Zumiez Inc. — Q3 FY2014 Form 10-Q
Business context and period. Specialty retailer of action-sports apparel, footwear, accessories and hardgoods, operating Zumiez and Blue Tomato stores and ecommerce sites. The quarter was the 13 weeks ended November 1, 2014; year-to-date covers 39 weeks. At quarter-end, Zumiez operated 602 stores: 551 in the U.S., 35 in Canada and 16 in Europe.
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | First 9 months FY2014 | First 9 months FY2013 |
|---|---|---|---|---|
| Net sales | $213.3 million | $191.1 million | $553.0 million | $497.5 million |
| Gross profit / margin | $77.9 million / 36.5% | $70.8 million / 37.0% | $189.3 million / 34.2% | $173.9 million / 35.0% |
| Operating profit / margin | $25.0 million / 11.7% | $20.7 million / 10.8% | $40.3 million / 7.3% | $32.5 million / 6.5% |
| Net income | $15.7 million | $11.9 million | $25.7 million | $19.1 million |
| Diluted EPS | $0.54 | $0.39 | $0.88 | $0.63 |
- Q3 sales increased 11.6%; comparable sales rose 3.7% (ecommerce +15.5%, stores +2.2%). For the first nine months, sales grew 11.2% and comparable sales rose 3.0% (ecommerce +17.0%, stores +1.4%).
- Gross margin contracted 50 basis points in Q3 and 80 basis points year to date, primarily from lower product margin. SG&A as a share of sales fell 140 and 160 basis points, respectively, contributing to higher operating margins.
- Year-to-date operating cash flow was $34.4 million, compared with $21.7 million. Capital expenditures were $29.0 million. Cash and cash equivalents were $13.8 million; current marketable securities were $94.9 million.
- At November 1, current assets were $276.0 million and current liabilities were $107.8 million. Inventory was $133.4 million, up from $87.2 million at February 1. Total liabilities were $155.4 million; shareholders’ equity was $344.2 million.
- There were $4.8 million of borrowings under international revolving lines; no borrowings were outstanding under the domestic secured revolver. Domestic facility capacity was $25 million, with an accordion feature to $35 million. The company reported compliance with covenants.
Changes, outlook and notable items
- Sales growth reflected 54 net store additions since the prior-year quarter and positive comparable sales. Ecommerce accounted for 11.2% of Q3 sales versus 11.0% a year earlier.
- Management expected FY2014 capital expenditures of approximately $37–$39 million, primarily for new stores, remodels and relocations, and planned 56 new store openings during the fiscal year. It expected operating cash flow, liquid investments and available borrowings to meet foreseeable operating and capital needs for at least 12 months. The filing does not provide numerical earnings guidance.
- Year-to-date other comprehensive loss was $6.4 million, mainly from foreign-currency translation. This reduced reported comprehensive income despite higher net income.
- A potential Blue Tomato acquisition incentive payment of up to €22.1 million was contingent on financial targets and continued employment through April 2015; management estimated no payment would be due at quarter-end. No related expense was recorded in the current-year periods, versus $1.1 million in Q3 and $3.2 million year to date in the prior year.
- A $1.3 million conditional settlement of a California assistant-store-manager wage-and-hour class action was approved by the court on November 24, 2014, after quarter-end. The company had recorded the settlement expense in FY2013. Other ordinary-course claims remain possible; the filing does not quantify potential additional exposure.
- Key risks include retail seasonality and inventory/markdown exposure, fashion and consumer-demand shifts, mall traffic and competition, international and foreign-exchange exposure, and substantial lease commitments. Minimum operating lease payments totaled $403.5 million; outstanding merchandise purchase orders were $140.0 million, generally cancellable before shipment subject to stated exceptions.
Important facts for investors to verify
- Whether the margin decline from lower product margin persists, and how comparable store and ecommerce sales perform beyond the holiday season.
- Inventory growth relative to sales, including subsequent sell-through, markdowns and working-capital cash needs.
- Delivery of the planned store openings and $37–$39 million capital expenditure plan, and the returns generated by those investments.
- Liquidity and access to revolving credit, including the international borrowings, covenant compliance and the credit facility’s September 2016 expiration.
- Final status and payment of the California settlement, any Blue Tomato incentive obligation, and developments in other litigation or contingencies.
- Potential effects of currency movements and the credit quality or liquidity of the municipal securities and variable-rate demand notes.