Zumiez Inc. — Q1 Fiscal 2023 10-Q
Business context and period: Specialty retailer of apparel, footwear, accessories and hardgoods operating under Zumiez, Blue Tomato and Fast Times. The 13-week quarter ended April 29, 2023; comparison is with the 13 weeks ended April 30, 2022. Zumiez operated 758 stores at quarter-end.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $182.9 million | $220.7 million | Down 17.1% |
| Gross profit / margin | $49.4 million / 27.0% | $72.4 million / 32.8% | Profit down 31.8%; margin down 580 bps |
| SG&A | $70.7 million / 38.7% of sales | $71.9 million / 32.6% of sales | Expense down 1.6%; rate up 610 bps |
| Operating result | Loss of $21.4 million | Profit of $0.5 million | Turned to operating loss |
| Net result / diluted EPS | Loss of $18.4 million / $(0.96) | Loss of $0.4 million / $(0.02) | Loss widened |
| Operating cash flow | Use of $12.9 million | Use of $24.5 million | Cash use improved by $11.6 million |
At April 29, 2023, cash and cash equivalents were $66.7 million and marketable securities were $88.7 million, totaling $155.3 million; total current assets were $336.6 million and current liabilities $161.1 million. The company had no revolving-credit borrowings. Operating lease liabilities totaled $246.4 million, including $63.9 million current. Inventory was $147.9 million, up from $134.8 million at January 28, 2023. Capital expenditures were $5.4 million; cash and cash equivalents declined $14.8 million during the quarter.
Material changes and management commentary
- North America sales fell 22.7%; Europe and Australia sales together increased 13.3%. Foreign exchange reduced reported sales by $1.9 million. Sales declined primarily due to weaker North American demand amid inflationary pressure; transaction counts fell, while dollars per transaction rose.
- Gross margin pressure reflected fixed-cost deleverage, including store occupancy, web shipping and distribution costs, as well as lower product margin and higher shrinkage, buying and private-label costs.
- SG&A dollars decreased modestly, but costs rose as a share of sales. Comparability was affected by a $3.6 million German COVID-related subsidy recorded as an SG&A reduction in Q1 FY2022; the prior-year quarter also included the company’s 100K event.
- Management expects fiscal 2023 capital expenditures of approximately $20–$22 million and remains on track to open approximately 23 stores. It stated cash, investments, operating cash generation and available credit are expected to cover foreseeable operating needs and planned capital expenditures for at least 12 months. No sales or earnings guidance is provided in the filing.
Risks, contingencies and unusual items
- Management identifies inflation, reduced consumer confidence and discretionary spending, competition, fashion and inventory risk, labor and freight costs, foreign exchange, supply-chain disruption, and store traffic as risks. Results are seasonal, with sales and profitability typically higher in the third and fourth quarters.
- A California PAGA wage-and-hour action brought by former employees is being contested; Zumiez has moved to compel individual claims to arbitration and says it intends to defend itself. The filing does not provide a clear estimate of potential loss.
- Outstanding merchandise purchase orders were $183.8 million; most may be canceled before shipment, subject to exceptions for certain orders. The credit facility includes a trailing-four-quarter net-income covenant of at least $5.0 million and a 1.25:1.0 quick-ratio covenant; no borrowing was outstanding at quarter-end.
- The company recorded $0.3 million of long-lived-asset impairment charges in the quarter. Marketable securities had $5.9 million of gross unrealized losses at quarter-end. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether weaker North American sales and consumer demand persist, and whether gross margin can recover from 27.0%.
- Inventory growth, markdown exposure, and the company’s ability to manage purchase commitments and seasonal stock.
- Liquidity and covenant headroom, particularly the net-income covenant, alongside lease obligations and planned capital spending.
- Progress on the planned store openings and the outcome or potential financial exposure of the PAGA litigation.
- How much of the year-over-year SG&A and earnings comparison reflects the prior-year subsidy and event timing rather than recurring operating trends.