Zumiez Inc. 10-Q Summary: Quarter Ended April 29, 2006
Business Context and Reporting Period
Zumiez Inc. is a specialty retailer of action sports apparel, footwear, equipment, and accessories targeting young men and women aged 12 to 24. As of April 29, 2006, the company operated 179 stores across 19 states, primarily in shopping malls. This report covers the 13-week period ended April 29, 2006 (First Quarter of Fiscal 2006).
Key Financial Metrics
| Metric | Q1 2006 | Q1 2005 |
|---|---|---|
| Net Sales | $47.8 million | $33.4 million |
| Gross Margin | $15.3 million (31.9%) | $9.8 million (29.5%) |
| Operating Profit | $1.5 million (3.1%) | $0.017 million (0.1%) |
| Net Income | $1.1 million | ($0.04) million loss |
| Diluted EPS | $0.04 | $0.00 |
| Cash and Equivalents | $1.8 million | $1.3 million (end of period) |
| Marketable Securities | $36.3 million | N/A |
| Inventory | $38.1 million | $30.6 million (Jan 28, 2006) |
| Debt | $0 (Revolving Credit Facility) | N/A |
| Operating Cash Flow | ($1.8) million used | ($9.6) million used |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 43.2% year-over-year, driven by a 19.7% increase in comparable store sales and the opening of 34 new stores.
- Profitability: The company turned a net loss of $40,000 in Q1 2005 into a net income of $1.1 million in Q1 2006. Operating profit improved significantly from $17,000 to $1.5 million.
- Margin Expansion: Gross margin percentage improved to 31.9% from 29.5%, attributed to better vendor pricing, leverage of fixed costs, and reduced markdowns.
- Expense Management: Selling, General, and Administrative (SG&A) expenses rose 40.3% to $13.8 million due to new store costs and public company compliance, but as a percentage of sales, SG&A decreased to 28.9% from 29.4%.
- Accounting Change: The company adopted SFAS No. 123(R) effective January 29, 2006, recognizing stock-based compensation expense ($337,000 for the quarter) which was not expensed in the prior year under APB 25.
Outlook, Risks, and Unusual Items
- Acquisition: On May 16, 2006, Zumiez entered into an agreement to acquire Action Concepts Fast Forward, Ltd. (19 stores) for approximately $14.0 million in cash, less assumed debt. Closing is expected in Q2 2006.
- Capital Expenditures: The company expects to spend approximately $19.1 million on capital expenditures in Fiscal 2006, primarily for 42 planned new store openings.
- Liquidity: The company maintains a $20.0 million revolving credit facility with no outstanding borrowings as of April 29, 2006. Management believes cash flows and existing credit facilities are sufficient for the next 12 months.
- Risks: Key risks include the ability to successfully open and integrate new stores, dependence on shopping mall traffic, seasonal sales fluctuations, and the volatility of fashion trends. The company also faces risks related to its sole distribution center in Washington and reliance on foreign manufacturers.
Investor Verification Checklist
- Verify the closing status and final terms of the Fast Forward acquisition.
- Monitor the execution of the 42 new store openings planned for Fiscal 2006 and their impact on SG&A leverage.
- Review inventory levels ($38.1 million) relative to sales velocity to assess markdown risks in subsequent quarters.
- Confirm compliance with the financial covenants of the $20 million revolving credit facility.
- Assess the impact of the new stock-based compensation accounting standard on future earnings reports.