Zumiez Inc. — Q1 FY2012 Form 10-Q
Reporting period: 13 weeks ended April 28, 2012; comparable period was the 13 weeks ended April 30, 2011. Zumiez operated 455 stores in 39 U.S. states and Canada and also sold online. Fiscal 2012 is a 53-week year ending February 2, 2013. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial results and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $129.9 million | $105.9 million | +22.7% |
| Comparable-store sales | +12.9% | Not stated in the provided text | — |
| Gross profit / margin | $42.1 million / 32.4% | $33.2 million / 31.3% | Margin +110 bps |
| Operating profit / margin | $7.3 million / 5.6% | $2.6 million / 2.4% | Profit increased |
| Net income / diluted EPS | $4.5 million / $0.14 | $1.9 million / $0.06 | Profit increased |
| Operating cash flow | $5.8 million | $3.6 million | +$2.2 million |
| Capital expenditures | $8.5 million | $2.5 million | Higher investment |
- SG&A was $34.8 million, up 13.7%, but declined to 26.8% of sales from 28.9%. Management attributed the improvement mainly to store operating efficiencies and lower corporate costs as a share of sales.
- Net income margin rose to 3.5% from 1.8%. The effective tax rate was 41.7%, versus 39.6%.
- At April 28, cash and cash equivalents were $8.0 million and current marketable securities were $163.2 million. Total current assets were $263.8 million; current liabilities were $62.4 million.
- No revolving-credit borrowings were outstanding. The company reported $0.1 million of commercial letters of credit and said it complied with its credit-facility covenants.
- Cash and cash equivalents decreased $6.8 million during the quarter, ending at $8.0 million. Net investing cash outflow was $14.6 million, including capital spending and net purchases of securities.
Material changes and management commentary
- Sales growth reflected 12.9% comparable-store sales growth and 47 net additional stores since the prior-year quarter. Higher dollars per transaction, driven by average unit retail, more than offset fewer comparable-store transactions. Ecommerce represented 7.7% of sales, up from 6.2%.
- Gross-margin improvement was attributed primarily to occupancy-cost leverage and distribution-center efficiencies, partly offset by higher ecommerce fulfillment costs, including relocation-related charges.
- Management planned approximately 50 store openings in FY2012 and forecast capital expenditures of approximately $42–$44 million, including new stores, remodels and construction of a new home office. These are plans, not assured outcomes.
- The company expected available liquidity and operating cash flows, together with its revolving facility, to cover foreseeable operating needs and planned capital expenditures for at least the next 12 months.
Outlook, risks, commitments and unusual items
- No full-year revenue, earnings or comparable-store-sales guidance is provided in the filing text.
- Zumiez entered a 10-year lease for a fulfillment center in Edwardsville, Kansas, with operations planned to begin in Q2 FY2012. Management expected the move to increase capacity and delivery speed and, once operating effectively at full capacity, reduce freight and distribution costs. It also planned to move its home office to Lynnwood, Washington.
- The company recorded $0.3 million of fulfillment-center relocation and exit costs in Q1, included in cost of goods sold. It expected approximately $0.8–$0.9 million of fulfillment-center relocation expenses and approximately $1.2 million of home-office relocation and lease-termination charges.
- Contractual commitments included $450.4 million of operating lease obligations and $124.2 million of merchandise purchase orders. Purchase orders were generally cancellable before shipment, subject to stated exceptions. Operating lease commitments exclude certain contingent rent and other costs.
- Key disclosed risks include fashion and inventory misjudgment, seasonal sales volatility, consumer and mall traffic weakness, competition, merchandise and freight cost increases, foreign sourcing disruptions, execution risks from store expansion and facility relocations, and substantial lease obligations. The filing also notes exposure to potential losses or liquidity reductions in municipal and other investments.
- The company revised the prior-year cash-flow presentation to report fixed-asset purchases when paid rather than when accrued. It judged the error immaterial; the revision changed cash-flow classifications but did not affect previously reported revenue, operating profit, net income, cash balances or equity.
- Ordinary-course litigation is disclosed, but the company said outcomes cannot be predicted; the filing text does not provide a clear quantified exposure. Disclosure controls were assessed as effective as of April 28, 2012.
Most important facts for investors to verify
- Whether the strong comparable-store sales growth and improved margins persist, particularly as transaction counts declined.
- Execution, timing and total costs of the Kansas fulfillment-center and Lynnwood home-office relocations, and whether anticipated operating efficiencies are achieved.
- Delivery of the planned store openings and $42–$44 million capital-spending plan, alongside the resulting cash needs.
- Inventory levels and upcoming seasonal demand, given the company’s dependence on back-to-school and holiday periods.
- Liquidity and investment quality, including the municipal-securities portfolio, and the effect of substantial lease and merchandise-purchase commitments.