In recent times, the youth-oriented apparel retailing market has been a tough one for many brands. Hot Topic
The reason it can be such a painfully slow and arduous process is that it often entails reversing consumer sentiment. Reversing consumer sentiment many times requires a rethinking of both merchandise assortment and merchandise presentation. Guess?
The most important news that came from PacSun's third quarter was the outlining of its turnaround strategy. Wall Street welcomed the plans, boosting its stock up in recent trading. In this edition of Fool on Call, we will investigate the retailer's turnaround strategy using its third-quarter earnings conference call, centering on its goal to improve merchandise presentation.
It's the old tried-and-true: Less is more
One of the primary steps Pacific Sunwear is undertaking as part of its turnaround plan is "to improve the clarity of our assortments by reducing inventory density" in the stores, CEO Sally Kasaks said during the call. My Foolish colleague Rich Smith isn't sold on the idea, noting that inventories have already been cut back by 5.6% per square foot, and all the while, Q3 comparable same-store sales dropped 6.7%. Further, management is predicting negative comps in Q4 as well, even as it continues to cut back on inventory. Rich's sentiment, then, is understandable -- the math just doesn't seem to add up.
Or does it? I've been to Pacific Sunwear stores many times, and two characteristics stand out in my experience: clutter and a lack of space. Its congested store layout concept reminds me of another struggling youth retailer, The Buckle. Both pack in the merchandise, making it extremely difficult to navigate the store and sort through the goods. The store layouts of these two are polar opposites of Guess?, which has thrived on the less-is-more approach to merchandise presentation.
Beyond Guess?, let's step out of the youth-oriented apparel retailing industry for a moment and highlight two other retailing examples that have proven the validity of the idea that you can get more by presenting less. In my investigation of eBay's
Similarly, in another conference call investigation, we learned that Harley-Davidson
As for Pacific Sunwear, by the end of FY2006 it will have reduced inventory per square foot to "low double-digit to mid-teens" vs. last year. Kasaks points out that this reduction does several things. For one, it improves its holiday floor set, which is hitting stores Nov. 17. Using some sites to test the strategy first, the company has received "very positive feedback so far." During the question-and-answer portion of the call, Kasaks noted that the PacSun locations look "visibly different" with the new floor sets implemented, and she is hopeful that it will see "some improvement" in sales.
Second, the reduction permits it to "accelerate some holiday deliveries, especially in juniors." During the Q&A, Kasaks added that there will be even more "increased velocity" on deliveries as it moves into the spring. The purpose of this is to keep the product offering as fresh and relevant as possible, which is critically important for the skater and surfer crowd the company is targeting.
Finally, the strategy is being employed in an attempt to refocus PacSun's footwear assortment. This latter point is particularly relevant, since poor footwear sales "accounted for a significant portion" of its negative comps over the past year.
A point of clarification is needed here. There is no question that PacSun carries too much variety in its merchandise offerings. Kasaks admitted, "I think we may have gotten a bit over-assorted." Reducing assortments will allow it to refocus attention on core merchandise. But don't expect there to be sparse inventory. On the contrary, as PacSun narrows its assortment, the reduced offerings will actually have ample inventory backing them up. Kasaks affirmed this by stating that the density of items in categories "will build up" within core assortments.
A turnaround in the making?
From footwear to apparel to accessories, consumers should start to see a more focused and targeted product mix from PacSun that will make the stores much easier to navigate. This should lead to an overall improvement in the shopping experience, which in turn should increase customer traffic. And as traffic increases, transactions increase.
Sometimes, in order to increase sales, it is necessary to decrease the variety of assortment offered. Time will tell if this plan will be successfully implemented, and whether PacSun's customers will respond.
In this Fool's opinion, it is time to take a closer look at PacSun -- a turnaround may be in the making.
More Foolish conference call analysis:
Fool contributor Jeremy MacNealy has a player rating of 97.36 and is ranked 341 out of 12,902 participants at Motley Fool CAPS. He has no financial interest in any company mentioned. The Motley Fool has a nifty disclosure policy.