Zumiez Inc. — FY2017 Form 10-K
Business context and period: Specialty retailer of action-sports, streetwear and lifestyle apparel, footwear, accessories and hardgoods, operating Zumiez, Blue Tomato and Fast Times stores and ecommerce sites. Fiscal 2017 ended February 3, 2018 and comprised 53 weeks; fiscal 2016 comprised 52 weeks. The filing is an annual report, not a standalone Q4 filing. Zumiez operated 698 stores at year-end: 607 in the U.S., 50 in Canada, 34 in Europe and 7 in Australia.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $927.4 million | $836.3 million |
| Gross profit / margin | $309.9 million / 33.4% | $275.0 million / 32.9% |
| Operating profit / margin | $48.8 million / 5.2% | $39.7 million / 4.8% |
| Net income / diluted EPS | $26.8 million / $1.08 | $25.9 million / $1.04 |
| Operating cash flow | $65.5 million | $48.5 million |
| Capital expenditures | $24.1 million | $20.4 million |
- Annual sales rose 10.9%; comparable sales increased 5.9%. The fiscal-year extra week contributed $10.3 million of sales, net store additions contributed $23.6 million, and foreign exchange contributed $6.3 million.
- Cash, cash equivalents and current marketable securities totaled $121.9 million, up from $78.8 million. Working capital was $179.9 million, versus $137.8 million.
- Cash and cash equivalents alone were $24.0 million; current marketable securities were $97.9 million. Inventory increased to $125.8 million from $106.9 million.
- No borrowings were outstanding on the $100 million ABL facility. A separate Austrian revolving line had $0.9 million outstanding. Total long-term liabilities were $44.3 million, principally deferred rent and tenant allowances; operating lease commitments totaled $412.9 million.
- FY2017 Q4 sales were $308.2 million, operating profit $36.9 million, net income $19.9 million and diluted EPS $0.80. Q4 comparable sales rose 7.5%.
Material changes and notable items
- Comparable sales turned positive, rising 5.9% for FY2017 after declining 0.2% in FY2016. Annual sales growth reflected stronger transactions; average transaction dollars declined as fewer units per transaction were partly offset by higher average unit retail.
- Gross margin improved 50 basis points, mainly from occupancy-cost leverage and product-margin improvement, partly offset by 60 basis points of higher inventory shrinkage. SG&A increased 11.0%; as a share of sales it rose 10 basis points, with higher incentive compensation partly offset by store-cost leverage.
- Net income increased 3.5%, less than operating profit’s 23% increase, as the effective tax rate rose to 44.6% from 35.6%. A $3.4 million Austrian deferred-tax-asset valuation allowance was partly offset by a $0.5 million benefit from U.S. tax legislation.
- FY2017 included $3.8 million of revenue recognized after an updated estimate of Zumiez STASH loyalty-point redemptions. The filing states that the tax and loyalty items together reduced net income by $0.5 million and diluted EPS by $0.02.
- Foreign-currency translation increased comprehensive income by $16.6 million. No goodwill or intangible-asset impairment was recorded; Blue Tomato’s estimated fair value exceeded carrying value by 10.4% at the latest test.
Outlook, risks and contingencies
- For FY2018, management planned approximately 13 new stores, including 7 in Europe and Australia, and expected capital expenditures of $21–$23 million. Management expected cost growth to be slower than in FY2017, inventory per square foot to grow roughly in line with sales, and cash, short-term investments and working capital to increase absent share buybacks. It did not anticipate new long-term borrowings.
- Management cited six consecutive quarters of positive comparable sales and planned investment in its Customer Engagement Suite, employees, operational efficiency and customer experience. Its longer-term aim is to grow operating profit faster than sales.
- Key risks include fast-changing fashion preferences, markdown and inventory risk, competition and mall/ecommerce traffic, seasonality, weather, international expansion and currency movements, vendor and supply-chain exposure, labor costs, cybersecurity and execution of the omni-channel strategy. Approximately 60% of FY2017 sales and all annual net income occurred in the third and fourth quarters combined.
- A putative California wage-and-hour class action remained pending, with appellate proceedings underway; the company said it could not estimate a reasonably possible loss. Management did not expect current litigation overall to have a material adverse effect. Future operating lease and purchase commitments were $621.4 million in total, including $412.9 million of operating leases and $208.5 million of purchase orders.
- No cash dividends have been declared. Auditors issued unqualified opinions on the financial statements and internal control; management also concluded internal controls were effective.
Important facts for investors to verify
- How much of sales and earnings growth reflects the extra fiscal week, loyalty-program revenue recognition, store openings and currency effects, versus underlying comparable demand.
- Whether positive comparable sales persist and whether gross-margin gains can continue despite higher shrinkage, promotion and compensation costs.
- The realization of Austrian deferred tax assets and the effect of the higher FY2017 effective tax rate on future earnings.
- Inventory quality and seasonal markdown exposure, alongside the economics and returns of planned store, digital and customer-engagement investments.
- Developments in the California class action and the effect of lease commitments, foreign-exchange exposure and the Blue Tomato goodwill valuation cushion.