Zumiez’s Strong Quarter; Stores, Stash, Expansion, Strategies, Shrinkage, Wayward, the Numbers

That’s a lot to cover.  I had some hope this would be short.  Let’s start with strategy and quote CEO Rick Brooks from the conference call.

“Our top and bottom line results…are a direct result of our relentless commitment to winning with today’s empowered consumer. Our success continues to be driven by the strength of our diverse and differentiated assortments that are presented through a seamless shopping experience across all consumer touch points, accompanied by the world class customer service that our teams continue to deliver globally.”

“With the increasingly blurred lines between retail channels, we’ve moved toward a channel-less world in which the empowered consumer isn’t focused on going into a store or buying online but rather transacting with a trusted retailer. With the barriers between the physical and digital worlds coming down and the increased speed at which individuals communicate, trend cycles are rotating faster than ever before. The same holds true for the pace at which demand for emerging brands can go from local to global in nature. In this type of environment where consumers can access so much information, a new level of transparency in retail is being created that is driving out inefficiencies within the market and forcing consolidation in the industry.”

It’s conceptually that simple, but really complicated to do, requiring a long-term perspective, flexibility in thinking and structure, a different attitude towards risk, and a strong balance sheet.  What, exactly, is the formula for management structure and discipline on the one hand, but raging flexibility on the other?

The bottom line, as you see in the quote, is that Rick thinks many of Zumiez’s competitors can’t do it.  Is just operating at the level required by the new environment now a long term strategic advantage?

Rick also commented about trends rotating faster than ever.  A couple of years ago, Rick was expressing the belief that longer trends would return.  It looks like he’s changed his thinking as the competitive environment required.

Okay, on to Wayward.  There’s no mention of the Wayward stores Zumiez has opened.  There are only two, they haven’t been open long, and the numbers are obviously not significant.  But I liked the concept and am kind of curious.

At the end of the quarter on August 4, Zumiez had 611 stores in the U.S., 50 in Canada (Room for more growth there? I’d guess not much), 35 in Europe- Blue Tomato, and 7 in Australia- Fast Times.  They expect to open 13 stores this fiscal year including five in the U.S., seven in Europe, and one in Australia.  I want to put that in context of their comment on expansion in the 10Q.

“We plan to continue to open new stores in the Canadian, European, and Australian markets. We may continue to expand internationally in other markets, either organically, or through additional acquisitions.”

That’s part of a risk factor telling us that theirs plans for international factors could be, well, risky.  Zumiez has acknowledged that they were running out of room for new stores in the U.S.  However, their concept of “trade areas” and a channel-less world coupled with ongoing industry consolidation makes me wonder if they can’t grow revenues in the U.S. without more stores.  I am certain they are wondering too.  There’s no reason that concept would only apply to the U.S.

CFO Chris Work reminds us in the conference call that Zumiez is doing almost 100% of their ecommerce fulfillment in their stores.  It sounds like they are doing it without much added expense.  In a previous call (but only one I think) Rick told us how in store fulfillment was allowing Zumiez to spread the cost of these sales over the existing expense structure.  That is very powerful.  I’m surprised nobody is pushing for more details.

In recent quarters, Zumiez has noted an issue they are having with shrinkage.  Chris says it cost them about $5.4 million in 2017, and they are continuing to work on it.  I wanted to raise it in conjunction with in store fulfillment because I have the sense the two happened around the same time.  I know correlation doesn’t prove causality, but I’m intrigued.  I almost hope it’s somehow related to that.  Zumiez decades long process of hiring, supporting, training, and advancing people who are part of Zumiez’s customer base has been key to their success.  I would think/hope it would mitigate against shrinkage.  If suddenly it’s not, I’d be concerned.  Shrinkage in the quarter was 0.3% lower than in last year’s quarter.

Last, but not least, their loyalty program called Stash.  What I wanted you to think about is that loyalty programs become more valuable as the quality of your algorithms and customer data rises.

Finally, we get to the numbers.  Revenues in the quarter rose 13.9% to $219 million, up from $192 million in the same quarter last year.  U.S. revenues rose 14.2% from $165 to $189 million.  In Canada, the increase was from $11.3 to $12.5 million.  Europe rose 14.8% from $11.3 to $16.1 million.  Australia rose from $1.687 million to $1.787 million, or by 5.5%.  Overall, U.S. revenue represented 86.15% of the total, up from 85.94 in last year’s quarter.  I imagine the U.S. percentage might be lower if not for the strong U.S. dollar.

“The [revenue] increase primarily reflected an increase in comparable sales of $12.8 million, an increase of $9.9 million due to the calendar shift to include an additional week of back-to-school season, and the net addition of 11 stores (made up of 10 new stores in North America, 5 new stores in Europe and 1 new store in Australia partially offset by 5 store closures in North America) subsequent to July 29, 2017.”

Comparable store sales rose 6.3%.

The gross margin rose from 31.1% to 33.1%.  “The increase was primarily driven by 160 basis point leveraging of our store occupancy costs, 30 basis point increase in product margin and 30 basis points in lower shrinkage of inventory partially offset by 30 basis points in higher shipping costs.”  Note the impact of leveraging occupancy costs and refer to the discussion of in store ecommerce fulfillment.

SG&A expenses as a percent of net sales decreased 150 basis points for the three months ended August 4, 2018 to 30.0%.  “The decrease was primarily driven by 140 basis points from the leveraging of our store costs and 40 basis points decrease due to the timing of annual training events partially offset by a 40 basis point increase related to the accrual of annual incentive compensation.”

There’s that improvement due to leveraging store costs again.  I’m growing very fond of in store ecommerce fulfillment.

Net income rose from a loss of $608,000 to a profit of $4.38 million.  That’s usually what happens when you increase revenue and gross margin while reducing expense as a percent of revenue.

The balance sheet remains strong with more cash and no long-term debt.  Cash provided by operating activities was $15.5 million for six months, up from $3.77 million in the same six months last year.  I’m wondering why they’ve got $5.6 million in short term debt on the balance sheet given all the cash they’ve got.  Maybe it’s a non-U.S. thing.

Good quarter.  As usual, there are interesting things to think about in the 10Q and conference call if you read carefully.  I look forward to their next quarter.