With a number of its streetwear labels riding strong popularity with teens, Zumiez Inc. reported earnings rose 16.0 percent in the third quarter ended November 3 to $13.8 million, or 55 cents per share, exceeding guidance calling for earnings in the range of 45 to 51 cents.
Rick Brooks, CEO, said on a conference call with analysts, “Our third quarter was highlighted by successful back-to-school season and solid full priced selling throughout the period. The combination of a mid-single-digit comparable sales gain and 100 basis point increase in gross margins helped us offset the loss of a high volume week that moved out of third quarter and into the second quarter.”
Sales improved 1.2 percent to $248.8 million, on the lower end of guidance calling for revenues in the range of $247 to $252 million.
Comparable sales increased 4.8 percent compared to a gain of 7.9 percent in the same period a year ago. Comps were projected to arrive between 4.0 percent and 6.0 percent.
The comp gain was driven by an increase in transaction volume, as well as increase in dollars per transaction. The increase in dollars per transaction resulted from higher average unit retail, partially offset by lower units per transaction. The period marked Zumiez’s ninth consecutive quarter of comparable sales growth and transaction gains.
During the quarter, the footwear category was the largest positive comping category followed by men’s, women’s and accessories. Hard goods was the only negative comping category.
The net sales improvement was supported by the net addition of nine stores since the end of last year’s third quarter. This is partially offset by the loss of approximately $9.6 million from the movement of the retail calendar, which shifted several days in early August, which are in the back-to-school season into Q2 this year versus Q3 last year.
Gross margin improved 100 basis points to 34.9 percent in the quarter. The increase was primarily driven by 70 basis points improvement in product margin and 70 basis points improvement in inventory shrinkage, offset by 30 basis points in higher shipping and fulfillment cost.
SG&A as a percentage of sales was 27.5 percent compared to 26.2 percent in the prior year. The 130 basis point increase was primarily driven by the movement of revenue related to the retail calendar shift. This resulted with 60 basis points of deleverage in store operating costs, 40 basis point of increase in corporate cost and 20 basis points increase in the accrual of annual incentive compensation.
Operating income eased slightly to $18.4 million, or 7.4 percent of sales, compared to $18.8 million, or 7.7 percent, for the third quarter of 2017.
Sales for the month of November increased 9.4 percent to $84.4 million. Same-store sales expanded 2.3 percent compared to an increase of 7.8 percent a year ago. The comp gain was highlighted by the Black Friday weekend comp of 4.1 percent.
“Our ongoing success continue 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,” said Brooks on the call.
He said the success reflects adjustments to its business model to meet today’s empowered consumer, the shift toward cross-channel shipping and fast-rotating trend cycles.
He cited four areas Zumiez is benefiting from:
- Enhancements to the process by which it identifies new brands and trends in the marketplace, both locally and globally, ”enabling us to offer the product our consumers are looking no matter when or where they choose to interact with us;”
- Recruiting, training and overall establishing a sales culture that drives more personalized human-to-human connections;
- Benefiting from the scale of having a presence in seven countries across three continents that also helps in finding and supporting emerging local brands;
- Continuously testing and learning from customers “with emphasis on inventing and improving upon ideas to meet their rapidly changing expectations,” including recent upgrades to localized fulfillment and Zumiez Stash.
Said Brooks, “Throughout this consolidation, we believe that we are positioned to be the dominant global winner in our lifestyle segment of the market. While others struggle to keep up, we believe Zumiez will continue to benefit from the opportunities being created by the constant state of change in retail.”
In the Q&A session, Brooks implied the chain is being helped by the healthy streetwear trend, although the company carries an extensive range of brands.
“From the streetwear perspective, I mean this is just a piece of what we do,” said Brooks. “As you know we represent art and music and action sports and I think I would even classify some brands that you can find in our stores as having just kind of a fun message. So all of that plays into what we’re doing, but we’ve seen streetwear brands kind of come and go here and I would say that’s pretty consistent with what we see in that total brand portfolio.”
Overall, the chain is benefiting from many of its core brands, such as Vans, doing well as shown by Zumiez’s top 20 brands becoming a bigger part of its sales mix this year. Beyond Vans, popular brands currently include Obey, Adidas, Santa Cruz, Thrasher, Champion, Ripndip, Odd Future, Diamond Supply, Fila, Huf and Nike SB.
Zumiez said it remains committed to launching new brands with an overall annual turnover goal of 20 to 30 percent of its brands. Chris Work, CFO, added, “We’re not seeing any weakness in the market in terms of new brands coming into the market.”
For the fourth quarter, revenues are projected to be in the range of $295 to $301 million resulting in EPS of $1.02 to $1.08. Comps are expected to be flat to up 2 percent.
That compares to sales of $308.2 million, earnings of 80 cents, and a comp gain of 7.5 percent in the year-ago period. Excluding non-recurring items related to deferred revenue from its Stash loyalty program and certain deferred tax assets in Europe, year-ago earnings would have been 82 cents.
Zumiez said comparisons in the fourth quarter will be impacted by an extra week in the year-ago fourth quarter that was worth approximately $9.1 million in sales, $1.9 million in operating profit and 5 cents per share when comparing to 2018.
Image courtesy Zumiez