Zumiez Inc. — Q1 Fiscal 2017 Form 10-Q
Reporting period: The 13 weeks ended April 29, 2017, compared with the 13 weeks ended April 30, 2016. Fiscal 2017 is a 53-week year ending February 3, 2018. Zumiez operated 688 stores across the U.S., Canada, Europe, and Australia, as well as ecommerce websites.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $181.2 million | $173.0 million |
| Gross profit / margin | $52.0 million / 28.7% | $50.0 million / 28.9% |
| SG&A / percent of sales | $58.3 million / 32.2% | $53.9 million / 31.2% |
| Operating loss / margin | $6.2 million / (3.5%) | $3.9 million / (2.3%) |
| Net loss / diluted loss per share | $4.4 million / $0.18 | $2.1 million / $0.08 |
| Operating cash flow | $4.7 million | $2.7 million |
All dollar amounts are U.S. dollars. Interest income was $0.1 million in Q1 FY2017 versus $0.03 million a year earlier. Other expense was $0.45 million, compared with other income of $0.50 million; the filing text does not clearly identify the principal driver of this change.
Liquidity, cash flow, and debt
- At April 29, 2017, cash and cash equivalents were $22.3 million and marketable securities were $54.2 million, totaling $76.5 million. Current assets were $226.1 million and current liabilities were $95.8 million; working capital was approximately $130.3 million.
- Operating cash flow was $4.7 million. Inventory used $15.4 million of cash, largely offset by a $27.9 million cash source from trade accounts payable. Investing cash flow was a $2.8 million use, including $7.1 million of capital expenditures and net proceeds from securities transactions. Financing provided $0.2 million; no shares were repurchased under the completed repurchase program.
- No borrowings were outstanding under the $100 million asset-based revolving facility or the international revolving lines at quarter-end. The company said available liquidity and expected operating cash flows should cover operations and planned capital expenditures for at least the next 12 months.
- Operating lease obligations totaled $416.6 million and merchandise purchase obligations were $190.8 million. Most purchase orders can be canceled before shipment, subject to exceptions.
Changes versus prior comparable period
- Sales increased 4.7%, reflecting a $3.1 million increase in comparable sales (up 1.8%) and net store additions since the prior-year period. North American sales rose 3.9%; other international sales rose 12.5%.
- Comparable sales growth was primarily transaction-driven; lower units per transaction were partly offset by higher average unit retail. Men’s and juniors’ clothing increased, while footwear, hardgoods, and accessories declined.
- Gross margin fell 20 basis points: a 50-basis-point increase in inventory shrinkage was partly offset by a 40-basis-point increase in product margin.
- SG&A grew 8.1%, faster than sales, and increased 100 basis points as a share of sales. Management cited salaries, minimum-wage increases, labor-cost deleverage, and incentive compensation.
- Net loss widened to $4.4 million from $2.1 million. The effective tax rate was 32.6%, versus 37.3%; the filing cites the accounting treatment of share-based tax deficiencies as a factor in the comparison.
Outlook, risks, and unusual items
- Management expected fiscal 2017 capital expenditures of approximately $24 million to $26 million, mainly for store openings, remodels, and relocations, and planned approximately 19 new stores. No full-year revenue or earnings guidance is provided in the filing text.
- Results are seasonal, with sales and profitability typically higher in the third and fourth quarters. Interim results should not be taken as indicative of the full year.
- Key disclosed risks include rapidly changing fashion preferences, retail competition and consumer traffic, inventory markdowns or shrinkage, labor and occupancy costs, foreign exchange and international supply-chain exposure, execution of international and omnichannel growth, cybersecurity and systems disruption, and dependence on operating cash flow and leased locations.
- The company adopted share-based payment accounting guidance in the quarter; it recorded $0.4 million of excess tax deficiencies against income tax benefit. It expects the future lease-accounting standard to have a material impact on its financial statements.
- The filing reports ordinary-course litigation and insurance reserves, but gives no clear quantified exposure for pending legal matters. Disclosure controls were concluded to be effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether comparable-sales momentum and international growth continue, and how store additions contribute to sales.
- Whether shrinkage, wage inflation, and SG&A growth ease enough to restore operating leverage and margins.
- Inventory quality and the timing of vendor payments, given the quarter’s inventory cash use and increase in trade payables.
- Execution of the 19-store and $24 million to $26 million capital-spending plans, alongside substantial lease and purchase commitments.
- Any developments in litigation, foreign exchange exposure, or adoption of the lease-accounting standard that could materially affect results or liquidity.