Zumiez Inc. (ZUMZ) reported second-quarter fiscal 2014 adjusted earnings of 27 cents per share, up 35% year over year and surpassed the Zacks Consensus Estimate of 23 cents per share.
Reported earnings were 26 cents per share compared with 16 cents per share reported in the year-ago quarter. Results for the quarter included a charge of 1 cent per share related to the Blue Tomato acquisition. The prior-year results also included a similar charge of 4 cents per share.
Quarter in Detail
Net sales increased 11.9% year over year to $176.7 million and was almost in line with the Zacks Consensus Estimate of $177 million driven by better-than-expected growth in comparable-store sales (comps). Net sales also outperformed the company’s second-quarter forecast of $167–$171 million driven by its ability to attract customers with an exclusive collection of brands.
Comps grew 3.4% against an increase of 0.9% registered in the year-ago quarter in part due to rise in comparable-store transactions along with an increase in dollars per transaction.
By category, the company witnessed comps growth in the hardgoods, men’s and juniors categories, which was partly offset by negative comps in the footwear and boys categories.
In the quarter, gross profit increased 10.5% year over year to $60.9 million, while as a percentage of sales, it contracted 40 basis points (bps) to 34.5%. 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 4.2% year over year to $49.3 million, while as a percentage of sales, it contracted 200 bps to 27.9%. Excluding one-time items for both the periods, SG&A expenses increased 1.8% year over year to $49.9 million compared with $49.0 million in the prior year.
On a reported basis, operating profit for the quarter increased 48.7% to $11.6 million, while as percentage of sales it expanded 160 bps to 6.6%.
August Sales Results
In conjunction with its second-quarter earnings, the company released its sales results for August (4-weeks ended Aug 30, 2014). The company reported comps growth of 2% for the month as against a growth of 3% registered in the year-ago period, ended Aug 31, 2013. Net sales in Aug 2014 rose 9.4% to $94.0 million compared with $85.9 million in the prior-year period.
The company attributed the increase to higher dollars per transaction that were marginally offset by a decline in comparable-store transactions. Further, results for the month reflected the company’s investments toward its workforce as well as in developing a strong and seamless omni-channel presence to stage its brands. 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 Aug 2, 2014, cash and marketable securities were $113.4 million, up 19.4% from $95 million as of Aug 3, 2013. The improvement mainly resulted from increased cash flow from operations offset by capital expenditures and stock repurchases. Inventory was $119.9 million as of Aug 2, 2014, up 5.9% from $113.2 million as of Aug 3, 2013. Inventory per square foot dipped marginally at the quarter-end as compared with a year ago.
In the first half of 2014, the company generated a cash flow of $30.5 million from operational activities as against $9.9 million generated in the prior-year comparable period.
In the first half of fiscal 2014, 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 into the underpenetrated markets and by either repositioning or closing underperforming stores through constant evaluation of stores, aimed at maximizing long-term productivity.
During the second quarter, Zumiez opened 26 new stores in North America including 22 in the U.S. and four in Canada. The company ended the quarter with a total store count of 582, marking an increase from 529 stores last year. The company’s total store count included 535 stores in the U.S., 33 in Canada and 14 in Europe.
For fiscal 2014, the company targets to open another 43 stores in the U.S., 7 in Canada and 6 in Europe.
Guidance
Zumiez announced its sales and earnings guidance for the third quarter of fiscal 2014. Management anticipates third-quarter revenues in the range of $207–$211 million, while comps are expected to be in the low single-digits range.
Gross margin is expected to contract 50 to 100 basis points from the prior year’s third quarter, based on lower product margin and slight deleverage of fixed cost. Moreover, operating margins are expected to be in the range of 10.5%—11%.
Based on sales projections for the quarter, the company formulated a bottom-line guidance of 47 cents to 50 cents per share. The earnings expectation also includes estimated charges of 2 cents per share related to the Blue Tomato acquisition.
For fiscal 2014, the company now projects low-single-digit comparable-sales results. The company expects product margins to be moderately down for the rest of 2014 due to impacts from notable shifts in product mix and overall trends.
Coming to SG&A expense, the company expects growth in 2014 but at a slower rate than 2013. However, the company expects SG&A expense to grow at a faster rate in the second half of 2014 compared with the first half.
For fiscal 2014, Zumiez expects capital expenditure to be around $38–$40 million, mainly directed at store openings and remodeling of outlets. Further, depreciation and amortization expenses will be nearly $30 million, up 12% from the fiscal 2013 level. Tax rate for the year is anticipated to be 38%.
In fiscal 2014, the company plans to expand its store base by opening 56 new stores, including 6 stores in Europe.
Other Stocks to Consider
Zumiez currently carries a Zacks Rank #2 (Buy). Other stocks performing well in the apparel-shoe retail space include Citi Trends Inc. (CTRN), Foot Locker Inc. (FL) and Express Inc. (EXPR). While Citi Trends sports a Zacks Rank #1 (Strong Buy), Foot Locker and Express Inc. carry a Zacks Rank #2.
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