Zumiez Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended November 2, 2019. The comparable periods ended November 3, 2018; each quarter was 13 weeks and each nine-month period was 39 weeks. Zumiez operated 718 stores across the U.S., Canada, Europe and Australia, as well as ecommerce sites.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $264.0M | $248.8M | $705.4M | $674.1M |
| Gross profit | $94.6M | $86.9M | $238.2M | $222.0M |
| Gross margin | 35.8% | 34.9% | 33.8% | 32.9% |
| Operating profit | $24.3M | $18.4M | $37.0M | $23.4M |
| Operating margin | 9.2% | 7.4% | 5.2% | 3.5% |
| Net income | $19.2M | $13.8M | $29.0M | $15.6M |
| Diluted EPS | $0.75 | $0.55 | $1.14 | $0.62 |
| Operating cash flow | Nine-month period: $29.5M | Prior nine-month period: $17.1M |
Liquidity and obligations: At November 2, cash and cash equivalents were $31.9M and marketable securities were $146.7M. Current assets were $389.6M and current liabilities $177.3M. Zumiez had no borrowings outstanding under its $35M secured revolving credit facility, which matures December 7, 2021. The balance sheet included $347.1M of operating lease liabilities, of which $59.7M was current; these are lease obligations, not drawn borrowings. Inventory was $183.4M, up from $129.3M at fiscal year-end.
Changes versus comparable periods
- Q3 net sales rose 6.1%; comparable sales increased 5.5%. Management attributed growth mainly to comparable sales and net store additions. YTD sales increased 4.6%, with comparable sales up 4.2%.
- Q3 gross margin improved 90 basis points and operating margin improved 180 basis points. Management cited occupancy-cost leverage, lower web fulfillment/distribution/shipping costs, and lower excess or slow-moving inventory write-offs. SG&A rose 2.6% in Q3 but declined as a share of sales by 90 basis points.
- YTD net income increased to $29.0M from $15.6M; diluted EPS rose to $1.14 from $0.62. The effective tax rate was 28.6%, versus 35.3% a year earlier. Q3 rates were 25.0% and 26.5%, respectively.
- YTD operating cash flow improved by $12.3M. Cash and cash equivalents plus restricted cash decreased $16.2M from the beginning of the fiscal year, while investing activities used $46.8M, including $32.9M of net purchases of marketable securities and $13.9M of capital expenditures.
Outlook, commentary and risks
- Management expected fiscal 2019 capital expenditures of approximately $19M–$21M, primarily for store openings, remodels and relocations, and remained on track to open approximately 15 stores during the year. It stated available liquidity and expected operating cash flow should cover foreseeable operating needs and planned capital expenditures for at least the next 12 months. No earnings or sales guidance is provided in the filing text.
- Management said comparable-sales gains reflected higher transactions and dollars per transaction. Hardgoods led Q3 category growth; women’s clothing declined. Foreign exchange reduced reported sales by $1.4M in Q3 and $5.3M YTD.
- Zumiez adopted ASC 842 lease accounting in fiscal 2019, recognizing substantial right-of-use assets and lease liabilities. Adoption included a $6.3M cumulative reduction to retained earnings for lease-asset impairment; the company said the change did not materially affect income or cash flows.
- Seasonality is significant: sales and profitability are typically higher in the third and fourth quarters, and results may fluctuate with holiday demand, fashion trends, inventory, weather and consumer spending. Other disclosed risks include competition, international sourcing and tariffs, foreign exchange, mall and ecommerce traffic, labor costs, cybersecurity, and execution of store and omni-channel plans.
- A California wage-and-hour putative class action remained pending; the company said it could not estimate the outcome or any reasonably possible loss. Merchandise purchase commitments were $183.2M, generally cancellable before shipment except for specified orders.
- On December 4, 2019, after quarter-end, the board authorized a new common-stock repurchase program of up to $100M through January 30, 2021, superseding prior programs. No shares were repurchased during the reported quarter or nine-month period.
Important facts for investors to verify
- Whether comparable-sales momentum and improved gross and operating margins continued into the holiday quarter; Q3 and nine-month results are seasonal and not necessarily indicative of the full year.
- Inventory growth, purchase commitments, and subsequent markdowns or working-capital needs.
- Cash generation and marketable-security liquidity relative to capital spending, lease payments, and the new $100M repurchase authorization.
- Lease obligations and related store-level commitments, alongside the company’s ability to meet credit-facility covenants.
- Developments in the wage-and-hour litigation and any change in the company’s ability to estimate potential exposure.