Zumiez’s Quarterly Results; Their Computer Systems are a Competitive Advantage

From a financial statement analysis point of view, this is kind of boring. The balance sheet is solid enough that I’ll pay it the ultimate compliment of not discussing it. No bank debt, and the inventory was more or less constant on a per square foot basis.

In the conference call, one of the analysts even wanted to know if they had any plans for dividends or acquisitions as a way to use up some cash. The answer was no. Zumiez like’s having cash when the economy sucks. Me too.

Sales for the quarter ended July 30 were $112.2 million, up 14.9% compared to the same quarter last year. Comparable store sales grew 7.5%. They opened a net of 31 stores during the fiscal year so far, bringing their total to 424 in 38 states and Canada. There are six stores in Canada and will be 10 by end of the year. Ecommerce sales were 5.3% of total sales for the quarter compared to 2.9% in the same quarter last year.
 
Gross profit rose 22.3% to $37.3 million. As a percentage of sales it was up from 31.2% to 33.2%. This improvement largely represents cost reductions and the ability to spread costs over a larger sales base rather than higher sale prices or lower product cost.  Remember that in the quarter last year they had a bunch of expense associated with the relocation of their distribution center that they don’t have this year. That represented 1% of the gross margin improvement.
 
Sales, general and administrative (SG&A) expenses rose about $1 million, but fell as a percentage of sales from 33.6% to 30%. 2.2% of that decline was due to last year’s payment of $2.1 million to settle a lawsuit. They didn’t have that expense this quarter. The rest was due to spreading costs over a bigger store base and reducing some expenses. Rent expense, in case you’re curious, was $16.7 million or not quite 50% of the SG&A total.
 
Net income improved to $2.59 million from a loss of $1.2 million in the same quarter last year.
 
That was easy. Now for the more intriguing stuff.
 
Zumiez still has a 14.3% equity investment “…in a manufacturer of apparel and hard goods.” And I still don’t know who it is or why they have it. It doesn’t actually matter particularly, but I’m just really curious about the circumstances behind it.
 
Zumiez’s 10Q (you can see it here) runs to 39 pages, which isn’t particularly long. But 10 pages of that- 25%- are taken up by a risk factors section that starts on page 22. PacSun doesn’t even include any risk factors, though they refer to the list in their last annual report. Zumiez must have more conservative lawyers.
 
The risk factor I focused on, as we work our way over to Zumiez’s strategy, was the one that said, “Our failure to meet our staffing needs could adversely affect our ability to implement our growth strategy and could have a material impact on our results of operations.”
This comes after, and is in addition, to the one about how they could be screwed if they lose key management, which is a risk factor most companies include.
 
Basically, they’re talking about getting enough of the people who work in the stores. You might think that in this economic environment it would be a little easier to get people. It is, but Zumiez doesn’t just want competent people. It wants competent people who are active action sports participants and who are committed to the life style. Unless they want to take some big risks with their business model, they can only grow as fast as they can recruit and train those people. They think they have the potential to open another 175 to 275 stores in the U.S.
 
Next, here’s CEO Rick Brooks talking about why Zumiez is successful:
 
“The foundation of our success and what will continue to strengthen our position as the leading branded action sports retailer is our product and our people. Our diverse mix of branded apparel, footwear, accessories, and hard goods, combined with a unique shopping experience, clearly distinguishes us from the competition. Our merchandise teams continue to do a great job fine-tuning our product assortments by mixing new hard-to-find brands with larger core brands that reflect current trends in demand.”
 
Then, after talking about the difficult economic conditions, he says the following:
 
“In this environment, the mall has become highly promotional. However, we believe that as a specialty retailer of product that’s hard to find elsewhere and with the in-store and Web experience that we provide, our concept reflects the quality of our strategies. We’ll benefit in the long run by staying true to this concept and will sustain our position as a quality destination lifestyle-driven retailer.”
 
They don’t much care, in other words, what others are doing. They are going to keep focused on doing what they do. CEO Brooks put it this way in response to an analyst’s question about Zumiez’s competitors. “It’s not that so much we’re concerned with what they’re doing, Jeff, from my perspective. It’s we’re concerned about what we need to do and what our plans are.”
 
And they have the balance sheet, cash flow, and marketing positioning as the core shop in the mall to back that up. To be fair, they also have the happy circumstance of not getting much of their revenue from the juniors business.
 
I guess I’ll let Rick Brooks continue to write this article for me.
 
“…we have a lot of brands you can’t find elsewhere. So, we are not inclined to discount brands that can sell at full price. In fact, again, I think we’ve been successful in being able to push through the price increases where there is demand for those brands.”
 
We have been trying to assort — do local assortments in stores from virtually the very beginning of Zumiez under a very simple sales-driven philosophy that you should put things in stores that people want to buy. Now with scale, that gets to be tougher and tougher, so over the last number of years, going back 10 or 15 years, we have been instituting technology enhancements to allow — to provide better tools for our merchandise teams to assort — to do local store assortments.”
 
Well, I don’t know, I guess I can see some logic to putting stuff in stores people want to buy. How exactly do you know which stuff should be in what store?
 
As CEO Brooks says, they’ve been working on that for 10 to 15 years. Serious competitive advantages don’t just spring fully formed out of a planning meeting. They are still working on it, and are “…instituting new business intelligence reporting tools.”
 
In the longer term, “…we’ll be able to do all sorts of things that we’ve never be able to do at a much more detailed level. Better size optimization within that structure, right color size, getting more fine-tuned about what mix of products and categories and lifestyles go together in each store.”
 
“And ultimately, we would — give us a few years out, there will be another evolution in that relative to around planning rack capacity and building rack capacity into this model.”
 
You can see, as I said in the title, why Zumiez’s systems are a competitive advantage. Like their personnel and hiring policies. Like their core store positioning in the malls. They aren’t invulnerable to a poor economy and see their customers buying closer to need. But thanks to certain operational efficiencies developed over many years (which is the only way they can be developed) and a consistency in applying their business model they are as well positioned as any retailer in our industry to deal with it.

 

 

2 replies
  1. glenn taylor
    glenn taylor says:

    Shortage of store staff. Zumies has always been a great shopping experience and perhaps it was enough that they sold action to draw authentic enthusiast to want to work their.
    Now that a pay check is no longer enough to entice people to work, A companies core values become important to attract , retain and enhance both customers and employees. not to mention shareholders. Further developing companies core values engaging in them and communicating them outwards attracts like minded people. Great examples of this are Quicksilver and surfriders foundation
    Patagonia and 1% for the planet. Toms shoes & glasses, Me to we and free the children etc. Purpose beyond self seems to be attached to business these days. Lance secretan wrote an interesting book about higher ground leadership that discusses some great concepts here. A great quote ” Profit to a company is like oxygen to a human, nessesary to enable what we do but not why we do what we do” or something along those lines. Thanks for your continued information.
    glenn

    • jeff
      jeff says:

      Glenn,
      I wonder if our current, extended, economic problems won’t make the pendulum swing back to just glad to have a job and a regular pay check. I tend to agree with you that it’s a good thing if employees identify with their employer’s core value. That kind of consensus makes the business run better. But right now, I know an awful people who are just glad to have, or would love to have, a job.

      thanks for the comment.
      J.

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