Zumiez Inc. — Q2 Fiscal 2018 Form 10-Q
Reporting period: Quarter and six months ended August 4, 2018; each was a 13- and 26-week period, respectively. Comparatives ended July 29, 2017. Zumiez operates specialty retail stores and ecommerce businesses under Zumiez, Blue Tomato and Fast Times. It had 703 stores across the U.S., Canada, Europe and Australia.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $219.0 million, up 13.9% | $425.3 million, up 13.9% |
| Comparable sales | Up 6.3% | Up 7.2% |
| Gross profit / margin | $72.5 million / 33.1% | $135.1 million / 31.8% |
| Operating profit (loss) | $6.7 million, versus $(0.8) million | $5.0 million, versus $(7.0) million |
| Net income (loss) | $4.4 million; diluted EPS $0.17 | $1.8 million; diluted EPS $0.07 |
| Operating cash flow | Not separately reported for the quarter | $15.5 million, versus $3.8 million |
Six-month capital expenditures were $9.1 million; operating cash flow less capital expenditures was approximately $6.5 million. At August 4, cash and cash equivalents were $41.4 million and marketable securities were $91.5 million. Total liabilities were $175.4 million and shareholders’ equity was $355.0 million. Borrowings were $5.6 million on international revolving lines; there were no borrowings under the $100 million ABL facility.
Changes and drivers
- Sales growth reflected comparable-sales increases, a calendar shift that management said added a week of back-to-school sales, and a net 11 additional stores versus the prior-year period.
- Q2 gross margin rose 200 basis points; six-month gross margin rose 180 basis points. Management cited occupancy-cost leverage, improved product margin and lower inventory shrinkage, partly offset by higher shipping costs.
- SG&A as a share of sales fell 150 basis points in Q2 and 130 basis points for the six months, primarily from store-cost leverage.
- Comparable-sales growth was driven mainly by transactions; dollars per transaction declined. Men’s apparel was the leading category, while hardgoods and accessories weighed on comparable sales.
- Six-month inventory increased to $149.7 million from $125.8 million at fiscal year-end; accounts payable increased to $79.4 million from $37.9 million.
Outlook, risks and unusual items
- Management expected fiscal 2018 capital expenditures of approximately $21–$23 million and remained on track to open approximately 13 stores during the year. It said available liquidity and expected operating cash flows should cover operations and planned capital expenditures for at least 12 months.
- The six-month effective tax provision was 66.5%, reflecting exclusion of losses in certain European jurisdictions; valuation allowances on deferred tax assets rose to $5.5 million, primarily related to Austria.
- Foreign-currency translation reduced six-month other comprehensive income by $8.2 million. Zumiez adopted ASC 606 using the modified retrospective method; the $2.1 million increase in opening retained earnings was not material to reported-period results.
- Future contractual obligations included $389.9 million of operating lease payments and $249.5 million of purchase commitments. Certain purchase orders are cancellable before shipment, subject to exceptions.
- A putative California wage-and-hour class action was on appeal; the company said it could not assess the ultimate outcome or reasonably estimate a possible loss. The filing also notes ordinary-course litigation and self-insurance reserves of $2.5 million.
- Key risks include fashion and inventory misjudgments, competition and mall/customer traffic, seasonality, international and foreign-exchange exposure, supply-chain and freight costs, labor costs, cybersecurity, and execution of ecommerce and store expansion. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much sales growth and earnings improvement came from comparable sales versus the calendar shift and store additions.
- Whether margin gains and comparable-sales momentum continued, particularly given lower dollars per transaction and seasonal inventory exposure.
- Inventory growth, vendor payment timing, and the sustainability of operating cash flow.
- European tax losses and valuation allowances, foreign-currency effects, and the potential financial impact of the California litigation.
- Lease and purchase commitments, planned store openings and capital spending, and the effect of lease-accounting adoption on reported assets and liabilities.