California Apparel News

The culture of surf and skate traditionally thrives on easygoing times, yet retailing this iconic West Coast look got tougher this month.

On May 6, Everett, Wash.–based surf and skate retailer Zumiez Inc. filed an initial public offering signaling the company would expand and build 35 more stores in 2005. Zumiez’s chief financial officer, Brenda Morris, declined to say how many of the proposed stores would be built in California, but any move to the state may prove challenging. Just like its freeways, California’s retail surf and skate market is getting more crowded.

From the field’s dominant players, such as Anaheim, Calif.–based Pacific Sunwear, to smaller chains such as Beach Bums, also of Anaheim, many retailers say the time is right to expand by building more stores at a larger square footage. Although the industry is earning some of the highest revenue in its history, $6.52 billion in 2004 sales, according to Leisure Trends Group of Boulder, Colo., observers wonder if the market can absorb all of this growth.

“It’s not always ’if I build it, they will come,’” said Roy Turner, president of the Board Retailers Association, based in Wilmington, N.C. “I’m not a naysayer, I think it can happen. But I wonder if there’s $65 million to $100 million of extra business in the youth market in Southern California, where the retail market is most concentrated.”

Turner voiced concern about rampant retail expansion leading to too much of a good thing. He specifically worried about retailers being stuck with inventories that ultimately outpaced their demand. “Then we have to discount, and no one wins,” Turner said.

Booming demographic

Analysts such as Jim Spring, president of the Leisure Trends Group, believe growth is warranted because the demographic of people most interested in looking like a surfer or a skater is booming. Generation Y, people born between 1979 and 1994, is estimated at 60 million, which is three times greater than the previous Generation X. Spring said the surf and skate industry’s recent success rides on its being able to meet this generation’s aspirations.

“I think a lot of credit needs to go to retailers and manufacturers,” said Spring. “They defined a niche. They know how to merchandise to that niche, and they’re not compromising in what they offer, in innovation, in fashion and in styling.”

Spring said that the surf and skate industry had a growth rate of more than 8 percent in 2004, good for a retail year marked by mixed sales.

Many expect board sports to stay on the collective mind of Generation Y because these sports have been attracting more media attention, as in the feature film Lords of Dogtown, which will be released by Sony Pictures on June 3. The Zumiez IPO filing stated that the market would continue to increase because awareness of board sports has been growing with the broadcast of ESPN’s X Games and snowboarding becoming a medal event in the Winter Olympics.

Leading the pack

The retailer registering the most growth is Pacific Sunwear. The company managed 1,013 stores by the end of the first quarter of this year, one third of the 3,010 stores owned by the largest specialty retailer in the world, Gap Inc. These stores include 754 Pacific Sunwear stores and 173 of the urban-inspired d.e.m.o. stores.

Pacific Sunwear reported they’ll be instituting a larger store format where square footage should grow to 9,000 square feet from 7,000 at their new stores, such as the Pacific Sunwear store in the Galleria at Tyler shopping center in Riverside, Calif., opening in July.

Greg Weaver, Pacific Sunwear’s executive chairman, believes supply will not outpace demand. “Our consistent sales and earnings growth would indicate that has not happened,” he said. “We have, however, said PacSun will cap at approximately 1,000 stores in ’07.We expect d.e.m.o. and our new concept to be the growth past ’07.”

Another surf retail success story is from Ohio. Abercrombie & Fitch opened 84 Hollister & Co. surf-inspired stores in fiscal 2004, and they have experienced heady growth in the last year.The New Albany, Ohio–based company reported Hollister’s net sales increased 71 percent and their comparative store sales rose 21 percent. Sales per square foot in Hollister stores were approximately 135 percent of the sales per square foot of Abercrombie & Fitch stores in the same malls in 2004, according to Abercrombie & Fitch SEC documents.

Quiksilver Inc.’s stake in retail is also increasing. The Huntington Beach, Calif.–based company owns 94 stores in the United States and built several flagship stores last year in high-profile places such as New York’s Times Square, Downtown Disney in Anaheim, Calif., Santa Monica’s Third Street Promenade and San Diego’s Gaslamp District. Gregg Solomon, Quiksilver’s senior vice president of retail, said he hopes retail will be 25 percent of the company’s total business, but that doesn’t necessarily entail a real estate expansion. “We’re more about hitting our yearly growth targets in terms of volume increase and profitability rather than how many stores we open,” he said.

Billabong International LTD. opened a store in New York’s Times Square and Santa Cruz, Calif., this year and purchased surf shop chains such as Beach Access in October 2004 and Honolua Trading Company in December 2003.Rip Curl will open a store in the Irvine Spectrum in Irvine, Calif., and also debuted a major store in Santa Monica’s Third Street Promenade in December 2004.

Saturating the coasts

Analyst Spring said the surf and skate industry is still small and has yet to seriously branch out in the South and the Midwest.

Yet business on America’s West and East coasts is a different story.Turner said 10 surf shops do business in his hometown of Wilmington, N.C., a city with a moderate population of 200,000. “Even in a small location, saturation is getting close,” Turner said. “If two or three more chains come into the area, would it come at the expense of already existing retailers? That’s not industry growth.”

Even with these concerns, Turner said the forecast for the surf and skate industry and its retailers looks the brightest in its history. “The time is right for picking now,” Turner said.