Zumiez Inc. 10-K Summary: Fiscal Year Ended January 29, 2011
Business Context and Reporting Period
Zumiez Inc. is a leading specialty retailer of action sports-related apparel, footwear, equipment, and accessories, operating under the Zumiez brand. The company targets young men and women aged 12 to 24. As of January 29, 2011, Zumiez operated 400 stores in 37 states, primarily located in shopping malls. The reporting period covers the 52-week fiscal year ended January 29, 2011 (Fiscal 2010).
Key Financial Metrics
| Metric | Fiscal 2010 | Fiscal 2009 |
|---|---|---|
| Net Sales | $478.8 million | $407.6 million |
| Gross Profit | $170.4 million | $134.7 million |
| Gross Margin | 35.6% | 33.1% |
| Operating Profit | $37.4 million | $12.7 million |
| Operating Margin | 7.8% | 3.1% |
| Net Income | $24.2 million | $9.1 million |
| Diluted EPS | $0.79 | $0.30 |
| Comparable Store Sales | +11.9% | -10.0% |
| Cash & Equivalents | $11.4 million | $1.6 million |
| Working Capital | $155.4 million | $133.9 million |
| Debt | $0 (No borrowings under credit facility) | $0 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 17.5% year-over-year, driven by an 11.9% increase in comparable store sales and the net addition of 23 stores (27 opened, 4 closed).
- Profitability Surge: Operating profit increased 193% and net income increased 165%. This was fueled by a 250 basis point improvement in gross margin and a 220 basis point reduction in SG&A as a percentage of sales.
- Store Expansion: Store count grew from 377 to 400. The company relocated its distribution center from Everett, Washington, to Corona, California, incurring $2.4 million in exit costs.
- Legal Settlements: The company recorded a $2.1 million litigation settlement charge in Fiscal 2010 (compared to $1.3 million in Fiscal 2009) related to a class action lawsuit regarding overtime wages and meal breaks.
Guidance, Outlook, and Risks
Outlook: Management maintains a "cautiously optimistic" outlook for Fiscal 2011. The company expects total sales to increase, driven by comparable store sales growth, the opening of approximately 44 new stores (including the first international locations in Canada), and e-commerce growth. Earnings are expected to increase if sales projections are met.
Capital Expenditures: Planned CapEx for Fiscal 2011 is estimated between $32 million and $34 million, primarily for new store openings and the construction of a new home office in Lynnwood, Washington.
Risks and Contingencies:
- Input Costs: Rising costs for cotton, foreign labor, and transportation could compress gross margins if not passed on to consumers.
- Seasonality: Approximately 61% of net sales occur in the third and fourth quarters; adverse conditions during these periods could materially impact annual results.
- Expansion Risks: Opening new stores, particularly in Canada, involves risks regarding market acceptance, lease terms, and integration.
- Liquidity: While the company has no outstanding debt, it holds $0.9 million in auction rate securities that have failed to sell in recent auctions, potentially limiting short-term liquidity.
Investor Verification Checklist
- Comparable Store Sales Sustainability: Verify if the 11.9% comparable store sales growth is sustainable given the competitive teen retail landscape and economic recovery status.
- Margin Pressure: Monitor the impact of rising raw material and labor costs on the 35.6% gross margin in upcoming quarters.
- Canadian Expansion: Assess the performance of the first international stores in Canada, a market with different consumer tastes and regulatory environments.
- Legal Exposure: Confirm the final resolution of the $2.1 million class action settlement and monitor for any new employment-related litigation.
- Auction Rate Securities: Review the status of the $0.9 million auction rate security investment and its potential impact on liquidity if auctions continue to fail.