A Long Term Plan; Zumiez’s Quarter

Well, Zumiez had a pretty good quarter. Net sales rose 11.6% to $213.3 million from $191.1 million in last year’s quarter.   “The increase reflected the net addition of 54 stores…and a comparable sales increase of 3.7% for the three months ended November 1, 2014.” Those numbers include ecommerce sales, which rose 15.7% and represented 11.2% of net sales, up from 11.0% in last year’s quarter. Brick and mortar comparable store sales were up 2.2%.

European sales were $14.7 million, up 45.7% due largely to new store openings.

The gross profit margin was down a bit from 37% to 36.5% due to higher product costs. SG&A rose from $50.1 million to $52.9 million, but as a percentage of net revenue it declined from 26.2% to 24.8%.

Operating income rose from $20.7 to $25 million and net income was up 32.6% from $11.9 to $15.7 million. The balance sheet is solid and cash provided by operating activities was $34.4 million in the first nine months of the fiscal year. In last year’s first nine months it was $21.7 million.

They ended the quarter with 603 stores; 551 in the U.S., 35 in Canada and 16 in Europe.

You know, I don’t have much fun when things are going well. Not much to analyze. I’m kind of digging in the bottom of the barrel here, but there are a couple of things I’ll mention from the 10Q before I move on.

This is the first risk factor Zumiez lists: “Our ability to attract customers to our stores depends heavily on the success of the shopping malls in which many of our stores are located; any decrease in customer traffic in those malls could cause our sales to be less than expected.“

This issue isn’t unique to Zumiez, but malls are in for some hard times in coming years. Here’s an article I previously pointed you to on the subject. Indirectly, Zumiez addresses this in the conference call. I’ll point that out when we get to it.

Second, referring to Blue Tomato, Zumiez notes that “At November 1, 2014, we estimated we will not be obligated for future incentive payments.”   It’s not, according to Zumiez CEO Rick Brooks, that Blue Tomato isn’t doing well, though obviously they aren’t doing as well as they thought they might. It’s just that the European market is tough. Zumiez is “very encouraged” by what Blue Tomato is doing and thinks they have a big opportunity in Europe.

Here’s how CFO Chris Work describes the situation with Blue Tomato in the conference call: “So at the time of acquisition, it was on par from a profitability perspective with our U.S. business, and today it’s probably more a breakeven business excluding charges.“

I’d interpret that to mean that Blue Tomato is losing money right now under generally accepted accounting principles where you have to include those pesky charges.

Okay, let’s move on to my favorite statement of the conference call from Rick Brooks. This was Rick’s response to a question about what categories are performing and what new brands or products he saw coming around.

“The strength of our business, as I’ve said a number of times now, it’s always about diversity, diversity of brands, diversity of categories in our business because we serve the entire lifestyle for this consumer.”

I added the emphasis. “A number of times” is probably about 4,907 over the years he’s been CEO.

Let me give the answer I think Rick would have loved to give. “Look, we’ve been following the same strategy since we started the company. It’s not about a particular brand, or a particular trend or a particular product group. What matters is that we have the best trained and best connected to our customer base group of employees we can have so that whatever the trends, brands, or cycles (all of which will continue to come and go) are, we have maybe just a little better idea than our competitors what’s going on and can respond better or quicker. Consistent with whom we are as a brand, we want to identify and help the brands that can grow, support the trends those brands represent, and adroitly step aside when those trends change. “

“And stop asking me how many stores we’re going to have! I keep trying to explain that in the ecommerce/mobile world number of stores is just not as relevant as it was. What matters is connection and credibility with your customers. We’re still figuring out, like everybody else, what stores of what size and what layout you should have where. What we’re pretty sure of, however, is that number of stores is not as closely connected with revenue growth as it used to be.”

And just to finish up, here’s an actual quote from Rick, rather than one I’ve made up. “…our topline goals don’t change based upon whatever number of stores we have, but on how we optimize catching those shares, to optimize margins and optimize how we serve our customers.”

Let’s see, what else should you know. First, Zumiez doesn’t see an easy business environment in coming years. Rick says, “On a longer term view, I think our view is one of caution. I’m saying that the recovery has been slow and painful and I think from a planning perspective, we continue to think that’s – we’re going to continue to face kind of a slow bumpy volatile recovery for a period of years yet.”

Finally, getting back to the issues of the future of malls and the role of brick and mortar stores CEO Brooks notes that “We have opened a couple of suite stores and we continue to have a small portfolio of off-mall locations around different parts of the country.” So they’re thinking about it.

A consistent strategy, and recognition of how the market is changing should serve Zumiez well especially if it’s as tough as they (and I) think it’s going to be.