More Retail Perspective; Zumiez’s Quarterly Report

The conference calls get shorter and shorter as Wall Street and its analysts decide the retail sector just isn’t worth their attention.  I don’t and won’t invest in anything I write about but damn, this feels like one piece of putting in a bottom in the retail sector.  Maybe it will take the recession to finish the process.

Zumiez had a quarter which I’ll describe as uninspiring.  Like every other industry retailer, they find themselves in circumstances of declining mall traffic, sluggish demand and an uncertain future that changes faster than you can react to it.

Revenue rose 4.7% from $173 to $181 million.  $3.1 million of that came from an increase in comparable sales (remember we no longer say, “comparable store sales” because it includes e-commerce). The rest was the result of the increase in the number of stores.  The gross profit margin fell a bit from 28.9% to 28.7%.

SG&A expenses rose 8.1% from$53.9 to $58.3 million.  As a percentage of revenue, they rose from 31.2% to 32.2%.  “The increase was primarily driven by 80 basis points due to investment in salaries, minimum wage increases and deleverage of labor costs and 30 basis points related to incentive compensation.”

The net loss rose 108% from $2.14 to $4.45 million.

The balance sheet remains strong.  There’s no long-term debt.  Compared to a year ago, cash rose.  Inventory was up largely because of new store openings.  Net cash provided by operating activities increased.

Zumiez ended the quarter with 688 stores; 603 in the U.S., 50 in Canada, 29 in Europe, and 6 in Australia.  A year ago, they had 663 stores; 596 in the U.S., 43 in Canada and 24 in Europe.  They closed six stores in North America.  19 stores are projected to be opened this year- four in Europe and two in Australia.

Zumiez expects store growth in Europe and Australia.  They are starting to approach their limit in Canada.  As they’ve been saying for years, they are approaching the U.S. limit.  My judgment is that the number of traditional physical stores a retailer needs is going to decline overall.  We’re already seeing the rate of store openings decline for retailers.

And yet CFO Chris Work tells us in the conference call, “…where we don’t have stores, we really don’t have much of a Web presence. When we open stores, we typically get a pretty big Web impact. And so what I would tell you is we think the customer is shopping in both channels. And what’s hard for us, as far as I can tell you what the Web numbers are, I can tell you what the store numbers are, I just am not sure how accurate they are anymore, because the customer may shop in an in-store channel and go home and make the purchase or start online and come into the store and make the purchase.”

You can hear the unsurprising uncertainty around what the relationship between online and brick and mortar is.  I imagine Zumiez is hoping the continuing roll out of their customer engagement suite software will shine some light on this issue.

And now it gets really interesting.  Survivors of the retail wars can expect to get some additional revenue from competitors who go away.  But the traditional model of increasing revenue has been to open more stores and evaluate each store individually.

That approach to growth is being consigned to the dust bin of retail history.  Here’s how Zumiez CEO Rick Books describes their approach:

“We’ve significantly enhanced our ability to engage with customers on multiple fronts through the integration of our physical and digital channels. We have a comprehensive customer experience that allows them to see all inventories through any channel and includes features in which our customers have access to their local stores inventory, can buy online, pick up in store, reserve online, pay in store, and buy whenever and however they choose. Included in this experience is fully localized fulfillment in our North American business, putting the local customer experience back in the hands of our store teams and significantly reducing our order to delivery time. In 2017, we’re continuing to roll out our new customer engagement suite across the U.S. store fleet.”

Zumiez started placing its bets on managing the relationship between online and brick and mortar earlier than most retailers.  Regular readers know I generally like what they’ve done.  But I don’t know if they are right or not.  Neither do they.  However, it’s especially true now that the biggest risk is taking no risk at all as things change.

This thing where we all try and figure out the internet and brick and mortar work best together is like an unfolded lump of clay waiting to be formed.  Zumiez is focusing on what they call “trade areas.”  These are geographic areas that include stores and associated online activity.  I think they may ultimately turn out to be fluid, but I’m not sure how dynamic that fluidity will be or what form it will take.

Zumiez won’t know either until they get that customer engagement suite completely rolled out and the algorithms begin to generate customer data.  I expect they will learn some really interesting and unexpected stuff.  I hope I can figure out a way to weasel my way into a meeting or conversation where I can find out what.

Wonder if they’ve got plans to put RFID tags on each piece of product yet.

And now for something really different.  Just for a moment, let’s stop thinking about e-commerce, and online, and omnichannel, and Amazon and brick and mortar’s relationship to it all.  Let’s talk about our relationship with our customers.

Remember when we could influence their choices and encourage trends at retail that lasted a long time?  Boy, that was great.  Now, with perfect information and perfect access, they influence us.  It seems hard for us to do more than react and help them get what they want.  We can and do blame the internet, etc., etc., etc.  But we also have to blame ourselves for too widely distributing too much product that was pretty much the same as our competitors.  It’s way harder to create a lasting distinction these days.

Like virtual subatomic particles that spontaneously pop in and out of existence in the world of quantum physics, we have brands and trends popping in and popping out.  A company needs to build its own large hadron collider like they did at CERN to find its own Higgs boson (though apparently there may be a second one they haven’t yet been able to find.  Pesky particles).

Zumiez, with its customer engagement suite, and other companies, are trying to do just that-  with less ambitious goals I suppose.  It’s a big undertaking with unknown results- conceptually though not in scale like the LHC; don’t know if it will work, not sure what we’ll find, confident, but unclear how useful it will be.

To do it, what you need is time, money, and the right people.  For now that means advantage big companies.  If they succeed, I don’t know if the balance of power between the brand/retailer and the customer will change.  But they might find themselves able to identify and respond to customers and their endlessly changing focus and demands a little more quickly and perhaps at less cost.

It’s Zumiez’s size and systems that allows it to introduce around 100 new brands in its stores each year and manage the comings and goings of those brands based on their level of success.

As much as I consider software and systems critical, remember that Zumiez will (hopefully) be able to maximize the value of these investments because of the 20 plus years they have spent consistently hiring the right people, training them, and offering them career paths.  The associates in their stores are the fulcrum of their relationship with the customer.

Even more fundamental for Zumiez is the change in their market position.  Let me remind you that they used to be a mall based action sports retailer.  Now they call themselves “…a leading specialty retailer of apparel, footwear, accessories and hardgoods for young men and women who want to express their individuality through the fashion, music, art and culture of action sports, streetwear, and other unique lifestyles.”

That’s a way bigger market segment and very different group of competitors.  And if I combine it with their “trade areas” concept, I wonder if there isn’t room to open stores in some different kinds of locations.

This change isn’t new this quarter, but it’s worth keeping in mind as it is a big change in competitive positioning.

What’s in the future?  Chris Work tells us in the conference call that they just couldn’t figure out a reasonable way to build a model for this year that “…we thought warranted a full incentive payout.”  To nobody’s surprise, it doesn’t appear to be another great year for retailers.

The watershed is going to come when a recession happens (it will- the business cycle has not been repealed) and brands and retailers benefit from the effort they’ve put into developing systems and procedures that let them better understand the relationship between brick and mortar and e-commerce.