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.

 

 

2 replies
    • jeff
      jeff says:

      Thanks Sean,
      Unfortunately I made a mistake, as you’ll see when you read the followup email I just sent out. It seems, a reader had to point out to me, that Zumiez has been discussing it’s possible opportunities in the international market in both investor conferences they’ve participate in within the last two weeks. I’d even listened to one, and still missed it. The lesson for me is don’t rely on my memory.

      J.

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