Pacific Sunwear of California Inc., which made surf and skate styles cool for millions of U.S. teens, is trying to avoid a wipeout.
After popularizing such brands as Quiksilver and Hurley, PacSun, as it’s known, alienated customers by trying to sell its own apparel. Many decamped. So did investors; the shares have fallen 92 percent in the past five years. Now, as PacSun tries to win back hearts and minds by retreating to its original strategy, it faces growing competition from Zumiez Inc. (ZUMZ) and Tilly’s Inc. (TLYS), which sell similar gear.
PacSun “lost credibility with their core market,” David King, a senior research analyst at Roth Capital Partners LLC in New York, said in a telephone interview. “The question is, ‘can they get back to that?’”
It’s not as though action-sports apparel is becoming less trendy. Fueled by the popularity of the Extreme Games on ESPN, sales of skateboards, surf apparel, footwear and accessories were $17 billion in 2010, the last year for which figures are available, according to Board-Trac, an industry consultant based in Trabuco Canyon, California.
And while consumers are still spending tentatively, surf- and skate-inspired apparel retailers may have an opportunity to grab a bigger part of the teen spending pie. Teens are moving away from the “preppy” graphic Ts and hoodies sold by Abercrombie & Fitch Co. (ANF) and American Eagle Outfitters Inc. to an eclectic mix of lifestyle brands, fueling the success of retailers like Tilly’s and Zumiez, Richard Jaffe, an analyst at Stifel Nicolaus & Co. in New York said in a May 29 note.
Zumiez has surged 37 percent this year, and in May Tilly’s raised $107 million in an initial public offering, closing on July 6 at $16.37. PacSun, based in Anaheim, California, has advanced 4.7 percent this year, a performance that’s due in part to stock purchases by Chief Executive Officer Gary Schoenfeld and other directors.
“We truly believe we can stand out through our on-trend and distinctive apparel, our unique mix of brands and the emotional connection we’re once again establishing with customers with our Golden State of Mind positioning,” Schoenfeld said in a telephone interview, referring to a new marketing campaign playing up PacSun’s California heritage.
Founded in 1982, PacSun introduced once-obscure skater and snowboarding brands to mall-shopping teens. Sales peaked at $1.44 billion in 2007. Revenue has declined every year since to $833.8 million in the year ended Jan. 28, and the retailer is closing stores. By the end of this fiscal year, PacSun will have as few as 620 stores, about half the number it once had. To help pay for the store closings, PacSun got a $60 million loan from private-equity firm Golden Gate Capital in December.
Former CEO Sally Kasaks, who led PacSun from October 2006 to June 2009, spearheaded a shift to higher-margin private label lines, reducing brand assortment and cutting footwear out of stores to compete with other mall-based retailers. The strategy, made more difficult by the onset of the recession and a drop in consumer spending, failed to resonate with teens who craved action sports brands and shoes, as well as junior girls who could find a bigger variety of cheap fashion elsewhere.
By walking away from the branded market, Schoenfeld says PacSun lost its status as a national platform for such emerging brands as Vans Inc., the skate shoe company he ran until its 2004 sale to VF Corp.
“We’ve been crystal clear that we’re going to get back to the old days, and get back to being a place where new emerging brands would be excited to be in our stores and where customers could rediscover new brands as well,” he said.
However, Zumiez and Tilly’s, founded in 1978 and 1982 respectively, have been using the same strategy. While both retailers were established at about the same time as PacSun, their expansion has taken off in the past five years.
Zumiez targets mostly action sport-oriented males with hardware like skateboards and branded apparel. Sales at the Everett, Washington-based company have jumped to $555.9 million in the year ended Jan. 28 from $407.6 million three years earlier and its store count has almost doubled in five years to 494 on April 28. The company projects expanding to as many as 700 locations, eclipsing PacSun in the next few years.
Given its focus on West Coast-inspired apparel, Tilly’s is more of a direct threat to PacSun. Still, the Irvine, California-based chain has fewer locations -- 145 as of April 28 -- that typically are situated outside malls.
PacSun is now targeting young men and women in their late teens and early 20s, older than the sought-after customer three to five years ago, according to Schoenfeld. The retailer has added clothes from emerging brands like Diamond Supply Co., also carried by Zumiez, and Young and Reckless, a label carried by both Zumiez and Tilly’s. Schoenfeld also has brought in Nike and Vans shoes and Oakley sunglasses, and wants to return to core branded apparel for men and boho-chic styles for women.
Same-store sales at PacSun rose 1 percent in the first quarter, the first increase for both men and women’s clothing since 2005, evidence the chain is getting some traction. Still, Zumiez posted a 12.9 percent increase in that period, and Tilly’s said comparable-store sales rose 4.3 percent.
Michael Christianson, an 18-year-old from Roswell, Georgia, bought jeans and shirts from PacSun last month, having never shopped there before.
The retailer has “a lot of T-shirts that fit my style -- some other places usually do, Urban Outfitters, for example, but Urban Outfitters is usually quite expensive,” Christianson said. He said he liked the assortment and will be back.
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