Zumiez Inc. — Q3 Fiscal 2012 Form 10-Q
Reporting period: Quarter ended October 27, 2012; year-to-date figures cover the 39 weeks ended that date. Fiscal 2012 is a 53-week year ending February 2, 2013. Amounts below are in U.S. dollars; financial amounts are in millions unless noted.
Business context
Zumiez operates specialty stores and ecommerce businesses selling action-sports apparel, footwear, equipment and accessories. At quarter-end it operated 495 stores: 471 in the U.S., 19 in Canada and five in Europe. Blue Tomato, acquired in July 2012, provided the company’s entry into Europe. Ecommerce represented 10.7% of quarterly sales and 8.7% of nine-month sales, compared with 6.4% and 6.0%, respectively, in the prior-year periods.
Financial results
| Metric | Three months ended Oct. 27, 2012 | Prior year | Nine months ended Oct. 27, 2012 | Prior year |
|---|---|---|---|---|
| Net sales | $180.0; +16.9% | $154.0 | $445.0; +19.6% | $372.0 |
| Comparable-store sales | +3.7% | — | +8.0% | — |
| Gross profit / margin | $67.1 / 37.3% | $59.9 / 38.9% | $155.6 / 35.0% | $130.2 / 35.0% |
| Operating profit / margin | $21.4 / 11.9% | $22.8 / 14.8% | $32.4 / 7.3% | $28.9 / 7.8% |
| Net income | $12.7 | $14.1 | $19.3 | $18.6 |
| Diluted EPS | $0.40 | $0.45 | $0.61 | $0.60 |
Quarterly sales growth reflected comparable-store gains, net additions of 48 U.S. and Canadian stores since the prior-year period, and Blue Tomato. Blue Tomato contributed $8.1 million of quarterly sales and $9.6 million since acquisition. Management attributed comparable-sales growth mainly to higher dollars per transaction, partly offset by fewer transactions.
Quarterly gross margin fell 160 basis points, principally due to ecommerce fulfillment and shipping costs and a $1.4 million acquired-inventory fair-value charge. Quarterly SG&A rose 23.1% and reached 25.4% of sales, reflecting Blue Tomato incentive compensation, corporate costs and acquired-intangible amortization, partly offset by store efficiencies. For the nine months, gross margin was flat; SG&A as a share of sales increased 50 basis points. Higher effective tax rates—40.9% for the quarter and 43.4% year to date—were attributed in part to Blue Tomato.
Cash, liquidity and obligations
- Nine-month operating cash flow was $28.2 million, versus $25.2 million a year earlier. Investing used $34.8 million, including $69.7 million net for the acquisition and $34.0 million in capital expenditures; financing provided $2.6 million.
- At October 27, cash was $10.6 million and current marketable securities were $87.8 million, down from $14.8 million and $158.0 million at January 28. Inventory was $109.8 million, versus $65.0 million at fiscal year-end.
- There were no borrowings under the $25 million revolving facility (available to increase to $35 million, subject to terms); $0.6 million of commercial letters of credit was outstanding. The facility expires September 1, 2013. Blue Tomato added $2.2 million of debt at quarter-end; Zumiez reported covenant compliance.
- Operating lease commitments totaled $483.5 million and merchandise purchase orders totaled $117.8 million. Management said it expected liquidity to cover foreseeable operating needs and planned capital expenditures for at least 12 months.
Outlook, risks and unusual items
- Management expected fiscal 2012 capital expenditures of approximately $42–44 million and planned about 50 new store openings. The filing provides no specific earnings or sales guidance.
- Blue Tomato’s purchase price was $74.8 million in cash; acquisition accounting and fair values remained preliminary. Possible seller incentives were estimated at €18.1 million ($23.4 million), subject to performance and continued employment through April 2015. The acquisition contributed a $1.8 million net loss from acquisition through quarter-end.
- Relocations of the ecommerce fulfillment center and home office generated $2.1 million of exit and related costs during the first nine months; management did not expect material additional costs. The company had a $1.8 million related liability at quarter-end.
- On November 13, 2012, the board authorized repurchases of up to $22 million of common stock through February 1, 2014, funded from working capital; the authorization does not establish that repurchases will occur.
- Key disclosed risks include fashion and discretionary-spending shifts, seasonality, inventory and markdown exposure, mall traffic and competition, execution and integration of international expansion, ecommerce and fulfillment disruptions, foreign exchange, and substantial lease commitments. The company also cited investment valuation/liquidity risk and ordinary-course litigation. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether comparable-sales momentum and ecommerce growth continue, and whether transaction counts recover.
- How margins develop as ecommerce shipping costs, Blue Tomato integration expenses, seller incentives and purchase-accounting charges affect results.
- Blue Tomato’s final acquisition fair values, performance, and potential incentive obligations.
- Inventory levels and seasonal sell-through, especially given the increase since fiscal year-end and the holiday-season concentration of sales.
- Cash and marketable-security liquidity, debt-facility renewal or replacement before September 2013, covenant compliance, and the scale of lease and purchase commitments.
- Actual capital spending, store openings and any stock repurchases relative to management’s plans and the board authorization.