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Zumiez (ZUMZ) Q2 Loss Lower than Expected, Q3 View Drab

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Zumiez Inc. (ZUMZ - Free Report) came out with second-quarter fiscal 2016 results, wherein both top and bottom lines fell year over year. However, backed by the company’s solid expense management efforts, the bottom line surpassed expectations, thus marking its fourth straight positive surprise in a row.

Zumiez posted a loss of 3 cents per share for the second quarter, narrower than the Zacks Consensus Estimate of a loss of 8 cents. However, in the year-ago period, the company had recorded adjusted earnings of 11 cents per share.

ZUMIEZ INC Price, Consensus and EPS Surprise
 

ZUMIEZ INC Price, Consensus and EPS Surprise | ZUMIEZ INC Quote

Further, the tough retail environment continued to weigh upon net sales, which dipped 0.9% year over year to $178.3 million, but were in line with the Zacks Consensus Estimate. The year-over-year decline in the top line was attributable to soft comps, partly compensated by the addition of new stores.

Quarterly comps dropped 4.9%, following a 4.5% decline registered in the year-ago quarter. Second-quarter comps bore the brunt of lower transaction volume, somewhat offset by a rise in dollars per transaction.

Concurrent with the second-quarter results, Zumiez reported its sales data for August, which marked its 17th consecutive month of negative comps. Comps for the month fell 1.1%, compared to a 10.7% plunge recorded in the same month a year ago. Nonetheless, net sales for the four-week period ended Aug 27, 2016, grew 2.6% year over year to $89.5 million. Further, the company stated that comps started improving as the second quarter progressed, largely fueled by Zumiez’s men’s category.

Quarter in Detail

In the reported quarter, gross profit fell 5% to $54.8 million, with the gross margin contracting 130 basis points (bps) to 30.8%. The contraction in gross margin was a result of occupancy cost deleverage, partly offset by higher product margins.

Zumiez’s selling, general and administrative expenses escalated 6.7% to nearly $56 million and as a percentage of sales, the same increased 230 bps to 31.5%.

The company posted an operating loss of $1.1 million in the quarter, as against an operating income of $5.3 million recorded in the year-ago period.

Financial Update

As of Jul 30, 2016, Zumiez’s cash and marketable securities were $52.3 million, down 35.3% year over year owing to share buybacks and capital expenditures, offset by cash flow from operations. Total shareholders’ equity at the end of the quarter was $280.2 million.

Also, during the quarter, the company repurchased roughly 447,000 shares for $6.7 million, that took its year-to-date share buybacks to $18.3 million. As of the end of the second quarter, the company had shares worth $36.1 million remaining under its standing authorization. Further, it spent around $11.9 million as capital expenditure on a year-to-date basis.

Store Update

During the second quarter, Zumiez introduced 9 North American and 1 European store, which took its total store count to 674 as of Aug 27, 2016.

In fiscal 2016, the company intends to introduce nearly 29 new stores, which include around 7 stores in Europe and up to 6 stores in Canada.  

Other Developments

Zumiez announced that on Aug 31, 2016, it acquired all shares of the Australian specialty retailer – Fast Times Skateboarding ("Fast Times"). The deal, valued at $6.9 million was a combination of $5.5 million in cash and stock worth $1.4 million. Founded nearly 8 years back, this retailer of skateboards; hardware; apparel and footwear currently  operates 5 stores, apart from operating through its website www.fasttimes.com.au.

Management stated that Fast Times will form a significant part of Zumiez’s retail channel, as it is now part of the latter’s U.S., Canadian and European operations. Further, this acquisition is likely to help Fast Times expand further in Australia, with the help of Zumiez’s proficiency of enhancing brand and culture.

Guidance

While comps witnessed some improvement toward the end of the reported quarter, the overall retail environment remained challenging, mainly owing to weak consumer demand. In the face of such headwinds, Zumiez remains on track with its expense control and expansion strategies, which are aimed at placing it on the growth curve and generating profit in the near term.

Based on the current scenario, management issued a subdued outlook for the third quarter of fiscal 2016. The company envisions net sales for the quarter in the $209–$213 million range, while comps growth is expected in a range of negative 2% to flat, over the same period.

Finally, for the third quarter, the company envisions earnings in a band of 21–26 cents per share. The Zacks Consensus Estimate is currently pegged at earnings of 31 cents per share.

Stocks to Consider

Zumiez currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , Tilly's, Inc. (TLYS - Free Report) and Urban Outfitters Inc. (URBN - Free Report) , each sporting a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

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