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Zumiez (ZUMZ): Zacks Rank Buy

Jared Levy

Zumiez (ZUMZ)

Even given the spotty economic data and mixed corporate earnings, there are still some consumer discretionary stocks that remain strong; Zumiez being one of them.

Coming into their earnings report on May 17th, the stock remains in a bullish channel and is trading very close to its 52 week high of $38.99.  For Zumiez, it will have some big expectations coming into the report given their relatively high (trailing) P/E of 31.63.

The recent hot IPO of competitor Tilly's may have showed that there may be strength left in this space and perhaps room for a couple key players in the sector.  Tilly’s net sales increased 20% to $400.6 million in 2011 and their net income jumped 41% to $34.3 million. Tilly's operates about a third of the stores Zumiez currently controls.

Earnings Estimates In the month ahead of the report, the majority of analysts have upped their rating and targets for Zumiez. Although there are several hold recommendations, its overall rating is a buy, with no analysts issuing a sell rating on the company.  The Zacks Consensus Estimate is for Zumiez to earn 11 cents per share this quarter, but the most recent forecast is down at 10 cents, which suggests a potentially weaker than expected report. 

On their last conference call, Zumiez projected Q1 revenue to be in the range of $123 to $125 million and resulting in net income per diluted share of approximately $0.06 to $0.08, which includes an estimated $0.01 per diluted share, for charges associated with the relocation of ecommerce fulfillment operations. 

In terms of the magnitude of analyst estimate trends, we are seeing all of the consensus estimates higher than they were just 30 days ago for the current quarter as well as FY2013 and FY2014; estimates for Q22012 have remained steady at 10 cents.   

Of the 15 analysts who now cover ZUMZ, the consensus is for the company to grow earnings by 22.5% in the current year (FY2013) and roughly 14.25% in FY2014.  Zumiez has surprised analysts to the upside 4 quarters in a row at an average of almost 68%. 

Financial Profile ZUMZ is a small-cap (1.18 billion) company that is trading at about 26 times forward (expectations for next quarter) earnings.  ZUMZ has been a Zacks Rank 1 strong buy since March 10th and has been between a Rank 1 and 2 since December 6th, 2011.

Total 2011 sales increased 16.1% compared to full year 2010.  Comparable store sales increased 8.7% in fiscal 2011, slightly down from the 11.9% sales growth in fiscal 2010.

ZUMZ GAAP earnings increased from $0.83 in FY2011 to $1.19 in FY2012.  They are expected to earn $1.44 in FY2013 (current FY) according to the Zacks Consensus Estimate.  Company Description & Developments Zumiez got their start outside of Seattle in 1978.  Headquartered in Everett, WA, they now operate over 420 stores in 37 states across the US, 10 in Canada and are growing rather fast.

The bulk of their stores are inside malls, which is where you are likely to find someone in their target demographic.  Zumiez stores offer couches and video games to keep teen customers (and sometimes their parents) in the store longer, spending money on one or more of their many brands. 

Having been around for almost 34 years, there is no doubt the company is doing something right.  But on the other hand one has to realize that as a niche, discretionary retailer they are going to be highly susceptible to consumer habits and trends.  For now, it seems that their business model is benefitting from an overall strong consumer and product line that is in favor. 

In 2011 they added 45 productive new stores which help fuel a 3% improvement in operating margin and generated more than $68 million in operating cash flow.   That expansion is expected to continue into 2012 and hopefully justify (and reduce) Zumiez’ relatively high P/E multiple.

Market Performance & Technicals Zumiez remains in its bullish channel, which began after a bullish gap in October of 2011.   During that time, the stock has maintained above its 50 day moving average which now stands at $34.89.  It broke above its 200 day moving average after reporting strong earnings in early December of 2011, which now stands at $26.86.

ZUMZ managed to make another new 52 week high on Friday despite the overall weakness in the broad markets.

Use the 50 day moving average to be key support moving forward; a break below it could signal a bearish trend change for the company.  It is also important to note that ZUMZ was again in overbought territory Friday as it eclipsed its upper Bollinger band.

ZUMZ has exceeded the S&P 500’s performance in the past year by 30% and outpaced it by almost 25.5% in the past 3 months as the broad market has begun to slow down.  The stock remains in a bullish trend and has maintained most of its momentum in the past month, leading the S&P 500 index by 6.61%.    

Use caution coming into the earnings report on May 17th and realize that ZUMZ still has a high Beta of 1.92, which means it’s both correlated to and more volatile than the S&P 500.

 Jared A Levy is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the market-beating Zacks Whisper Trader Service.

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