Zumiez Inc. — Q2 FY2019 Form 10-Q
Business context and period: Specialty retailer of apparel, footwear, accessories and hardgoods, operating Zumiez, Blue Tomato and Fast Times stores and ecommerce sites. The quarter and six-month period ended August 3, 2019 were each 13 and 26 weeks, respectively. Zumiez operated 710 stores across the U.S., Canada, Europe and Australia.
Financial performance
- Quarter: Net sales were $228.4 million, up 4.3% year over year; comparable sales increased 3.6%. Gross profit was $77.2 million, with gross margin of 33.8% versus 33.1%. Operating profit rose to $11.7 million from $6.7 million; net income was $9.0 million versus $4.4 million, and diluted EPS was $0.36 versus $0.17.
- First six months: Net sales were $441.4 million, up 3.8%; comparable sales increased 3.5%. Gross profit was $143.7 million, with gross margin of 32.5% versus 31.8%. Operating profit was $12.6 million versus $5.0 million; net income was $9.8 million versus $1.8 million, and diluted EPS was $0.39 versus $0.07.
- Drivers and costs: Management attributed sales growth mainly to comparable sales and seven net store additions. Hardgoods led comparable sales growth, followed by footwear and accessories; men’s and women’s clothing were weaker. Margin improvement reflected occupancy-cost leverage and lower distribution and shipping costs. SG&A declined as a share of sales in both periods. Foreign-exchange movements reduced sales by $1.2 million in the quarter and $3.9 million for the six months.
- Cash flow: Six-month operating cash flow was $35.2 million, compared with $15.3 million in the prior-year period. Investing activities used $19.5 million, including $8.3 million of capital expenditures and $11.2 million of net marketable-security purchases. Ending cash, cash equivalents and restricted cash were $69.8 million, versus $42.9 million a year earlier.
- Liquidity and obligations: At August 3, cash and cash equivalents were $63.8 million and marketable securities were $124.8 million. Current assets were $373.1 million and current liabilities $181.1 million. No borrowings were outstanding under the $35 million secured revolving credit facility. Management expected cash, operating cash flow and available credit to cover operations and planned capital expenditures for at least 12 months.
Changes, outlook and risks
- Zumiez adopted ASC 842 lease accounting in fiscal 2019. At August 3, the balance sheet included $306.1 million of operating lease right-of-use assets and $352.1 million of lease liabilities. Adoption included a $6.3 million cumulative retained-earnings reduction related to impaired lease assets; the company said adoption did not materially affect income or cash flows.
- Management expected fiscal 2019 capital expenditures of approximately $20–22 million, primarily for store openings, remodels and relocations, and remained on track to open approximately 16 stores. These are expectations, not guaranteed outcomes.
- Outstanding merchandise purchase commitments were $222.4 million, generally cancellable before shipment except for certain orders. Future minimum operating lease payments, including imputed interest, totaled $390.5 million.
- A California wage-and-hour putative class action remained unresolved; the company said it could not assess the outcome or estimate a reasonably possible loss. Ordinary-course litigation and self-insurance reserves also apply.
- Key risks include fast-changing fashion preferences and markdown exposure, discretionary-spending and mall-traffic trends, foreign sourcing and trade costs, foreign exchange, seasonality, labor and shipping costs, ecommerce/cybersecurity and execution of international growth. Results are typically stronger in the third and fourth quarters, so first-half performance is not necessarily indicative of the full year.
Investor verification priorities
- Confirm comparable-sales trends and whether growth in hardgoods, footwear and accessories offsets softness in apparel.
- Track gross-margin and SG&A leverage, including the effects of promotions, occupancy and fulfillment costs.
- Reconcile operating cash flow and working-capital movements with inventory and accounts-payable changes.
- Assess lease obligations and store economics alongside the planned capital spending and store openings.
- Monitor foreign-exchange impacts, purchase commitments, the California litigation and compliance with credit-facility covenants.