Zumiez Q1 Earnings Beat, Guides Q2 - Analyst Blog

Zumiez Inc. ZUMZ reported first-quarter fiscal 2014 adjusted earnings of 10 cents per share, down 23.1% year over year but double the Zacks Consensus Estimate of 5 cents per share.

Reported earnings were 9 cents per share compared with 8 cents per share reported in the year-ago quarter. Results for the quarter included a charge of 1 cent per share related to the Blue Tomato acquisition. The prior year results also included a similar charge of 5 cents per share.

Quarter in Detail

Net sales increased 9.7% year over year to $162.9 million and was above the Zacks Consensus Estimate of $160 million driven by a better-than-expected growth in comparable store sales (comps).

Comps grew 1.8% against a decline of 0.7% registered in the year-ago quarter on the back of a rise in comparable store transactions partially offset by a decline in dollars per transaction. Moreover, comps exceeded the company's initial forecast of a mid single-digit decline driven by full price selling in the latter half of the quarter as well as clearance of the excess inventory in the initial part.

By category, the company witnessed comps growth in the accessories, hardgoods and juniors categories, which was partly offset by negative comps in the footwear, boys and men's categories.

In the quarter, gross profit increased 5.2% year over year to $50.5 million, while as a percentage of sales, it contracted 130 basis points (bps) to 31.0%. The decline in margins was due to a decline in product margins as the company cleared excess inventory in the initial part of the quarter.

On a reported basis, Zumiez's selling, general and administrative (SG&A) expenses increased 6.6% year over year to $46.8 million, while as a percentage of sales, it contracted 90 bps to 28.7%. Excluding one-time items for both the periods, SG&A expenses increased 9.5% year over year to $46.2 million compared with $42.2 million in the prior year.

On a reported basis, operating profit for the quarter declined 7.5% to $3.7 million, while as percentage of sales it contracted 40 bps to 2.3%.

Financial Update

As of May 3, 2014, cash and marketable securities were $107.8 million, up 10.5% from $97.6 million as of May 4, 2013. The improvement mainly resulted from increased cash flow from operations offset by capital expenditures and stock repurchases. Inventory was $97.6 million as of May 3, 2014, up 7.4% from $90.9 million as of May 4, 2013. Inventory per square foot dipped marginally at the quarter-end compared with a year ago.

During the quarter, the company generated a cash flow of $16.6 million from operational activities as against $4.4 million generated in the prior-year comparable period.

During the quarter, the company bought back nearly 0.8 million of its shares for about $17.4million or $23.03 per share. As a result, the company has nearly $27.2 million remaining for repurchase under its share repurchase program.

Guidance

Zumiez announced its sales and earnings guidance for the second quarter of fiscal 2014. Management anticipates second-quarter revenues in the range of $167–$171 million, while comps are expected to be in the range of negative low single-digits to flat.

Gross margin is expected to contract 100 to 150 basis points from the prior year's second quarter based on deleverage of store occupancy and to some extent lower product margins. Moreover, operating margins are expected to be in the range of 3.5%—4.5%.

Based on sales projections for the quarter, the company formulated a bottom-line guidance of 12 cents to 16 cents per share. The earnings expectation also includes estimated charges of 2 cents per share related to the Blue Tomato acquisition.

For fiscal 2014, 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. Tax rate for the year is anticipated to be 38%.

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

Other Stocks to Consider

Zumiez currently carries a Zacks Rank #2 (Buy). Other stocks performing well in the retail space include American Apparel Inc. APP, Foot Locker Inc. FL and Genesco Inc. GCO. All these have a Zacks Rank #2 (Buy).