On March 12, “action sports-related apparel” company Zumiez (NASDAQ: ZUMZ) came out with its FY 2014 earnings announcement. The company managed to beat the Wall Street expectations game and did OK on the fundamentals front. Let’s take a look to see what’s going on with the company.
In 2014, Zumiez saw its revenue increase 12% year over year. Its net income declined 6% during that time while its free cash flow increased a whopping 75%. The company sits on an excellent balance sheet which is a good thing in the immensely competitive retailing environment. Zumiez sits on $155 million in cash and short-term investments equating to 43% of stockholder’s equity, well past my personal threshold of 20%. This should help the company adapt to changing consumer tastes by innovating new merchandise offerings. Zumiez’s “long-term debt and other liabilities” equates to 1.2% of stockholder’s equity. I like to see long-term debt to equity equating to 50% or less of stockholder’s equity.
What drove the numbers?
Zumiez’s results were driven by a mix of expansion, increased demand and acquisitions. Zumiez opened roughly 53 stores in 2014. Moreover, Zumiez saw its same store sales increase 4.6%, indicating that customers like its merchandise arrangement. All publicly traded business owners want to see their products in high demand. The company also acquired Blue Tomato adding further to Zumiez’s top line expansion. The acquisition also contributed heavily to Zumiez’s contraction in net income which should represent a one-time occurrence unless the company becomes a serial acquirer. Favorable accruals especially stock-based compensation and accounts payable contributed to the vast expansion in free cash flow.
Thoughts on the future
I have been discouraged in recent years by the struggles of various brick and mortar retailers. Consumers are increasingly shopping online if they shop at all. Consumers also have a myriad of retailing choices to pick from, making it difficult to bring them through the door. Some retailers successfully hone in on consumer tastes for a short time and then eventually fail to adapt when customers decide that their offerings are no longer cool. However, for the foreseeable future, Zumiez seems to be on track. Company management wants to open 57 new stores in FY 2015. As long as the company keeps offering merchandise consumers love, it will succeed. Personally I prefer companies that reside behind high barriers to entry and possess few competitors.
I have a neutral long-term outlook on Zumiez and retailers in general due to the competitive nature of the current retailing environment. However, Wall Street analysts disagree with me at least in the intermediate term. According to Yahoo! Finance, analysts have Zumiez’s EPS pegged at $1.94 for FY 2016 and $2.16 for FY 2017. If Zumiez’s current P/E ratio of 27 holds (which I doubt) and if the company can at least meet those estimate, that will translate into share prices of $52.38 and $58.32, respectively. Representing returns of roughly 34% and 49%, respectively, based on the current share price. Investors should heed caution when investing in retailers. If Zumiez shows signs of losing customers, investors should sell the stock.