Zumiez Inc. — Q2 FY2013 Form 10-Q
Reporting period: Quarter ended August 3, 2013 (13 weeks); six-month period ended August 3, 2013. Amounts are in U.S. dollars. Zumiez operated 529 stores across the U.S., Canada and Europe, plus ecommerce businesses under Zumiez and Blue Tomato.
Financial highlights
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $157.9m | $135.1m | $306.4m | $265.0m |
| Gross profit / margin | $55.1m / 34.9% | $46.4m / 34.4% | $103.1m / 33.7% | $88.5m / 33.4% |
| Operating profit / margin | $7.8m / 5.0% | $3.8m / 2.8% | $11.9m / 3.9% | $11.0m / 4.2% |
| Net income | $4.7m | $2.1m | $7.2m | $6.6m |
| Diluted EPS | $0.16 | $0.07 | $0.24 | $0.21 |
Q2 sales rose 16.9% year over year and net income more than doubled; first-half sales grew 15.6%, while first-half net income increased 9.4%. Q2 comparable sales increased 0.9% (ecommerce +19.1%, stores -0.4%); first-half comparable sales increased 0.2% (ecommerce +16.1%, stores -1.0%). Ecommerce was 8.8% of Q2 sales and 10.2% of first-half sales.
For the first half, cash from operations was $9.9m, versus $14.5m a year earlier. Capital expenditures were $14.5m; investing activities used $5.7m, including net proceeds from marketable securities. Financing activities used $2.4m, primarily reflecting $4.3m of share repurchases. Cash and equivalents ended at $19.1m, with current marketable securities of $75.9m.
At August 3, 2013, current assets were $240.2m and current liabilities $89.6m (current ratio approximately 2.7). Total liabilities were $141.5m. Blue Tomato-related long-term borrowings were $2.0m; there were no revolver borrowings. The $25m revolving facility had $1.0m of commercial letters of credit outstanding. The filing reports compliance with its credit covenants.
Changes and drivers
- Sales growth reflected 52 net store additions since the prior-year comparison, Blue Tomato sales not included in the prior-year period, a calendar shift that included an additional week of back-to-school sales in Q2, and modest comparable-sales growth. The filing cautions that Blue Tomato entered comparable-sales calculations beginning in July 2013.
- Q2 gross margin increased 50 basis points, partly because the prior-year quarter included ecommerce fulfillment center relocation costs and Blue Tomato inventory fair-value step-up costs. Increased ecommerce-related costs partly offset the improvement.
- Q2 SG&A was 29.9% of sales, down 170 basis points, helped by prior-year acquisition and relocation costs and lower incentive compensation. First-half SG&A was 29.8% of sales, up 60 basis points, with ecommerce investment and Blue Tomato incentive compensation partly offsetting prior-year costs.
- First-half operating cash flow declined despite higher net income, with inventory investment a major use of cash, partly offset by increased accounts payable.
Outlook, risks and contingencies
- Management expected FY2013 capital expenditures of approximately $36m–$38m, mainly for planned 58 new stores, remodels and relocations. Management stated existing liquidity and expected revolver availability should cover foreseeable operating needs and planned capital spending for at least 12 months. No earnings or sales guidance is provided in the supplied filing text.
- Results are seasonal, with sales and profitability typically higher in the third and fourth quarters. Management cited consumer demand, fashion and inventory risk, mall traffic, competition, international expansion and foreign exchange, merchandise sourcing and cost pressures, and ecommerce execution as material risks.
- Lease commitments totaled $504.4m, excluding certain contingent rent and related charges. Outstanding merchandise purchase orders were $134.4m, generally cancellable before shipment except for certain private-label orders.
- A California putative class action filed by assistant store managers alleges wage-and-hour and related violations. The company was investigating and could not predict the likelihood or range of loss. The filing also describes ordinary-course litigation and self-insurance reserves of $1.5m.
- Blue Tomato sellers and employees may receive incentive payments tied to performance and continued employment through April 2015. The estimated obligation at quarter-end was €9.0m ($11.9m); $2.1m of expense was recorded in the first half.
- The company held an auction-rate security with a $1.0m par value and a $0.2m temporary impairment charge; it reported no other-than-temporary impairment. Foreign currency translation reduced first-half other comprehensive income by $2.6m.
Important facts for investors to verify
- How much reported sales growth reflects store additions, Blue Tomato and the calendar shift versus underlying comparable demand.
- Whether ecommerce growth can continue while improving associated fulfillment and operating costs.
- Inventory levels, markdown activity and the impact of seasonal demand on second-half margins and cash flow.
- Progress against store-opening and capital-spending plans, and the remaining share-repurchase authorization ($12.5m at quarter-end).
- Developments in the California litigation, Blue Tomato incentive obligation, and the company’s substantial lease commitments.