Zumiez Inc. — Q2 FY2021 Form 10-Q
Business context and period. The quarter was the 13 weeks ended July 31, 2021; the six-month period was the 26 weeks ended that date. Zumiez operates specialty retail and ecommerce businesses under Zumiez, Blue Tomato and Fast Times. It had 725 stores across the U.S., Canada, Europe and Australia. Comparisons with 2020 are significantly affected by pandemic-related store closures: stores were open 96.3% of possible days in Q2 2021 versus 73.4% in Q2 2020.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First six months 2021 | First six months 2020 |
|---|---|---|---|---|
| Net sales | $268.7 million | $250.4 million | $547.7 million | $388.2 million |
| Gross profit / margin | $105.0 million / 39.1% | $90.9 million / 36.3% | $208.1 million / 38.0% | $114.6 million / 29.5% |
| Operating profit / margin | $32.0 million / 11.9% | $33.1 million / 13.2% | $66.2 million / 12.1% | $5.3 million / 1.4% |
| Net income | $24.0 million | $25.4 million | $50.4 million | $4.3 million |
| Diluted EPS | $0.94 | $1.01 | $1.96 | $0.17 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $52.1 million | $62.0 million |
- Q2 sales increased 7.3%; management attributed growth to reopened stores, response to current trends and continued domestic economic stimulus. Transactions increased, while dollars per transaction declined. Sales growth was led by men's clothing, accessories and footwear.
- Q2 gross margin expanded 280 basis points, helped by product margin, lower web shipping costs and reduced shrinkage. SG&A rose 26.5% to $73.0 million, increasing to 27.2% of sales from 23.1%; higher store wages, a legal settlement, corporate costs and incentive compensation contributed. Operating profit and net income consequently fell despite sales growth.
- For the first six months, sales rose 41.1% and net income increased substantially from the pandemic-affected prior-year period. Gross margin improved 850 basis points, principally from store-occupancy leverage, product margin and web fulfillment/shipping costs. SG&A as a share of sales declined 230 basis points.
- Six-month cash from operations was $52.1 million, down from $62.0 million. Investing used $43.1 million, including net purchases of marketable securities and capital expenditures; financing used $8.6 million, including share repurchases.
Financial position and liquidity
- At July 31, cash and cash equivalents were $74.2 million and marketable securities were $337.8 million, or approximately $412.0 million combined. Total current assets were $597.8 million; total liabilities were $436.4 million.
- No borrowings were outstanding under the $35 million Wells Fargo revolving facility or the UBS letter-of-credit facility. The Wells Fargo facility was scheduled to mature December 7, 2021. The company said available liquidity and operating cash flows were expected to cover foreseeable operating needs and planned capital expenditures for at least 12 months.
- Operating lease liabilities totaled $288.9 million in present value, including $65.8 million current and $223.0 million long-term. The company had $270.9 million in merchandise purchase orders, generally cancellable before shipment, with exceptions for certain orders.
- Operating cash flow included working-capital demands, notably a $15.4 million inventory increase. Management said prior-year cash flow benefited from $41.5 million of cash deferrals, including landlord payments, vendor terms and payroll taxes.
Outlook, commentary, risks and unusual items
- No full-year sales or earnings guidance is stated. Management expected FY2021 capital expenditures of approximately $22 million to $24 million and remained on track to open approximately 25 stores.
- A $2.8 million estimated settlement of a California wage-and-hour class action was recorded in Q2 SG&A; the resolution remained subject to court approval. Six-month impairment charges on operating lease right-of-use assets were $2.1 million.
- Zumiez repurchased 247,000 shares for $10.9 million during the first six months at an average $44.21 per share. Approximately $89.1 million remained under its $100 million authorization at July 31, 2021.
- COVID-19-related store closures, supply-chain disruption and changes in consumer spending remain material uncertainties. Other disclosed risks include fashion and inventory misjudgments, competition, freight and labor cost increases, foreign currency movements, seasonal volatility, and cybersecurity or systems disruption. Management cautioned that interim results are seasonal and not necessarily indicative of the full year.
- Disclosure controls were assessed as effective at July 31, 2021; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- How sales and margins perform against less distorted comparisons as pandemic-related reopening effects and economic stimulus fade.
- Whether higher wages, freight, occupancy and other operating costs pressure margins, and how inventory levels and merchandise availability develop.
- Status and terms of the $2.8 million class-action settlement, including court approval.
- Renewal or replacement of the Wells Fargo credit facility before its December 2021 maturity.
- Progress on planned store openings and capital expenditures, and the cash impact of lease obligations and purchase commitments.