Zumiez Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter (13 weeks) ended October 29, 2011, and first nine months (39 weeks) of fiscal 2011. Comparisons are with the corresponding periods ended October 30, 2010. Zumiez operated 442 stores in 38 U.S. states and Canada and sold action-sports apparel, footwear, equipment and accessories through stores and ecommerce.
Financial performance
| Metric | Third quarter 2011 | Third quarter 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $154.0 million | $135.9 million | $372.0 million | $322.7 million |
| Gross profit / margin | $60.1 million / 39.1% | $52.6 million / 38.7% | $130.9 million / 35.2% | $108.6 million / 33.7% |
| Operating profit / margin | $22.8 million / 14.8% | $19.0 million / 14.0% | $28.9 million / 7.8% | $13.4 million / 4.1% |
| Net income | $14.1 million | $12.3 million | $18.6 million | $9.2 million |
| Diluted EPS | $0.45 | $0.40 | $0.60 | $0.30 |
- Third-quarter sales rose 13.3%; comparable sales increased 6.0%. Nine-month sales rose 15.3%; comparable sales increased 8.3%. Growth also reflected a net 42-store increase since the prior-year comparison period.
- Management attributed comparable-sales gains primarily to higher dollars per transaction, driven by higher average unit retail, partly offset by fewer transactions and fewer units per transaction.
- Third-quarter gross margin improved 40 basis points, principally from distribution-center efficiencies. Nine-month gross margin improved 150 basis points, reflecting distribution efficiencies, occupancy-cost leverage and prior-year distribution-center relocation costs.
- SG&A was $37.3 million in the quarter and $101.9 million year to date. As a share of sales, it declined to 24.3% from 24.7% for the quarter and to 27.4% from 29.6% year to date. Store efficiencies and lower corporate costs were partly offset by higher web operating expense.
Cash flow, liquidity and obligations
- For the first nine months, operating cash flow was $25.2 million, versus $14.9 million a year earlier. Investing cash flow used $25.6 million, including $18.4 million of capital expenditures and $7.2 million of net purchases of marketable securities. Financing provided $2.9 million. Cash increased $2.5 million to $13.9 million.
- At October 29, cash and cash equivalents were $13.9 million and current marketable securities were $123.2 million. Current assets were $250.4 million and current liabilities $71.6 million. Inventories were $93.8 million, up from $56.3 million at fiscal year-end.
- The filing reports no outstanding borrowings. A secured revolving credit facility provides up to $25 million, with an option to increase to $35 million, through September 1, 2013. The company said it was covenant-compliant and expected liquidity sources to cover operations and planned capital expenditures for at least 12 months.
- Operating lease obligations totaled $402.7 million; merchandise purchase orders totaled $91.6 million. The filing reports no off-balance-sheet obligations.
Outlook, risks and notable items
- Fiscal 2011 capital expenditures were expected to be approximately $28–30 million, primarily for leasehold improvements and fixtures for 45 planned new stores and construction of a new home office in Lynnwood, Washington. No specific revenue or earnings guidance was provided.
- Management highlighted higher cotton, oil and other input costs and said it was working with vendors to mitigate them, while cautioning that margins could decline if efforts were unsuccessful. Key risks also include changing fashion preferences, discretionary-spending and mall-traffic weakness, seasonality, inventory markdowns, competition, international sourcing and substantial lease commitments.
- Ecommerce grew to 6.4% of quarterly sales and 6.0% of nine-month sales, versus 4.4% and 3.6%, respectively, in the prior-year periods.
- The company revised prior-year cash-flow presentation for an immaterial error involving unpaid fixed-asset purchases. The revision changed operating and investing cash-flow classifications, but not revenue, operating profit, net income, cash or equity; prior reports were not amended.
- A previously recorded $2.1 million employment class-action settlement was finally approved and paid in March 2011; it had been charged to SG&A in the prior-year period. A $0.9 million auction-rate security remained illiquid and classified as a long-term investment, with a $0.1 million temporary impairment. Disclosure controls were reported effective, with no material change in internal control during the quarter.
Important facts for investors to verify
- Whether comparable-sales momentum and transaction trends persisted into the holiday quarter, and how much growth came from new stores versus existing locations.
- Whether input-cost inflation, markdown activity and ecommerce expense affect gross margin and operating leverage.
- Inventory quality and seasonal sell-through, given the increase in inventory ahead of the peak selling season.
- Capital spending, store-opening execution and progress on the new home office, alongside the company’s significant lease and merchandise commitments.
- Credit quality and liquidity of municipal investments, including the auction-rate security, and continued compliance with credit-facility covenants.