Zumiez Inc. — Q1 FY2013 Form 10-Q
Reporting period: 13 weeks ended May 4, 2013; comparable period was the 13 weeks ended April 28, 2012. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Zumiez operated 503 stores at quarter-end: 475 in the U.S., 22 in Canada and 6 in Europe. It sells action-sports apparel, footwear, accessories and hardgoods through stores and ecommerce, including the Blue Tomato business acquired in July 2012. The company reports one operating segment.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change / context |
|---|---|---|---|
| Net sales | $148.5 | $129.9 | Up 14.3% |
| Comparable sales | Down 0.7% | Not stated here | Store comps down 1.8%; ecommerce comps up 13.1% |
| Gross profit | $48.0 | $42.1 | Up 13.9% |
| Gross margin | 32.3% | 32.4% | Down 10 basis points |
| SG&A | $43.9 | $34.8 | Up 26.1%; 29.6% of sales versus 26.8% |
| Operating profit | $4.0 | $7.3 | Operating margin 2.7% versus 5.6% |
| Net income | $2.5 | $4.5 | Down 44.8%; net margin 1.7% versus 3.5% |
| Diluted EPS | $0.08 | $0.14 | Down from $0.14 |
| Operating cash flow | $4.4 | $5.8 | Down $1.4 |
Sales growth reflected 42 net new U.S. and Canadian stores and the Blue Tomato acquisition, partly offset by weaker comparable sales. Ecommerce was 11.8% of sales, versus 7.7%. Management attributed gross-margin pressure to fixed-cost deleverage and higher ecommerce costs, partly offset by a 60-basis-point benefit from product margin improvement. SG&A growth included ecommerce costs, store deleverage, $1.1 million of estimated Blue Tomato incentive compensation and $0.6 million of acquired-intangible amortization.
Cash, liquidity and debt
- At May 4, cash and cash equivalents were $14.7 million and current marketable securities were $83.0 million, totaling $97.6 million in cash and current securities. Current liabilities were $65.5 million; current assets were $212.5 million.
- Cash declined $2.9 million during the quarter, to $14.7 million. Operating cash flow was $4.4 million; investing cash outflow was $4.2 million and financing cash outflow was $2.8 million.
- Inventory was $90.9 million, up from $77.6 million at February 2, 2013. The filing attributes operating cash movements in part to inventory purchases and accounts payable timing.
- No borrowings were outstanding on the $25 million revolving credit facility at May 4; $0.1 million of commercial letters of credit was open. The facility was scheduled to expire September 1, 2013. Blue Tomato-related debt outstanding was $2.1 million.
- Management said cash, operating cash generation and available revolving borrowings were expected to meet foreseeable operating and planned capital needs for at least 12 months. The company was in compliance with its credit covenants.
Changes, outlook and notable items
- For fiscal 2013, management expected capital expenditures of approximately $40–$42 million, primarily for new stores, remodels and relocations, and planned to open approximately 60 stores. These are expectations, not guarantees.
- The first-quarter earnings decline came despite higher sales: SG&A rose faster than revenue, while operating profit fell from $7.3 million to $4.0 million.
- Blue Tomato acquisition-related estimated future incentive payments were $11.8 million at quarter-end; the arrangement may reach $28.9 million if specified financial targets and employment conditions are met through April 2015. The quarter included $1.1 million of related compensation expense.
- The company repurchased 165,000 shares for $3.7 million at an average $22.36 per share; $12.5 million remained available under the program at quarter-end.
- Comprehensive loss was $0.9 million, including a $3.4 million foreign-currency translation loss. This reduced accumulated other comprehensive income to $2.6 million.
- Commitments included $499.9 million of minimum future operating lease payments and $155.4 million of merchandise purchase orders, which were generally cancellable before shipment except for certain private-label orders.
Risks and contingencies
- A California putative class action filed by an assistant store manager alleges wage-and-hour violations and related claims. The company was investigating and said it could not predict the likelihood or range of loss.
- Key disclosed risks include seasonal and fashion-sensitive demand, mall traffic, inventory markdowns, new-store execution, ecommerce costs and competition, international expansion and foreign-exchange exposure, vendor and supply-chain disruption, and substantial lease obligations.
- The company also cited potential effects from rising merchandise, labor and transportation costs; cybersecurity and information-system disruptions; litigation; and future healthcare costs. It noted that most sales and profitability are typically concentrated in the third and fourth fiscal quarters.
- The filing reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls as of May 4, 2013.
Important facts for investors to verify
- Whether comparable-store sales and store transactions improve, and whether ecommerce growth can offset store weakness without further margin pressure.
- Whether SG&A growth moderates and operating margins recover after the quarter’s acquisition-related, ecommerce and store-cost increases.
- Inventory levels, markdown activity, operating cash conversion and seasonal working-capital needs.
- Progress against the approximately 60-store opening and $40–$42 million capital expenditure plans, and whether expansion delivers expected returns.
- Blue Tomato performance, the eventual incentive-payment estimate and related foreign-currency effects.
- Developments in the California lawsuit, lease commitments, and the September 2013 revolving-facility renewal or replacement.