MARKET WATCH: Zumiez’s Annual Report

ADMIN

• March 31 2009
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The Importance of Executing your Strategy

I’ll get to the numbers below. But first let’s spend a minute on Zumiez’s strategy and how they compete.  They list five competitive strengths. Their discussion starts on page 2 of the 10K HERE if you want more detail.

First is “Differentiated Merchandising Strategy.” That is, they’ve got a wide selection of brands in both hard and soft goods and have the ability to recognize new trends and change brands quickly. Second is “Deep Rooted Corporate Culture.” This means attracting, training, and retaining employees who are “passionate and knowledgeable” about their products and promoting from within.

The last three are “Distinctive Store Experience, Disciplined Operating Philosophy, and High-Impact Integrated Marketing Approach.”

When you read Zumiez’s description of its competitive strengths you think, “Sure, that all makes sense. “   And it does. There are no secrets there. But what impresses me is the time span over which they’ve consistently executed their strategy, and the attention to nuts and bolts it requires. At the end of the year, they had 1,650 full time and 2,000 part time employees.  350 of those were at the home office and the rest at stores. The number of part timers fluctuates seasonally between 1,800 and 3,400.

Considering the hiring, training and evaluating that has to go on all the time just to staff new stores- especially since they want those store managers to come from within the organization. And who’s going to replace them when they move to the new store? There’s no retailer in this industry that doesn’t bemoan the difficulty of getting and keeping good people. In some ways, it’s easier for Zumiez because they can offer a clear career path often not available in small retailers. But the task of finding and keeping enough “passionate and knowledgeable” people is huge.

Then there’s the “Disciplined Operating Philosophy” they talk about in one paragraph.  Think about what that implies for the development and investment in information systems.  “Differentiated Merchandising Strategy?”  How do you find all these new brands, decide to try them, decide how big to go with them and when to get rid of them if they don’t work?

Any larger business has to deal with some of these same issues. And I’m certain that not every hire Zumiez has made, no matter how carefully evaluated, has worked out, not every new brand was a big success, and not every management report is on time with exactly the right information.

Zumiez, like every other business, place a bet on some premises- these five competitive strategies- and has succeeded with them.  It’s important that they picked the right ones (though never believe they can’t change) but it’s even more important that they were committed to them and work every day improve how they implement them.

I’d rather my premises are off a bit and that my execution is good any day of the week.

Zumiez has been around since 1978.  At the end of their fiscal year on January 31, 2009, they had 343 mostly mall stores in 31 states (69 in California) that averaged around 2,900 square feet in size. They are planning to open 37 new stores in the year ending January 31, 2010 compared to 58 in the previous year and 50 the year before that. But this year, “Unlike previous years, the number of anticipated store openings may increase or decrease due to market conditions.”

Well, any management team that wasn’t prepared to make adjustments based on current economic conditions would be not quite in touch with reality.

Numbers

The balance sheet has strengthened since last year. There’s no long term debt, and the only long term liability at all is $18 million for deferred rent and tenant allowances, which you’d expect. The current ratio rose from 3.12 to 4.59 and total liabilities to equity fell from 0.40 to 0.31. Total assets were up about $17 million to $233 million and shareholders’ equity ended the year at $177 million, up from $155 million.
One question you might ask if you were curious is why a retailer has $4.7 million in receivables. There’s almost a million bucks due from landlords for improvements, $2 million to be received from the credit card companies for recent sales, $324,000 in vendor credits, $257,000 due from employees and few other small things.

Other accrued liabilities of $7.6 million include general payables of $3.5 million, $3 million for gift cards that haven’t been used, and $1.8 million in sales taxes that haven’t been paid yet.

There’s just nothing too much to analyze on the balance sheet that’s interesting. Given what I often find interesting, that’s good.

Sales for the year rose from $381 to $408 million- up 7.1%.  30.6% of that was men’s, 14.2% women’s, and 55.2% accessories and other. The accessories and other category includes footwear and hard goods. The comparative numbers for the previous year were 42.4%, 15.4% and 52.2%. Private label was 15% of total sales and no single brand accounted for more than 6.9% of sales. Ecommerce represented 1.5% of sales, up from 1.1% and 0.8% the two previous years. Approximately 58% of net sales and 76% of net income occurred in the third and fourth quarters.

Net Sales in the first, second, and third quarters were all up compared to the same quarters the previous year. Sales in the fourth quarter, however, fell by a little more than $1 million to $125.5 million.  Here’s how they describe what happened to sales trends over the last two years:

“Beginning in September 2007, we saw our same store sales start to decline in California, Nevada and Arizona. Our new store sales in these states, and Florida, were also negatively affected by the deteriorating macroeconomic environment in those states. Those trends continued into fiscal 2008 and beginning in September 2008, our stores in the entire western half of the United States began experiencing same store sales declines. Sales from our stores in Florida and the western half of the United States accounted for approximately 60% or our total net sales in fiscal 2008.”

Gross profit margin for the year fell to 32.9% from 35.9% the previous year. It was 32.4% in the fourth quarter compared to 38.4% in the same quarter the previous year. Comparable store sales fell by 6.5% for the year compared to an increase of 9.2% the previous year and 14.5% the year before that.  In the fourth quarter, comparables store sales fell 13.4% compared to growth of 4% in the same quarter the prior year.

Selling, general and administrative expenses rose from $98 to $110 million, or by 12.2%.  Advertising expense, included in that number, was $763,000. As a percentage of net sales, it rose from 25.7% to 26.9%.  The dollar increase “was primarily the result of costs associated with operating new stores as well as increases in infrastructure and administrative staff to support our growth partially offset by a decrease in stock-based and incentive compensation expenses.”

Net income for the year fell 32.1% from $25.3 to $17.2 million. This represented 4.2% of sales compared to 6.6% the prior year.

Zumiez (like everybody else) expects this fiscal year to be very challenging. They are planning conservatively, lower capital expenditures, controlling costs and purchasing appropriately lower levels of inventory.  However, they expect their cash flow to be positive and that there will be no borrowings under their line of credit.

Nothing like a strong balance sheet to position you to do well when things improve.

Jeff Harbaugh is a consultant for the action sports industry and works with companies to identify and focus on critical business issues and opportunities fundamental to the bottom line. For more information, visit www.jeffharbaugh.com.