Zumiez's Q1 Loss Narrows, Comparable Sales Down Y/Y

Zumiez Inc. ZUMZ reported better-than-expected results in first-quarter fiscal 2024. Also, sales beat the Zacks Consensus Estimate. The bottom line compared favorably with the respective year-ago fiscal quarter's reported figure, while the top line dipped year over year.
Over the past three months, shares of this Zacks Rank #3 (Hold) company have gained 19.3% compared with the industry's 13% growth.

Results in Detail

Zumiez posted a quarterly loss of 86 cents per share, narrower than the Zacks Consensus Estimate of a loss of $1.14 per share. The bottom line improved from a loss of 96 cents per share reported in the year-earlier quarter.
Total net sales of $177.4 million surpassed the consensus estimate of $174 million but dipped 3% from the year-ago period's reading. Comparable sales also dropped 2.4%, affected by lower transactions, somewhat offset by growth in dollars per transaction. Dollars per transaction were up on increased average unit retail and rise in units per transaction.

We note that results were driven by North America as comparable sales for the region were positive for the first time since 2021, led by the men's business. The men's business was up year over year for the second straight quarter. The company's women's business performed well while hardgoods was under pressure. Zumiez witnessed higher average unit retail and units per transaction, offset by a decline in transactions. Merchandise margins were higher year over year. Growth in North America was offset by lower sales across the international markets.
From a regional perspective, North America's net sales were $142.7 million, down 0.9% from the year-ago fiscal quarter's tally. Other international sales, comprising Europe and Australia, were $34.7 million, down 10.8% from the year-ago quarter's level. We had anticipated North America's net sales to be $140.1 million and the other International sales to be $31.6 million.
Excluding the impacts of foreign currency translations, North America's net sales fell 0.9%, while other International net sales slipped 10.6% from the fiscal 2023 readings. Comparable sales for North America inched up 0.3%, while the metric for other international tumbled 13%.
Regarding sales by category, men's was the largest segment to report positive comparable sales, followed by women's. However, hardgoods was the negative comping category, followed by accessories and footwear.

Margins & Costs

Gross profit jumped 5.1% year over year to $51.9 million from $49.4 million reported in the year-ago quarter. The gross margin expanded 230 basis points (bps) to 29.3%. The improvement in the gross margin stemmed from several factors. These factors included an increase of 70 bps in product margin, 20 bps of leveraged distribution center costs and 70 bps of lower shipping costs. Further, a 20-bps fall in store occupancy costs and gains of 60 bps from a mix shift away from service and related shipping revenues in the year-ago results aided the gross margin. We anticipated the gross margin to remain flat year over year at 27%.
Selling, general and administrative (SG&A) expenses rose nearly 2% from the year-ago fiscal quarter's tally to $72.1 million. As a percentage of sales, SG&A expenses increased 190 bps to 40.6% from the year-ago quarter, owing to a 60-bps increase in annual incentive compensation and 50 bps rise related to the timing of employee training, which is likely to be favorable in the fiscal second quarter. Further, wage rate increases coupled with 50 bps of non-store wages and 40 bps of store wages lead to higher SG&A as a rate of sales. We anticipated SG&A expenses to rise 6.9% to $75.6 million and the metric, as a rate of sales, to increase 530 bps year over year to 44%.
Zumiez reported an operating loss of $20.2 million, which is narrower than the operating loss of $21.4 million recorded in the year-ago fiscal quarter. Our model expected an operating loss of $29.2 million.

Financial Updates

As of May 4, ZUMZ had cash and current marketable securities of $146.6 million compared with $155.3 million as of Apr 29, 2023. The decline was due to capital expenditures of $17.5 million, somewhat offset by cash flow from operations of $9.1 million. It had no debt at the end of the quarter.
Total shareholders' equity was $337.3 million. The company ended the fiscal first quarter with $146.8 million in inventory, down 0.7% from the year-ago quarter's figure.
On Jun 5, the company approved repurchases of up to a total of $25 million of common stock. This program is likely to continue through Jun 30, 2025, unless the period is extended or shortened by the company's board.
As of Jun 1, Zumiez operated 751 stores, including 593 in the United States, 47 in Canada, 86 in Europe and 25 in Australia. Management intends to open roughly 10 stores in fiscal 2024, comprising up to three stores in North America, three in Europe and four in Australia. The company anticipates closing 20-25 underperforming stores.

Other Updates

For the fiscal second quarter spanning four weeks and concluding on Jun 1, 2024, net sales rose 1.8% compared with the same four-week period ending May 27, 2023. When examining comparable sales for the four weeks ending Jun 1, there was a drop of 0.2% from the comparable four-week period ending May 27, 2023.
Regionally, net sales in North America for the same period climbed 2.5%, while sales in other International regions fell 1.1% year over year. Excluding the foreign currency translation impacts, North America sales for the four weeks ended Jun 1, 2024, rose 2.6% while other International sales dipped 0.4% compared with 2023. Comparable sales for North America increased 1.5% for the four weeks ended Jun 1 while the metric for International business decreased 7.3%.
In terms of category, the men's category exhibited the highest growth in comparable sales, with women's coming in next for fiscal May 2024. On the other end of the spectrum, the accessory category reported the company's largest decline in comparable sales, followed by hardgoods and footwear. The comparable sales were hurt by a fall in transactions, partly offset by a rise in dollars per transaction. Dollars per transaction increased for the four-week period on higher average unit retail and units per transaction.
The company launched more than 100 brands in 2022 and more than 150 brands in 2023, with plans to launch similar levels this year. It has also been expanding its Private Label brand portfolio in 2024.

Outlook

Zumiez provided guidance for the fiscal second quarter. The quarter will gain from the calendar shift, pulling a week of huge back-to-school volumes into the quarter and out of the fiscal third quarter. Adjusting this shift, management estimates sales to be negative low single digits to flat compared with the same week in the earlier year.
The company anticipates net sales to be between $199 million and $204 million, reflecting an increase in the range of 2.5-5% year over year. It expects consolidated operating loss, as a rate of sales, to be between negative 4.5% and negative 3%, with product margins to be slightly positive. It envisions a loss per share of 30-40 cents compared with a loss of 44 cents a share in the year-ago quarter.
Regarding the fiscal year outlook, management believes that there will be uncertainty and volatility in the macro landscape. Considering this, it has refrained from providing any specific financial guidance. The company has been witnessing multiple negative sales trends in the past two years, owing to the pandemic, inflation, competition for discretionary spending, negative brand trends and general global instability.
However, management believes that such negative business trends have started to moderate. Impressively, the company's men's category has been positive in the last two quarters, while the women's category has turned positive this quarter. As a result, it projects total sales growth and expects an increase in product margin for the fiscal year. It further anticipates leveraging SG&A costs year over year and returning to positive operating margins. The effective tax rate is likely to be around 47%.
Management forecasts capital expenditures in the range of $14-$16 million compared with $20.4 million in fiscal 2023 and $25.6 million in fiscal 2022. The reduction will be mainly due to lower planned store openings. Depreciation and amortization, excluding non-cash lease expenses, are expected to be $23 million, which is consistent with the preceding year. Management projects the company's diluted share count to be roughly 19.8 million.

Key Picks

We have highlighted three better-ranked stocks, namely Abercrombie ANF, Gap GPS and Deckers DECK.
Abercrombie, a leading apparel retailer, currently sports a Zacks Rank #1 (Strong Buy). ANF delivered an earnings surprise of 210.3% in the trailing four quarters.
The Zacks Consensus Estimate for Abercrombie's financial-year sales indicates growth of 10.5% from the year-ago reported figure.
Gap, a clothing and accessories retailer, currently sports a Zacks Rank of 1. GPS delivered an average earnings surprise of 202.7% in the last four quarters.
The consensus estimate for Gap's current financial-year earnings per share implies growth of 17.5% from the year-ago reported figure.
Deckers, a footwear and accessories dealer, currently carries a Zacks Rank #2 (Buy). DECK delivered an earnings surprise of 42.8% in the trailing four quarters.
The Zacks Consensus Estimate for Deckers' current financial-year sales indicates growth of 10.8% from the year-ago reported figure.

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