Zumiez Inc. — Q1 FY2019 Form 10-Q
Reporting period: The 13 weeks ended May 4, 2019; comparable period ended May 5, 2018. Zumiez operated 707 stores across the U.S., Canada, Europe and Australia, in addition to its ecommerce businesses. The company cautions that results are seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $212.9 million | $206.3 million |
| Gross profit / margin | $66.5 million / 31.2% | $62.6 million / 30.3% |
| SG&A / percent of sales | $65.5 million / 30.7% | $64.3 million / 31.1% |
| Operating income (loss) / margin | $1.0 million / 0.5% | $(1.7) million / (0.8)% |
| Net income (loss) | $0.8 million; $0.03 diluted EPS | $(2.6) million; $(0.10) diluted EPS |
| Cash from (used in) operations | $9.9 million | $(3.9) million |
At May 4, 2019, cash and cash equivalents were $60.6 million and marketable securities were $107.4 million. Current assets were $328.6 million versus current liabilities of $144.0 million. The company had no borrowings under its $35 million revolving facility. It reported $347.8 million of present-value operating lease obligations ($54.5 million current; $293.4 million long-term). These lease liabilities are not funded debt.
Inventory was $136.0 million, up from $129.3 million at February 2, 2019. Total assets were $834.7 million and shareholders’ equity was $394.0 million. The balance-sheet increase versus year-end largely reflects adoption of ASC 842 lease accounting.
Changes versus prior period
- Sales rose 3.2%; comparable sales increased 3.3%, driven by higher comparable transactions and dollars per transaction. Footwear led category growth, followed by hardgoods and accessories; women’s apparel and men’s apparel declined.
- North America sales increased 3.7%; Europe and Australia combined were down 0.2% as reported, but up 8.6% excluding currency effects. Foreign exchange reduced sales by $2.7 million.
- Gross margin improved 90 basis points, mainly from 40 basis points of store occupancy leverage, 20 basis points lower shipping and fulfillment costs, and a 10-basis-point product-margin improvement. SG&A as a share of sales fell 40 basis points, primarily from store-cost leverage.
- The company moved from a quarterly net loss to net income. The effective tax rate was 59.8%, versus 36.6%, reflecting jurisdictional earnings mix and uncertainty around realization of deferred tax assets in certain jurisdictions.
- Operating cash flow improved by $13.8 million year over year. Cash flows included a $19.6 million increase in accounts payable and a $7.5 million inventory cash use.
Outlook, risks and unusual items
- Management expected fiscal 2019 capital expenditures of approximately $20–$22 million, mainly for store improvements and approximately 15 planned new stores; it said it remained on track with that store-opening plan. No earnings or sales guidance was provided in the filing.
- Management expected cash, marketable securities, operating cash flow and available credit to fund operations and planned capital expenditures for at least the next 12 months.
- ASC 842 adoption added $297.3 million of lease right-of-use assets and $342.7 million of lease liabilities at transition, derecognized deferred rent and tenant allowances, and reduced opening retained earnings by $6.3 million for lease-asset impairment. Management said the change did not materially affect income or cash flows.
- Operating leases generated $18.0 million of quarterly expense. Contractual minimum lease payments, including imputed interest, totaled $387.1 million. Outstanding merchandise purchase orders were $240.2 million; most could be canceled before shipment, subject to exceptions.
- A putative California wage-and-hour class action remained pending. The company could not estimate the outcome or any reasonably possible loss. Self-insurance reserves were $2.5 million, up from $2.1 million at year-end.
- Key disclosed risks include fashion and inventory misjudgment, discretionary spending and mall/ecommerce traffic, competition, foreign sourcing and trade costs, currency movements, labor costs, seasonality, cybersecurity, and reliance on distribution facilities. The company reported no material changes to its previously disclosed risk factors and no material change in market risk.
- The credit facility includes financial covenants, including trailing-four-quarter net income after taxes of at least $5 million and a 1.25:1 quick ratio. The company reported no borrowings at quarter-end.
Most important facts to verify
- Whether comparable-sales momentum, category mix and currency-adjusted international growth continued after Q1.
- Whether planned fiscal 2019 store openings and $20–$22 million capital expenditures were achieved.
- Inventory levels, markdown exposure and the extent to which operating cash flow benefited from increased accounts payable.
- Lease commitments, upcoming lease commencements and the effect of occupancy costs on cash needs and covenant headroom.
- Developments in the wage-and-hour litigation and any change in the company’s ability to estimate potential exposure.
- Clarification that the 9,720 shares acquired during the quarter were for employee tax withholding, not repurchases under the authorized $75 million buyback program; the filing says there was no program repurchase activity.