Zumiez Inc. — Q1 FY2014 Form 10-Q
Business context and period. The filing covers the 13 weeks ended May 3, 2014; the comparable period ended May 4, 2013. Zumiez operated 558 stores—515 in the U.S., 29 in Canada and 14 in Europe—and ecommerce sites under the Zumiez and Blue Tomato names. The company reports one operating segment. Amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $162.9 million | $148.5 million | +9.7% |
| Gross profit / margin | $50.5 million / 31.0% | $48.0 million / 32.3% | +5.3%; margin down 130 bps |
| SG&A | $46.8 million | $43.9 million | +6.5% |
| Operating profit / margin | $3.7 million / 2.3% | $4.0 million / 2.7% | Down 7.8% |
| Net income | $2.5 million | $2.5 million | Essentially unchanged |
| Diluted EPS | $0.09 | $0.08 | Up from prior year |
| Operating cash flow | $16.6 million | $4.4 million | Up $12.2 million |
Comparable sales rose 1.8%, reflecting ecommerce comparable sales growth of 14.7% and flat comparable in-store sales. Ecommerce was 12.3% of sales versus 11.8%. Sales growth also reflected a net 55 additional stores since the prior-year quarter (59 openings and four closures). Gross margin contracted mainly because of markdowns to clear excess inventory and store-occupancy deleverage, partly offset by supply-chain efficiencies. SG&A as a share of sales improved to 28.7% from 29.6%, partly because the prior-year period included Blue Tomato incentive expense. Effective tax rate was 37.3%, versus 39.0%.
At May 3, cash and cash equivalents were $21.1 million and current marketable securities were $86.7 million, totaling $107.8 million in cash and current investments. Current assets were $232.9 million and current liabilities $80.4 million (working capital $152.5 million; current ratio approximately 2.9). Inventory was $97.6 million, up from $87.2 million at February 1. Operating cash flow included a $24.6 million increase in trade accounts payable; cash generation therefore benefited materially from working-capital timing. Capital expenditures were $6.8 million. Financing cash outflow was $18.8 million, mainly reflecting $19.6 million of cash spent on share repurchases.
The company had no borrowings under its U.S. secured revolver, which provided up to $25 million and was scheduled to expire September 1, 2014. It reported $0.6 million outstanding on international revolving lines and $1.9 million of other long-term debt. Management said available cash, investments, operating cash flow and revolver availability should cover foreseeable operating needs and planned capital spending for at least 12 months.
Outlook, commitments and risks
- Management expected FY2014 capital expenditures of approximately $37–$39 million, mainly for new stores, remodels and relocations, and planned to open 55 stores during the fiscal year.
- Minimum operating lease obligations totaled $401.9 million; outstanding merchandise purchase orders were $169.3 million. Certain purchase orders can be canceled before shipment, subject to exceptions. No material contractual-obligation changes outside the ordinary course were reported.
- A $30 million repurchase authorization approved in March 2014 remained in effect through FY2014; $27.2 million remained available at quarter-end. The company repurchased 757,000 shares at an average $23.03 per share under the reported program activity.
- Potential Blue Tomato incentive payments could reach €22.1 million if specified financial and employment conditions are met; management estimated at May 3 that no payment would be owed. No related expense was recorded in the quarter.
- A California assistant-store-manager wage-and-hour class action had a conditional $1.3 million settlement. The settlement was recorded in FY2013; the court granted preliminary approval on May 22, 2014. Other ordinary-course litigation and estimated self-insurance reserves of $1.8 million were disclosed.
- Key risks include fashion and demand shifts, inventory markdowns, seasonality, mall traffic, competition and ecommerce, international and foreign-exchange exposure, vendor and supply-chain risks, labor and health-care costs, substantial lease obligations, and investment-value risk. The filing reported no material change to previously disclosed risk factors and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether comparable-sales momentum and ecommerce growth continue, and whether markdowns ease enough to recover gross margin.
- Inventory levels, aging and sell-through, alongside the unusually large quarter-end increase in accounts payable and its cash-flow effect.
- Execution of the 55-store opening plan and the $37–$39 million capital-expenditure outlook, including effects on occupancy costs and profitability.
- Liquidity and financing after the U.S. revolver’s stated September 1, 2014 expiration, including covenant compliance and international borrowings.
- Progress and final approval of the $1.3 million settlement, and any change in the estimated Blue Tomato incentive obligation.
- Ability to fund share repurchases while meeting lease, purchase and expansion commitments; the filing lists $401.9 million of minimum lease obligations.