By David Clucas

Action sports lifestyle retailer Zumiez (Nasdaq:ZUMZ) echoed its peers in the category with better-than-expected results on increased sales and profits for its fiscal third quarter ended October 29, 2016, but CEO Rick Brooks isn’t ready to start the holiday party just yet.

The company, which has more than 650 stores in North America and 30 stores overseas in Europe and Australia, reported same-store sales up 4 percent during the quarter (it had expected at most a 2-percent increase), boosted by an 8.4-percent increase in sales to $221.4 million with 35 new stores versus a year ago. That includes five new Fast Times stores, which the company acquired to enter the Australian market.

Despite the positive news, Brooks said the company was moving ahead with prudence. “While these top-line results are a great sign of our brand strength and a testament to the strong execution by the Zumiez sales teams, we are cognizant that headwinds persist throughout the retail industry and challenges associated with muted mall traffic and macroeconomic uncertainly are still bringing unpredictability across the retail sector,” he told investors on the company’s December 1 conference call. “Accordingly, we are proceeding cautiously and tightly controlling expenses to protect profitability.”

More Frequent, Yet Smaller Purchases
The latest quarter was boosted by increased transaction volume, offset by a decline in dollars per transaction, suggesting that as with other retailers, particularly in the West, the retailer saw increased traffic following the closures of the bankrupt Sports Authority and Sport Chalet. Zumiez CFO Chris Work said net sales were driven by “gains in the retailer’s men’s, accessories and juniors’ categories, while footwear and hardgoods comped down for the quarter.” From a regional perspective, North America net sales increased 7.8 percent to $202.9 million while international sales rose $14.6 percent.

Despite the decline in dollars per transaction, Zumiez was able to bump up product margins, resulting in a 10-basis-point increase in gross margin as a percentage of sales to $34.4 percent for the third quarter versus a year ago. Coupled with SG&A expenses as a percentage of sales remaining flat at 26.8 percent, quarterly net income came in at 10.7 million, or 43 cents per diluted share, versus net income of 9.7 million, or 36 cents per diluted share, a year ago.

Zumiez officials said the growth has continued through November with its same-store sales for the month up 5.7 percent for the four-week period ending November 28, on a 10.3-percent increase in net sales to $69.3 million. That’s a significant improvement from a year ago, when same-store sales slid 13.8 percent during the same period in 2015.

Proceeding With Prudence
Part of that caution from Brooks involves a plan for slower store growth, while still viewing “physical-store expansion as an important piece of the customer omni-channel experience,” he said. New stores are expected to further slow for North America in 2017, while there is more opportunity to grow in Europe and Australia, he said.

As of October 29, 2016, inventory rose 12.7 percent to $150.6 million, including an increase in inventory per square foot. “Though inventory has grown in excess of our square footage growth, we feel confident in the general quality of the inventory and have seen our aged inventory, defined as inventory older than four months, decrease as a percent of total inventory year over year,” Work said.

Looking ahead, Zumiez projected its fiscal fourth-quarter same-store sales, ending January 28, 2017, increasing 3 to 5 percent, with net sales in a range between $258 million and $263 million. Its fourth-quarter gross margin is expected to improve by 50 to 100 basis points, in part due to easier comparisons from a year ago, when the company took a $1.2 million charge to clear inventory. Diluted earnings per share for the quarter are expected between 60 cents and 66 cents.

Photo courtesy Zumiez