Zumiez’s Quarter; Ho Hum, Another Good One. How Do They Keep Doing It?
If it wasn’t so intriguing, it would be getting boring. Zumiez’s sales for the quarter ended April 28, 2012 grew 22.7% to $129.9 million from $105.9 million in the same quarter the previous year. Comparable store sales were up 12.9%. Ecommerce sales rose 7.7% and were 6.2% of the quarter’s total sales. They think ecommerce may eventually be 10% of their sales. They had 47 more stores than they had at quarter’s end a year ago (445 in total).
You can see their complete 10Q here.
Their gross profit margin rose to 32.4% up from 31.3 in last year’s quarter. Mostly, the increase is due to leveraging their costs across more stores. That is, they have 47 more stores but didn’t have to buy another accounting system to support them, so the accounting system cost per store, to use one example, declined.
Selling, General and Administrative expenses as a percentage of sales fell by 210 basis points (2.1%). Three-quarters of that was due to operating efficiencies from having more stores, and one-quarter from a decrease in corporate costs.
Net income rose from $1.9 million to $4.5 million. The balance sheet is solid with no bank or other borrowing. Inventory was up of course, but it was essentially flat on a per square foot basis they tell us.
How does Zumiez’s do so well when others are struggling? We can get some insights from the conference call discussion. I also want to remind you of some advantages that aren’t mentioned there.
First, Zumiez is at a “sweet spot” in their growth curve. Their goal, you may remember, is 600 stores and right now, at 445 stores and growing, they are still able to find good places to open stores. It’s not like that’s an easy thing to do. Management reminds us of their disciplined application of a strategy they’ve followed since the company was founded, their employee development program, their commitment to infrastructure and systems, and their marketing approach of “…offering highly differentiated assortments of merchandise and delivering best-in-class service.” In other words, they run the business well.
Secondly, as I’ve written before, they were the first in the malls and are still the only ones, as far as I know, to offer hard goods. Actually, Billabong stores sell Sector 9 Longboards so I guess it’s not strictly true that they are the only ones anymore.
With so many independent specialty retailers closing due to the recession, and with all the brands opening stores in malls, Zumiez’s strategy has been validated by everybody else, but they are still the leaders in executing that strategy.
Now, on to some things they said in the conference call. One analyst asks the question I’m asking; “I guess I think probably the question we could ask the most is what is Zumiez doing, I mean that your sales trend is so good?” Here’s management’s answer in part.
CFO Marc Stolzman says, “…one of the real strengths…is our merchant’s ability to micro merchandise the product assortment. As a multi-branded retailer, that really is trying to capture each of the micro trends as they are occurring, it really takes a dedicated, very hard focus on the data, and really trying to keep everyone of those hot products in stock. Unlike a lot of our competition, we have purchase orders going back and forth with our vendors on a constant basis, and product coming into our warehouse constantly, instead of having more of an upfront purchase and then working through that inventory or replenishing it.”
CEO Richard Brooks adds, “…the benefit of our whole system is what you see is taking place here. With great job by our product team, great job by our sales teams on the web and in stores. And what you’re seeing is, us being able to rack quickly, move to what customers want, still being incredibly well diversified in our brands. I think last year our largest brand was about 6% of sales.”
Let’s consider the implications of that. If they have the systems and people to identify the micro trends, as they call them, in each store and the systems to react so they can stock according to those trends, my hat’s off to them. But how might this be impacting the brands Zumiez carries?
Note that no brand they carry was more than 6% of sales last June (their private label brands account for about 18% of total revenue for the year). If that’s generally true over the whole year, it limits the leverage any single brand has in negotiating with Zumiez. This is compounded by the fact that Zumiez is becoming a brand by itself and, in my judgment at least, is the most credible of the action sports retailers of any size. It’s good to have your brand in Zumiez. I’ve been saying for years that the best retailers give credibility to the brands they carry.
I wonder how Zumiez’s search for micro trends translates into individual store manager’s authority to select inventory and merchandise their stores. CFO Stolzman has told us, ‘…we have purchase orders going back and forth with our vendors on a constant basis…”
I can see how this translates into a good thing for Zumiez, and I’d love to talk with them about the algorithms they use in their system to manage their open to buy. But there’s some potential extra work, and therefore costs, for brands selling to Zumiez with, it sounds like, more, smaller purchase orders and potential frequent changes in those orders.
Apparently there are few brands that Zumiez absolutely has to carry, and part of their formula for success likely puts some extra demands on brands. That must make for interesting negotiations. If I had that kind of leverage I’d certainly use it.
Zumiez management refers to working closely with brands, and I hope part of that relationship is teaching some brands techniques that Zumiez uses to project demand and manage inventory. I can imagine that might be of benefit to everybody.
I’m happy to see a player winning in this economy! Interesting that they keep their house brand at a lower percentage than Pac Sun and clearly their employees are the competitive edge. I think Jeff pointing out that they haven’t maximized their regional footprint yet as a helpful position for growth. Nice analysis Jeff!
Thanks Rob.
J.
Hard core store in the mall! Thanks for the numbers and analysis….I love their dedication to education and growth of employees. Nice going Jeff and Zumiez.
Hi Jay,
You know, it’s like nobody picked up on what I wrote towards the end of the article about how they must be working with brands, the extra work and cost it creates for those brands, and my interest in understanding their algorithms. I’m not usually accused of this, but maybe I was too subtle. Can you really adjust your inventory at the store level while picking up “micro trends” and negotiating very hard with brands and have it all work without making unreasonable requests of brands? Still, so far they are pulling it off.
thanks for the comment,
J.