Zumiez Inc. — Form 10-Q Summary
Business context and reporting period
For the 13-week quarter ended October 31, 2015, and the 39-week year-to-date period, Zumiez operated 653 specialty retail stores in the U.S., Canada, and Europe, as well as ecommerce sites under the Zumiez and Blue Tomato names. Results are unaudited; retail seasonality means interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $204.3 million | $213.3 million | $561.7 million | $553.0 million |
| Gross profit | $70.1 million | $77.9 million | $184.4 million | $189.3 million |
| Gross margin | 34.3% | 36.5% | 32.8% | 34.2% |
| Operating profit | $15.2 million | $25.0 million | $24.7 million | $40.3 million |
| Net income | $9.7 million | $15.7 million | $15.6 million | $25.7 million |
| Diluted EPS | $0.36 | $0.54 | $0.55 | $0.88 |
- Q3 sales declined 4.2%; comparable sales fell 7.3%. Year-to-date sales rose 1.6%, while comparable sales fell 3.4%.
- SG&A increased 3.7% in Q3 and 7.2% year to date. Operating margin was 7.5% in Q3 versus 11.7%; year-to-date it was 4.4% versus 7.3%.
- Management attributed weaker margins mainly to store occupancy and operating-cost deleveraging as sales declined. Q3 gross margin also reflected lower product margin and higher distribution costs; year-to-date gross margin pressure included higher distribution costs.
- Year-to-date operating cash flow was $0.5 million, down from $34.4 million. Inventory-related cash use was $40.6 million. Investing activities provided $58.7 million, including net proceeds from marketable securities; financing activities used $75.2 million, primarily for share repurchases.
- At October 31, cash and cash equivalents were $4.8 million and current marketable securities were $46.3 million, versus $20.9 million and $133.8 million, respectively, at January 31. Current assets were $220.7 million and current liabilities $89.2 million.
- No borrowings were outstanding on the $25 million secured revolving facility. International revolving lines had $1.2 million outstanding. The company reported compliance with credit-facility covenants. Total liabilities were $141.5 million; the filing reports no conventional long-term debt balance.
Changes, outlook, risks, and unusual items
- Q3 North American sales fell 5.3%; European sales rose 10.0%. Year-to-date, North American sales fell 5.3% and European sales rose 26.2%. Foreign exchange reduced sales by $4.6 million in Q3 and $14.0 million year to date.
- Management cited fewer comparable transactions as the main driver of comparable-sales declines, partly offset by higher dollars per transaction. Q3 comparable sales fell across the reported merchandise categories; year-to-date hardgoods gains partly offset declines in other categories.
- Fiscal 2015 capital expenditures were expected to be approximately $35 million to $37 million, with 57 new stores planned for the year. The filing provides no specific revenue or earnings guidance. Management expected liquidity, available borrowings, and operating cash generation to cover foreseeable operations and planned capital expenditures for at least 12 months.
- Subsequent to quarter-end, on December 2, the board authorized a new share-repurchase program of up to $70 million, expected to run through fiscal year-end January 28, 2017. During the nine months, Zumiez repurchased 2.976 million shares for $77.7 million at an average $26.11 per share.
- Blue Tomato incentive payments of €6.0 million ($6.6 million) were paid during Q3: half in cash and half in shares. The company recorded $0.6 million of related expense year to date; no Q3 expense was recorded.
- Future minimum operating lease payments totaled $426.0 million, excluding contingent rent and certain occupancy costs. Outstanding merchandise purchase orders were $148.2 million; most could be canceled before shipment, subject to exceptions. Litigation was described as arising in the ordinary course, with outcomes not predictable.
- Key risks include weak discretionary demand and mall traffic, fashion and inventory misjudgments, seasonal volatility, foreign exchange, international expansion, supply-chain and vendor risks, labor and occupancy costs, ecommerce and information-security disruptions, and substantial lease commitments. The company noted no material changes to previously disclosed risk factors. Disclosure controls were concluded effective.
Important facts for investors to verify
- Whether comparable-sales trends and transaction counts stabilize, particularly in North America, and whether planned store growth offsets comparable-store weakness.
- Whether inventory levels, markdowns, and occupancy and operating-cost deleveraging continue to pressure gross and operating margins.
- How cash generation develops after the significant year-to-date working-capital use and share repurchases, and how the reduced cash and securities balance supports planned investment and buybacks.
- The execution and returns of the 57-store plan and $35 million to $37 million capital-expenditure outlook, alongside the company’s $426.0 million lease commitment.
- Exposure to foreign exchange and the performance of Europe, and the availability and covenant terms of revolving credit facilities as the secured facility approaches its September 2016 maturity.