Zumiez Inc. — Fiscal 2014 Form 10-K
Reporting period: 52 weeks ended January 31, 2015. Zumiez is a specialty retailer of youth-oriented apparel, footwear, accessories and action-sports hardgoods, operating Zumiez and Blue Tomato stores and ecommerce sites. It ended the year with 603 stores: 550 in the U.S., 35 in Canada and 18 in Europe. Fiscal 2014 fourth-quarter figures are included below where available.
Financial results and liquidity
| Metric | Fiscal 2014 | Fiscal 2013 |
|---|---|---|
| Net sales | $811.6 million | $724.3 million |
| Comparable sales | +4.6% | -0.3% |
| Gross profit / margin | $287.1 million / 35.4% | $261.8 million / 36.1% |
| Operating profit / margin | $71.6 million / 8.8% | $72.8 million / 10.1% |
| Net income | $43.2 million | $45.9 million |
| Diluted earnings per share | $1.47 | $1.52 |
| Operating cash flow | $89.9 million | $66.9 million |
| Capital expenditures | $35.8 million | $36.0 million |
Fourth-quarter fiscal 2014 sales were $258.6 million, operating profit $31.3 million, net income $17.5 million and diluted EPS $0.60; comparable sales rose 8.3%. Fourth-quarter fiscal 2013 included significant benefits from a rent-accounting correction and reversal of Blue Tomato incentive expense, affecting year-over-year comparability.
At year-end, cash and cash equivalents were $20.9 million and marketable securities were $133.8 million; combined cash, cash equivalents and current marketable securities were $154.6 million, versus $117.2 million a year earlier. Working capital was $198.3 million, up from $168.5 million. Total assets were $493.7 million and shareholders’ equity was $359.5 million. No borrowings were outstanding under the principal revolving facility or international revolving lines; the company reported $0.3 million of commercial letters of credit. The $25 million Wells Fargo facility (with an option to increase to $35 million) runs through September 2016. Fiscal 2014 financing included $19.6 million of share repurchases.
Material changes and management commentary
- Sales increased 12.0%, supported by 4.6% comparable-sales growth and a net addition of 52 stores. North American sales rose 10.6%; European sales rose 32.4%.
- Profitability weakened despite sales growth: gross margin fell 70 basis points and operating margin fell 130 basis points. Management cited lower product margin, occupancy-cost deleverage and higher ecommerce costs; acquisition-related incentive and amortization charges also weighed on results.
- Net income declined 6.0% and diluted EPS declined 3.3%. The effective tax rate increased to 39.7% from 36.1%.
- Management described the retail environment as challenging early in the year, with improving comparable-sales trends and a stronger fourth quarter. It cautioned that the fourth-quarter rebound was not sufficient evidence of a sustained trend.
Outlook, risks and unusual items
- For fiscal 2015, management expected sales, comparable sales and earnings to increase, while remaining cautious. It planned approximately 57 store openings, including about six in Europe, and capital expenditures of approximately $39–$41 million. Cost structure, excluding Blue Tomato acquisition costs, was expected to grow at a rate similar to fiscal 2014; inventory per square foot was expected to be flat or grow slightly. Management did not anticipate new borrowings.
- Management expected gross margins to fluctuate by quarter but generally remain in line with fiscal 2014, and expected cash, short-term investments and working capital to increase. Longer term, it aims to grow operating profit faster than sales.
- Blue Tomato performance payments could reach €22.1 million (approximately $25.0 million at the stated exchange rate), subject to performance and continued employment through April 2015. At year-end, the company estimated an obligation of €6.0 million ($6.8 million), split between cash and stock; it recorded $6.4 million of fiscal 2014 expense.
- Operating leases are a substantial fixed commitment: minimum future lease payments totaled $423.8 million, including $61.5 million due in fiscal 2015. Fiscal 2014 rent expense was $72.5 million, plus $39.6 million of real-estate taxes, insurance, common-area maintenance and other costs.
- Purchase obligations were $192.9 million, primarily for merchandise, and generally could be canceled before shipment, with exceptions for certain private-label orders. No off-balance-sheet arrangements were reported.
- Key risks include fashion and inventory execution, consumer discretionary spending, mall traffic and ecommerce competition, seasonal dependence, weather, vendor and overseas supply-chain issues, foreign currency exposure, labor and healthcare costs, and disruptions at distribution or fulfillment facilities. Municipal securities and variable-rate demand notes also carry credit and liquidity risk; marketable securities totaled $133.8 million current and $0.8 million long-term.
- The company reported that ordinary-course litigation was not expected to have a material adverse effect. A California assistant-store-manager class action settlement of $1.3 million was approved and paid during the year. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether the strong 8.3% fourth-quarter comparable-sales growth continued into fiscal 2015, and how much growth came from transactions versus ticket size.
- Whether gross and operating margins stabilize after fiscal 2014 declines, separating recurring performance from the Blue Tomato incentive charge and prior-year accounting and settlement benefits.
- The final Blue Tomato incentive payment, including the performance conditions, cash-versus-stock settlement and resulting expense.
- The liquidity, credit quality and saleability of municipal securities and variable-rate demand notes, alongside the company’s large lease commitments and planned store investment.
- Execution and returns from planned store openings, ecommerce and omni-channel investments, particularly in Europe.