A couple of years ago Zumiez stopped reporting comparable store sales changes and started reporting just comparable sales changes. That is, they no longer told us how their brick and mortar stores were doing in isolation from ecommerce.
They were one of the leaders in making this change. Now, it’s how most retailers report. Their argument was that they needed to think of their market as one sales channel- the proverbial omnichannel. It didn’t matter where the sale “happened” and they couldn’t always tell where it “happened” anyway. If a customer first saw a product they purchased on their phone in the store, where’s the credit for the sale?
I agreed with them at the time. I still think organizational cohesiveness requires that kind of thinking. To be in step with its customers, nobody who works at Zumiez can care where the process that leads to a sale begins or ends- because the customers don’t care.
However (you just knew there was a however coming), as I try and figure out how Zumiez, or any other brand with stores, is doing I find myself wanting to know more about how the brick and mortar business is changing.
One piece of common knowledge about the retail business is that the number, location, role, size and layout of brick and mortar stores is evolving. Another is that ecommerce revenues, however we define them, are growing as a percent of total revenues. I’m often leery of the things that “everybody knows” but in this case I believe it to be accurate.
With its concept of trade areas, new systems, and in store fulfillment of online orders, it may be that Zumiez telling me how much comparable brick and mortar store sales increased or decreased won’t help me figure out what’s going on.
But actually, Zumiez and the rest of you retailers, I guess I would like to start hearing about comparable store sales again. It wouldn’t give me the whole answer, but it’s a piece of data that could help me get my arms around the issue of how your brick and mortar is changing. I might, for example, not care if comparable store sales were declining if other revenues were growing, store numbers were static, and leverage on operating costs were improving.
If you read carefully, Zumiez gives some insights into what’s working for them in terms of store management. As background, know that their sales for the May 4 quarter rose 3.2% compared to last year’s quarter from $206.3 to $212.9 million. Pretax income grew from a loss of $1.908 million to a profit of $1.973 million.
First, they note a 1.3% improvement in gross margin for the quarter ended May 4th to 31.2%. They tell us in the 10-Q, “The increase was primarily driven by 40 basis points of leverage in our store occupancy costs, a 20-basis point decrease in shipping and fulfillment costs and a 10-basis point increase in product margin.”
Their SG&A expenses as a percent of sales fell by 0.40%. “The decrease was primarily driven by 40 basis points of leverage in our store costs.”
Zumiez told us some time ago that they’d moved responsibility for ecommerce fulfillment and for the customer relationship to the associates in the stores. This, it seems to me, is how Zumiez is giving their customers the ability to shop when and where they want. Here’s what CEO Rick Brooks says in the conference call.
“With one inventory that is accessible from all customer touch points, integrated sales teams, aligned goals and value set and localized fulfillment, we are well positioned to scale the business in today’s integrated world.”
When Zumiez says they are “leveraging” costs, they mean they are using the same assets to do more. That is, each dollar of revenue brings a bit more to the bottom line. Every retailer has to do that when we’re selling widely available, hard to differentiate products. Many of those who can’t or won’t aren’t going to survive a recession.
Revenue growth just ain’t what it used to be. In the conference call, Zumiez reiterated its “…expectation of consolidated comparable sales growth in the low-single digit range for fiscal 2019.”
Later in the conference call Rick says, “…we believe that we have still a lot opportunity around optimization. And when we talk about it, we always talk about localization optimization as a combo and the two things work together. We can be better, faster and localize fulfillment is a great example of this.”
So when Rick says they are positioned to “scale the business,” I’m pretty sure he’s not just talking about revenue, where I expect a challenge for most retailers. There are still significant opportunities in leveraging costs.
To give you a little more perspective, let’s take a look at Zumiez’s sales break down for the quarter by region.
At 83.1% of the total (83.0% in last year’s quarter) the U.S. continues to dominate. They note that foreign exchange rates reduced revenue by $2.7 million during the quarter compared to last year’s quarter. A strong dollar will do that.
For the quarter, “The [sales] increase primarily reflected an increase in comparable sales of $6.5 million and the net addition of 7 stores (made up of 4 new stores in North America, 7 new stores in Europe and 2 new stores in Australia partially offset by 6 store closures in North America) subsequent to May 5, 2018…By region, North America sales increased $6.7 million or 3.7% and other international sales decreased $0.1 million or 0.2% for the three months ended May 4, 2019 compared to the three months ended May 5, 2018.”
In North America, then, they increased sales by $6.703 million (only $326,000 of which was in Canada) while opening four stores and closing six. That’s a good result, but where did the sales increase come from? Online or brick and mortar? Do I care as long as I see those costs being leveraged? Is that an adequate measure of improving use of brick and mortar?
Not for me. See, I want to know how their criteria for opening and closing stores has changed. Size? Layout? Selection of location? How’s the concept of trade areas, introduced a couple of years ago but about which we’ve heard very little since that introduction, working out? How are the responsibilities of the people working in the stores changing as a result of housing ecommerce responsibilities in stores?
Before I close here, I have one piece of balance sheet housekeeping that perhaps some of you are interested in. If you look at the balance sheet, you’ll see a long-term asset called, “Operating lease right-of-use-assets. It’s for $302 million. You’ll also see a new current liability called “Operating lease liabilities” for $54.5 million and a long-term liability called “Long-term operating lease liabilities” for $293.4 million.
These were not on Zumiez’s last balance sheet dated February 2nd. Lease liabilities were previously disclosed in a financial statement footnote, which I’m sure you all read carefully. Yeah- neither do I. New accounting standards require both the value and the liability associated with these leases be included on the balance sheet. So now they are and that’s what you’re seeing.
Zumiez had a strong quarter. Long term, I expect them to do well compared to many of their competitors. I know not to expect them to answer the questions I’ve asked in their public documents if they don’t have to, but it’s information I’d need to more fully evaluate their strategy and prospects.