Zumiez Inc. 10-Q Filing Summary
Business Context and Reporting Period
Company: Zumiez Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2010 (First six months of Fiscal 2010)
Business Overview: Zumiez is a specialty retailer of action sports apparel, footwear, equipment, and accessories. As of July 31, 2010, the company operated 393 stores in 37 states, primarily in shopping malls, targeting young men and women aged 12 to 24.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended July 31, 2010 |
Six Months Ended Aug 1, 2009 |
|---|---|---|
| Net Sales | $186,798 | $161,977 |
| Gross Profit | $56,468 | $46,543 |
| Gross Margin | 30.2% | 28.7% |
| Operating Loss | $(5,622) | $(8,665) |
| Net Loss | $(3,114) | $(4,744) |
| Diluted Loss Per Share | $(0.10) | $(0.16) |
| Cash from Operating Activities | $4,409 | $13,435 |
| Cash & Cash Equivalents (End of Period) | $6,842 | $21,304 |
| Marketable Securities | $84,475 | $106,483 |
| Total Assets | $294,166 | $260,265 |
| Total Liabilities | $99,747 | $67,589 |
Liquidity & Debt: The company has a $25.0 million secured revolving credit facility with no outstanding borrowings as of July 31, 2010. Letters of credit outstanding totaled $2.4 million. The company holds significant liquid assets in cash and marketable securities ($91.3 million combined).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 15.3% year-over-year, driven by a 9.2% increase in comparable store sales and the net addition of 24 stores.
- Profitability Improvement: Net loss narrowed by 34.4% compared to the prior year period. Operating loss decreased from $8.7 million to $5.6 million.
- Margin Expansion: Gross margin improved by 150 basis points to 30.2%, attributed to product margin improvements and lower store occupancy costs, partially offset by higher distribution costs.
- Expense Management: Selling, General, and Administrative (SG&A) expenses increased 12.5% in absolute terms but decreased as a percentage of sales (33.2% vs. 34.0%). This was aided by a change in accounting estimate for leasehold improvements (reducing depreciation) and efficiencies, though offset by a $2.1 million litigation settlement charge.
- Cash Flow: Operating cash flow decreased significantly ($9.0 million drop) primarily due to increased inventory levels and higher income taxes receivable.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Capital Expenditures: Management expects to spend approximately $26.0 to $28.0 million on capital expenditures for Fiscal 2010, covering 27 planned new store openings and the acquisition of a new distribution center in Corona, California.
- Store Growth: The company plans to open 27 new stores in Fiscal 2010, though the actual number may vary based on market conditions.
- Distribution Relocation: The company relocated its distribution center from Everett, Washington, to Corona, California, incurring exit costs of approximately $1.8 million (cumulative for the six months) related to lease terminations, severance, and asset disposal.
Risks and Contingencies:
- Litigation: The company settled a class action lawsuit regarding overtime wages and meal breaks for an estimated $2.1 million, recorded in the current quarter. Another settlement regarding similar claims was finalized for $1.38 million in the prior year.
- Auction Rate Securities: The company holds $0.9 million in auction rate securities that have failed to sell in recent auctions. While currently classified as long-term and considered a temporary impairment, liquidity issues could persist.
- Economic Sensitivity: Results are heavily dependent on mall traffic, discretionary consumer spending, and the ability to anticipate fashion trends. The company notes that the current economic uncertainty could curtail spending.
- Seasonality: Sales are typically lower in the first and second fiscal quarters, with the majority of annual sales occurring in the third and fourth quarters (back-to-school and holidays).
Key Facts for Investor Verification
- Comparable Store Sales: Verify the sustainability of the 9.2% comparable store sales growth, which was driven by transaction volume rather than average ticket size (dollars per transaction declined).
- Inventory Levels: Inventory increased by $27.8 million during the period. Investors should monitor inventory turnover and potential future markdowns to clear excess stock.
- One-Time Charges: Assess the impact of the $2.1 million litigation settlement and the $1.8 million in distribution center exit costs on true operating performance.
- Accounting Change: Note the change in estimate for leasehold improvement useful lives (from 7 to 10 years), which reduced depreciation expense by $2.2 million for the six-month period.
- Liquidity Position: Confirm the company's ability to fund $26M+ in capital expenditures while maintaining a positive operating cash flow, given the recent decline in operating cash generation.