Stock Talk TMF Interview With Pacific Sunwear of California
Chairman & CEO Greg Weaver

With Dave Marino-Nachison (TMF Braden)
April 13, 2000

Anaheim, Calif.-based Pacific Sunwear of California (Nasdaq: PSUN) is a youth-focused apparel retailer that sells surf- and hip-hop-inspired clothes to teenagers. We spoke with Chairman and CEO Greg Weaver about why his company is ramping up advertising and why marketing clothes to active young men can present an added challenge.

TMF:
Let's start off by having you give us a breakdown of Pacific Sunwear and its chains, and what you guys sell there.

Weaver: Today, Pacific Sunwear is 480 stores operating in 47 states under three venues, and that would be Pacific Sunwear, Pacific Sunwear Outlet, and d.e.m.o., and that number will grow to 575 stores by the end of this year.

TMF: Out of those 575, can you give us the breakdown?

Weaver: At the end of this year, 575 stores will be open in total, 80 of those will be d.e.m.o., and then the balance, which will be 495, will be Pacific Sunwear and Pacific Sunwear Outlets.

The size of the Pacific Sunwear stores and Pacific Sunwear Outlets are about 4,000 sq. ft., d.e.m.o. is operating at about 2,000 sq. ft. We're working on a plan for the year 2003 that would take the corporation to 1,000 stores and at that point, that would be made up of 725 Pacific Sunwear, 75 Pacific Sunwear outlets, and 200 of the d.e.m.o. stores.

TMF: Let's talk a little bit about d.e.m.o. and the ideas behind why you started that up and why you see that as being a growth driver over the next couple of years.

Weaver: We had tremendous success rolling Pacific Sunwear stores out over the past several years and very much plan to continue that process, but there was a teen that we were not getting. That teen was somewhat older and inspired more by sports and music, whereas Pacific Sunwear is a 15-year-old who is very inspired in their fashion from skateboarding and surfing.

The d.e.m.o. customers were more about 19 years old and again, sports, music, higher price points, older customer and absolutely no overlapping product mix between the two stores. We did a test in April 1998, exactly two years ago, and the test was to put one of these stores into a shopping center about 30 minutes from our office so that we could nurture it, and we wanted to see if there was absolutely any cannibalization whatsoever.

"Young guys don't respond to fashion advertising, or they don't acknowledge that they respond to fashion advertising."
Today, as we near 80 d.e.m.o stores during the course of 2000, the majority of those stores, probably 85 or 90% of them, will co-exist with Pacific Sunwear.

TMF: So at d.e.m.o. you're really not trying to take the Pacific Sunwear shopper and turn them into a d.e.m.o. shopper?

Weaver: Not at all. It would really be superfluous in many ways for us to do that. If it was going to cannibalize the core customer we would have stopped it, but because the customer is older, because there is not an overlapping brand in the two stores, the price points are different, the build out is different, and it is such a different operation, we really felt that it would be pure incremental business. Today, it is not uncommon for a Pacific Sunwear store to operate in a shopping center doing $2 to $2.5 million and at d.e.m.o to be doing $1 to $1.2 million... and very often they are three doors down or across the hall, but certainly under the same shopping center roof.

TMF: Talking about d.e.m.o., and talking a little bit about Tommy Hilfiger (NYSE: TOM) and some of the other better-known brands, I guess you don't believe that this is bad timing for this kind of hip-hop-inspired clothing, to be building that up.

Weaver: I think there is huge growth, and I think that for a variety of reasons. First of all, on a national basis, [for] the lines of apparel that we are selling under the d.e.m.o. roof... the bulk of distribution is through department stores. We've learned through the Pacific Sunwear experience that given the opportunity, a young customer is always going to shop in a specialty environment that is purely catering to them rather than going to a department store.

In the case of Tommy, the [d.e.m.o.] concept when it started two years ago had Tommy as part of the assortment and it still has Tommy as part of the assortment, so it's not as if it's gone away, but we have also been able to build our private label, Penetration, within d.e.m.o. during the past two years. We expect that [Penetration] will grow to 20% of our d.e.m.o business this year, from zero two years ago.

Then there have been other emerging brands that have made d.e.m.o. strong like Sean John and Mekka, Ecko, and Avirex. Those are all powerful brands on their own.

TMF: I'm glad you brought up the department store aspect. I think the thing that really stood out as far as the way those products are marketed in department stores is that they would get huge sections where you would know that you were sort of walking into the Tommy or the Nautica (Nasdaq: NAUT) area, kind of a store-within-the-store and you guys don't really have that.

Weaver: Certainly, the feeling is very different and whether we're discussing d.e.m.o. or Pacific Sunwear, a young person has an opportunity to buy casual apparel in many, many environments. They can buy it in department stores, they can buy it in other specialty retail stores, so it really becomes a choice of what store is particularly narrowing their assortment to focus on him or her, and Pacific Sunwear has been very successful in that rollout for years in going after a 15-year-old customer, not trying to get a 30-year-old, not trying to get an 8-year-old. The same thing is happening with d.e.m.o.

Historically young people don't find shopping in a department store cool -- and everything they do has to be cool -- so I don't think they think of department store shopping as a cool experience. I don't think they're waited on by people that they are particularly comfortable being waited on by, whereas in our respective operation I think they are. Those are the things that help specialty people position themselves toward a certain customer and end up being successful in doing so.

TMF: Your stores are currently in 47 states. Do you feel like you have the opportunity to pretty much expand almost anywhere you want to in the U.S.?

Weaver: I do now more than ever because we've been accepted in 47 states. We do not have a weak market in the U.S. We haven't had an area of the country where we have been unsuccessful either through household income, or climate, or competition and that's been very much a positive force because obviously to take the company to the size that we aspire to grow to, we can't have lots of constraints.

We've been able to take this concept into markets where the household income is below $40,000 as well as very affluent parts of the country, whereas some corporations can only go into parts of the country where the income pockets are very high.

TMF: Can you speak a little bit about your international opportunities and plans in that area?

"Historically young people don't find shopping in a department store cool -- and everything they do has to be cool."
Weaver: Nothing is defined at this point other than we believe that in the next few years that we have an opportunity to expand internationally. I do plan on, with some of the senior executives, personally investigating some of the markets in the next few months that we might consider opening in the next two to three years. So, whatever we do internationally, it's more of a long-term strategic thing that we will work on now. We certainly would not be opening up stores. The very earliest would probably be two to two and a half years from now.

TMF: In reading your annual reports, you talk about how you don't dictate fashion, you're identifying trends. Can you expand on that?

Weaver: First of all, we spend a great deal of time in the field, in our stores, shopping our competition, and listening to kids at focus groups, and... we really do make an effort to get out of California. California is first of all where we live, it's where our vendors operate, it's where a lot of the fashion is being dictated from, that being California casual apparel, but for us to get feedback on how that apparel is being perceived we need to be in Boston.

I don't think there's any incentive on anyone's part here to try to dictate the fashion that's in our stores. We listen to what the needs of the kids are, we listen to what they like about our competition, what they don't like about our competition, whether it's their advertising, or their price points, or their sales help, and we try to participate in things we feel have longevity. We don't try to participate in true fads, we try to participate truly in what is a trend within apparel, and whether that's color stories or silhouettes, that's what we try to do. We try not to do anything that is terribly short-term because it tends to confuse the customer, and they don't tend to know from one three- or four-week period to the next what they are going to find.

TMF: Where does your private label merchandise fit into the whole picture? Does it sort of plug in holes?

Weaver: It plugs in holes often, and it also plugs in price points. A good example to answer your question, some of our private label jeans are $32, whereas some of the branded jeans that we might sell in our stores are $50. Not every mom heading back to school can bring three kids into a store that's selling $50 or $55 jeans, and although the kid may drool all over the store and feel it's the only place in the mall he wants to shop, the kid can still come in and maybe buy a branded T-shirt or branded baseball hat, but pick up a pair of jeans there, but they're just not $50 or $55, they're $32. If they want to get credit for a brand, it also tends to be on shirt, a sweatshirt, or a hat. They're a little bit less concerned about getting credit for a bottom because you don't see the labels; they don't wear their shirts tucked in and that sort of thing.

TMF: I'd like to talk about your media plans. It seems like this is really your most aggressive year to date.

Weaver: It most definitely is. We launched advertising in 1999. It really was the first time we'd ever done any significant level of magazine ads. The company can leverage expenses based on the size of the operation today, but also there are such strong brands that have gained such momentum, like Teen and Teen People and ESPN, Spin and there are just a lot of publications that are really zeroing in on this young customer, so because those magazines are as strong as they are and because our economies scale are what they are by the expansion of the company, we've been able to do that.

And then I have always had a strong interest in sponsoring the X Games because I think the very best way to reach our young male customer is through things that attract him or relates to his lifestyle, versus the fashion ad that says "Buy this shirt" or "Buy the shirt and don't you wish you looked like me."

We really try to participate in how they live their lives so they'll want to shop our stores because we are part of that. It's really worked for us. I think it keeps us from being pigeonholed. I've heard this from a lot of teens: that when exceptionally great-looking models are used in marketing, some of these kids actually resent it. There are 50% of them that want to look that way and there are 50% of them that say "I can never look that way." It's very divided.

TMF: Is that more salient with the young male shoppers?

Weaver: Absolutely. In our female advertising, we will show more product and they are more responsive to fashion advertising in general. Young guys don't respond to fashion advertising, or they don't acknowledge that they respond to fashion advertising. That is very often the case too. If you sat six guys and six girls on a side of a table and showed them an ad, and you would say to the girl, "What do you think of this?" six of them would say, "That is so cute, I love it, that's so cute." You ask the guys and it's "that's alright."

TMF: My last question is about your website and how you see it in your business now and down the road.

Weaver: We launched it to help round out our marketing efforts, to be able to use it as a store locator, in special events and sales and things like that. And of course, we hoped ultimately that it would be a resource for significant revenue opportunity. Today, after seven months since launch, it is in fact our highest-volume store. We don't have a store that does more volume than our website, so it has surpassed our expectations after only seven months. I think the TV campaign has driven a lot of people to it because as you'll see in the commercials, the last thing you see is the Web address.

TMF: You've got to do that nowadays, don't you?

Weaver: You really do, but I think if nothing else, it sparks curiosity to get on and explore, but our revenues have been very strong this year especially since [our] TV campaign went live.

The average transaction at a Pacific Sunwear store is in the low $40s, and the average e-commerce transaction is in the mid $60s. We feel there that it's a combination of an extreme comfort level with the teenager and their parents because they are familiar with Pacific Sunwear stores and if something doesn't fit or they flat-out don't like it when they get it, they can just exchange it at the mall the next time they're in the mall, whereas with some true catalogs or true e-commerce [companies], they've got to box it up, take it back to the post office, etc., and wait for a refund.

Another positive thing is we really are able to leverage marketing on that website because we are marketing almost 500 stores right now, heading toward 600 with these commercials, with the magazine ads and all those ads, all those commercials help the website as well, so it's not as if we have to go out and do additional marketing.

TMF: What is your own background with the company? I think right now is the time that they say is hard to hang onto a retail executive.

Weaver: I certainly have heard that a lot. I've had two retail jobs in my career, one was for 12 years before I came here and this one is 13 years and I'm 46 years old. I think what's happened to me at Pacific Sunwear, and probably more importantly what's happening to the company, has been the most incredible experience of my life.

I'm recruited frequently. I have not had interest in leaving here and don't have interest in leaving here. As you are probably aware, our earnings have averaged 50% increases for five years now, so it's a great story, I love to tell it and more importantly, I love to live it. It's just been a fun, fun environment and today, we're truly one of the fastest-growing retail companies in the country and I can't think of a place I'd rather work right now. I mean that literally. I just don't know why I would try and reinvent myself or try to prove myself to another corporation.

TMF: That's something that investors should be happy to hear.

Weaver: I hope they are.

Related Links:
Pacific Sunwear website
Pacific Sunwear discussion board
d.e.m.o. website
Fool News, 8/10/99: d.e.m.o. Working for PacSun