Zumiez Inc. — Fiscal 2019 Form 10-K
Business context and reporting period. The filing covers the 52-week fiscal year ended February 1, 2020; fiscal 2018 also had 52 weeks. Zumiez is a specialty retailer of apparel, footwear, accessories and hardgoods, operating Zumiez, Blue Tomato and Fast Times stores and ecommerce sites. At year-end it operated 718 stores across the U.S., Canada, Europe and Australia.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 |
|---|---|---|
| Net sales | $1,034.1 million | $978.6 million |
| Gross profit / margin | $366.6 million / 35.4% | $335.9 million / 34.3% |
| Operating profit / margin | $85.8 million / 8.3% | $61.1 million / 6.2% |
| Net income | $66.9 million | $45.2 million |
| Diluted EPS | $2.62 | $1.79 |
| Cash from operating activities | $105.6 million | $65.4 million |
| Capital expenditures | $18.8 million | $21.0 million |
Fourth quarter: Net sales were $328.8 million, operating profit $48.9 million, net income $37.9 million and diluted EPS $1.48. Comparable sales grew 6.4%. In the prior-year fourth quarter, sales were $304.6 million, operating profit $37.7 million, net income $29.6 million and diluted EPS $1.18.
Liquidity and obligations: Cash, cash equivalents and current marketable securities totaled $251.2 million at year-end, versus $165.3 million a year earlier; working capital was $252.9 million. The company had no borrowings under its $35 million secured revolving credit facility. The balance sheet included $346.5 million in operating lease liabilities at present value; undiscounted operating lease payments were $381.3 million. Fiscal 2019 investing cash outflow of $102.9 million included $84.1 million of net marketable-security purchases.
Material changes versus the prior comparable period
- Sales increased 5.7%; comparable sales rose 4.9%, marking 14 consecutive quarters of positive comparable sales.
- Operating profit rose 40.5%, and operating margin expanded 210 basis points. Management attributed gross-margin improvement to occupancy-cost leverage, better inventory management and lower shrink, distribution and fulfillment efficiencies, and modestly higher product margins; SG&A leverage also contributed.
- Sales strength came primarily from hardgoods, footwear and accessories; apparel trends slowed. Sales growth included a $2.0 million benefit from revised estimates of Zumiez STASH loyalty-program redemptions. Foreign-exchange movements reduced sales by $6.4 million.
- Fiscal 2019 total assets rose to $914.3 million from $534.2 million, principally reflecting adoption of ASC 842, which placed lease right-of-use assets and lease liabilities on the balance sheet. Adoption included a $6.3 million reduction to opening retained earnings and did not materially affect income or cash flows.
Outlook, risks and unusual items
- Management planned approximately 20 fiscal 2020 store openings, including 12 in Europe and Australia, with North American store count expected to remain roughly flat. Expected capital expenditures were $18–$20 million. Management anticipated operating-margin growth from fixed-cost leverage and expense initiatives, and did not expect new long-term borrowings. No specific sales or EPS guidance was provided.
- Management cited strong momentum and product diversity as supports for growth, while noting that apparel trends had slowed and skate hardgoods had strengthened. Fiscal 2019 results were seasonally weighted: about 57% of sales occurred in the third and fourth quarters.
- The filing identifies risks from rapidly changing fashion preferences, discretionary-spending weakness, competition and mall traffic, inventory markdowns, foreign sourcing and trade disruptions, foreign exchange, labor and freight costs, weather, cybersecurity, and execution of ecommerce and international expansion. Coronavirus and other public-health disruptions were specifically identified as potential risks to supply chains, distribution facilities and store traffic; the filing does not quantify their financial impact.
- A putative California wage-and-hour class action remained unresolved. The company said it could not estimate the ultimate outcome or any reasonably possible loss. Management stated that ordinary-course litigation was not expected to materially affect results or financial condition.
- The company authorized a $100 million share-repurchase program in December 2019; none of the authorization had been used at year-end. It had not declared cash dividends. The auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether comparable-sales momentum and margin gains continued after fiscal year-end, particularly as consumer and store conditions changed.
- The sales and cash-flow effects of the $2.0 million STASH estimate-related revenue recognition and the $6.4 million foreign-exchange sales impact.
- Liquidity after considering seasonal inventory needs, planned capital expenditures, the substantial operating-lease commitments and any share repurchases.
- The outcome and potential exposure from the California wage-and-hour class action, for which the company could not estimate a loss.
- Whether international growth and Blue Tomato performance support the planned expansion; the Blue Tomato reporting unit’s estimated fair value exceeded carrying value by 24.8% at its latest impairment assessment.