ZUMZ

Zumiez Inc. 10-K Summary: Fiscal Year Ended January 31, 2009

Business Context and Reporting Period

Zumiez Inc. is a mall-based specialty retailer of action sports apparel, footwear, equipment, and accessories targeting young men and women aged 12 to 24. The company operates under the Zumiez brand name. As of January 31, 2009, the company operated 343 stores across 31 states, primarily located in shopping malls. The fiscal year ended January 31, 2009, consisted of 52 weeks.

Key Financial Metrics

Liquidity: The company held $78.6 million in cash, cash equivalents, and current marketable securities. It maintained a $25.0 million revolving credit facility with no outstanding borrowings as of January 31, 2009.

Material Changes vs. Prior Period

• Revenue Growth vs. Comparable Sales: While total net sales increased 7.1% to $408.7 million, this growth was driven entirely by the opening of 58 new stores. Comparable store sales declined 6.5%, marking the first year-over-year decline in the company's history.
• Margin Compression: Gross margin decreased 300 basis points to 32.9%, driven by store occupancy costs growing faster than sales and lower product margins, particularly in apparel. Operating profit fell 36.8% to $24.6 million.
• Geographic Impact: Sales declines were concentrated in the western half of the United States (including California, Nevada, and Arizona), which accounted for approximately 60% of total net sales. Same-store sales in these regions declined 11%.
• Impairment Charges: The company recorded a non-cash impairment charge of $812,000 related to leasehold improvements for five underperforming stores.

Guidance, Outlook, and Risks

Outlook: Management expects fiscal 2009 to be "very challenging" with results likely below fiscal 2008 levels for at least the first six months. The company plans to open approximately 37 new stores in fiscal 2009, a slowdown from previous years, and intends to control inventory purchases and SG&A expenditures.

Key Risks and Contingencies:

• Economic Environment: The company cites the unprecedented global financial crisis and recession as primary drivers of reduced consumer traffic and discretionary spending.
• Investment Liquidity: The company holds $1.8 million in auction rate securities that have failed to sell in recent auctions. These are classified as long-term assets due to liquidity constraints, though management views the impairment as temporary.
• Debt Covenants: The revolving credit facility includes restrictive covenants, including a minimum net income after taxes of $1.00 for any trailing twelve-month period and a minimum quick asset ratio of 1.0. The company was in compliance as of January 31, 2009.
• Litigation: The company is defending a securities class action lawsuit filed in December 2007 alleging misrepresentations regarding financial results. Additionally, a putative class action regarding overtime wages and meal breaks for California employees was filed in March 2008.

Investor Verification Checklist

• Verify the sustainability of the 6.5% comparable store sales decline and the severity of the downturn in the western U.S. markets.
• Monitor the status of the $1.8 million auction rate securities and potential for further impairment charges if liquidity does not improve.
• Assess the company's ability to maintain compliance with credit facility covenants, specifically the minimum net income and quick asset ratio, given the projected earnings decline.
• Review the progress of the securities class action litigation and potential indemnification costs for directors and officers.
• Confirm the execution of the reduced store opening plan (37 stores) and the impact on capital expenditures versus cash flow generation.