Zumiez Earnings Slump on Soft Sales - Analyst Blog

Zumiez Inc. ZUMZ reported fourth-quarter fiscal 2013 adjusted earnings of 65 cents per share, down 13.3% year over year, largely due to soft sales that stemmed from a highly promotional environment in December and January as well as higher costs. This instilled negative sentiment among investors, which was reflected in a 2.8% decline in Zumiez's share price in the after-hours trading session yesterday. However, Zumiez's adjusted earnings for the quarter surpassed the Zacks Consensus Estimate of 61 cents per share.

Reported earnings were 89 cents compared with 74 cents reported in the year-ago quarter. Results included net benefits of 26 cents per share for the reversal of accruals related to the Blue Tomato contingent earn-out, a correction of an error in accounting for leases, and a release of a valuation allowance benefiting the effective tax rate as well as a 2 cents per share charge related to the amortization of intangible assets of the Blue Tomato acquisition.

Quarter in Detail

Net sales increased 1.1% year over year to $226.8 million and was marginally below the Zacks Consensus Estimate of $227.0 million. Moreover, quarterly sales were at the lower end of the company's recent guidance of $226–$229 million.

From a sales perspective, the quarter proved challenging in the U.S. as well as across borders due to the weak mall traffic during the holiday sales in December and a continued sloppy trend due to the extremely cold and snowy weather in January.  This resulted in increased promotional activity during the aforementioned months that impacted product margins as well.

Comps declined 2.2% against a 1.0% decline registered in the year-ago quarter. By category, the company witnessed comps growth in the juniors and accessories categories, which was more than offset by negative comps in the men's, boy's, hard goods and footwear categories.

In the quarter, gross profit increased 2.6% year over year to $87.9 million, while as a percentage of sales, it expanded 50 basis points (bps) to 38.7%. The improvement was primarily due to the correction of error in accounting for occupancy expenses, offset by increase in occupancy costs during the quarter.

On a reported basis, Zumiez's selling, general and administrative (SG&A) expenses declined 4.0% year over year to $47.6 million, while as a percentage of sales, it contracted 120 bps to 20.9%. Excluding one-time items for both the periods, SG&A expenses as a percentage of sales expanded due to higher cost pressures.

On a reported basis, operating profit for the quarter rose 11.6% to $40.3 million, while as percentage of sales it expanded 170 bps to 17.8%.

Full year Synopsis

For fiscal 2013, the company's adjusted earnings came at $1.46 per share, down 7.6% from $1.58 per share in fiscal 2012 and surpassed the Zacks Consensus Estimate of $1.40. Revenues for the year rose approximately 8.2% to $724.3 million, while it was almost in line with the Zacks Consensus Estimate of $724 million.

Financial Update

As of Feb 1, 2014, cash and marketable securities were $117.2 million, up 13.6% from $103.2 million as of Feb 2, 2013. The improvement mainly resulted from increased cash flow from operations offset by capital expenditures and stock repurchases. During fiscal 2013, the company generated a cash flow of $66.9 million from operational activities as against $66.2 million generated for fiscal 2012.

During the fourth quarter and through Mar 1, 2014, the company has bought back nearly 1.1 million of its shares for about $24.7 million or $22.52 per share. This comprised 0.7 million shares worth $15.4 million bought back in the fourth quarter of fiscal 2013 and about 0.4 million shares worth $9.3 million repurchased in February. As a result, the company had nearly $5.3 million remaining for repurchase under its previously authorized $30 million share repurchase program announced in Dec 2013.

Along with the earnings release, the company announced its board of directors' approval of an additional $30 million share repurchase program effective from Mar 12, 2014. The repurchases under the new authorization will begin following the completion of buy backs under the Dec 2013 program.

Guidance

Zumiez announced its sales and earnings guidance for the first quarter of fiscal 2014. Management anticipates first-quarter revenues in the range of $156–$160 million, while comps are likely to decrease in the low single digit range.

Based on sales projections for the quarter, the company formulated a bottom-line guidance of net loss per share of 2 cents to earnings per share of 3 cents. The earnings expectation also includes estimated charges of 2 cents per share related to the Blue Tomato acquisition.

For fiscal 2013, Zumiez expects capital expenditure to be around $37–$39 million, mainly directed at store openings and the remodeling of outlets. Further, depreciation and amortization expenses will be nearly $30 million, up 12% from the fiscal 2013 level.

In fiscal 2014, the company plans to expand its store base by opening 55 new stores, including up to 7 stores in Canada and 5 stores in Europe.

Other Stocks to Consider

Zumiez currently carries a Zacks Rank #3 (Hold). Some better-ranked apparel/shoe retail stocks include American Apparel Inc. APP, Foot Locker Inc. FL and G-III Apparel Group Ltd. GIII. All these have a Zacks Rank #2 (Buy).