Time To Buy The Dip On Zumiez?

| About: Zumiez Inc. (ZUMZ)

Summary

Zumiez delivered guidance that came in well below expectations, leading to a severe selloff.

Its poor performance recently has left it trading at a discount to the industry.

However, it seems to early to buy on the dip, as there is little clarity on how much things will improve in the second half of the year.

Zumiez (NASDAQ:ZUMZ), an apparel and hardgoods retailer focused on the extreme sports market, is having a rough time at the moment. Although its Q1 results were more or less in line with analyst expectations, the company's Q2 guidance sent shares skidding more than 19%. Following its declines this year, the stock is now trading at an attractive multiple relative to the industry, as well as the broader market. Is it time to go bargain hunting?

Guidance shocker

The first-quarter numbers didn't contain too many surprises. Adjusted EPS of $0.12 was in line with estimates, and moreover rose a rather healthy 20% year-over-year. Revenue ticked up 9% year-over-year, on top of a 3% increase in comps, which marked an acceleration from last year's 1.8% increase in comp store sales.

However, this is more or less where the good news ends. Towards the end of the quarter, management witnessed a slowdown in sales growth in its domestic business especially. This performance deteriorated further in May, the company logging a 2.2% decline in comps for the month versus a 3.6% increase last year.

Strength in Europe failed to offset the decline in the US business, which according to CEO Rick Brooks was a result of lack of clear fashion trends among the teen demographic, forex headwinds affecting tourism sales, seasonal weakness and the effects of the West Coast port slowdown. While the other factors may be temporary, shifting fashion trends among teens is a more permanent and thus more worrying factor.

All this has led to a severe cut to Q2 guidance. The company is now expecting EPS to come in at between $0.12 and $0.15 per share versus a $0.30 consensus, the sheer magnitude of the miss surprising many analysts. Comps are expected to decline in the range of 3%-5%. The guidance cut led the stock to tank 19.3% following the report.

Although the first half of the year is seasonally weak for the company, management commented that it expects improvement towards the back half of the year. However, the company did not provide full year guidance. At the moment, it is hard to envision an improvement in Q3 given the severity of the projected drop in Q2 comps.

A bargain?

Year-to-date, Zumiez stock has lost nearly 38% of its value, versus a 1.65% increase for the S&P 500. As such, one thing that the stock has going for it is its low valuation following the declines. It now trades at around 16.3 times trailing earnings, versus an industry average of around 20.5. The forward P/E is also low at 12.6.

However, a low valuation alone doesn't make an investment thesis. Considering just how quickly sales have deteriorated, it is hard to see full year results marking a meaningful improvement over last year. Indeed, the company was met with a barrage of analyst downgrades following the guidance cut, many citing the lack of visibility on how and when sales are expected to recover. Until there is more clarity on comps in the second half of the year, it seems best to stay on the sidelines.

Conclusion

The market reacted very badly to Zumiez' guidance cut. Indeed, the updated guidance came in so far below the consensus that many were left wondering how things could have gone downhill so quickly. While the stock is now trading at a significant discount to the industry due to its poor performance this year, uncertainty over how comps will perform in the second half of the year makes it too early to buy this stock on the dip, and there may well be more weakness in store.

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.

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Tagged: , Apparel Stores, Earnings
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