Zumiez’s Quarter: Comments on Growth and Ecommerce
Zumiez’s 10Q and conference call for its quarter ended May 4th offered some insight into its growth strategy that I think are worth reviewing. Some of it isn’t new, but taken together the comments are interesting.
Some Points of Strategy
At the end of the quarter, Zumiez had 503 stores; 475 in the United States, 22 in Canada and 6 in Europe. CEO Richard Brooks tells us in the conference call that they “…see room for new store growth in the U.S. and continue to plan our business here to be between 600 and 700 stores.” That includes outlet stores. They think they can triple the number of stores in Canada.
Zumiez plans to open a total of 58 new stores in 2013, including nine in Canada and six in Europe. So that means 43 new ones in the U.S. getting them to a total of 518 by year’s end.
With regards to their longer term plans for Europe, CEO Brooks tells us, “We’re not prepared to talk about the total European opportunity at this point, other than to say it’s significant, and we’re talking about hundreds of stores, not below, not in the double-digit number, but in the triple digit number, the store opportunity in Europe. And we don’t want to get too far ahead of ourselves. Again, because we’re, you worked with us for a long time, you know that we like to show results.”
So the goal is hundreds of stores in Europe (I don’t know if they will be branded Zumiez or Blue Tomato or both) but not too quickly. They are looking at a five year horizon for Blue Tomato to “…be a meaningful part of our business.”
The next piece of related information is that comparable ecommerce sales were up 13.1% and represented 11.8% of the quarter’s revenue compared to 7.7% of revenues in the quarter ended April 28th last year. Comparable ecommerce sales do not yet include Blue Tomato. That will happen in July, when Zumiez will have owned it for a year.
Talking about ecommerce, CEO Brooks tells us the following:
“We are also investing heavily in enhancing and expanding our unique perspective on the action sports lifestyle into the virtual space…There is still a great deal of a room to further integrate our selling platforms, but we continue to make important strides towards creating an omni-channel business that gives consumers quick and easy access to the product they want, however they want, anytime they want, and also delivers the same great Zumiez brand experience they’ve come to expect from us.”
This isn’t new and it isn’t exclusive to Zumiez. Brands and retailers are working to figure out how to give a consumer who is pretty clearly in charge access to their product in the way the consumer wants it and to control that interaction (at all the “touch points” as it’s being called). How, everybody including me wants to know, do you manage brick and mortar and ecommerce so that they are complementary and supportive rather than competitive?
Here’s part of the answer according to CEO Brooks:
“As we evaluate and execute on opportunities in the U.S., it’s important to note that we’ll actively manage the entire store portfolio, and we expect to close some low performing stores. Our goal here is to reach all markets in the U.S. with the right number of high productivity stores and a strong omni-channel presence.” He makes similar comments about how they expect to expand in Europe.
As a public company, continued growth has to be important to Zumiez. In maybe two to three years, assuming they can make the right deals in the right locations, they will reach 600 stores and have to face that probability that store growth will start to slow in the U.S. Part of their answer to slower growth here is growth in Europe. Another part is higher store productivity, ecommerce growth, and taking advantage of synergies in whatever form they exist between brick and mortar and online. This is their omni-channel strategy.
Part of that productivity focus, as well as a point of differentiation for the Zumiez brand, comes from the brands they carry. One analyst asked the following question:
“And it seems like some of the larger, more mature action sports brands are broadening the distribution.” Really?! No kidding?! Is this really happening?! Shocked! I’m shocked!
The analyst continues, “Seeing some of it up here, and even moderate department stores. I guess, how does that change your appetite for some of these big, well-established action sports brands?”
Rich Brook’s answer won’t surprise anybody who’s been following Zumiez for a while. “…I guess I’d challenge you to find much product in our store that is from those large, well-established actions sports brands. In most cases, we move beyond them pretty significantly. So you won’t find a very big presentation, if any, at all.”
Go back and read that carefully. Note that this is a trend we’ve seen in other retailers. PacSun for one, as I noted the last time I wrote about them. Just in case any smaller specialty retailers might be reading this, which brands are you carrying? Hopefully, it’s not the ones who give you the biggest discounts or stuff on consignment, because I can pretty much say you won’t earn a dollar on product that doesn’t sell.
I am not saying “Don’t carry big brands.” I am saying carry the brands that your customers want, that let you earn the margin dollars you need, and that differentiate you. I’ve been arguing for years in favor of trying new brands even though that often seems risky, because it’s riskier not to try.
Financial Results
Sales for the quarter grew 14.3% from $129.9 million to $148.5 million. Blue Tomato’s sales were up 8.6% and added $9.1 million to revenue. North American sales were up 7.3% or $9.5 million. Comparable store sales fell 0.7% compared to an increase of 12.9% last year. Brick and mortar comparable store sales were down 1.8% but, as noted above ecommerce, which is included in comparable store sales, was up 13.1%. This quarter was a week shorter than last year’s quarter. The sales increase came from new store openings (42 compared to last year’s quarter) and the addition of Blue Tomato.
The gross profit margin declined only very slightly from 32.4% to 32.3%. The merchandise gross margin rose by 0.6%.
Selling, general and administrative expenses (SG&A) as a percentage of sales rose 26.8% to 29.6%. 1.2% of that increase was due to higher spending on ecommerce. Given their strategy, I see that as positive. 0.5% was the result of comparable store sales being down, and they had a $1.1 million (0.7%) charge for Blue Tomato future incentive payments.
The higher SG&A expense reduced pretax income by 47% from $7.8 million to $4.1 million. Net income was down 45% from $4.5 million to $2.5 million.
As management acknowledges, the European environment is really tough. I think it’s likely to stay that way for a while. But Zumiez has big plans for it. They see it as a source of growth when North American store openings slow in a few years and that certainly explains at least partly the price they paid for Blue Tomato.
The things I find most interesting about Zumiez’s strategy is how they are evolving the brands they carry, and their focus on the “omni-channel” strategy where they, and the rest of us, try and figure out how to make the brick and mortar and ecommerce whole more than the sum of its parts.
observing retail assortments the past year, zumiez, tilly’s (and even pacsun & ccs to a degree) are taking the chances and promoting smaller, emerging brands more than the bulk of core specialty retailers. This is pretty sad and feels eerily similar to specialty surf/skate retail 20+ years ago and the distribution moves that eventually put us in hibernation for a minute.
The bread & butter retailers who helped establish this industry are feeling dated and irrelevant to the 13-18 year olds of today looking to make statements in what they’re wearing different than their “rad dads”. too many old relationships and loyalties getting in the way of progressing the industry as a whole to the generational brand/trend changes.
the good thing is kids are starting to talk with their wallets and are finding retailers who are taking the chances. looking at a lot of “different” dealers social media, you see the wave of momentum going west to east and east to west when new brands hit their floors. its still cool to be different than the kid next to you…always will be.
It’s unusual for me, but I pretty much have no response because I agree with you. I’ve been pushing specialty retailers to carry small/new brands for years now.
Thanks for the comment.
J.