Pacific Sunwear has tumbled from August highs

The stock is in danger of falling back down to its 2012 range of between $1.25 and $2.70 per share.

By Stock Traders Daily Oct 1, 2013 2:55PM

Image: Woman reading book on sunlounger on vacation © Image Source/Image Source/Getty ImagesBy Neal Rau

 

Pacific Sunwear of California (PSUN) is not the only retailer to warn of a weak outlook.


Retailers ranging from Wal-Mart (WMT) to Macy's (M) have reported disappointing quarterly results or weak outlooks as consumers become more careful about spending.


The specialty retailer in the action sports, fashion, and music influences of the California lifestyle gave guidance for an unexpected loss in the current quarter, downgrading its same-store sales projections as well, in light of an overall drop in consumer spending among retailers. The stock is up 93% this year, but well off the recent highs. Is the recent selloff a buying opportunity?

 

The disappointing outlook for the third quarter was a surprise to most analysts. Pacific Sunwear said it expects an adjusted loss between 4 cents and 9 cents per share. Most analysts were expecting it to break even. One positive was that revenue at stores open for at least a year, a key measure of retailer health, rose 3% for the quarter. However, adding to concern is the fact that many teen retailers like Abercrombie & Fitch Co. (ANF) and American Eagle Outfitters (AEO) have seen their stocks fall 24% and 27%, respectively, since the beginning of 2013.  

 

Even worse has been the meltdown at clothing retailer, Billabong. Billabong said its 40-year-old surf brand was worthless this year after the company's losses tripled, and it can no longer pay its debts. Billabong has struggled with inventory issues, as the company has mainly focused on board shorts and swimwear. Billabong was buying many brands, and aggressively expanding in 2007, right before the financial crisis. Many of those brands that the company purchased lost much of their value when the economy crashed.

 

Pacific Sunwear seems to be aware of the trends, as the company has been making the transition away from board shorts and swimwear to fashion, and more towards women shoppers. On the men's side, to avoid the weakness in board shorts, the company is focusing more on men's shoes and accessories. By far, the company’s best performing segment is its woman’s apparel, as second-quarter women's comps were up an impressive 11%.


The company notes that many of the teens that shopped their stores a couple years ago have now moved to other retailers, but with the rebranding and new clothing lines, it hopes to rekindle its relationship with shoppers that are now in the 17 to 24 year old range and have higher disposable income.

 

Nevertheless, more concerning than day-to-day news, or long-term trends in teen fashion, is the price of the stock. According to the real-time trading report by Stock Traders Daily, shares of PSUN have recently broken long-term support. Before the recovery in the stock in 2013, PSUN shares traded between $1.25 and $2.70 for most of 2012. Now, the stock is in danger of falling back down to those previous levels.


Pacific Sunwear has been a big winner this year as investors bought into its turnaround strategy, and shares were up as much as 169% from the beginning of the year, but the stock is now down over 30% from the highs in early August. After breaking lower, long-term support is now converted resistance, and as long as the stock remains below converted resistance, as defined in our real time trading report, Stock Traders Daily expects lower levels. That would make PSUN a sell/short at resistance, with risk controls in place if resistance breaks higher.


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