Zumiez Quarter and Some Interesting Conference Call Comments

Zumiez is one of the public companies I follow that I hold up as doing most things right, but that doesn’t make them invulnerable to a tough economic environment.

Revenues for the quarter ended July 30 were down 0.86% from the same quarter ended last year on August 1.  They declined from $179.8 to $178.3 million.  The decline reflects an $8.7 million decline in comparable store sales (4.9%) offset by a net opening of 33 new stores.  North American sales rose 0.2%- about $0.4 million.  “…European sales decreased $1.2 million or 8.5% to $12.3 million.”

The gross profit margin fell from 32.1% to 30.8%.  Product margin rose by 0.3%, but deleveraging of store occupancy costs (spreading more costs across lower revenues) cost them 1.3%.

SG&A expenses rose 6.7% from $52.5 to $55.9 million.  As a percentage of sales they rose from 29.2% to 31.5%.  This isn’t necessarily a completely bad thing, assuming some of the additional spending addresses their long term strategy.  Some of it is also funding minimum wage increases.

That produced an operating loss of $1.1 million compared to an operating profit of $5.3 million in last year’s quarter.  Net income fell from a profit of $3.2 million to a loss of $838,000.  That includes an income tax expense of $1.98 in last year’s quarter compared to a tax benefit of $526,000 in this year’s.

I guess you can argue that the balance sheet, compared to a year ago, weakened a bit but not so that it matters.  Cash and marketable securities fell from $80.7 to $57.3 million.  During the year, they have bought $18.3 million of their own stock ($6.7 million in the just ended quarter).

Inventory rose slightly from $122 to $132 million.  The current ratio fell from 2.43 to 2.05.  Shareholders’ equity declined 8.2% from $305 to $280 million.

At July 30, Zumiez had 673 stores; 604 in the U.S., 44 in Canada and 25 in Europe.  They are looking at opening 29 new stores in 2016 including six in Canada and seven in Europe.

During the conference call, they announced the August 31^st completion of the acquisition of Australian retailer Fast Times.  It operates five stores and a website.  They paid $5.5 million (Australian) plus $1.4 million in Zumiez’s stock (also valued in Australian dollars I assume).  In the 12 months ended June 30, Fast Times had revenue of AUD $9.2 million and had pretax margins of around 10%.

I assume the plan is to grow Fast Times stores in the same way we saw growth in European and Canadian stores once Zumiez got a foothold in those markets.  Another thing I find interesting is that Zumiez is now operating in four currencies.  It adds some complexity, but maybe also some opportunities as the Australian business grows.

Let’s start looking at strategy by recalling that Zumiez considers itself to have one distribution channel and doesn’t differentiate between online, mobile, and brick and mortar as they think about their market.   As a result, they divide their business up into something they call trade areas.

What’s a trade area?  I don’t think I’ve ever heard them define it publicly.  No doubt it has a geographic component, but I don’t think it’s that simple.  As I understand it (don’t want to be putting words in Zumiez’s mouth here), it is the “locus of connection” as defined by their customers and the way they choose to shop.  It’s a moving target.

Wow, that sounds great!  Unfortunately, I’m not completely sure what it means operationally, and I’m pretty sure Zumiez and other retailers are also still figuring it out.  Before I get too far into the clouds here, which is a pretty good way to put it, I’m going to let Zumiez’s CEO Rick Brooks help bring me back to earth.

“Our strategy for new store openings remains the same. We’re committed to opening only those stores that are required to best serve our customers in any given trade area. Accordingly, and as we begin to approach our target for total mall store count in North America, our new store openings have slowed. Our focus has shifted towards optimization of the store base as we leverage our integrated structural and technological platform to maximize the impact each store has on its respective geographic region.”

Okay, “optimization of the store base.”  What does that mean for these trade areas?  Do you need fewer stores?  For example, might you decide that a store with a $15 an hour minimum wage was too expensive to operate given that you have a store ten miles away where wages were $10 an hour and your customers were defining trade areas in such a way that they were willing to buy more on line?  Does good management of a trade area mean you can generate more revenue at lower cost with fewer brick and mortar stores?

I wrote this article on minimum wage a week or so ago based on a comment Zumiez made in their conference call.  I wanted to add that the additional company cost isn’t just the increase for those making less than minimum wage.  Remember the people already making the new minimum wage or more are going to ask why they can’t get an increase as well.  It’s a big number.  Please recognize that I’m not arguing for or against increases in the minimum wage.  I’m just pointing out, here and in the article, some possible impacts.

Next, let’s tie Zumiez’s idea of trade areas to the rollout of its new systems.  As they’ve announced, they are rolling out the new “structural and technological platform” referred to above.  They consider it an integral part of their strategy.  To call it a point of sale or accounting system would miss the point.

You know that Zumiez has worked towards “hyper-localized merchandised assortments” and fulfilling all their online orders through their stores.  Here’s how Rick describes the systems and their impact.

“Enhancements for making product delivery and our world class customer service are first and foremost aimed at augmenting our positioning and relevancy to our core customer base. Our efforts to-date are giving significantly faster delivery times for our online orders to our localized store fulfillment program. As we implement our customer engagements within North America, we’ll gain additional touch points for our customer, a faster, more integrated commerce platform and enhanced omni-channel functionality. This allowed us to further interact with our customers to facilitate alignment between our customers’ desires, our brand offerings and positioning.”

Zumiez considers itself a brand.  It does not want to be defined by the brands it carries.  It expects to sell brands at full price and margin.  This, according to Rick is “…representative of brand strength, our Zumiez brand strength, meaning that our consumer sees value on what we are doing and is willing to pay full price.”  It’s “…about having unique brands that are merchants in the marketplace, it reflects back to the comment we made about the strength of private label here performing well, and it also reflects back to the fact that we were down a little bit last year.”

They talk about brands emerging anywhere and how they “…quickly reach our niche consumers anywhere in the world through these mobile devices.”

“We want to be their local shop, but we want to be the local shop with global reach and global scale.”

How does this all come together?  First, Zumiez is going to be completely agnostic about brands.  They will carry those brands their customers want them to carry for as long as they can sell them for good margin.  That shouldn’t be a new concept for any retailer, but I expect the speed of brand turnover to generally accelerate.

Rick has spoken in past conference calls about long term trends that have allowed them, in the past, to sell of a lot of specific style or category of merchandise.  I wonder if he still expects those opportunities to return.  Zumiez is certainly organizing itself as if it doesn’t expect that.  Or perhaps it’s better to say they are organizing so it won’t matter if doesn’t happen.

Second, Zumiez doesn’t know what it’s going to find out when these new systems are all on line and generating data in ways they never been able to look at it before.  What will they learn?  What will they be able to do differently/better?  The consumer is in charge.  You’d better be able to react as quickly as they react and follow them to the new trends and brands before it changes again.  Your systems are no longer a cost center.  They are a critical element of your strategic advantage, if you can find one.

Third, notice the relationship between the brands that Zumiez carries and the strength of the Zumiez brand.  They are reinforcing each other.  This allows Zumiez to be successful in private label (and serve a customer looking for value and make a better margin) without damaging customer perception of the stores, as we’ve seen some other retailers do.  Zumiez mentions in the conference call that they did something like 300 events at stores and other place last year.

Fourth, the new systems, the data they generate, and the flexibility they provide will be the engine that drives the concept of the trade areas.  It will allow, as they said earlier, for “…optimization of the store base.”  But I think it’s a mistake to assume they are just talking about brick and mortar stores here.  It’s optimization of each trade area as they evolve, expand, correct, adjust.  This is all going to be continuously in motion.

Finally, Zumiez has been very specific about who their customers are and that they want to sell the right brands (as defined by those customers) at full price and margin.  This is very interesting to me.  You know I think there’s a conflict between being achieving the growth a public company requires and differentiating and supporting your brand.  It feels like Zumiez might be running up against this issue itself.  If I read between the lines, I almost hear them telling the analysts that the biggest opportunity is at the bottom line- not the top.

You know, I’m just giddy over what Zumiez is doing because it’s what I think I’d do and I can’t wait to see how it works out.  But we’re still an over retailed country and it’s becoming more costly to sell to a completely empowered consumer with less money to spend.  I know there will always be brick and mortar retail, but I don’t know the form it will take and how much we need.  Zumiez, and other established retailers, are stuck with a store base they can only change slowly and incrementally.  New retailers are often starting only online and going from there.

Where and how do you make brick and mortar an advantage?