Zumiez Inc. — Q3 FY2020 Form 10-Q
Reporting period: The 13-week quarter ended October 31, 2020, compared with the quarter ended November 2, 2019. Year-to-date figures cover 39 weeks. Zumiez operates Zumiez, Blue Tomato and Fast Times stores and ecommerce businesses; it had 725 stores at quarter-end.
Financial performance and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | First 39 weeks FY2020 | First 39 weeks FY2019 |
|---|---|---|---|---|
| Net sales | $271.0 million | $264.0 million | $659.1 million | $705.4 million |
| Gross profit / margin | $105.8 million / 39.0% | $94.6 million / 35.8% | $220.4 million / 33.4% | $238.2 million / 33.8% |
| SG&A | $67.9 million | $70.3 million | $177.3 million | $201.3 million |
| Operating profit / margin | $37.9 million / 14.0% | $24.3 million / 9.2% | $43.1 million / 6.5% | $37.0 million / 5.2% |
| Net income | $29.1 million | $19.2 million | $33.4 million | $29.0 million |
| Diluted EPS | $1.16 | $0.75 | $1.32 | $1.14 |
- Q3 sales rose 2.6%; comparable sales increased 8.1%, including ecommerce growth of 39.6% and comparable-store growth of 2.2%. YTD sales fell 6.6%, while comparable sales increased 18.8% (ecommerce +65.0%; stores +8.0%). Store closures reduced YTD sales by an estimated $154.7 million; comparable-sales gains offset $101.6 million.
- Q3 gross margin improved 320 basis points, supported by product margin, lower shrink and occupancy leverage. YTD gross margin declined 40 basis points, reflecting higher web fulfillment and shipping costs and store occupancy costs during closures.
- Cash and cash equivalents were $84.9 million and marketable securities $231.2 million at October 31, 2020, totaling approximately $316.2 million in cash and short-term investments. The cash-flow statement reports $91.8 million of cash, cash equivalents and restricted cash. The company reported no borrowings; its $35 million revolving facility had less than $0.1 million in letters of credit outstanding.
- YTD operating cash flow was $81.8 million, versus $29.5 million. Management attributed approximately $53 million of the increase to cash timing/deferments, including lower inventory, landlord payments, extended vendor terms and payroll tax payments, as well as income improvements from relief, credits and expense reductions. Investing cash use was $38.3 million; capital expenditures were $7.5 million. Financing cash use was $12.6 million, including $13.4 million of share repurchases.
- At quarter-end, inventory was $161.0 million; total liabilities were $475.0 million, including $327.7 million of present-value operating lease obligations. Equity was $499.2 million. Outstanding merchandise purchase orders were approximately $248.0 million, largely cancellable before shipment, subject to stated exceptions.
Material changes and unusual items
- COVID-19 store closures and restrictions materially affected results. Stores were open for approximately 94.7% of possible days during Q3, versus 72.8% over the first nine months. Online demand and store performance after reopening supported the recovery.
- The company recorded long-lived asset and right-of-use asset impairment charges of $2.3 million in Q3 and $4.4 million YTD, compared with none in Q3 2019 and $0.1 million YTD 2019. It reported no inventory write-offs material to the period and concluded that goodwill impairment was not then required, while continuing to monitor the risk.
- On December 2, 2020, after quarter-end, the board authorized a new $100 million share repurchase program through January 29, 2022. It replaced the prior program; $13.4 million had been repurchased during the first nine months, and none in Q3.
Outlook, risks and contingencies
- No earnings or sales guidance is provided in the filing. Management expected available operating cash, cash and short-term investments, and potential facility borrowings to meet foreseeable operating and planned capital needs for at least 12 months.
- FY2020 capital expenditures were expected to be approximately $10–11 million, revised down from the $18–20 million estimate reported in March. The company remained on track to open approximately 13 stores, subject to execution and market conditions.
- Management warned that the pandemic could drive renewed or prolonged closures, operating restrictions, weaker discretionary spending, supply-chain disruption and further volatility through year-end and potentially into 2021. Related risks include asset impairments, inventory markdowns, lease costs, and possible inability to realize deferred tax assets in certain jurisdictions.
- A California wage-and-hour putative class action remained pending after Ninth Circuit proceedings; the court had tentatively set a plaintiff class-certification motion deadline of April 15, 2021. The company said it could not estimate the possible loss or outcome.
- Other identified risks include fashion and inventory misjudgments, competition, mall traffic, vendor and foreign sourcing exposure, foreign exchange, labor costs, seasonality, cybersecurity, and execution of ecommerce and international growth. The filing reports no material change to the risk factors in the prior Form 10-K.
Key facts for investors to verify
- Whether renewed COVID-19 restrictions affect store-open days, comparable sales, ecommerce fulfillment and consumer demand.
- How much operating cash flow reflects sustainable earnings versus temporary working-capital, landlord, vendor and payroll timing benefits.
- Inventory quality, purchase commitments and the potential for markdowns or further impairment charges.
- Lease obligations and cash requirements, including the distinction between reported debt-free status and substantial operating lease liabilities.
- Developments in the California class action and any resulting change to the company’s loss assessment.
- Execution of the reduced capital-spending plan, planned store openings and the new share repurchase authorization.