Zumiez Inc. 10-Q Filing Summary
Business Context and Reporting Period
Company: Zumiez Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 30, 2011 (First Quarter of Fiscal 2011)
Business Overview: Zumiez is a specialty retailer of action sports apparel, footwear, equipment, and accessories. As of April 30, 2011, the company operated 408 stores across 37 U.S. states and Canada, targeting young men and women aged 12 to 24.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net Sales | $105.9 million | $89.1 million |
| Gross Profit | $33.4 million | $25.5 million |
| Gross Margin | 31.6% | 28.6% |
| Operating Profit | $2.6 million | ($3.3 million) Loss |
| Net Income | $1.9 million | ($1.9 million) Loss |
| Diluted EPS | $0.06 | ($0.06) |
| Cash & Cash Equivalents | $13.3 million | $11.4 million (Jan 29, 2011) |
| Marketable Securities | $117.4 million | $117.4 million (Jan 29, 2011) |
| Operating Cash Flow | $6.1 million | $2.7 million |
| Capital Expenditures | $5.0 million | $15.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 18.8% year-over-year, driven by a 12.6% increase in comparable store sales and the net addition of 27 stores.
- Profitability Turnaround: The company returned to profitability, reporting a net income of $1.9 million compared to a net loss of $1.9 million in the prior year. Operating profit improved from a $3.3 million loss to a $2.6 million gain.
- Margin Expansion: Gross margin improved by 300 basis points to 31.6%, attributed to the absence of distribution center relocation costs incurred in the prior year and better leverage of store occupancy costs.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased 7.4% in absolute terms but decreased as a percentage of sales by 310 basis points to 29.2%.
- Inventory Build: Inventory levels increased by $6.8 million to $63.1 million, reflecting preparation for peak seasons.
Guidance, Outlook, and Risks
- Capital Expenditure Outlook: Management expects to spend approximately $35 million to $37 million on capital expenditures for Fiscal 2011, primarily for 44 planned new store openings and the construction of a new home office in Lynnwood, Washington.
- Liquidity: The company maintains a $25.0 million secured revolving credit facility with no outstanding borrowings as of April 30, 2011. $2.1 million in commercial letters of credit were outstanding.
- Management Changes: Chief Financial Officer and Chief Administrative Officer Trevor S. Lang announced his resignation, effective June 2011. The CEO will assume the role of principal accounting and financial officer during the search for a replacement.
- Key Risks:
- Input Costs: Rising costs for cotton, foreign labor, and oil could compress gross margins in the second half of 2011.
- Seasonality: Results are heavily dependent on back-to-school and winter holiday shopping; Q1 and Q2 are typically slower.
- Expansion Risks: Opening new stores and entering the Canadian market introduces operational and competitive risks.
- Investment Liquidity: The company holds $0.9 million in auction rate securities which are currently illiquid due to market conditions.
Investor Verification Checklist
- Verify the timeline and progress of the new CFO search and the interim financial reporting structure.
- Monitor second-half gross margin trends against the management's expectation of higher product costs (cotton, labor, freight).
- Review the execution of the 44 planned new store openings and the associated capital expenditure burn rate.
- Assess the impact of the Canadian market expansion on comparable store sales and profitability.
- Confirm the status of the $0.9 million auction rate security and any potential impairment risks.