Zumiez (ZUMZ) Down 20% Since Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Zumiez Inc. ZUMZ. Shares have lost about 20% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Zumiez Q4 Earnings & Sales Beat Estimates

Zumiez delivered robust fourth-quarter fiscal 2016 results, wherein both the top and bottom line grew year over year and topped estimates. Notably, this marked the company’s sixth straight quarter of earnings and sales beat.

Q4 Highlights

Zumiez posted earnings of 74 cents per share for the quarter, which surged 39.6% year over year, coming much ahead of the Zacks Consensus Estimate of 67 cents. The bottom line gained from successful execution of the company’s omni-channel and localization initiatives, along with favorable taxes.

Net sales advanced 8.7% year over year to $263.6 million, surpassing the Zacks Consensus Estimate of $262 million. The improvement in the top line was mainly attributable to solid comparable store sales (comps) growth and store additions. Further, constant investments in merchandise offerings, sales teams and omni-channel capacities, drove holiday season sales. Also, these factors continue to place Zumiez, Blue Tomato and Fast Times well, amid a competitive landscape.

Quarterly comps jumped 5.1%, backed by higher transaction volume, somewhat offset by a drop in dollars per transaction, with the latter being a common obstacle in the retail space. Further, comps benefitted from robust performance of the men’s, accessories and junior’s categories.

However, the trend seemed to have reversed in February, as reflected by Zumiez’s monthly sales results. Concurrent with the fourth-quarter results, Zumiez reported its sales data for February, which broke its five month long trend of posting positive comps. Comps for February decreased 3.1%, compared with an 8.6% plunge recorded a year-ago. Moreover, net sales for the four-week period ended Feb 25, slipped 0.8% year over year to $51.5 million.

In the reported quarter, gross profit jumped 11.6% to about $94 million, with gross margin expanding 90 basis points (bps) to 35.7%, aided by higher product margins, reduced fixed expenses and occupancy cost leverage, on greater sales.

Zumiez’s selling, general and administrative expenses increased 5.4% to nearly $66.1 million, while as a percentage of sales, the same contracted 90 bps to 25%.

Thanks to the gross margin improvement, Zumiez’s operating profit of $27.9 million grew 29.8% year over year, with operating margin increasing 180 bps to 10.7%.

Financial Update

As of Jan 28, Zumiez’s cash and marketable securities were $78.8 million, up 4.2% year over year, backed by cash flow from operations of nearly $48.5 million, somewhat offset by share buybacks of $21.6 million and capital expenditures worth $20.4 million. Total shareholders’ equity at the end of the year was $307.1 million.

For fiscal 2017, the company expects capital expenditures in a range of $24–$26 million.

Store Update

During fiscal 2016, Zumiez introduced 22 North American and six European stores, alongside acquiring five Australian stores. Also, Zumiez shuttered down six stores in fiscal 2016, thus taking its net store openings for the year to 27. These actions took the total store count to 685 as of the end of fiscal 2016, including 651 in North America, 29 in Europe and five Fast Times stores in Australia.

In fiscal 2017, the company plans to introduce 18 new stores, including four in Europe and two Australian stores.

Guidance

Management remains pleased with its fiscal 2016 performance, amid a challenging retail scenario. In the face of macroeconomic headwinds like volatile consumer patterns, Zumiez remains on track with its cost-control efforts and multi-year growth targets, which are aimed at generating greater profits and shareholder-value in the long run.

However, based on the current situation and the retail hurdles, management issued a drab outlook for the first quarter of fiscal 2017. The company expects net sales for the quarter in the $178–$182 million range, while comps growth is expected in a range of flat to 2% growth, over the same period.

Further, consolidated operating margins are projected to range from negative 4% to negative 5%. Finally, for the first quarter, the company projects a loss of $0.17–$0.21 per share.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed a downward trend in fresh estimates. There have been three revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 445% due to these changes.

Zumiez Inc. Price and Consensus

 

Zumiez Inc. Price and Consensus | Zumiez Inc. Quote

VGM Scores

At this time, Zumiez's stock has a great Growth Score of 'A', though it is lagging a bit on the momentum front with a 'C'. Charting a somewhat similar path, the stock was allocated a grade of 'A' on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of 'A'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value and growth investors than momentum investors.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift.  It's no surprise that the stock has a Zacks Rank #4 (Sell). We are looking for a below average return from the stock in the next few months.

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