“We’ll Go Anywhere Our Customers Give Us Permission to Go;” Zumiez’s Quarterly Report

A few reports ago, I opined that while Zumiez owned the action sports space in the mall, the relatively small size of that niche and the evolution of the market to youth culture or fashion or whatever you want to call it was going to require Zumiez to move beyond it to achieve their growth plans.

During the conference call for the quarter ended May 3, an analyst asked, “…you guys have been incredibly successful at being the authentic action sports retail in the mall but clearly there’s a move towards more diverse fashions I guess, how do you feel about the balance between kind of the core action sports apparel versus potentially street wear…?”
The quote in the article title is part of CEO Rick Brooks answer. In more detail, he said, “…we have permission from our customer to do much more than just action sports and we’re really serving this consumer who wants to be different, who wants to be unique, wants to make a statement about who they are and what lifestyle they’re embracing through what they wear and, not just what they wear but they do on a holistic basis…”historically we kind of get pigeon holed as an action sports retailer. But we’ve always been able to move much more broadly.”
You go where the customer wants you to go. Who could argue with that? But the trick, and the management challenge, is figuring out in a timely manner where that is and how far, exactly, to go.

For example another analyst asked about Zumiez’s footwear business, noting that it “…probably was one of the underperformers versus maybe some of the other segment.” CEO Brooks responded by noting how Zumiez had always ridden brands and trends up and down. Referring specifically to footwear he says the following.
“So, there is just some trend items that are against the hot brand on the women’s side that’s not quite as hot as it once was. And on the men’s side and I think we all are well aware that athletic performance footwear, basketball shoes and things like that are actually more in trend than our typical product that we carry. So we’ve had modest success, we’re still fighting those upward battles in both the men’s and women’s side of the business.”
What does Zumiez do? Start carrying basketball shoes? Do the customers expect basketball shoes in their local Zumiez? Is that product consistent with Zumiez’s market position? To use an extreme example to make a point, Zumiez can’t start looking like a Footlocker.
Rick Brooks tells us, more or less, not to worry about it. They’ve always been able to move between brands and trends as the market evolved. It’s what Zumiez does that makes them successful. I agree. But they’ve always done it in a pretty clearly defined action sports market.  More and more, whatever market we’re in, it’s not action sports. It may be as broad as branded consumer products. Does that matter? I think so. We’ll see how much. A strategy that works in one market terrain may not work in another as competitors and customers change.
Zumiez ended its May 3 quarter with 558 stores, 515 in the U.S., 29 in Canada and 14 in Europe. Sales rose 9.7% from $148.5 to $162.9 million. They had a net of 55 new stores open compared to last year’s quarter. Comparable store sales rose 1.8%. However, brick and mortar comparable store sales were flat while ecommerce sales, included in the comparable store calculation, rose 14.7%.
The question, in the days of the omnichannel, is how we think about that? Obviously Zumiez would like to see brick and mortar comparable store sales rise.   But if brick and mortar and online/mobile are influencing and supporting each other in ways we’re all trying to understand, do we really care? I guess we’ll all figure that out together.
Ecommerce sales were 12.3% of sales for the quarter. In last year’s quarter, they were 11.8%. Sales in Europe were $12.3 million, up 34.6% over last year’s quarter.
The gross profit margin was down from 32.3% to 31%. “The decrease was primarily driven by a 130 basis points decrease in our product margin due to an increase in merchandise markdowns to clear excess inventory and a 40 basis points impact due to the deleveraging of our store occupancy costs, partially offset by efficiencies in our supply chain.”
SG&A expense rose 6.5% from $43.9 to $46.8 million. As a percentage of sales it was down from 29.6% to 28.7%. The main cause of the decline was that they didn’t book an expense for future incentive payments to Blue Tomato.
Operating profit fell 7.8% from $4.03 to $3.71 million and net income was essentially unchanged at $2.5 million.
The balance sheet remains strong and nothing changed enough from a year ago that I feel the need to discuss the details. Cash generated by operating activities rose from $4.4 to $16.6 million.
In perusing the pages of risk factors in the 10Q (which you can see here if you want to), Zumiez notes that, “We are required to make substantial rental payments under our operating leases and any failure to make these lease payments when due could have a material adverse effect on our business and growth plans.” In a footnote called “Contractual Obligation and Commercial Commitments” we learn that Zumiez has $402 million of such commitment over some period of years.
According to generally accepted accounting principles, Zumiez does not have to carry these operating lease obligations (for stores mostly) on their balance sheet. Neither does any other retailer or reporting company. But if it’s worth stating as a risk factor and requires a footnote, one wonders why it isn’t required to be on the balance sheet.
That really has nothing to do specifically with Zumiez. It’s just me going out on one of my semi, sort of, maybe, kind of related tangents.
No growth in profit on an increase in sales isn’t the result they would prefer.  However, Zumiez looks good compared to many of the other retailers I review. Basically, they’re all suffering from a poor economy here and in Europe and high unemployment among their target customers.   Zumiez even includes this as a risk factor:
“The current uncertainty surrounding the U.S. and global economies, including the European economy, coupled with cyclical economic trends in action sports retailing could have a material adverse effect on our results of operations…Because of this cycle, we believe the “value” message has become more important to consumers. As a retailer that sells approximately 80% to 85% branded merchandise, this trend may negatively affect our business, as we generally will have to charge more than vertically integrated private label retailers.”
Any retailer that doesn’t own the brands it sells has the same problem.
I’m not worried about Zumiez operating well because, frankly, my perception is that they always have. I’m more interested in how they meet the challenge of the changing market and keep on top of evolving brands and trends when, more and more, those brands and trends are no longer solely about action sports.

 

 

2 replies
  1. Kris
    Kris says:

    I am just a consumer but look forward to your articles. As a parent of a skater and Zumiez being the only “acceptable” store for my 11 year old to buy clothing from in my area. I think Zumiez made a mistake eliminating the jr. Boys section ( Apparently in many stores). I was just wondering if they had mentioned the reasoning to you? The kids that work in the stores don’t really know what’s going on, I think I get more insight from your blog that they are even privy to.

    • jeff
      jeff says:

      Hi Kris,
      Thanks for the kind words. No idea why they might have eliminated Junior Boys. One think I can tell you in general is that kids clothing cost about the same to source and produce at adult clothing, but typically don’t carry as good a margin. I don’t know if that had anything to do with Zumiez’s decison. Nor do I know if things are the same in all their stores. I can tell you that Zumiez works hard to get the right product to the right store at the right time, and does not carry the same brands and styles in all stores.

      Thanks for the comment,

      J.

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