Company PACIFIC SUNWEAR OF CALIFORNIA INC: PSUN (Nasdaq Global Market)

Date Period ending in

Last 10-K 3/31/2011 1/29/2011
Last 10-Q 12/8/2011 10/29/2011
Last 8-K 3/31/2011 1/28/2011

Currency USD
Risk-Free 2.24%

Bottom-Up Beta % Sales Beta

Retail (softlines) 100% 1.57
Total 1.57

Equity Risk Premium

Mature Risk Premium 5.52%
This company only sells in the US, no lambda or country risk premium

Market Value Equity $ 116,653,900

Market Value Net Debt $ 296,614,088
D/E 2.54

Marginal Tax Rate 40%

Unlevered Beta 1.57
Levered Beta 3.97
Yahoo Finance Beta 3.25
Risk free rate = 2.24%
Cost of Equity 24.13%
Cost of Debt 15.26%
Cost of Capital 13.38%
aq Global Market)

Market Value of Equity

Shares Outstanding Price Total
67,430,000.00 1.73 116,653,900.00

Market Value of Debt

No credit rating! But company has leases and financial debt outstanding
One solution would be to calculate a synthetic rating using the interest coverage ratio
The company interes coverage ratio is around 0.2 (including leases as interest expenses). This is equivalent as a
In December 7, 2011, the company entered into a 5-year term loan agreement for $60mln, with interest rate of 13%
But the company also gave warrants for the lender, worth $2.1 mln at the date. Thus we can calculate the actual in
FV 60 PMT 7.8
Time 5 PV -57.9
Interest Rate 14.0%
Default Spread 13.02% (D rating)
Risk-Free 2.24%
BT Cost of Debt 15.26%

Debt Type Interest 2011 Maturity Par Amount

Mortgage 1,867 2017 29,222
Term Loan 3,000 2017 60,000
Total 4,867 2017 89,222
Market Value 60,074,972.70

Leases (in mln) PV

2012 84 84.00
2013 50 43.38
2014 50 37.64
2015 50 32.65
2016 54 30.60
2017 54 26.55
2018 51 21.75
2019 51 18.87
Total 295,438,115.78

Bonds 60,074,973
Leases 295,438,116
Total Debt 355,513,088
is is equivalent as a C rating with a 12% spread
with interest rate of 13% (spread = 12%)
n calculate the actual interest rate charged:
Leverage is going to change as firm reduces its D/E -> Must use a "firm" model instead of equity
2-stage model: 1st stage (5 year) -> From the very bad situation of today until the industry average. 2nd Stage -> Ter
Firm will improve operating margin and asset turnover (Revenues/Net PP&E) to the industry average
Tax-Rate will be zero and will convert to the industry average at the terminal value
Working Capital / Revenue will move to the industry average as the company matures
In order to delever, company will reduce their total fixed assets (Net PP&E and leases) until it gets to a synthetic rati
The company reduces its Net Debt by the FCFF and the change in operating leases. This leads to a reduction in cost

2010 2011 2012 2013

Revenues 929,506 833,751 703,906 685,483
Revenues Growth -10.3% -15.6% -2.6%
Adjusted Op Margin -0.1% 3.3% 3.6% 3.9%
Adjusted Operating Income -558 27,234 25,097 26,489
Effective Tax Rate 0% 0% 0.0% 0.0%
EBIT (1-t) -558 27,234 25,097 26,489
Net CAPEX 55,820 43,464 14,972 6,737
Net WC -5,321 25,694 -6,315 -6,390
Cash Flow to the Firm 49,941 96,392 33,754 26,836
Cost of Capital 13.4% 12.3% 11.7%
Accumulated Discount Factor 1.00 1.13 1.27
PV 29,770 21,077
Total Firm Value 335,992

2010 2011 2012 2013

Working Capital 23,608 28,929 3,235 9,550
Work Capital / Revenues 3.1% 0.4% 1.4% 2.3%
Net PP&E 249,000 193,180 149,716 134,744
Leases 335,000 295,438 265,894
Total Fixed Assets 528,180 445,154 400,639
% Growth in Fixed Assets -15.7% -10.0%
Revenues / Net PP&E 3.73 4.32 4.70 5.09
Net Debt 296,614 233,317
Equity 116,654 144,800
Interest Expense 45,263 29,725
Cost of Debt 15.26% 12.7% 11.7%
Interest Coverage Ratio 0.55 0.89
Synthetic Rating C CC

D/E 2.54 2.54 1.61

Cost of Equity 24.1% 24.1% 19.3%
Cost of Capital 13.4% 12.3% 11.7%
D/(D+E) 72% 72% 62%
 equity
y average. 2nd Stage -> Terminal value
stry average

til it gets to a synthetic rating of B-

eads to a reduction in cost of capital
Cost of capital for high growth phase
2014 2015 2016 2017 2018 Marginal Tax Rate
700,579 766,447 834,875 913,034 940,425 Unlevered Beta
2.2% 9.4% 8.9% 9.4% 3.0% Levered Beta
4.2% 4.5% 4.8% 5.1% Yahoo Finance Beta
29,167 34,200 39,749 46,200 Risk free rate =
0.0% 0.0% 0.0% 24.6% Cost of Equity
29,167 34,200 39,749 34,816 Cost of Debt
-2,816 -2,878 -4,011 -4,131 Cost of Capital
-7,137 -9,594 -11,004 -12,933
19,213 21,728 24,734 17,752 Industry Averages
11.4% 10.8% 10.5% 7.15% Tax Rate
1.42 1.58 1.75 Op Margin
13,506 13,713 257,926 WC / Revenues
Revenue / Net PP&E

2014 2015 2016 2017 2018

15,940 23,077 32,671 43,675 56,608
3.3% 4.3% 5.2% 6.20% 6.20% Terminal Value
128,007 130,823 133,701 137,712 141,844 Last Cash Flow
252,600 258,157 263,836 271,751 279,904 Growth Rate
380,607 388,980 397,538 409,464 421,748 Cost of Capital
-5.0% 2.2% 2.2% 3.0% 3.0% Terminal Value
5.47 5.86 6.24 6.63 6.63
193,186 179,530 163,481 146,662 Value Calculation
172,725 201,608 232,931 266,837 Firm Value
22,680 19,730 14,697 11,352 - Net Debt
11.0% 9.0% 7.7% 4.5% = Equity
1.29 1.73 2.70 4.07 - Convertibles
CCC B- B+ BBB = Common Equity
Number Shares
1.12 0.89 0.70 0.55 Value per Share
16.7% 15.5% 14.6% 9.6%
11.4% 10.8% 10.5% 7.15%
53% 47% 41% 35%
pital for high growth phase
40% Interest Coverage
1.57 0
3.97 0.5
3.25 0.8
2.24% 1.25
24.13% 1.5
15.26% 2
13.38% 2.5
3
ndustry Averages 3.5
24.64% 4
5.06%
6.20%
6.63

Terminal Value
17,751.57
3.00%
7.15%
427,901.23

Value Calculation
335,992
296,614
39,378
4,496
34,882
67,430.00
0.52
Rating Default Spread
D 12.00%
C 10.50%
CC 9.50%
CCC 8.75%
B- 6.75%
B 6.50%
B+ 5.50%
BB- 4.75%
BB+ 3.75%
BBB 2.30%
 (in thousands) 2012 2011
Assets
Cash and cash equivalents 50,306 63,710
Restricted cash 8,593
Inventories 88,740 95,701
Prepaid Expenses 15,506 11,669
Other current assets 6,272 4,773
Total Current Assets 169,417 175,853
PP&E, net 149,716 193,180
Other long-term assets 35,998 32,243
Total Assets 355,131 401,276

Liabilities & Equity

Accounts payable 38,914 41,028
Other current liabilities 68,369 42,186
Total Current Liabilities 107,283 83,214
Deferred lease incentives 17,681 28,553
Deferred rent 16,602 19,786
Long-term debt 73,910 29,093
Other long-term liabilities 26,558 26,296
Total liabilities 242,034 186,942
Equity 113,097 214,334
Total liabilities & Equity 355,131 401,276

PP&E / Assets 42.2% 48.1%

Warrants (at 12/7/2011) (today)

Number Shares (mln) 13.5 13.5
Strike Price 1.75 1.75
Stock Price 1.35 1.73
Maturity (days) 3650 2021
Volatility 11% 7%
Option Price $0.16 0.333
Warrants Value 2,138,400.00 4,495,500.00
 2010 2009

93,091 24,776

89,665 107,205
10,801
5,365 58,943
198,922 190,924
249,000 323,344
29,296 55,241
477,218 569,509

38,481 45,263
43,742 47,564
82,223 92,827
39,207 52,313
21,396 23,008

27,714 29,374
170,540 197,522
306,678 371,987
477,218 569,509

52.2% 56.8%
 2011
(in thousands) 2011
Revenue 833,751
COGS 652,958
Gross Margin 180,793
Selling, general and administrative expenses 109,169
Depreciation on Leased Asset 44,390
Operating income (loss) from continuing operations 27,234
Lease Interest Expense 107,610
Interest Expense 1,867
Other expense/(income), net 7,574
Loss from continuing operations before taxes (89,817)
Income tax expense/(benefit) 806
Loss from continuing operations (90,623)
(Loss) from discontinued operations, net of tax effects (15,800)
Net Loss (106,423)

Source: Company 10-K, 10-Q and 8-K plus adjustments for

leases and interest expenses

Interest Coverage Ratio (including leases) 0.25

 2010 2009 2008
2010 2009 2008
929,506 1,027,101 1,254,886
724,120 768,498 934,779
205,386 258,603 320,107
139,530 175,728 216,008
66,414 67,651 68,064
(558) 15,224 36,035
94,586 96,349 96,936
900 0 0
30 276 (2,369)
(96,074) (81,401) (58,532)
574 (11,099) (19,287)
(96,648) (70,302) (39,245)
(24,577)
(96,648) (70,302) (63,822)

-0.01 0.16 0.37

Asset Value / 8 (term of leases)

Lease expense for each year - depreciation