decrease in cash flows from deferred lease incentives primarily due to repayments of
unamortized lease incentive balances to landlords in conjunction with lease terminations
associated with our discontinued demo concept(11)
    
    Decrease in cash flows from other changes in working capital items$ (26)
    
    Total
 Working Capital
  $ millions
    
    Description$ 187
    
    Working capital at February 2, 2008(96)
    
    Decrease in cash and cash equivalents, primarily due to the payment of demo lease
terminations, stock repurchases and the net losses incurred in the first half of
fiscal 2008, among other items (see cash flows statement)(10)
    
    Increase in accounts payable, net of inventories, due to timing of payments and
reduced inventory levels primarily due to the closing of the demo concept(11)
    
    Increase in short-term borrowings under credit facility33
    
    Net increase in working capital attributable to other current assets and liabilities$ 103
    
    Working capital at August 2, 2008
 Investing Cash Flows
  21




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##### Table of Contents



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
    
    $
    572
    
    
    $
    94
    
    
    $
    178
    
    
    $
    134
    
    
    $
    166Capital lease obligations
    
    
    <0.1
    
    
    
    <0.1
    
    
    
    
    
    
    
    
    
    
    
    FIN 48 obligations including interest and penalties
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Letters of credit
    
    
    38
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    612
    
    
    $
    132
    
    
    $
    180
    
    
    $
    134
    
    
    $
    166
  22




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##### Table of Contents



Operating Leases
  Indemnifications
   New Accounting Pronouncements
  23




---



##### Table of Contents



Inflation
  Seasonality and Quarterly Results
  
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4  CONTROLS AND PROCEDURES
   24




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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 business and profitability.
 We have stated our intention to place a greater emphasis on apparel, juniors merchandise, and the
proprietary brand penetration within the juniors category in our merchandising assortments than we
have in the past, which may not be successful in improving our store productivity or profitability.
 We continue to reinvest in our existing store fleet, which may not result in improved operating
performance.
 25




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##### Table of Contents



Our continued growth depends, in part, on our ability to develop new store concepts and/or open and
operate new/existing stores that achieve acceptable levels of profitability. Any failure to do so
may negatively impact our stock price and operational performance.
 Any deterioration in consumer spending due to macro-economic issues that are beyond our control can
have a material adverse impact on our results of operations, liquidity and stock price.
 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.
 26




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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.
 Our dependence on a single distribution facility exposes us to significant operational risks.
 27




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##### Table of Contents



Selling merchandise over the internet carries particular risks that can have a negative impact on
our business.
 The effects of terrorism or war could significantly impact consumer spending and our operational
performance.
 Our stock price can fluctuate significantly due to a variety of factors, which can negatively
impact our total market value.
   28




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##### 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
     DIRECTOR
    
    VOTES
    
    VOTESDIRECTOR NAME
    
    CLASS
    
    CAST FOR
    
    WITHHELDGeorge R. Mrkonic
    
    
    I
    
    
    
    65,298,012
    
    
    
    1,957,060Sally Frame Kasaks
    
    II
    
    
    64,873,083
    
    
    
    2,381,989Thomas M. Murnane
    
    II
    
    
    59,932,690
    
    
    
    7,322,382Grace Nichols
    
    II
    
    
    65,186,355
    
    
    
    2,068,717Peter Starrett
    
    II
    
    
    63,059,016
    
    
    
    4,196,056
  
 Item 5  Other Information
  29




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##### Table of Contents



Item 6  Exhibits
 Exhibit 3.1
    
    Third Amended and Restated Articles of Incorporation of the Company (1)Exhibit 3.2
    
    Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock of the Company (2)Exhibit 3.3
    
    Third Amended and Restated Bylaws of the Company, as amended (3)Exhibit 10.1
    
    First Amendment to Credit Facility, dated as of August 1, 2008, with JPMorgan Chase Bank, N.A., as Administrative
Agent, and a syndicate of other lendersExhibit 31.1
    
    Written statement of Sally Frame Kasaks pursuant to section 302 of the Sarbanes-Oxley Act of
2002Exhibit 31.2
    
    Written statement of Michael L. Henry pursuant to section 302 of the Sarbanes-Oxley Act of
2002Exhibit 32.1
    
    Written statements of Sally Frame Kasaks and Michael L. Henry pursuant to section 906 of the Sarbanes-Oxley Act of
2002
 
 Note Reference:
 (1)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-Q, as filed with the
Securities and Exchange Commission on August 31, 2004(2)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on December 24, 1998(3)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-Q, as filed with the
Securities and Exchange Commission on December 3, 2007 30




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##### Table of Contents



SIGNATURES
  PACIFIC SUNWEAR OF CALIFORNIA, INC.
(Registrant)Date: August 29, 2008
    
    /s/ SALLY FRAME KASAKS

Sally Frame KasaksChairman and Chief Executive Officer(Principal Executive Officer)Date: August 29, 2008
    
    /s/ MICHAEL L. HENRYMichael L. HenrySenior Vice President,Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)
 31




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##### Table of Contents



Exhibit Index
 Exhibit 3.1
    
    Third Amended and Restated Articles of Incorporation of the Company (1)Exhibit 3.2
    
    Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock of the Company (2)Exhibit 3.3
    
    Third Amended and Restated Bylaws of the Company, as amended (3)Exhibit 10.1
    
    First Amendment to Credit Facility, dated as of August 1, 2008, with JPMorgan Chase Bank, N.A., as Administrative
Agent, and a syndicate of other lendersExhibit 31.1
    
    Written statement of Sally Frame Kasaks pursuant to section 302 of the Sarbanes-Oxley Act of
2002Exhibit 31.2
    
    Written statement of Michael L. Henry pursuant to section 302 of the Sarbanes-Oxley Act of
2002Exhibit 32.1
    
    Written statements of Sally Frame Kasaks and Michael L. Henry pursuant to section 906 of the Sarbanes-Oxley Act of
2002
 
 Note Reference:
 (1)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-Q, as filed with the
Securities and Exchange Commission on August 31, 2004(2)
    
    Incorporated by reference from the Companys Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on December 24, 1998(3)
    
    Incorporated by reference from the Companys Quarterly Report on Form 10-Q, as filed with the
Securities and Exchange Commission on December 3, 2007