Zumiez Inc. 10-Q Filing Summary
Business Context and Reporting Period
Company: Zumiez Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 1, 2009 (First six months of Fiscal 2009)
Business Overview: A specialty retailer of action sports apparel, footwear, equipment, and accessories operating 369 stores in 34 states as of August 1, 2009. The company targets young men and women (ages 12-24) interested in skateboarding, surfing, snowboarding, BMX, and motocross.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended Aug 1, 2009 |
Six Months Ended Aug 2, 2008 |
|---|---|---|
| Net Sales | $161,977 | $170,960 |
| Gross Profit | $46,543 | $54,663 |
| Gross Margin | 28.7% | 32.0% |
| Operating Loss | $(8,665) | $5,538 (Profit) |
| Net Loss | $(4,744) | $4,089 (Income) |
| Diluted EPS | $(0.16) | $0.14 |
| Cash & Equivalents | $21,304 | $11,945 (Beginning Period) |
| Marketable Securities | $61,547 | $47,292 (Beginning Period) |
| Total Debt | $0 | $0 |
| Working Capital | $112,174 | $112,092 (Jan 31, 2009) |
Note: Debt is zero as there were no outstanding borrowings under the revolving credit facility. The company holds a $25 million credit facility with $2.6 million in letters of credit outstanding.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 5.3% year-over-year to $162.0 million. Comparable store sales dropped significantly by 17.2%, driven by fewer transactions and lower average unit retail prices across all departments except footwear.
- Profitability Reversal: The company swung from an operating profit of $5.5 million in the prior year to an operating loss of $8.7 million. This was caused by a 14.9% drop in gross profit and a 12.4% increase in Selling, General, and Administrative (SG&A) expenses.
- Margin Compression: Gross margin declined from 32.0% to 28.7%, primarily due to increased store occupancy costs. SG&A expenses rose to 34.0% of sales from 28.7%.
- Litigation Impact: SG&A expenses included a one-time charge of approximately $1.3 million related to a settlement of a class action lawsuit regarding overtime wages and meal breaks in California.
- Asset Impairment: A non-cash impairment charge of approximately $0.3 million was recorded for three underperforming stores.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects to spend between $19.0 million and $21.0 million on capital expenditures for Fiscal 2009, primarily for 36 planned new store openings and infrastructure improvements.
- Liquidity: The company expects cash flows from operations and its revolving credit facility to be sufficient for the next 12 months. However, future financing may be required if capital needs exceed current projections.
- Auction Rate Securities: The company holds $0.8 million in auction rate securities (net of a $0.2 million temporary impairment). These securities failed to sell at auction in March 2009, limiting short-term liquidity. Management intends to hold them until market liquidity improves.
- Risk Factors: Key risks include the high degree of competition, dependence on mall traffic, volatility in fashion trends, and the potential for further impairment of long-lived assets if store cash flows do not meet projections. The company also faces risks related to its credit facility covenants, specifically a maximum trailing four-quarter net loss of $10.0 million.
Investor Verification Checklist
- Comparable Store Sales Trend: Verify if the 17.2% decline in comparable store sales stabilizes in the upcoming quarters, as this is a primary driver of profitability.
- Litigation Settlement Finalization: Confirm the finalization of the $1.3 million California wage settlement and monitor for any new class action filings (e.g., the pending Chandra Berg case).
- Auction Rate Security Liquidity: Monitor the status of the $0.8 million auction rate security investment and any potential further impairment charges if the market remains illiquid.
- Store Opening Pace: Track the actual number of new store openings against the planned 36 for Fiscal 2009 to assess capital expenditure efficiency.
- Covenant Compliance: Review future quarterly results to ensure the company remains compliant with its credit facility covenants, particularly the net loss limitation and quick ratio requirements.