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Zumiez (ZUMZ) Stock Down Despite Q4 Earnings Beat: Why?

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Zumiez Inc. (ZUMZ - Free Report) delivered robust fourth-quarter fiscal 2016 results, wherein both the top and bottom line grew year over year and topped estimates. Notably, this marked the company’s sixth straight quarter of earnings and sales beat. However, shares plunged 14.3% during the afterhours trading session, as the company posted soft February sales, and provided a dismal outlook for first-quarter fiscal 2017.

Nonetheless, Zumiez has outperformed the Zacks categorized Retail – Apparel/Shoe industry in the last one year. Evidently, its shares have jumped 10.5% over the past one year, compared to the industry’s slump of 22.3% over the same time frame.
 


Q4 Highlights

Zumiez posted earnings of 74 cents per share for the quarter, which surged 39.6% year over year, coming much ahead of the Zacks Consensus Estimate of 67 cents. The bottom line gained from successful execution of the company’s omni-channel and localization initiatives, along with favorable taxes.

Zumiez Inc. Price, Consensus and EPS Surprise
 

Zumiez Inc. Price, Consensus and EPS Surprise | Zumiez Inc. Quote

Net sales advanced 8.7% year over year to $263.6 million, surpassing the Zacks Consensus Estimate of $262 million. The improvement in the top line was mainly attributable to solid comparable store sales (comps) growth and store additions. Further, constant investments in merchandise offerings, sales teams and omni-channel capacities, drove holiday season sales. Also, these factors continue to place Zumiez, Blue Tomato and Fast Times well, amid a competitive landscape.

Quarterly comps jumped 5.1%, backed by higher transaction volume, somewhat offset by a drop in dollars per transaction, with the latter being a common obstacle in the retail space. Further, comps benefitted robust performance of the men’s, accessories and junior’s categories.

However, the trend seemed to have reversed in February, as reflected by Zumiez’s monthly sales results. Concurrent with the fourth-quarter results, Zumiez reported its sales data for February, which broke its five month long trend of posting positive comps. Comps for February decreased 3.1%, compared with an 8.6% plunge recorded a year-ago. Moreover, net sales for the four-week period ended Feb 25, 2017, slipped 0.8% year over year to $51.5 million.

In the reported quarter, gross profit jumped 11.6% to about $94 million, with gross margin expanding 90 basis points (bps) to 35.7%, aided by higher product margins, reduced fixed expenses and occupancy cost leverage, on greater sales.

Zumiez’s selling, general and administrative expenses increased 5.4% to nearly $66.1 million, while as a percentage of sales, the same contracted 90 bps to 25%.

Thanks to the gross margin improvement, Zumiez’s operating profit of $27.9 million grew 29.8% year over year, with operating margin increasing 180 bps to 10.7%.

Financial Update

As of Jan 28, Zumiez’s cash and marketable securities were $78.8 million, up 4.2% year over year, backed by cash flow from operations of nearly $48.5 million, somewhat offset by share buybacks of $21.6 million and capital expenditures worth $20.4 million. Total shareholders’ equity at the end of the year was $307.1 million.

For fiscal 2017, the company expects capital expenditures in a range of $24–$26 million.

Store Update

During fiscal 2016, Zumiez introduced 22 North American and six European stores, alongside acquiring five Australian stores. Also, Zumiez shuttered down six stores in fiscal 2016, thus taking its net store openings for the year to 27. These actions took the total store count to 685 as of the end of fiscal 2016, including 651 in North America, 29 in Europe and five Fast Times stores in Australia.

In fiscal 2017, the company plans to introduce 18 new stores, including four in Europe and two Australian stores.

Guidance

Management remains pleased with its fiscal 2016 performance, amid a challenging retail scenario. In the face of macroeconomic headwinds like volatile consumer patterns, Zumiez remains on track with its cost-control efforts and multi-year growth targets, which are aimed at generating greater profits and shareholder-value in the long run.

However, based on the current situation and the retail hurdles, management issued a drab outlook for the first quarter of fiscal 2017. The company expects net sales for the quarter in the $178–$182 million range, while comps growth is expected in a range of flat to 2% growth, over the same period.

Further, consolidated operating margins are projected to range from negative 4% to negative 5%. Finally, for the first quarter, the company projects a loss of 17–21 cents per share, much wider than the Zacks Consensus Estimate of a loss of 3 cents.

Zacks Rank & Stocks to Consider

Zumiez currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the same industry include The Children's Place, Inc. (PLCE - Free Report) , DSW Inc. and Kate Spade & Company , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Children's Place has an average positive earnings surprise of 36.3% in the trailing four quarters. The stock, with a long-term growth rate of 10.3%, has seen positive estimate revisions in the last 60 days.

DSW Inc.’s long-term earnings per share (EPS) growth rate of 6.8% and impressive earnings surprise history bodes well.

Kate Spade, with long-term EPS growth rate of 28.3%, has seen positive estimate revisions over the past 30 days.

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