Zumiez reported their results for the year and quarter ended February 1st on March 12th. Great quarter and year. But about a week after their fiscal year ended, the impact of the pandemic on the economy became apparent. For all retailers who sell directly to the consumer, in our industry or not, the world is changing.
After I read the 10-K and conference call transcript, I asked myself if anybody cared, for any industry company, about financial statements that became potentially irrelevant financial history in ten days’ time?
While I was thinking about it, Zumiez announced the closing of all its stores and then, on April 2nd, a series of personnel and financial actions in response to the economic downturn (that’s way too benign a term). That convinced me I was right- nobody was likely to care about ancient history. You can read the two press releases on their investors’ web site.
It’s not business as usual, and it’s not going to be for a while. The result is that my evaluation of public company financial statements is going to change and I will focus on lessons we can learn on how to try and get through this and the actions you might consider taking.
Here is a very brief summary of Zumiez’s financial results for the year ended February 1st, 2020.
Revenue rose 5.7%. Gross profit was up from 34.3% in the prior fiscal year to 35.4%. SG&A expenses, as a percentage of sales, declined from 28.1% to 27.1%. Operating profit rose from $61.1 to $85.8 million. Net income was up 48.0%, rising from $42.2 to $66.9 million.
Like I said, an outstanding result. Meanwhile, the balance sheet shows $251 million in cash and no long-term debt (except for lease liabilities), and a current ratio of 2.58. It’s a good time to have a solid balance sheet.
Enough financial statement analysis. Here’s a list of the actions that Zumiez announced on the second.
- Suspending hiring, laying off virtually all of our part-time staff, eliminating substantially all planned fiscal 2020 bonuses and delaying majority of merit raises,
- Lowering operating costs, including travel, marketing and other non-essential items,
- Reducing capital spend by delaying or cancelling select projects,
- Reducing planned inventory receipts by cancelling or delaying orders,
- Suspending rent payments while we negotiate rent relief with our landlords and delaying or canceling planned new store openings,
- Extending payment terms for both merchandise and non-merchandise vendor invoices and
- Pausing its share repurchase program until there is more visibility to store openings.
Read the list carefully please. Zumiez is saying, “This is going to be bad, but we’re not sure how bad.” And if anybody reading is dumbstruck by the list and wondering why such a solid, profitable company as Zumiez would take these steps, you are one beer short of a six pack (You can probably guess which beer it is).
That Zumiez needs to take these steps is awful. That they have taken them- hard and fast- is exactly right, and I hope you are reviewing your business and taking steps just as urgently. In their March 12 conference call, they guided to a comparable store increase of 2% to 4% in the quarter that ends April 30. Pretty sure they’re not expecting that now. You’ve got to be impressed with how quickly Zumiez reacted.
When I’ve written about cash flow, and when I’ve had to manage cash flow in hard times, I’ve always focused on the cumulative impact of expense reductions. That is, if you wait two months more than you could have waited to cut $10,000 in expenses, you’ve got $20,000 less than you could have had. Zumiez’s SG&A expenses in their last fiscal year were $281 million. They’ve got $251 million in the bank. If this is worse than we hope and lasts longer than we expect, reducing expenses sooner rather than later could be very, very important.
I’d call steps like the ones Zumiez is taking tactical. They are being as ruthless as I perceive them to be because they just don’t know when we’re going to come out of this dark tunnel and what the landscape will be like when we get there. Will the strategy and company culture they’ve pursued and developed over decades still be valid? Will people shop the same way? Will they want, or be able, to buy the same merchandise as often? Will consumers recognize that they might not need all the stuff they’d been buying before even if they can afford it? Am I even asking the right questions?
On financial statements across the industry, for at least the next few quarters, I’ll be watching to see what kind of impairment charges companies take on their goodwill and intangible assets. As every company who has to take one always hastens to point out, they are non-cash charges. However, they are indicative of projected future cash flows (cash flow relating pretty directly to asset value). Those kinds of charges might give us some insight into how companies are thinking about the future.
With regards to Zumiez, I’ll be specifically interested to hear how their store closings impact their online business and omnichannel strategy. In what I thought was a brilliant move (I was chagrined when they had to point out the importance of it to me) Zumiez started, a while ago, doing most of their online fulfillment through their stores as a way to leverage their expenses not to mention put the customer relationship in the hands of their associates. Here’s how they describe it:
“In-store fulfillment is a key part of strategy that we believe will drive long term market share by leveraging the strengths of our store sales team, providing better and faster service to customers, improving product margins, maximizing the productivity of inventory, providing additional selling opportunities, and utilizing one cost structure to serve the customer.”
What’s the impact of the stores being closed? There wasn’t any discussion of this in the most recent conference call. I would love to have a conversation with Zumiez about how they are managing inventory. Do they see the relationship between ecommerce and brick and mortar changing?
The problem is the unknown unknowns. Nobody has ever managed through a situation like this. Zumiez had a great year. Then they had to switch gears and decide- quickly- to take some very harsh actions. You may take different actions but please have the mindset to recognize the need to identify and take them.