Zumiez Inc. — Q1 Fiscal 2016
Business context and reporting period. This unaudited Form 10-Q covers the 13 weeks ended April 30, 2016, compared with the 13 weeks ended May 2, 2015. Zumiez operated 663 stores across the U.S., Canada and Europe, as well as ecommerce businesses, selling apparel, footwear, accessories and hardgoods.
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Net sales | $173.0 | $177.6 | Down 2.6%; comparable sales down 7.5% |
| Gross profit / margin | $50.0 / 28.9% | $56.5 / 31.8% | Profit down 11.6%; margin down 290 bps |
| SG&A / percent of sales | $53.9 / 31.2% | $52.4 / 29.5% | Expense up 2.8%; ratio up 170 bps |
| Operating profit (loss) | $(3.9) | $4.1 | Turned to an operating loss |
| Net income (loss) | $(2.1) | $2.8 | EPS $(0.08), versus diluted EPS $0.09 |
| Cash from operations | $3.1 | $1.7 | Increased $1.4 |
| Cash and cash equivalents | $16.9 | $43.2 at Jan. 30, 2016 | Marketable securities were $45.2 at quarter-end |
Gross margin pressure primarily reflected 160 bps of store occupancy deleverage, 50 bps lower product margin and 30 bps higher outbound shipping costs as a share of sales. SG&A rose mainly from store operating-cost and corporate-cost deleverage, partly offset by prior-year Blue Tomato acquisition-related costs.
Liquidity, cash flow and capital allocation
- At April 30, current assets were $200.6 million and current liabilities were $84.1 million. Cash plus current marketable securities totaled $62.1 million. Inventory was $113.0 million, up from $98.3 million at January 30.
- Operating cash flow of $3.1 million included working-capital movements, notably a $13.1 million inventory cash use and a $22.6 million source from higher trade accounts payable. Investing used $17.6 million, including $13.1 million of net marketable-security purchases and $4.5 million of capital expenditures.
- Financing used $12.3 million, primarily for common-stock repurchases. The company repurchased 612,000 shares for $11.5 million at an average $18.83 per share; $42.9 million remained under the $70 million authorization.
- No borrowings were outstanding under the new $100 million asset-based revolving credit facility at quarter-end; availability is subject to a borrowing base. The facility matures February 5, 2021 and is secured by substantially all personal property of the borrowers and guarantors. No borrowings were outstanding under the separate euro-denominated lines; $0.5 million of letters of credit was open.
Outlook, risks and other notable items
- Management expected fiscal 2016 capital expenditures of approximately $24–$26 million, mostly for new-store construction, remodels and relocations, and planned approximately 29 new stores. Management stated that available liquidity and expected borrowings should meet operating and planned capital needs for at least the next 12 months.
- Management cited the decline in comparable sales as primarily driven by fewer transactions, partly offset by higher units per transaction; average unit retail declined. Comparable sales decreased across hardgoods, junior’s clothing, accessories, men’s clothing and footwear.
- Quarterly results are seasonal, with sales and profitability typically higher in the third and fourth quarters. Risks highlighted include fashion and demand shifts, mall traffic, markdowns and inventory exposure, competition, foreign exchange, supply-chain and merchandise-cost pressures, and substantial lease commitments.
- Future minimum operating lease payments totaled $425.5 million, excluding contingent rent and certain occupancy costs. Merchandise purchase orders were $179.8 million, generally cancellable before shipment except for certain private-label and international orders. Ordinary-course litigation was disclosed; the filing did not specify a clear quantified exposure.
- The company reported $499,000 of other income, net, in Q1 2016; the filing text does not provide a clear explanation of its components. Foreign-currency translation gains of $5.0 million contributed to comprehensive income of $2.9 million despite the net loss.
- Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective as of April 30, 2016. The company said it was evaluating the effects of several forthcoming accounting standards, including lease accounting.
Important facts for investors to verify
- Whether the 7.5% comparable-sales decline and transaction weakness continued, and how sales trends affected inventory and markdowns.
- Whether gross margin recovered from the 28.9% level, including occupancy deleverage, product margin and outbound shipping costs.
- Inventory quality and seasonal sell-through, particularly given higher inventory and substantial outstanding merchandise orders.
- Liquidity and investment quality: municipal securities and variable-rate demand notes are not U.S.-government guaranteed and may carry credit or liquidity risk.
- Actual capital spending and store openings versus the stated plan, and the cash impact of the share-repurchase program and long-term lease obligations.