Zumiez Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended January 30, 2016, a 52-week year. The filing also reports fourth-quarter results. Zumiez is a specialty retailer of apparel, footwear, accessories and action-sports hardgoods, operating Zumiez and Blue Tomato stores and ecommerce sites. It ended the year with 658 stores across the U.S., Canada and Europe.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $804.2 million | $811.6 million |
| Comparable sales | -5.3% | +4.6% |
| Gross profit / margin | $268.6 million / 33.4% | $287.1 million / 35.4% |
| Operating profit / margin | $46.2 million / 5.7% | $71.6 million / 8.8% |
| Net income | $28.8 million | $43.2 million |
| Diluted EPS | $1.04 | $1.47 |
| Cash from operations | $48.6 million | $89.9 million |
| Capital expenditures | $34.8 million | $35.8 million |
Fourth quarter: Net sales were $242.4 million versus $258.6 million a year earlier; comparable sales were down 9.5%, compared with an 8.3% increase in Q4 FY2014. Operating profit was $21.5 million versus $31.3 million, net income $13.1 million versus $17.5 million, and diluted EPS $0.50 versus $0.60.
At year-end, cash, cash equivalents and current marketable securities totaled $75.6 million, down from $154.6 million; working capital was $129.8 million, down from $191.4 million. Total assets were $414.7 million and shareholders’ equity was $297.0 million. No revolving-credit borrowings were outstanding at year-end. The company reported $425.4 million in future minimum operating lease payments, excluding contingent rent and other occupancy costs.
Changes and drivers
- Annual sales fell 0.9% despite a net 55-store increase. The 5.3% comparable-sales decline and $19.6 million adverse foreign-exchange impact outweighed store additions; North America sales fell 2.5%, while Europe sales rose 18.0%.
- Management attributed weaker comparables to fewer transactions and the lack of a strong fashion trend or key item to drive traffic. Higher average unit retail and, to a lesser extent, more units per transaction partly offset fewer transactions.
- Gross margin contracted 200 basis points, primarily from store occupancy deleverage, higher ecommerce-related costs and a 20-basis-point product-margin decline. SG&A rose 3.2% and increased as a share of sales, mainly because fixed store costs deleveraged.
- Operating cash flow fell $41.3 million. The company cited lower operating results and working-capital movements, including reduced trade accounts payable. Cash was also used for $92.2 million of share repurchases and store-related investment.
Outlook, risks and unusual items
- Management characterized its FY2016 outlook as cautious. It planned approximately 34 store openings, including seven in Europe, versus 57 openings in FY2015, and forecast capital expenditures of approximately $27–$29 million.
- Management expected cost structure growth to exceed FY2015’s rate, excluding FY2015 Blue Tomato acquisition costs and Kansas fulfillment-center exit costs. It anticipated inventory per square foot to be flat or increase slightly, and expected cash, short-term investments and working capital to increase absent share repurchases. It did not anticipate new borrowings during FY2016.
- The company closed its Kansas ecommerce fulfillment center in FY2015 and shifted most online order fulfillment to stores. Associated exit costs were $1.2 million. Other FY2015 charges included $0.6 million of Blue Tomato incentive expense and $0.9 million of intangible amortization.
- In February 2016, after year-end, Zumiez replaced its prior facility with a senior secured, asset-based revolving facility of up to $100 million, subject to a borrowing base, maturing February 5, 2021.
- Key risks include mall traffic and the shift to ecommerce, fast-changing consumer tastes and inventory markdowns, seasonal concentration (56% of FY2015 sales in Q3 and Q4), lease obligations, international currency exposure, supply-chain and sourcing risks, and execution of store growth and omni-channel investments. The filing reports no material expected adverse effect from current litigation; actual outcomes remain uncertain.
- FY2015 included a $3.1 million long-lived-asset impairment charge. Goodwill and intangible-asset impairment testing resulted in no impairment. The company repurchased 3.965 million shares for $93.3 million during the year; a $70 million authorization announced in December 2015 had $54.4 million remaining at year-end. No dividend had been declared.
Important facts for investors to verify
- Whether comparable-sales trends and transaction counts improve after the sharp Q4 deterioration.
- Whether gross margin stabilizes as occupancy costs deleverage and store-based online fulfillment scales.
- Actual store openings, capital spending and operating-cost growth compared with management’s FY2016 plans.
- Liquidity and cash use after repurchases, including the borrowing base, covenants and availability under the post-year-end $100 million facility.
- Total occupancy burden: minimum lease commitments exclude contingent rent, taxes, insurance, common-area maintenance and other lease costs.