e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended: October 31, 2009


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

Commission file number 0-21296

PACIFIC SUNWEAR OF CALIFORNIA, INC.

(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 þ No o

•

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 o No o

•

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large Accelerated Filer þ	Accelerated Filer o	Non-Accelerated Filer o	Smaller Reporting Company o
	(Do not check if smaller reporting company)

•

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

On December 1, 2009, the registrant had 66,110,624 shares of Common Stock outstanding.

PART I — FINANCIAL INFORMATION

ITEM 1 — Condensed Consolidated Financial Statements (unaudited)

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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


	October 31, 2009			January 31, 2009
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	15,564		$	24,776
Merchandise inventories		168,417			107,205
Other current assets		15,774			58,943

Total current assets		199,755			190,924

PROPERTY AND EQUIPMENT, NET:
Gross property and equipment		653,316			665,236
Less accumulated depreciation and amortization		(380,720	)		(341,892	)

Total property and equipment, net		272,596			323,344

Assets held for sale		—			3,682
Deferred income taxes		39,713			21,984
Other assets		25,231			29,575

TOTAL ASSETS	$	537,295		$	569,509


LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	63,298		$	45,263
Other current liabilities		40,159			47,564

Total current liabilities		103,457			92,827

LONG-TERM LIABILITIES:
Deferred lease incentives		42,229			52,313
Deferred rent		21,872			23,008
Other long-term liabilities		27,863			29,374

Total long-term liabilities		91,964			104,695

Commitments and contingencies (Note 11)

SHAREHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value; 170,859,375 shares authorized; 65,583,370 and 65,174,144 shares issued and outstanding, respectively		656			652
Additional paid-in capital		5,993			2,306
Retained earnings		335,225			369,029

Total shareholders’ equity		341,874			371,987


TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	537,295		$	569,509

See accompanying footnotes

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

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


	For the Third Quarter Ended						For the Three Quarters Ended
	October 31, 2009			November 1, 2008			October 31, 2009			November 1, 2008
Net sales	$	268,280		$	323,612		$	734,539		$	903,204

Cost of goods sold, including buying, distribution and occupancy costs		194,839			230,836			542,116			639,705

Gross margin		73,441			92,776			192,423			263,499

Selling, general and administrative expenses		89,365			95,308			245,477			281,163

Operating loss from continuing operations		(15,924	)		(2,532	)		(53,054	)		(17,664	)

Other expense, net		17			1,100			180			461

Loss from continuing operations before income taxes		(15,941	)		(3,632	)		(53,234	)		(18,125	)

Income tax benefit		(5,036	)		(112	)		(19,431	)		(6,344	)

Loss income from continuing operations		(10,905	)		(3,520	)		(33,803	)		(11,781	)
Income (loss) from discontinued operations, net of tax		—			1,046			—			(24,999	)


Net loss	$	(10,905	)	$	(2,474	)	$	(33,803	)	$	(36,780	)


Comprehensive loss	$	(10,905	)	$	(2,474	)	$	(33,803	)	$	(36,780	)


Loss from continuing operations per share:
Basic	$	(0.17	)	$	(0.05	)	$	(0.52	)	$	(0.18	)

Diluted	$	(0.17	)	$	(0.05	)	$	(0.52	)	$	(0.18	)


Net loss per share:
Basic	$	(0.17	)	$	(0.04	)	$	(0.52	)	$	(0.55	)

Diluted	$	(0.17	)	$	(0.04	)	$	(0.52	)	$	(0.55	)


Weighted average shares outstanding:
Basic		65,563,721			64,968,707			65,380,726			67,182,918
Diluted		65,563,721			64,968,707			65,380,726			67,182,918

See accompanying footnotes

PACIFIC SUNWEAR OF CALIFORNIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, amounts in thousands)


	Three Quarters Ended
	Oct. 31, 2009			Nov. 1, 2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(33,803	)	$	(36,780	)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization		53,326			58,743
Asset impairment		16,538			14,821
Goodwill impairment		—			6,492
Loss on disposal of property and equipment		555			2,368
Non-cash stock based compensation		5,030			4,442
Tax benefit deficiencies related to stock-based compensation		(1,702	)		(1,408	)
Excess tax benefits related to stock-based compensation		—			(5	)
Change in operating assets and liabilities:
Merchandise inventories		(61,212	)		(63,632	)
Other current assets		43,428			(20,817	)
Other assets		(12,968	)		17,398
Accounts payable		18,035			51,450
Other current liabilities		(8,049	)		(21,776	)
Deferred lease incentives		(10,084	)		(18,958	)
Deferred rent		(1,136	)		(4,199	)
Other long-term liabilities		(1,730	)		(1,454	)

Net cash provided by/(used in) operating activities		6,228			(13,315	)


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(19,540	)		(71,528	)
Proceeds from sale of land		3,705			—
Proceeds from sale of property and equipment		28			275

Net cash used in investing activities		(15,807	)		(71,253	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		373			1,613
Principal payments under capital lease obligations		(6	)		(9	)
Repurchases of common stock		—			(52,911	)
Borrowings under credit facility		—			168,739
Principal payments under credit facility		—			(125,639	)
Excess tax benefits related to stock-based compensation		—			5

Net cash provided by/(used in) financing activities		367			(8,202	)


NET DECREASE IN CASH AND CASH EQUIVALENTS:		(9,212	)		(92,770	)
CASH AND CASH EQUIVALENTS, beginning of period		24,776			97,587

CASH AND CASH EQUIVALENTS, end of period	$	15,564		$	4,817


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	—		$	174
Cash (refunded)/paid for income taxes	$	(28,061	)	$	539
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Increase/(decrease) in non-cash property and equipment accruals	$	408		$	(2,013	)
Capital lease transaction for property and equipment	$	—		$	20

See accompanying footnotes

PACIFIC SUNWEAR OF CALIFORNIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the quarterly period ended October 31, 2009

(unaudited)

1. NATURE OF BUSINESS

Pacific Sunwear of California, Inc. and its subsidiaries (collectively, the “Company,” “we,” “us,” or “our”) is a leading lifestyle specialty retailer rooted in the youth culture of California. We sell casual apparel with a selection of accessories and footwear designed to meet the needs of teens and young adults. We operate a nationwide, primarily mall-based chain of retail stores under the names “Pacific Sunwear” and “Pacsun”. In addition, we operate an e-commerce website at www.pacsun.com which sells PacSun merchandise online, provides content and community for our target customers, and provides information about the Company. As of October 31, 2009, the Company leased and operated 904 stores, comprising 3.5 million total square feet, among all 50 states and Puerto Rico.

2. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rules 5-02 and 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements include the accounts of Pacific Sunwear of California, Inc. and its subsidiaries (Pacific Sunwear Stores Corp. and Miraloma Corp.). 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 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 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 three quarters ended October 31, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending January 30, 2010 (“fiscal 2009”). For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (“fiscal 2008”). The Company has evaluated all subsequent events through the time that it filed its consolidated financial statements in this Form 10-Q with the Securities and Exchange Commission (“SEC”) on December 4, 2009.

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 2008. Presented below in this and the following notes is supplemental information that should be read in conjunction with “Notes to Consolidated Financial Statements” included in that report.

Recently Adopted Accounting Pronouncements — The Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”) Topic 105, “Generally Accepted Accounting Principles,” formerly FASB Statement 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” ASC 105 establishes the FASB Codification as the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of the federal securities laws are also sources of authoritative GAAP for SEC registrants. ASC 105 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. The FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and

(c) provide the basis for conclusions on the change(s) in the Codification. As the Codification does not change GAAP, it does not have a material impact on the Company’s consolidated condensed financial statements. Previous references made to GAAP literature in the notes to the Company’s consolidated condensed financial statements have been updated with references to the new Codification.

4. DISCONTINUED OPERATIONS

During the first quarter of fiscal 2008, the Company completed inventory liquidation sales and closed its demo stores. Accordingly, the operations of the demo business have been removed from continuing operations for fiscal 2008 and are presented as discontinued operations within the condensed consolidated statements of operations and comprehensive operations. The operating results for fiscal 2008 of the discontinued operations are as follows (amounts in thousands except per share amounts):


	Third Quarter Ended			Three Quarters Ended
	Nov. 1, 2008			Nov. 1, 2008
Net sales	$	—		$	27,051
Loss before income tax benefit		(683	)		(40,818	)
Income tax benefit		(1,729	)		(15,819	)
Net income (loss)		1,046			(24,999	)
Net income (loss) per diluted share	$	0.02		$	(0.37	)

5. SEGMENT REPORTING

The Company operates exclusively in the retail apparel industry in which the Company distributes, designs and produces clothing and related products catering to teens and young adults through its primarily mall-based PacSun retail stores. The Company has identified four operating segments: PacSun Core stores, PacSun Value stores, PacSun Outlet stores and pacsun.com. The four 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 four operating segments.

6. STOCK-BASED COMPENSATION

Stock-based compensation expense for the first three quarters of each of fiscal 2009 and 2008 is included in costs of goods sold for buying and distribution employees (approximately $2 million in each period) and in selling, general and administrative expense for all other employees (approximately $3 million in each period).

Stock Options

The Company granted 2,116,150 and 577,080 shares underlying stock options under the 2005 Performance Incentive Plan during the first three quarters of fiscal 2009 and 2008, respectively, at a weighted average grant-date fair value of $1.53 and $4.34 per share, respectively. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The table below summarizes the assumptions used in the valuation of stock options:


	For the First Three Quarters Ended
	Oct. 31, 2009			Nov. 1, 2008
Expected life	4 years			4 years
Expected volatility		69.4% – 75.6	%		40.3% – 42.8	%
Risk-free interest rate		1.5% – 2.0	%		2.3% – 3.0	%
Dividend yield		—			—

Non-vested Stock Awards

The Company granted 424,336 and 316,526 non-vested stock awards during the first three quarters of each of fiscal 2009 and 2008, respectively, at a weighted average grant-date fair value of $3.04 and $12.63, respectively.

As of October 31, 2009, the Company had approximately $7 million of compensation expense related to non-vested stock option and non-vested stock awards, net of estimated forfeitures, not yet recognized. This compensation

expense is expected to be recognized over a weighted-average period of approximately 2.4 years. The amount of unrecognized compensation expense noted above does not necessarily represent the amount that will ultimately be realized by the Company in its condensed consolidated financial statements due to actual forfeitures.

7. 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 and non-vested stock awards. For purposes of calculating diluted earnings per share, incremental shares were excluded for all periods presented as their effect would have been anti-dilutive. Options to purchase 1,785,317 and 2,546,602 shares of common stock in the third quarters of fiscal 2009 and 2008, respectively, and 2,169,645 and 2,621,356 shares of common stock in the first three quarters of fiscal 2009 and 2008, respectively, were not included in the computation of diluted earnings per share because either the option exercise price or the grant date fair value of the non-vested stock awards is greater than the market price of the Company’s common stock.

8. OTHER CURRENT ASSETS

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


	Oct. 31,		Jan. 31,
	2009		2009
Prepaid expenses	$	11,662	$	25,573
Income taxes receivable		2,191		30,251
Non-trade accounts receivable		1,921		3,119

Total other current assets	$	15,774	$	58,943

9. OTHER CURRENT LIABILITIES

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


	Oct. 31,		Jan. 31,
	2009		2009
Accrued compensation and benefits	$	8,276	$	13,584
Accrued gift cards		7,876		12,134
Sales taxes payable		3,893		5,177
Accrued capital expenditures		2,145		1,737
Deferred taxes		1,218		1,218
Other		16,751		13,714

Total other current liabilities	$	40,159	$	47,564

10. CREDIT FACILITY

The Company has an asset-backed credit agreement with a syndicate of lenders (the “Credit Facility”) which expires April 29, 2013 and provides for a secured revolving line of credit of up to $150 million, which can be increased to up to $225 million subject to lender approval. Extensions of credit under the Credit Facility are limited to a borrowing base consisting of specified percentages of eligible categories of assets, primarily cash and inventory (generally, 75% of inventories). The Credit Facility is available for direct borrowing and, subject to borrowing base availability ($120 million at October 31, 2009), up to $75 million is available for the issuance of letters of credit and up to $15 million is available for swing-line loans. The Credit Facility is secured by cash, cash equivalents, deposit accounts, securities accounts, credit card receivables and inventory. Direct borrowings under the Credit Facility bear interest at the Administrative Agent’s alternate base rate (as defined, 3.5% at October 31, 2009) or at optional interest rates that are primarily dependent upon LIBOR or the Federal Funds Effective Rate for the time period chosen. The Company currently believes that the availability under the Credit Facility, working capital and cash flows from operating activities will be sufficient to meet its operating and capital expenditure needs for at least the next twelve months. At October 31, 2009, the Company had no direct borrowings and $17 million in letters of credit outstanding under the Credit Facility. The remaining availability at October 31, 2009 was $103 million.

The Company is not subject to any financial covenant restrictions under the Credit Facility unless, at any point in time, total remaining borrowing availability under the facility falls below $15 million or 10% of the aggregate lender commitments in the event the facility is increased beyond $150 million. The Company is permitted to incur additional indebtedness outside the Credit Facility up to a maximum principal amount at any time outstanding of $150 million. Any such indebtedness may not be secured by any of the collateral designated under the Credit Facility or any other assets of the Company, except that up to $40 million of such indebtedness may be secured by liens on real property and related fixtures. Additionally, the Credit Facility contains specific limits on certain kinds of indebtedness, as defined in the facility agreement. The Company does not currently anticipate any outstanding borrowings under the Credit Facility at the end of the fourth quarter of fiscal 2009.

11. COMMITMENTS AND CONTINGENCIES

Litigation — The Company is involved from time to time in litigation incidental to our business. The Company believes that the outcome of current litigation will not likely have a material adverse effect on our results of operations or financial condition and, 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 our operating results.

Letters of Credit — The Company has issued guarantees in the form of commercial letters of credit, of which there were approximately $17 million outstanding at October 31, 2009 as security for merchandise shipments from overseas. All in-transit merchandise covered by letters of credit is accrued for in accounts payable.

12. INCOME TAXES

As of October 31, 2009, the Company had a long-term net deferred tax asset of $40 million and a current net deferred tax liability of $1 million. As disclosed in the Company’s Annual Report on Form 10-K for fiscal 2008, the Company established a $3 million valuation allowance against deferred tax assets related to Kansas state investment tax credits that more likely than not will not be utilized before expiration. In accordance with ASC 740, “Income Taxes,” and as a result of continued pre-tax operating losses, the Company re-evaluated the realizability of all of its gross federal and state deferred tax assets. ASC 740 requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. In assessing the potential need for a valuation allowance, ASC 740 requires an evaluation of both positive and negative evidence. An enterprise must use judgment in considering the relative impact of available evidence. In making such judgments, the weight given to the potential effect of positive and negative evidence should be commensurate with the extent to which it can be objectively verified. The Company’s assessment considered all available positive and negative evidence including recent and likely near term operating losses, the Company’s strong earnings history, current cumulative three year pre-tax income and various cost cutting efforts that have been implemented to improve future profitability. The Company concluded that based on a weighting of objectively verifiable positive and negative evidence available as of October 31, 2009, an additional valuation allowance of $1 million against deferred tax assets related to Kansas state investment tax credits and various short-lived state net operating losses (“NOLs”) was required. Given recent fluctuations in business trends, the Company may incur a non-cash charge in the fourth quarter of fiscal 2009 or in future quarters to record additional valuation allowance on the Company’s deferred tax assets which could have a material impact on the Company’s results of operations.

Pursuant to the Worker, Homeownership, and Business Assistance Act of 2009 which was signed into law on November 6, 2009 and allows for the extension of net operating loss carry-backs for an additional three years, the Company currently expects to receive a refund of previously paid federal income taxes of approximately $26 million. The Company expects to file for this refund in December 2009 with receipt anticipated in either late fiscal 2009 or early fiscal 2010. As this legislation was passed subsequent to the end of the third quarter of fiscal 2009, the $26 million refund is currently classified as a noncurrent asset within deferred income taxes in the balance sheet. Upon filing for this refund, the Company will decrease deferred income taxes by $26 million thereby reducing the impact of any potential future valuation allowance.

13. FAIR VALUE MEASUREMENTS

The Company’s assets and liabilities are measured and reported on a fair value basis in accordance with ASC 820, “Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about fair value measurements. ASC 820 enables the reader of the financial statements to assess the inputs used to develop those

measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. ASC 820 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

	•		Level 1: Quoted market prices in active markets for identical assets or liabilities

	•		Level 2: Observable market based inputs that are corroborated by market data

	•		Level 3: Unobservable inputs that are not corroborated by market data

The following table represents our fair value hierarchy for financial assets measured at fair value on a recurring basis as of October 31, 2009 (amounts in millions):

Fair Value Measurements at October 31, 2009

Quoted Prices

Significant

in Active

Other

Significant

Markets for

Observable

Unobservable

Identical Assets

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Long-lived assets held and used

273

—

273

Long-lived store assets (primarily property and equipment) with a carrying amount of $282 million were written down to their fair value of $273 million, resulting in an impairment charge of $9 million, which was included in the operating results for the third fiscal quarter of 2009. Fair value is determined using a discounted cash flow model. The estimation of future cash flows from operating activities requires significant estimates of factors that include future sales and gross margin performance. If the Company’s sales or gross margin performance or other estimated operating results are not achieved at or above the forecasted level, the carrying value of certain store assets may prove unrecoverable and the Company may incur additional impairment charges in the future.

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 Quarterly Report on Form 10-Q and the MD&A and the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009. See Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended January 31, 2009, which are hereby incorporated by reference into this Quarterly Report on Form 10-Q, and Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q for a discussion of these risks and uncertainties.

Cautionary Note Regarding Forward-Looking Statements

This report on Form 10-Q 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 31, 2009, and in Part II, Item 1A, Risk Factors in this Quarterly Report on Form 10-Q, 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:

	•		forecasts of future store closures

	•		forecasts of future comparable store net sales, gross margins, inventory levels and selling, general and administrative expenses

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

	•		future asset impairment charges

	•		our capital expenditure plans

	•		changes in merchandising and other business strategies

	•		future borrowings and repayments under our credit facility

	•		future changes in common area maintenance (CAM) expenses

	•		the outcome and expense of litigation

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. 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 Company 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 current Company 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 total net sales, cash and working capital.

Net merchandise margins — We analyze the components of net merchandise margins, specifically initial markups, discounts 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 discounts or 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. We currently believe that our working capital, cash flows from operating activities and credit facility availability will be sufficient to meet our operating and capital expenditure requirements for at least the next twelve months. 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 our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Results of Operations

The following table sets forth selected income statement data from our continuing operations expressed as a percentage of net sales for the fiscal periods indicated. The table and discussion that follows excludes the operations of the discontinued demo concept (see Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). The discussion that follows should be read in conjunction with the following table:


	Third Quarter Ended						First Three Quarters Ended
	Oct. 31,			Nov. 1,			Oct. 31,			Nov. 1,
	2009			2008			2009			2008
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold, including buying, distribution and occupancy costs		72.6			71.3			73.8			70.8

Gross margin		27.4			28.7			26.2			29.2
Selling, general and administrative expenses		33.4			29.5			33.4			31.1

Operating loss from continuing operations		(6.0	)		(0.8	)		(7.2	)		(1.9	)
Other expense, net		—			0.3			—			0.1

Loss from continuing operations before income taxes		(6.0	)		(1.1	)		(7.2	)		(2.0	)
Income tax benefit		(1.9	)		—			(2.6	)		(0.7	)

Loss from continuing operations		(4.1	)%		(1.1	)%		(4.6	)%		(1.3	)%


Total stores		904			940
Total square footage (in 000s)		3,494			3,608

The third quarter (thirteen weeks) ended October 31, 2009 as compared to the third quarter (thirteen weeks) ended November 1, 2008

Net Sales

Net sales decreased to $268 million for the third quarter of fiscal 2009 from $324 million for the third quarter of fiscal 2008. The components of this $56 million decrease in net sales are as follows:


$ millions		Attributable to
$(55)		18% decline in comparable store net sales in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 driven primarily by a decline in total transactions.

(3)		Net decrease in sales due to store closures

2		Increase due to non-comparable sales from new, expanded or relocated stores not yet included in the comparable store base and internet net sales

$(56)		Total

Comparable store net sales of apparel declined in the low-teens as a percentage of sales. Particular weaknesses were in fleece and Juniors basic denim. Comparable store net sales of non-apparel declined in the low-forties as a percentage of sales primarily due to our prior year shift in strategy to become more apparel focused which resulted in significant declines in inventories of accessories and sneakers throughout fiscal 2009. We plan to begin reintroducing certain categories of accessories and sneakers during the fourth quarter of fiscal 2009 in an effort to begin recapturing sales from these categories. We currently expect total comparable store net sales to continue to be negative throughout fiscal 2009.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, was $73 million for the third quarter of fiscal 2009 versus $93 million for the third quarter of fiscal 2008. As a percentage of net sales, gross margin was 27.4% for the third quarter of fiscal 2009 compared to 28.7% for the third quarter of fiscal 2008. The components of this 1.3% decrease in gross margin as a percentage of net sales were as follows:


%		Attributable to
(3.0)		Deleverage of occupancy costs as a result of the 18% same-store sales decline for the third quarter of fiscal 2009.

1.7		Increase in merchandise margins.

(1.3)		Total

We expect consumer spending to be negatively impacted throughout the remainder of fiscal 2009 and we plan to manage our inventories to respond to this environment. At the end of the third quarter of fiscal 2009, inventories per square foot were down 26% in dollars and 12% in total units versus the end of the third quarter of fiscal 2008. We ended fiscal 2008 with inventories down 30% per square foot and we currently anticipate ending fiscal 2009 with inventories roughly flat to down slightly versus last year’s level on a dollars per square foot basis. We expect declines in apparel inventories to be offset by growth within non-apparel inventories as we reintroduce certain footwear and accessories categories during the fourth quarter.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses decreased to $89 million for the third quarter of fiscal 2009, down from $95 million for the third quarter of fiscal 2008, a decrease of $6 million, or 6%. These expenses increased to 33.4% as a percentage of net sales in the third quarter of fiscal 2009 from 29.5% in the third quarter of fiscal 2008. The components of this 3.9% increase in SG&A expenses as a percentage of net sales were as follows:


%		Attributable to
1.7		Increase in payroll and payroll-related expenses as a percentage of net sales to 17.2% ($46 million) in the third quarter of fiscal 2009 from 15.5% ($50 million) for the third quarter of fiscal 2008 due to deleveraging these expenses against the 18% same-store sales decline. In dollars, payroll and payroll-related expenses decreased $4 million.

1.8		Increase in other SG&A expenses as a percentage of net sales to 12.6% ($34 million) in the third quarter of fiscal 2009 from 10.7% ($35 million) for the third quarter of fiscal 2008 due to deleveraging these expenses against the 18% same-store sales decline. In dollars, other SG&A expenses decreased $1 million.

0.4		Non-cash asset impairment charges decreased to $9 million for the third quarter of fiscal 2009 from $10 million for the third quarter of fiscal 2008.

3.9		Total

We evaluate the recoverability of the carrying amount of long-lived assets for all stores (primarily property and equipment) whenever events or changes in circumstances indicate that the carrying amount of these assets may not be fully recoverable. Should comparable store net sales and gross margin continue to decline, we may record additional non-cash impairment charges within selling, general and administrative expenses for underperforming stores in future quarters. We currently anticipate recording an estimated $5 million in non-cash, pre-tax store asset impairment charges in the fourth quarter of fiscal 2009. Actual impairment charges will be determined as part of our customary quarterly impairment analysis and could differ from our estimates.

Income Taxes

We recognized an income tax benefit of $5 million for the third quarter of fiscal 2009 compared to $0.1 million for the third quarter of fiscal 2008. The effective income tax rate was 31.6% and 3.1% for the third quarter of fiscal 2009 and 2008, respectively. The difference in the effective income tax rate is primarily attributable to changes in projected annual income. Our weighted-average effective state income tax rate will vary over time depending on a number of factors, such as differing average state income tax rates and changes in projected annual earnings. Information regarding the realizability of our deferred tax assets and our assessment of a need for a valuation allowance is contained in Note 12 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which note is incorporated herein by this reference.

The three quarters (39 weeks) ended October 31, 2009 as compared to the three quarters (39 weeks) ended November 1, 2008

Net Sales

Net sales decreased to $735 million for the first three quarters of fiscal 2009 from $903 million for the first three quarters of fiscal 2008. The components of this $168 million decrease in net sales are as follows:


$ millions		Attributable to
$(170)		20% decline in comparable store net sales in the first three quarters of fiscal 2009 compared to the first three quarters of fiscal 2008 driven by both a decrease in average unit retail and a decline in total transactions.

(5)		Decrease in sales due to store closures, store relocations, and temporary locations.

7		Non-comparable sales from new stores not yet included in the comparable store base and internet net sales.

$(168)		Total

Comparable store net sales of apparel declined in the low-teens as a percentage of sales. Particular weaknesses were in swim, shorts, Juniors basic denim and fleece. Comparable store net sales of non-apparel declined in the high-forties as a percentage of sales primarily due to our prior year shift in strategy to become more apparel focused which resulted in significant declines in inventories of accessories and sneakers throughout fiscal 2009. We plan to begin reintroducing certain categories of accessories and sneakers during the fourth quarter of fiscal 2009 in an effort to begin recapturing sales from these categories. We currently expect total comparable store net sales to continue to be negative throughout fiscal 2009.

Gross Margin

Gross margin, after buying, distribution and occupancy costs, was $192 million for the first three quarters of fiscal 2009 versus $263 million for the first three quarters of fiscal 2008. As a percentage of net sales, gross margin was 26.2% for the first three quarters of fiscal 2009 compared to 29.2% for the first three quarters of fiscal 2008. The components of this 3.0% decrease in gross margin as a percentage of net sales were as follows:


%		Attributable to
(3.6)		Deleverage of occupancy costs as a result of the 20% same-store sales decline for the first three quarters of fiscal 2009.

0.3		Increase in merchandise margins.

0.3		Decrease in freight and distribution costs of $8 million primarily due to the consolidation of our distribution function in the first quarter of fiscal 2008 and the impact of cost saving initiatives.

(3.0)		Total

We expect consumer spending to be negatively impacted throughout fiscal 2009 and we plan to manage our inventories to respond to this environment. At the end of the third quarter of fiscal 2009, inventories per square foot were down 26% in dollars and 12% in total units versus the end of the third quarter of fiscal 2008. We ended fiscal 2008 with inventories down 30% per square foot and currently anticipate ending fiscal 2009 with inventories roughly flat to down slightly versus last year’s level on a dollars per square foot basis. We expect declines in apparel inventories to be offset by growth within non-apparel as we reintroduce certain footwear and accessories categories during the fourth quarter.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased to $245 million for the first three quarters of fiscal 2009 from $281 million for the first three quarters of fiscal 2008, a decrease of $36 million, or 13%. These expenses increased to 33.4% as a percentage of net sales in the first three quarters of fiscal 2009 from 31.1% in the first three quarters of fiscal 2008. The components of this 2.3% increase in selling, general and administrative expenses as a percentage of net sales were as follows:


%		Attributable to
1.4		Increase in payroll and payroll-related expenses as a percentage of net sales to 18.1% ($133 million) in the first three quarters of fiscal 2009 from 16.7% ($151 million) for the first three quarters of fiscal 2008 due to deleveraging these expenses against the 20% same-store sales decline. In dollars, payroll and payroll-related expenses decreased by $18 million.

1.2		Increase in other SG&A expenses as a percentage of net sales to 13.0% ($95 million) in the first three quarters of fiscal 2009 from 11.8% ($107 million) for the first three quarters of fiscal 2008 due to deleveraging these expenses against the 20% same-store sales decline. In dollars, other SG&A expenses decreased by $12 million (primarily due to declines in depreciation, legal and advertising expenses).

(0.3)		Non-cash asset impairment charges and loss on disposals decreased to $17 million for the first three quarters of fiscal 2009 from $23 million for the first three quarters of fiscal 2008.

2.3		Total

Other expense, net

Other expense was $0.2 million for the first three quarters of fiscal 2009 compared to $0.5 million for the first three quarters of fiscal 2008. In fiscal 2009, we recorded a $0.3 million cash surrender charge upon liquidation of deferred compensation assets partially offset by interest income. In fiscal 2008, we recorded other expenses of $1 million related to costs incurred in connection with the sale of our Anaheim distribution offset by interest income of $0.5 million.

Income Taxes

We recognized income tax benefits of $19 million and $6 million for the first three quarters of fiscal 2009 and 2008, respectively. The effective income tax rate was 36.5% and 35.0% for the first three quarters of fiscal 2009 and 2008, respectively. The difference in the effective income tax rate was primarily attributable to changes in projected annual earnings. Our weighted-average effective state income tax rate will vary over time depending on a number of factors, such as differing average state income tax rates and changes in projected annual earnings. Information regarding the realizability of our deferred tax assets and our assessment of a need for a valuation allowance is contained in Note 12 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which note is incorporated herein by this reference.

Liquidity and Capital Resources

We have historically financed our operations primarily from internally generated cash flow with occasional short-term borrowings. Our primary capital requirements have historically been for the financing of inventories and the construction of newly opened, remodeled, expanded or relocated stores. We believe that our working capital, cash flows from operating activities and credit facility availability will be sufficient to meet our operating and capital expenditure requirements for at least the next twelve months.

As disclosed in Note 12 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, we currently expect to receive a refund of previously paid federal income taxes of approximately $26 million pursuant to the Worker, Homeownership, and Business Assistance Act of 2009 which was signed into law on November 6, 2009 and allows for the extension of net operating loss carry-backs for an additional three years. We expect to file for this refund in December 2009 and anticipate receipt in either late fiscal 2009 or early fiscal 2010.

Working Capital

Working capital at October 31, 2009 was $96 million compared to $98 million at January 31, 2009, a decrease of $2 million. The changes in working capital were as follows:


$ millions		Description
$98		Working capital at January 31, 2009

43		Increase in merchandise inventories, net of accounts payable, from fiscal year end due to planned receipt flows and buildup of inventory in advance of the peak holiday selling season.

7		Decrease in other current liabilities, primarily accrued salaries and benefits based on timing of payments.

(9)		Decrease in cash and cash equivalents (see condensed consolidated cash flow statement included in this Quarterly Report on Form 10-Q).

(43)		Decrease in other current assets, primarily due to receipt of a $29 million federal tax refund and a decrease in prepaid rent due to timing of rent payments.

$96		Working capital at October 31, 2009

Operating Cash Flows

Net cash provided by operating activities was $6 million for the first three quarters of fiscal 2009 compared to net cash used of $13 million for the first three quarters of fiscal 2008. The increase in cash from operating activities in the first three quarters of fiscal 2009 as compared to the first three quarters of fiscal 2008 was largely attributable to the impact of the discontinued demo concept in 2008 (see Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Additional details regarding the increase in cash from operating activities were as follows:


$ millions		Attributable to
$33		Change in income tax receivable and deferred tax assets from prior year as a result of operating losses and the closing of the discontinued demo concept in the first quarter of fiscal 2008.

14		Decrease in payments related to severance and lease termination accruals as a result of the closing of the discontinued demo concept in the first quarter of fiscal 2008.

12		Decrease in deferred lease incentive and deferred rent amortization due to discontinued demo concept in the first quarter of fiscal 2008.

3		Lower net losses in the current year as a result of the closing of the discontinued demo concept in 2008.

(31)		Increase in merchandise inventories, net of accounts payable.

(6)		Decrease in non-cash goodwill impairment charges.

(5)		Decrease in non-cash depreciation and amortization as a result of the closing of the Anaheim distribution center and impairment of store assets in fiscal 2009 and 2008.

$20		Total

Investing Cash Flows

Net cash used in investing activities in the first three quarters of fiscal 2009 was $16 million compared to $71 million for the first three quarters of fiscal 2008, a decrease in cash used of $55 million. Investing cash flows for the first three quarters of fiscal 2009 were comprised of capital expenditures of $20 million offset by proceeds from the sale of land of approximately $4 million. Investing cash flows for the first three quarters of fiscal 2008 were comprised entirely of capital expenditures. We expect total capital expenditures for fiscal 2009 to be between $25-30 million.

Financing Cash Flows

Net cash provided by financing activities in the first three quarters of fiscal 2009 was $0.4 million compared to cash used of $8 million in the first three quarters of fiscal 2008. In fiscal 2009, cash flows from financing activities were comprised entirely of proceeds received from the exercise of stock options. In fiscal 2008, we repurchased and retired $53 million of common stock, offset by net direct borrowings under our credit facility of $43 million and $2 million of proceeds from employee exercises of stock options.

Credit Facility

Information regarding our credit facility is contained in Note 10 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which note is incorporated herein by this reference.

Contractual Obligations

We have minimum annual rental commitments under existing store leases as well as a minor amount of capital leases for computer equipment. We lease all of our retail store locations under operating leases. We lease equipment, from time to time, under both capital and operating leases. In addition, at any time, we are contingently liable for commercial letters of credit with foreign suppliers of merchandise. At October 31, 2009, our future financial commitments under all existing contractual obligations were as follows:


	Payments Due by Period (in $ millions)
			Less						More
			than 1		1-3		3-5		than 5
Contractual Obligations	Total		year		years		years		years
Operating lease obligations	$	457	$	92	$	150	$	109	$	106
Capital lease obligations		<0.1		<0.1		<0.1		—		—
FIN 48 obligations including interest and penalties		1		—		1		—		—
Letters of credit		17		17		—		—		—

Total	$	475	$	109	$	151	$	109	$	106

Over the next three fiscal years through 2012, we will have approximately 45% of our store leases reach the end of their original lease term. These leases will either be renewed or extended, potentially at different rates, or 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.

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. Total store rental expenses, including CAM, were $165 million in fiscal 2008. Total CAM expenses may increase or decrease in the future depending on the total number of stores operated and the outcome of lease negotiations.

Operating Leases

We lease our retail stores and certain equipment under operating lease agreements expiring at various dates through February 2021. Substantially all of our retail store leases require us to pay minimum rent, CAM charges, insurance, property taxes and additional percentage rent ranging from 3% to 14% based on sales volumes exceeding certain minimum sales levels. The initial terms of such leases are typically 10 years, some of which contain renewal options exercisable at our discretion. Rent expense is recorded under the straight-line method over the life of the lease. Most leases also contain rent escalation clauses that come into effect at various times throughout the 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.

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 30 stores in the first three quarters of fiscal 2009 and currently anticipate closing 44 stores in total for the year.

The ASC 740 (FIN 48) obligations shown in the table above represent uncertain tax positions related to temporary differences. The years for which the temporary differences related to the uncertain tax positions will reverse have been estimated in scheduling the obligations within the table.

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 agreements, our occupancy of retail stores, 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

The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, derivative instruments, or other contingent arrangements that expose the Company 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 the Company.

Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is contained in Note 3 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, which note is incorporated herein by this reference.

Inflation

We do not believe that inflation has had a material effect on our results of operations in the recent past. There can be no assurance that our business will not be affected by inflation in the future.

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. Historically approximately 45% of our net sales have occurred in the first half of the fiscal year and approximately 55% have occurred in the second half, with the back-to-school and Christmas selling periods generally accounting for approximately 30-35% of our annual net sales and a higher percentage of our operating income on a combined basis. Our quarterly results of operations may also fluctuate significantly as a result of a variety of factors including, among others, 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

Interest Rate Fluctuations

The Company is exposed to interest rate risk from its Credit Facility (see Note 10 to the Company’s Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q). Direct borrowings under the Credit Facility bear interest at the Administrative Agent’s alternate base rate (as defined, 3.5% at October 31, 2009) or at optional interest rates that are primarily dependent upon LIBOR or the Federal Funds Effective Rate for the time period chosen. At October 31, 2009, the Company had no direct borrowings outstanding under the Credit Facility.

A sensitivity analysis was performed to determine the impact of unfavorable changes in interest rates on the Company’s 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.

The Company is not a party with respect to 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 SEC’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, in order 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 31, 2009. 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 11 to the condensed consolidated financial statements included on this Quarterly Report on Form 10-Q, which is incorporated by reference in response to this Item 1.

Item 1A — Risk Factors

The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended January 31, 2009, a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). The Company believes there are no material changes, other than the items disclosed below, from the disclosure provided in the Annual Report on Form 10-K for the year ended January 31, 2009 with respect to the Risk Factors. Investors should consider the Risk Factors prior to making an investment decision with respect to the Company’s stock.

We have previously stated our intention to change certain merchandising and real estate strategies with the goal of improving our operating results. We may continue to modify our strategies going forward and we cannot be certain that our existing or modified strategies will be successful in improving our store productivity or profitability. We have recently stated our intention to eliminate the distinction between our “Core” PacSun stores and our “Value” PacSun stores as this distinction has not resulted in improved store performance for the value stores. We have also stated our intention to reintroduce selected footwear and accessory merchandise in an effort to recapture sales within these product categories. We have also discussed our ongoing efforts to either restructure existing occupancy terms within our store operating leases or to close a significant number of stores over the course of the next few years. All of these strategy decisions are aimed at improving our operating results. However, there can be no assurance that these new strategies, or any future modification of our strategies, will result in improved operating results. The failure of these strategies to improve our operating results could have a material adverse impact on our business, financial condition, results of operations and stock price.

We operate our business from one corporate headquarters facility and one distribution facility which exposes us to significant operational risks. All of our corporate headquarters functions reside within a single facility in Anaheim, California. Our distribution function resides within a single facility in Olathe, Kansas. Any significant interruption in the availability or operation of our corporate headquarters or 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.

*************

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.

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

Between December 31, 2007 and June 30, 2009, employees participating in the Company’s Employee Stock Purchase Plan exercised options granted under the plan to acquire 519,325 shares of Common Stock for an aggregate purchase price of approximately $1.5 million. The offer and sale of these shares was not registered under the Securities Act of 1933, as amended, due to the inadvertent failure to file a Registration Statement on Form S-8 covering an increase in shares authorized under the plan. The Company does not believe that the amount of any contingent liability with respect to such shares is material to its financial condition and has not provided for any such liability in its financial statements.

Item 3 — Defaults upon Senior Securities

None.

Item 4 — Submission of Matters to a Vote of Security Holders

None.

Item 5 — Other Information

None.


	Page #
PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets—October 31, 2009 and January 31, 2009		3
Condensed Consolidated Statements of Operations and Comprehensive Operations—Third quarter (13 weeks) and three quarters (39 weeks) ended October 31, 2009 and November 1, 2008		4
Condensed Consolidated Statements of Cash Flows—Three quarters (39 weeks) ended October 31, 2009 and November 1, 2008		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3. Quantitative and Qualitative Disclosures about Market Risk		20
Item 4. Controls and Procedures		20

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		21
Item 1A. Risk Factors		21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3. Defaults upon Senior Securities		22
Item 4. Submission of Matters to a Vote of Security Holders		22
Item 5. Other Information		22
Item 6. Exhibits		23

SIGNATURE PAGE		24
EX-31.1
EX-32.1


		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

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

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


	PACIFIC SUNWEAR OF CALIFORNIA, INC. (Registrant)
Date: December 4, 2009	/s/ GARY H. SCHOENFELD
	Gary H. Schoenfeld
	President and Chief Executive Officer (Principal Executive Officer)


Date: December 4, 2009	/s/ MICHAEL L. HENRY
	Michael L. Henry
	Senior Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)



Date: December 4, 2009	/s/ GARY H. SCHOENFELD
	Gary H. Schoenfeld
	Chief Executive Officer



Date: December 4, 2009	/s/ MICHAEL L. HENRY
	Michael L. Henry
	Chief Financial Officer

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	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	(i)		the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

	(ii)		the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated: December 4, 2009	/s/ GARY H. SCHOENFELD
	Gary H. Schoenfeld
	Chief Executive Officer Pacific Sunwear of California, Inc. (Principal Executive Officer)


Dated: December 4, 2009	/s/ MICHAEL L. HENRY
	Michael L. Henry
	Chief Financial Officer Pacific Sunwear of California, Inc. (Principal Financial and Accounting Officer)


+		Filed herewith