Zumiez Inc. — FY2020 Form 10-K
Business and period: Specialty retailer of action-sports, streetwear and lifestyle apparel, footwear, accessories and hardgoods, operating as Zumiez, Blue Tomato and Fast Times. Fiscal 2020 was the 52 weeks ended January 30, 2021; fiscal 2019 was the 52 weeks ended February 1, 2020. The filing reports annual results and unaudited fourth-quarter results.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $990.7 million | $1,034.1 million |
| Gross profit / margin | $350.0 million / 35.3% | $366.6 million / 35.4% |
| Operating profit / margin | $96.9 million / 9.8% | $85.8 million / 8.3% |
| Net income | $76.2 million | $66.9 million |
| Diluted EPS | $3.00 | $2.62 |
| Cash from operations | $138.4 million | $106.1 million |
| Capital expenditures | $9.1 million | $18.8 million |
Quarter ended January 30, 2021: Sales were $331.5 million, gross profit $129.6 million, operating profit $53.8 million and net income $42.8 million. Comparable sales increased 4.7%.
Liquidity and obligations: Cash, cash equivalents and current marketable securities totaled $375.5 million, up from $251.2 million; working capital was $339.8 million, versus $252.9 million. Inventory was $134.4 million, compared with $135.1 million. No borrowings were outstanding under the $35 million Wells Fargo facility or the €15 million UBS letter-of-credit facility. The balance sheet included $313.1 million of present-value operating lease liabilities; undiscounted lease payments were $338.0 million. Shareholders’ equity was $552.6 million.
Material changes and drivers
- Annual sales fell 4.2%, primarily because of COVID-related store closures: stores were open approximately 78.4% of possible days. Nevertheless, comparable sales rose 13.6%, driven by ecommerce and strong store results after reopening; the calculation excludes stores closed for more than seven days.
- Operating profit rose 13.0% and diluted EPS rose 14.5%, despite lower sales. Gross margin edged down 10 basis points. SG&A fell 9.9%, with lower store wages and training costs, governmental credits and expense controls contributing to the improvement.
- Management said fiscal-year earnings benefited from product-margin gains, occupancy abatements and governmental credits, primarily payroll-related. Operating cash flow also included an estimated $30.1 million benefit from timing and deferrals, including lower inventory, landlord payments, extended vendor terms and payroll taxes.
- Net cash increased $21.7 million. Investing cash use was $110.5 million, including $101.4 million of net marketable-security purchases; financing cash use was $9.7 million, including $13.4 million of stock repurchases. The company repurchased 694,000 shares at an average $19.31 before pausing the program in March 2020.
Outlook, risks and contingencies
- For fiscal 2021, management expected fewer store closures and restrictions, a significantly stronger first quarter than the prior-year quarter, and more challenging comparisons in the second quarter and parts of the second half. It expected full-year operating-margin growth versus fiscal 2020, while restoring some costs cut in 2020.
- Management planned approximately 22 new stores, mainly in Europe and Australia, with North American store count expected to be roughly flat. Planned capital expenditures were approximately $20–$22 million. Inventory per square foot was expected to grow more slowly than sales; excluding potential buybacks, management expected cash, short-term investments and working capital to increase and did not anticipate new long-term borrowing.
- Key risks include COVID-19 resurgence, store restrictions and supply-chain disruption; fashion and discretionary-spending changes; competition and mall traffic; foreign sourcing, freight, labor and currency exposure; seasonal inventory risk; and execution of international expansion and the omni-channel strategy. About 60% of FY2020 sales occurred in the third and fourth quarters combined.
- Operating lease asset impairments were $3.4 million and fixed-asset impairments were $1.4 million. Goodwill impairment was not recorded. A California wage-and-hour putative class action remained in progress; the company said it could not estimate the outcome or any reasonably possible loss. Management stated that current litigation was not expected to have a material adverse effect overall.
- The financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of January 30, 2021.
Investor verification priorities
- Assess whether comparable-sales growth and digital demand persist as store operations normalize; note that the reported comparable-sales measure excludes stores closed for more than seven days.
- Separate recurring margin and cash generation from temporary COVID-era credits, rent abatements, cost reductions and payment deferrals, particularly as management planned to restore costs.
- Review liquidity against lease payments, $262.6 million of merchandise purchase commitments, planned capital spending and the December 2021 maturity of the Wells Fargo facility. Most purchase orders were cancelable before shipment, subject to stated exceptions.
- Monitor the California wage-and-hour case, renewed pandemic restrictions, supply-chain costs and the execution and returns of planned international store openings.