LAS VEGAS — After axing an unsuccessful footwear business and a comp-dragging streetwear chain earlier this year, Pacific Sunwear of California Inc. is ready to refocus on the core surf/skate apparel market that once vaulted the specialty chain into dominance.

PacSun, the company’s flagship division that brought surf brands like Billabong and Volcom to the masses, is under hopes will give the retailer greater cachet among fickle, brand-conscious consumers who now have multiple options for action sports apparel in the malls.

“For the first 25 years, being a great retailer was enough. Now you have to be a great brand,” Kennedy told DNR during a recent tour of a renovated PacSun store at the Fashion Show Mall in Las Vegas. “We thought that because we sold brands we couldn’t be a brand, but look at Target and Neiman Marcus.”

Faced with competition from surf/skate competitors like Zumiez and surf-inspired chains like Hollister, PacSun set in motion branding improvements that center largely on the in-store environment, a move that several analysts said was crucial to bettering sales of juniors’ and young women’s apparel. Since 2005 the Anaheim, Calif.–based company has overhauled the interiors of more than 100 of its 845 full-price doors, mostly in California and Florida, with 75 slated for completion in fiscal year 2008 and an additional 75 in fiscal 2009.

Aesthetically, converted doors have installed improved sound systems, darkened ceilings and premium light fixtures. Display tables feature dark, curved wood paneling—a look designed to evoke more of a surf/skate vibe. New stores are anchored by a T-shirt “rotunda” with logos of key labels like Hurley, Fox and Quiksilver placed at eye level to the consumer, another key improvement in selling strategy. “Our brands still have to read through the store design,” Kennedy said.

The visual height of in-store branding will vary to attract both teens and juniors, a market that has grown slightly from 43 percent in 2006 to 46 percent last year. The company is aiming at bringing that number to a full 50 percent of sales for 2008.

Liz Pierce, senior research analyst at Roth Capital Partners, called the goal “absolutely realistic. We’ve seen other unisex retailers move up their juniors’ business to 60 percent of the business, so why not?”

Pierce also pointed to Pacific Sunwear CEO Sally Frame Kasaks’ extensive private label experience at retailers like Ann Taylor and Abercrombie & Fitch. “Sally has great private label background in the female side of things,” she said, which enables the retailer to up its juniors’ penetration, with or without the support of industry brands.

Also female-friendly are the new store interiors, B. Riley & Co. analyst Jeff Van Sinderen noted: “[They] have a completely different flavor. The main thing is that it’s a lot better for female customers. PacSun used to be just a guys chain, with a primitive, industrial feel. The way they’ve set up the displays and the visual merchandise appeals more to the female customer than the old store format.

“You have to credit Sally Frame Kasaks,” he added, “because she came in and cleaned a lot of things up quickly. The stores look dramatically better.”

PacSun’s recent move to scale its shoe business to less than 6 percent of overall sales means greater flexibility to offer seasonal merchandise, such as technical outerwear and backpacks, in the back wall area of the store once dominated by footwear. “We have gotten great response to technical outerwear and we need to give that a home for three months,” Kennedy said as an example.

He also pointed to PacSun’s total December sales, which edged up only 4 percent despite a 14 percent increase in core apparel. “So we lost most of it to shoes,” he said. “It’s been challenging for 20 months now.”

January same-store sales for the retailer fell by 1.7 percent, with company-wide comps slipping 7.4 percent, mainly due to losses at demo, the retailer’s failed streetwear chain that is currently being phased out. During the first three fiscal quarters of 2007, demo and the now-defunct One Thousand Steps footwear chain suffered a combined pretax operating loss of $21 million. Pacific Sunwear expects to incur $3 million to $5 million in pretax charges for the closure of 154 demo doors in the fourth quarter of fiscal 2007, with overall expenditures estimated at between $35 million and $50 million. The company will report its 2007 fourth quarter and full-year financial results on March 13. “It’s a long-term, gradual turnaround story, but they’re doing the right things,” Van Sinderen said. “Demo was a drag on earnings, so now that they are focusing on PacSun, the surf apparel is doing well. It’s their go-forward business.”

In a research report at the end of January, Jeffrey Klinefelter, senior research analyst for Piper Jaffray, had a buy recommendation on the stock. He said 2008 will mark “part two of a turnaround for PacSun. Areas of opportunity exist in [easier comparisons] in footwear and accessories. Apparel was a point of strength during 2007 yet we look for improved flow and reducing exposure to markdown activity to lead to continued comp-sales stability.”

Kennedy said he expects 2008 to be “great for us as a stand-alone single concept. We’re really going to be able to focus on Pac. We think it’s going to be a tough economic environment but we feel good—better than we have in the past three years.”