Pacific Sunwear of California (NDAQ:PSUN) announced that it has hired Financo Inc. as its financial advisor to explore strategic alternatives for its demo chain of stores. The company said that it would explore alternatives for its demo stores, which sells urban-inspired clothing, and close its One Thousand Steps shoe boutiques. Shares in the company have risen more than eight percent since the original announcement as shareholders applauded the move.

Wall Street has complained for years that the demo stores were a drain on profits at Pacific Sunwear. The 154 demo stores and 9 One Thousand Steps stores combined for form a pre-tax operating loss of $21 million in the first three quarters of fiscal 2007. The demo stores saw its same-store sales decline more than 15% on top of a 17% drop last month. Many investors and analysts believed it was time just to dump the chain.

Pacific Sunwear is now looking to focus on turning around its PacSun change instead of trying to half-heartedly enter any new markets. The PacSun stores posted a 2.7% same-store growth number that outperformed many other teen-orientated retailers like American Eagle and Gap, which reported negative same-store sales for the quarter. The sale of these two chains should provide the company with ample cash to fund a turnaround to boost profitability even more.

Pacific Sunwear may also be a bargain with a price-to-sales ratio of just 0.76, which is less than half that of its competitors. The company's 2.26x book value is also an attractive valuation given that management has taken action to unlock value through the sale of these two chains. If the company can work to turn itself around and swing to a profit on stronger earnings, then this stock could be worth substantially more than it is now - and the sale of these two chains is a step in the right direction.

In the end, Pacific Sunwear still has a long way to go before it can become a successful apparel retailer. Its operating performance is has been very poor while its weak cash situation raises concerns about its outlook. Meanwhile, the company is experiencing very poor top and bottom line growth. This has created a relatively low valuation for the company that could become attractive if it is able to successfully turnaround its PacSun business. Combined, these factors make PSUN a stock worth watching!

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