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Pacific Sunwear skates toward the block

by Richard Collings  |  Published January 23, 2013 at 9:48 AM
PacSunPacificSunwear227x128.jpgAction sports retailer Pacific Sunwear of California Inc. will consider a sale once it completes a restructuring of the company, said chief financial officer Michael Kaplan.

Kaplan said Pacific Sunwear considered a sale in 2011, but decided instead to obtain financing from Golden Gate Capital rather than selling the company for what it believed was less than fair value. He made his comments at the 15th Annual ICR Xchange Conference held in Miami on Jan. 16.

Anaheim, Calif.-based Pacific Sunwear also has a $100 million revolving credit facility from Wells Fargo Capital Finance Inc. it has yet to draw on, which will provide capital as the company continues the turnaround effort.

Golden Gate, a San Francisco private equity firm, invested a $60 million senior secured term loan in exchange for convertible preferred stock, giving it the right to buy up to 19.9% of common stock, or 16.7% on a fully diluted basis, at a strike price of $1.75 per share, according to a Dec. 7, 2011, announcement.

In discussing Pacific Sunwear's restructuring, Kaplan said the first stage of the turnaround was to sort out the company's real estate assets. During his presentation, Kaplan said Pacific Sunwear has closed more than 200 stores since 2010, adding that about 10% of the company's stores were cash flow negative in 2012, compared to about 30% in 2010. Pacific Sunwear has aggressively worked to improve its real estate margins over the past 15 months through a combination of lease expirations, lease buyouts, rent reductions and landlord renegotiations.

By the end of this year, Pacific Sunwear will have 644 stores, chief executive Gary Schoenfeld said during the presentation. That's down from 819 stores as of Dec. 7, 2011.

Kaplan later added that the retail chain expects to close another 20 to 30 stores this year that are mostly cash flow negative through lease expirations, noting that they are not concentrated in any one region.

Kaplan said the next step in the company's restructuring is to achieve a cash flow breakeven point. During the company presentation the executives said revenue, or top-line growth, would be a key driver going forward.

Pacific Sunwear has seen its revenue decline over the past three years as it has closed stores. The retailer had nearly $834 million in sales for the year ended Jan. 28, 2012, down slightly from $837 million in sales for the same period a year earlier, and down from $902 million in sales in 2010, according to regulatory filings. Pacific Sunwear has shown improvement of late, however. Sales for the first three quarters of last year were $613 million, up from nearly $600 million for the same period a year earlier.

As of Oct. 27, Pacific Sunwear had nearly $24 million in cash and cash equivalents and long-term debt of nearly $75 million, according to a 10-Q filing with the Securities and Exchange Commission on Dec. 4.

An industry banker said now that Pacific Sunwear has cut real estate costs, it can focus more capital toward its product mix in an effort to boost profitability and, as a result, become an attractive acquisition target. The banker said Pacific Sunwear could theoretically achieve the rest of its turnaround within a year.

The action sports retail market has received a lot of attention from both private equity and strategic buyers of late. An auction of Australian surf brand Billabong International Ltd. has attracted suitors such as private equity firms Altamont Capital Partners, TPG Capital and Bain Capital LLC as well as apparel giant VF Corp., and Billabong's Americas head Paul Naude.

Among other deals, PPR SA acquired Volcom Inc., a California surf, snow and skatewear brand, for nearly $608 million on May 2, 2011.

Pacific Sunwear itself rejected a $329 million offer from Miami-based sports clothing retailer Adrenalina in 2008.

Golden Gate didn't return calls Tuesday.

Pacific Sunwear shares closed down 3 cents, or 1.47%, to $2.01, on Tuesday afternoon.

Tags: Adrenalina | Billabong International Ltd. | Gary Schoenfeld | Golden Gate Capital | ICR Xchange Conference | Michael Kaplan | Pacific Sunwear of California Inc. | PPR SA | Volcom Inc. | Wells Fargo Capital Finance Inc.

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Richard Collings

Senior Writer: Consumer Products & Retail

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