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Is It The Right Time To Invest In This Company?

May 26, 2014 | About:
Asha Poddar

Asha Poddar

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Teens are usually less affected by economic situations, especially when it comes to pursuing their passion such as playing their favorite sport. Moreover, teenagers are a great market for retailers since the former’s obsession of going out and hanging around with friends lures them to big and attractive stores. There are many retailers who use this opportunity to push up their sales.

A typical example here is that Zumiez (NASDAQ: ZUMZ), a sports-related specialty retailer. With great assortment of apparel, footwear and other sports accessories, the company caters to an age group of 12 to 24. Also, the biggest strength of this sports retailer is not what it offers to its customers but “how” it offers.

What drives revenue?

With approximately 500 stores, Zumiez attracts young people through its comfortable couches and video games and a courteous staff who help in making the purchase decision out of the wide array of products. Moreover, its stores are located at the right places where it can attract maximum people. Malls and movie theatres are the most apt places to lure youngsters to buy.

The bigger picture

These small marketing efforts have been helping Zumiez to register solid performances each quarter in spite of consumers being calculative about their spending. The specialty retailer has had the largest increase in revenue compared to other retailers such as The Buckle (NYSE: BKE) and American Eagle Outfitters (NYSE: AEO).

Though the retail industry did not do very well due to the prevailing economic conditions, Zumiez outperformed its peers with a 77.7% increase in revenue in the last five years, whereas Buckle and American Eagle posted growth of 25.6% and 12.4%, respectively.

For the recently ended quarter also, Zumiez performed better than Buckle. It beat analysts’ estimates and posted a 9.7% surge in revenue over the last year and a whopping 12.5% increase in its bottom line. On the other hand, Buckle posted a 0.7% jump in the top line and its earnings were almost flat as compared to the same period last year. Also, as far as same store sales growth is concerned, Zumiez registered 1.8% increase in comp sales whereas Buckle posted a 0.9% decline.

For American Eagle the recent quarter was a lackluster one. Its revenue dropped 5% along with negative same store sales growth. Even earnings were plunged 89% to $0.02 per share, largely disappointing investors. The company’s bottom line was hurt mainly due to increased markdowns as well as higher promotions during the holiday period. However, the retailer is working on its merchandise to offer better and attractive products to its customers, which might push up sales in the coming months.

Moreover, Zumiez’ recent acquisition of Blue Tomato has expanded its reach in Europe along with strengthening its online operations. E-commerce sales already posted an increase of 19.1% during the quarter and are expected to grow further in the upcoming holiday season.

Analyzing Further…

A quick look at the P/E multiples (on a trailing twelve month basis) of these companies will give us a better picture of how they are placed.

Clearly, Zumiez is expensive at a P/E multiple of 18.71 compared to Buckle which stand at 13.26. However, it is cheaper when compared to American Eagle which has a P/E multiple of 35.64, respectively. Along with a poor quarter, American Eagle’s higher P/E ratio makes it unattractive.

Conclusion

However, Zumiez has a comparatively higher multiple which makes it an unattractive stock to get into. Moreover, its declining same store sales metric is another put off. The retailer seems to be growing its revenue on the basis of new stores. Hence, this growth in revenue is short lived. I believe it is better to stay on the sidelines. This will not only help with entering the stock at the right levels, but also help in knowing how the new acquisition and expansion benefit the company.


Rating: 3.0/5 (1 vote)

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