Business Context and Reporting Period
Company: Zumiez Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended May 1, 2010 (Fiscal Q1 2010)
Business Overview: Zumiez is a specialty retailer of action sports apparel, footwear, equipment, and accessories. As of May 1, 2010, the company operated 381 stores in 35 states, primarily in shopping malls, targeting young men and women aged 12 to 24.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $89.1 million | $76.8 million |
| Gross Profit | $25.8 million | $21.9 million |
| Gross Margin | 28.9% | 28.5% |
| Operating Loss | $(3.3) million | $(3.4) million |
| Net Loss | $(1.9) million | $(1.7) million |
| Net Loss Per Share (Diluted) | $(0.06) | $(0.06) |
| Cash and Cash Equivalents | $12.9 million | $22.9 million (Jan 30, 2010) |
| Marketable Securities | $84.8 million | $86.0 million (Jan 30, 2010) |
| Inventory | $58.6 million | $50.9 million (Jan 30, 2010) |
| Working Capital | $126.1 million | $134.9 million (Jan 30, 2010) |
| Debt | $0 (No borrowings under credit facility) | $0 |
Cash Flow Summary (Q1 2010):
- Net cash provided by operating activities: $2.7 million
- Net cash used in investing activities: $(14.8) million (primarily capital expenditures for new distribution center and store openings)
- Net cash provided by financing activities: $2.1 million
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16.0% year-over-year, driven by a 9.1% increase in comparable store sales and the net addition of 23 new stores.
- Profitability: While the operating loss narrowed slightly in absolute terms, the net loss increased by $0.2 million. This was due to higher stock-based compensation and costs associated with relocating the distribution center, partially offset by improved gross margins and an accounting change regarding leasehold improvements.
- Accounting Change: The company changed the estimated useful life of leasehold improvements from 7 years to 10 years (or lease term). This reduced depreciation expense by $1.1 million and reduced the net loss by $0.7 million for the quarter.
- Inventory Build: Inventory increased by $7.7 million compared to the prior year period, reflecting preparation for peak seasons and new store openings.
- Capital Expenditures: Investing cash outflows increased significantly due to the $11.8 million acquisition of a new distribution center in Corona, California.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Capital Expenditures: The company expects to spend approximately $26.0 to $28.0 million on capital expenditures for fiscal 2010, covering 25 planned new store openings and the new distribution center.
- Liquidity: Management believes cash flows from operations and the $25.0 million revolving credit facility (currently unutilized) are sufficient to meet requirements for the next 12 months.
- Distribution Relocation: The move from Everett, WA to Corona, CA is intended to improve efficiency given the location of vendors. Additional exit costs of approximately $1.5 million are expected in Q2 2010.
Risks and Contingencies:
- Litigation: A class action settlement regarding overtime wages and meal breaks (Evan Johnson v. Zumiez) was preliminarily approved for $1.35 million. A second class action (Chandra Berg v. Zumiez) regarding store manager wages is ongoing with no settlement reached; potential loss is currently indeterminable.
- Auction Rate Securities: The company holds $0.9 million in auction rate securities that have failed to sell in recent auctions. While currently classified as temporary impairment, continued illiquidity could impact short-term liquidity.
- Seasonality: Sales are heavily weighted toward the third and fourth fiscal quarters (back-to-school and holidays).
- Vendor Relations: The company relies on third-party vendors for 85% of merchandise; disruptions or price increases could impact margins.
Investor Verification Checklist
- Comparable Store Sales: Verify the 9.1% comparable store sales growth and the specific drivers (transaction volume vs. dollars per transaction).
- Exit Costs: Monitor the realization of the estimated $1.5 million in additional lease termination and exit costs for the Everett distribution center in Q2 2010.
- Litigation Exposure: Track the status of the Chandra Berg class action lawsuit and the final approval of the Evan Johnson settlement.
- Inventory Levels: Assess the $58.6 million inventory balance against sales velocity to ensure no significant markdowns are required in future quarters.
- Auction Rate Security: Confirm the liquidity status of the $0.9 million auction rate security and any potential for further impairment charges.
- Capital Expenditure Execution: Verify the pace of the 25 planned new store openings against the $26-28 million capital budget.