Zumiez Q3 Earnings Decline Y/Y, Shares Fall
Battered by higher operating expenses owing to continued investment in strengthening the omni-channel selling strategy, Zumiez Inc.’s (ZUMZ) third-quarter fiscal 2013 adjusted earnings fell 9.8% year over year to 46 cents per share. This instilled negative sentiment among investors, which was reflected in a 4.7% decline in Zuminez's share price in the after-hours trading session. However, Zumiez’s adjusted earnings for the quarter remain in line with the Zacks Consensus Estimate.
Reported earnings, including a charge of 7 cents per share related to the acquisition of Blue Tomato and a lawsuit settlement, were 39 cents compared with 40 cents reported in the year-ago quarter. The prior-year earnings included a charge of 11 cents related to the Blue Tomato acquisition and relocation of the company’s corporate offices.
The company’s reported earnings for the quarter were in line with the lower-end of its earlier guidance range of 39–43 cents per share. During the quarter, Zumiez benefited from strong top-line growth but rise in expenses was a headwind.
Quarter in Detail
Net sales increased 6.2% year over year to $191.1 million and marginally beat the Zacks Consensus Estimate of $191.0 million. The year-over-year improvement in top line was primarily driven by solid comparable-store sales (comps) and e-Commerce performance, along with benefits from store openings.
Comps rose 1.5% against an increase of 3.7% in the year-ago quarter. By category, the company witnessed comps growth in the juniors, hard goods and accessories categories, while men's, boy's and footwear generated negative comps.
In the quarter, gross profit increased 5.5% year over year to $70.8 million. However, as a percentage of sales, it contracted 30 basis points (bps) to 37.0% primarily due to increased occupancy costs and e-Commerce fulfillment costs.
On a reported basis, Zumiez’s selling, general and administrative (SG&A) expenses increased 9.7% year over year to $50.1 million, while as a percentage of sales, it expanded 80 bps to 26.2%. Excluding one-time items for both the periods, SG&A expenses as a percentage of sales expanded 90 bps due to higher store operating expenses.
On a reported basis, operating profit for the quarter fell 3.4 % to $20.7 million, while as percentage of sales it contracted 110 bps to 10.8%. The year-over-year decline in operating margin was primarily due to lower gross margin and increased operating expenses as a percentage of sales.
Financial Update
As of Nov 2, 2013, cash and marketable securities were $94.2 million, down 4.2% from $98.3 million as of Oct 27, 2012. The decline was due to capital expenditures toward new stores and stock repurchases, partially offset by cash flow from operations. During the first three quarters of fiscal 2013, the company generated a cash flow of $21.7 million from operational activities as against $28.2 million in the same period of fiscal 2012.
Along with the earnings release, the company announced its board of directors’ approval a new share repurchase program of $30 million effective from Dec 4, 2013, which would replace its earlier share buyback program of $12.5 million. The repurchase program will continue through fiscal 2014 unless and otherwise extended or shortened by the board.
November 2013 Sales Update
Zumiez reported 1.7% increase in comparable-store sales for the four-week period ended Nov 30, 2013. This compares with a comps decline of 4.2% for the four weeks ended Nov 24, 2012. The comps growth was due to higher comparable store transactions, partially offset by a decline in dollars per transaction. Net sales for the period increased 16.3% to $62.4 million from $53.6 million reported in the year-ago period.
Guidance
Zumiez announced its sales and earnings guidance for the fourth quarter of fiscal 2013. Management anticipates fourth-quarter revenues in the range of $230–$237 million, while comps are likely to range from negative 1% to a positive 2% increase.
Based on sales projections for the quarter, the company expects earnings per share to be 60–66 cents. The earnings expectation also includes estimated charges of 5 cents per share related to the Blue Tomato acquisition. Operating margin is anticipated to be in the range of 13.5%–14.5%.
For fiscal 2013, Zumiez expects capital expenditure to be around $36–$38 million, mainly directed at store openings and the remodeling of outlets. Further, depreciation and amortization expenses will be nearly $26 million.
As of Nov 30, 2013, Zumiez had opened 57 stores, close to completing its target of opening 59 stores in fiscal 2013. The company is expecting to open the remaining 2 outlets during the fourth quarter. As of Nov 30, Zumiez operated 513 stores in the U.S., 28 in Canada and 10 in Europe.
Other Stocks to Consider
Zumiez currently carries a Zacks Rank #3 (Hold). Some better-ranked apparel/shoe retail stocks include Finish Line Inc. (FINL), Fossil Group, Inc. (FOSL) and Five Below, Inc. (FIVE). All these have a Zacks Rank #2 (Buy).
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Read the Full Research Report on FIVE
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