##### 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 1, 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 definitions 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 November 1, 2008
 Index
 Page #PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Condensed Consolidated Financial Statements (unaudited):Condensed Consolidated Balance SheetsNovember 1, 2008 and February 2, 2008
    
    
    3Condensed Consolidated Statements of Operations and Comprehensive OperationsThird quarter (13 weeks) and three quarters (39 weeks) ended November 1, 2008 and November 3, 2007
    
    
    4Condensed Consolidated Statements of Cash FlowsThree quarters (39 weeks) ended November 1, 2008 and November 3, 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
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults upon Senior Securities
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits
    
    
    30SIGNATURE PAGE
    
    
    31EX-31.1EX-31.2EX-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 1, 2008
    
    
    February 2, 2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    4,817
    
    
    $
    97,587Merchandise inventories
    
    
    233,814
    
    
    
    170,182Other current assets
    
    
    73,635
    
    
    
    52,818Total current assets
    
    
    312,266
    
    
    
    320,587PROPERTY AND EQUIPMENT, NET:Gross property and equipment
    
    
    678,305
    
    
    
    688,241Less accumulated depreciation and amortization
    
    
    (324,371
    )
    
    
    (311,998
    )Total property and equipment, net
    
    
    353,934
    
    
    
    376,243Assets held for sale
    
    
    15,637
    
    
    
    Other assets
    
    
    31,423
    
    
    
    55,313TOTAL ASSETS
    
    $
    713,260
    
    
    $
    752,143LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    113,799
    
    
    $
    62,349Short-term borrowings
    
    
    43,100
    
    
    
    Other current liabilities
    
    
    47,365
    
    
    
    71,107Total current liabilities
    
    
    204,264
    
    
    
    133,456Deferred lease incentives
    
    
    55,054
    
    
    
    74,012Deferred rent
    
    
    23,471
    
    
    
    27,669Other long-term liabilities
    
    
    32,213
    
    
    
    33,661Total liabilities
    
    
    315,002
    
    
    
    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; 64,993,641
and 70,026,510 shares issued and outstanding, respectively
    
    
    650
    
    
    
    700Additional paid-in capital
    
    
    1,538
    
    
    
    16,761Retained earnings
    
    
    396,070
    
    
    
    465,884Total shareholders equity
    
    
    398,258
    
    
    
    483,345TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    713,260
    
    
    $
    752,143
  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)
 For the Third Quarter Ended
    
    
    For the Three Quarters EndedNovember 1, 2008
    
    
    November 3, 2007
    
    
    November 1, 2008
    
    
    November 3, 2007Net sales
    
    $
    323,612
    
    
    $
    341,874
    
    
    $
    903,204
    
    
    $
    921,755Cost of goods sold, including
buying, distribution and occupancy
costs
    
    
    230,836
    
    
    
    227,148
    
    
    
    639,705
    
    
    
    629,986Gross margin
    
    
    92,776
    
    
    
    114,726
    
    
    
    263,499
    
    
    
    291,769Selling, general and administrative
expenses
    
    
    95,308
    
    
    
    88,325
    
    
    
    281,163
    
    
    
    251,962Operating (loss) income from
continuing operations
    
    
    (2,532
    )
    
    
    26,401
    
    
    
    (17,664
    )
    
    
    39,807Other expense (income), net
    
    
    1,100
    
    
    
    (652
    )
    
    
    461
    
    
    
    (2,162
    )(Loss) income from continuing
operations before income taxes
    
    
    (3,632
    )
    
    
    27,053
    
    
    
    (18,125
    )
    
    
    41,969Income tax (benefit) expense
    
    
    (112
    )
    
    
    9,910
    
    
    
    (6,344
    )
    
    
    15,906(Loss) income from continuing
operations
    
    
    (3,520
    )
    
    
    17,143
    
    
    
    (11,781
    )
    
    
    26,063Income (loss) from discontinued
operations, net of tax
    
    
    1,046
    
    
    
    (37,180
    )
    
    
    (24,999
    )
    
    
    (61,660
    )Net loss
    
    $
    (2,474
    )
    
    $
    (20,037
    )
    
    $
    (36,780
    )
    
    $
    (35,597
    )Comprehensive loss
    
    $
    (2,474
    )
    
    $
    (20,037
    )
    
    $
    (36,780
    )
    
    $
    (35,597
    )(Loss) income from continuing
operations per share:Basic
    
    $
    (0.05
    )
    
    $
    0.25
    
    
    $
    (0.18
    )
    
    $
    0.37Diluted
    
    $
    (0.05
    )
    
    $
    0.25
    
    
    $
    (0.18
    )
    
    $
    0.37Net loss per share:Basic
    
    $
    (0.04
    )
    
    $
    (0.29
    )
    
    $
    (0.55
    )
    
    $
    (0.51
    )Diluted
    
    $
    (0.04
    )
    
    $
    (0.29
    )
    
    $
    (0.55
    )
    
    $
    (0.51
    )Weighted average shares outstanding:Basic
    
    
    64,968,707
    
    
    
    69,765,113
    
    
    
    67,182,918
    
    
    
    69,678,733Diluted
    
    
    64,968,707
    
    
    
    69,949,070
    
    
    
    67,182,918
    
    
    
    69,975,662
  4




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, in thousands)
 Three Quarters EndedNov. 1, 2008
    
    
    Nov. 3, 2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (36,780
    )
    
    $
    (35,597
    )Adjustments to reconcile net loss to net cash from operating activities:Depreciation and amortization
    
    
    58,743
    
    
    
    58,295Asset impairment
    
    
    14,821
    
    
    
    59,756Goodwill impairment
    
    
    6,492
    
    
    
    Loss on disposal of property and equipment
    
    
    2,368
    
    
    
    3,245Non-cash stock based compensation
    
    
    4,442
    
    
    
    5,119Tax (deficiencies) benefits related to stock-based compensation
    
    
    (1,408
    )
    
    
    320Excess tax benefits related to stock-based compensation
    
    
    (5
    )
    
    
    (292
    )Change in operating assets and liabilities:Merchandise inventories
    
    
    (63,632
    )
    
    
    (36,997
    )Other current assets
    
    
    (20,817
    )
    
    
    (25,349
    )Other assets
    
    
    17,398
    
    
    
    (3,093
    )Accounts payable
    
    
    51,450
    
    
    
    39,770Other current liabilities
    
    
    (21,776
    )
    
    
    (8,047
    )Deferred lease incentives
    
    
    (18,958
    )
    
    
    (11,170
    )Deferred rent
    
    
    (4,199
    )
    
    
    (2,211
    )Other long-term liabilities
    
    
    (1,454
    )
    
    
    2,115Net cash (used in)/provided by operating activities
    
    
    (13,315
    )
    
    
    45,864CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (71,528
    )
    
    
    (94,939
    )Proceeds from sale of property and equipment
    
    
    275
    
    
    
    Purchases of available-for-sale marketable securities
    
    
    
    
    
    
    (171,400
    )Sales of available-for-sale marketable securities
    
    
    
    
    
    
    202,900Purchases of held-to-maturity marketable securities
    
    
    
    
    
    
    (23,300
    )Net cash used in investing activities
    
    
    (71,253
    )
    
    
    (86,739
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repurchases of common stock
    
    
    (52,911
    )
    
    
    Borrowings under credit facility
    
    
    168,739
    
    
    
    Principal payments under credit facility
    
    
    (125,639
    )
    
    
    Proceeds from exercise of stock options
    
    
    1,613
    
    
    
    2,237Principal payments under capital lease obligations
    
    
    (9
    )
    
    
    (42
    )Borrowing under long-term financing obligation
    
    
    
    
    
    
    23,300Excess tax benefits related to stock-based compensation
    
    
    5
    
    
    
    292Net cash (used in)/provided by financing activities
    
    
    (8,202
    )
    
    
    25,787NET DECREASE IN CASH AND CASH EQUIVALENTS:
    
    
    (92,770
    )
    
    
    (15,088
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    97,587
    
    
    
    52,267CASH AND CASH EQUIVALENTS, end of period
    
    $
    4,817
    
    
    $
    37,179SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    174
    
    
    $
    5Cash paid for income taxes
    
    $
    539
    
    
    $
    10,635SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:(Decrease)/Increase in non-cash property and equipment accruals
    
    $
    (2,013
    )
    
    $
    247Capital lease transaction for property and equipment
    
    $
    20
    
    
    $
    9
  5




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PACIFIC SUNWEAR OF CALIFORNIA, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the quarterly period ended November 1, 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 Third Quarter
    
    For the Three QuartersEnded
    
    EndedNov. 1,
    
    Nov. 3,
    
    Nov. 1,
    
    Nov. 3,2008
    
    2007
    
    2008
    
    2007Net sales
    
    $
    
    
    
    $
    31,274
    
    
    $
    27,051
    
    
    $
    116,196Loss before income tax benefit
    
    
    (683
    )
    
    
    (64,151
    )
    
    
    (40,818
    )
    
    
    (105,310
    )Income tax benefit
    
    
    (1,729
    )
    
    
    (26,971
    )
    
    
    (15,819
    )
    
    
    (43,650
    )Net income (loss)
    
    
    1,046
    
    
    
    (37,180
    )
    
    
    (24,999
    )
    
    
    (61,660
    )Net income (loss) per diluted share
    
    $
    0.02
    
    
    $
    (0.53
    )
    
    $
    (0.37
    )
    
    $
    (0.89
    )
  5. SEGMENT REPORTING
  7




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##### Table of Contents



6. STOCK-BASED COMPENSATION
  Fiscal Three Quarters2008
    
    2007Stock Awards
    
    ESPP
    
    Stock Awards
    
    ESPPExpected Life
    
    4 years
    
    0.5 years
    
    4 years
    
    0.5 yearsStock Volatility
    
    
    40.3% - 42.8
    %
    
    
    45.4% - 57.0
    %
    
    
    34.7% - 36.6
    %
    
    
    31.9
    %Risk-free Interest Rates
    
    
    2.3% - 3.0
    %
    
    
    2.1% - 3.2
    %
    
    
    4.3% - 4.9
    %
    
    
    5.0
    %Expected Dividends
    
    None
    
    None
    
    None
    
    None
   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
    
    
    $
    57Granted
    
    
    18,000
    
    
    
    7.97Exercised
    
    
    
    
    
    
    Forfeited or expired
    
    
    (123,230
    )
    
    
    20.15Outstanding at November 1, 2008
    
    
    2,476,326
    
    
    $
    18.54
    
    
    
    4.88
    
    
    $
    Vested and expected to vest at November 1, 2008
    
    
    1,970,353
    
    
    $
    19.32
    
    
    
    4.59
    
    
    $
    Exercisable at November 1, 2008
    
    
    1,411,928
    
    
    $
    20.13
    
    
    
    4.18
    
    
    $
    
  8




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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
    
    
    $
    16.55Granted
    
    
    24,203
    
    
    
    7.97Vested
    
    
    (39,631
    )
    
    
    16.35Forfeited
    
    
    (31,253
    )
    
    
    16.13Outstanding at November 1, 2008
    
    
    698,248
    
    
    $
    16.28
  7. EARNINGS PER SHARE
  Third Quarter Ended:
 November 1, 2008
    
    November 3, 2007Loss from
    
    
    
    
    
    
    
    
    
    Income fromcontinuing
    
    
    
    
    
    Per Share
    
    continuing
    
    
    
    
    
    Per Shareoperations
    
    Shares
    
    Amount
    
    operations
    
    Shares
    
    AmountBasic EPS:
    
    $
    (3,520
    )
    
    
    64,968,707
    
    
    $
    (0.05
    )
    
    $
    17,143
    
    
    
    69,765,113
    
    
    $
    0.25Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    183,957
    
    
    
    (0.00
    )Diluted EPS:
    
    $
    (3,520
    )
    
    
    64,968,707
    
    
    $
    (0.05
    )
    
    $
    17,143
    
    
    
    69,949,070
    
    
    $
    0.25
 Per Share
    
    
    
    
    
    
    
    
    
    Per ShareNet loss
    
    Shares
    
    Amount
    
    Net loss
    
    Shares
    
    AmountBasic EPS:
    
    $
    (2,474
    )
    
    
    64,968,707
    
    
    $
    (0.04
    )
    
    $
    (20,037
    )
    
    
    69,765,113
    
    
    $
    (0.29
    )Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    
    
    
    
    (0.00
    )Diluted EPS:
    
    $
    (2,474
    )
    
    
    64,968,707
    
    
    $
    (0.04
    )
    
    $
    (20,037
    )
    
    
    69,765,113
    
    
    $
    (0.29
    )
 9




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##### Table of Contents



Three Quarters Ended:
 November 1, 2008
    
    November 3, 2007Loss from
    
    
    
    
    
    
    
    
    
    Income fromcontinuing
    
    
    
    
    
    Per Share
    
    continuing
    
    
    
    
    
    Per Shareoperations
    
    Shares
    
    Amount
    
    operations
    
    Shares
    
    AmountBasic EPS:
    
    $
    (11,781
    )
    
    
    67,182,918
    
    
    $
    (0.18
    )
    
    $
    26,063
    
    
    
    69,678,733
    
    
    $
    0.37Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    296,929
    
    
    
    (0.00
    )Diluted EPS:
    
    $
    (11,781
    )
    
    
    67,182,918
    
    
    $
    (0.18
    )
    
    $
    26,063
    
    
    
    69,975,662
    
    
    $
    0.37
 Per Share
    
    
    
    
    
    
    
    
    
    Per ShareNet loss
    
    Shares
    
    Amount
    
    Net loss
    
    Shares
    
    AmountBasic EPS:
    
    $
    (36,780
    )
    
    
    67,182,918
    
    
    $
    (0.55
    )
    
    $
    (35,597
    )
    
    
    69,678,733
    
    
    $
    (0.51
    )Effect of dilutive equivalents
    
    
    
    
    
    
    
    
    
    
    (0.00
    )
    
    
    
    
    
    
    
    
    
    
    (0.00
    )Diluted EPS:
    
    $
    (36,780
    )
    
    
    67,182,918
    
    
    $
    (0.55
    )
    
    $
    (35,597
    )
    
    
    69,678,733
    
    
    $
    (0.51
    )
  8. OTHER CURRENT ASSETS
  Nov. 1,
    
    
    Feb. 2,2008
    
    
    2008Income taxes receivable
    
    $
    46,638
    
    
    $
    5,200Prepaid expenses
    
    
    13,514
    
    
    
    25,228Deferred income taxes
    
    
    9,547
    
    
    
    12,179Non-trade accounts receivable
    
    
    3,936
    
    
    
    10,211Total other current assets
    
    $
    73,635
    
    
    $
    52,818
 9. OTHER CURRENT LIABILITIES
  Nov. 1,
    
    
    Feb. 2,2008
    
    
    2008Accrued gift cards
    
    $
    8,915
    
    
    $
    15,493Accrued compensation and benefits
    
    
    8,250
    
    
    
    21,619Accrued capital expenditures
    
    
    5,431
    
    
    
    7,444Sales taxes payable
    
    
    2,872
    
    
    
    3,024Accrued lease terminations
    
    
    369
    
    
    
    3,958Other
    
    
    21,528
    
    
    
    19,569Total other current liabilities
    
    $
    47,365
    
    
    $
    71,107
 10. CREDIT FACILITY
  10




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11. COMMITMENTS AND CONTINGENCIES
 Litigation
 Letters of Credit
 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
    
    
    
    2,426
    
    
    $
    47,597Total
    
    
    5,347,544
    
    
    $
    9.89
    
    
    
    5,347,544
    
    
    $
    52,911
 
 (1)
    
    In June 2008, we completed the remainder of our $100 million stock repurchase program
announced in May 2006. 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
  11




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##### Table of Contents




    
    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 November 1, 2008Quoted Prices
    
    Significantin Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Deferred compensation assets
    
    $
    6,391
    
    
    $
    
    
    
    $
    6,391
    
    
    $
    
 14. GOODWILL IMPAIRMENT
  12




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15. ASSETS HELD FOR SALE
  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
    
    forecasts of future comparable store net sales, gross margins, 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 2008 and 2009
    
    expectations regarding future borrowings and repayments under our credit facility and
cash balances at fiscal year-end
    
    expectations regarding future increases in common area maintenance (CAM) expenses
  Executive Overview
  Comparable (or same store) sales
 14




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##### Table of Contents



Net merchandise margins
 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
  Third Quarter Ended
    
    
    Three Quarters EndedNov. 1,
    
    
    Nov. 3,
    
    
    Nov. 1,
    
    
    Nov. 3,2008
    
    
    2007
    
    
    2008
    
    
    2007Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, including buying,
distribution and occupancy costs
    
    
    71.3
    
    
    
    66.4
    
    
    
    70.8
    
    
    
    68.3Gross margin
    
    
    28.7
    
    
    
    33.6
    
    
    
    29.2
    
    
    
    31.7Selling, general and administrative expenses
    
    
    29.5
    
    
    
    25.8
    
    
    
    31.1
    
    
    
    27.3Operating (loss) income from continuing operations
    
    
    (0.8
    )
    
    
    7.7
    
    
    
    (2.0
    )
    
    
    4.3Other expense (income), net
    
    
    0.3
    
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.2
    )(Loss) income from continuing operations before
income taxes
    
    
    (1.1
    )
    
    
    7.9
    
    
    
    (2.0
    )
    
    
    4.6Income tax expense (benefit)
    
    
    0.0
    
    
    
    2.9
    
    
    
    (0.7
    )
    
    
    1.7(Loss) income from continuing operations
    
    
    (1.1
    )%
    
    
    5.0
    %
    
    
    (1.3
    )%
    
    
    2.8
    %
  Nov. 1,
    
    
    Nov. 3,2008
    
    
    2007PacSun stores
    
    
    815
    
    
    
    838PacSun Outlet stores
    
    
    125
    
    
    
    119Total stores
    
    
    940
    
    
    
    957Square footage (in 000s)
    
    
    3,608
    
    
    
    3,667
  The third quarter (thirteen weeks) ended November 1, 2008 as compared to the third quarter
(thirteen weeks) ended November 3, 2007
 Net Sales
  17




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$ millions
    
    Attributable to$
    
    (22
    )
    
    Decrease due to a (7.0)% decline in comparable store net sales in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. In percentage terms, the average sale transaction in a comparable store was down 10% partially offset by a 3% increase in total transactions(6
    )
    
    Net decrease in sales due to store closures10
    
    
    Increase due to non-comparable sales from new, expanded or relocated stores not yet included in the comparable store base and internet net sales$
    
    (18
    )
    
    Total
  Gross Margin
  %
    
    Attributable to(3.6
    )
    
    Decline in merchandise margin due to increased markdowns(1.4
    )
    
    Deleverage of occupancy costs as a result of the negative seven percent same-store sales results for the third quarter of fiscal 2008(0.2
    )
    
    Deleverage of buying costs as a result of the negative seven percent same-store sales results for the third quarter of fiscal 20080.3
    
    
    Decrease in freight and distribution costs of $1 million due primarily to the consolidation of our distribution function in the first quarter of fiscal 2008(4.9
    )
    
    Total
  Selling, General and Administrative Expenses
  18




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##### Table of Contents



%
    
    Attributable to2.6
    
    
    Increase in asset impairment charges of $8 million primarily attributable to a $6 million goodwill impairment charge and a $2 million increase in store fixed asset impairments0.5
    
    
    Increase in payroll and payroll-related expenses due to deleveraging these expenses against the negative seven percent same-store sales result. In dollars, payroll and payroll-related expenses were down $1 million.0.5
    
    
    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 program0.1
        
    Increase in other SG&A expenses3.7
    
    
    Total
  Other expense (income), net
  Income Taxes
  The three quarters (39 weeks) ended November 1, 2008 as compared to the three quarters (39
weeks) ended November 3, 2007
 Net Sales
  $ millions
    
    Attributable to$
    
    (27
    )
    
    Decrease due to a (3.0)% decline in comparable store net sales in the first three quarters of fiscal 2008 compared to the first three quarters of fiscal 2007. In percentage terms, the average sale transaction in a comparable store was down 5% partially offset by a 2% increase in total transactions(17
    )
    
    Decrease in sales due to store closures25
    
    
    Increase due to non-comparable sales from new, expanded or relocated stores not yet included in the comparable store base and internet net sales$
    
    (19
    )
    
    Total
 19




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##### Table of Contents



Gross Margin
  %
    
    Attributable to(1.2
    )
    
    Deleverage of occupancy costs as a result of the negative three
percent same-store sales result for the first three quarters of
fiscal 2008(1.1
    )
    
    Decrease in merchandise margins primarily due to higher markdowns(0.2
    )
    
    Deleverage of buying costs as a result of the negative three
percent same-store sales result for the first three quarters of
fiscal 2008(2.5
    )
    
    Total
  Selling, General and Administrative Expenses
  %
    
    Attributable to2.1
    
    
    Increase in asset impairment and disposal charges of $19
million, including $8 million from the materials handling
equipment and furniture and fixtures in our closed Anaheim
distribution center, $6 million from the impairment of
goodwill, and an increase of $5 million in store fixed asset
impairments and losses on disposals0.8
    
    
    Increase in depreciation expense of $6 million, primarily due
to the impact of accelerated depreciation associated with store
closures and relocations and new depreciation on existing
stores from our refresh program0.6
    
    
    Increase in other SG&A expenses of $4 million primarily due to
an increase of $2 million in e-commerce related expenses based
on the growth of our e-commerce business, $1 million in legal
settlement costs and $1 million for all other SG&A expenses0.3
    
    
    Deleverage of payroll and payroll-related costs due to the
negative three percent same-store sales result for the first
three quarters of fiscal 2008. In dollars, payroll and
payroll-related expenses were flat.3.8
    
    
    Total
  20




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##### Table of Contents



Other expense (income), net
  Income Taxes
  Liquidity and Capital Resources
  Operating Cash Flows
  21




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##### Table of Contents



$ millions
    
    Attributable to$
    
    (39
    )
    
    Decrease in non-cash asset impairments and loss on disposals primarily due
to the discontinued demo concept(15
    )
    
    Decrease in cash flows from an increase in merchandise inventories, net of
accounts payable, due primarily to in-transit holiday shipments and related
timing of payments(14
    )
    
    Decrease in cash flows from other current liabilities due to reduced
compensation and lease termination accruals primarily associated with the
discontinued demo concept(8
    )
    
    Decrease in cash flows primarily due to payback of unamortized portions of
deferred lease incentives in conjunction with demo lease terminations(8
    )
    
    Decrease in cash flows from other changes in working capital items25
    
    
    Increase in cash flows related to other current assets and other assets
primarily due to the timing of rent payments and increased income tax
receivables due to the discontinued demo concept and current year operating
losses$
    
    (59
    )
    
    Total
 Working Capital
  $ millions
    
    Description$
    
    187
    
    
    Working capital at February 2, 2008(93
    )
    
    Decrease in cash and cash equivalents, primarily due to the
payment of demo lease terminations, share repurchases and current
year operating losses, among other items (see cash flows
statement)(43
    )
    
    Increase in short-term borrowings under our secured credit facility24
    
    
    Net decrease in other current liabilities from reduced
compensation accruals primarily due to lower store counts as a
result of the discontinued demo concept and a decrease in our
accrued gift card liability as a result of current year
redemptions net of new gift card issuances21
     
   
    Net increase in other current assets primarily due to an increase
in income tax receivables resulting from the discontinued demo
concept and current year operating losses12
    
    
    Increase in inventories, net of accounts payable, due to timing of
payments and increased inventory levels in advance of the peak
holiday selling season$
    
    108
    
    
    Working capital at November 1, 2008
 Investing Cash Flows
  Financing Cash Flows
  22




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##### Table of Contents



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
    
    $
    592
    
    
    $
    95
    
    
    $
    182
    
    
    $
    139
    
    
    $
    176Capital lease obligations
    
    
    <0.1
    
    
    
    <0.1
    
    
    
    
    
    
    
    
    
    
    
    FIN 48 obligations including interest and penalties
    
    
    2
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Letters of credit
    
    
    39
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    633
    
    
    $
    134
    
    
    $
    184
    
    
    $
    139
    
    
    $
    176
   23




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##### Table of Contents



Operating Leases
  Indemnifications
   New Accounting Pronouncements
  Inflation
  Seasonality and Quarterly Results
  24




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ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4  CONTROLS AND PROCEDURES
   25




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1  Legal Proceedings
  
 Item 1A  Risk Factors
  The current volatility in the U.S. economy has adversely affected consumer spending, which could
negatively impact our business, operating results and stock price.
  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.
 Our net sales, operating income and inventory levels fluctuate on a seasonal basis.
 26




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##### Table of Contents



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 base, which may not result in improved operating
performance.
 Our future growth depends, in part, on our ability to 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.
 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.
 27




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##### Table of Contents



Our current or prospective vendors may be unable or unwilling to supply us with adequate quantities
of their merchandise in a timely manner or at acceptable prices, which could have a material
adverse impact on our business.
 Our foreign sources of production may not always be reliable, which may result in a disruption in
the flow of new merchandise to our stores.
 The loss of key personnel could have a material adverse effect on our business at any time.
 Adverse outcomes of litigation matters could significantly affect our operating results.
 Our dependence on a single distribution facility exposes us to significant operational risks.
 28




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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.
 Any material failure, interruption or security breach of our computer systems or information
technology may adversely affect the operation of our business and our financial results.
    29




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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
  
 Item 5  Other Information
  
 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
    
    Fourth Amended and Restated Bylaws of the Company (3)Exhibit 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 Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on November 26, 2008 30




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##### Table of Contents



SIGNATURES
  PACIFIC SUNWEAR OF CALIFORNIA, INC.
(Registrant)Date: December 9, 2008
    /s/ SALLY FRAME KASAKSSally Frame KasaksChairman and Chief Executive Officer

(Principal Executive Officer)Date: December 9, 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
    
    Fourth Amended and Restated Bylaws of the Company (3)Exhibit 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 Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on November 26, 2008