Zumiez Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended February 2, 2019 (52 weeks). The filing also reports fourth-quarter results; fiscal 2017 included an extra week, which affects comparisons. Zumiez is a specialty retailer of action-sports, streetwear and lifestyle apparel, footwear, accessories and hardgoods. It operated 707 stores across the U.S., Canada, Europe and Australia, alongside ecommerce sites.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $978.6 million | $927.4 million |
| Comparable sales growth | 5.6% | 5.9% |
| Gross profit / margin | $335.9 million / 34.3% | $309.9 million / 33.4% |
| Operating profit / margin | $61.1 million / 6.2% | $48.8 million / 5.2% |
| Net income | $45.2 million | $26.8 million |
| Diluted EPS | $1.79 | $1.08 |
| Cash from operating activities | $65.3 million | $65.5 million |
- Fourth-quarter sales were $304.6 million, versus $308.2 million a year earlier; comparable sales rose 3.9%. Fourth-quarter net income was $29.6 million, versus $19.9 million.
- Cash, cash equivalents and current marketable securities totaled $165.3 million at year-end, up from $121.9 million. Working capital was $234.1 million, up from $179.9 million.
- Capital expenditures were $21.0 million. The company reported no borrowings outstanding under its $35 million secured credit facility at year-end. Total long-term liabilities were $40.6 million, primarily including deferred rent and tenant allowances.
- Operating lease obligations totaled $391.3 million in scheduled future payments, excluding contingent rent and related occupancy costs. These commitments are distinct from reported debt.
Changes versus the prior period
- Sales increased 5.5% despite the prior year’s additional fiscal week; comparable sales increased for the tenth consecutive quarter. Management attributed growth to more transactions and higher dollars per transaction, supported by higher average unit retail.
- Gross margin improved 90 basis points, mainly from occupancy-cost leverage, lower inventory shrinkage and higher product margin, partly offset by higher shipping costs. SG&A fell 10 basis points as a share of sales.
- Net income and EPS rose substantially, but FY2018 results included an $8.7 million benefit from U.S. federal tax legislation, or $0.35 per diluted share. FY2017 included a $3.4 million tax provision related to an Austrian deferred-tax-asset valuation allowance and sales from its extra week.
- The company added a net nine stores, ending the year with 707. Private-label merchandise declined to 13.1% of sales from 16.8% in FY2017.
Outlook, risks and notable items
- For FY2019, management planned about 13 new stores overall, including eight in Europe and Australia, and expected capital expenditures of approximately $21–$23 million. The filing also refers to approximately 14 planned openings in its capital-expenditure discussion.
- Management expected cost growth to moderate, inventory per square foot to grow roughly in line with sales, and cash, short-term investments and working capital to increase excluding potential share repurchases. It did not anticipate new long-term borrowings. These are expectations, not guarantees.
- The board authorized up to $75 million in share repurchases through February 1, 2020; none had been purchased under that program by year-end. No cash dividend had been declared.
- Key risks include rapidly changing fashion preferences, inventory markdowns and seasonality, competition and mall traffic, international expansion and foreign-exchange exposure, supply-chain and labor costs, cybersecurity and systems risks, and the ability to recruit and retain staff. About 57% of FY2018 sales occurred in the third and fourth quarters.
- A California wage-and-hour putative class action remained unresolved; the company said it could not estimate the outcome or a reasonably possible loss. Management stated current litigation was not expected to materially adversely affect results or financial condition.
- No goodwill or intangible-asset impairment was recorded. Blue Tomato’s estimated fair value exceeded its carrying value by 9.7% at the latest assessment, leaving sensitivity to future performance and assumptions.
- The company adopted ASC 606 in FY2018; the reported financial-statement impact was not material. It expected adoption of the new lease standard in FY2019 to add more than $300 million of right-of-use assets and lease liabilities to the balance sheet, without a material income-statement or cash-flow impact.
Important facts for investors to verify
- Separate underlying operating growth from the $8.7 million tax benefit and compare periods on a consistent 52-week basis.
- Reconcile the FY2019 store-opening references (about 13 overall versus approximately 14 in the capital-expenditure discussion) and monitor actual openings and spending.
- Review inventory quality, shrinkage, markdowns and comparable-sales trends, particularly through the peak holiday quarter.
- Assess lease obligations and the balance-sheet effects of lease-accounting adoption alongside the company’s cash and marketable securities.
- Track the California litigation, tax valuation allowances and Blue Tomato goodwill headroom for material developments.