Zumiez Inc. — Q2 Fiscal 2016 Form 10-Q
Business context and reporting period. The unaudited quarter ended July 30, 2016, comprised 13 weeks; the six-month period comprised 26 weeks. Zumiez operated 673 stores—604 in the U.S., 44 in Canada and 25 in Europe—and ecommerce sites under Zumiez and Blue Tomato. Fiscal 2016 ends January 28, 2017.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $178.3 million | $179.8 million | $351.2 million | $357.4 million |
| Comparable sales | -4.9% | Not stated here | -6.2% | Not stated here |
| Gross profit / margin | $54.8 million / 30.8% | $57.8 million / 32.1% | $104.8 million / 29.8% | $114.3 million / 32.0% |
| SG&A / percent of sales | $56.0 million / 31.5% | $52.5 million / 29.2% | $109.9 million / 31.2% | $104.9 million / 29.3% |
| Operating income (loss) | ($1.1) million | $5.3 million | ($5.1) million | $9.4 million |
| Net income (loss) / diluted EPS | ($0.8) million / ($0.03) | $3.2 million / $0.11 | ($3.0) million / ($0.12) | $6.0 million / $0.21 |
| Operating cash flow | Not stated here | Not stated here | $6.4 million | $1.0 million |
At July 30, cash and cash equivalents were $19.6 million and marketable securities were $32.7 million. Cash decreased $23.6 million during the first half. Net investing cash outflow was $11.6 million, mainly capital expenditures of $11.9 million; net financing cash outflow was $18.7 million, primarily share repurchases. The company reported no revolving-credit borrowings. Total liabilities were $152.3 million; the filing reports substantial operating lease commitments rather than funded debt.
Material changes and management commentary
- Q2 sales declined 0.9%; first-half sales declined 1.7%. Comparable sales fell 4.9% and 6.2%, respectively, with lower transactions the primary driver. New store additions partly offset comparable-sales declines.
- Management attributed Q2 gross-margin contraction mainly to 140 basis points of store-occupancy deleverage, partly offset by 30 basis points of improved product margin. For the first half, lower occupancy leverage and higher outbound shipping costs contributed to the 220-basis-point gross-margin decline.
- SG&A increased 6.7% in Q2 and 4.8% in the first half, with store operating-cost and corporate-cost deleverage cited as drivers. The company moved from prior-year profits to losses in both periods.
- First-half operating cash flow improved year over year, but included significant working-capital movements: inventory used $32.8 million of cash, partly offset by a $38.2 million increase in trade payables.
Outlook, risks, contingencies and unusual items
- Management expected fiscal 2016 capital expenditures of approximately $24–$26 million, largely for about 29 planned new stores, remodels and relocations. It stated available liquidity and expected borrowings should cover foreseeable operating needs and planned capital expenditures for at least 12 months. No earnings or sales guidance was provided in the supplied filing text.
- The new $100 million asset-based revolving facility, subject to a borrowing base, matures February 5, 2021. No borrowings were outstanding at quarter-end. The facility is secured by substantially all personal property of the borrowers and guarantors.
- Operating lease commitments totaled $423.4 million; purchase obligations totaled $167.6 million, primarily merchandise orders. Certain purchase orders may be cancelled before shipment, subject to exceptions. The filing also describes ordinary-course litigation and self-insurance reserves of $2.5 million; it does not provide a clear quantified exposure for litigation.
- The board’s $70 million repurchase program remained in effect through January 28, 2017, subject to board action. The company repurchased 1.059 million shares for $18.3 million during the first half.
- After quarter-end, Zumiez acquired Australian retailer Fast Times Skateboarding on August 31, 2016, for $6.9 million, consisting of $5.5 million cash and $1.4 million in shares, subject to adjustments. Fast Times operated five stores and a website.
- Key risks include weak comparable sales, fashion and inventory markdown exposure, retail seasonality, mall traffic, international and foreign-exchange exposure, competition, supply-chain and labor costs, and significant lease obligations. Management reported no material changes to the risk factors in its prior Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether comparable-sales trends and transaction counts improved after the reported 4.9% quarterly and 6.2% first-half declines.
- Whether gross margin stabilized after occupancy deleverage and higher shipping costs, and whether expenses scaled with sales.
- Inventory quality, markdown needs and the timing of vendor payments, given the first-half inventory cash use and payable increase.
- Remaining repurchase authorization, liquidity after the Fast Times acquisition, and borrowing-base availability under the ABL facility.
- Execution and returns from planned store openings, the acquisition, and the company’s substantial lease and merchandise-purchase commitments.