Pacific Sunwear to Roll Out New Footwear Format as Business Matures…

Pacific Sunwear of California Inc. will need to expand store count to continue to deliver on their sales and earnings goals and will look to a stronger commitment in footwear to accomplish the task. The retailer that has relied on apparel and accessories to grow its business at its Pacific Sunwear and d.e.m.o. concepts, has learned enough from its commitment to the footwear category over the last few years to give it the experience they feel they need to launch a new footwear concept which will be called One Thousand Steps.

The new concept, which will be tested in 2006 through the launch of eight to ten stores averaging around 2,500 square feet in size, will give PSUN a format that will address the needs of a bit older consumer than they currently serve in their predominately teen formats. The new mall-based concept will target 18 to 24 year-old consumers and will feature an assortment of “casual, fashion-forward, branded footwear, and related accessories,” according to a release.

The One Thousand Steps chain, which could grow to as many as 600 to 800 stores, is expected to be roughly 80% footwear and 20% accessories.

“We're targeting older customers because we think there's an underserved market there,” said CEO/COO Seth Johnson in a conference call with analysts. They see little overlap with the PacSun footwear business.

Based on the description of the projected product mix at the stores, which is expected to include Steve Madden and Kenneth Cole’s Reaction line, the concept looks to be a Journeys format for an older demographic. PSUN said the stores will target consumers that are like a boutique format not unlike that found in some of the trendier shopping areas such as Melrose Ave.

While the PacSun format starts to mature (and may be reaching a saturation point) and the d.e.m.o. stores trade out male consumers for an increased female consumer base, the company has found new ways to continually increase earnings despite comparable store gains that have settled into the low-single-digit range instead of the strong double-digit gains of the last few years. PSUN saw improvements in both IMU and management of markdowns.

Operating margin improved 40 basis points to 10.6% of sales in Q2. Total transactions per comp store were down mid-single-digits, but the average transaction value per comp store was up mid-single-digits, driven by a high-single-digit increase in average unit retail.

On the men's side, denim was said to be “very strong throughout the spring season” and they expect “continued strong performance through back-to-school and holiday.” The men's tee business was described as “solid” and men's polo’s were seen as a strong business. Johnson said they had a much better quarter in men's shorts and board shorts than was planned.

Comps in the short-sleeve woven business have been “very tough,” but the woven inventory is “significantly below last year's level,” reducing the carryover risk.

In the PacSun girls business, they saw “good success with more feminine tees, tube tops, and halters.” The girls swim and short business was said to be “outstanding” and sold through at “much higher retails than last year” in Q2. Johnson said they would have benefited from more inventory in capris this spring.

PacSun footwear comps were hurt throughout the entire spring season by a “very difficult sandal business, particularly on the girls' side.” Johnson said the sneaker business has been positive in both guys and girls. The addition of the Circa brand was said to be a “major plus for the business.” They will add another new sneaker brand for the fourth quarter.

The PacSun business is about 56% guys and 44% girls.

The d.e.m.o. business continues to see strong momentum on the women's side of the business with the men's business much more difficult. Baby Phat is driving the gains in women’s and Apple Bottoms is also growing rapidly. They are planning to launch Baby Phat lingerie for holiday and have added Akedemiks for back-to-school.

Johnson said comps “remain very difficult” in the d.e.m.o. men's business. The men's polo business has been “very good,” but “unable to offset weakness in tees and short-sleeved wovens.” Men's novelty tees are performing well. d.e.m.o. added the Sean John brand in all stores this spring.

Johnson said the men's business will improve as they get further into the fall season, but reiterated that the overall d.e.m.o. business will continue to be driven by growth in women's. He said d.e.m.o. is still very underdeveloped in shoes and accessories.

The d.e.m.o. business is now 52% guys and 48% girls.