Zumiez Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended July 28, 2012. Unless noted otherwise, amounts below are in U.S. dollars. Zumiez operated 479 stores: 457 in the U.S., 17 in Canada and five in Europe. It completed its acquisition of European retailer Blue Tomato on July 4, 2012.
Financial performance
| Metric | Three months ended July 28, 2012 | Three months ended July 30, 2011 | Six months ended July 28, 2012 | Six months ended July 30, 2011 |
|---|---|---|---|---|
| Net sales | $135.1 million | $112.2 million | $265.0 million | $218.1 million |
| Comparable-store sales growth | 9.5% | — | 11.1% | — |
| Gross profit / margin | $46.4 million / 34.4% | $37.1 million / 33.0% | $88.5 million / 33.4% | $70.3 million / 32.2% |
| Operating profit / margin | $3.8 million / 2.8% | $3.6 million / 3.2% | $11.0 million / 4.2% | $6.1 million / 2.8% |
| Net income | $2.1 million | $2.6 million | $6.6 million | $4.5 million |
| Diluted EPS | $0.07 | $0.08 | $0.21 | $0.14 |
| Net cash from operating activities | — | — | $14.5 million | $11.3 million |
- Quarterly comparison: Sales increased 20.4%, supported by 9.5% comparable-store growth, 50 net U.S. and Canadian store additions since the prior-year quarter, and Blue Tomato. Blue Tomato contributed $1.5 million of reported-period sales. Net income declined despite higher sales and gross profit; the effective tax rate rose to 56.7% from 35.0%, and SG&A increased faster than sales.
- Six-month comparison: Sales rose 21.5% and net income rose 47.7%. Gross margin improved 120 basis points; SG&A as a share of sales decreased 20 basis points. The effective tax rate increased to 47.5% from 37.0%.
- Management attributed gross-margin gains mainly to product-margin improvement, occupancy-cost leverage and distribution efficiencies. In Q2, SG&A was 31.6% of sales versus 29.8%, including acquisition and relocation costs; store operating efficiencies partly offset those items.
Cash, liquidity and obligations
- At July 28, 2012, cash and cash equivalents were $12.6 million and current marketable securities were $84.2 million, compared with $14.8 million and $158.0 million, respectively, at January 28, 2012. Current assets were $222.5 million and current liabilities $89.7 million.
- Six-month operating cash flow was $14.5 million. Investing activities used $18.7 million, including $69.7 million net cash for the acquisition and $21.9 million of capital expenditures, partly offset by net sales of marketable securities. Financing activities provided $2.3 million.
- There were no borrowings under the $25 million revolving credit facility, which may be increased to $35 million under its accordion feature. The facility expires September 1, 2013; $2.5 million of commercial letters of credit was outstanding. Acquired Blue Tomato debt was $2.2 million at period end.
- Operating lease commitments totaled $454.7 million; purchase obligations were $128.9 million. Management said available liquidity and expected operating cash flows should cover operations and planned capital expenditures for at least the next 12 months.
Outlook, material items and risks
- Fiscal 2012 planned capital expenditures were approximately $45–$47 million, primarily for about 50 planned store openings, remodels and completion of the Lynnwood home office. The filing does not provide clear numerical full-year sales or earnings guidance.
- Blue Tomato was acquired for $74.8 million cash consideration. Potential seller incentive payments are capped at $27.2 million; the company estimated $22.3 million at quarter end and recognized $0.7 million of related compensation expense in the quarter. Acquisition accounting and fair values remained preliminary. Blue Tomato contributed a $0.6 million net loss after acquisition.
- Acquisition-related and unusual charges included $1.5 million of Q2 transaction costs, $0.5 million of inventory fair-value step-up expense, and relocation and exit costs. The company recorded $0.9 million of lease-termination costs and $0.4 million of other exit costs in the six-month period, and did not expect material additional relocation costs. Q2 other income also included a $0.5 million foreign-currency transaction gain.
- The company expects its effective tax rate to be higher than the U.S. federal statutory rate and its fiscal 2011 rate, in part because of the Blue Tomato acquisition.
- Key disclosed risks include seasonal and discretionary retail demand, changing fashion preferences and markdown exposure, international expansion and currency movements, integration of Blue Tomato, inventory and vendor risks, fulfillment-center disruption, substantial lease commitments, and investment-value fluctuations. Management reported compliance with credit covenants and effective disclosure controls; it reported no material change in internal control over financial reporting.
- The filing revised the prior-year cash-flow presentation for an immaterial error involving unpaid fixed-asset purchases. The revision changed reported operating and investing cash flows for the prior-year period, but not revenue, operating profit, net income, cash or equity; the company concluded the error was not material.
Important facts for investors to verify
- Whether comparable-store sales momentum and transaction trends persist; growth was driven by higher dollars per transaction while comparable transactions declined.
- Blue Tomato’s post-acquisition sales, profitability, integration progress, final purchase-price allocation and actual incentive payments.
- Seasonal inventory levels, margins and cash conversion, particularly as inventory reached $99.7 million at quarter end.
- Execution and cost of the fulfillment-center relocation, planned store openings and $45–$47 million capital-expenditure program.
- Liquidity after the acquisition, upcoming credit-facility expiry, debt and lease obligations, and compliance with lending covenants.