PacSun Prescribes Demo Diet

by MR Magazine Staff Feb 07, 2007

NEW YORK – Pacific Sunwear plans to close 74 unprofitable Demo stores, about one-third of the total, beginning during the first half of the 2007 fiscal year. It also will convert another 20 to 25 to a new prototype design.

Sally Frame Kasaks, interim chief executive of PacSun, estimated that the 74 stores being closed had aggregate pre-tax operating losses of $9m during fiscal 2006. She cited mall demographics, store layouts and store economics among the reasons for their poor performance and noted, “We believe that Demo remains a viable concept.”

She continued, “Exiting the stores now will allow us to focus our efforts on our better performing locations which we believe will improve our future financial results.”

As a result of the closures, PacSun will take a pre-tax non-cash charge of between US$25m and $27m, or between 22 and 24 cents per share after taxes, during the fourth quarter of 2006, which has just concluded, and cash charges of approximately $10m to $15m attributable to lease termination, severance and other related costs during the new fiscal year.

The Anaheim, California-based youth specialty retailer also reported Tuesday that its same-store sales for the five-week January period were down 7.7%, with PacSun down 7.3% and Demo off 9.5%.

The combination of weak sales and the fourth-quarter charge led PacSun to lower its guidance for the just-concluded period. Excluding the Demo-related impairment charge, earnings per share are anticipated to land between 36 and 38 cents a diluted share, putting year-end EPS, again exclusive of charges, at 78 to 80 cents a share.

Hilco Merchant Resources and Hilco Real Estate have been retained to manage the closures.

PacSun currently operates 849 PacSun stores, 116 PacSun Outlets, 225 Demo stores and 9 One Thousand Steps units for a total of 1,199. The Demo stores have leaned more towards an emphasis on urban-influenced sportswear while PacSun has focused on a more casual California lifestyle look.

With the announcement about Demo and disclosure of January results, PacSun also reported its revenues for the fourth quarter and year. For the 53-week year, sales were $1.45bn versus $1.39bn during the 52-week prior year, an increase of 4%. However, same-store sales declined 4.7% during the period. Same-store sales were off 4.2% at PacSun and down 7.9% at Demo.

Revenues for the 14-week quarter were $458.2m versus $425m during the 13-week prior-year quarter. Same-store sales were down 4.3%, off 3.4% and 9.6% at PacSun and Demo, respectively.