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Riding a Crowded Retail Wave

Pacific Sunwear faces increasing competition for its core surf clientele and the mass market.

March 17, 2006|Leslie Earnest | Times Staff Writer

Seth Johnson, meet Jason Bueker.

Jason is a 17-year-old surfer and skateboarder who sports a cleaned-up Southern California kid look: jeans, sneakers, a Hurley International shirt and a red baseball cap. And he's just the sort of shopper that your company, Pacific Sunwear of California Inc., used to have in its pocket.

In fact, he was a loyal PacSun shopper until Zumiez Inc. began opening stores here last year. Now, Jason has decided your competitor is "more interesting."

"Most of my friends feel the same way I do about it," he said. "They're heading now more toward Zumiez."

Teen retail is a brutal business, which wouldn't surprise Johnson, who was chief operating officer at Abercrombie & Fitch Co. before becoming chief executive at surf and skate apparel retailer Pacific Sunwear not quite a year ago.

It was a sometimes bumpy first year.

Sales at stores open at least a year -- including the company's urban-themed d.e.m.o. chain -- rose 3.2% during the last fiscal year, the Anaheim company's weakest showing since 2001. Two stock analysts downgraded Pacific Sunwear shares this month after it posted a 3.1% sales decline in February and presented a disappointing profit projection for the current quarter.

The stock, at $23.08 on Thursday, has made no net progress in more than two years.

In recent reports, analyst Stacy Pak of Prudential Equity Group complained about the worsening girls' business and weakness at the 198-store d.e.m.o. chain. Lyn Rhoads Walther of Wachovia Securities said Pacific Sunwear might not have its merchandise mix completely corrected until back-to-school season.

Then there's the matter of Pacific Sunwear's many agile rivals -- not just Zumiez but also Aeropostale Inc., American Eagle Outfitters Inc. and Abercrombie's beach-themed Hollister chain, which Johnson helped launch. The fight for customers has become so fierce that even he speaks of his competitors admiringly.

"There's a tremendous amount of competition out there, and the competition keeps getting better and better," he said during an interview last week at the company's headquarters.

The challenge from Zumiez is especially troublesome. The Everett, Wash.-based operator of 176 stores targets the same surfers and skateboarders that helped give Pacific Sunwear its credibility and allowed it to dominate the specialty surf and skate apparel niche in malls for years. Both retailers sell the iconic brands -- Billabong, Quiksilver and O'Neill -- but Zumiez also sells more edgy new lines such as Obey, Green Apple Tree and LRG as well as hard goods such as skateboards.

As a result, some young shoppers -- and at least one analyst -- have deemed Zumiez more "core" than PacSun.

"We believe that the true board-sport kid would prefer to shop at Zumiez, leaving PSUN to compete with the slew of more preppy retailers," such as Abercrombie, Aeropostale and American Eagle, independent analyst Jennifer Black wrote in a recent report.

As Pacific Sunwear grapples with beefed-up competition, the challenge will be to strike a balance between satisfying its core customers and offering "fashion for the masses," said Jeffrey Klinefelter, an analyst at Piper Jaffray & Co., whose firm has provided underwriting and investment banking services for Zumiez. "You now have to cater to core board sport enthusiasts and, in many cases, the teen masses," he said.

When it comes to marketing to those masses, Johnson has plenty of experience. He served a dozen years in top jobs at Abercrombie and was credited by analysts with keeping the New Albany, Ohio-based chain profitable through four years of same-store sales declines. Before that, he worked at retailers including Limited Brands Inc. and Dayton Hudson Inc. (now Target Corp.).

He points out that the kid in Toledo isn't losing sleep over whether a retailer is "core" -- a key issue for Southland surf and skate apparel manufacturers that claim authenticity by rooting themselves in board sports such as surfing, skateboarding and snowboarding.

"Just saying you're core or authentic doesn't mean you're owed any level of business," Johnson said. "Whether we in California like it or not, kids all over the country react to strong brands."

Further, retailers don't win by continually looking over their shoulders to see who's gaining on them, Johnson said, but by knowing what separates them from the pack.

"It's not about trying to be like the other guy who seems to be running bigger numbers at a particular point in time," he said. "If you do your job right, you'll get your share of business."

"I think we're the headquarters for the California lifestyle as reflected in the coolest, hippest surf and skate brands" supplemented by private-label brands, he added. "That's our niche, that's what we're known for, and that's what we need to dominate at."

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