Zumiez Inc. 10-Q Summary: Quarter Ended May 5, 2007
Business Context and Reporting Period
Zumiez Inc. is a specialty retailer of action sports apparel, footwear, equipment, and accessories, operating 254 stores across 25 states as of May 5, 2007. The company targets young men and women aged 12 to 24. This filing covers the 13-week fiscal quarter ended May 5, 2007 (Q1 Fiscal 2007), compared to the same period in the prior fiscal year ended April 29, 2006.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Sales | $68.8 million | $47.8 million |
| Gross Profit | $21.8 million | $15.3 million |
| Gross Margin | 31.7% | 32.0% |
| Operating Profit | $2.2 million | $1.5 million |
| Net Income | $1.6 million | $1.1 million |
| Diluted EPS | $0.06 | $0.04 |
| Cash and Equivalents | $5.8 million | $1.8 million (end of period) |
| Marketable Securities | $32.1 million | $43.8 million (prior period end) |
| Inventory | $50.3 million | $42.2 million (prior period end) |
| Debt | $0 (No borrowings under credit facility) | N/A |
Liquidity: The company holds $37.9 million in liquid assets (cash and marketable securities). It maintains a $25.0 million revolving credit facility with no outstanding borrowings as of May 5, 2007, though $1.7 million in letters of credit were outstanding.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 44.0% year-over-year. This was driven by an 11.3% increase in comparable store sales and a significant contribution from 75 new and acquired stores opened since the prior year.
- Margin Compression: Gross margin decreased slightly from 32.0% to 31.7%. Management attributed this to higher store occupancy costs due to a higher proportion of new stores and increased stock-based compensation, partially offset by improved product margins.
- Expense Growth: Selling, general, and administrative (SG&A) expenses rose 42.3% to $19.6 million, primarily due to costs associated with new store operations and infrastructure expansion. However, SG&A as a percentage of sales improved slightly to 28.5% from 28.9%.
- Cash Flow: Net cash used in operating activities was $13.0 million, a significant increase from the $2.8 million used in the prior year. This was primarily due to increased inventory and receivable levels to support growth.
Guidance, Outlook, and Risks
Outlook: Management expects SG&A expenses as a percentage of net sales to be lower in Fiscal 2007 than in Fiscal 2006. The company plans to open approximately 50 new stores in Fiscal 2007, with expected capital expenditures of $24.4 million.
Management Commentary: The company recently acquired "Fast Forward" (20 stores) in June 2006 to expand into Texas. The CFO, Brenda I. Morris, resigned in April 2007 for personal reasons; the CEO is currently serving as acting CFO.
Risks and Contingencies:
- Seasonality: Sales are heavily concentrated in the third and fourth fiscal quarters (back-to-school and holidays).
- Expansion Risks: Growth depends on opening new stores successfully; failure to do so or cannibalization of existing stores could harm results.
- Vendor Relations: The company relies on vendors for product supply and pricing without long-term contractual guarantees.
- Lease Obligations: The company leases all facilities. Future minimum lease payments total approximately $175.7 million.
Investor Verification Checklist
- Comparable Store Sales: Verify the 11.3% comparable store sales growth rate and the specific drivers (men's apparel and skate hardgoods).
- Inventory Levels: Monitor the $50.3 million inventory balance against sales velocity to assess potential markdown risks, especially given the seasonal nature of the business.
- Executive Turnover: Track the recruitment progress for a permanent Chief Financial Officer following the resignation of Brenda I. Morris.
- Capital Expenditures: Confirm the execution of the planned 50 new store openings and the associated $24.4 million capital spend for Fiscal 2007.
- Acquisition Integration: Assess the financial performance and integration status of the 20 Fast Forward stores acquired in the prior year.