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Zumiez continues to sharpen price points; small brands continue to take market share

By Brandon Ferro
August 21, 2009 5:16 AM

Zumiez reported second quarter earnings Thursday afternoon and hosted a conference call with analysts to discuss results. On the call, CEO Rick Brooks and CFO Trevor Lang reiterated the company's continued commitment to delivering price value, brand differentiation within stores and tight cost controls and spending discipline. Despite the weak environment the company continues to open a healthy amount of stores with plans for 36 new locations in its current fiscal year.

Key Takeaways

Driving better value across all pricing tiers remains a key initiative.

As long as the consumer remains more acutely focused on price, the company will continue to work on driving better value across all merchandise assortments by reducing average unit retail and opening price points. The company believes its value focus is broader-based compared to other retailers who have largely concentrated such efforts on basics such as tees. To offset the negative impact to margins from lower price points, the company will continue to work with vendors to strip cost out of product at the margin level to deliver better initial mark ups.

Beyond lower average unit retail, there will be little change to the company's merchandising and inventory planning during this year's back-to-school and snow seasons

Average unit retail will be down this back-to-school season, with a focus on driving better value across all price tiers and lower opening price points. The company is planning on reducing inventory per square foot in-line with its expectations for same store sales declines for the remainder of the year. The company would not comment on any to-date back-to-school traffic trends noting that it remained too early to determine how the selling season was shaping up, with Labor Day falling a week later this year vs. last year. Buys for the seasonal snow business will be conservative under the assumption the category will remain challenged like it was last year.

Small brands are taking market share within stores

The company noted that small brands are taking market share within stores and that the concentration of revenue among its top 10 vendors continues to shrink.

Tight cost controls and spending discipline remain in focus.

The company expects SG&A to continue to increase at roughly half the rate of square footage growth for the remainder of the year. Most spending cuts continue to occur at the corporate office level as opposed to the store level as the company would like to maintain the integrity of the in-store shopping experience. Zumiez continues to invest in select areas of its business including its website and other information technology.

There are opportunities to reduce rent expense in select locations

Within lower quality and traffic mall-based locations the company sees opportunities to reduce rent expense given the weak economy.

The company's forward looking guidance remains weak, but represents an improvement over recent results

Zumiez expects third quarter earnings of $0.05-$0.07 per share. This assumes a mid-to-low teen percentage decline in same-store sales. Both the earnings and same-store sales expectations represent a notable improvement over the second quarter results reported Thursday.


Second Quarter 2009 Results

Total Sales:

• -7% to $82.5 million including an 18.8% decline in same-store sales
• Same-store sales in the Western half and Southern portion of the U.S declined by over 20%, while same store sales in the in the Midwest and Northeast declined by 15%
• Web sales increased 20%
• Units per transaction increased in the quarter but average unit retail declined
• All categories posted same store sales declines

Gross Margins

• 28.9% or -3.7% vs. 32.6% last year
• De-leveraging of occupancy expense accounted for nearly all of the decline in gross margins vs. last year while merchandise margins were essentially flat


• +14% to $29.9 million. Excluding a one-time charge of $1.7 million, SG&A increased only 8%, half the rate of square footage growth
• As a percentage of sales 35% vs. 28.4% last year


• A loss of $0.10 per share which includes a non-recurring charge of $0.03 per share, better than the company's original guidance calling for a loss of $0.17-$0.14 per share. Upside was driven by a better than expected comparable store decline of 18.8% vs. company guidance which called for a decline in the low 20 percent range.

Balance Sheet

• Cash and Equivalents: +23% to $82.1 million vs. last year
• No borrowing based debt
• -3.5% to $69.6 million overall and -16% on a square footage basis vs. last year
• Store openings: 36 for all of 2009
• Earnings per share:
- $0.05-$0.07 in the third quarter, slightly worse than the $0.07 average estimate of analysts
• Same store sales: a mid-to-low teens percentage decline in the third quarter
o Fourth quarter same-store sales should improve vs. the third quarter
• Merchandise margins: flat in the second half of the year and in-line with the performance of the first half
• SG&A: grow at less than half the rate of square footage

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