You Own Action Sports in the Mall. Now What? Zumiez’s Quarter

 The headline I guess is that for its quarter ended August 3rd, Zumiez increased its sales and profits smartly. We have to talk about the impact of the Blue Tomato acquisition (July 4, 2012) and some restructuring costs, but basically things look good on a quarter over quarter basis. 

The more interesting issue, however, is the one I started to highlight when I talked about PacSun’s results. Zumiez is now the only pure retailer with an action sports focus in the mall. They describe themselves as “…a leading multi-channel specialty retailer of action sports related apparel, footwear, accessories and hard goods, focusing on skateboarding, snowboarding, surfing, motocross and bicycle motocross (“BMX”) for young men and women.”
 
I know Vans, Quik, and Billabong have mall stores, but they aren’t pure retailers and their focus is on their own brands. Their retail will live or die with the strength of their brands. Let’s not look for Billabong, just as an example, to replace Element with another skate brand if it’s not selling well. PacSun, as I discussed recently, has changed their focus away from action sports towards California based fashion trends.
 
If it’s too much to say that Zumiez owns the mall action sports niche, we can at least say they are the leader in the U.S., with 495 stores. They also have 27 in Canada and seven in Europe under the Blue Tomato name.
 
As CEO Richard Brooks describes it, their goal  “…is to reach all of our global markets with the right number of highly productive stores and a strong omni-channel presence that seamlessly extends our culture and our unique perspective on the action sports market wherever and whenever our customer interacts with us.”
 
So they are all about action sports. It’s great to be a leader in a niche as long as that niche supports your growth. I’d go so far as to say that through their consistent pursuit of a solid strategy over many years, their willingness to try and support new brands, the culture they’ve nurtured and their attention to system and operations that strive to get the right product to the right place at the right time, Zumiez has done most things right.
 
As you know, I’ve discussed how the action sports industry is actually smaller than we all thought it was during the good old days. I haven’t had anybody tell me I’m wrong about that. And we’ve all noted that fashion, youth culture, urban, or some other descriptor we haven’t come up with yet is a more accurate description of the market as it’s evolving.
 
If I were Rich Brooks, what would keep me up at night is wondering whether the market the company has worked so hard to stake its claim in isn’t changing so much that the competitive strengths the company has worked so hard to develop might not support the growth I need as a public company.  And if I step outside of the action sports market seeking that growth, how does that affect my ability to compete?
 
And Now, the Numbers
 
Sales for the quarter were $157.9 million, up 16.9% over the $135 million in last year’s quarter. North American sales grew 13.7%. European sales were around $6 million. Remember Zumiez only owned Blue Tomato for 1 of 3 months in last year’s quarter. Ecommerce sales increased 19.1% and represented 8.8% of revenue for the quarter, or %13.9 million. Comparative store sales were up 0.9%, but that includes the ecommerce results. Brick and mortar comparable store sales fell by 0.4%. If you add August in, comp sales are up by 0.8% for the year. By the way, I think including ecommerce sales in the calculation is the way to go. You just can’t isolate brick and mortar from ecommerce results any more.
 
The top line included 52 more stores than they had in last year’s quarter and benefitted from a calendar shift that meant the first week of back to school was in this second quarter instead of the third.
 
The gross profit margin rose from 34.4% to 34.9%. Most of the improvement was the result of not having half a million dollars in relocation costs they had last year, and not having another half a million in inventory step up costs they had due to the Blue Tomato acquisition. The product margin was “down slightly.” They expect it to be flat to slightly down for the rest of the fiscal year. 
 
Selling, general and administrative expenses rose from $42.6 to $47.3 million, but as a percentage of sales fell from 31.6% to 29.9%. Last year’s SG&A expenses included $800,000 in corporate office relocation costs. There were also $2.4 million of Blue Tomato related acquisition costs. In this year’s quarter there are $1.7 million of such costs. If we remove those costs from both quarters, SG&A expenses rose from $39.4 to $45.6 million.
 
Net income rose from $2.1 to $4.7 million.
 
There were comments about how promotional back to school continued to be and, consistent with other companies, how tough things were in Europe. There was this comment from CEO Brooks: “I think there is a trend back towards young women wanting to see more brands, perhaps better quality, in some of the clothing that they wish to purchase.” If he’s suggesting that fast fashion- cheap clothing bought often- might wear out its welcome, I agree with him.
 
I’ll be interested to watch Zumiez’s comparative store sales in coming quarters. I’ll also be interested to see if market evolution requires them to change the way they describe their market position in their filings. To me, Zumiez’s key strategic issue is whether the action sports market by itself will support the business they are building.