Zumiez’s Quarter; Other Stuff is More Interesting than the Numbers

The Numbers

In the quarter ended July 31st, Zumiez showed some improvement over the same quarter last year. Sales grew 14.7% from $85.2 million to $97.7 million. Comparable store sales were up 9.3% and 24 new stores (net of closings) have been opened since August 1, 2009.
 
“The increase in comparable stores sales was primarily driven by an increase in comparable store transactions, partially offset by a decline in dollars per transaction. Comparable store sales increases in accessories, men’s clothing and boy’s clothing were partially offset by comparable store sales decreases in hardgoods, junior’s clothing and footwear.”
 
Gross profit was $30.7 million, up 24.6% compared to the same period the prior year. Gross profit as a percentage of sales grew from 28.9% to 31.4%. I should note that Zumiez included in their cost of goods sold some expenses that other companies allocate differently. 
 
“The increase was primarily due to product margin improvement of 170 basis points, a 130 basis points decrease in store occupancy costs and a 40 basis points decrease in inbound shipping costs, offset by a 100 basis points increase due to distribution costs primarily associated with the relocation of our distribution center.” The 1% of distribution costs sounds like a one time thing.
 
Selling, general and administrative expenses increased $3.2 million, or 10.8%, to $33.1 million. As a percentage of sales they fell from 35.0% to 33.8%.   “The primary contributors to this decrease were a 150 basis points impact of a litigation settlement charge of $1.3 million incurred in the three months ended August 1, 2009, 120 basis points due to store operating expense efficiencies, the effect of the change in accounting estimate for the depreciable lives of our leasehold improvements of 110 basis points and a 40 basis points impact of the $0.3 million impairment of long−lived assets charge incurred in the three months ended August 1, 2009, partially offset by a 210 basis points impact of a litigation settlement charge of $2.1 million incurred in the three months ended July 31, 2010 and a 80 basis points increase in corporate costs, primarily due to incentive compensation.”
 
The two law suits were both around allegations that Zumiez didn’t treat their employees as the law requires. Alleged were failure to pay over time, not providing meal breaks and a bunch of other stuff. Both cases have been settled. Without the impact of the lawsuit settlement, sales, general and administrative expenses would only have declined by 1.8% instead of by 3.8%. 
 
The company had a net loss of $1.2 million in the quarter compared to a loss of $3.1 million in the same quarter the prior year. The balance sheet is in good shape. Not all that much changed from a year ago. Thanks to Zumiez for including the balance sheet from a year ago in their press release so I didn’t have to go dig it up. Let’s move on to the more interesting stuff.
 
The More Interesting Stuff
 
On May 11th, Zumiez bought a 14.3% interest in a manufacturer of apparel and hard goods for $2 million. I emailed Zumiez asking for more details but they aren’t disclosing any, which is what I expected. Zumiez has the right to sell its interest back any time between the fifth and the seventh anniversary of the investment. And the company they invested in has an option to buy their stock back on or after the seventh anniversary of the initial investment.
 
Sorry, that’s all the information I have. I am kind of intrigued. Brands going into retail, now retailers becoming manufacturers?   If $2 million bought 14.3% of the company, then they agreed the company had a value of about $14 million. So it’s not a little tiny company. 14.3% is kind of a funny number. I wonder if this isn’t an important source for Zumiez that was having some troubles. Makes hard goods as well as apparel huh?
 
Okay, I’m over speculating here. I just don’t know anything, but you can see why I’m curious.
 
Ecommerce was 2.9% of revenues for the quarter, up from 1.8% in the same quarter the prior year. Quite an increase.
 
You noted above that they ascribed some of the drop in sales, general and administrative expenses as a percent of sales to improved operating efficiencies. They discussed that in the conference call, referring specifically to “Infrastructure projects that facilitate better merchandise analysis and planning decisions” and contribute to “improved exception based analysis.” They also mentioned a new assortment planning tool which should allow Zumiez to “plan and micro merchandise our business even better.” They said this would allow them to lower cycle times and get product into stores faster. Their new distribution center, they noted, (moved from Everett Washington to Southern California) cuts two to three days off their supply cycle because 70% of their suppliers are located in Southern California.
 
As you know, I’ve been a cheerleader for systems improvements ever since the lousy economy started to rear its ugly head. Actually, since before then as I was pretty certain a lot of companies were leaving a lot of money on the table through poor operations. Now, I think your bottom line improvement is more likely to come from running better than from growing sales and it looks like Zumiez might think I’m on to something.
 
Zumiez noted in the call that two things were working really well for them. The first was the value portion of the business. The second was a lot of “full price selling coming from unique brands we carry.” They believe that they may still have some pricing power with those brands because of their controlled distribution.
 
I’ve written about how the recession can be an opportunity for small brands that aren’t widely distributed. It’s the only way for specialty retailers to differentiate themselves.
 
Here are a few other facts:
 
·         Juniors represent only about 10% of Zumiez sales. That’s a good thing because of how tough that market has been and is. Their private label juniors has performed better than the brands in the last few quarters.
·         In the last two complete years, private label has been 15 and 15.7% of sales.
·         Last quarter, they had the biggest decline in average unit retail that they’ve had in the last six quarters.
·         Concentration in their top 10 and 20 brands has been declining for a number of years.
·         They see some costs coming up and some lead times increasing, consistent with some other companies are saying. It will be interesting to see how brands reconcile that with consumer demands for value in the next year or two.
 
Obviously, you don’t want to say everything is fine when a company is losing money. But they are going in the right direction, have the balance sheet to consistently follow their strategy, are choosing and managing the brands they carry in a way appropriate for the environment, and are working hard to build efficiency and take costs out of the system.

 

 

3 replies
    • jeff
      jeff says:

      Chad,
      No idea. All I know is the little bit of information provided in the 10Q. I asked Zumiez, but they declined to provide any more information.

      J.

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