Zumiez Inc. 10-Q Summary: Period Ended July 29, 2006
Business Context and Reporting Period
Zumiez Inc. is a leading specialty retailer of action sports-related apparel, footwear, equipment, and accessories. As of July 29, 2006, the company operated 221 stores across 23 states, primarily targeting young men and women aged 12 to 24. This filing covers the quarterly period ended July 29, 2006 (the second quarter of fiscal 2006), and the six-month period ended on the same date.
Key Financial Metrics
| Metric | Three Months Ended July 29, 2006 |
Six Months Ended July 29, 2006 |
|---|---|---|
| Net Sales | $55.8 million | $103.5 million |
| Gross Margin | $18.8 million (33.7%) | $34.0 million (32.9%) |
| Operating Profit | $2.0 million (3.6%) | $3.5 million (3.4%) |
| Net Income | $1.6 million | $2.8 million |
| Diluted EPS | $0.06 | $0.10 |
| Cash and Equivalents | $4.2 million (as of July 29, 2006) | |
| Working Capital | $35.2 million (Current Assets $77.7M - Current Liabilities $42.4M) | |
| Debt | No outstanding borrowings on revolving credit facility; $2.7M in letters of credit. |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 41.6% for the quarter and 42.2% for the six-month period compared to the prior year. This was driven by a 12.6% increase in comparable store sales and the addition of 71 new stores, including the acquisition of Fast Forward.
- Profitability: Net income surged 94.0% for the quarter and 240% for the six-month period. Operating profit margins improved from 3.2% to 3.6% (quarterly) and 1.8% to 3.4% (six-month) due to better vendor pricing, reduced markdowns, and leverage of fixed costs.
- Acquisition Impact: The company acquired Fast Forward (20 stores) for $14.0 million in cash and assumed liabilities. This transaction added $11.6 million in goodwill to the balance sheet.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 46.1% quarterly, largely due to new store payroll, depreciation, and the adoption of FAS 123(R) for stock-based compensation.
Guidance, Outlook, and Risks
Outlook and Capital Resources: Management expects to spend approximately $19.1 million on capital expenditures for fiscal 2006, primarily for 42 planned new store openings. The company anticipates that cash flows from operations and its credit facility will meet requirements for the next 12 months. On September 1, 2006, the company secured a new $25.0 million revolving credit facility with Wells Fargo HSBC Trade Bank, replacing its expiring $20.0 million facility with Bank of America.
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 hurt results.
- Vendor Relations: The company has no long-term contracts with vendors and relies on their willingness to supply products at acceptable prices.
- Lease Obligations: The company leases all facilities, with significant future minimum lease payments totaling approximately $125.9 million.
Investor Verification Checklist
- Comparable Store Sales: Verify the sustainability of the 12.6% (quarterly) and 15.8% (six-month) comparable store sales growth rates.
- Inventory Levels: Review the significant increase in inventory ($51.8 million vs. $30.6 million prior year) and assess the risk of markdowns if demand softens.
- Acquisition Integration: Monitor the integration of the Fast Forward stores and the realization of expected synergies in the Texas market.
- Stock-Based Compensation: Note the impact of the new FAS 123(R) accounting standard on reported expenses and future earnings.
- Credit Facility Covenants: Confirm ongoing compliance with the financial covenants of the new $25 million credit facility (minimum net income, leverage, and quick ratios).