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Zumiez: Conservative Retailer Has Good Probability of High Growth

September 29, 2011 | About:
Zumiez (ZUMZ) is the leading specialty retailer of sports of apparel, footwear, equipment and accessories under Zumiez brand names. At January 2011, the company was operating 400 stores, mainly in shopping malls in 37 states. The main target customers are young men and women between the age of 12-24, for sports activities including skateboarding, surfing, snowboarding, bicycle motocross and motocross.

Historically, the business has been quite seasonal, with most of net sales and net income occurring in the third the fourth fiscal quarters. This occurs because of the increased demand during back-to-school and winter holiday seasons. During fiscal year 2010, around 61% of net sales were in the third and fourth quarter — same with 2009.

Operating performance

Over the years, Zumiez has mad quite nice improvements. The store count has grown 18.1% annually, from 174 at the end of fiscal year 2005 to 500 in 2010. The average net sales per square foot is $435 over the last five years, with the peak of $499 in the year 2006. And the company has been profitable for every single year in its 32-year history. Here is the operating performance of Zumiez over the years:

USD million 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Revenue 85 101 118 154 206 298 381 409 408 479
Operating Income 7 7 7 12 20 32 39 25 13 37
Net Income 6 6 4 7 13 21 25 17 9 24


It is worth noting that the revenue of Zumiez has kept increasing over the last 10 years of operating history. It has grown from $85 million to $479 million, for an annual compounded growth of 18.9%. The same trend, although with a little bit of fluctuation, is detected in operating income and net income. The annual growth is 18.1% and 14.9% for operating income and net income respectively. On average, the bottom line of Zumiez is $13.2 million.

The store data has been reported in the annual report of the company as follows:

2010 2009 2008 2007 2006
Store Data:
Number of stores open at end of period 400 377 343 285 235
Comparable store sales change (%) 11.9 -10 -6.5 9.2 14.5
Net sales per store (in thousands) 1,162 1,081 1,240 1,405 1,389
Total square footage at end of period (in thousands) 1,174 1,107 1,005 829 667
Average square footage per store at end of period (5) 2,935 2,937 2,930 2,909 2,840
Net sales per square foot (6) 396 367 424 488 499


It is very good to see the expansion of Zumiez by opening more stores year on year, with the increase in the comparable store sales, but being decreased in 2009 and 2008. Overall, by adding more stores and increasing the net sales over the years, we can see that Zumiez is on the trend to grow its business. What should be noted here is that the target customers of Zumiez are teenagers, who have a habit of fickle purchasing behavior. Thus, the performance of Zumiez can be considered quite inconsistent over time.

In addition, for apparel merchandising, it offers customers a wide selection. Alongside its private-owned label, it still gives customers other choices of other brands such as Volcom and Quicksilver. It can deal flexibly in the trends with the teenagers by having different brand names.

Profitability

In terms of profitability, the gross margin, operating margin and net margin have all been positive over the years. There is an upward trend in the gross margin, from 32% in 2001 to 35% in 2010. The average of the 10 years is 7.8% for the operating margin and 5.3% for the net margin.

Let’s analyze a little bit in terms of historical profitability in the Dupont Model which contains net margin, asset turnover, and financial leverage to come out at the return on equity.

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Net Margin % 7.56 5.63 3.8 4.73 6.25 6.99 6.64 4.21 2.24 5.05
Asset Turnover 3.01 2.86 2.84 3.19 2.43 2.12 1.99 1.82 1.65 1.7
Financial Leverage 2.36 3.01 2.25 2.12 1.55 1.6 1.4 1.31 1.35 1.33
Return on Equity % 53.8 43.8 24.3 32.9 25.8 23.4 19.5 10.4 4.93 11.5


The net margin is quite stable in the low range of 3% - 7.5%, with an average of 5.3%. The asset turnover is in a downtrend, along with the level of financial leverage. Those have dragged down the return on equity over the past four years.

Retailing is a cyclical business, which is subject to the swings of economic upturns and downturns. Zumiez has expanded, adding more numbers in the store base even during the economic depression. However, it is critical for any retailer to have financial strength to survive in the downturn.

Financial Health

As of its July 2011 balance sheet, the company is quite liquid, as it has more than 38% of its assets in cash and marketable securities, and the main items in its marketable securities are the state and local government securities. Zumiez is a debt-free retailer, with the ratio of debt over assets conservative at 31%. The enterprise value of Zumiez stays at $425 million.

Cash flow

One important thing that any value investor loves to see is the increasing in the level of operating cash flow and the free cash flow. And that has happened for the case of Zumiez, with the upward trend in the level of operating cash flow and eight years positive free cash flow.

USD million 2003 2004 2005 2006 2007 2008 2009 2010
CFO 7 16 21 30 34 38 45 49
CAPEX -6 -11 -13 -18 -31 -28 -17 -29
FCF 1 5 8 12 4 10 29 19


On the period of eight years, its free cash flow has increased 19 times, making annual compounded growth of 45%.

Valuation

As the free cash flow has been increasing and been positive over years, we can use the discount free cash flow model with Gordon growth. As the Treasury is very low currently, Benjamin Graham often suggested using the minimum discount rate of 10%. Assume that over the next five years, Zumiez’s free cash flow grew only 8% per year, and then afterward grew 1% per year to infinity.

Annual growth 8%
Infinity growth 2%
Discount rate 10%
Value (US million) 894


Using those above assumptions, we get the enterprise value of Zumiez at $886 million. With 31.11 million shares outstanding, the intrinsic value of its shares should be around $28.5. The current enterprise value of $425 million indicated the growth of its cash flow per year on the next five years is around only 5.8% per year.

Management

What is interesting to see is heavy insider ownership, and that is the case for Zumiez. Thomas Campion, the chairman of the board and founder currently holds nearly 17% of the company. Richard Brooks, the company’s CEO and director holds nearly 12%. Insiders collectively take nearly 30% of the total shares outstanding of Zumiez.

Conclusion

Zumiez is a growing retailer, expanding even in the economic downturn. Along with its strong financial health of being debt free, the operating cash flow and the free cash flow keep increasing over time. In addition, it has quite heavy insider ownership, which represents the commitment of the executive to the future of the company. Zumiez can be considered for a retail growth stock in the diversified basket of any value investor.

This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risk.

About the author:

Anh Hoang
Money manager into global equities, especially with US and Vietnam markets. CFA level 3 candidate. Lecturer for Stalla - CFA course in Vietnam

Visit Anh Hoang's Website


Rating: 3.7/5 (17 votes)

Comments

Adib Motiwala
Adib Motiwala - 2 years ago
Valuation does not seem that attractive. Several retailers appear much cheaper on a statistical basis ...

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