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Backed by strong merchandise, new store opening and e-commerce strategies along with improved margins, specialty retailer Zumiez Inc. (ZUMZ - Analyst Report) reported robust fourth-quarter 2011 result. The quarterly earnings of 60 cents per share beat the Zacks Consensus Estimate of 59 cents and surged 22.4% from the prior-period level of 49 cents.

Fiscal 2011 earnings was $1.20 per share, rising a penny above the Zacks Consensus Estimate of $1.19 per share and the year-ago earnings of 88 cents per share.

Net sales in the reported quarter climbed 17.7% to $183.9 million from $156.2 million a year ago. Comparable store sales rose 9.7% in the quarter compared with an increase of 13.0% in fourth-quarter 2010. Moreover, total revenue also surpassed the Zacks Consensus Estimate of $182 million.

The company’s yearly sales were up 16.1% to $555.9 million, outpacing the Zacks Consensus Estimate of $553 million.

Cost of goods sold in the fourth quarter increased 16.7% year over year to $112.4 million. Gross margin contracted 60 basis points to 61.1% in the quarter driven by increased costs. Selling, general and administrative expenses were $40.2 million, down 100 basis points to 21.9% as a percentage of net sales.

Nevertheless, the company reported an operating income of $31.3 million, up 30.4% from the year-ago operating income of $24.3 million in the prior-year quarter, resulting in an expansion of 160 basis points in operating margin to 17.0%.

Financial Update

At year-end 2011, cash and marketable securities were $172.8 million, a sharp increase of 34.2% from $128.8 million at the end of fiscal 2010. Total long-term liabilities increased to $34.3 million compared with $29.4 million at the end of last year.

Guidance

For the first quarter of fiscal 2012, management anticipates to generate revenue in the range of $123 to $125 million on the back of a high-single-digit growth in comparable store sales. On the verge of promising sales, the company expects earnings per share to come in the band of 6 cents to 8 cents. The current Zacks Consensus Estimate for the upcoming quarter stood at 8 cents per share, which is at the higher end of the guidance range.

We expect Zumiez’s focus on teenage action-sports based merchandise and expanding store network to deliver solid performance in the upcoming quarters. However, intense competition from other specialty retailers, seasonal nature of the business and risks associated with sourcing merchandise from foreign countries might weigh upon the company’s results.

The company operates in a highly fragmented specialty retail sector and faces intense competition from larger teenage-focused retailers, such as Abercrombie & Fitch Co. (ANF - Analyst Report), Aeropostale Inc. (ARO - Snapshot Report) and American Eagle Outfitters Inc. (AEO - Analyst Report).

We maintain our long-term “Neutral” recommendation on Zumiez. The quantitative Zacks #2 Rank (short-term Buy rating) for the company indicates no clear directional pressure on the stock over the near term.

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