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We have downgraded our long-term recommendation on Zumiez Inc. (ZUMZ - Analyst Report) to ‘Neutral’. Our view is based on the company’s declining comparable store sales transaction in fiscal 2012 so far, except in May.

We observed that the company’s rate of upside in comparable-store sales has been decelerating. It increased in the mid double-digit to low double-digit range between February and May (14.2% to 10.1%), but from June to September the comps portrayed an upside between high-single digit to low-single digit (8.2% to 3.7%). Therefore, considering this downward trend, we remain apprehensive about the company’s future comparable store sales performances.

Further, the sporting goods retail industry is a consumer-driven industry, and hence is very sensitive to the health of economy as sports are mainly a leisure activity. Spending on sporting goods is heavily dependent on personal disposable income of consumers. The current macroeconomic challenges such as high household debt and unemployment levels may restrain consumers spending on sporting goods.

However, continuing with its store expansion and e-commerce strategies, Zumiez posted better-than-expected quarterly results for the second quarter of 2012.The quarterly earnings of 17 cents per share doubled year over year. Net sales grew 20.4% during the quarter. Management now anticipates revenue between $181 million and $185 million and earnings in the band of 42–45 cents per share for the third quarter.

The company is currently in the early phase of its store expansion program and plans to augment its network to 600–700 stores in the long run. Further, the recent acquisition of Blue Tomato facilitates Zumiez to tap the European market. We believe these initiatives provide the company with a solid platform to effectively capitalize on the emerging opportunities.

The above pros and cons justify our long-term view on the company. Currently, Zumiez competes with other teenage-focused retailers as well as sporting goods retailers Hot Topic Inc. and Pacific Sunwear of California Inc. (PSUN - Snapshot Report).

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