Zumiez: My No. 1 Retail Post-Pandemic Play

Summary

• As the country continues to reopen from the pandemic, America’s malls are likely to attract a wave of reinvigorated consumers, including teenagers.
• ZUMZ has consistently grown revenue above 23% a year since 2015. Zumiez has continued churning out cash flow, surging FCF by almost 50% and EPS by 15% during the pandemic.
• The company’s financial position looks strong. Zumiez has no long-term debt outside of leases and current assets (excluding inventory) of $430M – nearly half the current market cap.
• My P/S, PEG, and DCF valuations imply significant undervaluation as they average to an intrinsic valuation of $90 (implying 100% upside).

JHVEPhoto/iStock Editorial via Getty Images

Thesis

Zumiez (NASDAQ:ZUMZ) may be the perfect opportunity to take advantage of the hypothesis that mall reopenings will be fruitful for retail companies. While there are other opportunities for post-COVID retail plays, I believe Zumiez is an ideal Long choice due to its strong financial position, current pricing well below fair value, and business model that specifically and successfully targets youth. I rate it a buy and am bullish long-term.

About ZUMZ

Zumiez is a leading specialty retailer of apparel, footwear, and accessories for younger generations who want to express individuality through action sports culture, music, art, and streetwear, with an emphasis on skateboarding.

Customers desire authentic merchandise and fashion that’s rooted in these lifestyles to express their individuality. Zumiez strives to keep merchandising fresh by continuously introducing new brands, styles, and categories of products. The brand's focus lies on a diverse collection of brands allowing quick adjustment to changing fashion trends.

Zumiez stores feature an industrial look, densely yet efficiently packed merchandise displays, and lifestyle-focused posters. Stores are specifically designed to encourage customers to shop for longer, interact with store associates (the average age of a Zumiez associate is 19, per 2020 10-K), and visit stores more frequently.

Drivers/Catalysts

Malls are adapting and reopening. Foot traffic was up 86 percent at 50 shopping centers tracked by the data firm Placer.ai compared to the same month last year, according to the Wall Street Journal. This is still 24 percent lower than it was in March 2019, implying there’s further room to grow for sales. Zumiez, however, has outperformed the mall traffic percentage decline. Revenues were only down 4% for FY 2020, and EPS was actually up 15%.

This may be a result of shoppers buying Zumiez products online. Online sales accounted for 26.4 percent of sales in 2020 compared to 16.6 percent in 2019. This is great news as it implies the Zumiez brand and products are attractive and the company can thrive separately from the malls themselves. Buyers, even when unable to shop physically at the mall, are still sticking with Zumiez. Therefore, FY 2020 revenue and net income figures were extremely positive results, and should only continue to brighten as restrictions fully ease.

Sales and mall traffic will improve over the next year because shoppers will look to exit lockdown and spend stimulus checks. In particular, Zumiez targets the niche demographic of teenage consumers, who are more likely to spend time and money at the mall upon reopening. As part of this business model, ZUMZ offers a diverse selection of items. No single third-party brand accounted for more than 9.4%, 13.9%, and 12.4% of net sales in fiscal 2020, 2019, and 2018, respectively, according to the 2020 10-K.

Finally, Zumiez also runs a unique customer loyalty program, the Zumiez STASH, which incentivizes purchases by giving users Zumiez points. These points can be redeemed for a broad range of rewards, including product and VIP experience rewards that aren’t readily available. I believe proper utilization and marketing of this program could serve as a major source of revenue in future years, especially if Zumiez continues to employ large influencer deals.

Financials

Source: Author created using company data

Pictured above is a recap and forecast of Zumiez's income statements. The 20% spike in 2021 forecasted sales may seem cheery, but it’s actually in line with results from Q1. Revenue in Q1 ‘21 was 279M, just over double the same quarter last year! Granted, Q1 ‘20 was the midst of the pandemic, but Q1 ‘19 revenue was only 212M, and Q1 ‘18 revenue was only 206M. Clearly, the Zumiez brand has evolved in order for such a revenue climb to have taken place.

Cost of revenue and SG&A have slowly declined since 2015, a testament to management’s ability to consistently control and cut down expenses. I consider it safe to forecast these to trend in their current direction. Keeping interest income roughly the same as the past two years (3.5M) and a 25% income tax expense, we could see steady EPS growth from 3 dollars now to around 6 dollars by 2025.

Source: Author created using company data

Zumiez also boasts a strong balance sheet (above) that should continue to stay fortified assuming no drastic changes to the income statement forecast. Current assets have increased 30% during the pandemic and liabilities have actually decreased.

I find it particularly impressive that inventory has remained around the same through the pandemic, further bolstering my conviction that Zumiez hasn’t had any major problem getting products off the shelves despite mall restrictions/shutdowns.

Zumiez’s assets alone, excluding lease right-of-use assets, combine for 750M, more than the market cap in October 2020 and only around half of the current market cap. To top it off, Zumiez also has essentially 0 long-term liabilities/debt (outside of lease liabilities, which balance with lease right-of-use assets).

The company has a book value of 580 million or around $22 per share. ZUMZ is therefore currently trading at 2x book value, very underpriced relative to the online retail industry average of 5.5x.

My Valuation

Source: Author created using company data

With the 4-year revenue forecast shown in my financials analysis and discounting with a calculated WACC of ~9.3%, I calculate that ZUMZ could be trading around $63 a share on a price/revenue basis. This is calculated by taking 2025's expected revenue, multiplying by the retail average P/S multiple of ~2x (this is a conservative weighted average of online and special line retail companies), and dividing by 26 million shares outstanding. This yields a price of $118 for 2025 and discounting with WACC yields $83 today.

Note this price/revenue valuation makes sense to use for ZUMZ since it's a metric suited for companies competing in a fast-paced/cyclical industry and whose future prospects are heavily dependent on consumer spending.

Source: Author created using company data

Pictured above is my PEG valuation for ZUMZ, using the same income statement forecast for EPS figures. The PEG ratio is a company’s P/E ratio divided by the annual earnings growth rate and is typically around 1 for a fairly valued company. Working backward from a PEG ratio of 1, I forecasted a 70$ price for Zumiez by 2025, discounting with a WACC of 9.3% to an intrinsic value of about 53 dollars today, implying around 25% upside from where ZUMZ trades today.

Finally, I performed a Discounted Cash Flow analysis, projecting Zumiez cash flow statement out several years (not shown) and obtaining approximate Free Cash Flow figures, shown above. These are actually conservative figures, as proven by my choices of a significantly smaller FCF yearly growth rate and faster-growing capital expenditures than years past. The results are outstanding, even the DCF’s most bearish output, using conservative FCF figures, half the normal long-term growth rate, and a WACC of 11% yields $116. Zumiez truly is a free cash flow machine.

My intrinsic valuation for ZUMZ is derived by averaging my 3 neutral-case valuations (PEG, P/S, and DCF of 52, 63, and 153 respectively) for a final price of $90/share.

Light Technical Analysis

Source: Yahoo Finance

Zumiez’s 1Y chart isn’t extremely suggestive but reveals some positive signals. Zumiez’s RSI of 49 is in line with recent consolidation and low volatility. There seems to be significant support at around 40$, and the price has tested this support 4 times, with significant rebounds every time. I believe this support helps to limit downside risk to around 10% below the current price. Finally, the MACD reveals a bullish signal with the MACD line just having crossed the signal line upwards for the first time in months. This is also very far below the baseline, indicating a stronger bullish signal. The technical factors combine to make $45 a decent enough entry point for Zumiez, although, in the long run, any price in the current trading range will prove to be a significant discount.

Bottom Line

Zumiez seems to be a great post-pandemic play owing to the combination of a solid financial position, strong brand appreciation, and undervaluation due to investor overreaction to pandemic pressures. As consumers (especially younger ones) reinvigorate demand for Zumiez products in-person, sales should continue to climb past the past year’s results, and the company should produce significant cash flow. The downside is technically and fundamentally limited, and ZUMZ has plenty of upward room to run.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.