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Zumiez, Inc. (NASDAQ:ZUMZ) has been growing at a decently steady pace and also has both short-term and long-term catalysts and risks. In the short-term, holiday shopping has historically produced great sales for the company, but recent rises in cotton prices could increase the company's expenses. In the long-run, a rise in disposable income and the opening of more stores will help the company achieve higher numbers, but a shift to e-commerce can hurt the stores' sales.
Business Overview
Zumiez, Inc. is a retailer of apparel, footwear, accessories, and hard goods (Skateboard equipment) for young men and women. The company sells its products through two brands, Zumiez and Blue Tomato. Zumiez operates in North America, Europe, and Australia, but primarily focuses on the United States.
The company has 721 total stores, including 602 in the United States, 52 in Canada, 13 in Australia, and 54 in Europe. The company also has multiple e-commerce websites for online shoppers.
Source: Zumiez.com
Zumiez is Growing at an Average Rate, but has Little Debt on its Balance Sheet
While Zumiez is not growing as fast as some other companies are, it does have very low debt compared to its competitors. Furthermore, the company is able to generate a sufficient amount of cash and spends little on capex.
The Company's Revenue and Earnings aren't Anything Special
From 2015-2020, the company's total revenue increased from $804.18 million to $990.65 million. This calculates to an average annual increase of 4.37%. Excluding the slight drop caused by the pandemic, the company's revenue grew by 6.42% from 2015-2019.
Zumiez's gross profit in 2020 came to $350.02 million, declining slightly from 2019's $366.56 million. However, this is still in line with the company's consistent 35% gross margin. There is a possibility this will decrease due to a rise in cotton prices, which we will cover later in the article.
To get to the net income, the gross profit is decreased massively due to high SG&A costs. The company's average net income margin since 2015 has been 4.96%. The SG&A costs include many of the expenses to run the stores, including wages, shipping costs, and more. A huge thing to mention is the shipping costs. Due to recent constraints, shipping costs have been increasing drastically. There is a possibility that Zumiez's SG&A expense could see a rise due to this external factor, leading to a decrease in the net income margin.
The Company has a Strong Balance Sheet with Lots of Cash and Low Debt
Zumiez has a strong amount of assets, especially current assets. The company currently has a current ratio of about 2.7. Furthermore, the company's $535.28 million in current assets includes $375.54 million in cash, as well as $134.35 million in inventory. The company is most likely going to use this cash to open more stores, as well as continue their share buyback plan.
The company has a low amount of debt compared to other metrics. Its current Total Debt/EBITDA sits at 1.55, which is far below the industry median of 3.84. The company also has a negative net debt since the balance sheet only has $289 million in total debt and $375.54 million in cash.
The company's retained earnings have also been increasing steadily. From 2015-2020, Zumiez's retained earnings increased from $177.19 million to $380.03 million. This was caused by the company consistently growing its earnings and not paying a dividend.
Another thing I'd like to mention is the company's tangible book value per share. The company does not have much in intangible assets, causing the tangible book value per share to be $18.56. At the time of writing this article, Zumiez is trading at $40.70.
Zumiez is Able to Generate a Decent Amount of Cash and Maintain Low Capex
From 2015-2020, Zumiez's operating cash flows have increased from $49.32 million to $138.41 million. This is because of consistently adding back in high values of non-cash items. In 2020, the company recorded $72.38 million in non-cash items. Conversely, the company's cash flow is decreased by consistently negative changes in working capital. In 2020, Zumiez recorded a change in working capital of -$30.36 million.
The company also spends little on capex. In 2020, the company spent $9.06 million on capex. However, management has stated this is expected to increase to around $20-22 million because of the opening of new stores in the upcoming year.
The increasing operating cash flows and little capex can cause Zumiez to have a high free cash flow and may lead to higher valuations in a DCF.
The Short-Term Catalysts and Risks will Most Likely Offset Each Other
Zumiez has historically benefitted off of two seasonal events, those being back to school shopping and winter holidays. Since the winter holidays are upcoming and will most likely drive Q4 numbers higher, this could be a great catalyst for the company's stock.
However, rising cotton prices will likely increase the company's cost of goods sold. In fact, the price of cotton just hit its 10-year high. Many retailers are expecting this to come into play in Q4 of 2020, including Levi Strauss (LEVI) showing lots of concern. This rise in price was caused by an increase of global demand tied with restrictions on cotton exports. Weather-related events have lowered cotton production in the United States, as well as India restricting exports to focus on domestic partners.
Source: Seeking Alpha
All in all, even though Zumiez is expecting to see higher sales during the winter holidays, the rise in cotton prices are most likely going to increase the cost of goods sold for the company and lower gross margins, causing an offset to the higher revenue.
The Long-Term Health of the Company May be Affected by E-Commerce
As mentioned previously, the company is expecting to see a rise in capex by opening more stores. Specifically, Zumiez is expecting to open 22 more stores, including 5 in North America, 12 in Europe, and 5 in Australia. This is generally a good sign for the company because management believes they have the ability to open more stores, leading to more revenue and earnings to be generated. However, it is important to note that management expects to close approximately 5-6 stores during the upcoming year.
Another piece of data that is likely to benefit the company is the expected rise in disposable income. From 2021-2026, per capita disposable income is expected to rise at an annual rate of 2.5%. With more money to spend, consumers are likely to buy more apparel, thus benefitting Zumiez.
A possible threat to Zumiez is the shift to online shopping. With e-commerce becoming more popular over time, Zumiez's brick & mortar strategy may need to be adjusted. As mentioned earlier, Zumiez does have multiple online stores, including Zumiez.com, FastTimes.com.au, and Blue-Tomato.com. To combat this shift to online shopping, Zumiez may need to focus more on these websites.
Valuation & Competitors
When comparing Zumiez to its competitors, it mostly has strong ratios. The EV/Revenue ratio is in line with the industry at 0.78. The EV/EBITDA multiple is far below the industry median of 9.44, sitting at 4.84. The P/E is below the industry's median of 9.42, hovering around 8.34. The Debt/EBITDA ratio is far below the industry's median at 3.84, which is 1.55. The only ratio that is above the industry's median is P/S. Zumiez P/S is 0.89, while the industry's median is 0.58.
Source: Created by Author
When finding the fair value of Zumiez, a relative valuation was used. A fair value of $45.47 was calculated by averaging EV/Revenue, EV/EBITDA, P/E, and P/S price targets.
By using consensus estimates for 2022 revenue, EBITDA, and EPS and applying each industry median ratio, the price targets of $41.04, $70.15, $43.60, and $27.11 were calculated. Averaging these together came to a final price target of $45.47, which implies an upside of 11.73%.
What Should Investors Do?
Overall, Zumiez has both short-term and long-term benefits and risks that balance each other out. Due to this, as well as the stock not having a large margin of safety, buying Zumiez's stock may not be best for investors. However, Zumiez may pose a great investment after the pandemic finally ends and commodity, supply chain, and e-commerce threats subside. Therefore, I believe giving Zumiez a Neutral rating is appropriate.
