Zumiez Defies Retail Weakness Story With Q2 Beat

Zumiez Inc. ZUMZ's second quarter earnings report was strong enough to warrant an upgrade from Wall Street.

B. Riley & Co.'s Jeff Van Sinderen upgraded Zumiez's stock from Neutral to Buy with a price target boosted from $17 to $18 as the fashion retailer proved it's a standout within the overall weak retail sector.

Zumiez's strategy of using micro-merchandising and specific local brands makes it a standout in the fashion space, Van Sinderen argued in his note. This also offers the company a strong competitive advantage and reason for consumers to visit both its online and physical stores which implies it will be "one of the last retailers standing."

Meanwhile, Zumiez continues to roll out its customer engagement suite retail technology software package, which is a "wise" investment even though it will result in higher SG&A spend, Van Sinderen said. Over the longer-term this will help to boost the company's operating margins to a high single-digit level.

Zumiez is also expected to introduce new brands at the rate of approximately 100 per year so it can continue to hold on to its "uniqueness and remain on trend." Of particular note, the company's most popular brand at any one point accounts for just 6 to 9 percent of total sales.

Bottom line, Zumiez's stock multiple has been pressured not on comps but from deleverage of SG&A but this "should morph into leverage" in 2018.

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