| PACIFIC SUNWEAR OF CALIFORNIA INC Item 1A Risk Factors Cautionary Note Regarding Forward-Looking Statements This report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, and we intend that such forward-looking statements be subject to the safe harbors created thereby |
| We are hereby providing cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in forward-looking statements of the Company herein |
| Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always through the use of words or phrases such as “will result,” “expects to,” “will continue,” “anticipates,” “plans,” “intends,” “estimated,” “projects” and “outlook”) are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements |
| All forward-looking statements included in this report, including forecasts of fiscal 2006 planned new store openings and future capital expenditures, are based on information available to us as of the date hereof, and we assume no obligation to update or revise any such forward-looking statements to reflect events or circumstances that occur after such statements are made |
| The products we sell are subject to significant merchandising/fashion sensitivity |
| Our success is largely dependent upon our ability to gauge the fashion tastes of our customers and to provide merchandise at competitive prices and in adequate quantities that satisfies customer demand in a timely manner |
| Our failure to anticipate, identify or react appropriately in a timely manner to changes in fashion trends could have a material adverse effect on our same store sales results, operating margins, financial condition and results of operations |
| Misjudgments or unanticipated fashion changes could also have a material adverse effect on our image with our customers |
| Some of our vendors have limited resources, production capacities and operating histories and some have intentionally limited the distribution of their merchandise |
| The inability or unwillingness on the part of key vendors to expand their operations to keep pace with the anticipated growth of PacSun, PacSun Outlet, d |
| and One Thousand Steps stores, or the loss of one or more key vendors or proprietary brand sources for any reason, could have a material adverse effect on our business |
| We may not be able to manage our planned expansion effectively |
| Our continued growth depends to a significant degree on our ability to open and operate stores on a profitable basis and to manage our planned expansion |
| There can be no assurance that we will achieve our planned expansion, that such expansion will be profitable, or that we will be able to manage our growth effectively |
| Our planned expansion is dependent upon a number of factors, including our ability to locate and obtain favorable store sites, negotiate acceptable lease terms, obtain adequate supplies of merchandise and hire and train qualified management level and other employees |
| Factors beyond our control may also affect our ability to expand, including general economic and business conditions affecting consumer spending |
| Any failure to manage growth could have a material adverse effect on our business, financial condition and results of operations |
| We will begin operating a new retail concept during fiscal 2006, One Thousand Steps, which could negatively affect existing operations |
| We will commence operations for One Thousand Steps during April 2006 |
| We are currently making final preparations for the initial nine store openings planned for fiscal 2006 |
| Our ability to make this new retail concept successful is subject to numerous risks, including, but not limited to, (i) unanticipated operating problems, (ii) lack of customer acceptance, (iii) new vendor relationships, (iv) competition from existing and new retailers, and (v) lack of sufficient product differentiation |
| There can be no assurance that this new retail concept will achieve sales and profitability levels that justify the Company’s investment in it |
| Additionally, the expansion of this new retail concept involves other risks that could have a material adverse effect on the Company, including, but not limited to, (i) diversion of management’s attention from the Company’s core businesses, (ii) inability to attract, train and retain qualified personnel, including management and product designers, and (iii) difficulty in locating and obtaining favorable 8 / Pacific Sunwear of California, Inc |
| Annual Report 2005 _________________________________________________________________ [9]Table of Contents store sites and negotiating acceptable lease terms |
| Any inability to succeed in developing a profitable new retail concept could have a material adverse effect on our continued growth and results of operations |
| Our customers may not accept our proprietary brand merchandise |
| Sales from proprietary brand merchandise accounted for approximately 31prca, 30prca, and 32prca of net sales in fiscal 2005, 2004 and 2003, respectively |
| We may increase the percentage of net sales in proprietary brand merchandise in the future, although there can be no assurance that we will be able to achieve increases in proprietary brand merchandise sales as a percentage of net sales |
| Because our proprietary brand merchandise generally carries higher merchandise margins than our other merchandise, our failure to anticipate, identify and react in a timely manner to fashion trends with our proprietary brand merchandise, particularly if the percentage of net sales derived from proprietary brand merchandise increases, may have a material adverse effect on our same store sales results, operating margins, financial condition and results of operations |
| Our comparable store net sales results can fluctuate significantly |
| Our comparable store net sales results have fluctuated significantly on a monthly, quarterly, and annual basis, and are expected to continue to fluctuate in the future |
| A variety of factors affect our comparable store net sales results, including changes in fashion trends, changes in our merchandise mix, calendar shifts of holiday periods, actions by competitors, weather conditions and general economic conditions |
| Our comparable store net sales results for any particular future fiscal month, quarter or year may decrease |
| As a result of these or other factors, our future comparable store net sales results are likely to have a significant effect on the market price of our common stock |
| We could lose key personnel at any time |
| Our continued success is dependent to a significant degree upon the services of our key personnel, particularly our executive officers |
| The loss of the services of any member of our senior management team could have a material adverse effect on our business, financial condition and results of operations |
| Our success in the future will also be dependent upon our ability to attract and retain qualified personnel |
| Our inability to attract and retain qualified personnel in the future could have a material adverse effect on our business, financial condition and results of operations |
| Our dependence on a single distribution facility exposes us to significant operational risks |
| All of our current distribution functions continue to reside within a single facility in Anaheim, California |
| The Company is currently evaluating site selection alternatives for the construction of a second distribution center |
| Any significant interruption in the operation of the existing distribution facility due to natural disasters, accidents, system failures or other unforeseen causes would have a material adverse effect on our business, financial condition and results of operations |
| There can be no assurance that our current distribution center will be adequate to support our future growth |
| Selling merchandise over the internet carries particular risks that can distract attention from our core businesses |
| Our internet operations are subject to numerous risks that could have a material adverse effect on our operational results, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems |
| Specific risks include: (i) diversion of sales from our stores; (ii) rapid technological change; (iii) liability for online content; and (iv) risks related to the failure of the computer systems that operate the website and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions |
| In addition, internet operations involve risks which are beyond our control that could have a material adverse effect on our operational results, including: (i) price competition involving the items we intend to sell; (ii) the entry of our vendors into the internet business, in direct competition with us; (iii) the level of merchandise returns experienced by us; (iv) governmental regulation; (v) online security breaches involving unauthorized access to Company and/or customer information; (vi) credit card fraud; and (vii) competition and general economic conditions specific to the internet, online commerce and the apparel industry |
| Any terrorist attacks or war/threat of war could significantly affect consumer spending |
| The majority of our stores are located in regional shopping malls |
| Any threat of terrorist attacks or actual terrorist events, particularly in public areas, could lead to lower customer traffic in regional shopping malls |
| In addition, local authorities or mall Pacific Sunwear of California, Inc |
| Annual Report 2005 / 9 _________________________________________________________________ [10]Table of Contents management could close regional shopping malls in response to any immediate security concern |
| Mall closures, as well as lower customer traffic due to security concerns, could result in decreased sales |
| Additionally, war or the threat of war could significantly diminish consumer spending, resulting in decreased sales for the Company |
| Decreased sales would have a material adverse effect on our business, financial condition and results of operations |
| Our foreign sources of production may not always be reliable |
| We purchase merchandise directly in foreign markets for our proprietary brands |
| In addition, we purchase merchandise from domestic vendors, some of which is manufactured overseas |
| We do not have any long-term merchandise supply contracts and our imports are subject to existing or potential duties, tariffs and quotas |
| We face competition from other companies for production facilities and import quota capacity |
| We also face a variety of other risks generally associated with doing business in foreign markets and importing merchandise from abroad, such as: (i) political instability; (ii) enhanced security measures at United States ports, which could delay delivery of imports; (iii) imposition of new legislation relating to import quotas that may limit the quantity of goods which may be imported into the United States from countries in a region within which we do business; (iv) imposition of duties, taxes, and other charges on imports; (v) delayed receipt or non-delivery of goods due to the failure of foreign-source suppliers to comply with applicable import regulations; (vi) delayed receipt or non-delivery of goods due to organized labor strikes or unexpected or significant port congestion at United States ports; and (vii) local business practice and political issues, including issues relating to compliance with domestic or international labor standards which may result in adverse publicity |
| New initiatives may be proposed that may have an impact on the trading status of certain countries and may include retaliatory duties or other trade sanctions that, if enacted, would increase the cost of products purchased from suppliers in countries that we do business with |
| Any inability on our part to rely on our foreign sources of production due to any of the factors listed above could have a material adverse effect on our business, financial condition and results of operations |
| Any failure by us to maintain credit facility financial covenants could have a material adverse impact on our business |
| A significant decrease in our operating results could adversely affect our ability to maintain required financial ratios under our credit facility |
| Required financial ratios include a rolling four-quarter minimum fixed charge coverage ratio as well as a maximum leverage ratio |
| If these financial ratios are not maintained, the lenders will have the option to terminate the facility and require immediate repayment of all amounts outstanding under the credit facility, if any |
| The alternatives available to the Company if in default of its covenants would include renegotiating certain terms of the credit agreement, obtaining waivers from the lenders, or obtaining a new credit agreement with another bank or group of lenders, which may contain different terms |
| Adverse outcomes of litigation matters could significantly affect our operational results |
| We are involved from time to time in litigation incidental to our business |
| We believe that the outcome of current litigation will not have a material adverse effect upon our results of operations or financial condition |
| However, our assessment of current litigation could change in light of the discovery of facts with respect to legal actions pending against us not presently known to us or determinations by judges, juries or other finders of fact which do not accord with our evaluation of the possible liability or outcome of such litigation |
| Our stock price can fluctuate significantly |
| The market price of our common stock has fluctuated substantially in the past and there can be no assurance that the market price of the common stock will not continue to fluctuate significantly |
| Future announcements or management discussions concerning the Company or its competitors, net sales and profitability results, quarterly variations in operating results or comparable store net sales, changes in earnings estimates by analysts or changes in accounting policies, among other factors, could cause the market price of the common stock to fluctuate substantially |
| In addition, stock markets have experienced extreme price and volume volatility in recent years |
| This volatility has had a substantial effect on the market prices of securities of many public companies for reasons frequently unrelated to the operating performance of the specific companies |
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| Annual Report 2005 _________________________________________________________________ [11]Table of Contents We caution that the risk factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on behalf of the Company |
| Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements |