Zumiez Beats on Q3 Earnings, November Comps Rise 6.3%

Zumiez Inc. (ZUMZ) reported third-quarter fiscal 2014 adjusted earnings of 56 cents per share, which increased 21.7% year over year and surpassed the Zacks Consensus Estimate of 52 cents per share.

Earnings came in at 54 cents per share compared with 39 cents per share reported in the year-ago quarter. Results for the quarter included a charge of 2 cents per share related to the Blue Tomato acquisition. The prior-year results also included a similar charge along with a charge for provisional settlement of a California class action wage and hour lawsuit, both totaling 7 cents per share.

Quarter in Detail

Net sales increased 11.6% year over year to $213.3 million and was above the Zacks Consensus Estimate of $211 million, driven by better-than-expected growth in comparable-store sales (comps). Meanwhile, net sales also outperformed the company’s third-quarter revenue forecast of $207–$211 million.

Comps grew 3.7% against an increase of 1.5% registered in the year-ago quarter due to rise in both comparable-store transactions and dollars per transaction on the back of a splendid back-to-school season in the U.S. and an excellent start to fall and winter season. Moreover, the company stated that these trends continued in November which resulted in a strong Black Friday weekend this year.

By category, the company witnessed comps growth in the hardgoods, juniors, men's and accessories categories, partly offset by negative comps in the footwear and boys.

In the quarter, gross profit increased nearly 10% year over year to $77.9 million, while as a percentage of sales, it contracted 50 basis points (bps) to 36.5%. The decline in margins was due to a drop in product margins.

On a reported basis, Zumiez’s selling, general and administrative (SG&A) expenses increased 5.6% year over year to $52.9 million, while as a percentage of sales, it contracted 140 bps to 24.8%. Excluding one-time items for both the periods, SG&A expenses increased 11% year over year to $52.3 million compared with $47.1 million in the prior year.

On a reported basis, operating profit for the quarter increased 20.8% to $25 million, while as percentage of sales it expanded 90 bps to 11.7%.

November Sales Results

In conjunction with its third-quarter earnings, the company released its sales results for the month of November (4-weeks ended Nov 29, 2014). The company reported comps growth of 6.3% for the month as against growth of 1.7% registered in the year-ago period, ended Nov 30, 2013. Net sales in Nov 2014 rose 12.6% to $70.3 million compared with $62.4 million in the prior-year period.

The company attributed the increase to higher dollars per transaction along with improved comparable-store transactions. Results for the month also reflected the continuation of strong trends from the third quarter which fortified in November due to cooler weather and solid sales over the Black Friday weekend. The company noted that comps for the four days, Thanksgiving through Sunday, jumped more than 7% this year.

Outperforming categories in the month included juniors, men’s, hardgoods and accessories with positive comps, while footwear and boys categories posted negative comps.

Financial Update

As of Nov 1, 2014, cash and marketable securities were $108.7 million, up 15.4% from $94.2 million as of Nov 2, 2013. The improvement mainly resulted from increased cash flow from operations, offset by capital expenditures and stock repurchases. Inventory grew 5.3% to $133.4 million as of Nov 1, 2014 compared with $126.7 million as of Nov 2, 2013 due to an enlarged store base. Inventory per square foot dipped marginally at quarter-end as compared with the same period a year ago.

In the first nine months of 2014, the company generated cash flow of $34.4 million from operational activities as against $21.7 million in the prior-year comparable period.

Over the same period, the company has bought back nearly 0.8 million of its shares for about $17.4 million or $23.03 per share. As a result, the company has nearly $27.2 million remaining under its share repurchase program.

Store Update

Zumiez keeps up with the strategy of optimizing its store base through expansion in the underpenetrated markets and by either repositioning or closing underperforming stores through constant evaluation of stores, aimed at maximizing long-term productivity.

During the third quarter, Zumiez opened 18 new stores in North America, including 16 in the U.S. and two in Canada, and one in Europe. The company ended the quarter with a total store count of 602, marking an increase from 548 stores last year, which included 551 stores in the U.S., 35 in Canada and 16 in Europe.

Further, the company noted that it has opened a total of 56 stores year-to-date, including 7 stores in Canada and 6 stores in Europe, hence marking the completion of its planned store openings for fiscal 2014. Based on these metrics, the company anticipates net new stores at the end of fiscal 2014 to be 52, including the 56 new store openings and the planned 4 store closures.

Guidance

Zumiez announced its sales and earnings guidance for the fourth quarter of fiscal 2014. Management anticipates fourth-quarter revenues in the range of $249–$251 million, while comps are expected to grow in the 3%–4% range.

Gross margin is expected to contract 200 to 250 basis points from the prior year’s fourth quarter, despite inline product margins with last year. However, the decline is expected to come from the prior-year benefit related to the correction of an error in accounting for rent expenses. Moreover, operating margins are expected to be in the range of 12.5%—13%.

Based on sales projections for the quarter, the company formulated a bottom-line guidance of 69 cents to 72 cents per share. The earnings expectation also includes estimated charges of 2 cents per share related to the Blue Tomato acquisition.

For fiscal 2014, Zumiez expects capital expenditure to be around $37–$39 million, mainly directed at store openings and remodeling of outlets. Further, depreciation and amortization expenses will be nearly $29 million. Tax rate for the year is anticipated to be 37.5%.

Other Stocks to Consider

Zumiez currently carries a Zacks Rank #2 (Buy). Other stocks performing well in the apparel-shoe retail space include American Eagle Outfitters Inc. (AEO), Foot Locker Inc. (FL) and DSW Inc. (DSW), all carrying a Zacks Rank #2.

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Read the Full Research Report on AEO
Read the Full Research Report on FL
Read the Full Research Report on DSW


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