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.