Zumiez Inc. — Q2 Fiscal 2020 Form 10-Q
Reporting period: Quarter and six months ended August 1, 2020; comparisons are to the corresponding periods ended August 3, 2019. Amounts are in USD unless stated otherwise. Zumiez operates specialty retail stores and e-commerce businesses; it had 720 stores, of which 645 (89.6%) were open on August 1. COVID-19 closures meant stores were open 73.4% of possible days during the quarter.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $250.4m | $228.4m | $388.2m | $441.4m |
| Gross profit / margin | $90.9m / 36.3% | $77.2m / 33.8% | $114.6m / 29.5% | $143.7m / 32.5% |
| Operating profit / margin | $33.1m / 13.2% | $11.7m / 5.1% | $5.3m / 1.4% | $12.6m / 2.9% |
| Net income / diluted EPS | $25.4m / $1.01 | $9.0m / $0.36 | $4.3m / $0.17 | $9.8m / $0.39 |
| Cash from operations | Not separately reported for the quarter | $62.0m | $35.2m |
- Revenue and profit: Q2 sales rose 9.6%; comparable sales increased 37.3%, including comparable store sales growth of 20.1% and e-commerce growth of 122.2%. Store closures reduced quarterly sales by $46.2m. First-half sales fell 12.1% as closures outweighed comparable sales growth of 27.6%.
- Margins: Q2 gross margin expanded 250 basis points, reflecting improved product margin and lower occupancy costs as a percentage of sales, partly offset by higher web shipping costs. First-half gross margin declined 300 basis points, primarily because rent continued during closures and web fulfillment costs rose.
- Liquidity and debt: Cash and cash equivalents were $133.9m and marketable securities $165.2m at August 1, totaling $299.1m in cash and short-term investments. The company reported no borrowings under its $35m revolving facility; $0.3m of letters of credit was outstanding. Current assets were $461.2m and current liabilities $203.6m.
- Other obligations: Present value of operating lease liabilities was $334.0m. Purchase orders outstanding were $252.1m, generally cancellable before shipment except for certain commitments.
Changes, outlook, and risks
- First-half operating cash flow increased to $62.0m from $35.2m. Management attributed $41.5m of cash benefit to deferrals and working-capital effects, including landlord payments, lower inventory, extended vendor terms, and payroll-tax payments; this means the increase was not solely from improved underlying earnings.
- Management reduced operating costs, sought rent relief, extended vendor payment terms, cut or deferred capital spending, and effectively paused share repurchases. The company repurchased $13.4m of shares during the first half, but none during Q2.
- Fiscal 2020 capital expenditure expectation was reduced to approximately $10m–$11m from the previously stated $18m–$20m; management remained on track to open approximately 10 stores. The filing does not provide earnings or revenue guidance.
- COVID-19 remained a significant uncertainty: renewed or prolonged closures, changes in consumer spending, supply-chain disruption, and financial stress among suppliers could affect results. Management warned of continued volatility through the balance of the year and possible future asset impairment if results weaken. First-half long-lived-asset and lease-asset impairment charges were $2.1m, including $1.5m in Q2; no material COVID-related inventory write-offs were recorded.
- A California wage-and-hour putative class action remained pending after remand; the company said it could not estimate a reasonably possible loss. The filing also cites fashion, competition, seasonal inventory, foreign exchange, labor, and lease-related risks.
Important facts for investors to verify
- Confirm the pace of store reopenings and the sustainability of strong e-commerce and comparable-sales trends, especially as closures or restrictions may recur.
- Assess the quality and repeatability of operating cash flow, given the disclosed $41.5m of deferrals and working-capital benefits.
- Monitor liquidity against lease obligations, purchase commitments, and the credit facility’s financial covenants.
- Review impairment assumptions and potential future charges, as well as the outcome and potential exposure of the California litigation.
- Reconcile an apparent MD&A wording error: the six-month discussion describes prior-year diluted EPS of $0.39 as a “loss,” while the statements of operations report positive diluted EPS of $0.39.