Zumiez Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2011, ended July 30, 2011. Fiscal 2011 ends January 28, 2012. Amounts are in U.S. dollars; financial statement figures are in millions except per-share amounts.
Business context
Zumiez operates specialty stores and an ecommerce business selling action-sports apparel, footwear, equipment and accessories. At quarter-end it operated 424 stores in 38 states and Canada. Ecommerce represented 5.3% of second-quarter sales and 5.7% of first-half sales.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $112.2 | $97.7 | $218.1 | $186.8 |
| Comparable-store sales growth | 7.5% | — | 9.9% | — |
| Gross profit | $37.3 | $30.5 | $70.7 | $56.0 |
| Gross margin | 33.2% | 31.2% | 32.4% | 30.0% |
| SG&A | $33.7 | $32.9 | $64.6 | $61.6 |
| Operating income (loss) | $3.6 | ($2.4) | $6.1 | ($5.6) |
| Net income (loss) | $2.6 | ($1.2) | $4.5 | ($3.1) |
| Diluted EPS | $0.08 | ($0.04) | $0.14 | ($0.10) |
Sales rose 14.9% in Q2 and 16.7% in the first half, reflecting comparable-sales gains and 31 net additional stores since July 2010. Management attributed comparable-sales growth principally to higher dollars per transaction in Q2, and to both transaction growth and higher dollars per transaction for the first half. Gross margin improved 200 basis points in Q2 and 240 basis points in the first half. SG&A increased in dollars but declined as a share of sales, to 30.0% and 29.6%, respectively.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $15.2 million, versus $4.4 million a year earlier. Investing activities used $15.1 million, including $13.9 million of fixed-asset additions; financing activities provided $2.7 million.
- At July 30, cash and cash equivalents were $14.2 million and current marketable securities were $117.7 million. The company also reported $2.8 million of long-term investments.
- Total assets were $343.4 million; current assets were $238.9 million and current liabilities $73.5 million. Inventory was $84.4 million, up from $56.3 million at January 29, 2011; trade payables were $50.7 million, up from $16.4 million.
- No revolver borrowings were outstanding at quarter-end. On August 29, 2011, Zumiez renewed its secured revolving facility through September 1, 2013 for up to $25 million, with an option to increase it to $35 million. The company reported compliance with its covenants at July 30.
- Operating lease obligations totaled $389.2 million and merchandise purchase commitments were $108.8 million at July 30. The filing says no off-balance-sheet obligations existed.
Outlook, risks and unusual items
- Management expected fiscal 2011 capital expenditures of approximately $35–$37 million, primarily for leasehold improvements and fixtures for 45 planned new stores and construction of a new home office in Lynnwood, Washington. It stated that cash, investments, operating cash flow and available credit were expected to meet foreseeable requirements for at least 12 months.
- Management cited rising cotton, oil-related and other input costs, with product-cost increases expected to be higher in the second half of 2011 than the first half. Mitigation efforts may not prevent margin pressure. Other disclosed risks include fashion and demand shifts, seasonality, mall traffic, competition, foreign sourcing, store expansion and weather.
- The prior-year comparison benefited from unusual charges in 2010: distribution-center relocation costs affected gross profit, and a $2.1 million employment class-action settlement affected SG&A. The settlement received final court approval and was paid in March 2011.
- A $0.9 million auction-rate security remained classified as a long-term investment, net of a $0.1 million temporary impairment; liquidity recovery timing was uncertain. The company noted possible further fair-value declines.
- Zumiez disclosed $262,000 remaining for lease-termination costs related to its distribution-center relocation. It stated that no material additional relocation costs were expected.
Important facts for investors to verify
- Whether comparable-sales momentum and store additions continue, and how ecommerce growth affects profitability.
- Whether higher merchandise costs, inventory levels and markdowns pressure gross margin in the second half.
- Execution and funding of the planned 45 store openings, capital spending and new home-office construction.
- Liquidity, investment quality and availability of the auction-rate security, alongside compliance with the renewed credit facility’s terms.
- The scale of fixed lease obligations and purchase commitments relative to future cash generation; results are seasonal and first-half performance may not indicate full-year results.