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The Growing Debt-Free Retailer with 1970% Yearly Return in Just Two Months

December 05, 2011 | About:
Zumiez (ZUMZ), in my previous post describing the business and valuation, is the expanding teenager retailer even in the downturn, with growing operating and free cash flow over time, plus the heavy insider ownership. I wrote about the company at the end of September, when the stock price was around $17.5/share. My conservative estimation of ZUMZ’s enterprise value should be $886 million, making the intrinsic value around $28.5. To my surprise, within just two months later, as of Friday, December 2, ZUMZ’s share advanced more than 24% to nearly $29 per share. Anyone who bought in at the end of September would be lucky to realize yearly return of 1970%.

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The reason why the market has reacted so favorablly to ZUMZ’s share is because the beyond expected performance that ZUMZ delivered in Q3 2011. In the conference call, Richard Brooks, the CEO has discussed that the company has consistently grown sales and earnings from the beginning of 2010. Sales increased 13.3% with comps up 6% on top of 14.4% increase on the previous year. It was better than initial projections at the end of August. Richard felt good about the prospects for back-to-school in fall, based on the strength of the product assortment and shopping experience supplied by the company’s store and from the web. Of course, the executive team has prepared to operate in a highly promotional mall environment when the economy was pushed in the more challenging situation along with the inflationary pressures.

The indication for any retailer is the comparable store figure, measuring the operating performance excluding the effect of opening up more stores. In November, comparable store sales were up 8.4% on top of the 20.7% increase last year. The Black Friday weekend was in line with the comp results for the month, the good beginning promises a good holiday sales season. At the end of November, the company has opened all 45 stores for 2011, including 35 in the U.S. and 10 in Canada. Currently, there are around 434 stores in the U.S. and ZUMZ has plans to open between 8% to 10% new domestic stores each year, moving toward the long-term goal of 600-700 domestic locations.

In terms of finances, the 13.3% increase in sales from the prior-year period was mainly because of the increase in comp store of 6% and the opening of 43 additional stores since the end of third quarter of 2010. The gross profit margin was up 14.4% year on year because of the product margin improvement and the effect of leveraging the supply chain expenses on the sales gain. For the nine months ended October 2011, net sales were $372 million, 15.3% higher than the same period last year. Comp sales for the first nine months increased 8.3% on top of 11.3% with fiscal 2010. Net income was $18.6 million or $0.6 per diluted share. In the third quarter 2011, ZUMZ got a stronger and more liquid balance sheet with a 38.5% increase in cash and market securities, from $98.9 million to $137.1 million, mainly because of strong operating cash flow generation. And as of October 2011, the company is debt-free, including no outstanding balances on the revolving credit facility.

For valuation, with nearly a 100% increase in the stock price from the last time I wrote about it, I thought ZUMZ has reached its full value based on my conservative estimation I gave out two months ago. The P/E is now 26.8x, P/B is already 3.8x and P/CF is nearly 20x already. Interesting to note is the Magic Formula author, Joel Greenblatt, has begun to buy into the position since June this year and added three times more the previous positions in September. The last quarter might deliver the great results for ZUMZ as well because of the holiday seasons. And ZUMZ can be great stocks to hold for the very long term. However, with the current full valuation, there would be smaller probability for the stock to make a big again in the near future.

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


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