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ZUMZ > SEC Filings for ZUMZ > Form 10-Q on 11-Sep-2013All Recent SEC Filings

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Form 10-Q for ZUMIEZ INC


11-Sep-2013

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 19, 2013 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.

General

Net sales constitute gross sales (net of actual and estimated returns and deductions for promotions) and shipping revenue. Net sales include our in-store sales and our ecommerce sales. 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 in net sales 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 or ecommerce business. We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our in-store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Therefore, our comparable store sales also include our ecommerce sales. Changes in our comparable store sales between two periods are based on net sales of "in-store" or ecommerce businesses which were in operation during both of the two periods being compared and, if an in-store or ecommerce business is included in the calculation of comparable store sales for only a portion of one of the two periods being compared, then that in-store or ecommerce business 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 are included in the calculation of comparable store sales beginning in July 2013. Current year foreign exchange rates are applied to both current year and prior year comparable store sales to achieve a consistent basis for comparison. There may be variations in the way in which some of our competitors and other apparel 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, buying, occupancy, ecommerce fulfillment, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold, 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.


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Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, freight costs for merchandise shipments from the distribution centers to the stores, 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, amortization of intangibles 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 and ecommerce businesses 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. Operating profit is the difference between gross profit and selling, general and administrative expenses. 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.

Critical Accounting Estimates

Our condensed consolidated financial statements have been prepared in conformance with U.S. 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 U.S. 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 February 2, 2013.

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                                 Six Months Ended
                                    August 3, 2013             July 28, 2012           August 3, 2013            July 28, 2012
Net sales                                      100.0 %                  100.0 %                   100.0 %                 100.0 %
Cost of goods sold                              65.1                     65.6                      66.3                    66.6

Gross profit                                    34.9                     34.4                      33.7                    33.4
Selling, general and
administrative expenses                         29.9                     31.6                      29.8                    29.2

Operating profit                                 5.0                      2.8                       3.9                     4.2
Interest and other income,
net                                              0.0                      0.8                       0.0                     0.5

Earnings before income taxes                     5.0                      3.6                       3.9                     4.7
Provision for income taxes                       2.0                      2.1                       1.5                     2.2

Net income                                       3.0 %                    1.5 %                     2.4 %                   2.5 %


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Three Months (13 weeks) Ended August 3, 2013 Compared With Three Months (13 weeks) Ended July 28, 2012

Net Sales

Net sales were $157.9 million for the three months ended August 3, 2013 compared to $135.1 million for the three months ended July 28, 2012, an increase of $22.8 million or 16.9%. The increase reflected the net addition of 52 stores (57 new stores offset by five store closures) subsequent to July 28, 2012, the impact of the calendar shift to include a week of the back-to-school season in the three months ended August 3, 2013 compared to the prior year quarter, Blue Tomato sales during the three months ended August 3, 2013 that were not comparable to the prior year quarter and a comparable store sales increase of 0.9% for the three months ended August 3, 2013.

The 0.9% increase in comparable stores sales was a result of a 19.1% increase for our comparable ecommerce sales, partially offset by a 0.4% decrease for our comparable in-store sales. Total ecommerce sales represented 8.8% of sales for the three months ended August 3, 2013, compared to 6.9% of sales for the three months ended July 28, 2012, increasing due to Blue Tomato ecommerce sales that were not comparable to the prior year quarter and the growth in comparable ecommerce sales mentioned above. The increase in comparable store 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 units per transaction, partially offset by a decrease in average unit retail. Comparable store sales increases in hardgoods, junior's clothing and footwear were partially offset by comparable store sales decreases in accessories, men's clothing and boy's clothing. For information as to how we define comparable stores, see "General" above.

Gross Profit

Gross profit was $55.1 million for the three months ended August 3, 2013 compared to $46.4 million for the three months ended July 28, 2012, an increase of $8.7 million, or 18.7%. As a percent of net sales, gross profit increased 50 basis points for the three months ended August 3, 2013 to 34.9%. The increase was primarily driven by an 80 basis points benefit due to prior year costs related to exit costs and other charges related to the relocation of our ecommerce fulfillment center and a step-up in inventory to estimated fair value in conjunction with our acquisition of Blue Tomato. This increase was partially offset by an increase in ecommerce related costs due to ecommerce sales increasing as a percent of total sales.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $47.3 million for the three months ended August 3, 2013 compared to $42.6 million for the three months ended July 28, 2012, an increase of $4.7 million, or 10.9%. SG&A expenses as a percent of net sales decreased by 170 basis points for the three months ended August 3, 2013 to 29.9%. The decrease was primarily driven by a 170 basis points benefit due to prior year costs related to transaction costs incurred in conjunction with our acquisition of Blue Tomato and exit costs and other charges related to the relocation of our home office. The decrease in SG&A expenses as a percent of net sales was also impacted by a decrease in incentive compensation. These decreases were partially offset by an increase in ecommerce corporate costs due to the growth and investments in our ecommerce business as a percent of total sales.

Net Income

Net income for the three months ended August 3, 2013 was $4.7 million, or $0.16 per diluted share, compared with net income of $2.1 million, or $0.07 per diluted share, for the three months ended July 28, 2012. Our effective income tax rate for the three months ended August 3, 2013 was 39.4% compared to 56.7% for the three months ended July 28, 2012. Our effective tax rate for the three months ended July 28, 2012 was adversely impacted by the tax effects of the acquisition of Blue Tomato.

Six Months (26 weeks) Ended August 3, 2013 Compared With Six Months (26 weeks) Ended July 28, 2012

Net Sales

Net sales were $306.4 million for the six months ended August 3, 2013 compared to $265.0 million for the six months ended July 28, 2012, an increase of $41.4 million or 15.6%. The increase reflected the net addition of 52 stores (57 new stores offset by five store closures) subsequent to July 28, 2012, Blue Tomato sales during the six months ended August 3, 2013 that were not comparable to the prior year, the impact of the calendar shift to include a week of the back-to-school season in the six months ended August 3, 2013 compared to the prior year and a comparable store sales increase of 0.2% for the six months ended August 3, 2013.


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The 0.2% increase in comparable stores sales was a result of a 16.1% increase for our comparable ecommerce sales, partially offset by a 1.0% decrease for our comparable in-store sales. Total ecommerce sales represented 10.2% of sales for the six months ended August 3, 2013, compared to 7.3% of sales for the six months ended July 28, 2012, increasing due to Blue Tomato ecommerce sales that were not comparable to the prior year and the growth in comparable ecommerce sales mentioned above. The increase in comparable store 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 units per transaction, partially offset by a decrease in average unit retail. Comparable store sales increases in hardgoods and junior's clothing were partially offset by comparable store sales decreases in men's clothing, accessories, boy's clothing and footwear. For information as to how we define comparable stores, see "General" above.

Gross Profit

Gross profit was $103.1 million for the six months ended August 3, 2013 compared to $88.5 million for the six months ended July 28, 2012, an increase of $14.6 million, or 16.5%. As a percent of net sales, gross profit increased 30 basis points for the six months ended August 3, 2013 to 33.7%. The increase was primarily driven by a 50 basis points benefit due to prior year costs related to exit costs and other charges related to the relocation of our ecommerce fulfillment center and a step-up in inventory to estimated fair value in conjunction with our acquisition of Blue Tomato. This increase was partially offset by an increase in ecommerce related costs due to ecommerce sales increasing as a percent of total sales.

Selling, General and Administrative Expenses

SG&A expenses were $91.2 million for the six months ended August 3, 2013 compared to $77.5 million for the six months ended July 28, 2012, an increase of $13.7 million, or 17.7%. SG&A expenses as a percent of net sales increased by 60 basis points for the six months ended August 3, 2013 to 29.8%. The increase was primarily due to an increase in ecommerce corporate costs due to the growth and investments in our ecommerce business as a percent of total sales and a 40 basis points impact of the charge related to the estimated future incentive payments to be paid in conjunction with our acquisition of Blue Tomato. Theses increases were partially offset by an 100 basis points benefit due to prior year costs related to transaction costs incurred in conjunction with our acquisition of Blue Tomato and exit costs and other charges related to the relocation of our home office. The decrease in SG&A expenses as a percent of net sales was also impacted by a decrease in incentive compensation.

Net Income

Net income for the six months ended August 3, 2013 was $7.2 million, or $0.24 per diluted share, compared with net income of $6.6 million, or $0.21 per diluted share, for the six months ended July 28, 2012. Our effective income tax rate for the six months ended August 3, 2013 was 39.3% compared to 47.5% for the six months ended July 28, 2012. Our effective tax rate for the six months ended July 28, 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, inventory purchases and capital investments, including new stores, store remodels, store relocations, store fixtures and ongoing infrastructure improvements. Additionally, we may use cash for the repurchase of our common stock. 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, current 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 remodel and relocation 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 2013, we expect to spend approximately $36 million to $38 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the 58 new stores we plan to open in fiscal 2013 and remodels or relocations of existing stores. There can be no assurance that the number of stores that we actually open in fiscal 2013 will not be different from the number of stores we plan to open, or that actual fiscal 2013 capital expenditures will not differ from this expected amount.


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Operating Activities

Net cash provided by operating activities decreased by $4.6 million to $9.9 million for the six months ended August 3, 2013 from $14.5 million for the six months ended July 28, 2012. 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 $5.7 million for the six months ended August 3, 2013, related to $14.5 million of capital expenditures primarily for new store openings and existing store remodels or relocations, partially offset by $8.8 million in net sales of marketable securities. Net cash used in investing activities was $18.7 million for the six months ended July 28, 2012, related to $69.7 million for the acquisition of Blue Tomato (net of cash acquired) and $21.9 million of capital expenditures primarily for new store openings and the construction of our new home office building in Lynnwood, Washington, partially offset by $72.9 million in net sales of marketable securities.

Financing Activities

Net cash used in financing activities for the six months ended August 3, 2013 was $2.4 million, primarily related to $4.3 million cash paid for the repurchase of common stock, partially offset by proceeds from stock-based compensation exercises and related tax benefits of $2.0 million. Net cash provided by financing activities for the six months ended July 28, 2012 was $2.3 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, 2014 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 August 3, 2013 and February 2, 2013. We had open commercial letters of credit outstanding under our secured revolving credit facility of $1.0 million and $0.2 million at August 3, 2013 and February 2, 2013. The secured revolving credit facility bears interest at the Daily Three Month LIBOR rate plus 1.00%.

Additionally, in conjunction with our acquisition of Blue Tomato, we assumed $2.3 million in long-term debt, which relates to amounts borrowed to fund operations. At August 3, 2013, the amount of borrowings under this debt was $2.0 million.


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Contractual Obligations and Commercial Commitments

There were no material changes outside the ordinary course of business in our
contractual obligations during the six months ended August 3, 2013. The
following table summarizes the total amount of future payments due under our
contractual obligations at August 3, 2013 (in thousands):



                                                                   Fiscal 2014 and       Fiscal 2016 and
                                    Total        Fiscal 2013         Fiscal 2015           Fiscal 2017         Thereafter
Operating lease obligations (1)   $ 504,389     $      35,322     $         140,279     $         126,583     $    202,205
Purchase obligations (2)            134,451           134,451                    -                     -                -
Debt principal and interest (3)       2,176               174                   695                   516              791

Total (4)                         $ 641,016     $     169,947     $         140,974     $         127,099     $    202,996

(1) Amounts do not include percentage rent, real estate taxes, insurance or common area maintenance charges unless these costs are fixed and determinable.

(2) We have an option to cancel these commitments with no notice prior to shipment, except for certain private label purchase orders in which we are obligated to repay contractual amounts upon cancellation.

(3) Amounts include debt principal and scheduled interest payments on our long-term debt assumed in conjunction with our acquisition of Blue Tomato.

(4) The table above excludes the potential future incentive payments to the sellers and certain employees of Blue Tomato in an aggregate amount of up to 22.1 million Euros ($29.2 million, using the exchange rate as of August 3, 2013) to the extent that certain financial metrics are met and the sellers and certain employees remain employed with Blue Tomato through April 2015. At August 3, 2013, we estimated that we will be obligated for future incentive payments of 9.0 million Euros ($11.9 million). See Note 2, "Business . . .

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