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ZUMZ > SEC Filings for ZUMZ > Form 10-K on 18-Mar-2014All Recent SEC Filings

Show all filings for ZUMIEZ INC

Form 10-K for ZUMIEZ INC


18-Mar-2014

Annual Report


Item 7. 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 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." See the cautionary note regarding forward-looking statements set forth at the beginning of Part I of the Annual Report on Form 10-K.


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Fiscal 2013-A Review of This Past Year

In fiscal 2013, teen retail in general experienced a challenging sales environment, with many mall based teen retailers seeing significant sales declines. Zumiez was not immune to the declines in traffic; however, with our distinctive brand offering and diverse product selection, as well as the unique customer experience our sales associates provide, our sales results held strong relative to the teen retail sector, with comparable stores sales down slightly while product margins remained essentially flat. At the beginning of fiscal 2013, we anticipated the upcoming year would be more challenging; however, we made a decision to continue making strategic investments that we believe will reap long-term benefits.

Our primary focus in fiscal 2013 was continued investments domestically and internationally in technology and people aimed at enhancing the consumer experience across all channels our customer engages with us and to build out our infrastructure in Europe where we are in the early stages of growth after the acquisition of Blue Tomato in fiscal 2012. In North America we opened 53 stores (44 in the U.S. and nine in Canada), we upgraded the zumiez.com ecommerce platform and made progress across our omni-channel initiatives, including expanding access to our inventory in all channels. In Europe we opened six stores during fiscal 2013, doubling our store count to 12 stores at the end of fiscal 2013, and we launched blue-tomato.com on a new ecommerce platform during the year.

The following table shows net sales, operating profit and margin and diluted earnings per share growth for fiscal 2013 compared to fiscal 2012. The fiscal 2013 results include a $2.7 million benefit for the correction of an prior year error related to our calculation to account for rent expense on a straight-line basis and a $1.3 million expense for a litigation settlement. Charges in fiscal 2013 associated with the acquisition of Blue Tomato netted to a benefit of $0.1 million primarily related to a $2.6 million benefit for the reversal of the previously recorded expense associated with future incentive payments related to the transaction, offset by $2.3 million for the amortization of intangible assets. The fiscal 2012 results include $7.3 million in costs associated with the acquisition of Blue Tomato, including one-time acquisition costs, amortization of intangible assets and the costs associated with the future incentive payments related to the transaction, as well as $2.1 million in charges for the relocation of our home office and ecommerce fulfillment center.

                                         Fiscal 2013 (1)            Fiscal 2012 (1)            % Change
Net sales (in thousands)                $         724,337          $         669,393                   8 %
Operating profit (in thousands)         $          72,842          $          68,542                   6 %
Operating margin                                     10.1 %                     10.2 %
Diluted earnings per share              $            1.52          $            1.35                  13 %

(1) Fiscal 2013 consisted of 52 weeks versus 53 weeks in fiscal 2012.

The increase in net sales was primarily driven by the net addition of 53 stores (59 new stores offset by six store closures), partially offset by the impact of one less week of sales and a 0.3% decrease in comparable store sales. The decrease in comparable stores sales was primarily driven by a decrease in transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased primarily due to an increase in units per transaction, partially offset by a decline in average unit retail. Operating margin was down slightly in fiscal 2013 compared to fiscal 2012 as a result of deleveraging the cost structure on a comparable store sales decline, including the impact of investments made in the year, and the impact of the other charges discussed above.

The results for fiscal 2013 were below our expectations and our historical growth performance; however, when viewed against the teen landscape, we are encouraged that we were able to hold comparable store sales close to flat while maintaining strong product margins. While we cannot project when the current traffic headwinds will end, we believe that our proven product strategies and differentiating shopping experience, along with the enhancements we continue to make, will result in long-term earnings growth.


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Fiscal 2014-A Look At the Upcoming Year

We enter fiscal 2014 with many of the same challenges we faced throughout fiscal 2013. The teen retail sector is in the midst of a down cycle which appears to be driven by a combination of factors. With limited visibility into when these headwinds will subside, we are being cautious with our outlook for the year. Fiscal 2013 was a heavy investment year relative to our top line growth. In fiscal 2014, we do not anticipate the same rate of growth for our cost structure; however, we do plan to fund the growth and strategic initiatives that support our long-term vision. This could put pressure on our earnings in the short-term, but we believe will reap long-term benefits.

Long-term we aim to grow sales annually and grow operating profit at a faster rate than sales by focusing on our growth initiatives while managing our cost structure. Our primary growth vehicles in both our domestic and international markets are:

1. Initiatives that drive comparable store sales gains;

2. Opening high return new stores;

3. Ecommerce penetration; and

4. Omni-channel initiatives.

In fiscal 2014, we expect total sales to increase driven by the opening of approximately 55 new stores, including approximately five stores in Europe. We will make further investments in people and infrastructure in fiscal 2014, building on the progress we have made through fiscal 2013, primarily focused on the development of our omni-channel sales strategies and our international growth. We anticipate inventory levels per square foot to be flat or grow slightly. We expect our cash, short-term investments and working capital to increase, and do not anticipate any new borrowings during the year.

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. Net sales are allocated between in-store and ecommerce based on the location where the sale is fulfilled, which does not always represent where the customer originated the sale. 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.


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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.

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, training expenses and 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 and store occupancy. Comparable store sales also have a direct impact on our total net sales, operating profit, 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.


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Results of Operations

The following table presents selected items on the consolidated statements of income as a percent of net sales:

                                           Fiscal 2013             Fiscal 2012            Fiscal 2011
Net sales                                         100.0 %                 100.0 %                100.0 %
Cost of goods sold                                 63.9 %                  64.0 %                 63.7 %

Gross profit                                       36.1 %                  36.0 %                 36.3 %
Selling, general and
administrative expenses                            26.0 %                  25.8 %                 25.5 %

Operating profit                                   10.1 %                  10.2 %                 10.8 %
Interest and other
(expenses)/income, net                             (0.2 %)                  0.3 %                  0.3 %

Earnings before income taxes                        9.9 %                  10.5 %                 11.1 %
Provision for income taxes                          3.6 %                   4.2 %                  4.4 %

Net income                                          6.3 %                   6.3 %                  6.7 %

Fiscal 2013 Results Compared With Fiscal 2012

Net Sales

Fiscal 2013 had 52 weeks versus 53 weeks in fiscal 2012. Net sales numbers for fiscal 2012 include an additional week and fiscal 2013 comparable stores sales are compared to the comparable store sales for the 52 weeks ended February 2, 2013. Net sales were $724.3 million for fiscal 2013 compared to $669.4 million for fiscal 2012, an increase of $54.9 million or 8.2%. The increase reflected the net addition of 53 stores (59 new stores offset by six store closures) and Blue Tomato sales during fiscal 2013 that were not comparable to the prior year, partially offset by the impact of the 53rd week included in fiscal 2012 results and a comparable store sales decrease of 0.3% for fiscal 2013.

The 0.3% decrease in comparable store sales was a result of a 1.0% decrease for our comparable in-store sales, partially offset by a 5.4% increase for our comparable ecommerce sales. Total ecommerce sales represented 12.3% of sales for fiscal 2013, compared to 11.2% of sales for fiscal 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 decrease in comparable stores sales was primarily driven by a decline in comparable store transactions, partially offset by an increase in dollars per transaction. Dollars per transaction increased due to an increase in units per transaction, partially offset by a decrease in average unit retail. Comparable store sales decreases in men's apparel, footwear and boy's apparel were partially offset by comparable store sales increases in junior's apparel, hardgoods and accessories. For information as to how we define comparable store sales, see "General" above.

Gross Profit

Gross profit was $261.8 million for fiscal 2013 compared to $241.3 million for fiscal 2012, an increase of $20.5 million, or 8.5%. As a percentage of net sales, gross profit increased 10 basis points in fiscal 2013 to 36.1%. The increase was primarily driven by a 40 basis points benefit due to prior year costs related to a step-up in inventory to estimated fair value in conjunction with our acquisition of Blue Tomato and a 40 basis points impact of the correction of an error related to our calculation to account for rent expense on a straight-line basis. These increases were partially offset by a 50 basis points impact due to the deleveraging of our store occupancy costs and a 50 basis points impact of the increase in ecommerce related costs due to ecommerce sales increasing as a percent of total sales.


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Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $188.9 million for fiscal 2013 compared to $172.7 million for fiscal 2012, an increase of $16.2 million, or 9.4%. SG&A expenses as a percent of net sales increased by 20 basis points in fiscal 2013 to 26.0%. The increase was primarily driven by a 60 basis points impact of the increase in ecommerce corporate costs due to the growth and investments in our ecommerce business as a percent of total sales, a 40 basis points impact due to the deleveraging of our store operating expenses, a 20 basis points impact due to the deleveraging of our corporate costs and a 20 basis points impact of a litigation settlement charge incurred in fiscal 2013. These increases were partially offset by a 70 basis points impact of the reversal of the previously recorded expense associated with the future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, a 30 basis points benefit due to prior year costs related to transaction costs incurred in conjunction with our acquisition of Blue Tomato and a 20 basis point impact due to a decrease in incentive compensation.

Net Income

Net income for fiscal 2013 was $45.9 million, or $1.52 per diluted share, compared with net income of $42.2 million, or $1.35 per diluted share, for fiscal 2012. Our effective income tax rate for fiscal 2013 was 36.1% compared to 40.0% for fiscal 2012. The decrease in the effective tax rate for fiscal 2013 compared to fiscal 2012 was primarily due to the impact of non-taxable acquisition related expenses incurred in fiscal 2012, the release of valuation allowance related to net operating losses and other deferred tax assets of foreign subsidiaries and a reduction of state and local income taxes.

Fiscal 2012 Results Compared With Fiscal 2011

Net Sales

Fiscal 2012 had 53 weeks versus 52 weeks in fiscal 2011. Net sales for the year include an additional week and fiscal 2012 comparable stores sales are compared to the comparable store sales for the 53 weeks ended February 4, 2012. Net sales were $669.4 million for fiscal 2012 compared to $555.9 million for fiscal 2011, an increase of $113.5 million or 20.4%. The increase reflected a comparable store sales increase of 5.0% for fiscal 2012 as well as the net addition of 54 stores (59 new or acquired stores offset by five store closures), which includes the acquisition of Blue Tomato during the second quarter of fiscal 2012. Included in the results for fiscal 2012 were $28.3 million in net sales of Blue Tomato.

The 5.0% increase in comparable store sales was a result of a 2.9% increase for our comparable in-store sales and a 31.8% increase for our comparable ecommerce sales. Total ecommerce sales represented 11.2% of sales for fiscal 2012, compared to 7.3% of sales for fiscal 2011, and this increase was driven by the growth in comparable ecommerce sales mentioned above and our Blue Tomato acquisition. 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 apparel, junior's apparel, footwear and hardgoods were partially offset by comparable store sales decreases in accessories and boy's apparel. For information as to how we define comparable store sales, see "General" above.

Gross Profit

Gross profit was $241.3 million for fiscal 2012 compared to $201.7 million for fiscal 2011, an increase of $39.6 million, or 19.6%. As a percentage of net sales, gross profit decreased 30 basis points in fiscal 2012 to 36.0%. The decrease was primarily due to an 80 basis points increase in ecommerce fulfillment and ecommerce shipping expenses due to ecommerce sales increasing as a percentage of total sales and a 30 basis points impact of a $2.2 million charge recorded during fiscal 2012 related to a step-up in inventory to estimated fair value in


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conjunction with our acquisition of Blue Tomato. These decreases were partially offset by a 70 basis points impact from leveraging our store occupancy costs on a 20.4% net sales increase and 30 basis points in distribution center efficiencies.

Selling, General and Administrative Expenses

SG&A expenses were $172.7 million for fiscal 2012 compared to $141.4 million for fiscal 2011, an increase of $31.3 million, or 22.1%. SG&A expenses as a percent of net sales increased by 30 basis points in fiscal 2012 to 25.8%. The increase was primarily due to a 60 basis points increase in ecommerce corporate costs due to the growth in our ecommerce business, a 30 basis points impact of a $2.3 million charge incurred during fiscal 2012 related to the estimated future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, a 30 basis points impact of the $1.9 million in transaction costs incurred during fiscal 2012 in conjunction with our acquisition of Blue Tomato and a 20 basis points impact of $1.3 million in amortization of intangible assets acquired as part of our Blue Tomato acquisition. These increases were partially offset by 90 basis points in store operating efficiencies and a 30 basis points decrease in incentive compensation.

Net Income

Net income for fiscal 2012 was $42.2 million, or $1.35 per diluted share, compared with net income of $37.4 million, or $1.20 per diluted share, for fiscal 2011. Our effective income tax rate for fiscal 2012 was 40.0% compared to 39.5% for fiscal 2011. Our effective tax rate for fiscal 2012 was adversely impacted by the tax effects of the acquisition of Blue Tomato.

Seasonality and Quarterly Results

As is the case with many retailers of apparel and related merchandise, our business is subject to seasonal influences. As a result, we have historically experienced, and expect to continue to experience, seasonal and quarterly fluctuations in our net sales and operating results. Our net sales and operating results are typically lower in the first and second quarters of our fiscal year, while the back-to-school and winter holiday periods in our third and fourth fiscal quarters historically have accounted for the largest percentage of our annual net sales. Quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings and the relative proportion of our new stores to mature stores, fashion trends and changes in consumer preferences, calendar shifts of holiday or seasonal periods, changes in merchandise mix, timing of promotional events, general economic conditions, competition and weather conditions.


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The following table sets forth selected unaudited quarterly consolidated statements of income data. The unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial statements included elsewhere herein and includes all adjustments that we consider necessary for a fair presentation of the information shown. This information should be read in conjunction with our audited consolidated financial statements and the notes thereto. The operating results for any fiscal quarter are not indicative of the operating results for a full fiscal year or for any future period and there can be no assurance that any trend reflected in such results will continue in the future.

                                                                  Fiscal 2013 (1)
                                           First             Second            Third             Fourth
                                          Quarter            Quarter          Quarter          Quarter (2)
                                                 (in thousands, except stores and per share data)
Net sales                               $   148,496         $ 157,858        $ 191,145        $     226,838
Gross profit                            $    47,972         $  55,120        $  70,789        $      87,879
Operating profit                        $     4,029         $   7,835        $  20,678        $      40,300
Net income                              $     2,498         $   4,739        $  11,860        $      26,851
Basic earnings per share                $      0.08         $    0.16        $    0.40        $        0.90
Diluted earnings per share              $      0.08         $    0.16        $    0.39        $        0.89
Number of stores open at the end of
the period                                      503               529              548                  551
Comparable store sales (decrease)
increase                                       (0.7 %)            0.9 %            1.5 %               (2.2 %)

                                                                  Fiscal 2012 (3)
                                           First             Second            Third             Fourth
                                          Quarter            Quarter          Quarter            Quarter
                                                 (in thousands, except stores and per share data)
Net sales                               $   129,899         $ 135,066        $ 180,023        $     224,405
Gross profit                            $    42,101         $  46,425        $  67,075        $      85,683
Operating profit                        $     7,262         $   3,778        $  21,401        $      36,101
Net income                              $     4,527         $   2,086        $  12,667        $      22,884
Basic earnings per share                $      0.15         $    0.07        $    0.41        $        0.75
Diluted earnings per share              $      0.14         $    0.07        $    0.40        $        0.74
Number of stores open at the end of
the period                                      455               477              493                  498
Comparable store sales increase
(decrease)                                     12.9 %             9.5 %            3.7 %               (1.0 %)

(1) All quarters in fiscal 2013 are 13 week periods ended May 4, 2013, August 3, 2013, November 2, 2013 and February 1, 2014.

(2) Included in the results for the fourth quarter of fiscal 2013 are the following: a) a benefit of $5.8 million, of which $2.6 million related to prior fiscal years, for the reversal of the previously recorded expense associated with the future incentive payments to be paid in conjunction with . . .

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