Zumiez Inc. — Q2 FY2015 Form 10-Q
Reporting period: The 13 weeks and 26 weeks ended August 1, 2015, compared with the periods ended August 2, 2014. Zumiez operated 640 stores at quarter-end: 578 in the U.S., 40 in Canada and 22 in Europe, in addition to its ecommerce businesses. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $179.8 | $176.7 | $357.4 | $339.6 |
| Comparable sales | -4.5% | — | -0.9% | — |
| Gross profit / margin | $57.8 / 32.1% | $60.9 / 34.5% | $114.3 / 32.0% | $111.4 / 32.8% |
| Operating profit / margin | $5.3 / 2.9% | $11.6 / 6.6% | $9.4 / 2.7% | $15.3 / 4.5% |
| Net income | $3.2 | $7.5 | $6.0 | $10.0 |
| Diluted EPS | $0.11 | $0.26 | $0.21 | $0.34 |
| Operating cash flow | — | — | $1.0 | $30.5 |
Q2 sales rose 1.8%, but comparable sales fell 4.5%; H1 sales rose 5.2% while comparable sales declined 0.9%. Store additions drove reported sales growth, partly offset by weaker comparable sales and foreign-exchange effects. Q2 gross margin contracted 240 basis points and H1 margin contracted 80 basis points. Management attributed the Q2 decline mainly to store-occupancy deleverage, lower product margin and higher distribution costs; SG&A deleverage also weighed on operating results. Net income fell about 57% in Q2 and 40% for H1.
Financial position and liquidity
- At August 1, cash and cash equivalents were $22.2 million and current marketable securities were $58.6 million, totaling $80.8 million. Current assets were $240.0 million and current liabilities $98.7 million.
- Operating cash flow was $1.0 million for H1, down from $30.5 million. The filing cites working-capital changes; inventory increased $29.0 million on the cash-flow statement.
- H1 capital expenditures were $20.0 million. Net cash from investing was $53.8 million, primarily reflecting net marketable-security sales; financing used $53.3 million, principally for share repurchases.
- No borrowings were outstanding under the $25 million Wells Fargo facility. The company had $4.6 million outstanding on international revolving credit lines at August 1. It reported compliance with credit-facility covenants.
- Total assets were $457.4 million and shareholders’ equity $305.1 million. Total liabilities were $152.2 million. The filing reports no material off-balance-sheet arrangements.
Material changes, outlook and other items
- SG&A increased 6.4% in Q2 and 9.1% in H1, with store operating expense deleverage a principal factor. Rent expense for H1 rose to $34.7 million from $30.9 million.
- Management expected FY2015 capital expenditures of approximately $39–$41 million, primarily for new stores, remodels and relocations, and planned 57 new stores for the fiscal year. It stated available liquidity and expected borrowings should cover foreseeable operating needs and planned capital spending for at least 12 months.
- Under the Blue Tomato acquisition incentive, the company determined it owed €6.0 million ($6.6 million at the disclosed exchange rate), payable half in cash and half in shares; payment occurred after quarter-end. H1 included $0.6 million of related expense.
- During H1, Zumiez repurchased 2.266 million shares for a reported total cost of $61.0 million. The company disclosed $16.7 million remained under its then-current repurchase authorization at August 1.
- Commitments included $406.8 million of minimum future operating lease payments and $172.0 million of merchandise purchase orders. Most purchase orders could be canceled before shipment, subject to stated exceptions. Litigation was described as arising in the ordinary course; the filing did not identify a specific material case or quantify a probable loss.
- Management highlighted seasonality, mall traffic, fashion and inventory risks, international and foreign-exchange exposure, competition, vendor and supply-chain risks, and substantial lease commitments. It cautioned that interim results are not necessarily indicative of full-year results. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether comparable-sales trends and margin pressure improved in subsequent quarters, particularly given the seasonal importance of the second half.
- How inventory levels, operating cash flow and liquidity developed after the reported cash-flow decline and seasonal inventory build.
- Actual FY2015 store openings and capital spending compared with management’s plans.
- The cash and share components and subsequent payment of the Blue Tomato incentive, and the remaining share-repurchase authorization and activity.
- Exposure to lease and merchandise purchase commitments, foreign-exchange movements, and any developments in litigation or contingencies.