Zumiez Triumphs, Gives 2Q Outlook

Zacks

Zumiez Inc. (ZUMZ), a mall-based specialty retailer of action sports allied apparel, footwear, equipment and accessories, reported better-than-expected results for first-quarter 2012 on account of improved margins as well as strong merchandise, store expansion and e-commerce strategies. Quarterly earnings of 15 cents per share beat the Zacks Consensus Estimate of 11 cents and surged 150.0% from the prior-period level of 11 cents.

Net sales in the reported quarter climbed 22.7% to $129.9 million from $105.9 million a year ago. Total revenue was almost in line with the Zacks Consensus Estimate of $129 million. First-quarter 2012 comparable store sales at Zumiez were up 12.9% compared with an increase of 12.6% reported in first-quarter 2011.

Cost of goods sold in the quarter increased 20.8% year over year to $87.8 million. Gross profit margin expanded 110 basis points to 32.4% in the quarter driven by lower costs. Selling, general and administrative expenses totaled $34.8 million, up 13.7% year over year. However, as a percentage of net sales, SG&A expenses contracted 210 basis points to 26.8%.

Consequently, the company’s operating income shot up 180.8% to $7.3 million from the year-ago operating income of $2.6 million. Operating margin expanded 320 basis points to 5.6% from 2.4% in the prior-year period.

Financial Update

As of April 28, 2012, cash and marketable securities were $171.2 million, a sharp increase of 31.0% from $130.7 million as of April 30, 2011. Total long-term liabilities increased to $36.1million at quarter end compared with $31.3 million at the end of the prior-year quarter.

Guidance

Following solid first-quarter results, Zumiez initiated its sales and earnings guidance for the second quarter of fiscal 2012. Management anticipates second-quarter revenue in the range of $128 - $130 million, on the back of a mid-single-digit growth in comparable store sales. Based on sales projections for the quarter, the company expects earnings per share to come in the band of 4 cents - 6 cents. The current Zacks Consensus Estimate for the upcoming quarter stands at 10 cents per share, which is way above the company’s guidance range.

Our View

Everett, Washington-based Zumiez targets young men and women in the age group of 12 to 24 years, who seek popular brands that represent a lifestyle centered on extreme sports activities. We expect Zumiez’s focus on teenage action-sports based merchandise and expanding store network to deliver solid performance in the upcoming quarters.

However, intense competition from other specialty retailers, seasonal nature of the business and risks associated with sourcing merchandise from foreign countries might weigh upon the company’s results. The company competes head-to-head with Hot Topic Inc. (HOTT) and Pacific Sunwear of California Inc. (PSUN).

We maintain our long-term “Neutral” recommendation on Zumiez. The quantitative Zacks #1 Rank (short-term Strong Buy rating) for the company indicates continued success from its growth initiatives and store expansion efforts.

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