A Look at Zumiez’s April 29 Quarter: I Take the Lazy Approach

I see no reason to spend time explaining what’s going on at Zumiez when CEO Rick Brooks has done me the favor of laying it out in his introductory conference call remarks.  Read them, then I’ll offer short discussions.

“Our top priority is to stay consistent and relevant with our customers in order to expand our market share…”

“We believe there are increasingly blurred lines between retail channels. Our focus is firmly on embracing today’s empowered customer and winning them over for authentic culture and brand. We believe empowered consumer lives in a channel-less world and is not focused on going into a physical store or buying online but rather transacting with a retailer they know and trust.”

“In this channel-less world, we believe that trend cycles are shifting at a faster rate than ever before. New brands emerge that can quickly move from locally recognized brands to global brands. We believe there is a level of customer transparency in retail that is driving out inefficiencies within the market and forcing consolidation in the industry.”

“We’ve established a strategic presence in six countries across three continents, with a digital presence that allows us to reach even further. This scale allows us to work together with our brand partners to serve our customers globally. These include existing emerging local brands, both domestically and internationally in their evolution to global brands.”

In past analyses, I’ve talked specifically about what Zumiez is doing as far as I can tell from public information.  Regular readers know what I’m referring to but let me pull a few words out of Rick’s mouth where I suggest you focus.  I’ve highlighted those words above.

Okay, the first one. They think they can expand market share even though store openings are declining.  They ended the quarter with 700 stores worldwide.  Since the end of last year’s quarter, they added a net of 5 stores in the U.S., 6 in Europe and one in Australia.  At 50 stores, I expect Canada is pretty much done building out.  13 total openings are expected this year.

They think they can increase share because of their Trade Area concept, their systematic approach for identifying and introducing new brands, the integration of all their revenue streams, and the constantly improving quality of their data.  A trade area has a geographic concept, but it’s more than that.  Exactly how they will function and what they will turn out to be even Zumiez isn’t clear on yet.  They are clear it will evolve.

Second, focus on the words “authentic culture and brand.”  Notice they didn’t say surfing, or skateboarding, or action sports or anything like that?  No activity mentioned.  If you are tied to a single activity, it’s going to be hard to increase your market share unless you are small.  But figuring out culture is hard and ever changing- and not in your control.

The third bold underlined phrase, talking about customer transparency etc. isn’t a surprise to anybody.  I hope.  Your customer is in control.  Product cycles are shorter.  Your speed of reaction is everything- follow your customer, I’ve said, but not too far and not blindly.  Your customer connections and data systems are critical- not just to follow them but to manage your costs as they ask for more quality and continual newness at lower prices.

Zumiez believes that if they get culture and brand right, they will be able to “…serve our customers globally.”  So far, the acquisition of Blue Tomato in Europe, for which they paid a lot of money, isn’t quite working out as it’s losing money.  Strategically, I expect they are looking to role out world wide the process they have in the U.S. for identifying new brands and Blue Tomato is important to that end.  They introduced about 150 new ones during the last complete year.  I’ll be interested to see the extent to which they can identify and bring brands from one geography to another.

For that to work, Zumiez has to have a target customer that embraces a “culture” that crosses national cultural lines.  No small challenge, but the only way Zumiez will get a chance to serve its customer globally with the efficiency it has to realize.  One of Zumiez’s big legs up is that its 40-year-old internal culture is consistent with that.

It would have been easy to write several thousand words on each of the four conference calls quotes.  But let’s leave it at this before moving on the numbers.  If anything I wrote was a surprise you are a candidate to be involved in the forced consolidation of the industry Rick is referring to, and to help Zumiez increase its market share.

Zumiez’s revenues for the quarter rose 13.8% from $181 in last year’s quarter to $206 million.  82.7% of revenue was from the U. S., up from 85.1% in last year’s quarter.  “The increase primarily reflected the increase in comparable sales of $15.2 million [8.3%] and the net addition of 12 stores…By region, North America sales increased $18.7 million or 11.5% and other international sales (which consists of Europe and Australia sales) increased $6.4 million or 34.3% for the three months ended May 5, 2018 compared to the three months ended April 29, 2017.”

The gross profit margin rose from 28.7% to 30.3%.  “The increase was primarily driven by a 160-basis point increase due to the leveraging of our store occupancy costs.”

SG&A expenses were up from $58.3 to $64.3 million but fell 1.1% as a percentage of revenues.  “The decrease was primarily driven by 160 basis points from the leveraging of our store costs partially offset by a 30 basis points increase in corporate costs and 30 basis points increase due to the timing of annual training events.”

Please pay close attention to both those mentions of “leveraging” costs.  It happens when you open more stores, but in this case, it also has something to do with Zumiez thinking of it’s online and brick and mortar revenues as one revenue stream and managing ecommerce through it’s stores.  That is the future.

The pretax loss improved from $6.6 million in last year’s quarter to a loss of $1.9 million in this year’s quarter.

The balance sheet is stronger than a year ago.  Besides losing money in Europe, the only financial issue I might raise is a continuing problem with inventory shrinkage.  It’s at about 1%.  They’ve been talking about it for some quarters now.  I wonder if it doesn’t relate to the system changeover and the movement of responsibility for ecommerce relationships into the stores.

When I do these analyses, my goal is always to make you think.  Zumiez had a strong quarter.  What I really want you to focus on is their decision to ride the whirlwind.  At the most fundamental level, the organization collectively said, “I’ve got no clue as to how this is all going to work out, but we’d better get out in front of it even if there’s a bit of chaos.”

They did, and there is, but what was the choice.  What’s your choice?