MARKET WATCH: Zumiez’s Quarter Ended Nov. 1st

When it comes to public filings, the last thing you want is for your company's filings to be filed with interesting stuff that somebody like me can have a great time dissecting. I'm afraid that I'll have almost no fun at all reviewing this filing. Oh well.

The most interesting thing about the quarter was the comment from their November 20th conference call where Zumiez noted, "We continue to do well with new and smaller brands that are more exclusive to our stores in the mall; however the larger more national brands continue to negatively impact our overall sales and product margins."

Hmmm. I think that's a whole separate article. I feel a good rant coming on.

Anyway HERE’S THE LINK to Zumiez's quarterly report.

Let's take a look at the Nov. 1, 2008 balance sheet and compare it to the one from Nov. 3rd a year ago. Current assets are up about $39 million, but it's because of a big increase in cash and marketable securities (never a bad thing in a poor economy) and an increase in inventory consistent with sales growth. That, plus the increase in leasehold improvements and equipment for opening new stores, explains most of the increase in total assets from $205 to $258 million. The current ratio fell from 2.64 to 2.53, but that's not enough of a change to matter.

There's only $24 million in long term liabilities, and the biggest increase in current liabilities is in trade accounts payable, which I expect is basically the result of growth. Total debt to equity at 0.52 is up insignificantly from 0.46.

Like I said, boring.

Sales for the quarter were up 7.9% to $112.2 million compared to the same quarter the previous year. But operating profit fell 18.4% to $10.4 million. This was because selling, general and administrative expenses grew 12% to $28.9 million and, while gross profit grew by 2% to $39.3 million, the gross margin percentage fell from 37% to 35%. Had they maintained their gross profit margin, their operating profit would have been $12.7 million, almost what it was the same quarter the previous year.

Some comments on the results from Zumiez:

"The increase in total net sales was due to an increase in net sales from non-comparable or new stores of approximately $14.3 million partially offset by a decrease in comparable store net sales of approximately $6.1 million. The increase in non-comparable store net sales was primarily due to the opening of 57 new stores subsequent to November 3, 2007."

"Comparable store net sales decreased 5.8% for the three months ended November 1, 2008 compared to the three months ended November 3, 2007. The decrease in comparable store net sales was primarily due to lower net sales of men's apparel, junior's apparel, hard goods and accessories partially offset by higher net sales of footwear." I imagine the increase in footwear had something to do with mall competitor PacSun getting out of the footwear business.

"The reduction in gross profit as a percent of net sales was driven by store occupancy costs growing at a faster rate than sales and to a lesser extent a decline in gross margin on apparel products."
Net income, as a result, fell 16.4% to $6.82 million, or 6.1% of net sales.

I want to talk for a minute about how Zumiez calculates cost of goods sold. They tell us it consists "of the cost of merchandise sold to customers, inbound shipping costs, internet shipping costs, distribution costs, depreciation on leasehold improvements at our distribution center, buying and merchandising costs and store occupancy costs. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold."

I haven 't done a study of how other retailers calculate their cost of goods sold, but I can imagine that they might choose not to include some of the things Zumiez includes, thereby increasing their gross margin compared to Zumiez. It's not that Zumiez does it right or does it wrong. Accounting has rules and, like in The Matrix, "Some can be bent. Others can be broken." Sometimes there's not a "right" way. The goal is to get the information you need in the form that best lets you manage your business.

Zumiez's 33 page filing includes eight pages of risk factors. There's nothing unexpected in them. I think I'm noticing that those sections of reports are getting longer as the economy continues to underperform.
Anyway, Zumiez is impacted by the recession just like the rest of us, but they have the balance sheet to take advantage of the circumstances.

Pretty much the moment I had finished this article and sent it in, Zumiez came out with a press release with their November, 2008 sales results that said:

"…total net sales for the four-week period ended November 29, 2008 decreased 2.1% to $32.6 million, compared to $33.3 million for the four-week period ended December 1, 2007. The company’s comparable store sales decreased 15.0% for the four-week period, versus a comparable store sales increase of 5.6% in the year ago period."

Be careful reading too much into one four week report for any company.
Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.