Business Context and Reporting Period
Company: Zumiez Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine months ended November 1, 2008 (Fiscal 2008)
Business Overview: Zumiez is a specialty retailer of action sports apparel, footwear, equipment, and accessories. As of November 1, 2008, the company operated 340 stores in 31 states, primarily targeting young men and women aged 12 to 24.
Key Financial Metrics
| Metric (in thousands) | 9 Months Ended Nov 1, 2008 | 9 Months Ended Nov 3, 2007 |
|---|---|---|
| Net Sales | $283,205 | $254,810 |
| Gross Profit | $93,926 | $88,420 |
| Gross Margin | 33.2% | 34.7% |
| Operating Profit | $15,922 | $19,607 |
| Net Income | $10,907 | $12,884 |
| Diluted EPS | $0.37 | $0.44 |
| Cash from Operations | $19,827 | ($619) |
| Cash & Equivalents (End of Period) | $9,249 | $6,920 |
| Total Debt (Book Overdraft) | $4,047 | $7,384 |
Liquidity: The company holds $58.0 million in marketable securities, including $1.7 million in auction rate securities classified as long-term due to liquidity constraints. The company has a $25.0 million revolving credit facility with no outstanding borrowings as of November 1, 2008, though $2.5 million in letters of credit were outstanding.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 11.1% to $283.2 million, driven by $36.4 million in sales from 57 new stores opened since the prior year.
- Comparable Store Sales: Comparable store sales declined 3.2% for the nine-month period, attributed to lower sales in men's apparel, junior's apparel, snow hard goods, and accessories, partially offset by higher footwear and skate hard goods sales.
- Profitability Decline: Operating profit decreased 18.8% to $15.9 million. Gross margin contracted from 34.7% to 33.2% due to store occupancy costs growing faster than sales and lower apparel margins.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 13.4% to $78.0 million, primarily due to costs associated with new store openings and increased infrastructure staffing.
- Inventory Build: Inventory levels increased significantly from $48.7 million to $81.8 million, reflecting preparation for the holiday season and new store openings.
Outlook, Risks, and Contingencies
- Auction Rate Securities: The company holds $1.7 million in auction rate securities that have failed to sell in recent auctions. These are classified as long-term assets. An impairment charge of $0.3 million was recorded. Management believes the liquidity issues are temporary but acknowledges the risk of further declines in fair value.
- Capital Expenditures: The company expects to spend approximately $29.0 to $31.0 million on capital expenditures for fiscal 2008, primarily for 58 planned new store openings.
- Litigation: The company is a defendant in a putative securities class action lawsuit alleging misrepresentations regarding projected financial results. A shareholder derivative action is also pending. The company cannot predict the outcome or potential liability.
- Operational Risks: Risks include dependence on mall traffic, seasonal sales fluctuations, competition, and the ability to anticipate fashion trends. The company also faces risks related to its single distribution center in Washington state.
Investor Verification Checklist
- Verify the status of the $1.7 million auction rate securities and potential for further impairment charges.
- Monitor comparable store sales trends in the upcoming holiday quarter to assess the impact of the 3.2% decline.
- Review the progress of the securities class action litigation and potential indemnification costs for directors and officers.
- Assess the company's ability to manage inventory levels ($81.8 million) against actual holiday demand to avoid future markdowns.
- Confirm compliance with financial covenants in the $25 million credit facility, specifically the minimum quick asset ratio and net income requirements.