Zumiez’s October 30 Quarter and Its Position in the Market

This shouldn’t take long. The balance sheet has more cash than a year ago, no long term debt, and is solid. The inventory increase of 8.8% since a year ago is a lot less than the 20% sales increase for the quarter (but remember that inventory is at cost and revenue at retail price). Zumiez indicated in the conference call that efficiencies provided by the new Southern California warehouse had a lot to do with their ability to better control inventory. They expect to continue to increase inventory by less than sales.  You can see the complete filing here.

Sales grew from $113 million to $136 million. Gross profit margin rose from 35.4% to 39%. If that looks low, remember they include occupancy and certain other costs in their cost of goods sold calculations. Other companies don’t do that. They indicated the increase was about half product margin improvement and half a decrease in store occupancy costs. In 2007 it cost them around $440,000 to open a new store. Now those costs are down to about $340,000 due to better deals with landlords and their improved operations.

Ecommerce sales for the quarter were about 4.4% net sales for the quarter, or a bit less than $6 million. In the same quarter the previous year, they were 2% of net sales, or about $2.3 million. They expect that ecommerce will be “…substantially larger for us over the next five years,” but they weren’t specific.
Management indicated they were learning a lot from the ecommerce business. They can read trends faster and allocate inventory better. They noted that operating margins in stores and on the web were not very different. Those of you who have actually invested in the systems and people it takes to run a really responsive ecommerce site won’t be surprised at that.
Selling, general and administrative expenses were up 7.3% but fell as a percentage of sales from 28% to 25.1%. Of the 300 basis points decline, 140 came from “store operating expense efficiencies and the rest from accounting changes I won’t bore you with the details of. Net income rose 143% to $12.3 million. That’s 9.1% of net sales compared to 4.5% in the same quarter last year.
Now for some fun facts about Zumiez.
  • 400 stores in 37 states. They opened 27 in 2010. They expect to open “a handful” in Canada in 2011, but not enough to have a meaningful impact on revenue. You know, I wonder if they ever really thought they were going to buy West 49 or if they just hoped to get a peek at their numbers.
  • They’ve still got this 14.3% interest in a manufacturer of apparel and hard goods I reported last quarter. They still won’t tell me who it is or how they got it. Rats.
  • Unredeemed gift cards at October 30 were $1.83 million. They don’t count them as income until they are used, but after 24 months they take unused card balances as revenue because their experience is that they won’t ever be used after that. Got to love that free money.
  • Pages 29-38 of their 10Q are all risk factors. It’s the longest section of the report. I just find it interesting that a company that seems to be doing so well could feel the need to talk about so many things that might go wrong. Must be the lawyers.
  •  Private label represented 15.7% of net sales last year. That number will be higher for 2010, but they didn’t say what it will be.
  • Their long term goal is to have 600 to 700 stores. I imagine that’s based on their analysis of how many malls there are that can support their concept. But I wouldn’t be surprised if they’ve looked at what happened to PacSun and said to themselves, “Nobody need 900 Zumiez stores.”
  • They bought snow product cautiously and might be a little tight on inventory if the snow conditions are good. Good for them. Leftover snowboard inventory is a dagger in the heart. Okay, maybe I’m overdramatizing, but you know what I mean.
  • Back in 2006, their sales per square foot were about $500. They think they could reach their operating goals now with square foot sales of maybe $440 or $460 due to operating leverage, the web, and their new warehouse. 
CEO Brooks say they want to “Stay true to who we are and focus on things that distinguish Zumiez from the competition.” That means carrying hard to find brands, providing a unique shopping experience, and having the best in class customer service. My guess is that their growth will be constrained by their ability to staff stores with the kind of action sports enthusiasts they want, but I’d characterize that as happening in a good cause. They’d be crazy to grow faster than they are able to perpetuate their culture in new stores.
Zumiez, like everybody else, is concerned about the strength of the economic recovery, issues with certain product supply, and increasing product cost due to cotton costs, labor, shipping, and other factors. Yet they seem uniquely positioned as the only hard goods carrying mall shop with at least a feel of independent core shops. And the days of it being evil to be in mall are long gone based on the other brands that are there.   



2 replies

Comments are closed.