Zumiez Inc. 10-K Summary: Fiscal Year Ended February 3, 2007
Business Context and Reporting Period
Zumiez Inc. is a mall-based specialty retailer of action sports-related apparel, footwear, equipment, and accessories. The company targets young men and women aged 12 to 24. As of February 3, 2007, Zumiez operated 235 stores across 23 states. The fiscal year ended February 3, 2007, was a 53-week period.
Key Financial Metrics
| Metric | Fiscal 2006 (2007) | Fiscal 2005 (2006) |
|---|---|---|
| Net Sales | $298.2 million | $205.6 million |
| Gross Margin | $108.6 million (36.4%) | $72.8 million (35.4%) |
| Operating Profit | $32.4 million (10.9%) | $20.0 million (9.8%) |
| Net Income | $20.9 million | $12.9 million |
| Diluted EPS | $0.73 | $0.47 |
| Comparable Store Sales Growth | 13.0% | 14.2% |
| Cash and Cash Equivalents | $8.2 million | $4.7 million |
| Working Capital | $54.9 million | $47.4 million |
| Capital Expenditures | $17.9 million | $13.4 million |
Debt and Liquidity: The company maintains a $25 million revolving credit facility with Wells Fargo HSBC Trade Bank, N.A. There were no outstanding borrowings under this facility as of February 3, 2007. The company had $711,000 in outstanding letters of credit. Net cash provided by operating activities was $29.9 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 45.0% year-over-year, driven by a 13.0% increase in comparable store sales and the addition of 42 new stores plus the acquisition of 20 stores from Action Concepts Fast Forward, Ltd. ("Fast Forward").
- Margin Expansion: Gross margin percentage improved to 36.4% from 35.4%, attributed to leveraging fixed costs over higher sales volume, improved vendor pricing, and reduced freight/distribution costs as a percentage of sales.
- Expense Management: Selling, general, and administrative (SG&A) expenses increased 44.4% in absolute terms but decreased slightly as a percentage of net sales (25.5% vs. 25.6%) due to operational leverage, despite increased costs for new store payroll, depreciation, and public company compliance (Sarbanes-Oxley).
- Acquisition: The Fast Forward acquisition added 20 stores (17 in Texas, 2 in Oklahoma, 1 in California) and resulted in $12.9 million of recorded goodwill.
Guidance, Outlook, and Risks
Outlook: Management plans to open approximately 50 new stores in fiscal 2007, targeting an average store size of 3,000 square feet. Capital expenditures for fiscal 2007 are expected to be approximately $24.4 million. The company expects SG&A expenses to continue declining as a percentage of net sales.
Management Commentary: The company emphasizes its "action sports lifestyle" brand and culture as key differentiators. Management noted that the resignation of the Chief Financial Officer, Brenda I. Morris, effective April 2007, requires a search for a replacement, with the CEO assuming interim financial responsibilities.
Risks and Contingencies:
- Seasonality: Sales are heavily concentrated in the third and fourth fiscal quarters (back-to-school and holidays).
- Competition: High competition from other teen retailers and sporting goods chains.
- Vendor Relations: No long-term contracts with vendors; reliance on maintaining good relationships for product supply and pricing.
- Lease Obligations: The company leases all stores and its distribution center. Future minimum lease payments total approximately $153.8 million through 2011 and beyond.
- Private Label Risk: Private label merchandise accounted for 14.3% of net sales; failure to anticipate trends in this higher-margin category could impact results.
Key Facts for Investor Verification
- Verify the execution of the 50 new store openings planned for fiscal 2007 and the associated capital expenditure burn rate.
- Monitor the recruitment and onboarding of a new Chief Financial Officer following the resignation of Brenda I. Morris.
- Assess the integration performance of the 20 acquired Fast Forward stores, particularly in the Texas market.
- Review the impact of the new SFAS 123(R) stock-based compensation accounting standard on future earnings, with $4.6 million of unrecognized compensation cost remaining.
- Track compliance with financial covenants in the $25 million revolving credit facility, specifically the minimum net income and quick ratio requirements.