Here's How Zumiez Is Doing So Far This Year

Summary

• E-commerce, same store sales increases, and expansion contributed to robust fundamental gains.
• Zumiez sports a solid balance sheet that should help it self-finance expansion.
• Zumiez has rewarded its shareholders handsomely over the past five years.

On Dec. 9, snowboarding, motocross, snowboarding related apparel, footwear, and accessories company Zumiez (NASDAQ: NASDAQ:ZUMZ) came out with its Q3 2014 10-Q which followed up in more detail on its earnings announcement released on Dec. 4. The company has performed well so far this year and stands in solid financial shape which is a good thing in the competitive retailing landscape.

Excellent fundamental expansion

Zumiez's year-to-date revenue expanded an incredible 11% year-over-year. The addition of 54 stores along with a comparable sales increase of 3% contributed to the robust top line gains. E-commerce contributed the majority of the same stores sales increase. Zumiez e-commerce business saw a 17% increase in comparable store sales vs. a 1.4% increase in comparable store sales. It's also important to note that e-commerce expanded its footprint in the Zumiez business going to 11% of total sales vs. 10.5% the same time last year. The e-commerce growth is reflective of the overall shift in shopping patterns to the internet and away from brick and mortar stores. Also, customers are increasing their frequency of purchases and spending more per transaction.

Zumiez's year-to-date net income also expanded 35%. Net income expansion was helped by the absence of incentive payments that related to its Blue Tomato transaction, cost controls, and the absence of a litigation charge that the company had in 2013. Zumiez's free cash flow swung from a negative $5.5 million this time last year to a positive $5.5 million so far this year. Increased net income and favorable changes in operating assets and liabilities, most notably accounts payable, contributed to this positive change in free cash flow.

Excellent balance sheet

Zumiez is one of the few companies I have researched that meets my high standards on balance sheets. Currently, the company possesses roughly $109 million in cash and marketable securities which equates to a whopping 32% of stockholder's equity. I like to see companies harbor cash amounting to 20% or more of stockholder's equity to self-finance acquisitions, product innovation, etc. Also, Zumiez has $2.7 million in long-term debt which equates to less than 1% of stockholder's equity, way below my personal threshold of 50%. This will translate into less interest expense that will choke out profitability and cash flow.

What's the long-term picture?

Over the past five years Zumiez has grown its revenue, net income, and free cash flow 91%, 475%, and 47% respectively (see tables below). Increased store locations accounted for some of the revenue increases. However, it's worth noting that comparable sales increases steadily declined starting in 2010 going into the negative in 2013. Hopefully, Zumiez will have a good holiday season and turn that trend around this year. Also according to Morningstar, the company spent heavily on capital expenses and operating cash remained roughly even over the past three years which partially accounts for the suppressed free cash flow figure. Over the past five years, Zumiez has given its shareholders a 205% total return vs. 99% total return for the S&P 500.

ZUMZ Revenue (NYSE:TTM) data by YCharts

ZUMZ Total Return Price data by YCharts

Looking ahead

Zumiez operates in a highly competitive environment. Always be watchful of comparable sales trends. If customers start fleeing to other chains then investors may want to sell. Zumiez currently trades at a P/E ratio 20.5 vs. 18.7 for the S&P 500 according to Morningstar and 33 for Zumiez's five year average giving it a reasonable valuation. However, it's worth noting that it trades at a forward P/E of 22.4 meaning that analysts anticipate a decline in earnings per share next year. Finally, its rock solid balance sheet means this company at least deserves a spot on your watch list.

Analyst’s Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.