Zumiez Annual Results and its Evolution as a Brand

I’ve talked before about brands becoming retailers and retailers becoming brands. There’s a lot of uncertainty as to what that would mean and how it would cause the market  to evolve. I’ve also said that the best retailers make the brands they carry credible- not the other way around. That’s true, but I don’t think I completely understood the implications. 

I’m sure I still don’t- completely.  But Zumiez, with its annual report and conference call, may have advanced my thinking a bit. I want to talk with you about how Zumiez management sees their company developing. I’ll get to all the numbers, but this isn’t about comparable store sales, or the growth of ecommerce, or the number of stores they open, but what it means for Zumiez to be a brand and how they expect to reach their customers.
 
The Integrated Experience
 
Interestingly, and maybe intentionally, you don’t really find the discussion in the 10K (which you can read here). They say, under Marketing and Advertising, “We seek to reach our target customer audience through a multi-faceted marketing approach that is designed to integrate our brand image with the action sports lifestyle,” but that’s as far as they go.
 
Multi-faceted marketing approach requires some more explanation. Integrating the brand with the lifestyle goes a long ways towards Zumiez giving credibility to the brands it carries.
 
Let’s start by noting that Zumiez includes ecommerce sales when calculating comparable store sales. To me, that’s an acknowledgement that ecommerce and brick and mortar sales impact each other and neither can be looked at in isolation. It is also an acknowledgement that the relationship between them is dynamic and a bit uncertain. We’re all still learning. CEO Richard Brooks notes in the conference call that they are going to have to “…reinvent the way we think about these metrics…” and they say in the 10K that, “There is significant interaction between our in-store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers.”
 
Take a look at his’ comments in the conference call on what Zumiez is trying to accomplish and why.
 
“…what I really want to get everyone focused on this idea of what we’re really trying to do, which is build an omni-channel model, which is an integrated, multichannel selling platform, where you can unleash the power of what we’re doing with inventory and the brand experience for consumers, as well as our salespeople in every touch point of the business.”
 
He sees a lot of opportunity in their pure ecommerce play, “But the primary opportunity is going to be continuing to look and build — continuing to look at how we build this integrated multichannel selling platform across the organization and that’s really where our growth has been coming from, will continue to come from, as I see it over the next year or so.”
 
If you’re unclear about what he means by touch points and why they are important, take a look at this book, which I’ve recommended before.
 
CEO Brooks believes “…we’re in a period of market consolidation, where the best operators will win share.” Acknowledging the power that the consumers now have, he continues, “…when you talk about the power of the consumer, the integration of their ability to shop in any time of the day, any place, any time through these new smart devices I think it simply means that more volume moves towards the direct channel, in whatever form that may take… And I think what it highlights is that there is simply too much physical retail space. When we talk about share consolidation,…that’s the underlying reasons, as we see it, for the consolidation that’s taking place…our perception is that we’re in the early stages of this idea of omni-channel retail, of integrated multichannel selling…So this has a ways to go. It’s going to take a number of years yet for this fully to play out. And that’s why in our comments, you hear us talk about, again, striving to make the right investments, continuing to invest in our people throughout the organization, as key things that are going to drive our ability to perform well in this kind of environment.”
 
Like me, and probably most of you, Richard Brooks doesn’t know exactly how this is all going to work out but he’s sure it’s going to continue. I wonder which retailer will be the first to have one of those solid object, 3D printers.
 
In the past, Zumiez has indicated they thought they might ultimately have 600 to 700 stores in North America. But Brooks says Zumiez is “…regularly reevaluating what that range is…” and that they are managing their store portfolio “aggressively.” That’s because they are not as focused on their store number as on how those stores fit in with their omni-channel world.
 
“…it doesn’t really matter where we end up in that 600 to 700 range, we’re modeling the same amount of revenue. It’s how we’re capturing the revenue, Paul, that is the key thing and in which channel we’re capturing it, whether it be purely e-commerce, whether it be in-stores or whether it be an integrated omni-channel world.”
 
We could go back to the 10K (it wouldn’t hurt you to skim pages four and five) and learn what Zumiez thinks are their competitive strengths and growth strategies. But I’ve listed and discussed them before. I think those strengths and strategies are basically tactics. Their strategy is to develop an integrated omni-channel retailing model where each channel supports the other and, by doing that strengthen the Zumiez brand, makes it something of an arbiter of the brands it carries, and create a competitive advantage. They’ve been working on it for years, and it feels like market evolution is playing right into their hands.
 
There is a danger for brands here and I’ve written about it before. To the extent Zumiez can actually succeed in becoming an arbiter of which brands are cool, and to the extent a brand becomes dependent on a large order from Zumiez, a brand might lose some control over its own destiny. What that probably means is that brands need to pursue some of the same “touchpoint” strategies as Zumiez.
 
Financial Results
 
As of February 2, 2013, Zumiez had 500 stores; 472 in the U.S., 20 in Canada (ten opened during the year), and 8 in Europe (remember they acquired Blue Tomato in July of 2012). In the year ended February 3, 2012, they opened 53 stores, closed five, and acquired eight. Typically, each store gets merchandise five times a week. Private label was 16.9% of net sale, consistent with the last couple of years. No single brand accounted for more than 9% of their revenues. That’s up from 6.3% the prior year.
 
Sales for the year ended February 2 grew 20.4% from $556 in the prior year to $669 million. This includes $28.3 million in net sales from Blue Tomato, which are not yet included in comparable store sales. Comparable store sales rose 5.0%. That 5% includes a 2.9% increase in brick and mortar sales, and a 32% increase in ecommerce sales which, as I noted above, are included in comparable store sales. Note that the most recent year included an extra week compared to the previous year. That’s just the way the calendar worked out.
 
Men’s apparel represented 34% of net sales. Footwear was 23%, accessories 19%, and hard goods and junior apparel each 11%. It’s been assumed that carrying hard goods has been an important differentiator of Zumiez in the mall. I’ve assumed that as well, but I think if I were Zumiez management, I’d be taking a close look at the roll of hard goods. I’m guessing they aren’t highly profitable, but they take up some room. Wonder how few they can carry and still get the market differentiation they think it provides?
 
Of the total sales of $669 million, $619 million were in the U.S. and $50 million were foreign. Foreign includes Canada and Blue Tomato. 
 
Gross margin fell from 36.3% to 36%. Selling, general and administrative expenses (SG&A) rose from $141 to $173 million and as a percent of revenue were up from 25.4% to 25.8%. Advertising expenses, which exclude sponsorships and vendor reimbursements (love to know more about that), were $6 million, up from $2.5 million the previous year and $1.3 million the year before that. I interpret that as more spending to support the Zumiez brand, consistent with what I’ve described above.
 
Zumiez also committed $700,000 to the Zumiez Foundation, a charitable nonprofit organization focused on the helping the under-privileged. Cool.   
 
Operating profit grew about $8 million to $68.5 million, and net income was up 12.9% from $37.4 to $42.2 million. The latest year’s results included $7.3 million in costs associated with the Blue Tomato acquisition and $2.1 million in charges for relocating their home office and ecommerce fulfillment center.
 
For the last quarter of the year, net sales rose 21.7% from $184 to $224 million compared to the same quarter the previous year. The gross profit margin fell from 38.9% to 38.2%. Comparative store sales (including ecommerce remember) fell 1%. Net income grew from $18.7 to $22.9 million. There’s no discussion of the quarter’s results in the 10K.
 
The balance sheet is fine. There’s a big decline in cash, but that’s due to paying for Blue Tomato, their share repurchase program and the cost of opening new stores.
 
The Plan for 2013.
 
Zumiez expects to open 60 stores globally during the current year. 15 will be in Europe and Canada. Due to economic conditions in Europe, they have reduced their projections for Blue Tomato, though they don’t say by exactly how much.
 
They don’t provide a projection for the full year because, according to CFO Chris Work, “…consumer sentiment is tough to gauge and there is still uncertainty about the sustainability of an economic recovery.” For the first quarter they expect “…same-store sales [including ecommerce remember] to decrease in the mid-single-digit range.”
 
But they “…are planning our comparable store sales to increase in fiscal 2013, although we are cautious in outlook and believe this could be lower than comparable store sales in 2012.” Chris continues, “…we expect our consolidated product margins, excluding the impact of the inventory step up, to be down slightly. We plan to continue making strategic investments that we believe will reap long-term benefits, focused on enhancing the customer experience across multiple channels, growing our international footprint and investing in our people and infrastructure to support our domestic and international growth in 2013 and beyond. We expect these investments to slightly deleverage our overall gross margin, as well as SG&A for 2013. However, we expect operating profit to increase.”
 
Like all of us, Zumiez is hostage to economic conditions. But they are pursuing their strategy (as discussed above) even at some short term cost and have the balance sheet to do it.

 

 

8 replies
  1. Doug Drabek
    Doug Drabek says:

    $650 million in sales and they donate 700k towards some charity. That is pathetic. With those sales numbers, they need to put some of that back into the culture that they are making their money off of.

    I hope any company dealing with Zumiez reads this article, and gets as much money out of them as possible. Because they seem to be doing pretty well making money off young kids who don’t have access to real skate shops.

    Doug Drabek

    • jeff
      jeff says:

      Hi Doug,
      Well, I guess I see your point about the $700K, but my thinking is that the $700k is making a difference to some people and that’s a good thing. By the way, it’s not like Zumiez was pushing to let people know about this. It was deep in the footnotes under related party transactions, and I’ll bet I’m one of the very few who actually read it in the 10K.

      As far as Zumiez making money off young kids without skate shop access, I’ve got a couple of comments. First, if those kids truly don’t have access to “real” skate shops, at least they can get their skate stuff somewhere, besides Amazon I mean. Second, Zumiez understandably does what they can to make their business more successful. So do skate shops. You seem angry at Zumiez for doing that. You and I probably agree that we wish the skate industry had evolved differently than it has, but we’ve also got to acknowledge that the skate industry has some responsibility for how it turned out. It’s not Zumiez’s fault. Finally, I write what I write so people can hopefully see trends (whether or not I like them) and think about how to react to them. Maybe I turn out to be wrong in my analysis but if I get people thinking about the trends and how it impacts their business, I think I’ve succeeded. Help me do that Doug. Don’t just be mad at Zumiez.

      Thanks for the comment,

      J.

  2. Micky
    Micky says:

    Hi Jeff,
    Interesting to note that Blue Tomato (B.T.) only has 9 brick and mortar stores in Austria and Germany at this point but is one of the largest online retailers throughout the whole of Europe in the action sports market. The Omni channel idea is not exclusive to Zumiez and their purchase of B. T. was, to me, a logical one to use as a platform for European growth.
    I don’t have the numbers to support my theory but I imagine that the B.T. online business is fueling the brick and mortar growth, which acts as a “window” to advertise their brand which in turn strengthens the online business! As a retailer with a long term vision, it would be irresponsible not to make the hedge of being both in e-commerce and brick and mortar retail in more than one continent! Global brands have very few global retailers to service!
    I would also contest your theory of retailers creating brands rather than the other way around and suggest that this is more of a cyclical relationship. New retailers rely on carrying the right brands to attract customers as a new shop full of unknown brands is not attractive to consumers. Once established as a (strong) retailer however, new brands can be introduced to the already loyal consumer base as a way of differentiating themselves from every other store. This route is better than simply competing on price, which is what the less creative and “me too” retailers tend to have as their only strategy.
    Good retailers know their customers and can introduce new brands with success as part of a strategy and my good friend Jeremy Sladen has often done this with outstanding success, BUT, this can only be done if there is enough presence of well known brands to satisfy the late majority and give a comfort level to all consumers (i.e. have brands that you know will help you pay the bills!). I would be interested to hear your thoughts on this.
    In closing, I wish nothing but success to Zumiez and hope they can continue to evolve and thrive. They play their part in the grand scheme of things and play it well.
    Keep the articles coming! I really enjoy reading them.
    Cheers
    Micky

    • jeff
      jeff says:

      Hi MIcky,
      I don’t think I said that retailers “create” brands. What I said is that they make the brands they carry credible. Zumiez is certainly creating itself as a brand, and some retailers are trying to make brands out of their private labels. But the brands Zumiez decides to carry have already been created by somebody else.

      It isn’t that either brands make retailers credible or retailers make brands credible. It’s both. You’re probably right that no retailer can carry all unknown brands. Nor, I think, can they be predominantly just big brands that are available everywhere. The mix is going to depend on the individual store, but I do think credible retailers can make new brands more credible. Zumiez claims to do this.

      I basically agree with you about B.T. What I’d point out is that I assume brick and mortar and ecommerce fuel each other, but the trick is to try and figure out exactly how that works and where the balance is. Again, probably different for each retailer.

      Thanks for the comment.

      J.

  3. april mcintosh
    april mcintosh says:

    Quick note that being the in the skateboarding industry, I fully understand that frustration in regards to the competition between “Core Skate Shops and the Zumiez of the world. As a wholesaler those Core Skate Shops are our bread and butter and we are completely committed to their success in this battle. However, I have also worked with Zumiez for several years with our grassroots charity event, where they not only participate with monetary donations up front but throughout the day raise funds to our charity. We do not do any business with Zumiez and this is therefore not anything that has a clear ROI for them. I have found that their consistency, attention to detail and desire to promote within is reflected even in things as simple as their event set up and promotions team management. Their image is carefully crafted and their employees seem to be hand picked for their positions. People may take issue with Zumiez, but I think it might be better to try to take a few lessons from their strategy instead.

    • jeff
      jeff says:

      Hi April,

      Thanks for this kind of balancing response (if that’s what you meant it to be) to Doug’s comment below. I agree with you that there are some things Zumiez does really well, and one of them is select and develop people. I’ve even written that having enough of the right kind of people may from time to time be a drag on their ability to open new stores. It’s also true that Zumiez can put some real pressure on brands they carry. My suggestion to those brands who have raised the issue with me is to decide what your bottom line price and terms are, give them to Zumiez, and be prepared to walk away if you can’t make a deal that allows you to make the profit you need. If your brand is selling well, Zumiez (or any other retailer) won’t let you walk away. If it isn’t, you’ve got other problems.

      Thanks for the comment.

      J.

  4. Scott
    Scott says:

    Jeff, following on April’s lessons from others strategy – what what do you think about the Hansen’s/Rip Curl store license – a revenue model for specialty retailers and brands and in alignment with Rome’s local dealer “% for snowboarding” program? A way to compete w/ Zumiez, et al, for the smaller guys…?

    • jeff
      jeff says:

      Hi Scott,
      I guess part of the reason this might work is because of the location of the store, right across from a surf break. I think location is increasingly critical for specialty retailers. And I understand the brand and retailer’s desire to be able to merchandise the brand’s complete product line. What I don’t know is the specifics of the financial arrangements, and that would impact my opinion. The total costs don’t change and I wonder who’s paying for what with what expectations.

      Thanks for the comment,
      J.

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