Zumiez Inc.
/ (ZUMZ-NASDAQ)/ Equity Research / ZUMZ | Page 2
Current Recommendation / OUTPERFORM
Prior Recommendation / Neutral
Date of Last Change / 02/06/2015
Current Price (02/05/15) / $38.06
Target Price / $46.00
We have upgraded our long-term recommendation on Zumiez driven by its solid comparable store sales performance for the past three months and encouraging fourth quarter guidance. The company reported comps growth of 6.3%, 8% and 12.3% respectively, for November, December and January. Further, the company expects fourth quarter sales in the range of $255–$256 million, along with 7% comps growth and earnings of $0.75–$0.77 per share. All this, coupled with an upward revision in estimates, further strengthen our confidence in the company’s upcoming fourth quarter results. Zumiez’s strength is also evident from its positive earnings surprise history. Moreover, we believe the company’s store expansion policy, along with the improvement of its omni-channel capabilities will help boost its top and bottom lines.
SUMMARY
/ Equity Research / ZUMZ | Page 2SUMMARY DATA
52-Week High / $41.4052-Week Low / $21.01
One-Year Return (%) / 76.94
Beta / 2.17
Average Daily Volume (sh) / 278,735
Shares Outstanding (mil) / 29
Market Capitalization ($mil) / $1,112
Short Interest Ratio (days) / N/A
Institutional Ownership (%) / 72
Insider Ownership (%) / 28
Annual Cash Dividend / $0.00
Dividend Yield (%) / 0.00
5-Yr. Historical Growth Rates
Sales (%) / 15.5
Earnings Per Share (%) / 31.9
Dividend (%) / N/A
P/E using TTM EPS / 22.7
P/E using 2015 Estimate / 19.9
P/E using 2016 Estimate / 17.4
Zacks Rank *: Short Term
1 – 3 months outlook / 2 - Buy
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Mid-Blend
Industry / Retail-App/Shoe
Zacks Industry Rank * / 101 out of 267
OVERVIEW
Zumiez Inc. is a mall-based specialty retailer of action sports related apparel, footwear, equipment and accessories. The company targets the youth – both men and women – between the ages of 12 to 24, who seek popular brands that symbolize a lifestyle representing extreme sports. Zumiez’s stores span 2,900 square feet on an average, and feature couches and video game stations to encourage customers to shop for extended periods. The company’s stores are strategically located near busy areas of a mall, such as food courts, movie theatres, music/game stores and other popular teenage hang-out destinations.
Zumiez also offers branded products, such as Adidas, Nike 6.0, Burton, Supra, Circa, Element, Etnies, Empyre, Glamour Kills and Volcom, as well as private-label brands. The company’s merchandise mix consists of both apparel and hard goods, such as skateboards, snowboards and ancillary gears including boots and bindings. The company has a wholly owned subsidiary, Blue Tomato, which is one of the leading European multi-channel retailers, providing board sports as well as related apparel and footwear.
REASONS TO BUY
Ø Unique Strategy of Attracting Target Customers: Zumiez’s strategy is based on offering action sports merchandise focused on young adults, including men and women, aged 12 to 24 years. This has enabled the company to carve a distinct niche for itself. 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 frequently visited by the company’s target customers.
Ø Strategic Initiatives to Retain the Positive Surprise Trend: Zumiez posted solid earnings results for third-quarter fiscal 2014, with a positive earnings surprise of 7.7%. Bottom-line growth in the quarter was driven by strong top-line performance on the back of a splendid back-to-school season in the U.S. and an excellent start to the fall and winter seasons. With this, the company has now surpassed the Zacks Consensus Estimate 23 times in the past 24 quarters. We expect the company to keep up this trend of posting positive earnings surprises going forward, based on its focus on boosting productivity at existing stores, developing a leading omni-channel platform and enhancing its presence, both domestically and overseas.
Ø Improving Comparable Store Sales Performance: After posting soft comps through fiscal 2013, it seems that Zumiez is returning to the growth trajectory this year. This is evident from the comps growth of 1.8%, 3.4% and 3.7% witnessed in the first, second and third quarter of fiscal 2014, respectively. Additionally, comps for the months of November December and January have improved 6.3%, 8% and 12.3% respectively, indicating a remarkable fourth-quarter fiscal 2014 for Zumiez. The excellent holiday comps followed by the company’s performance in January, further strengthens our confidence in its recently raised fourth quarter guidance, which projects about 7% growth in comps compared with 3%–4% growth expected earlier.
Ø Expanding Stores and eCommerce Platform to Boost Top Line: The company is in the process of expanding its store base and plans to increase its network to 600–700 stores in the long run. With the opening of 18 stores in the third quarter, the company has successfully attained its planned target of opening 56 stores in fiscal 2014, bringing the company’s total store count to 602. In addition, the company is striving to expand its eCommerce and omni-channel platforms to provide consumers with the facility of quick and easy access to its products and brands. We believe that the company’s well-balanced store expansion and eCommerce strategies will drive top-line growth. Further, the company is focused on optimizing its presence in all markets through repositioning or closing of its underperforming stores to ensure utmost long-term productivity.
RISKS
Ø Competitive Pressure: The company faces intense competition from other teen-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.
Ø Seasonal Risk: Zumiez’s operations are seasonal in nature and typically generate stronger sales during the third and fourth quarters, characterized by the back-to-school and holiday seasons. As a result, the company is exposed to significant risks if these seasons fail to deliver.
RECENT NEWS
Zumiez Posts Robust January Comps, Sales Surge 16% – Feb 4, 2015
Zumiez Inc. reported a 12.3% rise in comps for the four weeks ended Jan 31, 2015, in contrast to a 7.6% decline reported for the four weeks ended Feb 1, 2014. The company’s net sales for January soared 16% to $44.1 million from $38.1 million posted last year.
Zumiez's December Comps Jump 8% on Striking Holiday Sales – Jan 7, 2015
Zumiez Inc. reported an 8.0% rise in comps for the five weeks ended Jan 3, 2015, in contrast to a 2.4% decline reported for the five weeks ended Jan 4, 2014. Solid comps growth for the month is attributed to a remarkable holiday season that gained from a favorable backdrop of lower gas prices and improved unemployment rate along with the right weather conditions.
The company’s net sales for December soared 14.4% to $143.4 million from $125.3 million posted last year.
After a strong holiday season and encouraged by its sales performance so far in the fourth quarter, the company has raised its sales and earnings guidance for the fourth quarter of fiscal 2014. The guidance upgrade can also be attributed to improved product margins. However, foreign currency headwinds will continue to play spoilsport.
Management now anticipates fourth-quarter revenues to come in the range of $255–$256 million compared with the prior forecast of $249–$251 million. Meanwhile, comps are expected to grow about 7%, substantially higher than the previously guided range of 3%–4% growth.
Further, the company expects earnings per share in the range of $0.75–$0.77 versus the previous projection of $0.69–$0.72 per share. However, the company maintained that the earnings expectation for the quarter includes an estimated charge of $0.02 per share related to the Blue Tomato acquisition.
Zumiez Beats on Q3 Earnings, November Comps Rise 6.3% – Dec 4, 2014
Zumiez Inc. reported third-quarter fiscal 2014 adjusted earnings of $0.56 per share, which increased 21.7% year over year and surpassed the Zacks Consensus Estimate of $0.52 per share.
Earnings, on a GAAP basis, came in at $0.54 per share compared with $0.39 per share reported in the year-ago quarter. Results for the quarter included a charge of $0.02 per share related to the Blue Tomato acquisition. The prior-year results also included a similar charge along with a charge for provisional settlement of a California class action wage and hour lawsuit, both totaling $0.07 per share.
Quarter in Detail
Net sales increased 11.6% year over year to $213.3 million and came in above the Zacks Consensus Estimate of $211 million, driven by better-than-expected growth in comparable-store sales. Meanwhile, net sales also outperformed the company’s third-quarter revenue forecast of $207–$211 million.
Comps grew 3.7% against an increase of 1.5% registered in the year-ago quarter due to a rise in both comparable-store transactions and dollars per transaction on the back of a splendid back-to-school season in the U.S. and an excellent start to the fall and winter seasons. Moreover, the company stated that these trends continued in November which resulted in a strong Black Friday weekend this year.
Category-wise, the company witnessed comps growth in the hardgoods, juniors, men's and accessories categories, partly offset by negative comps in the footwear and boys categories.
In the quarter, gross profit increased nearly 10% year over year to $77.9 million, while as a percentage of sales, it contracted 50 basis points (bps) to 36.5%. The decline in margins was due to a drop in product margins.
On a reported basis, Zumiez’s selling, general and administrative (SG&A) expenses increased 5.6% year over year to $52.9 million, while as a percentage of sales, it contracted 140 bps to 24.8%. Excluding one-time items for both the periods, SG&A expenses increased 11% year over year to $52.3 million compared with $47.1 million in the prior year.
On a reported basis, operating profit for the quarter increased 20.8% to $25 million, while as a percentage of sales it expanded 90 bps to 11.7%.
November Sales Results
In conjunction with its third-quarter earnings, the company released its sales results for the month of November (4-weeks ended Nov 29, 2014). The company reported comps growth of 6.3% for the month as against growth of 1.7% registered in the year-ago period, ended Nov 30, 2013. Net sales in Nov 2014 rose 12.6% to $70.3 million compared with $62.4 million in the prior-year period.
The company attributed the increase to higher dollars per transaction along with improved comparable-store transactions. Results for the month also reflected the continuation of strong trends from the third quarter which fortified in November due to cooler weather and solid sales over the Black Friday weekend. The company noted that comps for the four days, Thanksgiving through Sunday, jumped more than 7% this year.
Outperforming categories in the month included juniors, men’s, hardgoods and accessories with positive comps, while footwear and boys categories posted negative comps.
Financial Update
As of Nov 1, 2014, cash and marketable securities were $108.7 million, up 15.4% from $94.2 million as of Nov 2, 2013. The improvement mainly resulted from increased cash flow from operations, offset by capital expenditures and stock repurchases. Inventory grew 5.3% to $133.4 million as of Nov 1, 2014 compared with $126.7 million as of Nov 2, 2013 due to an enlarged store base. Inventory per square foot dipped marginally at quarter-end as compared with the same period a year ago.
In the first nine months of 2014, the company generated cash flow of $34.4 million from operational activities as against $21.7 million in the prior-year comparable period.
Over the same period, the company has bought back nearly 0.8 million of its shares for about $17.4 million or $23.03 per share. As a result, the company has nearly $27.2 million remaining under its share repurchase program.
Store Update
Zumiez keeps up with the strategy of optimizing its store base through expansion in the underpenetrated markets and by either repositioning or closing underperforming stores through constant evaluation of stores, aimed at maximizing long-term productivity.
During the third quarter, Zumiez opened 18 new stores in North America, including 16 in the U.S. and two in Canada, and one in Europe. The company ended the quarter with a total store count of 602, marking an increase from 548 stores last year, which included 551 stores in the U.S., 35 in Canada and 16 in Europe.
Further, the company noted that it has opened a total of 56 stores year-to-date, including 7 stores in Canada and 6 stores in Europe, hence marking the completion of its planned store openings for fiscal 2014. Based on these metrics, the company anticipates net new stores at the end of fiscal 2014 to be 52, including the 56 new store openings and the planned 4 store closures.
Guidance
Zumiez announced its sales and earnings guidance for the fourth quarter of fiscal 2014. Management anticipates fourth-quarter revenues in the range of $249–$251 million, while comps are expected to grow in the 3%–4% range.
Gross margin is expected to contract 200 to 250 bps from the prior year’s fourth quarter, despite in-line product margins with last year. However, the decline is expected to come from the prior-year benefit related to the correction of an error in accounting for rent expenses. Moreover, operating margins are expected to be in the range of 12.5%–13%.
Based on sales projections for the quarter, the company formulated a bottom-line guidance of $0.69 to $0.72 per share. The earnings expectation also includes estimated charges of $0.02 per share related to the Blue Tomato acquisition.
For fiscal 2014, Zumiez expects capital expenditure to be around $37–$39 million, mainly directed at store openings and remodeling of outlets. Further, depreciation and amortization expenses will be nearly $29 million. Tax rate for the year is anticipated to be 37.5%.
VALUATION