Zumiez Inc. 10-Q Summary: Quarter Ended October 31, 2009
Business Context and Reporting Period
Zumiez Inc. is a specialty retailer of action sports apparel, footwear, equipment, and accessories. As of October 31, 2009, the company operated 378 stores across 35 states, primarily in shopping malls, targeting young men and women aged 12 to 24. This filing covers the quarterly period ended October 31, 2009 (13 weeks) and the nine-month period ended October 31, 2009 (39 weeks).
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2009 | Nine Months Ended Oct 31, 2009 |
|---|---|---|
| Net Sales | $113.2 million | $275.2 million |
| Gross Profit | $40.1 million (35.4% margin) | $86.6 million (31.5% margin) |
| Operating Profit (Loss) | $8.4 million (7.4% margin) | ($0.3 million) (-0.1% margin) |
| Net Income | $5.1 million | $0.3 million |
| Diluted EPS | $0.17 | $0.01 |
| Cash and Cash Equivalents | $10.5 million | $10.5 million (Balance Sheet) |
| Marketable Securities | $72.1 million | $72.1 million (Balance Sheet) |
| Inventory | $76.4 million | $76.4 million (Balance Sheet) |
| Total Debt | $0 (No borrowings outstanding) | $0 |
| Working Capital | $121.2 million | $121.2 million |
Note: All figures in millions unless otherwise noted. Nine-month operating loss was $0.3 million.
Material Changes vs. Prior Period
- Revenue: Net sales increased 0.8% in the quarter but decreased 2.8% for the nine-month period compared to the prior year. Comparable store sales declined 8.0% in the quarter and 13.6% for the nine months, driven by fewer transactions across all regions.
- Profitability: Operating profit decreased $2.0 million in the quarter and swung to a loss of $0.3 million for the nine months (compared to $15.9 million profit in the prior year). This was primarily due to increased SG&A expenses and lower gross margins.
- Expenses: SG&A expenses increased 9.9% in the quarter and 11.5% for the nine months. Increases were driven by costs associated with 39 new store openings, a $1.3 million legal settlement accrual, and $0.7 million in store impairment charges.
- Liquidity: Cash and cash equivalents decreased from $33.1 million to $10.5 million over the nine-month period, largely due to increased inventory levels and capital expenditures.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to spend approximately $17.0 to $19.0 million on capital expenditures for fiscal 2009, primarily for new store openings and infrastructure.
- Liquidity Outlook: The company expects cash flows from operations and its $25.0 million revolving credit facility (currently unutilized) to be sufficient for the next 12 months.
- Impairment Charges: The company recorded a $0.7 million non-cash impairment charge for seven underperforming stores during the nine-month period. Future impairments may occur if store cash flows do not meet forecasts.
- Legal Contingencies: A class action lawsuit regarding overtime wages (Evan Johnson) was settled for approximately $1.3 million. Another class action (Chandra Berg) regarding store manager wages is ongoing, with potential losses currently indeterminable.
- Investment Risk: The company holds $0.8 million in auction rate securities classified as long-term due to market illiquidity. While currently considered a temporary impairment, further declines in fair value could impact earnings.
Key Facts for Investor Verification
- Comparable Store Sales Decline: Verify the sustainability of the 13.6% decline in comparable store sales over nine months and the impact of the macroeconomic environment on discretionary spending.
- Inventory Levels: Inventory increased significantly to $76.4 million; monitor for potential future markdowns or write-downs if sales do not recover.
- Store Impairments: Assess the risk of additional non-cash impairment charges given the company's history of writing down underperforming store assets.
- Auction Rate Securities: Confirm the status of the $0.8 million auction rate security investment and the likelihood of liquidity returning by the March 2010 auction date.
- Legal Settlements: Track the finalization of the $1.3 million Johnson settlement and the potential exposure from the ongoing Berg litigation.