Zumiez Releases More Information on Blue Tomato

Life is so not fair. Here I am on vacation, vowing to just get the Zumiez analysis done. I do that, I send it out and now I can relax, right? Nah. Literally 20 minutes later, along comes an 8K/A from Zumiez filed with the SEC giving us the Blue Tomato financial statements.

Let’s try and keep this short. First, here’s the link to my article on Zumiez’s quarter. I noted in that article:

“The Blue Tomato acquisition closed on July 4th. They paid $74.8 million for it (59.5 million Euros actually). Blue Tomato has 5 retail stores in Austria and a big online business. Lord knows Zumiez didn’t pay that price for 5 stores so it’s clearly a really big online business. There are also potential additional payouts totaling $27.2 million at the current exchange rate, part of which is in Zumiez stock, through April 2015.”
The presentation of financial statements in Austria is different from the U.S., but my review of the notes suggests that accounting standards are similar. There’s actually a footnote describing the differences and for our purposes, they aren’t that different.
The April 30 balance sheet (numbers in Euros) for Blue Tomato shows current assets of 13.85 million. That includes merchandise inventory of 3.9 million and cash of 5.2 million. There are also trade receivables of almost 1 million which I wouldn’t necessary expect from a retailer, but things work differently in Europe. Maybe it’s just money due from the credit card companies.
Fixed assets are 2.6 million. I assume that’s the net value after depreciation. There is only 355,000 in intangible assets. Liabilities are 2.85 million, of which 1.85 million is bank loans and overdrafts. Equity is 9.26 million. The balance sheet then, is very solid.
The income statement is for the 2011/12 fiscal year, but it doesn’t say on the income statement what month that year ends. I’m guessing it’s April 30 since that’s the balance sheet date. Revenue from merchandise sale was 29.5 million. Expenses for materials and other purchased services were 16.78 million, giving a gross profit of 12.69 million, or 43%.
However, this is a retailer. Remember that in the U.S. a retailer would typically include in cost of goods sold certain salaries and occupancy costs. Blue Tomato doesn’t present its numbers that way. That’s neither right nor wrong- just different.
Total personnel expenses, we see next, were 3.4 million of which 20.5% was for payroll taxes and contributions. Blue Tomato had 137 employees. They report operating income of 4.7 million, but that includes “other expenses” of 4.05 million. That’s kind of a big number to not identify. I’ll check the footnotes. Nope, no note explaining that.
Blue Tomato’s net income for the year is 3.49 million, or 11.8% of revenue.
Zumiez goes on to provide us with some more information in the form of unaudited, proforma income statements for the year ended January 28, 2012 as if the Blue Tomato acquisition had occurred on January 30, 2011. As Zumiez points out, all we’re doing here is adjusting some numbers and applying U.S. generally accepted accounting principles, and there’s no reason to think this actually represents how the year would have gone. Still, it’s instructive.
The bottom line is that Zumiez reported a net income of $37.4 million in the year ending January 28, 2012. If you add Blue Tomato in and adjust its accounting to U.S. standards, the net income of the consolidated entity is $30.92 million, a decline of 17.3%. Since Blue Tomato made money, how come?
First, as I discussed in my original article, there’s a write up of inventory value of $2.2 million that increases the cost of goods sold. But the bigger number is the increase in selling, general and administrative expenses of $11.25 million. That includes $2.3 million of additional amortization expense for the acquired intangible assets, $200,000 of additional depreciation expense, and $8.7 million of future incentive payments to the owners of Blue Tomato.
There’s also a tax benefit of $2.3 million.
I guess everybody is trying to figure out if Zumiez got a good deal, or paid too much or what. It’s very much a strategic purchase which means we won’t really know for a while. Let’s put it this way; with the limited information I have, I’d say they paid a lot, but purchased a high quality business. If it continues to grow, and offers Zumiez international expansion opportunities, it will have been a good deal.



Zumiez Buys Blue Tomato

Well, this one caught me by surprise, though I guess it was supposed to. No, not that Zumiez bought Blue Tomato, though that caught me by surprise too. What surprised me is that Zumiez has a “…strategic plan to build the leading global action sports retail business.” And, according to the press release, this acquisition is the “next step” in that plan, so I guess it’s not new.

 Zumiez CEO Rick Brooks noted, “The similarities between each organization’s culture and operating philosophies give us great confidence we can successfully leverage our combined expertise to selectively expand Blue Tomato’s European footprint and strengthen our foundation to support future international development.”

I knew about the Canadian expansion, and I knew Zumiez is planning something like 600 U.S. stores, but I didn’t know about these global plans. I don’t recall any specific discussion in any SEC filings or in a conference call. Maybe I just missed it.
All the currency figures I’m going to give you are in euros. The current exchange rate is 1.265 euros to the dollar. To hear Zumiez’s announcement and discussion of the transaction, you can call (877) 523-5612 and enter passcode 16847. The press release and SEC filing is available here.
Blue Tomato was founded in 1988 by Gerfried Schuller and has five stores in Austria. It’s got a 10,000 square foot flagship store, two smaller stores, and two other snow focused store that are seasonal. It sells “…an extensive and diverse mix of branded snow and skate hard goods, apparel, footwear, and accessories across Europe.” Its sales in the year ended April 30, 2012 was EUR 29.4 million. That’s a 27% increase over the previous year, and Zumiez says their EBITDA has grown at a compound rate of 42% over the last three years. Their net income for the April 30, 2012 year was EUR 3.5 million under Austrian accounting standards. No idea how Austrian accounting standards are different from the U.S.
75% of Blue Tomato’s business, or EUR 22 million in the last complete fiscal year, is done on the internet. They operate in 14 languages and sell to 60 countries, though those sales are concentrated in Europe.
Zumiez is paying EUR 59.5 million plus contingent payments of EUR 22.1 million over the next three years that will depend on management achieving certain performance objectives. We aren’t told the specifics, but the contingent payments will depend partly on achieving a certain EBITDA in the 2015 fiscal year and, interestingly, “…the opening of certain defined incremental stores in the European market by the end of the fiscal year ending 2015.” 
 Up to EUR 5 million of the contingent payment will be in Zumiez stock. The purchase price will be paid from Zumiez existing cash balances. Existing management will continue to run Blue Tomato.
Even ignoring the earn out, the purchase price is more than twice the last complete year’s sales. Shades of Decker’s purchase of Sanuk. I’m really wishing I knew something about Austrian accounting.
Zumiez paid what I take to be a big price for Blue Tomato, but they expect it to improve their earnings in the second half of their fiscal year (assuming the deal closes by July 1 as planned). But given the growth Blue Tomato has experienced in what is generally conceded to be a soft and deteriorating European economy, I can imagine why that price might be justified. And, happily for Zumiez, the Euro has weakened in the last couple of months. I wonder if Blue Tomato’s decision to sell now wasn’t based, at least in part, on the overall financial and economic situation in Europe. My hat’s off to them for deciding to sell when things were going well.
So Zumiez is going to open some stores in Europe, but we don’t know if they will be Zumiez or Blue Tomato stores, or both. We also have another example of a retailer whose brick and mortar stores, though important for building the brand, are a smaller part of the overall business’ revenues and profits compared to ecommerce. This is not a new trend.
I will look forward to watching how the Zumiez’s culture translates to Europe, seeing how and where they open stores, how they integrate inventory management, and how their respective web presences evolve to work with each other.