Zumiez (ZUMZ) Falls on Q4 Earnings Miss, Sales Remain Strong

Zumiez Inc. ZUMZ delivered lower-than-expected earnings in fourth-quarter fiscal 2017, despite solid top-line trends. Notably, sales topped estimates for the seventh straight quarter. Additionally, the company’s earnings and sales improved year over year.

However, shares of Zumiez declined 2% in the after-market trading session yesterday, mainly due to the earnings lag and a soft earnings view for first-quarter fiscal 2018. Nonetheless, this Zacks Rank #3 (Hold) stock has advanced 11.4% in the past year, outperforming the industry’s growth of 1.3%. This can primarily be attributed to its solid comps trend.

Q4 Highlights

Zumiez delivered earnings of 82 cents per share, which improved 10.8% year over year but lagged the Zacks Consensus Estimate of 90 cents.

Zumiez Inc. Price, Consensus and EPS Surprise

Zumiez Inc. Price, Consensus and EPS Surprise | Zumiez Inc. Quote

Net sales advanced 16.9% year over year to $308.2 million, beating the Zacks Consensus Estimate of $302 million. The improvement in the top line came on the back of favorable comps, the contribution from the 53rd week, positive currency impact and 13 net new store additions since last year. Additionally, the company benefited from an adjustment to deferred revenues related to the STASH loyalty program.

Quarterly comps grew 7.5%, substantially surpassing the company’s projection of 7% growth. Comps benefited from higher transaction volume, somewhat offset by a drop in dollars per transaction. This marked its sixth straight quarter of positive comps and transaction gains. Moreover, strength in the men’s, women's and footwear categories aided comps growth, partly negated by lower comps in accessories and hardgoods.

The company’s robust comps performance in the quarter stemmed from the success in the holiday season. Further, top-line growth reflects significant gains from its differentiated merchandising strategies, integrated sales channels and excellent customer service.

Further, the company’s positive comps trend continued in February. Comps for the four-week period ended Mar 3, 2018, escalated 9.2% against a 3.1% decline recorded a year-ago quarter. Moreover, Zumiez reported sales growth of 23.2% to $63.4 million in February.

In the reported quarter, gross profit jumped 22% to about $114.7 million, while gross margin expanded 150 basis points (bps) to 37.2%. The increase can be attributed to 120 bps occupancy expense leverage, 70 bps gains from product margin and 80 bps related to the aforementioned adjustment to deferred revenues associated with the STASH loyalty program. This was partly negated by 70 bps rise in inventory shrinkage and 20 bps increase in incentive compensation.

Zumiez’s selling, general and administrative (SG&A) expenses increased 17.5% to nearly $77.7 million, while as a percentage of sales, SG&A expense expanded 20 bps to 25.2%. The higher expenses related to increased annual incentive compensation were partly offset by leverage in store operating and corporate costs.

Operating income grew 32.4% year over year to $18.8 million. Moreover, operating margin expanded 130 bps to 12%.

Financial Update

As of Feb 3, Zumiez’s cash and marketable securities were $121.9 million, up 54.7% year over year. The upside was driven by cash flow from operations, partly offset by capital expenditures. Total shareholders’ equity at the end of the quarter was $355.9 million.

Further, the company generated $65.5 million as cash flow from operations in fiscal 2017. Capital expenditures for the year totaled $24.1 million.

For fiscal 2018, the company anticipates capital expenditures in a range of $21-$23 million, which will be primarily used for new store openings and planned remodels.

Store Update

In fiscal 2017, the company opened 19 new stores, including 12 in North America, five in Europe and two in Australia. Additionally, the company closed six stores as a part of its strategy of optimizing store fleet. This brings the net store openings for fiscal 2017 to 13.

As of Feb 3, 2018, the company operated a total of 698 stores, including 657 in North America, 34 in Europe and seven in Australia.

In fiscal 2018, the company plans to open about 13 new stores including six in the United States, five in Europe and two in Australia. It anticipates nearly half of these openings to occur ahead of the back-to-school season.

Guidance

Going into 2018, Zumiez remains confident of delivering accelerated earnings growth for the year, backed by solid top-line and positive comps trends, margin enhancement programs, improved expense leverage and lower taxes. Additionally, the company believes that infrastructure investments, made to provide a seamless customer experience and a unique approach to merchandising, will aid both top- and bottom-line growth in 2018 and beyond.

Consequently, the company projects comps to grow in the low single-digit range in fiscal 2018. However, it expects sales and earnings for the year to be impacted by the absence of the additional 53rd week compared with fiscal 2017.

Further, the company expects product margins to be flat to slightly accretive in fiscal 2018. Operating profit is estimated to increase in the high single-digit range. SG&A expenses are expected to grow at a significantly slower rate than fiscal 2017, due to strong expense management and absence of increase in incentive compensation that occurred in fiscal 2017. Apart from the aforementioned gains, the company expects earnings for fiscal 2018 to benefit from the new tax reform with an effective tax rate of roughly 27%.

However, the company’s guidance for first-quarter fiscal 2018 was slightly disappointing. While the company robust comps growth and sales guidance, earnings projections were discouraging.

The company expects net sales for the first quarter in the $198-$202 million range, while comps growth is anticipated to be 4-6%. The company stated that monthly sales in the quarter will be impacted by the shift in Easter holiday. The shift is likely to bear a positive impact on sales for March and hurt sales in April.

Consolidated operating margins are projected between negative 2.6% and negative 1.7%. At the high-end of the guidance, this reflects nearly 46% decline from first-quarter fiscal 2017. Consequently, the company projects loss per share of 13-18 cents compared with a loss of 18 cents per share reported in the year-ago quarter. This is likely to stem from 3 cents per share negative impact, related to the company’s inability to recognize the tax benefit on losses in certain jurisdictions within Europe.

Moreover, this is estimated to negatively impact earnings per share for the second and third quarters as well. However, this should turn to be beneficial in the fourth quarter as the company generates earnings in Europe.

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