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Zumiez Inc. (ZUMZ - Analyst Report) – a mall-based specialty retailer of action sports apparel, footwear, equipment and accessories – reported adjusted earnings of 20 cents per share for second-quarter 2013, surpassing both the Zacks Consensus Estimate of 17 cents as well as the year-ago earnings of 16 cents.

Reported earnings, including a charge of 4 cents per share related to the acquisition of Blue Tomato, were 16 cents compared with 7 cents reported in the year-ago quarter, which included a charge of 6 cents related to the Blue Tomato acquisition and 3 cents related to relocation of the company’s e-Commerce center.

The year-over-year improvement was driven by top-line growth, inflated margins and higher comparable store sales (comps). However, a rise in expenses was the headwind.

Quarter in Detail

Net sales increased 16.9% year over year to $157.9 million. Quarterly sales were almost in line with the Zacks Consensus Estimate of $158.0 million.

Comps inched up 0.9% compared with an increase of 9.5% reported in the year-ago quarter. By category, the company witnessed positive comps growth in the juniors, hard goods, and footwear categories, while men's, accessories, and boy's generated negative comps.

During the quarter, gross profit increased 18.7% year over year to $55.1 million and as a percentage of sales, it expanded 50 basis points (bps) to 34.9%. The rise in gross profit margin was mainly due to absence of charges related to inventory costs concerning the Blue Tomato acquisition and relocation of the e-Commerce fulfillment center during the prior-year quarter.

Zumiez’s selling, general and administrative (SG&A) expenses increased 10.9% year over year, while as a percentage of sales, it contracted 170 bps year over year to 29.9%.

On a reported basis, operating profit for the quarter jumped over twofold to $7.8 million, while as percentage of sales, it expanded 220 bps to 5.0%.

Financial Update

As of Aug 3, 2013, cash and marketable securities were $95.0 million, falling 1.9% from $96.8 million as of Jul 28, 2012. The decline was due to capital expenditures and stock repurchases, offset by cash flow from operations. During the first half of 2013, the company generated a cash flow of $9.9 million from its operational activities as against $14.5 million in the first half of 2012.

August 2013 Sales Update

Zumiez reported 3.0% increase in comparable-store sales for the four-week period ended Aug 31, 2013. This compares with a comps rise of 3.7% for the four weeks ended Aug 25, 2012. The comps growth was due to rise in dollars per transaction and higher comparable store transactions.

Net sales increased 14.3% to $85.9 million from $75.2 million reported in the year-ago period.

Guidance

Zumiez announced its sales and earnings guidance for the third quarter of fiscal 2013. Management anticipates third-quarter revenues in the range of $187–$191 million, while comps are likely to range from flat to a 2% increase.

Based on sales projections for the quarter, the company expects earnings per share to be 39–43 cents. The earnings expectation also includes estimated charges of 4 cents related to the Blue Tomato acquisition. Operating margin is anticipated to be in the range of 10–11%.

For fiscal 2013, Zumiez expects capital expenditures to be around $36–$38 million. Further, depreciation and amortization expenses will be nearly $27 million. The company plans to expand its store base by opening 58 new stores in fiscal 2013, which includes 9 stores in Canada and 5 in Europe.

Other Stocks to Consider

Zumiez currently carries a Zacks Rank #3 (Hold). Apart from Zumiez, other stocks performing well in the apparel/shoe space include Citi Trends, Inc. (CTRN - Analyst Report), ANN INC (ANN - Snapshot Report) and The Children (PLCE - Snapshot Report). While Citi Trends has a Zacks Rank #1 (Strong Buy), ANN and The Children carry Zacks Rank #2 (Buy).

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