Zumiez Inc. — Q2 FY2022 Form 10-Q
Business context and period. Specialty retailer of apparel, footwear, accessories and hardgoods, operating Zumiez, Blue Tomato and Fast Times. The quarter ended July 30, 2022 (13 weeks); the six-month period was 26 weeks. Zumiez operated 751 stores across the U.S., Europe, Canada and Australia.
Financial performance
Amounts in USD millions, except per-share data. Comparisons are with the corresponding 2021 periods.
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $220.0 | $268.7 | $440.7 | $547.7 |
| Gross profit / margin | $75.1 / 34.1% | $105.0 / 39.1% | $147.4 / 33.5% | $208.1 / 38.0% |
| Operating profit / margin | $5.0 / 2.3% | $32.0 / 11.9% | $5.5 / 1.2% | $66.2 / 12.1% |
| Net income / diluted EPS | $3.1 / $0.16 | $24.0 / $0.94 | $2.7 / $0.14 | $50.4 / $1.96 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(24.2) | $52.1 |
Liquidity, debt and capital allocation
- At July 30, cash and cash equivalents were $59.1 million and marketable securities were $107.0 million; combined cash and securities were approximately $166.2 million. Cash, cash equivalents and restricted cash totaled $65.7 million.
- No borrowings were outstanding under either credit facility. The Wells Fargo revolver provides up to $25 million through December 2023, with availability subject to letters of credit and facility terms; the UBS facility supports letters of credit.
- Operating lease liabilities totaled $263.5 million, including $67.4 million current. Merchandise purchase orders outstanding were $236.6 million, generally cancellable before shipment, subject to stated exceptions.
- Six-month investing cash flow was $55.7 million, including net sales of marketable securities; capital expenditures were $10.3 million. Financing cash use was $87.6 million, principally $87.9 million for repurchases of 1.914 million shares. The December 2021 $150 million repurchase authorization was completed in March 2022; no program repurchases occurred in Q2.
Material changes and management commentary
- Q2 sales declined 18.1%; six-month sales declined 19.5%. Management attributed weakness mainly to prior-year U.S. stimulus comparisons and inflation-related pressure on consumer confidence and spending. Transactions and dollars per transaction fell; lower units per transaction were partly offset by higher average unit retail.
- North American sales declined 20.1% in Q2 and 22.6% for the six months. International sales were relatively stronger excluding foreign exchange; FX reduced sales by $4.7 million in Q2 and $7.5 million year to date.
- Gross margin contracted 500 basis points in Q2 and 450 basis points for the six months. Management cited fixed-cost deleverage and higher occupancy, shrink, web shipping and distribution costs. SG&A dollars were nearly flat year to date, but SG&A as a share of sales rose to 32.3% from 25.9%.
- Six-month operating cash flow turned negative, with inventory use of cash increasing to $24.7 million from $15.4 million. Cash and marketable securities fell from $294.5 million at January 29, 2022 to $166.2 million, alongside share repurchases and operating cash use.
- Fiscal 2022 capital spending guidance was approximately $29–31 million, with about 35 new stores planned; management said it remained on track. Management expected available liquidity and borrowing capacity to cover foreseeable operating needs and planned capital expenditures for at least 12 months.
Outlook, risks and unusual items
- No specific revenue, earnings or comparable-sales guidance was provided in the filing. Management cautioned that results are seasonal, typically weighted toward the third and fourth quarters.
- Key risks discussed include inflation and weaker discretionary spending, higher labor and freight costs, fashion and inventory execution, supply-chain disruption, foreign-exchange movements, competition, store traffic, and potential COVID-19 impacts. The filing reported no material changes to the risk factors in the prior 10-K.
- A $3.6 million German government COVID-related subsidy was recognized in SG&A in Q1 FY2022. A $2.8 million wage-and-hour class-action settlement was accrued and expensed in Q2 FY2021, received court approval in July 2022, and was paid in August 2022.
- Marketable securities had $5.4 million of gross unrealized losses at quarter-end, compared with $1.8 million at fiscal year-end; the filing says securities may be liquidated at management’s discretion before maturity.
- The credit facility generally requires trailing-four-quarter net income of at least $5 million and a 1.25:1.0 quick ratio. The filing reports no borrowings outstanding; confirm covenant calculations and compliance independently.
Important facts for investors to verify
- Whether sales trends, transaction counts and consumer demand improved after the reported quarter, especially in North America.
- Whether inventory levels, markdowns, shrink and freight/occupancy costs put further pressure on gross margin and cash flow.
- Whether planned store openings and the $29–31 million capital expenditure outlook were achieved, and how the company funded those commitments.
- Liquidity and covenant headroom, including the distinction between unrestricted cash, marketable securities and restricted cash, and lease and purchase commitments.
- Share repurchase activity, share count and cash use after the prior authorization was completed.