Pacific Sunwear of California, Inc. History

Address:

5200 East La Palma Avenue
Anaheim, California 92807
U.S.A.

Telephone: (714) 693-8066
Fax: (714) 701-4298

Website: www.pacificsunwear.com

Public Company
Incorporated: 1979
Employees:3,161
Sales:$227.1 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: PSUN
NAIC: 44811 Men's Clothing Stores; 44814 Family Clothing Stores

Company Perspectives:

Of course we started as a surf shop. Now we're surf, skate, snow and street. We're summer and winter. Guys and girls. We're beach and mountains, country and city. We're water, sand, dirt and concrete. We're clothes, shoes and all the rest. We're Pacific Sunwear.

Company History:

A fast-growing specialty retailer, Pacific Sunwear of California, Inc. sells casual apparel, footwear, and accessories designed for teenagers and young adults in more than 300 stores throughout 40 states. Pacific Sunwear operates two chains, its flagship Pacific Sunwear concept, which caters to suburban fashion tastes, and d.e.m.o., a concept influenced by urban fashion trends. Nearly all the company's stores are located in regional malls. During its relatively short history, Pacific Sunwear has undergone several transformations. The company started as a surf shop, broadened its merchandise to include casual young men's apparel in 1990, and began retailing young women's apparel and footwear in 1995. Against the background of these strategic alterations, the company expanded vigorously, increasing its store count from 21 units in 1988 to 344 units by the beginning of 1999. Annual sales during the decade swelled from $18 million to $321 million. The company was expected to open 108 stores in 1999, which included 25 units of its 15-unit d.e.m.o. chain. Merchandise brands carried in the company's stores include Quiksilver, Rusty, Stussy, Billabong, Doc Martens, Venus Girl Trap, and private-label brands Bullhead, Breakdown, Diversion, and Tilt. Pacific Sunwear generates 75 percent of its revenues from young men's merchandise and the balance from young women's merchandise. More than a quarter of total sales are derived from the sale of T-shirts and knit and woven tops.

1980 Surfing Origins

The roots of Pacific Sunwear's business originated in Newport Beach, California, where Tom Moore opened his first shop catering to surfers in 1980. The opening of another small surf shop in southern California was not a remarkable event, but the success of the Newport Beach store did lead to a novel development in surf shop history. Hoping to secure year-round business, Moore and his partners opened a second shop the following year in a mall--the exclusive domain of Pacific Sunwear stores for the next 17 years.

The location proved a winner, generating more than $1 million in sales in 1982. The success of the first mall store, located in Santa Monica Place, spawned the establishment of ten more stores, all in proximity to the coast and all situated in malls. With the financial backing of venture capitalists in 1987, the chain grew to 21 stores, collecting $18 million in sales in 1988.

By all measures, the concept was a success, thriving during a decade in which bright, neon shorts and shirts of the surfer lifestyle were popular, trendy apparel items among nonsurfers as well. Quick success, however, turned to quick failure when the company began to expand outside of California. Sales plunged sharply at stores on the East Coast and in Minnesota, for example, where a company store located in the Mall of America struggled to sell shorts when the thermometer outside read 17 degrees below zero. According to a company official, the typical customer reaction was "this is a cool store, I'll be back when it's summer." In response, new management was brought in to inaugurate the new decade, led by Michael W. Rayden, whose chief task was to transform the chain into a profitable retailer able to expand outside of southern California.

Strategy Changes in 1990

A retail veteran, Rayden joined Pacific Sunwear in 1990 after working for Stride Rite, Eddie Bauer, and Liz Claiborne. During the early 1990s, Pacific Sunwear registered two money-losing years and closed eight underperforming stores, as the company suffered along with the decline in popularity of the surfer "look." Of the stores closed, four were in the company's mainstay California market and the other four were located in new markets--two units in Texas and two in Washington, D.C.

Pacific Sunwear had faltered in its first bid to become a national retailer, but the company did not make the same mistake twice. Rayden devoted his first years with the company to developing a new merchandising strategy and forming a more prudent real estate plan to support geographic expansion. Rayden's new merchandising strategy revamped the Pacific Sunwear concept. He broadened consumer appeal--thereby increasing the company's customer base--by adopting a new focus for the retailer. Instead of relying on shorts, shirts, and hats, Rayden shaped Pacific Sunwear into a young men's casual apparel retailer, a chain that carried fashionable brands such as Stussy, Mossimo, Quicksilver, Rusty, and Billabong. Rayden was trying to attract a specific customer: white, suburban, teenage males. The intense focus on attracting this type of customer proved successful. By early 1993, there were 60 Pacific Sunwear stores in operation, with 47 units located in California and the remaining 13 units spread among Arizona, Connecticut, Florida, Nevada, New Jersey, and Washington--all in regional malls Annual sales in 1992 were up more than 30 percent from the previous year's total, and profitability was sound. Profitability had been sustained for seven consecutive quarters, and Rayden was ready to expand in earnest.

The signal informing outside observers of Rayden's readiness to expand on a grand scale arrived in March 1993, when Pacific Sunwear filed with the Securities and Exchange Commission for an initial public offering (IPO) of stock. The company hoped to raise $14.4 million in proceeds from the IPO, and earmarked $4.2 million of the total to expand. News of the IPO arrived at the same time the company announced its expansion plans for the immediate future; between 18 to 20 store openings were planned for 1993, and 25 store openings were slated for 1994.

1993 Public Offering Fuels Expansion

In the wake of the IPO, Pacific Sunwear expanded at a vigorous pace, exceeding its own projections. By late 1994, there were 118 stores in 17 states, the result of 46 new stores added to the chain in 1994, which was nearly twice as many new store openings as announced in early 1993. On the heels of this prodigious growth spurt, plans were announced for the expansion of the chain by 35 percent, or 50 new stores, in 1995. In 1995, the square footage of the entire Pacific Sunwear chain increased 45 percent over the retail space occupied by the company in 1994. Fifty-five stores debuted during the year for a total of 128 stores opened during the previous three years. Remarkably, profitability was sustained during this period of prolific growth, as Pacific Sunwear recorded positive net income for 15 consecutive quarters.

Amid the frenzied expansion activity in 1995, the first currents of a movement to fundamentally alter Pacific Sunwear's concept emerged. At a two-and-a-half day executive retreat in May 1995, Pacific Sunwear officials discussed broadening the chain's customer appeal again. The executives who had gathered at Rancho Valencia discussed introducing new types of merchandise into the stores, making the stores bigger to house the new merchandise, and increasing the percentage of private label merchandise within the stores. In the months following the executive retreat, footwear and junior women's apparel began appearing in Pacific Sunwear stores, as the stores themselves became larger. The square footage in new stores was increased 50 percent to 3,000 square feet. With these changes, the company began to stray from its tight focus on white, suburban, teenage males in order to embrace a broader customer base, thereby making the transition from a niche-oriented retailer to a more broadly defined specialty retailer.

As the company maneuvered through this transition--its most profound change since Rayden arrived in 1990--unexpected news took industry pundits and analysts by surprise. On January 30, 1996, Rayden announced his resignation from Pacific Sunwear, sending a shockwave through the financial community that caused the company's stock value to fall 15 percent. Rayden left the company to join Ohio-based women's apparel retailer The Limited, where he was named president of Limited Too, a division that sold casual sportswear for girls. While an executive search firm looked for a replacement for Rayden, Greg Weaver, Pacific Sunwear's chief operating officer, took over as president.

Weaver Era Begins in 1996

Weaver's temporary stewardship of Pacific Sunwear occurred at a critical juncture in the company's history and at a time of great opportunity for astutely managed, young men's apparel retailers. During the previous three years, more than 2,500 young men's stores were closed, as such retailers as Merry-Go-Round, Edison Bros., and Clothestime either exited the business or reduced the size of their chains. Fewer stores left more business for existing retailers to capture, business that Weaver estimated at $2 billion. Enticed by the potential, Weaver was intent on capturing the lion's share of the abandoned business. "Our mission," he said in September 1996, "is to become the dominant, national specialty retailer of teenage apparel, footwear, and accessories." A month after setting this lofty goal, Weaver was named chief executive officer of the company, having, according to Pacific Sunwear's chairman of the board, "demonstrated great success since assuming operational control." The search for Rayden's successor was over; it was Weaver's responsibility to lead the company toward national dominance.

As Weaver set out in pursuit of his objective in September 1996, Pacific Sunwear operated 198 stores in 33 states. By the end of 1996, 30 new stores had been established during the year. This was a relatively slow pace of expansion for the company, limited by the problems associated with its transition into a specialty retailer, but 1996 only proved to be a temporary lull. In 1997, 50 new stores were slated to open and another 50 stores scheduled for 1998, with expansion aided by a stock offering in June 1997 that raised $29 million.

As Pacific Sunwear began fulfilling its expansion goals, opening an average of two new stores each month, the company achieved additional growth in a new way. For the first time in its history, Pacific Sunwear completed an acquisition, purchasing a 15-unit, young men's and junior chain named Good Vibrations for $9.2 million in September 1997. Similar to Pacific Sunwear, Good Vibrations was a regional mall-based retailer of casual young men's apparel, accessories, and footwear, whose annual sales, collected from the company's stores in Florida, amounted to $17 million. Following the acquisition, the Good Vibrations name was retained, with Good Vibrations and Pacific Sunwear stores in many cases operating within the same mall.

Pacific Sunwear broke with tradition in another way in 1997, opening its first non-mall, freestanding store. Located in Greenwich Village, the 6,000-square-foot store was evidence of Weaver's conviction, as expressed to the Daily News Record in September 1997, that Pacific Sunwear "can take this store prototype anywhere in the country." The Greenwich Village store was the first of what was expected to be several Pacific Sunwear units in the lucrative New York City market. Following the debut of the Greenwich Village store, the company began researching other potential store locations in densely populated urban environments, specifically in Chicago and Boston.

As the company entered 1998, it announced plans to expand on another front. In February, Pacific Sunwear revealed its intentions to launch a second retail concept whose merchandise would duplicate Pacific Sunwear merchandise to a very limited extent. Named "d.e.m.o.," the new concept was expected to offer, according to the company, "popular and emerging cross-cultural brands," catering to urban fashion tastes rather than retailing the clothing trends of suburbia. After initial experiments proved positive, Good Vibrations stores were converted to the d.e.m.o. format. A majority of the 15 stores planned for the first wave of expansion were expected to be opened before the 1998 school season, with stores slated for malls in California, Florida, Illinois, Louisiana, New Jersey, New York, and Michigan. Between April and August, 15 d.e.m.o. stores were opened in time for the back-to-school season, recording sufficient success to prompt the company to expand further.

As Pacific Sunwear reached the end of a prodigious ten-year growth period, the company showed no sign of slowing its pace of expansion. In 1999, 108 stores were scheduled to be opened, including the 25 new d.e.m.o. units. To assist in this ambitious expansion, the company launched its first national advertising campaign in February 1999, placing advertisements in the Sports Illustrated swimsuit issue, Teen People magazine, and Seventeen magazine. Said Weaver, according to a February 1999 Business Wire report, "With our aggressive growth plans to add 108 stores in 1999 we felt it was the right time to aggressively step up our marketing efforts." On this note, Pacific Sunwear prepared for the work ahead, intent on becoming the dominant national retailer for the youth of America.

Principal Subsidiaries: Good Vibrations, Inc.

Pacific Sunwear of California, Inc. History

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