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We reiterate our long-term Neutral recommendation on Zumiez Inc. (ZUMZ - Analyst Report), driven by the company’s strong third quarter results, offset by the skepticism surrounding its future comps performance. The company also maintains a Zacks Rank #3 (Hold).

Why Neutral?

Zumiez’s store expansion and e-Commerce strategies coupled with improved margins as well as strong merchandise aided 13% earnings per share growth in the third quarter of 2012. Earnings per share of 51 cents also came ahead of the Zacks Consensus Estimate of 47 cents. Net sales also rose 16.9% to $180.0 million during the quarter.

Management anticipates fourth quarter revenue between $218 million and $221 million. Based on sales projections for the quarter, the company expects earnings per share to come in the range of 59 cents to 62 cents per share.

Further, we believe Zumiez’s initiatives such as its store opening program and the acquisition of Blue Tomato will provide it a solid platform to effectively capitalize on the emerging opportunities.

This mall-based retailer of sports related merchandise is currently in the early phase of its store expansion program, and plans to strengthen its network to 600 – 700 stores in the long-run. So far, in fiscal 2012, the company has added 56 new stores, including 10 new stores in Canada and 3 in Germany bringing the total store count to 502. We believe the company’s store expansion initiative will drive its top-line growth.

Despite strong quarterly results, our Neutral stance on the stock is based on the apprehension regarding Zumiez’s future comps performance. We note that the company’s comparable store sales transactions have witnessed a declining trend so far in fiscal 2012, except for May. Further, the company’s rate of upside in comps has been decelerating over the past several months, with comps for the past two months remaining negative. Moreover, the company is now projecting comps decline of 3% to 4% for the fourth quarter of fiscal 2012.

Additionally, we believe intense competition from other specialty retailers, seasonal nature of the business, and risks associated with sourcing merchandise from foreign countries may undermine the company’s results.

Other Stocks to Consider

Besides Zumiez, another stock to consider among retailers dealing in sports related merchandise is Hot Topic Inc. , which carries a Zacks Rank #2 (Buy).

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