Zumiez (ZUMZ) is a retailer of sports apparel, accessories, footwear and equipment. Its shares fell 9% on Friday, following a decline in profits for Q2 2012 and the EPS guidance being below analyst estimates. Despite sales growth, the company has shown a decline in profits. There seems to be a general trend away from the teen apparel sector as well. In August, same store sales, teen/child apparel retailers seemed to be the worst performers among other apparel retailers. We see no catalyst in the foreseeable future. Given that the stock seems fairly priced, we give Zumiez a hold rating.
Following are the details of the latest quarterly (Q2 2012) results:
- Sales and gross profit margin have gone up as compared to the same quarter last year. Sales were $112.21 million in Q2 2011, and went up by 20% to reach $135 million in Q2 2012. However, this top-line growth is not translating into bottom line profitability.
- Net income dropped from $2.59 million in Q2 2011 to $2.09 million in Q2 2012. This means a decline of 19%. The company reported EPS of $0.07/diluted share as compared to $0.08/diluted share in the same quarter last year. Excluding the one-time costs like the Blue Tomato acquisition worth $2.5 million, EPS come out to be $0.17/share, which beats analyst estimates of $0.13/share.
- The company also gave a guidance for Q3 2012. Net sales guidance range is $181-$185 million, as compared to analyst estimates of $183.46 million, while the EPS guidance range is $0.42-$0.45/diluted share. Analysts expect $0.53/share. This guidance assumes same store sales of 3%-5% for the third quarter of 2012, and revenues and expenses from the Blue Tomato acquisition. 50 new stores are to be added in fiscal 2012; 10 of those will be in Canada. The company, wisely, does not intend to open new stores in Europe in the current year.
ZUMZ's peers in the teen apparel sector are Wet Seal (WTSLA) and the Buckle (BKE). The company's August same store sales showed a gain of 3.7%, below the expected gain of 4.7%, and below last year's gain of 4.3%. The Buckle, however, posted a same store sales gain of 4.5% as compared to August 2011's 8.3%. Analysts had expected a drop of 0.3%. Wet Seal disappointed even more than Zumiez when its August same store sales came in at -18%, below analyst estimates of -17%. It was the biggest loser amongst all retailers that released same store sales in August. The gain in same store sales for Zumiez will be of little value when the net income keeps decreasing.
Pacific Sunwear of California (PSUN) is another competitor of Zumiez that caters to teen fashion with a focus on sports (surfing). It's experiencing negative earnings and a revenue decline, showing that the entire teen apparel sector is under pressure.
The company has no debt and the cash in hand stands at $96.8 million. The operating cash flows as at six months ending in July 2012 increased to $14.5 million from $11.2 million last year. Thus, from a liquidity point of view, the company is doing fine.
The company has a beta of 1.85, which means that it will be affected by the economic situation, as customers are careful about their discretionary spending. People can head to discount stores like Target (TGT) and TJX (TJX) for their clothing needs.
The company does not pay dividends and is up 67% in the last year.
Following the lower than expected outlook, ZUMZ has been subject to some target price cuts. Based on the FY2015 consensus EPS estimate of $2.17 (calculated by applying long term earnings growth rate of 19%) and the 16x forward P/E for Zumiez , the valuations come out to be $35. The last 5-year earnings growth rate was 12%.
The stock is fairly priced after the recent drop, and there seems to be no near-term upside potential. There is also a general trend away from basics to lifestyle brands and certain fashion looks like colored denim this year, which Gap (GPS) has capitalized on. We give Zumiez a hold rating. Another reason for not being bullish is that the sales growth is not translating into profits.