PacSun: Figuring Out Where the Sun Shines

After a year of slumping sales, retail observers are wondering whether Pacific Sunwear of California’s newest formula for success will work for the purveyor of surf and skate–oriented apparel.

In the fickle world of teen shoppers, life has become increasingly competitive for PacSun, which has seen upstarts such as Hollister Co., an Abercrombie & Fitch Co. spinoff chain, and Zumiez Inc., a smaller mall-based chain out ofEverett, Wash., nibble away at PacSun’s bottom line. All three cater to the same young customer, ages 12 to 24. In fiscal 2007, PacSun’s net income dipped 68.6 percent to $40 million, compared to fiscal 2006, while Zumiez’s net income jumped 56 percent to $20 million in fiscal 2007 from the previous year.

“Before, we could do no wrong,” said one PacSun executive who asked not to be identified. “It’s all about identifying with that kid and that in-store experience.”

Competition isn’t limited to other specialty stores either. Big department stores such as Macy’s and mass merchandisers such as Target are trying to lure away that young customer who has to have the latest Southern California–inspired fad. “That’s a trend we have been seeing in the last year,” said Aubie Goldenberg, a retail partner at Ernst & Young Co. in Los Angeles. “Being highly successful is getting the right merchandise and the right trend in the right way. That seems to be the big difference between the different retailers and whether they are successful.”

So PacSun is rejiggering its retail recipe to revamp its stores, provide faster fashion that is updated, open up the store floors with fewer rounders and more wall displays and relaunch the company’s private denim label, Bullhead, for both men and women. Until now, the label has been designed exclusively for men. The new denim concept should be on the store floors by June with a notched-up wash and hipper fashion quotient. The company’s Tilt blue-jean label for young women will be shifted to PacSun outlets.

The company is also aiming to entice more young women to its stores with dresses, knit tops and that new-and-improved denim. Pac- Sun is going after customers such as Natasha Bruce, a 21-year-old Southern California customer who shops at both Zumiez and Pacific Sunwear. She likes to buy brands such as Volcom, Hurley and Roxy. She likes Zumiez’s clothes but often ends up making her purchases at PacSun because the clothes fit her better. “I’m not so skinny,” she said.

Now juniors make up less than 30 percent of PacSun customers. The idea is to increase that to about 50 percent. “Our first major goal has been to really focus on the juniors business. It is the single biggest opportunity we have,” said Sally Frame Kasaks, PacSun’s interim chief executive officer since Oct. 1. “We are going after the fashion juniors business, not the tomboy kid.”

Improvement in footwear, particularly sneakers, is another goal. All this is being accomplished with new footwear and juniors teams that came on board last year.

Mistakes and solutions

In 2006, Pacific Sunwear experienced several merchandise missteps in its attempt to cater to its typical customer, who likes board sports.

Fleece was really hot last year. Although PacSun had fleece, it didn’t have trendy fleece in various fleece weights.

“Unfortunately, PacSun has made some internal mistakes when it came to merchandising issues,” said Betty Chen, an analyst in Los Angeles with Wedbush Morgan Securities. “When denim was really big, they didn’t seem to have the right silhouette and wash. They didn’t seem to have the right product at the right time.”

PacSun’s nearly 1,200 stores— which at the end of March included 843 PacSun stores, 116 PacSun outlets, 223 demo stores, which embrace a more hip-hop, urban crowd, and nine One Thousand Steps, a new footwear and accessories concept that opened in early 2006—stumbled last year. Samestore sales declined 4.2 percent at PacSun and 7.9 percent at demo.

The drop is due in part to a revolving door of key executives. The top job of chief executive has been vacant for six months at the Anaheim, Calif., mall-based chain that was led so successfully for years by Greg Weaver. Weaver left the CEO position in 2005 and retired from the board of directors in 2006. He was replaced in 2005 by Seth Johnson, a former Abercrombie & Fitch chief operating officer, who stayed only 1 1/2 years before leaving in October.

Since then, veteran retailer Kasaks, a board member and former chairman and chief executive officer of Ann Taylor Stores Inc. as well as the former president and chief executive officer of Abercrombie & Fitch, has been at the helm, guiding the ship through uncertain waters.

In a mid-March conference call with analysts, Kasaks minced no words. She characterized 2006 as a learning period when consolidation and transition became the retailer’s new mantra.

“Based on our sub-par results, it became clear we had to take a fresh view of the business,” she said. “The process has just begun.”

But Pacific Sunwear, a $1.44 billion company that opened its first mall store in 1981, has a tough road to travel, with smart competition from Zumiez, whose 235 stores generated $298.2 million in revenues in fiscal 2007.

Zumiez is on a major expansion course, planning to open 50 storesthis year in areas such as California, Texas and Florida, while Pac- Sun is closing 74 demo stores and adding 15 to 20 PacSun stores.

Zumiez’s expansion could hamper PacSun’s success. “We don’t do well in any mall that has a Zumiez,” said the PacSun executive who didn’t want to be identified.

Kids are enticed by the rad environment inside Zumiez stores, where heavily decorated skateboards hang near the cash register or on the walls. Urban-influenced T-shirts with dark colors and crosses populate the window mannequins. Zumiez executives believe their customers want clothes and fashion rooted in the action-sports lifestyle and styles that reflect their individuality. The company focuses on a diverse collection of brands that allows it to adjust to fashion trends. Zumiez also carries brands that are not carried at PacSun, such as LRG, Obey and KR3W. That mix helped Zumiez’s same-store sales jump 13 percent last year.

Zumiez’s store layout has more open space available for things such as a lounging couch. Until recently, PacSun stores were crammed with merchandise, keeping the stores’ young customers from hanging out at the store for very long. “It would be a huge leap for us to take up space with a couch,” said the PacSun executive. “But we are creating a cleaner look.”

PacSun’s store walls are splashed with eye-pleasing displays of shoes, purses and other accessories. Deep discounts on old merchandise were made last year to bring in new Spring looks before the end of 2006, Kasaks said.

At the demo stores, the lighting and fixtures are being changed. At a few stores, the company is having the roofs raised to give the spaces more of a boutique feel and to see if that attracts customers. The demo merchandising team is reassessing the mix of brands and moving into a more contemporary brand direction.

The result is that March samestore sales are expected to be up. “The company is firing on all cylinders now,” said one inside source.

Now the next step is to find a new chief executive who is adept at branding and merchandising. That may not be easy. There are seven other major apparel and retail companies looking for qualified leaders to take over the CEO spot, Kasaks said.