Does it Matter What Industry We Think We’re In? Zumiez’s Quarter
For many of us, “action sports” doesn’t really describe our target market anymore. We struggle (or at least I struggle) with words like “youth culture” or “fashion” or “outdoor” to describe it. None of them work very well. They are all correct, but not adequate or complete.
Maybe Zumiez has helped me figure out why. During the conference call, CEO Rick Brooks said, “…it’s really not about e-commerce, it’s really not about stores, it’s about meeting whatever our customers want and whatever channel they want it, anyway they want to get the product. That’s where we’re trying to play and we’re trying to dominate the market in that arena of integrated multichannel selling.”
He’s also talked about the fact that they had reduced their North American store projection over the years from 800 to between 600 and 700, but with no decline in revenue from what they would have expected with 800. That is due to the growth of ecommerce and integrated multichannel selling (also known as the now ubiquitous omni channel).
The thought that popped into my head was that Rick probably didn’t care quite as much as he used to whether the customer was best classified as action sports, youth culture, fashion, outdoor, or something else. What he cares about was that Zumiez carried the apparel, accessory, footwear, and limited hard goods brands (because that’s a point of differentiation- for now- for Zumiez) that his teen to young adult customers want.
At some level Zumiez, or any other retailer for that matter, isn’t going to define itself quite as rigorously as it used to. Its customer is going to define it. That will happen at least partly through Zumiez’s rigorous and ongoing process of identifying and assisting new brands and integrating them into Zumiez’s selling channels at whatever level they can succeed. They discuss the process of identifying and supporting new brands in the conference call. Here’s part of what CEO Brooks say on the subject:
“…we are just laser-focused on trying to be supportive and a really good partner for our small retail brands. And again, we have hundreds of brands today that we’re doing business with, just like we always have. And some of them are just in a few doors, and we want to be the right way for that young brand, and we want to do everything we can to help see them be successful. Maybe it’s just those 10 doors, but we’re hoping that over time — and they have to do their job well, too, of making sure that they have great products. They have to have a great marketing, and product and marketing have to be completely aligned with the unique brand positioning. And then they have to have great retail partners that believe in full price selling.”
It occurs to me we’re already seeing the customer define the brand happen in the decline of traditional print and media advertising. Why bother spending money (whose impact was already unclear) to define yourself to a certain customer group when the omnipotent, endlessly connected customer with near perfect information is going to decide for themselves what you stand for?
It certainly changes the roll of the marketing department. It doesn’t have to explain what the company is about. It has to listen to the customer to evolve with them but not, it occurs to me, let that customer pull the company too fast or in a direction which will ultimately be wrong.
And yet, in response to analyst’s question, Rick talks about their Ultimate Gift Guide that they are mailing to selected control groups to see what kind of response they get. Maybe the role of print is changing in ways we don’t quite understand yet. I’d love more details on how they see the guide tying into their ecommerce channel.
Zumiez may also have an advantage in this environment in the way they identify store managers and give them a high level of management discretion.
So I think I’m going to stop stressing out about what to call our industry. I’ve concluded not only that it’s less important, but that it might be a mistake to worry about it as it could lead to resistance to inevitable change.
Meanwhile, back in the financial statements, Zumiez’s revenues rose 6.2% to $191.1 million in the quarter ended November compared to the quarter ended October 27 last year. Ecommerce sales were 11% of the total (10.7% in last year’s quarter). They had a net of 55 more stores open in this year’s quarter (541 in North America at the end of the quarter). Comparable store sales increased 1.5%, “…partially offset by the negative impact of the calendar shift, which moved a week of the back-to-school season into the second fiscal quarter of fiscal 2013 and out of the three months ended November 2, 2013 compared to the prior year quarter.” The impact was $7 million.
Comparable store sales include ecommerce sales. They rose 7.9% while brick and mortar sales were up only 0.7%.
The gross margin declined slightly from 37.3% to 37%. “The decrease was primarily driven by the deleveraging of our store occupancy costs and an increase in ecommerce related costs due to ecommerce sales increasing as a percent of total sales. This decrease was partially offset by an 80 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.”
Without the Blue Tomato inventory step-up, then, the gross margin would have been 36.2%.
SG&A expense as a percentage of sales rose from 25.4% to 26.2% or from $45.7 to $50.1 million. Part of the increase was from “…deleveraging of our store operating expenses.” I might have expected the opposite result with 55 more stores open. No detailed explanation is offered.
There was a charge of $1.3 million for settling litigation included, and some additional investments in their ecommerce business. There was a benefit of 0.6% because they reduced the expected earnout payments for the Blue Tomato acquisition. That happens because Blue Tomato isn’t performing as well as they had previously expected. That does not necessarily mean it’s performing badly. Total charge for the Blue Tomato acquisition this quarter was $1.7 million.
Operating profit fell from $21.4 to $20.7 million and net income was down from $12.7 to $11.9 million. The balance sheet is fine, and there’s no big change from last year. Inventory is up, but it’s consistent with having 55 more stores. In North America, inventory per square foot was basically flat.
I guess I’ll have Rick Brooks help me end this.
“I just view retail in America as over-stored. I think, in particular, teen retail is way over-stored. And that is one of the reasons that there’s such tremendous promotional pressure in the teen retail world. One of the reasons, not all of them. But it is a significant reason, I think, that we see the level of promotional cadence in the teen world that we’re seeing today.”
That’s a problem for everybody in this space- not just Zumiez. And it’s a reason why you have to operate well. Sales and margin increases are hard to come by. The winners, I think, will be letting their customers help them determine their market position. I think Zumiez’s management would agree with that.
action sports culture is expanding beyond the traditional core sports (skate, surf, snow, bmx, moto). The problem is the brand leaders in action sports have become stale, safe, and complacent. We need to remember that we as a culture were anti-establishment, anti-fashion, and anti-corporate and that’s why our brands were exciting to kids. You couldn’t buy them in a mall. They were not the brands you parent wanted you wearing. Action Sports retailers and brands need to find a way to make kids “want” the action sports brand experience again.
Hi Matt,
As action sports expands beyond core sports, it becomes less action sports all the time. If you’re public you need to grow and you pretty quickly more past the “core” market. Even when you’re not public, this tends to happen. Remember how small the real action sports market is. I agree with you that retailers and brands need to make “want” the brand experience, but please remember that’s something each company has to do for itself. “The industry” will not fix this.
Thanks for the comment,
J.