I would first like to thank Zumiez for keeping their 10K to only 75 pages, simplifying my task and reducing my work load. I have a theory that the best companies have the shortest 10Ks; business models that are simple to describe and fewer problems to explain. Maybe that’s a new investment strategy.
Zumiez’s financial results, like with every other publically traded company in any industry, reflect the recession and their efforts to manage through it. There was inventory control, expense management, a reduction in capital expenditures, and focus on continuing to follow their basic strategy (which can be done, as usual, when you have a strong balance sheet like Zumiez’s).
Zumiez ended their fiscal year with 377 stores in 35 states averaging 2,900 square feet each. As they note, their size seems to leave them room to grow given the number of stores that other similar retail chains have. New store openings have declined from 58 stores in fiscal 2008 to 36 in 2009 and a projected 25 in 2010.
Their customers are “…young men and women between the ages of 12 and 24 who seek popular brands representing a lifestyle centered on activities that include skateboarding, surfing, snowboarding, BMX and motocross.”
They go on to say:
“Our stores bring the look and feel of an independent specialty shop to the mall by emphasizing the action sports lifestyle through a distinctive store environment and high-energy sales personnel. We seek to staff our stores with store associates who are knowledgeable users of our products, which we believe provides our customers with enhanced customer service and supplements our ability to identify and react quickly to emerging trends and fashions. We design our stores to appeal to teenagers and young adults and to serve as a destination for our customers. Most of our stores, which average approximately 2,900 square feet, feature couches and action sports oriented video game stations that are intended to encourage our customers to shop for longer periods of time and to interact with each other and our store associates. To increase customer traffic, we generally locate our stores near busy areas of the mall such as food courts, movie theaters, music or game stores and other popular teen retailers. We believe that our distinctive store concept and compelling store economics will provide continued opportunities for growth in both new and existing markets.”
They talk about this strategy in more detail in the 10K and you can see the whole thing at http://www.sec.gov/Archives/edgar/data/1318008/000119312510064532/d10k.htm. Focus on pages one through nine.
Ignoring whether or not you think this strategy is valid (their history tells us it has been), you’ll notice that this description of their stores and how they position themselves could essentially be the same description that any independent core retailer would use. Except of course the core retailer wouldn’t be in the mall (I guess by definition?) and doesn’t, therefore, have the ability to locate in high traffic areas in the mall. So your typical independent core retailer might to be more dependent on destination traffic than a Zumiez. Zumiez pursues, on a national scale, the same branding strategy the best independent retailers pursue. “We seek to build relationships with our customers through a multi-faceted marketing approach that is designed to integrate our brand image with the action sports lifestyle.” They spent $822,000 on advertising in fiscal 2009.
In other words, as I’ve said a few dozen times before, the best retailers, chain or independent, give credibility to the brands they carry and do not rely on those brands to define them. Zumiez is clearly not dependent on a handful of brands. No single brand accounted for more than six percent of net sales in 2009. Their private labels in total accounted for 15.7% of net sales, up only slightly over the last two years. Ecommerce sales represented 2.3% of the total, up from 1.1% two years ago.
And Zumiez has undeniable advantages in terms of negotiations with vendors and landlords, systems, and overall efficiencies associated with size. Like they say, “compelling store economics.” Genesco, by the way, pretty much said the same thing. So would any multi hundred store retailer. Here’s another kind of long quote that described part of that advantage.
“We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandise strategy. We utilize a broad vendor base that allows us to shift our merchandise purchases as required to react quickly to changing market conditions. We manage the purchasing and allocation process by reviewing branded merchandise lines from new and existing vendors, identifying emerging fashion trends and selecting branded merchandise styles in quantities, colors and sizes to meet inventory levels established by management. We also coordinate inventory levels in connection with our promotions and seasonality. Our management information systems provide us with current inventory levels at each store and for our Company as a whole, as well as current selling history within each store by merchandise classification and by style.”
Pretty powerful stuff. Then I noticed that in 2008, Zumiez’s net investment to open a new store (net of inventory and landlord contribution) was $311,000. In 2009 it was down to $221,000. In part that’s because of economic conditions, but it’s also indicative of the advantages of scale.
Let’s talk about the numbers while all this strategic stuff sinks in. I’ll come back to it in my conclusions.
Net sales for the year were about even, falling $1 million to $407.6 million. Comparable store sales were down 10% after having been down 6.5% the previous year. Net sales per store were down 12.8% from $1.24 million to $1.08 million. Comparable store sales had grown an average of 12.6% a year in fiscal 2005 to 2007. Gross profit as a percent of sales actually grew from 32.9% to 33.1%, an indication of good inventory management and control of the need to discount. This gross profit percentage may look a bit low, but you have to consider how the company calculates it.
“Cost of sales consists of branded merchandise costs, and our private label merchandise including design, sourcing, importing and inbound freight costs. Our cost of sales also includes shrinkage, certain promotional costs and buying, occupancy and distribution and warehousing costs. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold.”
I agree. There’s no right or wrong way to do this but, though detail is lacking, I think Zumiez includes some costs that other don’t.
Selling, general and administrative expense rose from $109 to $122 million both due to store openings and, I assume, because Zumiez had the balance sheet to let it continue to pursue its strategy. As a percentage of sales, it rose 3% to 29.9%.
Operating profit fell by half from $24.6 to $12.7 million. Though cash and cash equivalents grew from $78 to $108 million, interest income fell from $2.059 to $1.176 million, reflecting not only the difficulty in finding yield under current conditions but, I suspect, an unwillingness to take risk. Net income fell from $17.2 to $9.1 million for the year.
Comparing fourth quarters you can see what looks like the beginning of some level of economic recovery (this is not unique to Zumiez). Sales rose 5.5% from $125.5 to $132.4 million. Same store sales had fallen 13.4% in the quarter ended Jan. 31, 2009. They only fell 1.7% in the quarter ended Jan. 30, 2010. Okay, so maybe that isn’t good news but it’s sure less bad. Gross profit as a percent of sales was up from 32.4% to 36.3%. Net income rose from $6.3 to $8.8 million in the quarter ended January 30, 2010 compared to the same quarter the previous year.
The balance sheet has actually strengthened slightly from last year by the measures I use and is in good shape. I won’t bore you with a detailed analysis of nothing interesting.
Now we’re back to those pesky strategic issues and you know what? I don’t think I’m going to write a new conclusion. I’m just going to go see if I can’t use the same one I used when I wrote about Genesco (the owner of Journey’s) a few days ago. Here it is. I’m quoting myself, which is a little strange.
“I wrote not too long ago about Billabong’s retail strategy. They might agree with Genesco executives about how the retail environment is evolving.”
“My own expectation is that due to some of the pressures on core store described above, their numbers will tend to decline until we have just the right number to service the enthusiasts who are truly prepared to pay extra for expert advice and service in a community based environment. I don’t know how many stores that is or how long it takes, but when it happens, we will have come full circle in the action sports core store business; because that’s how it use to be.”
Zumiez thinks they can be a core store in a mall. They are the only one who puts it quite so directly, but others are thinking that way too. If they’re right, and they have other business advantages (as described above) what does the model of a successful independent core retailer look like?
I’m going to the IASC sponsored skateboarding conference this month and am going to moderate a panel discussion on retailing. As you can see, I’ll have some interesting questions to ask.