d.e.m.o. Working For PacSun (News) August 10, 1999

d.e.m.o. Working For PacSun

By Dave Marino-Nachison (TMF Braden)
August 10, 1999

Pacific Sunwear of California (Nasdaq: PSUN) has cultivated a reputation as a down-with-the-surf-scene mall-based apparel retailer since it started down the road to chaindom in 1981.

Now, it's changing gears and shifting its focus to the urban scene and its culturally influential fashion movement that shows up everywhere from television to movies to music to nightclubs that have difficulties enforcing the drinking age. The vehicle is d.e.m.o., a rapidly expanding store line established last year.

The d.e.m.o. concept, which targets a mid-teen to early-20s customer -- slightly older and quite possibly socially incompatible with Pacific Sunwear's traditional shorts and T-shirts crowd -- features brands like Fubu, Tommy Hilfiger (NYSE: TOM), Mecca, Polo Ralph Lauren (NYSE: RL), Enyce and Wu Wear, rather than the well-known surf names -- Billabong, Quiksilver, O'Neill, Redsand, and Stussy among them -- familiar to Pacific Sunwear shoppers. There isn't any merchandise or brand overlap between the two chains.

The company said today it plans to open 40 d.e.m.o. stores in 2000 (out of a total of 125 planned openings), just about doubling the chain's expected size to 80 based on the company's stated plans for this year. Assuming that happens, d.e.m.o. store openings will make up 32% of company's openings for 2000, an increase on the 25 of 100 slated for this year. "Sales and customer reception to this new concept has been strong," Chairman and CEO Greg Weaver said.

Although Pacific Sunwear had to load up on brand-name merchandise in the d.e.m.o. stores in 1998 -- private-label sales at d.e.m.o. were just 5% for the year, compared with more than 60% for the company as a whole -- as a means to get customers in the door and familiarize them with the new concept, it intends to grow that number as the chain matures, filling out price points and offering exclusive options for shoppers as it has done successfully at its traditional stores.

d.e.m.o. stores, generally smaller than Pacific Sunwear shops, currently cost a bit more to stock per square foot at opening because of the reliance on brand-name merchandise.

Certainly, Pacific Sunwear is taking on an extra chunk of risk by committing to a heavy investment in a fashion market it hasn't been working in much for the nearly 20 years of the company's existence.

But now might be the right time for an aggressive new move, with net income and same-store sales growth slowing over the past three years.

If Pacific Sunwear proves it can merchandise effectively on both fronts, it stands to lessen its exposure to fashion trends by providing a hedge against the swells of surfer chic -- as well as another growth opportunity.

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