Zumiez Inc. — FY2016 Form 10-K
Business context and reporting period. Zumiez is a specialty retailer of apparel, footwear, accessories and hardgoods serving youth lifestyle markets, with stores and ecommerce operations under Zumiez, Blue Tomato and Fast Times. Fiscal 2016 was the 52 weeks ended January 28, 2017; the filing also reports fourth-quarter results. The company operated 685 stores at year-end, including 603 in the U.S., 48 in Canada, 29 in Europe and 5 in Australia. Fast Times was acquired in August 2016.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $836.3 million | $804.2 million |
| Comparable sales | -0.2% | -5.3% |
| Gross profit / margin | $275.0 million / 32.9% | $268.6 million / 33.4% |
| Operating profit / margin | $39.7 million / 4.8% | $46.2 million / 5.7% |
| Net income | $25.9 million | $28.8 million |
| Diluted EPS | $1.04 | $1.04 |
| Cash from operations | $48.5 million | $48.6 million |
| Capital expenditures | $20.4 million | $34.8 million |
Fourth quarter: Sales were $263.6 million versus $242.4 million; comparable sales rose 5.1% versus a 9.5% decline a year earlier. Operating profit was $27.9 million versus $21.5 million, net income was $18.2 million versus $13.1 million, and diluted EPS was $0.74 versus $0.50.
Annual sales increased 4.0%, primarily due to store additions and the Fast Times acquisition, while comparable sales remained slightly negative. Net income fell about 10%; diluted EPS was flat as the weighted-average diluted share count declined to 24.9 million from 27.7 million. Gross margin contracted 50 basis points, and SG&A rose to 28.1% of sales from 27.7%. Management attributed margin pressure mainly to fixed-cost deleveraging, including store occupancy and wage costs. The effective tax rate declined to 35.6% from 37.2%.
Liquidity, debt and capital allocation
Cash, cash equivalents and current marketable securities totaled $78.8 million at year-end, compared with $75.6 million a year earlier; working capital was $137.8 million versus $129.8 million. Cash and cash equivalents alone declined to $20.2 million from $43.2 million, alongside higher marketable securities. The company reported no borrowings under its $100 million asset-based revolving facility, which matures in February 2021, or its international credit lines. The filing states liquidity sources are expected to cover foreseeable operating and planned capital needs for at least 12 months.
FY2016 cash flows included $48.5 million from operations, $51.5 million used in investing and $20.1 million used in financing. Investing outflows included capital expenditures, the Fast Times acquisition and net purchases of marketable securities. The company repurchased $21.6 million of stock during the year; its $70 million authorization expired January 28, 2017. It has not declared cash dividends. Future minimum operating lease payments were $411.7 million, excluding certain contingent rent and other occupancy costs.
Outlook, risks and unusual items
- Management expressed caution about FY2017, a 53-week year ending February 3, 2018. It planned approximately 18 store openings, fewer than FY2016, and expected capital expenditures of approximately $24–$26 million.
- Planned investment includes a Customer Engagement Suite integrating ecommerce and in-store point-of-sale, order-management and transportation systems. Management expects the cost structure to grow faster than in FY2016, citing these investments and statutory wage increases.
- Management expected year-end inventory per square foot to increase, partly due to timing of the extra fiscal week. Excluding possible buybacks, it expected cash, short-term investments and working capital to increase and did not anticipate new long-term borrowings.
- Key risks include volatile youth fashion preferences and discretionary spending, mall and ecommerce competition and traffic, seasonal inventory and weather exposure, labor and merchandise costs, foreign exchange, international expansion and acquisition integration, cybersecurity and systems reliability, and reliance on leased retail locations and distribution facilities. A 10% exchange-rate change was estimated to move FY2016 sales by approximately $12.5 million.
- FY2016 included $1.9 million of long-lived asset impairment. No goodwill or intangible impairment was recorded; Blue Tomato goodwill of $40.3 million had estimated fair value 20% above carrying value at the latest test. Management stated current litigation was not expected to have a material adverse effect. The auditor gave an unqualified opinion on the financial statements and internal controls were reported effective.
Important facts for investors to verify
- Whether FY2016’s positive comparable-sales trend in the second half continues, and whether sales growth can be sustained without relying on new stores.
- Whether gross margin and operating margin stabilize amid occupancy, wage and other cost pressures.
- Inventory quality and markdown exposure, particularly through the seasonal holiday period and the 53-week FY2017 calendar.
- Execution and returns from the Customer Engagement Suite, store fulfillment strategy and planned capital spending.
- Liquidity and cash generation relative to share repurchases, lease commitments, international expansion and foreign-exchange exposure.