Zumiez Inc. — Q1 Fiscal 2020 Form 10-Q
Reporting period: 13 weeks ended May 2, 2020; comparable period ended May 4, 2019. Zumiez operated 719 stores across the U.S., Canada, Europe and Australia. COVID-19 closures began in mid-March; only 65 stores (9%) were open at quarter-end.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $137.8 million | $212.9 million |
| Gross profit / margin | $23.7 million / 17.2% | $66.5 million / 31.2% |
| Operating profit (loss) | $(27.8) million | $1.0 million |
| Net income (loss) | $(21.1) million | $0.8 million |
| Diluted EPS | $(0.84) | $0.03 |
| Cash from (used in) operating activities | $(17.5) million | $9.9 million |
- Sales declined 35.3%, primarily because stores were closed. Reported comparable sales increased 12.9% ($15.3 million), reflecting February growth before closures and strong e-commerce; stores closed more than seven days were generally excluded from comparable sales.
- Gross margin fell 1,400 basis points. Management attributed the decline chiefly to store occupancy costs without corresponding sales, higher web fulfillment and distribution costs, lower pre-shrink product margin, and COVID-related asset impairment.
- SG&A declined 21.2% to $51.6 million, but rose to 37.4% of sales from 30.7%, as lower revenue outweighed cost reductions and fixed-cost deleverage persisted.
- At May 2, cash and cash equivalents were $63.7 million and marketable securities were $153.5 million, or $217.2 million combined. The company reported no borrowings under its credit facility. Operating lease liabilities totaled $340.2 million, including $70.6 million current.
- Inventory was $136.4 million, versus $135.1 million at February 1, 2020. Current assets were $375.6 million and current liabilities $156.9 million.
Changes, outlook and management commentary
- COVID-19 materially reduced first-quarter revenue and operating income. Management expected negative impacts to continue through the balance of fiscal 2020 and cited uncertainty around further closures, customer spending, supply chains, and asset valuations.
- Liquidity actions included workforce and expense reductions, lower planned inventory receipts, delayed or canceled projects and store openings, rent-payment suspensions while seeking landlord relief, extended vendor payment terms, and pausing share repurchases. The company repurchased 694,000 shares for $13.4 million during the quarter before pausing.
- Fiscal 2020 capital expenditure expectations were reduced to approximately $10–11 million from $18–20 million previously reported. Zumiez remained on track to open approximately nine stores, subject to uncertainty. No full-year sales or earnings guidance was provided.
- At the end of May, 493 stores (69% of the fleet) were open. May sales were down 8.6% year over year, while sales for stores open over comparable portions of the month, including comparable e-commerce, rose 79.6%.
- The $35 million revolving facility matures December 7, 2021 and has financial covenants, including at least $5 million of trailing-four-quarter net income after taxes and a 1.25:1.0 quick ratio. The filing reports no borrowings but does not clearly state whether any covenant relief or waiver was obtained.
Risks, contingencies and unusual items
- COVID-related store closures triggered $1.5 million of long-lived-asset and lease right-of-use-asset impairment charges. Management warned of possible further impairment and inventory write-offs depending on reopening pace and customer behavior; no COVID-related inventory write-offs were recorded in the quarter.
- The company had $177.5 million of outstanding merchandise purchase orders, generally cancelable before shipment, with exceptions for certain private-label, packaging and international orders. Operating lease minimum payments totaled $372.2 million, including imputed interest.
- A putative California wage-and-hour class action remained unresolved. The Ninth Circuit affirmed denial of judgment on reporting-time-pay and minimum-wage claims and reversed on an expense-reimbursement claim; rehearing was denied in May 2020. The company said it could not estimate a reasonably possible loss.
- Management identified prolonged or renewed store closures, discretionary-spending weakness, supply-chain disruption, lease and asset valuation, and seasonal inventory exposure as key uncertainties. Fiscal results are seasonal, with sales and profitability typically higher in the third and fourth quarters.
Important facts for investors to verify
- Store reopening progress, e-commerce trends, and whether May’s comparable-sales strength continued.
- Cash, marketable securities, operating cash flow, and the cash impact of rent, payroll and vendor-payment measures.
- Compliance with the credit facility’s financial covenants and any amendments or waivers.
- Potential additional impairment charges, inventory markdowns or write-offs, and the status of landlord concessions.
- Developments and potential exposure in the California wage-and-hour litigation.