Zumiez Inc. 10-K Summary: Fiscal Year Ended January 30, 2010
Business Context and Reporting Period
Zumiez Inc. is a mall-based specialty retailer of action sports apparel, footwear, equipment, and accessories targeting young men and women aged 12 to 24. The company operates under the Zumiez brand name. This report covers the fiscal year ended January 30, 2010 (Fiscal 2009), a 52-week period. As of the reporting date, Zumiez operated 377 stores across 35 states, primarily located in shopping malls.
Key Financial Metrics
| Metric | Fiscal 2009 (2010) | Fiscal 2008 (2009) | Change |
|---|---|---|---|
| Net Sales | $407.6 million | $408.7 million | -0.3% |
| Gross Profit | $134.7 million | $134.5 million | +0.2% |
| Gross Margin | 33.1% | 32.9% | +20 bps |
| Operating Profit | $12.7 million | $24.6 million | -48.4% |
| Net Income | $9.1 million | $17.2 million | -46.9% |
| Diluted EPS | $0.30 | $0.58 | -48.3% |
| Comparable Store Sales | -10.0% | -6.5% | N/A |
| Cash and Cash Equivalents | $23.0 million | $33.1 million | -30.5% |
| Total Cash & Investments | $108.1 million | $78.6 million | +37.5% |
| Working Capital | $134.9 million | $112.1 million | +20.4% |
| Capital Expenditures | $16.6 million | $28.3 million | -41.3% |
Debt and Liquidity: The company maintained a $25.0 million secured revolving credit facility with Wells Fargo HSBC Trade Bank, N.A., with no outstanding borrowings as of January 30, 2010. Approximately $0.6 million in commercial letters of credit were outstanding. The company held $108.1 million in cash, cash equivalents, and short-term investments.
Material Changes vs. Prior Period
- Revenue Stagnation: Net sales remained flat (-0.3%) due to a 10.0% decline in comparable store sales, which was largely offset by the addition of 34 net new stores (36 opened, 2 closed).
- Profitability Decline: Net income dropped 46.9% to $9.1 million. This was driven by a significant increase in Selling, General, and Administrative (SG&A) expenses as a percentage of sales (rising from 26.9% to 30.0%).
- SG&A Drivers: The increase in SG&A was attributed to costs associated with opening 36 new stores (180 basis points), impairment charges on 21 stores (40 basis points), and legal settlement costs (30 basis points).
- Store Impairment: The company recorded a non-cash impairment charge of $2.5 million related to 21 underperforming stores in Fiscal 2009, compared to $0.8 million for five stores in Fiscal 2008.
- Seasonality: The first half of Fiscal 2009 was challenging with a 17.2% decline in same-store sales, while the second half showed improvement with a 4.7% decline.
Guidance, Outlook, and Risks
Outlook: Management maintains a cautious outlook for Fiscal 2010, planning conservatively while making strategic investments in supply chain efficiencies and product placement. The company expects to open approximately 25 new stores in Fiscal 2010, a reduction from the 36 opened in Fiscal 2009. Capital expenditures are forecasted to increase to $26.0–$28.0 million, largely due to the acquisition of a new distribution center.
Key Risks and Contingencies:
- Economic Sensitivity: The company faces risks from the U.S. economic recession, which impacts discretionary spending on action sports apparel. Sales are heavily dependent on mall traffic.
- Store Relocation: Zumiez acquired a 168,450 square foot building in Corona, California, for $11.8 million to replace its Everett, Washington distribution center. The move is scheduled for April/May 2010, carrying operational disruption risks.
- Liquidity of Investments: The company holds $0.9 million in an auction rate security that has failed to sell in recent auctions due to market illiquidity. While currently classified as a temporary impairment, further declines could impact earnings.
- Legal Proceedings: A class action lawsuit regarding overtime wages and meal breaks in California was settled for $1.35 million, with preliminary court approval granted in March 2010. Another putative class action regarding store manager wages is ongoing.
- Vendor Relations: The company relies on vendors for 85% of its merchandise. Disruptions in supply chains or vendor financial instability could impact inventory availability.
Investor Verification Checklist
- Verify the impact of the 10.0% comparable store sales decline on future profitability, given the high fixed cost structure of mall leases.
- Monitor the execution and cost overruns associated with the relocation of the distribution center to Corona, California.
- Assess the liquidity status of the $0.9 million auction rate security and potential for further impairment charges.
- Review the status of the ongoing California wage and hour litigation (Chandra Berg v. Zumiez Inc.) and potential exposure beyond the settled $1.35 million case.
- Confirm the company's ability to maintain its credit facility covenants, specifically the minimum quick ratio of 1.25 and the maximum net loss limit, amidst continued economic uncertainty.