Zumiez Inc. — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended July 29, 2023 (13-week and 26-week periods, respectively). Comparative periods ended July 30, 2022. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted.
Business context
Zumiez operates specialty retail stores and ecommerce businesses selling apparel, footwear, accessories and hardgoods under Zumiez, Blue Tomato and Fast Times. It operated 761 stores at quarter-end across the U.S., Europe, Canada and Australia.
Financial performance
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Net sales | $194.4 | $220.0 | $377.3 | $440.7 |
| Gross profit / margin | $61.7 / 31.7% | $75.1 / 34.1% | $111.0 / 29.4% | $147.4 / 33.5% |
| SG&A | $72.2 | $70.1 | $142.9 | $142.0 |
| Operating income (loss) | $(10.5) | $5.0 | $(31.8) | $5.5 |
| Net income (loss) | $(8.5) | $3.1 | $(26.9) | $2.7 |
| Diluted EPS | $(0.44) | $0.16 | $(1.40) | $0.14 |
- Q2 sales fell 11.6%; first-half sales declined 14.4%. North America was the main source of weakness: sales decreased 15.9% in Q2 and 19.3% in the first half. Europe and Australia combined increased 15.5% and 14.3%, respectively.
- Q2 gross margin contracted 240 basis points; first-half margin contracted 410 basis points. Management cited sales deleverage in store occupancy and other fixed costs, lower product margin and cost increases.
- SG&A rose 2.9% in Q2 and 0.6% in the first half, despite lower sales. As a share of sales, SG&A increased to 37.1% in Q2 and 37.8% in the first half.
- Management attributed weaker sales to inflationary pressure on consumers, spending shifting toward travel and experiences, and softer demand for full-price key styles and trends in North America. Transactions declined, while dollars per transaction increased as higher average unit retail partly offset fewer units per transaction.
Cash flow, liquidity and obligations
- First-half operating cash flow was a $24.3 million use, approximately unchanged from a $24.2 million use a year earlier. Investing used $1.4 million; financing provided $0.3 million.
- Cash and cash equivalents were $57.9 million at July 29, 2023, versus $81.5 million at January 28, 2023. Marketable securities were $82.1 million, down from $92.0 million. Combined cash and marketable securities totaled about $140.0 million.
- No revolving-credit borrowings were outstanding. The Wells Fargo facility matures December 1, 2024; availability is up to $25 million through December 1, 2023 and up to $35 million thereafter. Borrowings bear daily simple SOFR plus 1.35%. The company amended financial maintenance covenants on July 27, 2023.
- Credit covenants generally require a 1.25:1.0 quick ratio and minimum EBITDA of $12 million for the quarters ending July 29 and October 28, 2023, rising to $20 million for the quarter ending February 3, 2024 and subsequent quarters. The filing reports the requirements but does not provide a clear calculation of covenant EBITDA or the quick ratio.
- Operating lease liabilities totaled $250.5 million, including $66.1 million current and $184.4 million long-term. These lease obligations are distinct from borrowings under the credit facility.
- Inventory was $156.7 million, up from $134.8 million at fiscal year-end. Outstanding merchandise purchase orders were $151.2 million; most could be canceled before shipment, subject to stated exceptions.
Outlook, risks and unusual items
- Management expects fiscal 2023 capital expenditures of approximately $19–$21 million, primarily for stores, remodels and relocations, and said it remained on track to open approximately 19 new stores. It expects available liquidity and the credit facility to meet foreseeable operating and planned capital needs for at least 12 months.
- The filing provides no earnings or sales guidance. Management cautions that results are seasonal, with sales and profitability typically higher in the third and fourth quarters; interim results may not indicate full-year performance.
- Key disclosed risks include discretionary-spending weakness and inflation, fashion and inventory execution, competition, vendor and supply-chain disruption, labor and occupancy cost increases, foreign exchange, cybersecurity and store traffic. The company said risk factors had not materially changed from its FY2022 Form 10-K.
- The first half of FY2022 included a $3.6 million German government COVID-related subsidy recorded as a reduction to SG&A; the smaller prior-period cost base contributed to the year-over-year comparison. In the first half of FY2023, the company recorded $0.4 million of fixed-asset and lease right-of-use asset impairments.
- A California PAGA wage-and-hour action brought by former employees remains pending; Zumiez intends to enforce individual arbitrations and says it will vigorously defend itself. The company reports that it has accrued for litigation when appropriate, but the filing does not provide a clear estimated exposure for this matter.
- There were no issuer share repurchases during the quarter. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales trends, particularly in North America, stabilize and whether consumer demand, transaction counts and full-price selling improve.
- Whether gross margin recovers as occupancy and other fixed costs are leveraged, and how markdowns and inventory levels develop.
- Compliance with amended credit covenants, especially the specified EBITDA thresholds and quick-ratio requirement; covenant calculations are not clearly provided in this filing text.
- Execution and funding of the planned capital program and approximately 19 store openings, alongside cash use and lease commitments.
- Any developments in the California PAGA litigation, marketable-security values, and the company’s ability to meet seasonal inventory and cash requirements.