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PacSun Rises in West: $1 Billion in Sales, 1,100 Units on Horizon

Pacific Sunwear is riding high in the surf these days, with major plans to expand its chains and continue its solid growth.

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ANAHEIM, Calif. — Girls really do rule.

At least at Pacific Sunwear of California Inc., where growth is skyrocketing at a time when other retailers are grappling with a tough economy, merchandise missteps, the consumer blahs and a retail environment that has been universally labeled one of the worst in recent memory. It’s even outpacing competitors in the junior category like Abercrombie & Fitch and Hot Topic thanks to its focus on teen girls and the hot surf, skate and urban categories.

And the company, which operates the PacSun and Demo chains, wants to ride the wave as far as it can. As recently as 1995, the 22-year-old PacSun was a men’s chain with 150 stores. Now, the corporation’s 819 stores nationwide are approaching the $1 billion mark in annual sales.

More than 300 stores are in the planning stages through 2005, which will be a 39 percent increase in doors. PacSun, currently at 635 units, is expected to grow to 825; PacSun Outlet, at 75 units, will add another 10 to 15, and Demo’s 109 could more than double.

Around 83 stores are expected to bow this year alone, and the company expects to expand 30 of its “highly productive” PacSun stores, increasing the average store size to 3,700 square feet.

Within two years, the group expects to have 1,110 stores — not far from Gap brand’s 1,446 units.

“We’re at a critical-mass stage right now,” said chairman and chief executive officer Greg Weaver in an exclusive interview, noting Business Week, Forbes and Fortune have recognized the chain as a hot-growth enterprise. “We’re not a little company doing well. We’re a big company doing well.”

The retailer last month scored a staggering 142 percent jump in first-quarter net income, to $8 million in the first quarter ended May 3 from $3.3 million in the year-ago period — at a time when many other juniors specialty stores posted significant profit drops. Sales for the same quarter increased to $198.3 million from $161.7 million while comparable-store sales increased 13.2 percent. Teen girls’ comps for both PacSun and Demo have been in the double-digit range for the last six quarters.

“The one discipline is to stay focused,” said Weaver, a handsome blond 49-year-old with a radio-worthy voice. “To us, that means the 15-year-old is the core customer.”

Weaver was hired by venture capitalists 16 years ago after acquiring the 60-unit chain from two avid surfers, Tom Moore and Randy Bloome. His job was to turn PacSun around and take it public in 1993.

Weaver admittedly doesn’t surf but is most certainly not a “suit” and lives a “very casual California lifestyle.” At the core, he is a retail lifer, given his 28 years in the business, most recently overseeing Jaeger Sportswear’s U.S. and Canadian stores. Right-hand man Tim Harmon also came up through the retail ranks, primarily at PacSun, where he was executive vice president before being named president and chief merchandising officer.

Admittedly, it took PacSun a while to find its current focus. The company’s hand was forced when men’s wear sales began dropping a few years ago due to lack of fashion direction. PacSun turned to teen girls and hasn’t looked back. Only two years ago, teen girls’ apparel accounted for 20 percent of PacSun’s mix. Today, it generates about half.

Analysts emphasize the strongest teen chains today are “lifestyle driven,” bearing a core philosophy with which consumers identify throughout the economic cycles. Surf- and skate-skewed PacSun and urban hip-hop concept Demo go after this strategy.

PacSun is not gimmicky. Stores are simply merchandised with stacks of Dickies, jeans and cords on the wall and tables piled high with screen-printed T-shirts. The walls are painted yellow and speakers blare rap and hip-hop to popular rock — music all tailored to teen tastes.

By contrast, hip-hop pumps through Demo stores, which are slightly smaller and darker with a more urban industrial decor and a considerable amount of metal throughout. Urban brands are set up by collection, like in-store shops in a department store.

Both concepts market to teens with a dedicated annual budget of $10 million for print ads in Seventeen, Cosmo Girl and Teen Vogue, among others.

“I think we’ve created two really great concepts that are well-balanced and product-diverse,” said Weaver. “Our hat is not hung on one vertical brand.”

Another key growth component is offering “great product diversity” to consumers, said Weaver. “Definitely, this is helping us to grow market share,” he said, noting 67 percent of sales come from Fox, Dickies, Roxy, Billabong and Hurley, among others, and the remainder from the company’s private label, Tilt.

Vendors gush. “PacSun is the ideal retailer to outfit America’s teens in Hurley products,” said Hurley sales director Dean Quinn. “PacSun makes Hurley available to kids throughout the country who might have trouble finding a Hurley representative near them.”

Quiksilver’s women’s division president, Steve Tully, echoed the sentiment. “PacSun is a key retail partner for Roxy and Raisins. They’re committed to brands and to our lifestyle, and, as recent results indicate, their formula works.”

The beauty of outside brands, said Weaver, is a retailer can get in or out, as needed. “When a teenager cools on a brand and your brand is the name of your store, you have your hands full,” he said, pointing out there is little PacSun branding in the store, save for shopping bags and store signage. “We manage brands. If a brand doesn’t sell, we can plan them right out the door.”

Its private label, Tilt — with lower price points such as T-shirts for $20 and denim for $39.50 — makes up 33 percent of the overall business and is generally set apart from other brands in its own area near entrances.

But even it can be retired, if and when necessary.

Then there’s knowing what to avoid, like, say, a children’s department. “If we were to do that,” said Weaver, “we’d be very successful. There are a lot of 10-year-olds who can’t wait to be 15. It would be, short-term, very impactful. But long-term, we would lose our coolness factor.”

He pointed to the firm’s frequently held focus groups. “You can’t get somebody to call us a poseur chain. We don’t copy anybody else. That’s good feedback for us. Being core means being cool for a lot of these kids.”

According to a national survey of 350 girls, ages 10 to 18, conducted last week for this article by Los Angeles-based Girls Intelligence Agency, 38 percent “love” PacSun and will “always” visit the store first; 38 percent think the store’s “OK” and cite other stores they’d hit first, and 24 percent said PacSun isn’t their thing. As for brands, the respondents said this summer they “had to have” Roxy (80 percent) and Tilt (10 percent).

Sandy Potter, an owner of Los Angeles buying office Directives West, cautioned even too much Tilt could affect its coolness factor. “You have to be careful not to get greedy,” she said, pointing out the allure of higher margins that private labels bring.

There are no plans to back off outside brands, even though the stores are considered among the priciest in malls, with Demo ranked as the most expensive followed by Abercrombie & Fitch and then PacSun. An average transaction at PacSun is $43; $67 at Demo. PacSun vendors also strictly dictate markdowns, as they generally do with all their accounts, meaning less flexibility on unloading inventory.

But Weaver is unfazed, saying less flexibility creates discipline. He acknowledges some leeway, considering PacSun’s relationship with vendors who have “no issue” with the retailer’s practice of unloading slower sellers by creating two-for-one incentives, not restricted to a specific brand, to encourage multiple sales.

“You can’t win on price,” noted Harmon. “We’re based on getting fashion correct. When you get fashion correct, they pay full price.”

Over 65 percent of its transactions are in cash, an indication, said Harmon, that “kids are making the purchase.” And to ensure teens have no reason to shop department stores, PacSun upped its offering of ancillary items like belts, wallets, socks, underwear and sandals.

Despite reports that mall traffic is waning, Weaver and Harmon are not convinced teens have any less interest in malls than before. This year, PacSun will “fill in” markets in Arkansas, Washington and Alaska.

Nontraditional malls or power strip centers with tenants like Old Navy are also proving lucrative. “We’re definitely going to continue leasing those,” said Weaver.

International expansion with Canada, as a way “to get our feet wet,” is another option, but Weaver cautions they “will be ridiculously careful because there have been so many U.S. retailers that have not been successful there.”

On that note, he added, acquisitions could be a consideration “some day. Nothing in mind, not by any means about to happen, but if an opportunity presents itself for us to leverage our experience as one of the largest teen retailers in the country, we would leverage that experience. That’s part of our future, too.”

Five-year-old Demo, estimated by analysts to account for $60 million of the company’s $846 million in 2002 sales, is expected to account for the lion’s share of future growth.

Since 2001, Demo’s operations have been brought up to PacSun’s standards: Merchandise has been redefined to reflect a focus on teen girls and private labels Re:verb (men) and Anisette (women) have increased to 12 percent of total sales. Future store sizes have been upped from 2,300 square feet to between 2,500 and 3,000 square feet to house more styles from the brands Demo already carries.

Demo posted a 36.5 percent comp-store sales increase in the first quarter of 2003.

In August, after another quarter of 2003 is under his belt, Weaver is expected to reveal “what a good realistic goal would be.” The chain will be significantly larger than 200 units, he said.

About 80 percent of Demo stores exist alongside PacSun, yet there is no overlap. PacSun is organized by outfits; Demo by collection. Consumers would never see a PacSun sales clerk or bag at Demo or vice versa. “In five years of focus groups for Demo, we’ve heard PacSun mentioned twice,” said Weaver. “There’s no cannibalization against that volume. That’s key — it’s all incremental business.”

As with PacSun, there is a specific target customer: an 18-year-old who lives in the suburbs and identifies with and loves hip-hop. Top juniors’ brands are Ecko Red, Baby Phat and JLo.

“We bring urb to the ’burb,” said Harmon. “There are plenty of good local retailers taking care of this market in New York, D.C. and Detroit. But nobody’s catering to the mainstream mall environment.” The best locations, or those bringing in $1,000 a square foot, exist in nonurban areas of California and Louisiana.

Weaver concedes Demo is not quite as merchandise-diverse yet as PacSun. For example, Demo stores still do not carry underwear. But that will soon change, he said. Demo’s masculine decor will become more “female-friendly,” with say, a lighter coat of paint and the removal of some of the metal, he said.

Another distinction is ethnicity. PacSun attracts mostly Caucasians, while Demo’s patronage is 55 percent Caucasian, 35 percent African-American and the balance Latino and Asian.

A particular incentive for Weaver is the Latino population, expected to double in the next five years. “This thing has meat in a major way or I wouldn’t risk my 16 years here or my stock,” he said.

The pair admits to some mistakes. “A start-up is very distracting and I think we lost a lot of ground,” said Weaver. “We could have planned Demo better. We assumed a completely different vendor base, mostly from New York. You’re on a plane. Big distraction. Eyes off the ball of our core business.”

That said, the pair values the lessons they have learned. “Harmon and I personally grew in 2001, our worst year here,” admitted Weaver. “When business hits a wall, 10,000 employees watch senior management to see how they are going to react. Our reaction was, ‘We’re going to fix this and fix it quickly.’ There was no pointing fingers. We worked to get business back on track.”

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