Zumiez Inc. — Q1 Fiscal 2018 Form 10-Q
Business context and period. Zumiez is a specialty retailer of apparel, footwear, accessories and hardgoods, operating 700 stores and ecommerce sites under the Zumiez, Blue Tomato and Fast Times names. The quarter was the 13 weeks ended May 5, 2018; comparisons are with the 13 weeks ended April 29, 2017. Fiscal 2018 ends February 2, 2019.
Financial performance
| Metric | Q1 FY2018 | Prior-year quarter |
|---|---|---|
| Net sales | $206.3 million | $181.2 million |
| Gross profit / margin | $62.6 million / 30.3% | $52.0 million / 28.7% |
| SG&A / % of sales | $64.3 million / 31.1% | $58.3 million / 32.2% |
| Operating loss | $1.7 million | $6.2 million |
| Net loss / diluted loss per share | $2.6 million / $0.10 | $4.4 million / $0.18 |
| Cash from operations | $(3.9) million | $4.7 million |
- Sales rose 13.9%; comparable sales increased 8.3%. Management attributed comparable-sales growth mainly to more transactions, led by men’s apparel, then women’s apparel and footwear. Lower units per transaction partly offset higher average unit retail.
- Gross profit increased 20.2%, with gross margin up 160 basis points, primarily from better leverage of store occupancy costs. SG&A increased 10.3% in dollars but declined 110 basis points as a share of sales.
- Interest income, net, was $0.3 million; other expense, net, was $0.5 million. The company recorded a $0.7 million income-tax provision versus a $2.2 million benefit a year earlier. The effective tax rate was 36.6% versus a 32.6% benefit rate, reflecting exclusion of losses in certain European jurisdictions from the estimated annual rate, partly offset by the lower U.S. federal tax rate.
- At May 5, 2018, cash and cash equivalents were $29.1 million and marketable securities were $88.9 million. Current assets were $278.6 million and current liabilities $95.2 million. Total assets were $491.7 million and shareholders’ equity $352.5 million.
- Short-term borrowings were $4.7 million, up from $0.9 million at February 3, 2018, under international revolving lines. There were no borrowings under the $100 million asset-based credit facility. The company said available liquidity, including cash, securities and borrowing capacity, should cover foreseeable operating needs and planned capital expenditures for at least 12 months.
Material changes and cash flows
- Net sales increased $25.1 million, including $15.2 million from comparable-sales growth and the net addition of 12 stores since the prior-year quarter. North America sales grew 11.5%; Europe and Australia sales grew 34.3%.
- Operating cash flow moved from $4.7 million provided to $3.9 million used. The filing highlights working-capital movements, including inventory cash use of $3.8 million and lower accrued payroll and income-tax payables.
- Investing activities provided $5.1 million, mainly from net sales of marketable securities, partly offset by $3.6 million of capital expenditures. Financing activities provided $4.3 million, including $3.9 million net proceeds from revolving credit facilities.
- Foreign-currency translation and other comprehensive loss totaled $4.9 million, largely due to currency translation. Accumulated other comprehensive income moved from $0.0 million at February 3 to a $4.9 million loss at quarter-end.
Outlook, risks and unusual items
- Management expected fiscal 2018 capital expenditures of approximately $21–$23 million, mainly for store improvements and fixtures, including approximately 13 planned new stores; it said it remained on track for that store-opening plan.
- Retail results are seasonal, with sales and profitability typically higher in the third and fourth quarters. Management cautioned that interim results are not necessarily indicative of full-year results.
- The company adopted ASC 606 on February 4, 2018 using the modified retrospective method. It changed ecommerce revenue timing from delivery to shipment and gift-card breakage recognition; adoption increased opening retained earnings by $2.1 million, net of tax, and was not material to Q1 results. Current and prior periods therefore use different revenue-recognition standards.
- Lease commitments totaled $405.0 million, excluding contingent rent and certain occupancy costs. Merchandise purchase orders totaled $243.8 million; most could be canceled before shipment, subject to exceptions. The company expected adoption of the new lease standard in fiscal 2019 to materially increase reported assets and liabilities.
- A putative California wage-and-hour class action remained in litigation. The company could not estimate the outcome or any reasonably possible loss. It reported no material changes to its previously disclosed risk factors.
- Key risks include rapidly changing fashion preferences and markdown exposure, competition and mall/customer traffic trends, seasonality, international expansion and currency exposure, merchandise sourcing and freight costs, labor costs, cybersecurity and information-system reliability, and dependence on operating cash flow and leased locations.
Important facts for investors to verify
- Whether comparable-sales growth and improved gross margin continued beyond the first quarter, particularly through seasonal peak periods.
- How inventory levels, operating cash flow and cash conversion developed after the quarter, given cash used in operations despite higher sales.
- Whether the planned $21–$23 million capital-spending program and approximately 13 store openings were completed as expected.
- The effect of foreign exchange, international operations and the differing ASC 606 versus ASC 605 accounting bases on reported comparisons.
- Any developments in the California wage-and-hour case, lease-accounting adoption, and available liquidity or borrowing under the international credit lines.