Brands, Staffing, and Stores; Zumiez’s Quarterly Results

Zumiez increased revenues and profits in their October 29 quarter compared to the same quarter last year.  The more interesting strategic question is how (if a single quarter is indicative of longer terms trends) and I’d like to highlight three factors that I see working together, though they are typically discussed separately.

Zumiez keeps pointing to the new brands (not store brands) it introduces each year and how it’s process for selecting and working with those brands has evolved and improved.  CEO Rick Brooks, in the conference call, says, “This year we’ve already launched over 100 new brands bringing a newness and localized fashions that our customers are looking for. These emerging brands coupled with the growth of more established brands within our portfolio…have a direct impact on both our current results and those in the coming years.”

What’s pretty obvious is that if they are launching 100 brands a year, and continue to do that, not all those brands are going to continue their partnerships with Zumiez over many years.  It would be interesting to get some data points on just what “launch” typically means, and the typical growth and longevity of new brands.

I imagine we’d find it’s improved, as Zumiez tells us it has fine-tuned its identification and onboarding process.  That’s important because the worst possible outcome is spending time and money supporting a brand that doesn’t work out.

Okay, on to staffing.  Remember Zumiez, over decades, has focused on finding and keeping employees that are actively involved in their target customers’ culture.  This is such a focus that it’s at times been a constraint on growth.  I know that focus is still critical, but it would be interesting to learn how and if it has changed as Zumiez has evolved from a mall based action sports retailer to a “…a leading specialty retailer of apparel, footwear, accessories and hardgoods for young men and women who want to express their individuality through the fashion, music, art and culture of action sports, streetwear, and other unique lifestyles.”

Sounds like a broader customer group with an expanded group of competitors.  Does it change hiring practices?

Anyway, you bring in these new brands and all the people who work in the stores are in a position to say, “This brand is cool!” or “This brand sucks!” basically as representatives of your customer class.  I expect that process starts before a potential new brand partner ever sees the inside of a Zumiez store.

The result is that selecting, slicing and dicing new brands is made more accurate and efficient by how Zumiez’s staffs it’s stores.  It’s further improved, in my view, because there’s less of the typical corporate barrier that can impair communication between senior management and people a bit further down in the organization.

Zumiez is a public company, and not immune to the pressures that come with being one.  They had a (now completed) stock buy back program which helped their EPS and talk about growth opportunities even as they remind the wall street community that, at least in the U.S., store openings are moderating.

It is, of course, easier to meet wall street expectation when nobody expects much from retail anyway.  There were only two analysts on the conference call this quarter down, I want to say, around 7 in earlier calls.  This works for me because it makes for 9, rather than 25-page, conference call transcripts I have to read.

Zumiez ended the quarter with 694 stores.  604 in the U.S., 51 in Canada, 32 in Europe and 7 in Australia.  Management has been cautioning for years that store openings in North America will moderate, and it has.  Rick says, “…we continue to proactively open stores in each of our geographic regions with a goal of achieving the optimal number of locations require to reach our customers and provide them with a superior level of service they expect from Zumiez’s.”  In the past, they’ve described it as having the “right” number of stores in each of their “trade areas.”  I don’t know what a trade area is or how many there are or how they may change.

I sense a certain dynamic tension here between growth through store openings (more and more outside of North America) and improvement in comp sales and overall efficiencies leading to a better bottom line even with less store growth.  In a fast changing and continuing to be uncertain retail market, they are focused on maximizing their brick and mortar flexibility.  “At present within the bottom 20% of our North America store base in terms of store contribution we have the right to exit over 85% of those stores in the next three years.”

Part of Zumiez’s store management revolves around their new “customer engagement suite” software.  They’ve got it in 30% of their stores now.  I’ve never seen a new system implementation go completely smoothly, and I suspect this one is no difference.  Remember this wasn’t just a new system they bought, but one they were the guinea pig beta test site for.  They expect it to provide all kinds of new data, insights, and flexibility in customer and inventory management.

Now, remember they moved online order fulfillment to their stores.  CFO Chris Work describes it this way.  “We’re doing localized fulfillment, we are fulfilling closer to the customer and we’re really able to leverage our store system to help perform that task and get it to the customer sooner. So, we saw that the fastest fulfillment, we’ve ever seen with over 95% of our order shipping same day, because we’re able to fulfill out of our vast store network.  We also saw a meaningful increase in sales, but less packages, which ties to kind of our continued effort here and we’ve been doing this for couple of years to get the product mix right within each market place, meaning there’s less split shipment, and we’re able to provide a better customer experience overall.”

To start to sum up the strategic connectivity I’m trying to illustrate, I’ll start with a quote from Rick.  “Trends emerge and spread much faster in our more connected world and customers expect to be able to experience brands on a much more frequent and more personalized level.”

If that’s true (anybody want to dispute it?) then you must have new products (brands) all the time, you need an efficient methodology for identifying, promoting and, when necessary, shooting them and making the product available in the right places.  With it’s emerging systems, long time approach to staffing, and integration of brick and mortar with online, Zumiez has as good a shot as that as anybody and probably better since they started earlier.

Zumiez isn’t the only retailer doing some or all of this of course.  It’s almost amazing they tell us as much as they do (though not as much as I’d like).

If the strategy is correct, the money stuff usually works out.  Not quickly and not necessarily easily, but over the long term.  Even though I think I’ve covered the important points above, let’s allocate a few words to the financial statements.

Revenues for the quarter, compared to the same quarter last year, rose 11.1% from $221.4 to $245.8 million.  “The increase primarily reflected the increase in comparable sales of $17.3 million and the net addition of 6 stores (made up of 11 new stores in North America, 4 new stores in Europe and 2 new stores in Australia partially offset by 11 store closures in North America) subsequent to October 29, 2016. By region, North America sales increased $20.2 million or 10.0% and other international sales (which consists of Europe and Australia sales) increased $4.2 million or 22.5% for the three months ended October 28, 2017 compared to the three months ended October 29, 2016.”

Comparative store sales rose 7.9%.

The gross margin fell from 34.4% to 33.9%.  “The decrease was primarily driven by an 80 basis point increase in inventory shrinkage and 40 basis point decrease in product margin partially offset by a 90 basis point increase due to the leveraging of our store occupancy costs.  Chris Work tells us in the conference call that, “The decrease in product margin is due primarily to our efforts in our European business to move through aging inventory and to a lesser extent a slight decline in North America.”

The inventory shrinkage number is worthy of some of their attention.

SG&A expenses rose from $59.3 to $64.6 million, but fell as a percent of revenue from 26.8% to 26.2%.  Net income rose 11.5% from $10.7 to $11.9 million.

The balance sheet doesn’t have anything worthy of a lengthy discussion, except that cash and equivalents (my favorite) rose about 75% to $85 million.  The result was a current ratio that was up from 1.97 to 2.20.

Zumiez has explained to us exactly what their business model is and, in general, how they are doing it.  Makes sense to me.  I guess everybody should do it.  Many are trying to do at least parts.  All they have to do to be like Zumiez is go back 25 years (or however many it is) and establish the staffing process and business culture Zumiez has developed.  Zumiez has found (and more importantly, been able to maintain) the correct balance between pushing independence and responsibility down but having the correct level of information and control at the top when necessary.

I really have no idea how they’ve done it for this long.