Zumiez delivered a bleak outlook for the third quarter after reporting inflationary pressures caused sales and earnings in the second quarter to fall well below company guidance.
On a conference call with analysts, Rick Brooks, CEO, noted that the year-ago quarter benefited from “several very strong tailwinds,” including another round of government stimulus checks and as local economics re-opened to capture pent-up demand.
“Zumiez, fresh off a record first quarter in 2021, posted the best second quarter in the company’s history as we captured our fair share of that outsized demand,” said Brooks. “Over the past 12 months, those tailwinds have dissipated. Headwinds have materialized and then intensified, particularly in our U.S. business.”
He added, “On top of the difficult sales comparison a year ago, the operating environment has become increasingly more challenging due to lingering supply chain disruptions, higher logistics costs, a tight labor market, negative foreign currency exchange impacts, and most acutely, high level of inflation, leading to intense competition for declining discretionary dollars. While each of these factors was incorporated into our outlook for this quarter and thoughts on the year, inflationary pressure on the consumer intensified as the quarter unfolded. Beyond the macroeconomic factors, we have also continued to feel the pressure of skate hardgoods declines on the business as well, a push to more value-added offerings away from our higher price point branded product.”
Brooks said that the combination of these factors led to sales coming in $12 million beneath the bottom of its expected range and earnings sliding “well below” projections due to the sales miss and inflationary pressures.
“We’re disappointed that our recent performance fell short of expectations,” said Brooks. “As we mentioned last quarter, we intend to remain flexible and agile in adjusting inventory, expense, and capital allocation plans based on any changes in the macroeconomic environment. We are actively adjusting our merchandise assortments and managing expenses in order to better position ourselves for the current operating environment.”
He added that while comparisons begin to moderate in the back half of the year, “we believe it is prudent to adopt a more cautious view on the remainder of 2022 that account for the increased pressure we’ve seen on the consumer.”
In the second quarter ending July 30, sales slumped 18.1 percent to $220.0 million, below company guidance in the range of $232 million to $239 million. Compared to the pre-pandemic 2019 second quarter, sales were down 3.7 percent.
Excluding the impact of foreign currency fluctuations, sales were down 16.4 percent compared with the prior year and down 3 percent compared to 2019.
From a regional perspective, North America sales were $189.9 million, a decrease of 20.1 percent from 2021 and down 8.2 percent compared with the same period of 2019. Other international net sales, consisting of Europe and Australia, were $30.1 million, down 3.4 percent from last year and 40.2 percent from pre-pandemic levels in 2019.
All categories were down in total sales from the prior year during the quarter, with men’s being the most negative, followed by hardgoods, accessories, women’s, and footwear.
Earnings fell 87.1 percent to $3.1 million, or 16 per share, from $24.0 million, or 94 cents, a year ago and well below guidance in the range of 45 cents to 55 cents compared to earnings in Q219 of $9.0 million, or 36 cents; earnings were down 65.6 percent.
Gross margins eroded to 34.1 percent for the quarter from 39.1 percent a year ago and 33.8 percent in the second quarter of 2019.
The 500 basis points year-over-year margin decline reflects the sales mix shift away from its higher-margin U.S. business as product margins were strong in most geographies on full-price during the quarter. Store occupancy costs deleveraged by 220 basis points on lower sales volumes. Shrink increased 120 basis points in a return to more normalized pre-pandemic levels. Web shipping costs increased by 80 basis points, and distribution center costs deleveraged by 70 basis points.
SG&A expense was 31.8 percent of sales in the quarter, up from 27.2 percent a year ago and 28.7 percent of net sales in 2019 due to the sales deleverage. Higher store wages were the biggest factor in the decline.
Operating income in the second quarter was $5 million, or 2.3 percent of sales, compared to $32 million, or 11.9 percent, last year and $11.7 million, or 5.1 percent, in the second quarter of 2019.
Looking ahead, sales for the first 37 days of the quarter through September 5 were down 18.1 percent year-over0year. Compared to the 37-day period ending September 9, 2019, sales were down 12.6 percent. Total comparable sales for the 37-day period declined 19.7 percent over the prior year and 15.3 percent from the comparable period in 2019.
For the third quarter, sales are projected in the range of $220 to $228 million, down in the range of 21 percent to 24 percent from $289.5 million a year ago. Consolidated operating margins are projected in a wide range between 0.5 percent and 2.5 percent, resulting in EPS in the range of 3 cents to 18 cents. In the year-ago third quarter, earnings reached $1.25 at an operating margin of 13.8 percent.
Brooks said Zumiez saw a few “bright spots” in the second quarter, including its Fast Times chain in Australia performing “exceptionally well to our plan.”
Companywide product margins remained strong, although down slightly from the prior year. Brooks said, “We have not given back the vast majority of gains we’ve made over the past few years.”
Inventory was managed “very well,” with an overall foreign exchange adjusted increase of only 4.4 percent. On a reported basis, inventory was up 1.1 percent. Second quarter 2022 inventory was flat to second quarter 2019 inventory. Chris Work, CFO, said on the call, “Overall, the inventory on hand is healthy and selling at a favorable margin.”
Brooks also cited progress in completing long-term initiatives, including the opening of 34 stores since the same time last year. As of August 27, Zumiez operated 753 stores, including 612 in the U.S., 52 in Canada, 70 in Europe and 19 in Australia.
Brooks said, “While the current environment has caused a near-term pause on our quarterly sales growth, our focus remains on creating long-term shareholder value. Zumiez’s four-decade history of adept management through multiple business and fashion cycles, coupled with our strong balance sheet, gives me confidence that this slowdown is temporary.”
