Zumiez Inc. — Q3 FY2013 Form 10-Q
Business and period: Specialty retailer of action-sports apparel, footwear, accessories and hardgoods, operating Zumiez and Blue Tomato stores and ecommerce sites. The quarter ended November 2, 2013; comparisons are with the 13 weeks ended October 27, 2012. Fiscal 2013 is a 52-week year ending February 1, 2014. At quarter-end, Zumiez operated 548 stores: 511 in the U.S., 28 in Canada and nine in Europe.
Financial performance
| Metric | Q3 FY2013 | Q3 FY2012 | First 9 months FY2013 | First 9 months FY2012 |
|---|---|---|---|---|
| Net sales | $191.1 million | $180.0 million | $497.5 million | $445.0 million |
| Gross profit / margin | $70.8 million / 37.0% | $67.1 million / 37.3% | $173.9 million / 35.0% | $155.6 million / 35.0% |
| Operating profit / margin | $20.7 million / 10.8% | $21.4 million / 11.9% | $32.5 million / 6.5% | $32.4 million / 7.3% |
| Net income | $11.9 million | $12.7 million | $19.1 million | $19.3 million |
| Diluted EPS | $0.39 | $0.40 | $0.63 | $0.61 |
| Operating cash flow | — | $21.7 million | $28.2 million |
Q3 sales increased 6.2%; comparable sales rose 1.5%, comprising ecommerce growth of 7.9% and in-store growth of 0.7%. Ecommerce was 11.0% of Q3 sales versus 10.7%. For the first nine months, sales increased 11.8%; comparable sales rose 0.7%, with ecommerce up 11.9% and in-store sales down 0.4%. Blue Tomato sales were not comparable with the prior-year nine-month period.
Financial position and liquidity
- At November 2, cash and cash equivalents were $5.3 million and current marketable securities were $88.9 million. The filing notes a negative cash balance in certain accounts due to right of offset with investment accounts. Cash plus current marketable securities totaled approximately $94.2 million.
- Current assets were $250.0 million and current liabilities $87.9 million; working capital was approximately $162.1 million. Inventory was $126.7 million, up from $77.6 million at fiscal year-end.
- No borrowings were outstanding on the $25 million revolving credit facility, which could be increased to $35 million under its accordion feature; $0.2 million of commercial letters of credit was outstanding. Other debt borrowings were $2.0 million. The company reported compliance with credit covenants.
- Nine-month operating cash flow fell to $21.7 million, mainly reflecting greater cash use for inventory, partly offset by increased accounts payable. Investing activities used $31.7 million; financing activities used $2.1 million, including $4.3 million of share repurchases. Cash declined by $12.3 million to $5.3 million.
Changes and management commentary
- Q3 gross margin declined 30 basis points, primarily from store occupancy deleverage and higher ecommerce costs. Nine-month gross margin was unchanged year over year; distribution efficiencies and the prior-year Blue Tomato inventory fair-value step-up partly offset occupancy and ecommerce cost pressure.
- SG&A rose 9.7% in Q3 and 14.8% for the nine months. SG&A as a share of sales increased 80 basis points in both periods, with ecommerce investment and store expense deleverage among the drivers. The Q3 results included a litigation-settlement charge recorded as $1.3 million in SG&A.
- Q3 net income declined despite higher sales, while nine-month net income was nearly flat. A calendar shift moved a week of back-to-school sales out of the current Q3 and into the second quarter.
- Blue Tomato acquisition-related future incentive payments were estimated at €9.0 million ($12.2 million) at quarter-end; the maximum potential payments are €22.1 million. The company recorded $3.2 million of related expense in the first nine months.
Outlook, commitments and risks
- Management expected fiscal 2013 capital expenditures of approximately $36–$38 million, primarily for new stores, remodels and relocations, and planned 59 store openings during the year. It stated available liquidity and revolving-credit availability should cover foreseeable operating needs and planned capital expenditures for at least 12 months. The filing provides no specific full-year sales or earnings guidance.
- After quarter-end, on December 4, the board authorized a new $30 million share repurchase program through January 31, 2015, replacing the prior program, which had $12.5 million remaining.
- Minimum operating lease commitments totaled $500.9 million; merchandise purchase commitments totaled $124.7 million, generally cancellable before shipment except for certain private-label orders. These commitments, seasonality and inventory exposure are material considerations.
- A California assistant-store-manager putative class action had a conditional $1.25 million settlement agreed on November 12, subject to court approval; the charge was recorded in Q3. A related case’s class allegations had been dismissed without prejudice. The company also disclosed ordinary-course litigation and self-insurance reserves of $1.5 million.
- Key disclosed risks include mall traffic and discretionary-spending weakness, rapidly changing fashion preferences and markdown risk, seasonality and weather, competition and ecommerce execution, international expansion and foreign exchange, sourcing and input costs, substantial lease obligations, and operational, cybersecurity and litigation risks. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Check subsequent holiday-quarter sales, comparable sales, margins and inventory markdowns against the seasonally important Q4.
- Assess whether ecommerce growth and planned investment translate into sustainable profitability, given higher ecommerce costs and store occupancy deleverage.
- Track inventory growth, vendor commitments and operating cash conversion, including the timing of seasonal purchases and accounts payable.
- Verify court approval and final cost of the conditional $1.25 million settlement, and monitor Blue Tomato incentive-payment estimates.
- Review execution of the store-opening and capital-spending plans, the new repurchase authorization, and ongoing liquidity and lease obligations.