Zumiez Inc. — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended February 2, 2013. FY2012 comprised 53 weeks; FY2011 comprised 52 weeks. The fourth quarter was 14 weeks versus 13 weeks in the prior year, so reported growth is not strictly like-for-like.
Business context
Zumiez is a specialty retailer of action-sports apparel, footwear, accessories and hardgoods, selling through stores and ecommerce. At year-end it operated 500 stores: 472 in the U.S., 20 in Canada and eight in Europe. The July 2012 acquisition of European retailer Blue Tomato expanded its international business.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $669.4 million | $555.9 million |
| Gross profit / margin | $241.3 million / 36.0% | $201.7 million / 36.3% |
| Operating profit / margin | $68.5 million / 10.2% | $60.2 million / 10.8% |
| Net income | $42.2 million | $37.4 million |
| Diluted EPS | $1.35 | $1.20 |
| Cash from operations | $66.2 million | $68.1 million |
Annual sales increased 20.4%, operating profit 14%, and diluted EPS 13%. Comparable sales rose 5.0% (in-store +2.9%; ecommerce +31.8%); ecommerce reached 11.2% of sales versus 7.3%. Blue Tomato contributed $28.3 million in sales after acquisition. Annual results included $7.3 million of Blue Tomato-related costs and $2.1 million of relocation charges.
Fourth-quarter net sales were $224.4 million versus $183.9 million; operating profit was $36.1 million versus $31.3 million; net income was $22.9 million versus $18.7 million; and diluted EPS was $0.74 versus $0.60. Fourth-quarter comparable sales declined 1.0%, after increasing 9.7% in the prior-year quarter.
At year-end, cash, cash equivalents and current marketable securities totaled $103.2 million, down from $172.8 million; working capital was $146.1 million, down from $197.9 million. The reductions chiefly reflected the Blue Tomato acquisition, $41.1 million of capital expenditures and $25.2 million of share repurchases. The company had $2.3 million of debt assumed with Blue Tomato and no revolver borrowings; its $25 million secured revolving facility was scheduled to expire September 1, 2013. Total assets were $409.1 million and shareholders’ equity was $303.4 million.
Operating lease commitments totaled $485.6 million, with $65.9 million due in fiscal 2013; FY2012 rent expense was $78.0 million. Operating cash flow covered capital expenditures, but the company also used cash for acquisition and repurchases. No cash dividends had been declared.
Material changes and unusual items
- Blue Tomato was acquired for $74.8 million cash. It added goodwill of $47.4 million and intangible assets; acquired operations generated $28.3 million in sales and $0.1 million net income, excluding specified transaction and incentive-payment costs.
- Gross margin fell 0.3 percentage points, primarily from higher ecommerce fulfillment and shipping costs and a $2.2 million inventory fair-value step-up charge. SG&A rose 0.3 percentage points of sales, including acquisition-related incentive, transaction and amortization costs.
- The company repurchased 1.265 million shares during FY2012 for a reported total cost of $25.8 million in the equity note; cash-flow repurchases were $25.2 million. A further repurchase authorization of up to $20 million remained in place.
- The company recorded $6.0 million of foreign-currency translation gains in other comprehensive income. No goodwill or intangible-asset impairment was recorded.
Outlook, risks and contingencies
Management expected FY2013 sales to increase, supported by comparable-sales growth, approximately 60 new stores (including about 15 in Canada and Europe), ecommerce growth and a full year of Blue Tomato sales. If sales projections were achieved, management expected earnings to increase. Planned FY2013 capital expenditures were approximately $42–44 million; inventory per square foot was expected to grow slightly. Management was cautious given economic uncertainty and second-half FY2012 category weakness, notably footwear, snow hardgoods and outerwear. The filing gives no specific numerical sales, comparable-sales or EPS guidance.
Key risks include volatile youth fashion and discretionary spending, seasonal and weather sensitivity, mall traffic and ecommerce competition, inventory markdown exposure, vendor and sourcing risks, international expansion and foreign exchange, store-opening execution, and substantial lease commitments. Management stated that available liquidity and expected operating cash flows were sufficient for foreseeable operating needs and planned capital spending for at least 12 months; future financing availability was not assured.
A California putative class action filed February 15, 2013 alleges wage-and-hour violations involving assistant store managers. The company was investigating and could not estimate the likelihood or potential loss. The filing also reported an existing lease-exit liability of $1.2 million related to the former Everett facility. Management and the auditor concluded internal control over financial reporting was effective, but Blue Tomato was excluded from the company’s assessment and audit of those controls.
Important facts for investors to verify
- How FY2013 comparable sales and margins developed after the fourth-quarter comparable-sales decline, allowing for the extra FY2012 week.
- Whether Blue Tomato met operating expectations, how much of its potential incentive payment became payable, and whether integration costs or synergies differed from expectations.
- Cash generation, working-capital trends, investment liquidity and debt-facility renewal or replacement after the revolver’s scheduled September 2013 expiry.
- Returns on planned store openings and $42–44 million of FY2013 capital expenditures, alongside the $485.6 million operating-lease commitment.
- Developments, potential exposure and any accruals relating to the California employment lawsuit and other contingencies.