Zumiez Downgraded to Sell

Zumiez Inc. (ZUMZ - Analyst Report) is a specialty retailer of action sports related apparel, footwear, equipment and accessories.

Zumiez's first quarter EPS topped our estimate by $0.11 thanks to a higher-than-expected gross margin. However, management's second-quarter guidance was disappointing. The company expects comp-store sales to decline in the low-to-mid 20% range with a net loss per share of $0.14-$0.17.

Our previous EPS estimate was a loss of $0.09/share. We are reducing our earnings estimates for the remainder of fiscal 2009 and fiscal 2010.

We expect sales trends to remain weak for the next several quarters. The stock trades a premium valuation of 156x our fiscal 2009 EPS estimate and 52x our fiscal 2010 EPS estimate.

The combination of weak business trends and a premium stock valuation point to a lower stock price. As a result, we are downgrading the Zumiez from Hold to Sell and lowering our target price from $7 to $5.