Pacific Sunwear Of California (PSUN) - Description of business

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Item 1. Business

Pacific Sunwear of California, Inc. (together with its wholly owned subsidiaries, the “Company,” “Registrant,” “we,” “us,” or “our”) is a leading specialty retailer of everyday casual apparel, accessories and footwear designed to meet the needs of active teens and young adults.

We operate three nationwide, primarily mall-based chains of retail stores under the names “Pacific Sunwear” (also “PacSun”), “Pacific Sunwear Outlet,” and “d.e.m.o.” PacSun and PacSun Outlet stores specialize in board-sport inspired casual apparel, footwear and related accessories catering to teenagers and young adults. d.e.m.o. specializes in fashion-focused streetwear, including casual apparel, footwear and related accessories catering to teenagers and young adults. In addition, we operate two websites that sell PacSun and d.e.m.o. merchandise online, respectively, provide content and community for our target customers and provide investor relations information about us. We will begin operating a new mall-based chain of specialty retail footwear stores under the name “One Thousand Steps” during April 2006.

The Company, a California corporation, was incorporated in August 1982. As of the dates presented, we leased and operated the following number of stores among all 50 states and Puerto Rico:

		January 28, 2006								March 24, 2006
		# of Stores				Square Footage				# of Stores				Square Footage
PacSun			811				2,994,945				814				3,019,184
Outlet			96				393,565				96				393,008
d.e.m.o.			198				542,481				197				542,344
Total			1,105				3,930,991				1,107				3,954,536

Our executive offices are located at 3450 East Miraloma Avenue, Anaheim, California, 92806; the telephone number is (714) 414-4000; and our internet addresses are www.pacsun.com and www.demostores.com . Through our websites, we make available free of charge, as soon as reasonably practicable after such information has been filed or furnished to the Securities and Exchange Commission (the “Commission”), our annual reports on Form  10-K, quarterly reports on Form  10-Q, current reports on Form  8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. Fiscal year-end dates for all periods presented or discussed herein are as follows:

Fiscal Year	Year-End Date			# of Weeks
2006	February 3, 2007			53
2005	January 28, 2006			52
2004	January 29, 2005			52
2003	January 31, 2004			52
2002	February 1, 2003			52
2001	February 2, 2002			52

Our Mission and Strategies

Our mission is to be the leading lifestyle retailer of casual fashion apparel, footwear and accessories for teens and young adults. Our target customers are young men and women between the ages of 12 and 24. We believe our customers want to stay current with, or ahead of, fashion trends and continually seek newness in their everyday wear. We offer a complete wardrobe selection representing fashion trends considered timely by our target customers. We believe the following items are the key strategic elements necessary to achieve our mission:

Offer Popular Name Brands Supplemented by Proprietary Brands. In each of our store formats, we offer a carefully developed selection of popular name brands supplemented by our own proprietary brands, with the goal of being seen by our teenage and young adult customers as the source for wardrobe choices appropriate to their lifestyle. We believe

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that our merchandising strategy differentiates our stores from competitors who may offer 100% proprietary brands or seek to serve a wider customer base and age range. See “Merchandising.”

Promote the PacSun and d.e.m.o. Brand Images. We promote the PacSun and d.e.m.o. brands primarily through national print advertising in major magazines that target teens and young adults. We also maintain a proprietary brand credit card through a third party to promote the PacSun brand image and lifestyle.

Actively Manage Merchandise Trends. We do not attempt to dictate fashion, but instead devote considerable effort to identifying emerging fashion trends and brand names. We use focus groups, listen to our customers and store employees, monitor sell-through trends, test small quantities of new merchandise in a limited number of stores, and maintain close domestic and international sourcing relationships. We believe that these practices enhance our ability to identify and respond to emerging fashion trends and brand names as well as develop new proprietary brand styles in order to capitalize on existing fashion trends.

Maintain Strong Vendor Relationships. We view our vendor relationships as important to our success and we promote frequent personal interaction with our vendors. We believe many of our vendors view PacSun, PacSun Outlet and d.e.m.o. stores as important distribution channels due to our nationwide presence and ability to introduce products to a broad audience. We tend to be one of the largest, if not the largest, customers for many of our vendors and we work closely with them to respond to emerging fashion trends and to obtain PacSun and d.e.m.o. “exclusives,” which are products that cannot be found at any other retailer.

Provide Attentive Customer Service. We are committed to offering courteous, professional and non-intrusive customer service. We strive to give our young customers the same level of respect that is generally given to adult customers at other retail stores, and to provide friendly and informed customer service for parents. Responding to the expressed preferences of our customers, we train our employees to greet each customer, to give prompt and courteous assistance when asked, and to thank customers after purchases are made, but to refrain from giving extensive unsolicited advice. PacSun and PacSun Outlet stores display large assortments of name brands and proprietary brands, merchandised by category. d.e.m.o. merchandise is displayed by brand accompanied by vendor logo signage. Additionally, the stores provide a friendly and social atmosphere for teens with appropriate background music, while also providing a comfortable environment for parents and other adults. We believe the combination of our attentive customer service and unique store environments is key to our success.

Continue to Expand the Number of Stores. We intend to continue our store growth through the opening of new stores under our three existing formats as well as through the launch of One Thousand Steps. We believe the One Thousand Steps concept can reach 600-800 stores in the future. We may also acquire an existing retail chain. In each of the last three fiscal years in the period ended January 28, 2006, we opened 115, 113, and 86 net new stores, respectively. See “Store Expansion” within the “Stores” section of this document for further details regarding plans for fiscal 2006.

Offer Merchandise for Sale Over the Internet. We sell merchandise over the internet at www.pacsun.com and www.demostores.com . The websites offer a selection of the same merchandise carried in our stores. We maintain a substantial database of e-mail names that we use for marketing purposes. We also advertise our websites as a shopping destination on certain internet portals and search engines and market our websites in our stores using in-store signage, merchandise bags and receipts. Our internet strategy benefits from the nationwide retail presence of our stores, the strong brand recognition of PacSun and d.e.m.o., a loyal and internet-savvy customer base, the participation of our key brands and the ability to return merchandise to our stores.

Merchandising

Merchandise. PacSun, PacSun Outlet and d.e.m.o. stores offer a broad selection of casual apparel, related accessories and footwear for young men (“guys”) and young women (“girls”), with the goal of being viewed by our customers

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as the dominant retailer for their lifestyle. The following table sets forth our merchandise assortment as a percentage of net sales for the most recent three fiscal years:

		Total Company
		2005				2004				2003
Guys apparel			36%				37%				38%
Girls apparel			31%				30%				31%
Accessories			19%				19%				19%
Footwear			14%				14%				12%
Total			100%				100%				100%

		PacSun and Outlet												d.e.m.o.
		2005				2004				2003				2005				2004				2003
Guys apparel			35%				35%				36%				45%				51%				63%
Girls apparel			29%				29%				31%				38%				35%				27%
Accessories			20%				20%				20%				13%				12%				10%
Footwear			16%				16%				13%				4%				2%				n/a
Total			100%				100%				100%				100%				100%				100%

We offer many name brands best known by our target customers. PacSun offers a wide selection of well-known board-sport inspired name brands, such as Quiksilver/ Roxy/ DC Shoes, Billabong/ Element, Hurley and Volcom. d.e.m.o. offers well-known name brands sought by its target customers, such as Ecko, Phat Farm/ Baby Phat, Enyce, Rocawear, Sean John, Akademiks and Apple Bottoms. In addition, we continuously add and support up-and-coming new brands in both PacSun and d.e.m.o. During fiscal 2005, Quiksilver (which incorporates the Quiksilver, Roxy, and DC Shoes brands) accounted for 10.4% of total net sales and Billabong (which incorporates both Billabong and Element brands) accounted for 10.3% of total net sales. No other individual branded vendor accounted for more than 6% of total net sales during fiscal 2005.

We supplement our name brand offerings with our own proprietary brands. Proprietary brands provide us an opportunity to broaden our customer base by providing merchandise of comparable quality to brand name merchandise at lower prices, to capitalize on emerging fashion trends when branded merchandise is not available in sufficient quantities, and to exercise a greater degree of control over the flow of our merchandise. Our own product design group, in collaboration with our buying staff, designs our proprietary brand merchandise. We have a sourcing group that oversees the manufacture and delivery of our proprietary brand merchandise, with manufacturing contracted both domestically and internationally. Proprietary brand merchandise sales accounted for approximately 31%, 30%, and 32% of total net sales in each of fiscal 2005, 2004 and 2003, respectively. For fiscal 2005, proprietary brand merchandise sales accounted for 34% of total PacSun/ Outlet net sales and 16% of total d.e.m.o. net sales.

Vendor and Contract Manufacturer Relationships. We maintain strong and interactive relationships with our vendors, many of whose philosophies of controlled distribution and merchandise development are consistent with our own strategy. We generally purchase merchandise from vendors who prefer distributing through specialty retailers, small boutiques and, in some cases, better department stores, rather than distributing their merchandise through mass-market channels.

To encourage the design and development of new merchandise, we frequently share ideas regarding fashion trends and merchandise sell-through information with our vendors. We also suggest merchandise design and fabrication to certain vendors. We encourage the development of new vendor relationships by attending trade shows and inviting potential new vendors to make presentations of their merchandise to our buying staff.

We have cultivated our proprietary brand sources with a view toward high-quality merchandise, production reliability and consistency of fit. We source our proprietary brand merchandise both domestically and internationally in order to

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benefit from the lower costs associated with foreign manufacturing and the shorter lead times associated with domestic manufacturing.

Purchasing, Allocation and Distribution. Our merchandising department oversees the purchasing and allocation of our merchandise. Our buyers are responsible for reviewing branded merchandise lines from new and existing vendors, identifying emerging fashion trends, and selecting branded and proprietary brand merchandise styles in quantities, colors and sizes to meet inventory levels established by Company management. Our planning and allocation department is responsible for management of inventory levels by store and by class, allocation of merchandise to stores and inventory replenishment based upon information generated by our merchandise management information systems. These systems provide the planning department with current inventory levels at each store and for the Company as a whole, as well as current selling history within each store by merchandise classification and by style. See “Information Systems.”

All merchandise is delivered to our distribution facility in Anaheim, California, where it is inspected, received into our computer system, allocated to stores, ticketed when necessary, and boxed for distribution to our stores or packaged for delivery to our internet customers. Each store is typically shipped merchandise three to five times a week, providing it with a steady flow of new merchandise. We use a national and a regional small package carrier to ship merchandise to our stores and internet customers. We may occasionally use airfreight to ship merchandise to stores during peak selling periods.

Stores

Locations. We operate stores in each of the 50 states and Puerto Rico. For a geographical breakdown of stores by state for each of our store concepts, see