By  on October 25, 2007

Pacific Sunwear of California Inc. said Wednesday that it is exploring "strategic alternatives" for its D.e.m.o. stores, and that it will close its One Thousand Steps stores.

The Anaheim, Calif.-based teen chain said it made the decision after a comprehensive review and evaluation of the real estate portfolio and profit performance of D.e.m.o. and One Thousand Steps. Pacific Sunwear said it plans to hire an investment banker to advise on strategic alternatives for the D.e.m.o. stores, and "close the One Thousand Steps stores as soon as is practical."

"We believe the best way to enhance shareholder value at this time is to focus management's attention and capital on the core PacSun business. Over the past two years, our D.e.m.o. team has made many efforts to improve this business. However, as is evidenced by our D.e.m.o. division comp-store sales, the urban streetwear business has been very challenging. At this time, the board has chosen to explore strategic alternatives for this division,'' said Sally Frame Kasaks, chief executive officer of Pacific Sunwear, in a statement.

PacSun currently operates 154 demo stores.

She added that the company has "learned a great deal from our nine-store test" of One Thousand Steps, but that it has concluded that its "shareholders are unlikely to benefit from the continued operation of this division."

The D.e.m.o. and One Thousand Steps stores together have generated a total pre-tax operating loss of $21 million during the first three quarters of fiscal 2007, excluding previously announced lease termination and asset impairment charges, the company said. It is estimating a third-quarter noncash fixed asset impairment charge on D.e.m.o. stores of $48 million, as well as inventory reserve charges for D.e.m.o. and One Thousand Steps of $4 million. The third quarter ends Nov. 3.

The firm also said there may be additional future charges related to potential lease terminations and inventory and liquidation costs, the timing of which will depend on what course of action is decided upon after a review of the strategic options.

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