Zumiez Inc. — Q3 Fiscal 2016 Form 10-Q
Reporting period: The 13 weeks ended October 29, 2016; year-to-date figures cover 39 weeks. Comparatives are the periods ended October 31, 2015. Amounts below are in U.S. dollars.
Business context and reporting period
Zumiez is a specialty retailer of apparel, footwear, accessories and hardgoods, operating stores and ecommerce businesses under the Zumiez, Blue Tomato and Fast Times names. It had 688 stores at quarter-end: 608 in the U.S., 47 in Canada, 28 in Europe and 5 in Australia. In August 2016, Zumiez acquired Australian retailer Fast Times for $7.1 million, comprising $5.7 million cash and $1.4 million in shares.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $221.4 million | $204.3 million | $572.6 million | $561.7 million |
| Gross profit | $76.2 million | $70.1 million | $181.0 million | $184.4 million |
| Gross margin | 34.4% | 34.3% | 31.6% | 32.8% |
| Operating profit | $16.9 million | $15.2 million | $11.8 million | $24.7 million |
| Net income | $10.7 million | $9.7 million | $7.7 million | $15.6 million |
| Diluted EPS | $0.43 | $0.36 | $0.31 | $0.55 |
- Q3 sales increased 8.4%; comparable sales rose 4.0%. Growth included $8.2 million in comparable sales and net store additions. Q3 gross margin improved 10 basis points, while SG&A remained 26.8% of sales.
- Nine-month sales increased 1.9%, but comparable sales declined 2.5%. Gross margin fell 120 basis points; management attributed the decline mainly to store-occupancy deleverage and higher outbound ecommerce shipping costs. SG&A rose to 29.5% of sales from 28.4%.
- Cash from operations was $4.0 million for the nine months, versus $0.5 million a year earlier. Inventory growth used $51.0 million of cash, partly offset by a $35.9 million increase in accounts payable.
- Investing activities used $20.5 million, including $16.8 million of capital expenditures and $5.4 million for Fast Times, net of cash acquired. Financing activities used $8.8 million, including $21.6 million of cash share repurchases.
- At October 29, cash was $18.0 million and marketable securities were $31.2 million. Current assets were $228.3 million and current liabilities $116.0 million. Inventory was $150.6 million, compared with $98.3 million at January 30, 2016.
- Short-term borrowings were $11.8 million under international revolving lines; no borrowings were outstanding under the $100 million asset-based credit facility. The facility is subject to a borrowing base and matures in 2021.
Material changes, outlook and risks
- The contrast between stronger Q3 comparable sales and the nine-month comparable-sales decline coincided with materially lower year-to-date operating profit and net income. Q3 sales growth reflected higher comparable transactions, while average transaction dollars declined.
- Management expected fiscal 2016 capital expenditures of approximately $21–$23 million, primarily for new stores and store remodels or relocations, and planned approximately 28 store openings for the year. The filing does not provide clear full-year sales, earnings or EPS guidance.
- Management stated that operating cash, available cash and current marketable securities, together with available revolver borrowings, should meet foreseeable operating and planned capital needs for at least the next 12 months. It cautioned that later financing needs may depend on operating cash flows and access to additional financing.
- Key disclosed risks include fashion and inventory misjudgments, mall traffic and discretionary spending, seasonal volatility, competition and ecommerce, international expansion and foreign exchange, supply-chain and labor-cost disruptions, and substantial lease obligations. Minimum operating lease payments totaled $416.3 million, excluding contingent rent and certain occupancy costs.
- Purchase commitments were $153.0 million, generally cancellable before shipment except for certain private-label and international orders. Litigation was described as arising in the ordinary course; the filing does not provide a clear quantified exposure. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q3 comparable-sales growth continued after the reported quarter, given the year-to-date decline and seasonal importance of the holiday period.
- Inventory levels, markdowns and gross-margin trends, including whether the increase in inventory was aligned with expected seasonal demand.
- Drivers of the year-to-date operating-profit decline and the extent to which store and corporate expense deleverage persists.
- Cash generation and liquidity after seasonal inventory purchases, share repurchases, planned capital spending and lease-related payments.
- Fast Times integration and performance, planned store openings, and exposure to international markets and currency movements.