Zumiez Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended February 1, 2014 (52 weeks). Fiscal 2012 had 53 weeks. The fourth quarter was 13 weeks; comparisons with the prior-year quarter are affected by its 14th week.
Business context
Zumiez is a specialty retailer of action-sports apparel, footwear, accessories and hardgoods, operating the Zumiez and Blue Tomato brands through stores and ecommerce. It ended FY2013 with 551 stores: 511 in the U.S., 28 in Canada and 12 in Europe. Blue Tomato was acquired in FY2012.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $724.3 million | $669.4 million |
| Gross profit / margin | $261.8 million / 36.1% | $241.3 million / 36.0% |
| Operating profit / margin | $72.8 million / 10.1% | $68.5 million / 10.2% |
| Net income | $45.9 million | $42.2 million |
| Diluted EPS | $1.52 | $1.35 |
| Comparable sales | -0.3% | +5.0% |
| Ecommerce share of sales | 12.3% | 11.2% |
Annual sales grew 8.2%, operating profit 6.3%, and net income 9.0%; results include a shorter fiscal year in FY2013. Comparable sales declined as in-store comparable sales fell 1.0%, partly offset by 5.4% growth in comparable ecommerce sales. Annual gross margin improved 10 basis points, while operating margin slipped 10 basis points as expenses grew faster than sales.
| Fourth-quarter metric | FY2013 Q4 | FY2012 Q4 |
|---|---|---|
| Net sales | $226.8 million | $224.4 million |
| Gross profit | $87.9 million | $85.7 million |
| Operating profit | $40.3 million | $36.1 million |
| Net income | $26.9 million | $22.9 million |
| Diluted EPS | $0.89 | $0.74 |
| Comparable sales | -2.2% | -1.0% |
Cash and liquidity: Operating cash flow was $66.9 million, versus $66.2 million in FY2012. Capital expenditures were $36.0 million; cash and cash equivalents plus current marketable securities totaled $117.2 million at year-end, and working capital was $168.5 million. The company reported $1.9 million of long-term debt and no borrowings on its $25 million revolving facility. It held $98.0 million of investments in municipal securities and variable-rate demand notes, including long-term holdings.
Changes, unusual items and outlook
- FY2013 store expansion added 59 stores and closed six; the company also upgraded its U.S. ecommerce platform and launched Blue Tomato’s new platform. Ecommerce growth and international expansion contributed to higher sales.
- FY2013 results included a $2.7 million rent-accounting correction benefit, a $2.6 million reversal of previously accrued Blue Tomato incentive expense, $2.3 million of intangible amortization, and a $1.3 million litigation settlement expense. The prior-year period included acquisition-related and relocation costs and an extra week.
- Management described the teen-retail environment as challenging, with traffic headwinds and results below its expectations. It cited disciplined product margins and near-flat full-year comparable sales relative to sector conditions, while cautioning that the timing of recovery was unclear.
- For FY2014, management expected sales to increase, planned approximately 55 new stores (including about five in Europe), and forecast capital expenditures of $37–$39 million. It expected inventory per square foot to be flat or slightly higher, cash and working capital to increase, and no new borrowings. The company warned strategic investment could pressure near-term earnings.
- Material exposures include fashion and discretionary-spending volatility, seasonality and weather, mall traffic, inventory markdowns, ecommerce competition, foreign exchange, vendor and supply-chain risks, and substantial lease commitments. Minimum operating-lease payments totaled $353.8 million; additional contingent rent and occupancy costs are excluded. A potential Blue Tomato incentive payment of up to €22.1 million was not estimated to be payable at year-end, but depended on future performance and employment conditions.
Important facts for investors to verify
- Whether comparable-sales and traffic trends improve, particularly given the Q4 comparable-sales decline and weak teen-retail backdrop.
- How much reported earnings benefited from the rent correction and Blue Tomato incentive reversal, and whether those items recur.
- Execution and returns on planned store openings, ecommerce/omnichannel investment, and European expansion.
- Liquidity and investment-security quality, lease obligations, and the status and terms of the revolving credit facility, which was scheduled to expire September 1, 2014.
- Outcome and final court approval of the conditional $1.3 million California wage-and-hour settlement.
- Share repurchases: $17.6 million of cash purchases in FY2013; the board authorized a further $30 million program in March 2014.