Zumiez Inc. — Q3 FY2022 Form 10-Q
Reporting period: 13 weeks ended October 29, 2022; comparisons are with the 13 weeks ended October 30, 2021. Year-to-date figures cover 39 weeks. Amounts below are in U.S. dollars unless stated otherwise.
Business context
Zumiez operates specialty retail stores and e-commerce businesses selling apparel, footwear, accessories and hardgoods. It operated 760 stores at quarter-end across the U.S., Europe, Canada and Australia.
Financial performance and liquidity
| Metric | Q3 FY2022 | Q3 FY2021 | First 9 months FY2022 | First 9 months FY2021 |
|---|---|---|---|---|
| Net sales | $237.6m | $289.5m | $678.3m | $837.2m |
| Gross profit / margin | $82.0m / 34.5% | $114.7m / 39.6% | $229.4m / 33.8% | $322.8m / 38.6% |
| Operating profit / margin | $10.4m / 4.4% | $39.8m / 13.8% | $15.9m / 2.3% | $106.1m / 12.7% |
| Net income | $6.9m | $30.7m | $9.6m | $81.1m |
| Diluted EPS | $0.36 | $1.25 | $0.49 | $3.20 |
- Q3 sales declined 17.9%; nine-month sales declined 19.0%. Q3 net income margin was 2.9%, versus 10.6% a year earlier.
- For the first nine months, operating cash flow was a use of $36.4m, compared with $71.9m provided in the prior-year period. Inventory-related cash use was $52.0m.
- At October 29, cash and cash equivalents were $49.3m and marketable securities were $91.8m, down from $117.2m and $177.3m, respectively, at January 29, 2022. Current assets were $353.3m and current liabilities $175.5m.
- No borrowings were outstanding under the revolving credit facilities. The Wells Fargo facility provides up to $25m through December 1, 2023, subject to letters of credit and covenants. Operating lease liabilities totaled $254.1m, including $65.2m current.
- Repurchased 1.914m shares for $83.3m during the first nine months; no shares were repurchased in Q3. Outstanding shares were 19.490m at October 29, compared with 21.215m at January 29.
Material changes and management commentary
- Management attributed lower sales mainly to inflationary pressure on consumers and comparison with prior-year domestic stimulus and pandemic-related limits on travel and in-person entertainment. Transactions and dollars per transaction declined; higher average unit retail partly offset fewer units per transaction.
- Gross margin fell 510 basis points in Q3 and 480 basis points year to date. Management cited fixed-cost deleverage, higher store occupancy and web shipping costs, distribution-center cost deleverage, and increased inventory shrinkage; Q3 product margin also declined.
- SG&A dollars decreased 4.4% in Q3, but rose as a share of sales by 430 basis points to 30.1%, principally due to wage and other store-cost deleverage and rate increases.
- Foreign exchange reduced sales by $5.8m in Q3 and $13.3m year to date. Comprehensive loss was $10.2m year to date, including $19.8m of other comprehensive loss, primarily currency translation and unrealized investment losses.
Outlook, risks and contingencies
- Management expected FY2022 capital expenditures of approximately $27m–$29m and said it remained on track to open approximately 33 stores. No earnings or sales guidance is provided in the supplied filing text.
- Management said available cash, current marketable securities, operating cash flows and available borrowing capacity should meet foreseeable operating and planned capital needs for at least 12 months. It cautioned that future financing, if needed, may not be available on acceptable terms.
- Key risks include weaker discretionary spending and continued inflation, merchandise and freight costs, fashion and inventory risk, competition, labor costs, foreign exchange, supply-chain disruption, seasonality, and dependence on store and e-commerce traffic. Management noted that higher consumer price inflation had reduced confidence and spending.
- A $3.6m German government COVID-related subsidy was received and recorded as a reduction of SG&A in Q1 FY2022. The $2.8m settlement of a previously disclosed California wage-and-hour class action was approved and paid in Q3; a separate California PAGA wage-and-hour action was filed in October 2022, and the company stated it intended to defend itself.
- Outstanding merchandise purchase orders were $181.1m; most were cancellable before shipment, with exceptions for certain private-label and international orders. The filing reports no material change in risk factors from the FY2021 Form 10-K.
Important facts for investors to verify
- Whether sales trends, transaction counts and consumer demand improved after quarter-end, especially in North America.
- Whether elevated inventory levels led to markdowns, margin pressure or further working-capital cash use.
- Whether gross-margin and SG&A deleverage persisted, and how inflation, wages, freight and shrinkage affected costs.
- Whether cash and marketable securities, planned capital spending, buybacks and credit-facility covenant requirements remain consistent with liquidity needs.
- Developments in the California PAGA litigation and any resulting financial exposure.