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 13, 2012 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 leading multi-channel specialty retailer of action sports related apparel, footwear, equipment and accessories, focusing on skateboarding, snowboarding, surfing, motocross and BMX for young men and women. At October 27, 2012, we operated 495 stores; 471 in the United States, 19 in Canada and five in Europe. In the United States and Canada we operate under the name Zumiez and in Europe we operate under the name Blue Tomato. Additionally, we operate ecommerce web sites under www.zumiez.com and www.blue-tomato.com. We completed the acquisition of Blue Tomato during the second quarter of fiscal 2012. Blue Tomato is a multi-channel retailer for board sports and related apparel and footwear that operates primarily in the European marketplace.

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. 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 10.7% and 6.4% of total net sales for the three months ended October 27, 2012 and October 29, 2011 and 8.7% and 6.0% of total net sales for the nine months ended October 27, 2012 and October 29, 2011. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards that will not be redeemed ("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, due to the substantial integration of our stores and ecommerce business. 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 and relocations, does not eliminate that store from inclusion in the calculation of comparable store sales. Any store or ecommerce business that we acquire will be included in the calculation of comparable store sales after the first anniversary of the acquisition date. As such, Blue Tomato results will not be included in the calculation of comparable store sales until July 2013. 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.

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, amounts billed to our customers 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 28, 2012.

Results of Operations

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



                                                 Three Months Ended                                        Nine Months Ended
                                   October 27, 2012              October 29, 2011            October 27, 2012             October 29, 2011
Net sales                                       100.0 %                      100.0 %                      100.0 %                     100.0 %
Cost of goods sold                               62.7                         61.1                         65.0                        65.0

Gross profit                                     37.3                         38.9                         35.0                        35.0
Selling, general and
administrative expenses                          25.4                         24.1                         27.7                        27.2

Operating profit                                 11.9                         14.8                          7.3                         7.8
Interest and other income,
net                                               0.0                          0.2                          0.3                         0.3

Earnings before income
taxes                                            11.9                         15.0                          7.6                         8.1
Provision for income taxes                        4.9                          5.8                          3.3                         3.1

Net income                                        7.0 %                        9.2 %                        4.3 %                       5.0 %

Three Months (13 weeks) Ended October 27, 2012 Compared With Three Months (13 weeks) Ended October 29, 2011

Net Sales

Net sales were $180.0 million for the three months ended October 27, 2012 compared to $154.0 million for the three months ended October 29, 2011, an increase of $26.0 million or 16.9%. The increase reflected a comparable store sales increase of 3.7% for the three months ended October 27, 2012 as well as the net addition of 48 U.S. and Canada stores (51 new stores offset by three store closures) subsequent to October 29, 2011 and the acquisition of Blue Tomato during the second quarter of fiscal 2012. Included in the results for the three months ended October 27, 2012 were $8.1 million in net sales of Blue Tomato.

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 men's clothing, junior's clothing, footwear and hardgoods were slightly offset by a comparable store sales decrease in accessories and boy's clothing. For information as to how we define comparable stores, see "General" above.

Gross Profit

Gross profit was $67.1 million for the three months ended October 27, 2012 compared to $59.9 million for the three months ended October 29, 2011, an increase of $7.2 million, or 11.9%. As a percent of net sales, gross profit decreased 160 basis points for the three months ended October 27, 2012 to 37.3% from 38.9% for the three months ended October 29, 2011. The decrease was primarily due to a 90 basis points increase in ecommerce fulfillment and ecommerce shipping expenses and a 80 basis points impact of a $1.4 million charge recorded during the three months ended October 27, 2012 related to a step-up in inventory to estimated fair value in conjunction with our acquisition of Blue Tomato. These increases were partially offset by a 40 basis points impact from leveraging our store occupancy costs on a 3.7% comparable store sales increase.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $45.7 million for the three months ended October 27, 2012 compared to $37.1 million for the three months ended October 29, 2011, an increase of $8.6 million, or 23.1%. SG&A expenses as a percent of net sales increased by 130 basis points for the three months ended October 27, 2012 to 25.4% compared to 24.1% for the three months ended October 29, 2011. The increase was primarily due to a 110 basis points impact of a $2.0 million charge incurred during the three months ended October 27, 2012 related to the estimated future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, a 100 basis points increase in corporate costs and a 30 basis points impact for the amortization of intangible assets acquired as part of our Blue Tomato acquisition of $0.5 million for the three months ended October 27, 2012. These increases were partially offset by 90 basis points in store operating efficiencies and a 40 basis points decrease in incentive compensation.

Net Income

Net income for the three months ended October 27, 2012 was $12.7 million, or $0.40 per diluted share, compared with net income of $14.1 million, or $0.45 per diluted share, for the three months ended October 29, 2011. Our effective income tax rate for the three months ended October 27, 2012 was 40.9% compared to 38.9% for the three months ended October 29, 2011. Our effective tax rate for the three months ended October 27, 2012 was adversely impacted by the tax effects of the acquisition of Blue Tomato.

Nine Months (39 weeks) Ended October 27, 2012 Compared With Nine Months (39 weeks) Ended October 29, 2011

Net Sales

Net sales were $445.0 million for the nine months ended October 27, 2012 compared to $372.0 million for the nine months ended October 29, 2011, an increase of $73.0 million or 19.6%. The increase reflected a comparable store sales increase of 8.0% for the nine months ended October 27, 2012 as well as the net addition of 48 U.S. and Canada stores (51 new stores offset by three store closures) subsequent to October 29, 2011 and the acquisition of Blue Tomato during the second quarter of fiscal 2012. Included in the results for the nine months ended October 27, 2012 were $9.6 million in net sales of Blue Tomato, which reflect Blue Tomato sales from the acquisition date of July 4, 2012 to October 27, 2012.

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 men's clothing, footwear, junior's clothing and hardgoods were slightly offset by a comparable store sales decrease in boy's clothing and accessories. For information as to how we define comparable stores, see "General" above.

Gross Profit

Gross profit was $155.6 million for the nine months ended October 27, 2012 compared to $130.2 million for the nine months ended October 29, 2011, an increase of $25.4 million, or 19.5%. As a percent of net sales, gross profit was flat for the nine months ended October 27, 2012 at 35.0% compared to 35.0% for the nine months ended October 29, 2011. Gross profit as a percent of sales was impacted by an 80 basis points impact from leveraging our store occupancy costs on a 8.0% comparable

store sales increase and 40 basis points due to distribution center efficiencies, which were offset by a 60 basis points increase in ecommerce fulfillment and ecommerce shipping expenses and a 40 basis points impact of a $1.9 million charge recorded during the nine months ended October 27, 2012 related to a step-up in inventory to estimated fair value in conjunction with our acquisition of Blue Tomato

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $123.2 million for the nine months ended October 27, 2012 compared to $101.3 million for the nine months ended October 29, 2011, an increase of $21.9 million, or 21.6%. SG&A expenses as a percent of net sales increased by 50 basis points for the nine months ended October 27, 2012 to 27.7% compared to 27.2% for the nine months ended October 29, 2011. The increase was primarily due to a 60 basis points impact of a $2.7 million charge incurred during the nine months ended October 27, 2012 related to the estimated future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, a 40 basis points impact of the $1.9 million in transaction costs incurred during the nine months ended October 27, 2012 in conjunction with our acquisition of Blue Tomato, a 20 basis points impact of amortization of intangible assets acquired as part of our Blue Tomato acquisition of $0.7 million for the three months ended October 27, 2012 and a 20 basis points impact of exit costs and other charges of $1.1 million incurred during the nine months ended October 27, 2012 related to the relocation of our home office. These increases were partially offset by 110 basis points in store operating efficiencies.

Net Income

Net income for the nine months ended October 27, 2012 was $19.3 million, or $0.61 per diluted share, compared with net income of $18.6 million, or $0.60 per diluted share, for the nine months ended October 29, 2011. Our effective income tax rate for the nine months ended October 27, 2012 was 43.4% compared to 38.4% for the nine months ended October 29, 2011. Our effective tax rate for the nine months ended October 27, 2012 was adversely impacted by the tax effects of the acquisition of Blue Tomato.

Liquidity and Capital Resources

Our primary uses of cash are for operational expenditures, capital investments, inventory purchases, store remodeling, store fixtures, ongoing infrastructure improvements such as technology enhancements and distribution capabilities and potential future acquisitions. 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.

During fiscal 2012, we expect to spend approximately $42 million to $44 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the approximately 50 new stores we plan to open in fiscal 2012, remodels of existing stores and the completion of the construction of our new home office building in Lynnwood, Washington. There can be no assurance that the number of stores that we actually open in fiscal 2012 will not be different from the number of stores we plan to open, or that actual fiscal 2012 capital expenditures will not differ from this expected amount.

Additionally, during fiscal 2012, we acquired Blue Tomato for cash consideration of $74.8 million ($69.7 million net of cash acquired).

Operating Activities

Net cash provided by operating activities increased by $3.0 million to $28.2 million for the nine months ended October 27, 2012 from $25.2 million for the nine months ended October 29, 2011. 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 $34.8 million for the nine months ended October 27, 2012, related to $69.7 million for the acquisition of Blue Tomato (net of cash acquired) and $34.0 million of capital expenditures primarily for new store openings and the construction of our new home office building in Lynnwood, Washington, partially offset by $69.0 million in net sales of marketable securities. 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.

Financing Activities

Net cash provided by financing activities for the nine months ended October 27, 2012 and October 29, 2011 was $2.6 million and $2.9 million related primarily to proceeds from stock-based compensation exercises and the related tax benefits.

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.

We maintain a secured credit agreement with Wells Fargo Bank, N.A., which 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 27, 2012 and January 28, 2012. We had open commercial letters of credit outstanding under our secured revolving credit facility of $0.6 million at October 27, 2012 and $0.9 million at January 28, 2012. The secured revolving credit facility bears interest at the Daily One Month LIBOR rate plus 1.00%.

Additionally, in conjunction with our acquisition of Blue Tomato, we acquired $2.3 million in long-term debt, which relates to amounts borrowed to fund operations. At October 27, 2012, the amount of borrowings under this debt was $2.2 million.

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 27, 2012, with the exception of the long-term debt that we acquired in conjunction with the acquisition of Blue Tomato. The following table summarizes the total amount of future payments due under our contractual obligations at October 27, 2012

(in thousands):

                                                                   Fiscal 2013 and       Fiscal 2015 and
                                    Total        Fiscal 2012         Fiscal 2014           Fiscal 2016         Thereafter
Operating lease obligations       $ 483,482     $      15,399     $         130,806     $         123,183     $    214,094
Purchase obligations                117,812           117,812                    -                     -                -
Debt principal and interest           2,381                85                   679                   607            1,010

Total                             $ 603,675     $     133,296     $         131,485     $         123,790     $    215,104

Off-Balance Sheet Obligations

. . .