Fashion

The Long, Agonizing Fall of PacSun

A slo-mo wipeout ends in bankruptcy court for the 36-year-old surf retailer.

A Pacific Sunwear store in Santa Monica, Calif., in May of last year.

Photographer: Araya Diaz/Getty Images

How did it come to this? 

Pacific Sunwear of California Inc. filed for bankruptcy protection from creditors on Thursday, hoping a restructuring could help turn around the 36-year-old surf retailer's fortunes. Once a staple merchant of California cool, PacSun wasn't able to adapt as fashion trends left surfwear behind and overexpansion sapped its resources. It amassed crippling debt as it recorded losses each year since 2008. Every effort at reinvention failed. Executives couldn't figure out how to stop the bleeding. The company's shares are down 96 percent over the past 12 months.

Back in 2005, surf sellers could do no wrong. Extreme sports were omnipresent in pop culture, and surf brands Quiksilver and Billabong surged alongside PacSun. That year, when PacSun's shares were at an all-time high, the retailer boasted nearly 1,000 stores across America. Executives promised continued mass expansion, with another 400 stores over the next three years. Teen mall-goers clamored over PacSun's selection of edgy surf labels such as Roxy and Hurley.

"I think the PacSun business is a very strong business," Seth Johnson, the chief operating officer and incoming chief executive at the time, said at a conference in January of that year. "It's been very successful over time. So it's not been in need of anybody to come in and fix it."

PacSun soon brought somebody in to fix it. Johnson left after a year at the helm, and Sally Frame Kasaks, a lauded retail veteran who had previously run Abercrombie & Fitch, Ann Taylor, and Talbots, was hired and tasked with winning back teens lost to such stores as Hollister and Zumiez.

Kasaks shuttered money-losing experiments such as PacSun's shoe chain, 1000 Steps, and its urban shop, Demo. The plan was to relinquish the beach vibe and become a Southern California cool-girl destination, pushing its own private-label clothes alongside such traditional surf brands as Billabong and Volcom. That didn't work either. PacSun had too many underperforming stores and was selling too many unfamiliar brands. 

Enter Gary Schoenfeld, the former Vans CEO, in 2009. Two years in, he started closing 200 PacSun shops while trying to pin down teen fashion trends as fast-fashion retailers such as Forever 21 and H&M spread across the U.S. Schoenfeld tried collaborations to get girls excited again, signing on Kendall and Kylie Jenner, then just emerging from the reality TV shadow of the more famed Kardashians, in 2012 to sell a fashion line for juniors. He brought in trendy West Coast brands like Brandy Melville. With foot traffic at malls waning, it wasn't enough.

Now about 40 percent of those stores are gone. Annual revenue has plunged to around $800 million, down 40 percent from $1.44 billion a decade ago. 

There is still hope. Under the bankruptcy restructuring plan, PacSun will solicit bids to be acquired or will be taken private by San Francisco private equity firm Golden Gate Capital, converting much of its debt into equity. Meanwhile, Wells Fargo has agreed to lend Pacific Sunwear as much as $100 million to use as it restructures.

Golden Gate hopes the retailer has put its beach bum past behind it. "PacSun has successfully transitioned beyond its historical base of action sports brands to what we believe is the most relevant and coveted mix of brands celebrating the California lifestyle," Josh Olshansky, managing director at Golden Gate Capital, said in a statement. 

Operations will continue unhindered throughout the process, according to Schoenfeld, and all stores will open on normal schedules without interruption. In a letter released on Thursday,  he assured customers that all gift cards and loyalty points will remain redeemable, calling his company the "New PacSun."

Schoenfeld told industry publication Shop-Eat-Surf that a "large portion" of the retailer's remaining stores could survive. A person with knowledge of the matter said PacSun is working with landlords for potential lease reductions or terminations, though little is likely to change before back-to-school season in the fall.

The company follows beachside brands Quiksilver and Wet Seal into bankruptcy court—retailers that took the same path of overexpansion before crashing. A reorganized PacSun may take its cues from them, slimming down its retail fleet to shift more to e-commerce and rebuild around its most successful merchandise. In PacSun's case, with surf falling out of favor with teens, this likely means it will continue to push its California casual gear, such labels as Brandy Melville, LA Hearts, and Kendall + Kylie. For now, the focus is on the financials.

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