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Battered by weak European economy, comparable store sales (Comps) of Zumiez Inc. (ZUMZ - Analyst Report), for the four-week and thirteen-week periods ended October 27, 2012, remain below the company’s own guidance. Owing to the below-expected sales result, the company lowered its earnings guidance range for the third-quarter.

Comps of this Washington-based retailer of sports-related teen apparel inched up 0.6% for the four-week period, compared with an increase of 3.3% in the four-weeks ended October 29, 2011. Positive comps at the company’s juniors and men’s sections were mostly offset by negative comps in accessories, hardgoods, boys and footwear sections.

Net sales for the month under review surged 20.2% to $41.9 million from $34.9 million reported in the year-ago period. We believe the company’s store expansion and investment in enhancing e-commerce capabilities has driven this year-over-year growth in total sales.

Comps for the thirteen-week period ended October 27, 2012, remains at the lower end of its guidance range of 3%–5%, increasing 3.7% against a 6.0% increase recorded in the year-ago period. The company revealed that its comps result for the third-quarter missed its own expectations due to the weakness in European economy.

Citing below-than-expected sales results, the company trimmed down its earnings outlook for the third quarter of fiscal 2012. Zumiez now expects earnings per share to come in the band of 38–39 cents, down from the previously guided range of 42 cents to 45 cents. The earnings expectation also includes the estimated costs of 10 cents per share related to the Blue Tomato acquisition.

Our Recommendation

We believe that the company will again be on track of growth with its well-balanced store expansion and e-commerce strategies. The company’s store expansion plans remain on course as it is nearing its target of opening 50 new stores during the fiscal 2012, of which 10 are to be opened in Canada.

During the last few years, Zumiez launched stores averaging 3,000 square feet, which enabled it to offer extended merchandise without compromising on the store ambience. These initiatives provide the company with a strong platform to effectively capitalize on emerging opportunities.

However, the sporting goods retail industry is a consumer-driven industry, and hence is very sensitive to the health of economy since sports come under 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.

Dealing in action sports-related apparel, footwear, equipment, and accessories, Zumiez targets young men and women in the 12 to 24 year age-group who seek popular lifestyle brands centered on extreme sports activities. The company competes with Hot Topic Inc. and Pacific Sunwear of California Inc. (PSUN - Snapshot Report).

Zumiez's stores offer couches and video game stations to its customers so that they spend more time for shopping. These stores are strategically located near busy areas of the mall, such as food courts, movie theatres, music/game stores and other popular teenage hang-out destinations. As of October 29, 2012, the company operated a total of 495 stores, including 471 in the United States, 19 in Canada and 5 in Europe.

Currently, Zumiez carries a Zacks #3 Rank, implying a short-term Strong Hold rating. Moreover, we are maintaining a long-term ‘Neutral’ recommendation on the stock.

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