Zumiez Inc. Q1 2009 Financial Summary
Business Context and Reporting Period
This Form 10-Q covers the 13-week period ended May 2, 2009. Zumiez Inc. is a specialty retailer of action sports apparel, footwear, equipment, and accessories, operating 358 stores across 31 states as of the period end. The company targets young men and women (ages 12-24) interested in skateboarding, surfing, snowboarding, and motocross.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $76.8 million | $78.7 million |
| Gross Profit | $21.9 million | $24.6 million |
| Gross Margin | 28.5% | 31.2% |
| Operating Loss | $(3.4) million | $1.6 million (Profit) |
| Net Loss | $(1.7) million | $1.4 million (Income) |
| Diluted EPS | $(0.06) | $0.05 |
| Cash & Equivalents | $20.3 million | $7.6 million |
| Marketable Securities | $62.5 million | $47.3 million |
| Operating Cash Flow | $8.9 million | $8.3 million |
Liquidity & Debt: The company holds no outstanding borrowings under its $25.0 million revolving credit facility. However, $1.8 million in letters of credit are outstanding. Total liabilities were $66.0 million, with shareholders' equity at $177.5 million.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 2.4% year-over-year. Comparable store sales dropped significantly by 15.3%, driven by fewer transactions and declines in apparel and hardgoods sales, partially offset by footwear growth.
- Margin Compression: Gross margin fell 270 basis points to 28.5%, primarily due to increased store occupancy costs.
- Expense Growth: Selling, General, and Administrative (SG&A) expenses rose 10.5% to $25.3 million. This increase was driven by the operational costs of 52 new stores opened since the prior year period and increased administrative support.
- Profitability Shift: The company swung from an operating profit of $1.6 million in Q1 2008 to an operating loss of $3.4 million in Q1 2009.
Outlook, Risks, and Contingencies
- Guidance: Management expects capital expenditures for fiscal 2009 to range between $23.0 million and $24.0 million, primarily for 36 planned new store openings. They anticipate cash flows from operations and their credit facility will meet requirements for the next 12 months.
- Auction Rate Securities: The company holds $1.7 million in auction rate securities (Level 3 assets) which have failed to sell in recent auctions due to credit market illiquidity. A temporary impairment charge of $0.3 million was recorded. One security redeemed at par subsequent to the period end; the remaining security is held until the next auction in March 2010.
- Legal Proceedings: A securities class action lawsuit filed in 2007 was dismissed with prejudice in March 2009. Two employment-related class actions regarding overtime and wage statements in California are pending; potential exposure for one is estimated between $0 and $600,000, while the other is currently indeterminable.
- Risk Factors: Key risks include the macroeconomic downturn affecting discretionary spending, the inability to open new stores as planned, and the potential for goodwill impairment if stock prices or operating results decline further.
Investor Verification Checklist
- Verify the sustainability of the 15.3% decline in comparable store sales and its impact on future quarters.
- Monitor the liquidity status of the $1.7 million auction rate securities and potential for further impairment charges.
- Assess the company's ability to meet the "minimum net income after taxes of $1.00" covenant in its credit agreement given the current net loss.
- Review the progress of pending California employment litigation and potential settlement costs.
- Confirm the pace of new store openings against the planned 36 stores for fiscal 2009 to ensure capital expenditure forecasts remain accurate.