Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ZUMZ > SEC Filings for ZUMZ > Form 10-Q on 2-Dec-2011All Recent SEC Filings

Show all filings for ZUMIEZ INC

Form 10-Q for ZUMIEZ INC


2-Dec-2011

Quarterly Report


Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in "Item 1A Risk Factors" in our Form 10-K filed with the SEC on March 15, 2011 and in this Form 10-Q.

Forward-looking statements relate to our expectations for future events and future financial performance. Generally, the words "anticipates," "expects," "intends," "may," "should," "plans," "believes," "predicts," "potential," "continue" and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. Actual events or results may differ materially. Factors which could affect our financial results are described below under the heading "Risk Factors" and in "Item 1A Risk Factors" of our Form 10-K referred to in the preceding paragraph. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

References in the following discussion to "we," "us," "our," "the Company" and similar references mean Zumiez Inc. and its wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Overview

We are a specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. At October 29, 2011, we operated 442 stores primarily located in shopping malls, giving us a presence in 38 states and Canada. Our stores cater to young men and women between the ages of 12 and 24 who seek popular brands representing a lifestyle centered on activities that include skateboarding, surfing, snowboarding, BMX and motocross. We support the action sports lifestyle and promote our brand through a multi-faceted marketing approach that is designed to integrate our brand image with our customers' activities and interests. This approach, combined with our differentiated merchandising strategy, store design, comprehensive training programs and passionate employees, allows us to provide an experience for our customers that we believe is consistent with their attitudes, fashion tastes and identities and is otherwise unavailable in most malls. Accordingly, our success is largely dependent upon our ability to anticipate, identify and respond to the fashion tastes of our customers and to provide merchandise that satisfies customer demands.

General

Net sales constitute gross sales net of actual and estimated returns and deductions for promotions. Net sales include our in-store sales and our ecommerce sales, which includes ecommerce shipping revenue. Ecommerce sales were 6.4% and 4.4% of total net sales for the three months ended October 29, 2011 and October 30, 2010 and 6.0% and 3.6% of total net sales for the nine months ended October 29, 2011 and October 30, 2010. Sales of gift cards are deferred and recognized when gift cards are redeemed. The amount of the gift card liability is determined taking into account our estimate of the portion of gift cards that will not be redeemed or recovered ("gift card breakage"). Gift card breakage is recognized as revenue after 24 months, at which time the likelihood of redemption is considered remote based on our historical redemption data.

We report "comparable store sales" based on net sales beginning on the first anniversary of the first day of operation of a new store. Our comparable store sales also include our ecommerce sales. Changes in our comparable store sales between two periods are based on net sales of stores which were in operation during both of the two periods being compared and, if a store is included in the calculation of comparable store sales for only a portion of one of the two periods being compared, then that store is included in the calculation for only the comparable portion of the other period. Any change in square footage of an existing comparable store, including remodels, does not eliminate that store from inclusion in the calculation of comparable store sales. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales. As a result, data herein regarding our comparable store sales may not be comparable to similar data made available by our competitors or other retailers.


Table of Contents

Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of goods sold also includes shrinkage and buying, occupancy, distribution and warehousing costs. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. We receive cash consideration from vendors, which have been recorded as a reduction of cost of goods sold if the inventory has sold, as a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors' products.

With respect to the freight component of our ecommerce sales, we arrange and pay the freight for our customers and bill them for this service, unless our customers have their product shipped to one of our stores or we have free shipping promotions to our customers, in which case we do not bill our customers. Such amounts billed are included in net sales and the related freight cost is charged to cost of goods sold.

Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, outbound freight, store supplies, depreciation on fixed assets at our home office and stores, facility expenses and training, advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses and other miscellaneous operating costs are also included in selling, general and administrative expenses. This may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.

Key Performance Indicators

Our management evaluates the following items, which we consider key performance indicators, in assessing our performance:

Comparable store sales. As previously described in detail under the caption "General," comparable store sales provide a measure of sales growth for stores open at least one year over the comparable prior year period.

We consider comparable store sales to be an important indicator of our current performance. Comparable store sales results are important to achieve leveraging of our costs, including store payroll, store supplies and rent. Comparable store sales also have a direct impact on our total net sales, cash and working capital.

Gross profit. Gross profit measures whether we are optimizing the price and inventory levels of our merchandise. Gross profit is the difference between net sales and cost of goods sold. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.

Operating profit. We view operating profit as a key indicator of our success. The key drivers of operating profit are comparable store sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense.

Store productivity. We review our stores' operating profit as a measure of the stores' profitability.

Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared in conformance with GAAP. In connection with the preparation of the condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time the condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that the condensed consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

There have been no significant changes to our critical accounting estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended January 29, 2011.


Table of Contents

Results of Operations

The following table presents, for the periods indicated, selected items on the
condensed consolidated statements of operations as a percent of net sales:



                                                   Three Months Ended                                     Nine Months Ended
                                      October 29, 2011            October 30, 2010           October 29, 2011           October 30, 2010
Net sales                                         100.0  %                   100.0  %                   100.0  %                   100.0  %
Cost of goods sold                                  60.9                       61.3                       64.8                       66.3

Gross profit                                        39.1                       38.7                       35.2                       33.7
Selling, general and
administrative expenses                             24.3                       24.7                       27.4                       29.6

Operating profit                                    14.8                       14.0                        7.8                        4.1
Interest and other income, net                       0.2                        0.3                        0.3                        0.4

Earnings before income taxes                        15.0                       14.3                        8.1                        4.5
Provision for income taxes                           5.8                        5.2                        3.1                        1.6

Net income 9.2 % 9.1 % 5.0 % 2.9 %

Three Months (13 weeks) Ended October 29, 2011 Compared With Three Months (13 weeks) Ended October 30, 2010

Net Income

Net income for the three months ended October 29, 2011 was $14.1 million, or $0.45 per diluted share, compared with net income of $12.3 million, or $0.40 per diluted share, for the three months ended October 30, 2010. Our effective income tax rate for the three months ended October 29, 2011 was 38.9% compared to 36.5% for the three months ended October 30, 2010.

Net Sales

Net sales were $154.0 million for the three months ended October 29, 2011 compared to $135.9 million for the three months ended October 30, 2010, an increase of $18.1 million or 13.3%. The increase reflected a comparable store sales increase of 6.0% for the three months ended October 29, 2011 as well as the net addition of 42 stores (43 new stores offset by one store closure) subsequent to October 30, 2010.

The increase in comparable stores sales was primarily driven by an increase in dollars per transaction, partially offset by a decline in comparable store transactions. Dollars per transaction increased due to an increase in average unit retail, partially offset by a decrease in units per transaction. Comparable store sales increases in footwear, men's clothing, junior's clothing and boy's clothing were partially offset by a comparable store sales decrease in accessories and hardgoods. For information as to how we define comparable stores, see "General" above.

Gross Profit

Gross profit was $60.1 million for the three months ended October 29, 2011 compared to $52.6 million for the three months ended October 30, 2010, an increase of $7.5 million, or 14.4%. As a percentage of net sales, gross profit increased 40 basis points for the three months ended October 29, 2011 to 39.1% from 38.7% for the three months ended October 30, 2010. The increase was primarily due to distribution center efficiencies.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $37.3 million for the three months ended October 29, 2011 compared to $33.6 million for the three months ended October 30, 2010, an increase of $3.7 million, or 11.0%. SG&A expenses as a percent of sales decreased by 40 basis points for the three months ended October 29, 2011 to 24.3% compared to 24.7% for the three months ended October 30, 2010. The decrease was primarily due to 40 basis points in store operating efficiencies and a 50 basis points decrease in corporate costs, partially offset by an increase in web operating expenses as a percent of total sales of 50 basis points due to the growth of the web business.


Table of Contents

Nine Months (39 weeks) Ended October 29, 2011 Compared With Nine Months (39 weeks) Ended October 30, 2010

Net Income

Net income for the nine months ended October 29, 2011 was $18.6 million, or $0.60 per diluted share, compared with net income of $9.2 million, or $0.30 per diluted share, for the nine months ended October 30, 2010. Our effective income tax rate for the nine months ended October 29, 2011 was 38.4% compared to 36.8% for the nine months ended October 30, 2010.

Net Sales

Net sales were $372.0 million for the nine months ended October 29, 2011 compared to $322.7 million for the nine months ended October 30, 2010, an increase of $49.3 million or 15.3%. The increase reflected a comparable store sales increase of 8.3% for the nine months ended October 29, 2011 as well as the net addition of 42 stores (43 new stores offset by one store closure) subsequent to October 30, 2010.

The increase in comparable stores sales was primarily driven by an increase in dollars per transaction, slightly offset by a decline in comparable store transactions. Dollars per transaction increased due to an increase in average unit retail, partially offset by a decrease in units per transaction. Comparable store sales increases in footwear, men's clothing, accessories and junior's clothing were partially offset by comparable store sales decreases in hardgoods and boy's clothing. For information as to how we define comparable stores, see "General" above.

Gross Profit

Gross profit was $130.9 million for the nine months ended October 29, 2011 compared to $108.6 million for the nine months ended October 30, 2010, an increase of $22.3 million, or 20.5%. As a percentage of net sales, gross profit increased 150 basis points for the nine months ended October 29, 2011 to 35.2% from 33.7% for the nine months ended October 30, 2010. The increase was primarily due to a 70 basis points decrease related to costs incurred in the nine months ended October 30, 2010 associated with the relocation of our distribution center, 50 basis points decrease due to leveraging our store occupancy cost over a 8.3% comparable store sales gain and 40 basis points in distribution center efficiencies.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $101.9 million for the nine months ended October 29, 2011 compared to $95.2 million for the nine months ended October 30, 2010, an increase of $6.7 million, or 7.0%. SG&A expenses as a percent of sales decreased by 220 basis points for the nine months ended October 29, 2011 to 27.4% compared to 29.6% for the nine months ended October 30, 2010. The decrease was primarily due to 130 basis points in store operating efficiencies, a 70 basis points impact of a litigation settlement of $2.1 million incurred in the nine months ended October 30, 2010 and a 50 basis points decrease in corporate costs, partially offset by an increase in web operating expenses as a percent of total sales of 40 basis points due to the growth of the web business.

Liquidity and Capital Resources

Our primary uses of cash are for operational expenditures, capital investments, inventory purchases, store remodeling, store fixtures and ongoing infrastructure improvements such as technology enhancements and distribution capabilities. Historically, our main sources of liquidity have been cash flows from operations.

The significant components of our working capital are inventories and liquid assets such as cash, cash equivalents, marketable securities and receivables, reduced by accounts payable and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors.

Our capital requirements include construction and fixture costs related to the opening of new stores and remodeling expenditures for existing stores. Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords. In that regard, our net investment to open a new store has varied significantly in the past due to a number of factors, including the geographic location and size of the new store, and is likely to vary significantly in the future. In addition, we will incur construction costs in fiscal 2011 and fiscal 2012 related to building our new home office in Lynnwood, Washington.

During fiscal 2011, we expect to incur approximately $28 million to $30 million on capital expenditures, which will primarily relate to leasehold improvements and fixtures for the 45 new stores we plan to open in fiscal 2011 and the construction of our new home office building in Lynnwood, Washington. There can be no assurance that actual fiscal 2011 capital expenditures will not differ from this expected amount.


Table of Contents

Operating Activities

Net cash provided by operating activities increased by $10.3 million to $25.2 million for the nine months ended October 29, 2011 from $14.9 million for the nine months ended October 30, 2010. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, store occupancy expenses and other operational expenditures. Cash received from our customers generally corresponds to our net sales. Because our customers primarily use credit cards or cash to buy from us, our receivables from customers settle quickly. Changes to our operating cash flows have historically been driven primarily by changes in operating income, which is impacted by changes to non-cash items such as depreciation, amortization and accretion, deferred taxes, and excess tax benefit from stock-based compensation, and changes to the components of working capital.

Investing Activities

Net cash used in investing activities was $25.6 million for the nine months ended October 29, 2011, related to $18.4 million of capital expenditures primarily for new store openings and $7.2 million in net purchases of marketable securities. Net cash used in investing activities was $11.3 million for the nine months ended October 30, 2010, related to $23.9 million of capital expenditures primarily for the purchase of our distribution center in Corona, California and new store openings, partially offset by $12.6 million in net sales and maturities of marketable securities.

Financing Activities

Net cash provided by financing activities for the nine months ended October 29, 2011 was $2.9 million related to proceeds from stock-based compensation exercises and the related tax benefit. Net cash provided by financing activities for the nine months ended October 30, 2010 was $3.1 million related to the proceeds received from stock-based compensation exercises and the related tax benefit.

Sources of Liquidity

Our most significant sources of liquidity continue to be funds generated by operating activities and available cash, cash equivalents and current marketable securities. We expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures for at least the next twelve months. Beyond this time frame, if cash flows from operations and borrowings under our revolving credit facility are not sufficient to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. However, there can be no assurance that equity or debt financing will be available to us when we need it, or if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.

On August 29, 2011, we renewed and amended our secured credit agreement with Wells Fargo Bank, N.A., and the prior facility agreement was terminated. The credit agreement provides us with a secured revolving credit facility until September 1, 2013 of up to $25.0 million, which, pursuant to an accordion feature, may be increased to $35.0 million at our discretion. The secured revolving credit facility provides for the issuance of a standby letter of credit in an amount not to exceed $5.0 million outstanding at any time and with a term not to exceed 365 days. The commercial line of credit provides for the issuance of a commercial letter of credit in an amount not to exceed $10.0 million and with terms not to exceed 120 days. The amount of borrowings available at any time under our secured revolving credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time. There were no outstanding borrowings under the secured revolving credit facility at October 29, 2011 and January 29, 2011. We had open commercial letters of credit outstanding under our secured revolving credit facility of $1.2 million at October 29, 2011 and $0.5 million at January 29, 2011. The secured revolving credit facility bears interest at the Daily One Month LIBOR rate plus 1.00%. The credit agreement contains a number of restrictions and covenants that generally limit our ability to, among other things, (1) incur additional debt, (2) undergo a change in ownership and (3) enter into certain transactions. The credit agreement also contains financial covenants that require us to meet certain specified financial tests and ratios, including, a maximum net loss not to exceed $10.0 million after taxes on a trailing four-quarter basis provided, that, there shall be added to net income all charges for impairment of goodwill and store assets not to exceed $5.0 million in aggregate, and a minimum quick ratio of 1.25. The quick ratio is defined as our cash and near cash equivalents plus certain defined receivables divided by the outstanding borrowings. Our accounts receivable, general intangibles, inventory and equipment have been pledged to secure our obligations under the credit agreement. We must also provide financial information and statements to our lender. We were in compliance with all such covenants at October 29, 2011.


Table of Contents

Contractual Obligations and Commercial Commitments

There were no material changes outside the ordinary course of business in our
contractual obligations during the nine months ended October 29, 2011. The
following table summarizes the total amount of future payments due under our
contractual obligations at October 29, 2011 (in thousands):



                                                                   Fiscal 2012 and       Fiscal 2014 and
                                    Total        Fiscal 2011         Fiscal 2013           Fiscal 2015         Thereafter
Operating lease obligations       $ 402,694     $      13,059     $         108,611     $         104,314     $    176,710
Purchase obligations                 91,572            91,572                    -                     -                -

Total                             $ 494,266     $     104,631     $         108,611     $         104,314     $    176,710

We occupy our retail stores and our current combined home office and ecommerce fulfillment center under operating leases generally with terms of five to ten years. At October 29, 2011, we were committed to property owners for operating lease obligations for $402.7 million. A majority of our leases provide for ongoing co-tenancy requirements or early cancellation clauses that would further lower rental rates, or permit lease terminations, or both, in the event that co-tenants cease to operate for specific periods or if certain sales levels are not met in specific periods. Most of the store leases require payment of a specified minimum rent and contingent rent based on a percentage of the store's net sales in excess of a specified threshold. Amounts in the above table do not include contingent rent, real estate taxes, insurance or common area maintenance costs unless these costs are fixed and determinable.

At October 29, 2011, we had outstanding purchase orders to acquire merchandise from vendors of $91.6 million, including $1.2 million of letters of credit outstanding. We have an option to cancel these commitments with no notice prior to shipment, except for private label purchase orders in which we are obligated to repay certain contractual amounts upon cancellation.

Off-Balance Sheet Obligations

We did not have any off-balance sheet obligations at October 29, 2011.

Impact of Inflation

We do not believe that inflation has had a material impact on our net sales or operating results in the recent past. There can be no assurance that our business will not be affected by inflation in the future.

Risk Factors

Investing in our securities involves a high degree of risk. The following risk factors, issues and uncertainties should be considered in evaluating our future prospects. In particular, keep these risk factors in mind when you read "forward-looking" statements elsewhere in this report. Forward-looking statements relate to our expectations for future events and time periods. . . .

  Add ZUMZ to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ZUMZ - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.