PACIFIC SUNWEAR OF CALIFORNIA INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - PACIFIC SUNWEAR OF CALIFORNIA INC	Financial_Report.xls
EX-31.1 - SECTION 302 CEO AND CFO CERTIFICATION - PACIFIC SUNWEAR OF CALIFORNIA INC	d263158dex311.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - PACIFIC SUNWEAR OF CALIFORNIA INC	d263158dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: October 29, 2011

¨	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.

(Exact name of registrant as specified in its charter)


California		95-3759463
(State of incorporation)		(I.R.S. Employer Identification No.)

3450 East Miraloma Avenue, Anaheim, CA 92806

(Address of principal executive offices and zip code)

(714) 414-4000

(Registrant’s telephone number)

•

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 x No ¨

•

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

•

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):

•

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

On December 6, 2011, the registrant had 67,401,389 shares of Common Stock outstanding.

PACIFIC SUNWEAR OF CALIFORNIA, INC.

FORM 10-Q

For the Quarter Ended October 29, 2011

Index


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets—October 29, 2011 and January 29, 2011		3
Condensed Consolidated Statements of Operations and Comprehensive Operations—Third quarter (13 weeks) and three quarters (39 weeks) ended October 29, 2011 and October 30, 2010, respectively		4
Condensed Consolidated Statements of Cash Flows—Three quarters (39 weeks) ended October 29, 2011 and October 30, 2010, respectively		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures about Market Risk		22
Item 4. Controls and Procedures		22

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Reserved		23
Item 5. Other Information		23
Item 6. Exhibits		24
SIGNATURE PAGE		26
EX-31.1
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements.

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, all amounts in thousands except share and per share amounts)


	October 29, 2011			January 29, 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	8,280		$	63,710
Merchandise inventories		152,249			95,701
Prepaid expenses		18,405			11,669
Other current assets		6,620			4,773

Total current assets		185,554			175,853

PROPERTY AND EQUIPMENT, NET:
Gross property and equipment		602,953			619,478
Less: Accumulated depreciation and amortization		(444,796	)		(426,298	)

Total property and equipment, net		158,157			193,180

Deferred income taxes		6,243			6,243
Other assets		25,482			26,000

TOTAL ASSETS	$	375,436		$	401,276

LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	89,572		$	41,028
Other current liabilities		39,133			42,186

Total current liabilities		128,705			83,214

LONG-TERM LIABILITIES:
Deferred lease incentives		22,483			28,553
Deferred rent		18,623			19,786
Mortgage debt, long-term portion		28,692			29,093
Other long-term liabilities		26,554			26,296

Total long-term liabilities		96,352			103,728

Commitments and contingencies (Note 10)

SHAREHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value; 170,859,375 shares authorized; 67,389,703 and 66,173,397 shares issued and outstanding, respectively		674			662
Additional paid-in capital		15,956			11,593
Retained earnings		133,749			202,079

Total shareholders’ equity		150,379			214,334

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	375,436		$	401,276

See accompanying footnotes

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE OPERATIONS

(unaudited, all amounts in thousands except share and per share amounts)


	For the Third Quarter Ended						For the Three Quarters Ended
	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Net sales	$	242,011		$	257,904		$	642,663		$	666,548
Cost of goods sold, including buying, distribution and occupancy costs		183,377			193,527			499,059			508,947

Gross margin		58,634			64,377			143,604			157,601

Selling, general and administrative expenses		75,352			71,093			209,332			218,192

Operating loss		(16,718	)		(6,716	)		(65,728	)		(60,591	)

Other expense, net		1,178			420			2,292			497

Loss before income taxes		(17,896	)		(7,136	)		(68,020	)		(61,088	)

Income tax (benefit) expense		(294	)		(173	)		310			367

Net loss	$	(17,602	)	$	(6,963	)	$	(68,330	)	$	(61,455	)

Comprehensive loss	$	(17,602	)	$	(6,963	)	$	(68,330	)	$	(61,455	)

Net loss per share:
Basic and Diluted	$	(0.26	)	$	(0.11	)	$	(1.03	)	$	(0.93	)

Weighted-average shares outstanding:
Basic and Diluted		66,855,443			66,056,822			66,467,688			65,948,679

See accompanying footnotes

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, all amounts in thousands)


	For the Three Quarters Ended
	October 29, 2011			October 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(68,330	)	$	(61,455	)
Adjustments to reconcile net loss to net cash from operating activities:

Depreciation and amortization		32,758			41,910
Asset impairment		12,829			8,209
Loss on disposal of property and equipment		161			710
Noncash stock-based compensation		2,524			3,082
Change in operating assets and liabilities:
Merchandise inventories		(56,548	)		(76,869	)
Prepaid expenses and other current assets		(7,298	)		932
Other assets		518			334
Accounts payable		48,544			38,756
Other current liabilities		(3,361	)		(8,466	)
Deferred lease incentives		(6,070	)		(7,656	)
Deferred rent		(1,163	)		(1,166	)
Other long-term liabilities		174			(520	)

Net cash used in operating activities		(45,262	)		(62,199	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(10,165	)		(15,544	)
Proceeds from insurance settlement		300			—

Net cash used in investing activities		(9,865	)		(15,544	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage borrowings		—			29,800
Payments for mortgage borrowings costs		—			(1,154	)
Principal payments under mortgage borrowings		(375	)		(80	)
Proceeds from exercise of stock options		313			298
Principal payments under capital leases		(241	)		(237	)

Net cash (used in) provided by financing activities		(303	)		28,627

NET DECREASE IN CASH AND CASH EQUIVALENTS		(55,430	)		(49,116	)
CASH AND CASH EQUIVALENTS, beginning of period		63,710			93,091

CASH AND CASH EQUIVALENTS, end of period	$	8,280		$	43,975

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	1,745		$	435
Cash paid (refunded) for income taxes	$	991		$	(268	)
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Property and equipment purchases accrued at period end	$	1,388		$	578
Shares issued in connection with lease modifications	$	1,585		$	—
Capital lease transactions for property and equipment	$	470		$	283

See accompanying footnotes

PACIFIC SUNWEAR OF CALIFORNIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. NATURE OF BUSINESS

Pacific Sunwear of California, Inc. (together with its wholly-owned subsidiaries, the “Company” or “PacSun”) is a leading specialty retailer rooted in the action sports, fashion and music influences of the California lifestyle. The Company sells a combination of branded and proprietary casual apparel, accessories and footwear designed to appeal to teens and young adults. It operates a nationwide, primarily mall-based chain of retail stores under the names “Pacific Sunwear” and “PacSun.” In addition, the Company operates an e-commerce website at www.pacsun.com which sells PacSun merchandise online, provides content and community for its target customers, and provides information about the Company. The Company, a California corporation, was incorporated in August 1982. As of October 29, 2011, the Company leased and operated 820 stores in each of the 50 states and Puerto Rico.

2. BASIS OF PRESENTATION

The accompanying Condensed Consolidated Financial Statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 (“fiscal 2010”) filed with the SEC. The Condensed Consolidated Financial Statements include the accounts of Pacific Sunwear of California, Inc. and its wholly-owned subsidiaries (Pacific Sunwear Stores Corp., a California corporation (“PacSun Stores”) and Miraloma Borrower Corporation, a Delaware corporation (“Miraloma”)). All intercompany transactions have been eliminated in consolidation.

In the opinion of management, all adjustments consisting only of normal recurring entries necessary for a fair presentation have been included. The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements as well as the reported revenues and expenses during the reporting period. Actual results could differ from these estimates. The results of operations for the Company’s fiscal quarter or three quarters ended October 29, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending January 28, 2012 (“fiscal 2011”).

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Information regarding significant accounting policies is contained in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for fiscal 2010. Presented below in the following notes is supplemental information that should be read in conjunction with “Notes to Consolidated Financial Statements” included in that Report.

Income Taxes

The Company calculates its interim income tax provision in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, “Interim Reporting” (“ASC 270”) and ASC Topic 740, “Accounting for Income Taxes” (“ASC 740”). At the end of each interim period, the Company estimates the annual effective tax rate and applies that rate to its ordinary quarterly earnings. The tax expense or benefit related to significant, unusual, or extraordinary items is recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws, rates or tax status is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including the expected operating income or loss for the year, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets generated in the current fiscal year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

Recent Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, “Presentation of Comprehensive Income.” The ASU requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Based on the Company’s evaluation of this ASU, the adoption of this standard is not expected to have a material impact on the Company’s financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure requirement in U.S. GAAP and IFRSs.” The ASU provides additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Based on the Company’s evaluation of this ASU, the adoption of this standard is not expected to have a material impact on the Company’s financial position or results of operation.

4. IMPAIRMENT OF LONG-LIVED ASSETS

The Company assesses long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Based on reviews of the operating performance and projected outlook for the Company’s stores, the Company determined that certain stores would not be able to generate sufficient cash flows over the remaining term of the related leases to recover the Company’s investment in the respective stores. As a result, the Company recorded noncash impairment charges of approximately $7.0 million and $12.8 million within selling, general and administrative expenses during the third quarter and the three quarters ended October 29, 2011, respectively, in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Operations to write-down the carrying value of long-lived store assets to their estimated fair values. Fair value is determined using a discounted cash flow model which requires “Level 3” inputs, as defined in ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). The impairment charge reduced the carrying amount of the respective long-lived assets as follows (in millions):


	For the Third Quarter Ended						For the Three Quarters Ended
	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Carrying value of long-lived assets	$	9.0		$	3.7		$	17.6		$	12.3
Less: Impairment charge		(7.0	)		(1.9	)		(12.8	)		(8.2	)

Fair value of long-lived assets	$	2.0		$	1.8		$	4.8		$	4.1

5. DEBT

As of the end of the current quarter, the Former Credit Facility was set to expire on April 29, 2013 and provided for a secured revolving line of credit of up to $150 million that could be increased to up to $225 million subject to lender approval. Extensions of credit under the Former Credit Facility were limited to a borrowing base consisting of specified percentages of eligible categories of assets, primarily cash and inventory (generally, 75% of inventories). The Former Credit Facility was available for direct borrowing and, subject to borrowing base availability ($80 million at October 29, 2011), up to $75 million was available for the issuance of letters of credit and up to $15 million was available for swing-line loans. The Former Credit Facility was secured by cash, cash equivalents, deposit accounts, securities accounts, credit card receivables and inventory. Direct borrowings under the Former Credit Facility bore interest at the administrative agent’s alternate base rate (as defined, 3.75% at October 29, 2011) or at optional interest rates that was primarily dependent upon LIBOR or the federal funds effective rate for the time period chosen. At October 29, 2011, the Company had no direct borrowings and $26 million in letters of credit outstanding under the Former Credit Facility resulting in remaining availability of $54 million. However, subsequent to quarter end, the Company borrowed approximately $20 million under the Former Credit Facility to fund temporary working capital needs.

The Company was not subject to any financial covenant restrictions under the Former Credit Facility unless total remaining borrowing availability under the Former Credit Facility fell below $15 million at any point in time, or 10% of the aggregate lender commitments in the event the Former Credit Facility was increased beyond $150 million. The Company was restricted from incurring additional indebtedness or liens in excess of certain levels specified by the Former Credit Facility. In general, the Company was not allowed to incur additional secured indebtedness, but could obtain unsecured indebtedness outside of the Former Credit Facility up to $150 million. Additionally, the Former Credit Facility contained specific limits on particular kinds of indebtedness, as defined in the Former Credit Facility agreement, and such agreement contained other typical affirmative and negative covenants, such as obligations to deliver financial statements, provide certain notices, comply with laws, and not enter into certain transactions or make certain payments without the consent of the lenders.

6. OTHER CURRENT LIABILITIES

As of the dates presented, other current liabilities consisted of the following (in thousands):


	October 29, 2011		January 29, 2011
Accrued compensation and benefits	$	8,127	$	10,036
Accrued gift cards		7,651		12,046
Sales taxes payable		3,469		4,120
Deferred tax liability		2,147		2,147
Accrued capital expenditures		1,388		1,298
Other		16,351		12,539

Total other current liabilities	$	39,133	$	42,186

7. MORTGAGE DEBT

On August 20, 2010, the Company, through its wholly-owned subsidiaries, Miraloma, and PacSun Stores, executed two promissory notes pursuant to which borrowings in an aggregate amount of $29.8 million from American National Insurance Company (“Anico”) were incurred. The note executed by Miraloma (the “Miraloma Note”) is in the amount of $16.8 million and bears interest at the rate of 6.50% per annum. Monthly principal and interest payments under the Miraloma Note commenced on October 1, 2010, and are $113,435. The principal and interest payments are based on a 25-year amortization schedule. The remaining principal balance of the Miraloma Note, and any accrued but unpaid interest thereon (estimated to be $14.4 million), will be due in full on September 1, 2017. The Miraloma Note is secured by a deed of trust on the building and land comprising the Company’s principal executive offices in Anaheim, California and is non-recourse to the Company. The Miraloma Note does not contain any financial covenants. In connection with this transaction, the Company transferred the building and related land securing the Miraloma Note to Miraloma and entered into a lease for the building and land with Miraloma.

Miraloma paid a prepayment fee to Anico equal to 1% of the principal amount of the Miraloma Note on the closing date of the transaction. As a result, Miraloma may prepay the Miraloma Note, in whole, but not in part, at any time without penalty upon 30 days prior written notice to Anico.

The note executed by PacSun Stores (the “PacSun Stores Note”) is in the amount of $13.0 million and bears interest at the rate of 6.50% per annum. Monthly principal and interest payments under the PacSun Stores Note commenced on October 1, 2010, and are $87,777. The principal and interest payments are based on a 25-year amortization schedule. The remaining principal balance of the PacSun Stores Note, and any accrued but unpaid interest thereon (estimated to be $11.2 million), will be due in full on September 1, 2017. The PacSun Stores Note is secured by a mortgage on the Company’s leasehold interest in the building and land comprising the Company’s distribution center in Olathe, Kansas, and is unconditionally guaranteed by the Company. The PacSun Stores Note does not contain any financial covenants. PacSun Stores paid a prepayment fee to Anico equal to 1% of the principal amount of the PacSun Stores Note on the closing date of the transaction. As a result, PacSun Stores may prepay the PacSun Stores Note, in whole, but not in part, at any time without penalty upon 30 days prior written notice to Anico.

These transactions generated net cash proceeds to the Company of approximately $28 million. As of October 29, 2011, remaining aggregate principal payments required under these mortgage debt borrowings are as follows (in thousands):


FISCAL YEAR ENDING:
January 28, 2012	$	129
February 2, 2013		539
February 1, 2014		576
January 31, 2015		614
January 30, 2016		655
Thereafter		26,709

		29,222
Less: Current portion		530

Mortgage debt, long-term	$	28,692

Interest expense recorded on the mortgage debt was $1.4 million and $0.3 million for the first three quarters of fiscal 2011 and 2010, respectively.

8. INCOME TAXES

The provisions codified within ASC 740 require companies to assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. In accordance with ASC 740, a full valuation allowance was established during the fourth fiscal quarter of 2009 and continues to be maintained on all federal and the majority of state deferred tax assets. Remaining net state deferred tax assets of $4 million were not reserved as the Company concluded it is more likely than not that these net deferred tax assets would be utilized before expiration. The Company has discontinued recognizing federal and certain state income tax benefits until it is determined that it is more likely than not that the Company will generate sufficient taxable income to realize the deferred income tax assets.

The Company continues to monitor whether an ownership change has occurred under Internal Revenue Code Section 382 (“Section 382”). Based on available information at the reporting date, the Company believes it has not experienced an ownership change through the quarter ended October 29, 2011. The determination of whether or not an ownership change under Section 382 has occurred requires the Company to evaluate certain acquisitions and dispositions of ownership interests over a rolling three-year period. As a result, future acquisitions and dispositions could result in an ownership change of the Company under Section 382. If an ownership change were to occur, the Company’s ability to utilize federal net operating loss carryforwards could be limited.

9. STOCK-BASED COMPENSATION

The Company maintains two stock-based incentive compensation plans: (1) 2005 Performance Incentive Plan (“2005 Plan”); and (2) the amended and restated Employee Stock Purchase Plan (“ESPP”). The types of awards that may be granted under the 2005 Plan include stock options, stock appreciation rights, and restricted stock, or other forms of awards granted or denominated in the Company’s common stock or units of the Company’s common stock. Persons eligible to receive awards under the 2005 Plan include officers or employees of the Company or any of its subsidiaries, directors of the Company and certain consultants and advisors to the Company or any of its subsidiaries. The vesting of awards under the 2005 Plan is determined at the date of grant. Each award expires on a date determined at the date of grant; however, the maximum term of options and stock appreciation rights under the 2005 Plan is ten years after the grant date of the award. As of October 29, 2011, the maximum number of shares of the Company’s common stock that was authorized for award grants under the 2005 Plan was 3.9 million shares. Any shares subject to awards under prior stock plans that are canceled, forfeited or otherwise terminate without having vested or been exercised, as applicable, will become available for other award grants under the 2005 Plan. The 2005 Plan will terminate on March 22, 2015 unless terminated earlier by the Company’s Board of Directors.

The Company accounts for stock-based compensation expense according to ASC Topic 718, “Stock Compensation” (“ASC 718”). The Company uses the Black-Scholes option-pricing model to estimate the grant date fair value of its stock-based compensation expense. Forfeitures are estimated at the date of grant based on historical rates and reduce the compensation expense to be recognized during the vesting period. The expected term of options granted is derived primarily from historical data on employee exercises adjusted for expected changes to option terms, if any. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant. Expected volatility is based primarily on the historical volatility of the Company’s stock. The Company records stock-based compensation expense using the straight-line method over the vesting period, which is generally three to four years. The Company’s stock-based awards generally begin vesting one year after the grant date and, for stock options, expire in seven to ten years or three months after termination of employment with the Company. The Company’s stock-based compensation expense resulted from awards of stock options, nonvested shares, and stock appreciation rights, as well as from shares purchased under the Company’s employee share purchase plan.

The fair value of the Company’s stock-based compensation activity was determined using the following weighted-average assumptions:


	For the Three Quarters Ended
	October 29, 2011		October 30, 2010
	Stock Options	ESPP	Stock Options	ESPP
Expected life	4 years	0.5 years	4 years	0.5 years
Expected volatility	82.9% — 83.7%	54.0%	79.4% — 81.0%	73.4%
Risk-free interest rate	0.7% — 1.6%	0.20%	1.0% — 2.0%	0.38%
Dividend yield	—	—	—	—

Stock Options

Under the Company’s stock option plans, incentive and nonqualified options have been granted to employees and directors to purchase common stock at prices equal to the fair value of the Company’s shares at the respective grant dates. A summary of stock option activity for the first three quarters of fiscal 2011 is presented below:

Weighted-

Average

Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Stock Options

Shares

Price

Term (Yrs.)

($000s)

Outstanding at January 29, 2011

3,253,554

7.12

Granted

121,500

3.04

Exercised

(70,825

)

1.64

Forfeited or expired

(254,491

)

11.36

Outstanding at October 29, 2011

3,049,738

6.73

4.6

Vested and expected to vest at October 29, 2011

2,695,553

7.09

4.5

Exercisable at October 29, 2011

1,350,813

10.24

3.6

The weighted-average grant-date fair value per share of options granted during each of the first three quarters ended of fiscal 2011 and 2010 was $1.84 and $2.81, respectively.

Nonvested Share Awards

A summary of nonvested share awards activity under the Company’s 2005 Plan for the first three quarters of fiscal 2011 is presented below. Nonvested share awards contain a time-based restriction as to vesting. These awards generally vest over four years with 25% of the grant vesting each year on the anniversary of the grant date.


Nonvested Share Awards	Shares			Weighted- Average Grant-Date Fair Value
Outstanding at January 29, 2011		434,255		$	6.56
Granted		657,500			3.51
Vested		(125,931	)		9.66
Forfeited or expired		(129,189	)		4.64

Outstanding at October 29, 2011		836,635		$	4.00

Nonvested Share Units

A summary of nonvested share units activity under the Company’s 2005 Plan for the first three quarters of fiscal 2011 is presented below. Nonvested share units contain a time-based restriction as to vesting. These awards generally vest 100% on the first anniversary of the grant date.


Nonvested Share Units	Shares			Weighted- Average Grant-Date Fair Value
Outstanding at January 29, 2011		175,000		$	3.68
Granted		150,000			3.19
Released		(175,000	)		3.68
Forfeited		—			—

Outstanding at October 29, 2011		150,000		$	3.19

Stock-based compensation expense related to nonvested stock options, nonvested share awards and nonvested share units for the third quarter of fiscal 2011 and 2010, was $0.8 million and $0.9 million, respectively, and $2.4 million and $2.9 million for the first three quarters of fiscal 2011 and 2010, respectively.

At October 29, 2011, the Company had approximately $4.4 million of compensation cost related to nonvested stock options, nonvested share awards and nonvested share units not yet recognized. This unearned compensation expense is expected to be recognized over a weighted-average period of approximately 2.4 years.

Employee Stock Purchase Plan (“ESPP”)

The Company maintains an ESPP, which provides a method for Company employees to voluntarily purchase the Company’s common stock at a 10% discount from fair market value as of the beginning or the end of each six-month purchasing period, whichever is lower. The ESPP covers substantially all employees, excluding senior executives, who have three months of service with the Company. The ESPP is intended to constitute an “employee stock purchase plan” within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended.

During the first three quarters of fiscal 2011 and 2010, the Company issued 95,798, and 104,938 shares at an average price of $2.35 and $2.89, respectively, under the ESPP. Related compensation expense was $0.1 million and $0.2 million during the first three quarters of fiscal 2011 and 2010, respectively.

Lease Modification

In connection with certain lease modifications in the current quarter, the Company issued 900,000 shares of its common stock to certain of its landlords. The fair value on the date of issuance was approximately $1.6 million, which is being amortized on a straight-line basis as a component of occupancy costs over the respective rent reduction period.

10. COMMITMENTS AND CONTINGENCIES

Litigation

Charles Pfeiffer, individually and on behalf of other aggrieved employees vs. Pacific Sunwear of California, Inc. and Pacific Sunwear Stores Corp., Superior Court of California, County of Riverside, Case No. 1100527. On January 13, 2011, the plaintiff in this matter filed a lawsuit against the Company alleging violations of California’s wage and hour, overtime, meal break and rest break rules and regulations, among other things. The complaint seeks an unspecified amount of damages and penalties. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. As the ultimate outcome of this matter is uncertain, no amounts have been accrued by the Company as of the date of this report. Depending on the actual outcome of this case, provisions could be recorded in the future which may have an adverse effect on the Company’s operating results and cash flows.

Phillip Gleason, on behalf of himself and others similarly situated vs. Pacific Sunwear of California, Inc., Superior Court of California, County of Los Angeles, Case No. 457654. On March 21, 2011, the plaintiff in this matter filed a putative class action lawsuit against the Company alleging violations of California’s wage and hour, overtime, meal break and rest break rules and regulations, among other things. The complaint seeks class certification, the

appointment of the plaintiff as class representative, and an unspecified amount of damages and penalties. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. As the ultimate outcome of this matter is uncertain, no amounts have been accrued by the Company as of the date of this report. Depending on the actual outcome of this case, provisions could be recorded in the future which may have an adverse effect on the Company’s operating results and cash flows.

Tamara Beeney, individually and on behalf of other members of the general public similarly situated vs. Pacific Sunwear of California, Inc. and Pacific Sunwear Stores Corporation, Superior Court of California, County of Orange, Case No. 30-2011-00459346-CU-OE-CXC. On March 18, 2011, the plaintiff in this matter filed a putative class action lawsuit against the Company alleging violations of California’s wage and hour, overtime, meal break and rest break rules and regulations, among other things. The complaint seeks class certification, the appointment of the plaintiff as class representative, and an unspecified amount of damages and penalties. The Company has filed an answer denying all allegations regarding the plaintiff’s claims and asserting various defenses. As the ultimate outcome of this matter is uncertain, no amounts have been accrued by the Company as of the date of this report. Depending on the actual outcome of this case, provisions could be recorded in the future which may have an adverse effect on the Company’s operating results and cash flows.

Since the allegations in all three of the above cases are substantially similar, the Company filed a motion to coordinate the cases in the Los Angeles Superior Court on April 20, 2011. That motion was granted on June 15, 2011. On October 14, 2011, the Company filed a motion for judgment on the pleadings with respect to several causes of action in each of the cases. A hearing on such motion is scheduled for December 9, 2011.

The Company is also involved from time to time in other litigation incidental to its business. The Company believes that the outcome of such litigation will not likely have a material adverse effect on its results of operations or financial condition. From time to time, the Company may make provisions for probable litigation losses. Depending on the actual outcome of pending litigation, charges in excess of any provisions could be recorded in the future, which may have an adverse effect on the Company’s operating results and cash flows.

Letters of Credit

The Company has issued guarantees in the form of commercial letters of credit primarily as security for merchandise shipments from overseas. The Company had approximately $26 million of such letters of credit outstanding at October 29, 2011. All in-transit merchandise covered by letters of credit is accrued for in accounts payable.

11. SEGMENT REPORTING

The Company operates exclusively in the retail apparel industry. The Company designs, produces and distributes clothing and related products catering to teens and young adults through its primarily mall-based PacSun retail stores. The Company has identified three operating segments: PacSun stores, PacSun Outlet stores and pacsun.com. The three operating segments have been aggregated into one reportable segment based on the similar nature of products sold, production, merchandising and distribution processes involved, target customers, and economic characteristics among the three operating segments.

12. EARNINGS PER SHARE

Basic earnings per common share is computed using the weighted-average number of shares outstanding. Diluted earnings per common share is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock using the treasury stock method, if dilutive. In periods where a net loss is reported, incremental shares are excluded as their effect would be anti-dilutive. In such circumstances, the weighted-average number of shares outstanding in the basic and diluted earnings per common share calculations will be the same. Anti-dilutive options and nonvested shares are excluded from the computation of diluted earnings per share because either the option exercise price or the grant date fair value of the nonvested share is greater than the market price of the Company’s common stock. Options to purchase 3,052,813 and 2,849,978 shares of common stock in the third quarter of fiscal 2011 and 2010, respectively, and 2,762,626 and 2,975,667 shares of common stock in the first three quarters of fiscal 2011 and 2010, respectively, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

13. SUBSEQUENT EVENTS

Subsequent to October 29, 2011, the Company reached agreement with certain of its landlords to modify certain lease agreements, which included the buyout of approximately 75 leases at a cost of approximately $13 million, short-term extensions for approximately 50 stores, and the termination upon lease expiration of approximately 115 stores. As a result, we expect to close approximately 80 stores during fiscal 2011 and approximately 110 stores during fiscal 2012. The cumulative net cash savings during fiscal 2012 is expected to be approximately $9 million, excluding the one-time buyout payments.

On December 7, 2011, the Company entered into a new five-year, $100 million revolving credit facility with Wells Fargo Capital Finance (“New Credit Facility”), which replaced the Company’s previous revolving credit facility with JPMorgan Chase (the Former Credit Facility). Borrowings under the New Credit Facility bear interest at a floating rate which, at the Company’s option, may be determined by reference to a LIBOR Rate or a Base Rate (as those terms are defined in the New Credit Facility). Extensions of credit under the New Credit Facility are limited to a borrowing base consisting of specified percentages of eligible categories of assets. The New Credit Facility is available for direct borrowings and allows for the issuance of letters of credit, and up to $12.5 million is available for swing-line loans. The New Credit Facility is secured by liens and security interests with (a) first priority security interest in the current and certain related assets of the Company including cash, cash equivalents, deposit accounts, securities accounts, credit card receivables, and inventory, and (b) second priority security interest in all assets and properties of the Company that are not secured by a first lien and security interest. The New Credit Facility also contains covenants that, subject to specified exceptions, restrict the Company’s ability to, among other things, incur additional indebtedness, incur liens, liquidate or dissolve, sell, transfer, lease or dispose of assets, or make loans, investments or guarantees. The New Credit Facility is scheduled to mature on December 7, 2016.

Additionally, on December 7, 2011 the Company entered into a new five-year, $60 million term loan (“Senior Secured Term Loan”), funded by an affiliate of Golden Gate Capital. The Senior Secured Term Loan will bear interest initially at an interest rate of 5.5% per annum to be paid in cash, due and payable quarterly in arrears, and 7.5% per annum, due and payable in kind (“PIK”) upon maturity, accruing annually in arrears with adjustments to the cash and PIK portion of the interest rate in accordance with the Senior Secured Term Loan agreement, following principle prepayments. Annual cash interest for fiscal 2012 is expected to be approximately $3 million. The Senior Secured Term Loan is guaranteed by each of the Company’s subsidiaries and will be guaranteed by any future domestic subsidiaries of the Company. The Senior Secured Term Loan is secured by liens and security interests with (a) a first priority security interest in all long-term assets of the Company and Pacific Sunwear Stores Corp. and all other assets not subject to a first lien and security interest pursuant to the New Credit Facility, (b) a first priority pledge of the equity interests of Miraloma Borrower Corporation and (c) a second priority security interest in all assets of the Company and Pacific Sunwear Stores Corp. subject to a first lien and security interest pursuant to the New Credit Facility. The Senior Secured Term Loan also contains covenants substantially identical to those in the New Credit Facility. The principal balance and any unpaid interest related to the Senior Secured Term Loan is due on December 7, 2016.

In conjunction with the Senior Secured Term Loan, the Company issued convertible preferred stock with a liquidation value of $0.1 million to an affiliate of Golden Gate Capital, which gives that affiliate the right to purchase up to 13.5 million shares of the Company’s common stock, based on an initial conversion ratio of 1,000 shares of common stock to one share of convertible preferred stock, representing 19.9% of the Company’s common stock outstanding (16.7% on a fully-diluted basis). The convertible preferred stock has an exercise price initially equal to $1.75 per share of underlying common stock. The initial holder of the preferred stock will be entitled to customary registration rights with respect to the underlying common stock.

On December 7, 2011, the Company’s Board of Directors adopted a Shareholder Protection Rights Plan and declared a dividend of one Right on each outstanding share of common stock of the Company. The dividend will be paid to shareholders of record on December 12, 2011, upon certification by the Nasdaq Global Select Market to the SEC that the Rights have been approved for listing. Additionally, if any person or group acquires between 15% and 50% of the Company’s common stock, the Board of Directors may, at its option, exchange one share of the Company’s common stock for each Right. Under the Plan, among other things, a person or group which acquires 15% or more of the common stock of the Company will trigger the ability of the shareholders (other than the 15% holder) to exercise the Rights for an exercise price of $4.50 per Right (subject to certain adjustments from time to time) and to purchase a number of shares of common stock with a market value of twice the exercise price of the Rights exercised. Existing holders of 15% or more of the common stock are grandfathered under the Plan, until such time as they acquire more than 0.1% of the common stock than they had as of the date of the adoption of the Rights Plan. The Rights are redeemable at any time by the Company at $.01 per Right. The Plan expires in 2014.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with our Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Report.

Cautionary Note Regarding Forward-Looking Statements

This Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend that such forward-looking statements be subject to the safe harbors created thereby. In Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended January 29, 2011 (the “2010 Annual Report”), we provide cautionary statements identifying important factors that could cause our actual results to differ materially from those projected in the forward-looking statements contained herein. Any statements that express, or involve discussions as to, expectations, beliefs, plans, objectives, assumptions, future events or performance (often, but not always, identifiable by 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. Examples of forward-looking statements in this Report include, but are not limited to, the following categories of expectations about:

•

the sufficiency of operating cash flows, working capital and available credit to meet our operating and capital expenditure requirements,

•

our capital expenditure plans for fiscal 2011,

•

potential recording of noncash impairment charges for underperforming stores in future quarters,

•

increases in product sourcing costs,

•

forecasted net cash savings as a result of the amendment or termination of certain leases,

•

forecasts of future store closures, expansions, relocations and store refreshes during fiscal 2011, and

•

future increases in occupancy costs.

All forward-looking statements included in this Report are based on information available to us as of the date hereof, and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. See Item 1A, Risk Factors, in the 2010 Annual Report, which are hereby incorporated by reference in this Report for a discussion of these risks and uncertainties. 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.

Executive Overview

We consider the following items to be key performance indicators in evaluating our performance:

Comparable (or “same-store”) sales. Stores are deemed comparable stores on the first day of the fiscal month following the one-year anniversary of their opening or expansion/relocation. We consider same-store sales to be an important indicator of the Company’s current performance. Same-store sales results are important in achieving operating leverage of certain expenses such as store payroll, store occupancy, depreciation, general and administrative expenses and other costs that are somewhat fixed. Positive same-store sales results usually generate greater operating leverage of expenses while negative same-store sales results generally have a negative impact on operating leverage. Same-store sales results also have a direct impact on our net sales, cash and working capital.

Net merchandise margins. We analyze the components of net merchandise margins, specifically initial markups and markdowns as a percentage of net sales. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse impact on our gross margin results and results of operations.

Operating margin. We view operating margin as a key indicator of our success. The key drivers of operating margins are comparable store net sales, net merchandise margins, and our ability to control operating expenses. For a discussion of the changes in the components comprising operating margins, see “Results of Operations” in this section.

Store sales trends. We evaluate store sales trends in assessing the operational performance of our stores. Important store sales trends include average net sales per store and average net sales per square foot.

Cash flow and liquidity (working capital). We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs. Based on the availability under the New Credit Facility and the funds received upon closing of the Senior Secured Term Loan, the Company believes that it will be able to meet its operating and capital expenditure needs for the next twelve months. At October 29, 2011, we had no direct borrowings under the Former Credit Facility; however, we borrowed $20 million under the Facility subsequent to such date. The $20 million was re-paid at the closing of the Senior Secured Term Loan financing on December 7, 2011. For a discussion of the changes in operating cash flows and working capital, see “Liquidity and Capital Resources” in this section.

Critical Accounting Policies

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2010 Annual Report.

Results of Operations

The following table sets forth selected operating data expressed as a percentage of net sales for the fiscal periods indicated. The discussion that follows should be read in conjunction with the following table:


	For the Third Quarter Ended						For the Three Quarters Ended
	October 29, 2011			October 30, 2010			October 29, 2011			October 30, 2010
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold, including buying, distribution and occupancy costs		75.8			75.0			77.7			76.4

Gross margin		24.2			25.0			22.3			23.6
Selling, general and administrative expenses		31.1			27.6			32.5			32.7

Operating loss		(6.9	)		(2.6	)		(10.2	)		(9.1	)
Other expense, net		0.5			0.2			0.4			0.1

Loss before income taxes		(7.4	)		(2.8	)		(10.6	)		(9.2	)
Income tax (benefit) expense		(0.1	)		(0.1	)		—			—

Net loss		(7.3	)%		(2.7	)%		(10.6	)%		(9.2	)%

Number of stores open at end of period		820			877
Total square footage (in 000s)		3,194			3,400

The third quarter (thirteen weeks) ended October 29, 2011 as compared to the third quarter (thirteen weeks) ended October 30, 2010

Net Sales

Net sales decreased to $242 million for the third quarter of fiscal 2011 from $258 million for the third quarter of fiscal 2010. The components of this $16 million decrease in net sales are as follows:


$ millions			Attributable to
$	(13	)	Decrease in net sales due to store closures.
	4		Increase in other non-comparable sales including sales from expanded or relocated stores not yet included in the comparable store base, e-commerce and bulk sales.
	(7	)	3% decrease in comparable store net sales in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010.

$	(16	)	Total

For the third quarter of fiscal 2011, comparable store net sales of Women’s product decreased 5% and Men’s product decreased 1%. Apparel represented 87% of total sales for the third quarter of fiscal 2011 and 2010. Accessories and footwear represented a combined 13% of total net sales for the third quarter of fiscal 2011 and 2010.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, was $59 million for the third quarter of fiscal 2011 versus $64 million for the third quarter of fiscal 2010. As a percentage of net sales, gross margin was 24.2% for the third quarter of fiscal 2011 compared to 25.0% for the third quarter of fiscal 2010. The components of this 0.8% decrease in gross margin as a percentage of net sales were as follows:


%			Attributable to
	0.1		Increase in merchandise margin as a percentage of sales.
	(0.5	)	Decrease in occupancy costs to $45 million in the third quarter of fiscal 2011 compared to $47 million in the third quarter of fiscal 2010.
	(0.2	)	Decrease in buying and distribution costs to $9 million in the third quarter of fiscal 2011 compared to $10 million in the third quarter of fiscal 2010.
	(0.2	)	Increase in e-commerce shipping costs as a percentage of sales.

	(0.8	)	Total

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) increased to $75 million for the third quarter of fiscal 2011 from $71 million for the third quarter of fiscal 2010, an increase of $4 million, or 6%. These expenses increased to 31.1% as a percentage of net sales in the third quarter of fiscal 2011 from 27.6% in the third quarter of fiscal 2010. The components of this 3.5% increase in SG&A as a percentage of net sales were as follows:


%			Attributable to
	0.9		Increase in payroll and payroll-related expenses as a percentage of sales. In dollars, payroll and payroll-related expenses were flat in the third quarter of fiscal 2011, as compared to the prior year, which includes a $2 million bonus accrual reversal.
	(1.1	)	Decrease in depreciation expense to $10 million in the third quarter of fiscal 2011 from $13 million in the third quarter of fiscal 2010.
	2.9		Increase in noncash asset impairment charges and store closure related charges to $9 million in the third quarter of fiscal 2011 from $2 million in the third quarter of fiscal 2010.
	0.8		Increase in all other SG&A expenses. In dollars, all other SG&A expenses were $18 million in the third quarter of fiscal 2011 compared to $16 million in the third quarter of fiscal 2010.

	3.5		Total

We evaluate the recoverability of the carrying amount of long-lived assets (primarily property and equipment at the store level) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For a discussion of impairment charges, see Note 4 to the Condensed Consolidated Financial Statements included in this Report. Should comparable store net sales and gross margin decline, we may record additional noncash impairment charges within selling, general and administrative expenses for underperforming stores in future periods.

Other Expense, Net

Other expense was $1.2 million and $0.4 million for the third fiscal quarter of 2011 and 2010, respectively, primarily related to interest expense associated with the mortgage debt described in Note 7 to the Condensed Consolidated Financial Statements included in this Report.

Income Taxes

We recognized an income tax benefit of $0.3 million and $0.2 million during the third quarters of fiscal 2011 and 2010, respectively. For fiscal 2011, we expect to continue to maintain a valuation allowance against deferred tax assets resulting in minimal income tax expense for the year. For further information, see Note 8 to the Condensed Consolidated Financial Statements included in this Report, which information is incorporated herein by reference.

Net Loss and Net Loss Per Share

Our net loss for the third quarter of fiscal 2011 was $17.6 million, or $(0.26) per share, versus a net loss of $7.0 million, or $(0.11) per share, for the third quarter of fiscal 2010. Amounts for the third quarter of fiscal 2011 and 2010 include store closure related charges and the continuing impact of a valuation allowance against our deferred tax assets.

The first three quarters (39 weeks) ended October 29, 2011 as compared to the first three quarters (39 weeks) ended October 30, 2010

Net Sales

Net sales decreased to $643 million for the first three quarters of fiscal 2011 from $667 million for the first three quarters of fiscal 2010. The components of this $24 million decrease in net sales are as follows:


$ millions			Attributable to
$	(29	)	Decrease in sales due to store closures.
	9		Increase in other non-comparable sales including sales from expanded or relocated stores not yet included in the comparable store base, e-commerce sales and bulk sales.
	(4	)	1% decrease in comparable store net sales in the first three quarters of fiscal 2011 compared to the first three quarters of fiscal 2010.

$	(24	)	Total

For the first three quarters of fiscal 2011, comparable store net sales of Women’s product was flat and Men’s product decreased 1%. Apparel represented 86% of total sales for the first three quarters of fiscal 2011 versus 87% for the first three quarters of fiscal 2010. Accessories and footwear represented a combined 14% of total net sales for the first three quarters of fiscal 2011 versus 13% in the first three quarters of fiscal 2010.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, was $144 million for the first three quarters of fiscal 2011 versus $158 million for the first three quarters of fiscal 2010. As a percentage of net sales, gross margin was 22.3% for the first three quarters of fiscal 2011 compared to 23.6% for the first three quarters of fiscal 2010. The components of this 1.3% decrease in gross margin as a percentage of net sales were as follows:


%			Attributable to
	(1.2	)	Decrease in merchandise margins as a percentage of sales.
	(0.1	)	Decrease in occupancy costs to $138 million in the first three quarters of fiscal 2011 compared to $143 million for the first three quarters of fiscal 2010.
	0.1		Decrease in buying and distribution costs to $26 million in the first three quarters of fiscal 2011 compared to $28 million for the first three quarters of fiscal 2010.
	(0.1	)	Increase in e-commerce shipping costs as a percentage of sales.

	(1.3	)	Total

Selling, General and Administrative Expenses

SG&A decreased to $209 million for the first three quarters of fiscal 2011 from $218 million for the first three quarters of fiscal 2010, a decrease of $9 million, or 4.0%. These expenses decreased to 32.6% as a percentage of net sales in the first three quarters of fiscal 2011 from 32.7% in the first three quarters of fiscal 2010. The components of this 0.1% decrease in SG&A as a percentage of net sales were as follows:


%			Attributable to
	(0.5	)	Decrease in payroll and payroll-related expenses as a percentage of sales. In dollars, payroll and payroll-related expenses were $116 million in the first three quarters of fiscal 2011 compared to $124 million in the first three quarters of fiscal 2010.
	(1.2	)	Decrease in depreciation expense to $31 million in the first three quarters of fiscal 2011 compared to $40 million in the first three quarters of fiscal 2010.
	0.9		Increase in noncash asset impairment charges and store closure related charges to $15 million in the first three quarters of fiscal 2011 from $9 million in the first three quarters of fiscal 2010.
	0.7		Increase in all other SG&A expenses as a percentage of sales. In dollars, all other SG&A expenses were $48 million in the first three quarters of fiscal 2011 and $45 million in the first three quarters of 2010.

	(0.1	)	Total

Other Expense, Net

Other expense was $2.3 million and $0.5 million for the first three quarters of fiscal 2011 and 2010, respectively, primarily related to interest expense associated with the mortgage debt described in Note 7 to the Condensed Consolidated Financial Statements included in this Report.

Income Taxes

We recognized income tax expense of $0.3 million and $0.4 million during the first three quarters of fiscal 2011 and 2010, respectively. For fiscal 2011, we expect to continue to maintain a valuation allowance against deferred tax assets resulting in minimal income tax expense for the year. For further information, see Note 8 to the Condensed Consolidated Financial Statements included in this Report, which information is incorporated herein by reference.

Net Loss and Net Loss Per Share

Our net loss for the first three quarters of fiscal 2011 was $68.3 million, or $(1.03) per share, versus a net loss of $61.5 million, or $(0.93) per share, for the first three quarters of fiscal 2010. Amounts for the first three quarters of fiscal 2011 and 2010 include store closure related charges and the continuing impact of a valuation allowance against our deferred tax assets.

Liquidity and Capital Resources

We have typically financed our operations primarily from internally generated cash flow, with occasional short-term and long-term borrowings. Our primary cash requirements have been for the financing of inventories and construction of newly opened, remodeled, expanded or relocated stores.

We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs. Based on the availability under the New Credit Facility and the funds received upon closing of the Senior Secured Term Loan, the Company believes that it will be able to meet its operating and capital expenditure needs for the next twelve months. At October 29, 2011, we had no direct borrowings under the Former Credit Facility; however, we borrowed $20 million under the Facility subsequent to such date. The $20 million was re-paid at the closing of the Senior Secured Term Loan financing on December 7, 2011. For a discussion of the changes in operating cash flows and working capital, see “Liquidity and Capital Resources” in this section.

At October 29, 2011, we had no direct borrowings under our Former Credit Facility, however we borrowed $20 million under that credit facility subsequent to such date.


	For the First Three Quarters Ended
(In thousands)	October 29, 2011			October 30, 2010
Net cash used in operating activities	$	(45,262	)	$	(62,199	)
Net cash used in investing activities		(9,865	)		(15,544	)
Net cash (used in) provided by financing activities		(303	)		28,627

Net decrease in cash and cash equivalents	$	(55,430	)	$	(49,116	)

Operating Cash Flows

Net cash used in operating activities for the first three quarters of fiscal 2011 was $45 million. We used $20 million of cash in operations (net of noncash charges), before working capital changes. In addition, cash decreased $19 million from changes in working capital items primarily due to increases in merchandise inventories of $57 million, offset by increased accounts payable of $49 million due to the seasonal variation between the ramp up for the holiday season and the annual low point for inventories at the end of the fiscal year. The remaining decrease in cash from working capital items was attributable to an increase in other current assets of $7 million primarily due to an increase in prepaid expenses of $5 million. Additional decreases in operating cash flows were due to changes in other assets and liabilities of $7 million.

Net cash used in operating activities for the first three quarters of fiscal 2010 was $62 million. We used $8 million of cash in operations (net of noncash charges), before working capital changes. In addition, cash decreased $54 million from changes in working capital items primarily due to increases in merchandise inventories of $77 million, offset by increased accounts payable of $39 million due to the seasonal variation between the ramp up for the holiday season and the annual low point for inventories at the end of the fiscal year. Additional decreases in operating cash flows were due to changes in other assets and liabilities of $16 million.

Working Capital

Working capital at October 29, 2011 was $57 million compared to $93 million at January 29, 2011, a decrease of $36 million. The changes in working capital were as follows:


$ millions			Description
$	93		Working capital at January 29, 2011
	(55	)	Decrease in cash and cash equivalents.
	8		Increase in merchandise inventories, net of accounts payable, from fiscal year end due to planned receipt flows.
	7		Increase in other assets, primarily prepaid expenses.
	4		Decrease in other current liabilities.

$	57		Working capital at October 29, 2011

Investing Cash Flows

Net cash used in investing activities in the first three quarters of fiscal 2011 was $10 million compared to $16 million for the first three quarters of fiscal 2010, a decrease in cash used of $6 million. Investing cash flows for the first three quarters of fiscal 2011 and 2010 were comprised primarily of capital expenditures at the store level. We expect total capital expenditures for fiscal 2011 to be approximately $13 to $15 million.

Financing Cash Flows

Net cash used in financing activities in the first three quarters of fiscal 2011 was $0.3 million compared to cash provided of $29 million for the first three quarters of fiscal 2010, an increase in cash used of approximately $30 million. The primary source of financing outflows in fiscal 2011 was principal payments under mortgage borrowings and capital leases offset by cash proceeds from the exercise of stock options. The primary source of financing inflows in fiscal 2010 was proceeds from mortgage borrowings, offset by payments for mortgage borrowing costs.

Credit Facility

Information regarding our Credit Facility is contained in Note 5 to the Condensed Consolidated Financial Statements and is incorporated herein by reference.

Mortgage Transactions

Information regarding our mortgage debt is contained in Note 7 to the Condensed Consolidated Financial Statements included in this Report and is incorporated herein by reference.

Contractual Obligations

We have minimum annual rental commitments under existing store leases as well as collateralized debt obligations related to our corporate headquarters and distribution center. In addition, at any given time, we are contingently liable for commercial letters of credit with foreign suppliers of merchandise. At October 29, 2011, our future financial commitments under all existing contractual obligations were as follows:


	Payments Due by Period (in $ millions)
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Operating lease obligations	$	443	$	84	$	149	$	108	$	102
Mortgage debt		29		1		1		1		26
Letters of credit		26		26		—		—		—
Guaranteed minimum royalties		4		1		3		—		—

Total	$	502	$	112	$	153	$	109	$	128

We review the operating performance of our stores on an ongoing basis to determine which stores, if any, to expand, relocate or close. We closed 32 stores in the first three quarters of fiscal 2011. We have an aggregate of nearly 400 lease expirations for reconsideration through 2013. These leases will either be renewed or extended, potentially at different rates, terminated early, or be allowed to expire. As a result, depending on market conditions, actual future rental commitments and the time frame of such commitments may differ significantly from those shown in the table above. Currently, we anticipate closing approximately 150 of these stores prior to the end of fiscal 2013.

The contractual obligations table above does not include common area maintenance (“CAM”) charges, which are also a required contractual obligation under our store operating leases. In many of our leases, CAM charges are not fixed and can fluctuate significantly from year to year for any particular store. Additionally, total CAM expenses may continue to fluctuate significantly from year to year as long-term leases come up for renewal at current market rates in excess of original lease terms and as we continue to close stores.

We lease our retail stores and certain equipment under operating lease agreements expiring at various dates through January 2023. Substantially all of our retail store leases require us to pay minimum rent, CAM charges, insurance, property taxes and additional percentage rent based on sales volumes exceeding certain minimum sales levels. The initial terms of such leases are typically 8 to 10 years, many of which contain renewal options exercisable at our discretion. Most leases also contain rent escalation clauses that come into effect at various times throughout the lease term. Rent expense is recorded under the straight-line method over the related lease term. Other rent escalation clauses can take effect based on changes in primary mall tenants throughout the term of a given lease. Most leases also contain cancellation or kick-out clauses in our favor that relieve us of any future obligation under a lease if specified sales levels are not achieved by a specified date. None of our retail store leases contain purchase options.

Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and officers in certain circumstances.

It is not possible to determine our maximum potential liability under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses. Historically, we have not incurred material costs as a result of obligations under these agreements.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to us.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 3 to the Condensed Consolidated Financial Statements and is incorporated herein by reference.

Inflation

We do not believe that inflation has had a material effect on our results of operations in the recent past. However, we are currently anticipating that product sourcing costs will continue to increase during fiscal 2011 due to a combination of increases in cotton, labor, fuel and currency costs. We intend to partially mitigate these increases through a combination of initiatives such as better product assortments, refined pricing strategies, localization initiatives, shipment consolidation and detailed reviews of product specifications.

Seasonality and Quarterly Results

Our business is seasonal by nature. Our first quarter historically accounts for the smallest percentage of annual net sales with each successive quarter contributing a greater percentage than the last. In recent years, approximately 45% of our net sales have occurred in the first half of the fiscal year and 55% have occurred in the second half. The six to seven week selling periods for each of the back-to-school and holiday seasons together account for approximately 35% to 40% of our annual net sales and a higher percentage of our operating results on a combined basis. Our quarterly results of operations may also fluctuate significantly as a result of a variety of factors: including changes in consumer buying patterns; fashion trends; the timing and level of markdowns; the timing of store closings, expansions and relocations; competitive factors; and general economic conditions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to interest rate risk in connection with the New Credit Facility. Generally, direct borrowings under the New Credit Facility bear interest at a floating rate which, at the Company’s option, may be determined by reference to a LIBOR rate, plus 1.50% (1.77% at December 7, 2011). See Note 13 to the Condensed Consolidated Financial Statements included in this Report.

A sensitivity analysis was performed with respect to the New Credit Facility to determine the impact of unfavorable changes in interest rates on our cash flows. The sensitivity analysis quantified that the estimated potential cash flow impact would be less than $10,000 in additional interest expense (for each $1 million borrowed) if interest rates were to increase by 10% over a three-month period. Actual interest charges incurred may differ from those estimated because of changes or differences in market rates, differences in amounts borrowed, timing and other factors. We are not a party to any derivative financial instruments.

ITEM 4. CONTROLS AND PROCEDURES.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act. These disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures are also designed to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of October 29, 2011.

No change in our internal control over financial reporting occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

For information on legal proceedings see “Litigation” within Note 10 to the Condensed Consolidated Financial Statements, which information is incorporated herein by reference.

Item 1A. Risk Factors.

We have included in Part I, Item 1A of the 2010 Annual Report and Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended July 30, 2011 (the “Q2 Form 10-Q”) descriptions of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). We believe there are no material changes from the disclosure provided in the 2010 Annual Report and the Q2 Form 10-Q with respect to the Risk Factors, other than as set forth below. Investors should consider the Risk Factors prior to making an investment decision with respect to the Company’s stock.

Our failure to reverse declining sales would have a material adverse impact on our business, profitability and liquidity. In fiscal 2010 and fiscal 2009, we experienced declines of 8% and 20%, respectively, in comparable store net sales. If similar trends were to reoccur for an extended period of time, we believe that our working capital and cash flows from operating activities might not be sufficient to meet our operating requirements and we may be required to access some, if not all, of the New Credit Facility and potentially require other sources of financing to fund our operations, which might not be available. We evaluate cash flow from operations, liquidity and working capital to determine our short-term operational financing needs. Based on current forecasts and plans for the balance of fiscal 2011 and for fiscal 2012, we believe that the proceeds from the Senior Secured Term Loan and availability under our New Credit Facility will be sufficient to meet our operating and capital expenditure needs for the next twelve months.

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. As a result, we may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness. In addition, our current level of debt could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under the Mortgage Debt, the New Credit Facility, and the Senior Secured Term Loan.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Reserved.

Item 5. Other Information.

None.

Item 6. Exhibits.


		Incorporated by Reference
Exhibit #	Exhibit Description	Form	Filing Date

3.1	Third Amended and Restated Articles of Incorporation of the Company	10-Q	8/31/04

3.2	Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock of the Company	8-K	12/24/98

3.3	Fifth Amended and Restated Bylaws of the Company	8-K	4/3/09

3.4	Certificate of Determination of Preferences of Convertible Series B Preferred Stock of the Company.	8-K	12/7/11

4.1	Shareholder Protection Rights Agreement, which includes as Exhibit A the forms of Rights Certificate and Election to Exercise and as Exhibit B the Certificate of Determination of Preferences of Series A Junior Participating Preferred Stock.	8-K	12/7/11

10.1	$100,000,000 Credit Agreement, dated as of December 7, 2011, among the Company and Wells Fargo Bank, N.A., as Administrative Agent, Collateral Agent, and Swing Line Lender, and Wells Fargo Capital Finance, LLC., as Syndication Agent, Documentation Agent, Sole Lead Arranger and Sole Bookrunner, and between Pacific Sunwear Stores Corp. and Wells Fargo Bank N.A.	8-K	12/7/11

10.2	Guaranty, dated as of December 7, 2011, between Miraloma Borrower Corp. and Wells Fargo Bank N.A.	8-K	12/7/11

10.3	Security Agreement, dated as of December 7, 2011, among the Company, Pacific Sunwear Stores Corp. and Wells Fargo Bank N.A.	8-K	12/7/11

10.4	$60,000,000 Credit Agreement, dated as of December 7, 2011, among the Company and certain subsidiaries of the Company, as guarantors, and PS Holdings Agency Corp., as Administrative Agent, and the other lenders party thereto.	8-K	12/7/11

10.5	Facility Guaranty, dated as of December 7, 2011, between Pacific Sunwear Stores Corp. and PS Holdings.	8-K	12/7/11

10.6	Unsecured Guaranty, dated as of December 7, 2011, between Miraloma Borrower Corporation and PS Holdings Agency Corp.	8-K	12/7/11

10.7	Security Agreement, dated as of December 7, 2011, among the Company and certain subsidiaries of the Company and PS Holdings Agency Corp.	8-K	12/7/11

10.8	Stock Purchase and Investors Rights Agreement, dated as of December 7, 2011, among the Company and PS Holdings of Delaware, LLC – Series A.	8-K	12/7/11

10.9	Registration Rights Agreement, dated as of December 7, 2011, between the Company and PS Holdings of Delaware, LLC – Series A.	8-K	12/7/11

31.1+	Written statements of Gary H. Schoenfeld and Michael W. Kaplan pursuant to section 302 of the Sarbanes-Oxley Act of 2002

32.1+	Written statement of Gary H. Schoenfeld and Michael W. Kaplan pursuant to section 906 of the Sarbanes-Oxley Act of 2002


101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Label Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

+	Filed herewith

**	These interactive files are deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and are otherwise not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PACIFIC SUNWEAR OF CALIFORNIA, INC.
	(Registrant)

Date: December 7, 2011	By:	/s/ GARY H. SCHOENFELD
		Gary H. Schoenfeld
		President, Chief Executive Officer and Director
		(Principal Executive Officer)

Date: December 7, 2011	By:	/s/ MICHAEL W. KAPLAN
		Michael W. Kaplan
		Sr. Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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