Zumiez Inc. (ZUMZ), a mall-based specialty retailer of action sports apparel, footwear, equipment and accessories, remains on our Neutral list with a target price of $28.
Why the Reiteration?
Zumiez has carved a distinct niche for itself in the specialty retail market, driven by its strategy that is based on offering action-sports merchandise focused on young men and women in the age of group of 12 to 24 years. Furthermore, the company’s stores are strategically located in busy areas of the mall, such as food courts, movie theatres and music/game stores, which are frequented by the company’s target customers.
Building on its long-term growth strategies and strength in assortments, Zumiez managed to beat earnings expectations in first-quarter fiscal 2013, marking its 18th consecutive quarterly beat. The average surprise for the trailing 18 quarters stands at 33.1%. We expect the company to keep up this trend of posting positive earnings surprises in the years ahead, based on its focus on boosting productivity at existing stores, developing a leading omni-channel platform and enhancing its presence both domestically and overseas.
Going forward, we believe Zumiez’s store expansion policy, along with enhancement of e-Commerce will help boost its top and bottom line. The company is currently in the early phase of its store expansion program, and plans to increase its network to 600 – 700 stores in the long-run. The company plans to expand its store base by opening 58 new stores in fiscal 2013, comprising 9 stores in Canada and 6 in Europe.
We also remain impressed with the Blue Tomato acquisition, which has provided the company a solid platform to capitalize on emerging opportunities.
However, we are skeptical about the company’s future comps performance due to the fall in comparable store transactions in recent times. Analyzing the trailing 5 months performance, we note that the company’s comps have been increasing at a declining rate every month, with the exception of April, when it rose 4.6% and February, when the company posted negative 8.9% comps. Additionally, Zumiez is projecting comparable-store sales to range from flat to a 2% increase in the second quarter of fiscal 2013.
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.
Other Stocks Worth Considering
Zumiez currently holds a Zacks Rank #3 (Hold). Other stocks worth considering among apparel/shoe retailers are Gap Inc. (GPS), Stein Mart Inc. (SMRT) and Pacific Sunwear of California Inc. (PSUN), all of which carry a Zacks Rank #2 (Buy).
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