Zumiez Inc. — Q1 FY2022 Form 10-Q
Business context and period: Specialty retailer of apparel, footwear, accessories and hardgoods operating under Zumiez, Blue Tomato and Fast Times. The quarter was the 13 weeks ended April 30, 2022; comparisons are with the 13 weeks ended May 1, 2021. Zumiez operated 741 stores across the U.S., Europe, Canada and Australia.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $220.7 million | $279.1 million |
| Gross profit / margin | $72.4 million / 32.8% | $103.2 million / 37.0% |
| Operating profit / margin | $0.5 million / 0.2% | $34.3 million / 12.3% |
| Net income (loss) | $(0.4) million; $(0.02) diluted EPS | $26.4 million; $1.03 diluted EPS |
| Operating cash flow | $(24.5) million | $26.9 million |
- At April 30, cash and cash equivalents were $62.5 million and marketable securities were $110.5 million, totaling $173.0 million. Current assets were $348.8 million versus current liabilities of $178.3 million.
- No borrowings were outstanding under either credit facility. Operating lease liabilities totaled $277.3 million, including $69.3 million current. The filing reports no other funded debt.
- Inventory was $141.9 million, up from $128.7 million at January 29, 2022. Cash, cash equivalents and restricted cash ended the quarter at $69.2 million, down from $124.1 million at fiscal year-end.
Material changes and drivers
- Sales declined 20.9%. Management attributed the decrease primarily to comparison with prior-year domestic stimulus and consumer spending patterns, as well as continued inflationary pressure. North America sales fell 25.1%; Europe and Australia sales rose 13.0% combined, or 21.8% excluding foreign exchange effects.
- Gross margin contracted 420 basis points, mainly from fixed-cost deleverage and higher store occupancy, web shipping and distribution costs. SG&A rose 4.3% to $71.9 million and increased to 32.6% of sales from 24.7%, reflecting deleverage and higher store, event and corporate costs.
- Stores were open for approximately 100% of possible days versus 93.4% a year earlier. A $3.6 million German government COVID-related subsidy was recorded as a reduction of SG&A.
- Operating cash use reflected working-capital outflows, including inventory, payroll and lease-liability payments. Investing activities provided $58.6 million, primarily from net sales and maturities of marketable securities. Financing activities used $87.5 million, mainly for share repurchases.
- The company repurchased 1.914 million shares for $83.3 million at an average $43.51 per share; the $150 million authorization was completed in March. Shares outstanding were 19.459 million at April 30, down from 21.215 million at January 29.
Outlook, risks and contingencies
- Management expected $30–$32 million of FY2022 capital expenditures, mainly for store improvements and new locations, and remained on track to open approximately 34 stores. It said cash, marketable securities, operating cash flow and available credit were expected to cover foreseeable operating needs and planned capital expenditures for at least 12 months.
- The Wells Fargo facility provides up to $25 million through December 1, 2023, and up to $35 million thereafter through December 1, 2024. Its covenants include trailing-four-quarter net income of at least $5 million and a 1.25:1 quick ratio; the filing reports no borrowings but does not state a covenant breach.
- Key risks include inflation and cost increases that may not be recoverable through pricing, discretionary consumer demand, changing fashion preferences, supply-chain and labor costs, foreign exchange, COVID-19 disruptions, and seasonal inventory and sales volatility. The quarter’s results are not necessarily indicative of the full year.
- Outstanding merchandise purchase orders were $257.3 million; most could be canceled before shipment, subject to exceptions. A California wage-and-hour class action settlement estimated at $2.8 million received preliminary court approval in May 2022; the amount had been accrued and expensed in Q2 FY2021. The filing reports other ordinary-course litigation and related uncertainties.
- Net unrealized losses on available-for-sale securities contributed to a $9.8 million other comprehensive loss for the quarter. No impairment losses were recorded in Q1 FY2022, compared with $2.1 million of lease-asset impairment in the prior-year quarter.
Investor verification points
- Check subsequent sales, comparable-sales trends, inventory levels and markdowns against the sharp Q1 revenue and margin deterioration.
- Assess whether operating cash flow improves after the seasonal inventory build and whether the company maintains ample liquidity after substantial repurchases.
- Review covenant compliance, particularly the minimum trailing-four-quarter net income and quick-ratio requirements; no breach is disclosed in this filing.
- Track progress against the $30–$32 million capital-spending plan and approximately 34 planned store openings, alongside the $257.3 million of purchase orders.
- Monitor the settlement approval and final cost of the California litigation, foreign-exchange exposure, and the impact of inflation and shipping, occupancy and wage costs.