Zumiez Inc. — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended July 29, 2017; each was a 13-week or 26-week period, respectively. FY2017 is a 53-week year ending February 3, 2018. Zumiez is a specialty retailer of apparel, footwear, accessories and hardgoods, operating 692 stores across the U.S., Canada, Europe and Australia, as well as e-commerce sites. The company reports one operating segment.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | First half FY2017 | First half FY2016 |
|---|---|---|---|---|
| Net sales | $192.2 million | $178.3 million | $373.4 million | $351.2 million |
| Comparable sales growth | 4.7% | Not provided here | 3.3% | Not provided here |
| Gross profit / margin | $59.8 million / 31.1% | $54.8 million / 30.8% | $111.8 million / 30.0% | $104.8 million / 29.8% |
| SG&A / percent of sales | $60.6 million / 31.5% | $56.0 million / 31.5% | $118.8 million / 31.9% | $109.9 million / 31.2% |
| Operating loss | $0.8 million | $1.1 million | $7.0 million | $5.1 million |
| Net loss / diluted loss per share | $0.6 million / $0.02 | $0.8 million / $0.03 | $5.1 million / $0.21 | $3.0 million / $0.12 |
Q2 sales increased 7.8%, including a $8.3 million increase in comparable sales and net store additions. Comparable sales growth reflected more transactions, partly offset by lower dollars per transaction. First-half sales rose 6.3%. The company said Q2 gross margin improved mainly from occupancy-cost leverage, partly offset by higher inventory shrink; first-half improvement reflected product margin and occupancy leverage, partly offset by shrink. Q2 SG&A was flat as a share of sales, while first-half SG&A increased as a share of sales, driven mainly by salaries, minimum-wage increases and incentive compensation.
Cash, liquidity and commitments
- Cash and cash equivalents were $17.3 million and marketable securities were $53.4 million at July 29, 2017, totaling $70.7 million. Working capital was approximately $135.8 million.
- First-half operating cash flow was $3.8 million, down from $6.4 million a year earlier. Inventory cash use was $32.6 million, partly offset by a $34.6 million increase in trade payables.
- Investing cash use was $7.4 million, including $12.5 million of capital expenditures; financing provided $0.2 million. Cash declined $3.0 million from year-end.
- No borrowings were outstanding under the $100 million asset-based revolving facility or the international revolving lines at quarter-end; the filing reports no debt borrowings outstanding.
- Management expected available liquidity and operating cash flows to cover operations and planned capital expenditures for at least 12 months. FY2017 capital expenditures were forecast at approximately $24–$26 million, mainly for new stores, remodels and relocations; approximately 18 new stores were planned.
- Future operating lease payments totaled $424.2 million and merchandise purchase commitments were $190.7 million. The company generally could cancel purchase orders before shipment, with exceptions for certain private-label and international orders.
Material changes, outlook and risks
- Q2 net loss narrowed year over year, but first-half net loss widened to $5.1 million from $3.0 million, as higher SG&A more than offset improved gross profit.
- Other comprehensive income included $9.8 million of first-half foreign-currency translation gains. These gains reduced accumulated other comprehensive loss; they were not operating earnings.
- The company completed its previously authorized $70 million share-repurchase program by January 28, 2017; there were no repurchases in the first half of FY2017.
- Management identified fashion and consumer-preference changes, retail competition and traffic, seasonality and inventory markdown exposure, international expansion and foreign exchange, labor costs, supply-chain and vendor risks, cybersecurity, and dependence on operating cash flow as material risks. Retail sales and profitability are typically stronger in the third and fourth quarters.
- Ordinary-course litigation and self-insurance obligations are disclosed; the filing does not provide a clear quantified potential litigation exposure. No material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no material internal-control change during the quarter.
Important facts for investors to verify
- Whether comparable-sales momentum and transaction growth continue, and how sales per transaction and category mix develop.
- Whether first-half inventory growth and operating cash flow improve as seasonal sales progress, and whether shrink and markdowns remain controlled.
- Actual capital spending, store openings and returns on expansion, particularly in international markets.
- The liquidity and cash-flow impact of substantial lease commitments, purchase orders, and any currency or consumer-demand pressures.