Zumiez Inc. — Q3 FY2018 Form 10-Q
Business and period. Specialty retailer of apparel, footwear, accessories and hardgoods, operating 703 stores across the U.S., Canada, Europe and Australia, plus e-commerce sites. The quarter was the 13 weeks ended November 3, 2018; the nine-month period was 39 weeks. Comparisons are with periods ended October 28, 2017. Amounts below are USD unless noted.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $248.8m | $245.8m | $674.1m | $619.2m |
| Comparable sales growth | 4.8% | Not stated here | 6.3% | Not stated here |
| Gross profit | $86.9m | $83.4m | $222.0m | $195.2m |
| Gross margin | 34.9% | 33.9% | 32.9% | 31.5% |
| Operating profit | $18.4m | $18.8m | $23.4m | $11.8m |
| Operating margin | 7.4% | 7.7% | 3.5% | 1.9% |
| Net income | $13.8m | $11.9m | $15.6m | $6.9m |
| Diluted EPS | $0.55 | $0.48 | $0.62 | $0.28 |
Cash flow and liquidity. Nine-month operating cash flow was $17.1m, versus $13.9m; capital expenditures were $15.7m, versus $19.1m. Cash and cash equivalents were $29.6m and marketable securities $98.2m at November 3. Current assets were $348.2m and current liabilities $147.0m (working capital $201.2m). Inventory was $186.9m, up from $125.8m at February 3, reflecting seasonal stocking and a $63.9m inventory-related operating cash outflow.
Debt. No borrowings were outstanding under the $100m Wells Fargo ABL facility at quarter-end. International revolving borrowings were $5.7m, compared with $0.9m at fiscal year-end. The filing reports no other significant funded debt.
Changes and management commentary
- Quarterly sales rose 1.2%; comparable sales increased 4.8%, but reported sales were affected by a calendar shift that reduced the comparison by $9.6m due to an additional prior-year week of back-to-school sales. Comparable gains were led by footwear and apparel; hardgoods declined.
- Nine-month sales increased 8.9%, including 6.3% comparable growth. Management attributed growth primarily to comparable sales and store additions. Gross margin improved 140 basis points over nine months, supported by occupancy-cost leverage, stronger product margin and lower shrinkage.
- Quarterly SG&A increased 6.1% and rose 130 basis points as a share of sales, contributing to lower operating profit despite higher sales and gross margin. Management cited the calendar shift, higher corporate costs and incentive compensation. Nine-month SG&A grew 8.3%, but declined 20 basis points as a share of sales.
- The effective tax rate fell to 26.5% for Q3 and 35.3% for the nine months, primarily reflecting the lower U.S. federal tax rate under the Tax Cuts and Jobs Act, partly offset by uncertainty around Austrian deferred tax assets.
Outlook, commitments and risks
- Management expected FY2018 capital expenditures of approximately $18m–$20m and remained on track to open approximately 13 stores. The company stated available liquidity should cover foreseeable operating needs and planned capital expenditures for at least 12 months. No full-year earnings or sales guidance is provided in the filing text.
- Operating lease commitments totaled $383.7m, excluding contingent rent and certain occupancy costs. Merchandise purchase commitments were approximately $199.0m, largely cancellable before shipment, subject to exceptions.
- Zumiez adopted ASC 606 in February 2018; the filing says its impact on reported quarterly and nine-month results was not material. The company expected adoption of the new lease standard beginning fiscal 2019 to materially increase balance-sheet assets and liabilities.
- A putative California wage-and-hour class action remained pending; the company said it could not estimate a reasonably possible loss. Self-insurance reserves were $2.8m. The filing also highlights retail seasonality, fashion and inventory risk, competitive and traffic pressures, international and foreign-exchange exposure, supply-chain costs, labor costs, cybersecurity, and reliance on distribution facilities.
- Subsequent event: on December 7, 2018, the company entered a new secured revolving credit facility of up to $35m, replacing the prior $100m ABL facility. The new facility matures in December 2021.
Key facts for investors to verify
- Whether comparable-sales momentum and gross-margin gains continued beyond the reported quarter, and how the calendar shift affects year-over-year comparisons.
- Inventory quality, seasonal sell-through and markdown exposure, given the increase in inventory and planned holiday-season commitments.
- The impact of higher quarterly SG&A on operating leverage and the full-year result.
- Availability and terms of the replacement $35m credit facility, and ongoing international borrowings and liquidity needs.
- Potential effects of lease-accounting adoption, the California litigation and material operating lease obligations.