Selling Teen Spirit

By Michele Orecklin

Regular readers of the financial pages might be forgiven for thinking the sun has not set for the past few fiscal years. In describing the improving fortunes of teen-clothing retailer PacSun, pun-happy headline writers have frequently alluded to the company's tendency to rise, shine, blaze and heat up. Pacific Sunwear, as it is more formally known, continued the perpetual daylight when it announced last week that its second-quarter profits jumped 84% compared with the same period last year. Sales also increased at hefty double-digit rates, up nearly 23%, to $234.4 million.

The performance was especially impressive in light of the generally sluggish retail environment. But Pacific Sunwear, perhaps more than any other retailer, seems to have figured out how to cater to the fashion desires of that fickle yet reliably profligate demographic group, American teenagers. By stocking only the hottest surf-and skate-clothing brands--and by being willing to dump them the moment they start to cool--the once laid-back West Coast retailer has expanded into a 650-store monster with outlets in 49 states and Puerto Rico (a store in the 50th state, Arkansas, should open soon). And it has done this without losing cachet with its target market. Pacific Sun, says shopper Heather Brentlinger, 17, of Omaha, Neb., "has the surfer look I like."

Brentlinger has never surfed. She doesn't even swim, which might have disturbed the company's founder, dedicated surfer Tom Moore. He managed to find time for his first love even as the Newport Beach, Calif., surf-gear shop he opened in 1980 grew to an 11-store chain. In the late 1980s the business caught the attention of venture capitalists who were convinced that brands made by Southern California manufacturers for a Southern California lifestyle could work outside the area. After the merchandise was slightly tweaked (some suppliers had to start making long pants and outerwear for East Coast customers), the concept took off. In 1993, with 60 stores, the company went public on the NASDAQ market. Today Pac-Sun plans to have 1,000 stores by 2007. (Gap, by contrast, has almost 3,000 stores worldwide.)

PacSun stores are located almost exclusively in suburban malls. A good portion of customers, like Brentlinger, don't live anywhere near a large body of water. But that has not diminished the appeal of PacSun's surfwear. Thanks to MTV and movies like Blue Crush, kids from Alaska to Alabama are eager to look as if they spend the day with sand between their toes. In addition to its private label, PacSun stocks brands like Billabong, Quiksilver and Hurley, lines that pro surfers and skaters wear. Even though teens can get some of these brands at mass merchandisers such as Wal-Mart and Target, "they think shopping at PacSun is cooler," says Jennifer Black, a retail-stock analyst for Wells Fargo Securities. She adds that there is little danger of the surf trend's evaporating, as it has been around since the 1950s.

But to continue to grow, PacSun executives knew they had to push into additional niches. In 1998 the company, based in Anaheim, Calif., opened a new chain of stores called D.E.M.O. to pull in the hip-hop crowd. With their highly polished chrome-and-black decor, d.e.m.o. outlets aren't exactly street. The stores are designed to fit into shopping malls but carry merchandise from P. Diddy's clothing line Sean John and Eminem's line Shady Limited, as well as Phat Farm, Ecko and Enyce--brands that appeal to both blacks and middle-class whites. Company officials had planned to boost d.e.m.o. outlets, now numbering 114 stores, to 200 by 2007. But d.e.m.o. has performed so well, they expect to add double that number.

The architect for Pacific Sun's expansion is CEO Greg Weaver, previously at retailer Jaeger Sportswear Ltd., who was brought on board in 1987 when the venture capitalists moved in. Though originally from Connecticut, Weaver has acquired the tanned skin and relaxed manner of an Orange County native. His laid-back appearance belies his intense mastery of all aspects of PacSun operations; he can recall in an instant, for example, that store No. 39 opened in Paramus, N.J.

Weaver passes off some of the decisions he has made as almost simplistic ("Retail 101," he calls them). But, in fact, his strategies can be quite the opposite. The company has a knack for employing tactics that seem to fly in the face of convention.

For example, Pacific Sun tends to downplay rather than call attention to its house brand. PacSun stores carry the company's private-label clothing, called Tilt, but instead of stitching the name prominently on the outside of clothes, the retailer hides the logos on inside tags. The strategy provides insurance against the inevitable moment when a brand goes from In to "losers only" with customers. "When a teen decides a brand is dead," Weaver says, "they don't kill it slowly. They put it immediately out of its misery." That is also the reason PacSun stocks a wide variety of brands besides Tilt, which accounts for 35% of all merchandise. As soon as a brand cools, it gets moved out, and another is brought in to replace it.

Though the chain's mer chandise looks cutting edge, Weaver is quite care ful to avoid fashion extremes. Unlike competitor Abercrombie & Fitch, which plays up the libidinous elements of its teen offerings, PacSun sells clothes that would pass muster at any high school with a dress code. Weaver says he avoids resorting to sexual advertising messages to move merchandise. "Many teenagers love it," he says, "but why would I alienate the parents? I can't forget my customer is 15 and doesn't have a credit card."

But Weaver has not avoided all the pitfalls. In 2001 the company misjudged demand, and weaker-than-expected sales hurt earnings, which fell to a disappointing $8.9 million in the third quarter of 2001. Weaver chalked it up to the growing pains of a rapidly expanding chain. "Suddenly I realized that all the things I was able to do with 150 stores, I couldn't do at 650," he says.

Fortunately, PacSun was broadening its customer base at about the same time. Before, its clothes had a punkish surf-skate attitude that appealed mainly to teenage boys--an image the company reinforced by, among other marketing moves, sponsoring the X Games. But in 2001 Weaver took some tentative steps into the girls' market. Customer response was strong, helping pull the chain out of its mild slump. Weaver today attributes much of the past year's success to the purchasing instincts of girls, who, unlike boys, buy not just a single item of clothing but an outfit with a belt, bag, hat, earrings and any other accessories for which they can find space on their body. Weaver has dropped the X Games sponsorship and now devotes almost all his $10 million annual advertising budget to magazines like CosmoGirl. As long as the stores aren't too feminine, he says, boys don't seem to mind. Sales to girls account for 48% of total purchases, a portion Weaver expects to climb to 50% in the next few months.

PacSun isn't finished with expansion. Weaver says the company is looking at possible acquisitions, although he plans to stay squarely in the teen market. For as fickle as teenagers can be, they can also be charmingly oblivious to events that suppress the purchasing appetites of other consumers. Teens "are CNN-proof," he says. "Sept. 11 and a day or two after were clearly brutal, but within four or five days, business came back." For teens, the sun rarely sets. --With reporting by Paige Bowers/Atlanta, Esther Chapman/Omaha, Harlene Ellin/Chicago and Adam Pitluk/Dallas

With reporting by Paige Bowers/Atlanta, Esther Chapman/ Omaha, Harlene Ellin/Chicago and Adam Pitluk/Dallas