A Q2 Beat Earns Zumiez A New Price Target From BMO

Zumiez Inc. ZUMZ reported its Q2 results ahead of expectations, backed by a recovery in the men's business and cost control.

BMO Capital Markets’ John D. Morris maintained a Market Perform on the company, while raising the price target to $16.

The company reported its Q2 EPS at$ $0.03), ahead of the consensus, driven by better than anticipated operated margin, which in turn was due to lighter than expected operating margin contraction, partly offset by additional SG&A deleverage.

Zumiez issued Q3 guidance of -2 percent to flat comp, with EPS of $0.21-$0.26.

“While management indicates ZUMZ is off to a good start for 3Q, we continue to remain on the sidelines based on the continued headwinds that face the business — including an out-of-favor assortment and operating margin compression,” the analyst mentioned.

Men’s Segment

The company witnessed sequential improvement in comp for the Men’s segment, followed by a marginal decline in August.

“The men's category remained a primary driver to the improvement in the comp that was reported to be positive quarter-to-date when including the first week of September,” Morris stated.

Zumiez believes that international expansion would drive growth and intends to scale the recently acquired Fast Times.

While management recognized that industry forces were likely to continue to pressure the company’s market share, they intend to continue to target a niche market rather than “casting a wider net for broad appeal.”

Margin Upside

While SG&A is likely to further deleverage in Q3, due to expectations of negative to flat comp and unfavorable shift in SG&A investments from Q4 to Q3, Morris expects margin upside in Q4, driven by easy compares from Q4 2015.

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