Still Bullish on Zumiez

We continue to maintain our long-term Outperform recommendation on mall-based action-sports specialty retailer, Zumiez Inc. (ZUMZ - Analyst Report). Our recommendation is based on the company’s continuous better-than-expected quarterly performance primarily driven by its well-balanced store expansion and e-commerce strategies.

Zumiez’s recently reported first-quarter 2012 earnings of 14 cents per share not only topped the Zacks Consensus Estimate of 11 cents but also jumped more than two folds from the prior-year earnings of 6 cents.The robust performance was driven by improved margins as well as strong merchandise, store expansion and e-commerce strategies.

Excluding the cost associated with the relocation of the company’s e-commerce fulfillment center, Zumiez’s earnings came in at 15 cents per share. With respect to earnings surprises, Zumiez has topped the Zacks Consensus Estimate over the last four quarters in the range of 1.7% to 60%. The average remained at 27%, indicating that Zumiez has surpassed the Zacks Consensus Estimate by the same measure in the trailing four quarters.

Net sales in the reported quarter climbed 22.7% from the prior-year period, primarily due to solid comparable store sales performance. Moreover, on the back of leveraged selling, general and administrative expenses and improved gross margin, Zumiez’s operating margin expanded 320 basis points to 5.6%.

Moreover, we believe the company’s recent agreement to acquire one of Europe’s leading action sports retailers Blue Tomatowill provide it broader avenues to strengthen its international base while also selectively expanding Blue Tomato's European footprint. The transaction, which Zumiez expects to complete by July 1, will be accretive to the company’s top- and bottom line.Zumiez raised its second-quarter sales guidance to the range of $134 - $136 million from $128 - $130 million, inclusive of nearly $2 million sales from Blue Tomato.

Moreover,despite includingacquisition related costs and expenses, the company maintained its pre- Blue Tomatoacquisition earnings per share guidance range of 4 cents to 6 cents. Comparable store sales for the second quarter are guided in the range of 8% - 10%, up from mid-single digit growth expected earlier.

Furthermore, Zumiez has a near to debt-free balance sheet with total long-term debt of $36.1 million and shareholder’s equity of $280.4 million, reflecting debt-to-capitalization ratio of only 11.4% at the end of first quarter of fiscal 2012. Moreover, Zumiez ended the quarter with $171.2million of cash and marketable securities compared with $130.7 million at the end of first quarter of fiscal 2011. This offers the company the financial flexibility to drive future expansion.

Everett, Washington-based Zumiez targets young men and women in the age group of 12 to 24 years, who seek popular brands that represent lifestyle centered on extreme sports activities. We expect Zumiez’s focus on teenage action-sports based merchandise and expanding store network to deliver solid performance in the upcoming quarters. The company competes head-to-head with Hot Topic Inc. (HOTT) and Pacific Sunwear of California Inc. (PSUN - Snapshot Report).

Currently, Zumiez holds a Zacks #2 Rank, which implies a short-term Buy rating on the stock.