Why the Pacific Brands Limited share price increased 29% in July

Is Pacific Brands Limited (ASX:PBG) a turnaround opportunity?

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Clothing retailer Pacific Brands Limited (ASX: PBG) climbed 29% over the month of July after the company announced an improved earnings guidance range before significant items. The new range is expected to be between $63 million to $65 million, compared to prior estimates of an amount between $57.4 million to $63 million. The group also said net debt is expected to be cash positive at the end of the 2015 financial year.

The group has posted a stronger second half to the financial year than expected with sales over the summer and autumn of 2015 exceeding expectations. In particular the group said its Sheridan and Bonds underwear businesses posted particularly strong sales.

The stock now sells for 42 cents, compared to 33 cents at the start of July and investors’ minds will be trained on several issues when it reveals its full year results in August. If management feel sufficiently confident to reinstate a dividend the stock price is likely to receive substantial support. This is because it suggests sufficient confidence in the outlook and that the market’s expectations over the turnaround potential of the business are too low. Overall it looks one of the better turnaround prospects available for bargain hunters on the ASX.

The retail sector in general has struggled recently amidst soft consumer spending that has hit other retailers like Kathmandu Holdings Ltd (ASX: KMD) and OrotonGroup Limited (ASX: ORL). In my opinion it’s a sector investors need to be wary of as there are other other growth stocks still on attractive valuations.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. You can find Tom on Twitter @tommyr345 We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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