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Pacific Sunwear Courts Girls to Reverse Slump

Anaheim-based Pacific Sunwear of California Inc. can feel the heat.

The once highflying teen clothing retailer now finds itself answering tough questions about why the company has cooled as competitors keep coming on strong.

“There’s no question they have struggled,” said Elizabeth Pierce, analyst at Sanders Morris Harris. “They will candidly admit they’ve made some mistakes.”

Pacific Sunwear, which sells clothes inspired by surfing and hip-hop music in more than 1,100 mall stores, got off to a rough start this year with fashion missteps and poor merchandising.

Sales at Pacific Sunwear’s stores open at least a year have flip-flopped about as much as the fickle teens the company targets.

In May, same-store sales were off 2% from a year earlier, echoing the trend from the first quarter, which saw a 1.8% drop.

On Wall Street, Pacific Sunwear’s shares are off by about 25% for the year with a market value of $1.4 billion last week.


Rivals Luring Shoppers

Rivals American Eagle Outfitters Inc., Abercrombie & Fitch Co. and Zumiez Inc. have fared better, raising the bar with swanky store displays that are luring girl shoppers.

American Eagle and Zumiez posted double-digit same-store sales gains in May. Abercrombie was up 3%.

Shares of American Eagle and Zumiez are up more than 50% so far this year. Abercrombie is off about 14%.

“There’s a lot more competition,” Pierce said. Pacific Sunwear “has to be sharper.”

The company knows it.

Seth Johnson, chief executive since last year, told analysts at a June meeting about a slew of changes Pacific Sunwear is making to jump-start sales and attract shoppers in time for back-to-school,one of the most critical periods for retailers.

The bulk of the changes are playing out at the company’s dominant PacSun chain, which has some 900 stores selling clothes inspired by surfing and skateboarding. The company’s smaller d.e.m.o. chain, with 200 stores, sells urban fashions.

Both units have had hits and misses.

PacSun’s same-store sales were down 2.2% for the first quarter. D.e.m.o. faired better, with same-store sales inching up 1%.

The company’s new One Thousand Steps shoe chain started in April and is off to a strong start, executives said.

Johnson has dug in.

He came on last year at a critical time for Pacific Sunwear, just as the company’s heady gains under former longtime chief executive Greg Weaver began to slow.

Weaver retired as executive chairman in April, after launching One Thousand Steps.

Johnson, a former Abercrombie executive, has spearheaded changes, said Jeff Van Sinderen, analyst at B. Riley & Co.

He’s made key hires in merchandising, including new division heads for PacSun and d.e.m.o., Van Sinderen said. He’s also revamped merchandising, marketing and store designs at both chains.

“They had a lot of things brewing before Seth came on,” Van Sinderen said of Pacific Sunwear. “They were cycling against a couple years of a strong business. There’s a lot of moving parts. Seth is doing a good job managing the business.”

PacSun is honing in on its struggling business selling girls’ clothes, which Johnson calls the company’s biggest “opportunity.”

The company could do a lot better, Johnson said. PacSun still sells most of its garb to guys, though mall stores typically sell more to women, he said.

“Most of our peer groups, meaning the Hollisters, Abercrombie, American Eagle, Aeropostale, are much more weighted in the girls’ business than we are,” Johnson said.

It’ll take some planning.

PacSun has “missed a little bit on fashion” and “was late to the table” with new trends, such as longer girly tank tops and T-shirts with graphics, said Pierce of Sanders Morris Harris.

Its staple sellers,surf trunks and swimsuits,were strong, she said.

“The customer still considers it a destination,” Pierce said. “It’s a matter of getting some of the more fashion driven product in line with current trends.”

PacSun added more brand name T-shirts and tweaked its denim clothes for girls, which hit later this month.

The company is promoting it all with marketing and improved displays in stores.


Display Problems

One reason PacSun has struggled with girls is old displays made it too hard to show outfits, Johnson said. Showing girls how they can dress from head to toe is something competitors do better, he said.

“Our visual presentation has probably lagged some of the competitive set,” Johnson said.

PacSun started experimenting with better displays at its new, bigger “design” stores. The first opened last year at Tyler Mall in Riverside. The company now has 19 design stores.

Existing PacSun stores can borrow ideas, Johnson said. The company redesigns about 40 outdated shops a year.

The new layout is more “conducive to female customers” since it “can romance the product much better with better fixtures,” Johnson said.

There’s room for more mannequins, a shoe wall and places for accessories, which used to be “crammed into any place we can find in our stores,” Johnson said.

“The results so far are these stores immediately have a higher penetration of girls’ selling,” Johnson said.

D.e.m.o. has seen its own challenges. The unit targets girls and guys ages 16 to 24, slightly older than PacSun shoppers.

Under division president Lou Ann Bett, who joined last year, the chain has worked hard to reverse a lagging guys’ business and move into more mainstream fashions.

Past efforts had mixed results.

D.e.m.o. continues to revamp marketing, merchandising fixtures and store designs. The chain is getting a better handle on inventory so it doesn’t again run short of popular girls’ brands, such as Baby Phat.

“The customer there is more fickle than the PacSun customer,” B. Riley’s Van Sinderen said. “The nuance of the business is more sensitive to what’s happening in terms of fashion.”

D.e.m.o. also faces more competition from regional players, including Industry-based Hot Topic Inc., which are expanding, Johnson said.

D.e.m.o. is expected to double to 400 stores in the next few years, Johnson said.

Growth also is planned for PacSun. The chain is expected to go from 900 to 1,000 stores.

One Thousand Steps eventually could grow to around 600 stores, Johnson said. There now are six shops with another three set to open in July.

So far, the “early reads are very promising,” Johnson said.

“It’s a great concept,” Pierce of Sanders Morris Harris said of One Thousand Steps. “I’ve been very pleased with the level of fashion. The obvious issue is it’s so small. It’s not going to have an impact on the chain for sometime.”

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