Zumiez Inc. — Q3 FY2017 Form 10-Q
Reporting period: 13 weeks ended October 28, 2017; year-to-date figures cover 39 weeks. Fiscal 2017 is a 53-week year ending February 3, 2018. Zumiez operated 694 stores across the U.S., Canada, Europe and Australia, alongside ecommerce sites.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | First 9 months FY2017 | First 9 months FY2016 |
|---|---|---|---|---|
| Net sales | $245.8m | $221.4m | $619.2m | $572.6m |
| Gross profit / margin | $83.4m / 33.9% | $76.2m / 34.4% | $195.2m / 31.5% | $181.0m / 31.6% |
| Operating profit / margin | $18.8m / 7.7% | $16.9m / 7.6% | $11.8m / 1.9% | $11.8m / 2.1% |
| Net income | $11.9m | $10.7m | $6.9m | $7.7m |
| Diluted EPS | $0.48 | $0.43 | $0.28 | $0.31 |
Cash flow and liquidity: Nine-month operating cash flow was $13.9m, versus $4.0m; capital expenditures were $19.1m, implying approximately $5.2m of operating cash flow less capital expenditures. Investing cash outflow was $35.9m, including net marketable-security purchases. Cash and cash equivalents were $10.7m at October 28, while marketable securities were $75.1m. Current assets were $272.9m and current liabilities $124.8m.
Debt: $11.4m was drawn on international revolving lines, compared with none at fiscal year-end. The $100m asset-based facility had no borrowings outstanding. Total liabilities were $169.7m; the company reported no off-balance-sheet arrangements.
Changes and management commentary
- Q3 sales rose 11.0%; comparable sales increased 7.9%, primarily on higher comparable transactions. Men’s clothing was the main category driver. North America sales grew 10.0% and other international sales grew 22.5%.
- For the first nine months, sales rose 8.1% and comparable sales increased 5.1%. International sales grew 20.2%; North America sales grew 7.0%.
- Q3 gross margin fell 50 basis points, reflecting higher inventory shrinkage and lower product margin, partly offset by better occupancy-cost leverage. Year-to-date gross margin declined 10 basis points.
- Q3 SG&A rose 8.9% in dollars but declined 60 basis points as a share of sales. Year-to-date SG&A rose 8.4% and increased 10 basis points as a share of sales, with incentive compensation and wage investment partly offset by store-cost leverage.
- Year-to-date net income and diluted EPS declined despite higher sales; the effective tax rate increased to 39.2% from 36.3%, partly due to $0.5m of excess tax deficiencies related to share-based payments.
Outlook, risks and unusual items
- Management expected fiscal 2017 capital expenditures of approximately $24m–$26m, primarily for store openings, remodels and relocations, and remained on track to open approximately 19 stores for the year. No earnings or sales guidance was provided in the supplied filing text.
- Management expected available liquidity and revolving-credit availability to cover foreseeable operating needs and planned capital expenditures for at least 12 months.
- Seasonality is significant: sales and profitability are typically higher in the third and fourth quarters, and peak-season inventory increases the risk of markdowns if demand weakens.
- Inventory shrinkage was a notable margin headwind. Other disclosed risks include changing fashion preferences, retail competition and consumer traffic, vendor and supply-chain disruption, foreign-exchange exposure, labor costs, cybersecurity, and execution of international and omni-channel growth.
- Outstanding merchandise purchase orders were $172.7m, generally cancellable before shipment subject to exceptions. Operating lease obligations totaled $415.8m, excluding contingent rent and other occupancy costs. The company reported ordinary-course litigation and stated that some matters were not accrued because liability was not probable or could not be reasonably estimated.
- The company expected the new lease-accounting standard to have a material impact on its financial statements; its impact was still under evaluation. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Investor verification priorities
- Verify comparable-sales trends and whether Q3 transaction growth and category strength continued into the holiday quarter.
- Assess inventory levels, shrinkage, markdown exposure and the effect on gross margin.
- Reconcile year-to-date earnings and cash generation, including working-capital movements and capital spending.
- Review the $11.4m international facility borrowing, available borrowing capacity and the substantial lease and merchandise-purchase commitments.
- Check actual fiscal-year store openings and capital expenditures against management’s stated plans, and monitor the implementation and balance-sheet effect of lease accounting.