Chasing the Demographics; Pacific Sunware Focuses on Youth

There’s got a way to make this story exciting. Oh the injustice of making me write about a company with a strong balance sheet, growing revenue and earnings, no meaningful litigation, and an experienced management team with a clear strategic focus. I’ve got to stir up some drama somewhere if there’s to be any hope that people will make it all the way to the end of the article.

The drama is in the execution of the strategy. Pacific Sunware started out as the store where young, white males could get the trendy, casual brands they wanted. Now, twenty two percent of their sales are to females. The new d.e.m.o. stores are focusing on cross cultural trends. Pacific Sunware sells snowboard clothing. They are selling their own private label brands.
Can they expand their target market, but keep their focus and their niche? Can they keep the loyalty of a notoriously finicky customer group? Inquiring minds want to know. But first, the boring stuff.
Pacific Sunware: A Snapshot
As of the fiscal year ended January 31, 1999, Pacific Sunware (PacSun, as they seem to want to be known) had 342 stores in 42 states. Their customers are young men, and increasingly women, between the ages of 12 to 22 who prefer a casual look. Revenues have grown from $85 million in 1994 to $321 million for the year ended January 31, 1999. Net income has climbed from $3.9 to $23.5 million during the same period. They had 4,058 employees of whom 3,822 were store employees. Of the store employees 2,700 were part time. Management is mostly in their 40s. Most of the team has been with the company since 1994 or before.
PacSun by the Numbers
At May 2, 1999, the balance sheet was, well, boring. There’s eleven million dollars of cash and a current ratio of 3.16. There’s basically no long-term debt, and the total debt to equity ratio is 0.25. The piece of information I would like but don’t have is a way to judge the quality of the forty six million dollars of inventory. Obviously, when you’re selling trendy goods to young people, you’d better be right on your inventory selection. On the other hand, even if a chunk of that inventory were obsolete, this balance sheet would still be strong.
One caveat on evaluating the balance sheet of any fast growing retail business- comparisons from one balance sheet date to the next are difficult due to both growth and seasonality. Ratios will tell you the strength of the balance sheet, but getting a handle on operational efficiencies using the balance sheet is tough when, for example, inventory goes up a bunch, but so did the number of stores.
For the thirteen weeks ending May 2, 1999 sales were $81.4 million, up 33 percent from the same period the previous year. Income grew forty percent to $4.04 million. Gross profit margins were essentially constant in these two periods at 32.1%.
Similar trends can be seen in comparing the two years ending January 31, 1999 and February 1, 1998. Sales grew 41.4% to $321 million. Net income was up 43.7% to $23.5 million. Gross margin fell two tenths of a percent to 33.7. Operating expenses as a percentage of sales fell from 22.5 to 21.9 percent, largely as a result of the rapid growth in sales.
Also important to note is that the average inventory between these two dates was $37.3 million. They did $321 million in sales. So they turned their inventory 8.6 times, and that is a great place to move into how the PacSun’s market strategy and how it dovetails with their financial and operational strategies.
Setting the Stage
PacSun either figured out or fell into the fact that it’s not just surfers that buy surf wear, snowboarders that buy snowboard clothing and skateboarders that buy skate clothing anymore. The specialty markets are crossing over each other. Fashion and lifestyle are as important as participation in the sport that originally spawned the apparel. If it were just surfers who wore surf apparel, the company wouldn’t be planning to increase its square footage by forty two percent this fiscal year.
So Pacific Sunwear has positioned itself, it hopes, at the cross roads where everybody passes through but nobody is confused or put off by seeing surf/skate/snow in one place. The theory is that you aren’t selling out anymore as long as you’ve got the cool stuff to sell.
Trouble is that somebody keeps changing the road signs at the crossroad. Fashions come and go as fast as commemorative postage stamps. Faster, probably. How does Pacific Sunwear hope to keep its road map accurate?
Real Marketing!
It’s my personal observation that most action sports companies think advertising and promotional tactics are marketing. Pacific Sunwear doesn’t seem to suffer from that delusion. Chief Financial Officer Carl Womack described the two-hour focus groups they do each year in half a dozen cities and have been doing for seven or eight years. He explained that their on-line inventory reporting allowed them to see what was selling and what wasn’t on a daily basis.
“Not only does this allow us to manage our inventory on a day to day basis, but it helps us anticipate trends so we can respond on a timely basis.”
He emphasized the close relationships they had with suppliers as a critical source of market trend data. They share ideas regarding fashion trends and merchandise self through with their vendors. “We always pay our suppliers on time- sometimes even early if they need it,” he indicated. That ought to go a long way towards creating good working relationships.
They experiment with new colors, styles and items by ordering small number (maybe twelve dozen) and seeing how they sell.
To sum it all up, it seems that marketing (that is, figuring out what the customer wants) is institutionalized at Pacific Sunware. Everybody thinks about it all the time and is required, as described below, to react to what they learn.
Running the Business
So PacSun’s success depends on their ability to respond to the dynamic fashion whims of young people aged twelve to twenty-two. How do they run their business to accomplish that?
All the stores of a given class are the same in terms of size, fixtures and inventory. Nobody has to do a study to figure out how build out and stock a new store. It’s a good thing, since they plan to open 108 new stores in fiscal 1999. Sixty-seven are planned to be Pacific Sunwear stores, sixteen Outlet stores, and twenty-five d.e.m.o. stores.
Though stores have the same inventory selection, the timing of inventory receipt will vary according to store locations. It gets colder some places earlier in the year than in others.
The company manages inventory through what CFO Womack called “permanent markdowns.” Every two weeks, based on the daily sales data, the store managers get to work to find the markdowns already downloaded into their store registers. All they have to do is put up the “On Sale!” signs. No slow moving inventory is allowed to linger in the hope that it will suddenly become hot. The inventory turns quickly, and the customer doesn’t wait for big sales promotion before coming into the store.
Stores have daily, weekly and monthly sales goals against which performance is measured. Feedback is immediate, as are bonuses for meeting monthly goals. Yet the store managers have no involvement in the actual selection of merchandise, though of course their input and ideas are solicited.
So what’s going on here? Pacific Sunwear’s systems and operating procedures dovetail nicely with their marketing imperatives. Need to have the right inventory? Better have the systems to know what selling so you can move what’s not. Want to grow quickly? The stores better be more or less the same. Want to be on top of trends? Better get along with your suppliers. The financial results are good expense control, minimizing writedowns and inventory levels, and high margins.  And a strong bottom-line.
Notice how all the pieces work together. There seems to be a company wide strategic focus that makes it immediately clear to management when something is “right” and when it is “wrong.” I’m usually not this gah-gah over a company. What could go wrong?
I’d focus on three things. First, management could lose touch with trends. Age does that no matter how good your systems and marketing are. Second, defections from a management team that has been together this long could be a problem. I hope the golden handcuffs are reinforced with titanium, and I hope the district and regional managers have a lot of input. Finally, fast growth can cause problems all by itself, but that’s a risk it looks like we’ve going to have to live with.