Zumiez On the Verge of a Breakthrough

| About: Zumiez Inc. (ZUMZ)

On July 24th, we initially reviewed Zumiez (NASDAQ:ZUMZ) with a post entitled: Zoom Zoom Zumiez. Concurrently we started to add a first round of investments for our client portfolios. The price at the time was approaching $38.50.hottest retailers

Recently, CNN.com reported that Bon-Ton is a top grower on Stores Magazine’s list of ‘Hot 100′ firms. This list ranks stores with fastest-growing annual sales. Also ranking towards the top is GameStop (NYSE:GME), Zumiez, and CitiTrends. Meanwhile, Wal-Mart (NYSE:WMT) is down at number 78.

According to the article, Zumiez is at number 4! This is a huge move over the past 12 months. Zumiez is an online and mall-based seller of clothing and accessories for active sports like snowboarding, skateboarding and surfing. All the HOT products...

Since then, there have been several interesting announcements from the company and the sector. First, Zumiez announced same store sales that beat expectations by 40%. Coming in at an impressive 9% growth rate compared to the last report was enough to push the stock higher for a few days. Then the retail sector reported that sales had slowed in many sectors. This had a cooling effect on many retail stocks.

The strength this name had during the recent market downturn demonstrates increasing support and awareness for the underlying brand that Zumiez sells. The sector has a broad range of companies, some of which will do well in this current market and economic environment and others which will not. Furthermore, there are a select few that will be more protected from market risk (although not removed from it). These are the companies that sell to the younger crowd that will continue to buy up the “hot” items. This is where we want to invest.

Zumiez is planning to release quarterly earnings on August 22. The latest run up followed by an almost immediate pullback indicates that we are seeing short-covering (as of July 17, 15.7 million shares were held short, which is 27% of float) into this announcement. The company only has 17.47 million shares in float and a daily volume approaching 1,248,190. This is a sharp increase from the 3-month average of 660,000 shares.

With 88% institutional ownership and Profit Margin (ttm) of 6.69%, along with operating Margin (ttm) of 11.33%, the earnings will certainly show us if this is a short term aberration or if this company and its management actually understands their segment of the market. Up until now, they have done a stellar job honing in on the trends and creating an environment within their stores that helps to move products.

The continuing concern is the Forward P/E nearing 32.6. This is high compared to the market as a whole and the retail sector in particular. As we wrote in the initial review and buy recommendations, the P/E along with a hot PEG ratio has us wondering if this is a growth company on the verge of a major breakthrough or a company that is overvalued.

The next earnings announcement will give us a much clearer perspective. That said, in the recent market meltdown, we have been recommending and buying this name aggressively.

Analysts are looking for quarterly earnings with a range of $.08-.09 and annual of $.95-1.01. Management has surprised in the past, although the surprises are not consistent. For this reason, investors have not made a comittment. Until we see otherwise, we are finding good reasons to build positions, especially when shares are below $40. This may be the last time investors have this option, as a good earnings report will solidify the range and should push the shares above $46.

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ZUMZ 1-year chart

Disclosure: Clients of Horowitz & Company hold LONG positions of ZUMZ