During the quarter, Zumiez increased its sales and reduced its loss compared to the same quarter last year. It continued to follow its strategy and its balance sheet remains solid- perhaps a bit stronger than a year ago.
I’ve generally been a supporter of Zumiez’s strategy. It’s not that they necessarily know any better than any other retailer how things are going to shake out as retail consolidation winds its way through the industry, or that they are certain how, exactly, brick and mortar and online are going to evolve and influence each other. But they’ve made a couple of bets (that we’ve been talking about for some quarters bordering on years now) that are complementary to their long-term strengths and strategies and that offer them the data and flexibility to respond when, inevitably, things don’t turn out exactly as they expect.
As usual, they kind of allude to those in the conference call almost challenging the analysts to ask about them (not that they’d give detailed answers if asked), but the analysts never seem to rise to the bait.
I’m going to ask but, as usual, I won’t have solid answers based on the data I have or any expectation that I can get them in the detail I’d love.
As you consider this, remember that Zumiez’s grade A, number 1 critical priority is transitioning from an action sports retailer to “…a leading specialty retailer of apparel, footwear, accessories and hardgoods for young men and women who want to express their individuality through the fashion, music, art and culture of action sports streetwear, and other unique lifestyles.” It’s funny they never talk about that though they’ve acknowledged it in their public filings as you can see in the quote. They must make that transition to grow as a public company. If they can do it, they will grow. Brands, we all know, are now retailers and retailers are brands. The result is that Zumiez has the same issue as a brand; the further they get from their core constituency the harder it can be to differentiate themselves as a brand and maintain brand integrity. Let’s take a look at the financial results.
Sales rose 7.9% from $178.3 to $192.2 million. Comparable sales rose 4.7% and accounted for $8.3 million of the increase. The addition of 19 new stores was responsible for the rest. They ended the quarter with 692 stores. 605 are in the U.S., 51 in Canada, 30 in Europe and 6 in Australia.
North American sales rose $10.6 million or 6.4%. Europe and Australia were up 27.1%, or by $3.4 million. Zumiez didn’t own Australian retailer Fast Times in last year’s quarter, so that accounts for a chunk of the international growth. Remember, a strengthening U.S. dollar has made those international sales less valuable when translated into U.S. currency.
The gross profit margin rose from 30.8% to 31.1%. Most of the increase came from spreading fixed costs across more stores. SG&A expense was up 8.2% from $56.0 to $60.6 million, “…as we continue to absorb minimum wage increases across the country and invest in important initiatives for our long-term success…,” CFO Chris Work tells us. As a percent of revenues, it was constant at 31.5%.
The operating loss declined from $1.14 million to $762,000. The net loss fell from $838,000 to $608,000. But it’s still a loss.
Now for the stuff I can never get enough details on. Three things; trade areas, their new customer engagement suite, and new brands.
I guess retailers used to call trade areas regions. I think the name change for Zumiez is significant, as it implies not just a connection with ecommerce, but more fluidity in servicing those areas. CEO Rick Brooks says, “…the pace of new store openings in North America continues to moderate, as we are close to achieving the optimal number of locations we believe are required to reach our customers and service them at a level they come to expect when engaged with our brand.” “Our focus,” he continues, “remains on not having one more physical store than is necessary to service our customers in each trade area.”
Well, that’s all perfectly clear. I mean, why would I want to know:
- How many trade areas there are?
- How are they determined in the first place?
- How they vary in size and how they change with conditions?
- How you determine what “enough” stores in a trade area is?
- How ecommerce is impacting store location and layout?
- How revenues will grow once the number of stores stops growing?
- How come nobody asks any of this in the conference call?
Let’s leave the list at that and move on to their customer engagement suite. Rick says, “We’re continuing to roll out our new customer engagements suite across the U.S. store fleet. We’re very excited about this system enhancement, which in concert with existing omnichannel capabilities gives us new ways to learn about our customers and engage with them in a more meaningful way.”
“Through this level of engagement in conjunction with face-to-face interaction in stores, we’ll be able to keep our finger on the pulse of local trends, allowing us to provide hyper localized, authentic product assortments and a superior personalized brand experience for our customers.”
As I’ve said before, I wonder if Zumiez knows what kind of useful surprises they’ll get once the software algorithms start crunching the data. Obviously, it will contribute to the management of their trade areas and the answers to some of the questions above. The other thing it will do, which I just love, is contribute to getting the right amount of inventory of the right brands to the right place at the right time, reducing, I expect, markdowns and working capital investment in inventory.
I am wondering if the system is rolling out on schedule, and I’m curious what kinds implementation surprises they’ve had.
On to new brands. Zumiez, for the last year or two and this year, has launched something like 100 brands. Not house brands. Not brands they created. Brands they become aware of and choose to work with.
I have a hint for any brands that expects to approach Zumiez to see if they might be one of those brands. I imagine you will be asked to describe your brand and explain what makes it different. Do not, repeat do not, say anything resembling, “It’s just like Brand X.” Zumiez has already seen Brand X and probably carries it if it’s any good. Actually, you have a bigger problem. If the best you can do is to describe your brand in terms of other brands, you probably don’t have much of a brand. Think that through- and not just so Zumiez will love you.
I’ve always told retailers, especially in recent years, that the biggest risk was to take no risk at all, and I’ve encouraged them to try new brands. Yes, new brands are risky. But not so much for Zumiez. They have an up or out portfolio approach to new brands and a process for bringing them in and culling them that at worst minimizes new brand risk and at best pretty much eliminates it. I would love to know more about that process- both the in boarding and the culling part.
No single new brand, or probably any 20 new brands are much of a risk for Zumiez. Their size, the new customer engagement system, and the fact that they’ve now done this with so many brands pretty much guarantees that.
Rick puts it like this. “We remain focused on finding new and unique brands across all of our departments. This year we’re on plan to launch over 100 new brands, bringing the newness in localized fashion that our customer is looking for. These emerging brands, coupled with the growth of more established brands within our portfolio demonstrate the power of our business model.”
Remember, they can take these brands to Europe, and now Australia. I imagine they are focused on using the same process of brand identification, whatever it is, in both those places. Perhaps brands they find there will end up in North America.
Just a couple of more comments. In the conference call Rick characterizes the U.S. and Canadian markets as mature. As a result, he expects the focus will be on “…localization of our sales effort and optimization of the cost structure.” Somewhere else, he notes they’ve got “…a pretty aggressive remodel budget…”
I’m curious about the “mature” comment. I don’t think he means to imply no growth opportunities in those markets. Because they are expanding outside of Zumiez’s original action sports franchise there should be room for growth if they’re successful. I also think (maybe I mean hope) that the evolution of the trade area may offer some growth opportunities. But that comes under the heading of things I don’t know for sure.
The “remodel” comment strikes a related chord with me. Once again, I don’t have any solid information and I’d love to. I hypothesize that the remodeling they are doing may be impacted by the number and turnover of brands they are launching, the fact that online orders are now managed and filled through stores, and the trade area concept.
I am and have been optimistic about Zumiez, but that doesn’t mean I’m right. I’m trying to extrapolate their generalities into opportunities, based on their strategies as I see them, that may or not be there. The thing I’d most like to see is a positive number on their bottom line.