PacSun Hopes to Grab More Hip (S)Hoppers

Pacific Sunwear of California Inc. is expanding from the sea to the streets.

The Anaheim-based retailer, which built its reputation on selling apparel to surfers, said Wednesday that it would open 87 new stores this year while closing 12 outlets. The expansion is set to include at least 10 more d.e.m.o. stores, a chain that peddles brands such as Ecko, Enyce and Baby Phat mainly to suburban youths who are going for an urban look.

D.e.m.o.’s move reflects the mushrooming popularity of clothes inspired by rap and hip-hop music, analysts say.

“It’s building every year,” said Jeffrey Klinefelter, who is with U.S. Bancorp Piper Jaffray. “You see Eminem, a musician and rapper, coming up with his own line, J.Lo coming up with her own line. We’re monitoring very closely to see just how big this could become.”

Currently, the company has 686 PacSun stores -- which carry surf and skate brands, such as Quiksilver and Billabong -- and 107 d.e.m.o. stores nationwide. Although both mall-based chains have been performing well recently, PacSun faces strong competition, including from Abercrombie & Fitch Co.’s beach-themed Hollister stores.

Conversely, there are few mall-based specialty retailers jostling with d.e.m.o. in the hip-hop segment. D.e.m.o.’s main rival, Long Beach-based Mr. Rags, has been shrinking. It filed for Chapter 11 bankruptcy protection in January and said it would close 14 of its 114 stores.

In another advantage for d.e.m.o., youths who favor urban styles tend to buy “hookups,” baggy two-piece warmups and other outfits of tops, bottoms and jackets of the same brand that are meant to be worn together. That drives up the tally on the sales receipt, analysts say.

Since its launch in 1998 with half a dozen stores, the chain has managed to find wide appeal among youths, especially suburbanites, Chief Financial Officer Carl Womack said. “It’s Caucasian kids, Asian kids, African-American kids,” he said. “It’s all kinds of kids.”

Pacific Sunwear said that over the next few years, d.e.m.o.’s size could double to at least 200 stores.

Still, not all observers are convinced that d.e.m.o. is a slam-dunk. “I’m not sold on the concept as yet,” said Robert Buchanan, an analyst with A.G. Edwards & Sons. Buchanan said he would need to see more consistent comparable-store sales gains and evidence that the chain can show a strong return on investment.

Womack said d.e.m.o.’s comparable-store sales have risen 17% over the last nine months. He declined to comment on the chain’s return on investment.

Buchanan contends that d.e.m.o., which has 21 stores in California, has strong competition from department stores.

And because hip-hop styles tend to shift quickly, the d.e.m.o. business could prove “more treacherous” than Pacific Sunwear’s surf wear trade, said Richard Jaffe, an analyst with UBS Warburg.

“The consumer is riding the next trend pretty quickly,” he added. “It’s all about what was in the video yesterday.”

Investors were not impressed with Pacific Sunwear’s Wednesday announcement. Its stock closed at $17.82, down 38 cents, in Nasdaq trading. The stock has gained 12% in the last year.

Overall, Pacific Sunwear has been one of retail’s strongest performers in recent months, reaping solid sales during the holiday season, while many others took a whipping.

This month, the retailer said its January same-store sales rose 20%, well above analysts’ estimates. It also said it expected to earn 44 cents a share in its fiscal fourth quarter ended Feb. 1, which would be a 52% increase over the year-earlier period.

The company is scheduled to release earnings Monday.

Womack said total net investment for all 2003 store openings would be about $5 million, including inventory. He declined to say what the effect would be on earnings.

For the year just ended, the consensus of analysts tracked by Thomson First Call is for PacSun to earn 97 cents a share, a 59% increase over the previous year. D.e.m.o. remains a small part of the firm’s base, representing about 10% of its overall sales of $846 million last year.

In many ways, changes at d.e.m.o. mirror the company’s experience with PacSun. Both chains, noted Womack, have found that business has boomed when they’ve moved beyond catering just to guys and started stitching apparel for young women, who tend to be much heartier shoppers.