Zumiez Retains Underperform Stance


We retain Zumiez Inc. (NASD:ZUMZ) on our Underperform list given the company’s soft earnings performance in third-quarter fiscal 2013. The stock currently carries a Zacks Rank #5 (Strong Sell).

Why Underperform?

Zumiez’s third-quarter fiscal 2013 results disappointed as earnings declined 9.8% on a year-over-year basis, while margins remained under pressure due to higher operating expenses from ongoing investments to strengthen its omni-channel selling strategy.

While the company’s comps performance in November and the third quarter impressed following recovery from the continuous decline witnessed in the past few months, its unfavorable fourth-quarter comps and earnings guidance make us skeptical about the company’s future performance. This, in turn, triggered a downward trend in the Zacks Consensus Estimate for the fourth quarter and fiscal 2013, as analysts become less constructive on the stock’s future performance.

Though the company is aggressively implementing strategies to overcome the downward sales trend, we do not see any meaningful improvement in the near term, as evident from the company’s negative comps guidance for the fourth quarter.

Further, we believe that intense competition from rival specialty retailers, the seasonal nature of the business and risks associated with sourcing merchandise from foreign countries may undermine the company’s results.

The company faces intense competition from other teenage-focused retailers as well as sporting goods retailers on the basis of brand recognition, fashion, price, service, store location, and quality. We believe that being in such a competitive industry, Zumiez may find it difficult to execute and implement new business strategies.

Alongside, we believe the company is exposed to significant seasonality risks as it typically generates stronger sales during the third and fourth quarters, which are characterized by the back-to-school and holiday seasons.

Other Stocks That Warrant a Look

While we prefer to avoid Zumiez until we see signs of improvement in the company's performance, other apparel/shoe retailers worth a look are Finish Line Inc. (NASD:FINL), The Men's Wearhouse Inc. (NYSE:MW) and Deckers Outdoor Corp. (NASD:DECK). All of these have a Zacks Rank #2 (Buy).

Read the Full Research Report on ZUMZ
Read the Full Research Report on DECK
Read the Full Research Report on MW
Read the Full Research Report on FINL

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