Zumiez (ZUMZ) Q3 Earnings Beat, Stock Dips on Soft Q4 View
Zumiez Inc. ZUMZ reported third-quarter fiscal 2018 results, wherein both the top and bottom line improved year over year and came ahead of the Zacks Consensus Estimate. While this marked the company’s third consecutive earnings beat, sales topped estimates for the 10th straight quarter. Additionally, November marked the 11th straight month of positive comparable sales (comps) this year.
However, management’s bearish outlook for the fourth quarter of fiscal 2018 disappointed investors. Also, shares of the company declined more than 6% during the after-market trading session on Dec 6. In the past three months, this Zacks Rank #3 (Hold) stock has lost 34%, underperforming the industry’s 12.2% decline.
Zumiez delivered earnings of 55 cents per share, exceeding the Zacks Consensus Estimate and the year-ago quarter figure of 48 cents.
Net sales advanced 1.2% year over year to $248.8 million, marginally beating the Zacks Consensus Estimate of $248.6 million. The company’s sales gained from comps growth and the addition of nine stores since the end of third quarter last year. However, this was partly offset by the loss of $9.6 million contributions from the calendar shift, which led to the occurrence of the back-to-school season in second-quarter fiscal 2018 compared with the third quarter of fiscal 2017.
Zumiez Inc. Price, Consensus and EPS Surprise
Quarterly comps grew 4.8%, within the company’s forecast of 4-6% growth. This marked its ninth straight quarter of positive comps and increase in transactions. Comps benefited from higher transaction volume as well as increase in dollars per transaction. Strength in the men’s, women’s and footwear categories also aided comps growth, partly negated by lower comps across hardgoods.
Notably, the favorable comps trend continued in November. Comp for the four-week period (ended Dec 1, 2018) jumped 2.3% compared with a 7.8% increase registered in the year-ago quarter. Zumiez also reported sales growth of 9.4% to $84.4 million in the same month.
While gross profit increased 4.2% to $86.9 million in the fiscal third quarter, gross margin expanded 100 basis points (bps) to 34.9%. Gross margin expansion can be attributed to 70 bps improvements in inventory shrinkage and product margin, partly offset by 30 bps increase in shipping and fulfillment cost.
Zumiez’s selling, general and administrative (SG&A) expenses increased 6.1% to nearly $68.5 million, while SG&A expense, as a percentage of sales, expanded 130 bps to 27.5%. The uptick was driven by the movement of $9.6 million in revenues from third-quarter fiscal 2018 in to the fiscal second quarter due to calendar shift mentioned earlier. This, in turn, resulted store operating costs deleverage, higher corporate expenses and increase in the accrual of annual incentive compensation.
Consequently, operating income amounted to $18.4 million, down 2.1% from $18.8 million in the prior-year quarter.
Zumiez ended the reported quarter with cash and marketable securities of $127.9 million, up 49.1% year over year. The upside was driven by cash flow from operations, partly offset by capital expenditures. Total shareholders’ equity at the end of the third quarter was $368.8 million.
Further, the company generated $17.1 million as cash flow from operations in the first nine months of fiscal 2018.
For fiscal 2018, the company anticipates capital expenditures of about $20 million compared with $24 million last year.
As of Dec 1, 2018, the company operated 708 stores, including 610 in the United States, 50 in Canada, 41 in Europe and seven in Australia.
The company remains on track to open 13 stores in fiscal 2018, including seven in Europe, one in Australia and five in the United States. Of these, it has opened 12 stores year to date. This leaves the company with the target of opening just one store in the fourth quarter of fiscal 2018.
Management remains impressed with Zumiez’s robust third-quarter show and strong back-to-school season. Moreover, the company has kick started the fourth quarter on a solid note driven by robust demand during the Black Friday weekend and Cyber Monday. Further, the company’s differentiated product offering, seamless multi-channel shopping experience, and superior customer service positions it well for a strong finish to the year and continued success over the long term.
However, the company’s disappointing outlook for fourth-quarter fiscal 2018 lagged analyst expectations. It expects net sales of $295-$301 million, with comps growth of 0-2%. Consolidated operating margins are projected to be 11.3-11.6% of net sales compared with 12% in the year-ago quarter.
Consequently, the company projects earnings of $1.02-$1.08 per share compared with 80 cents in the prior-year quarter. Notably, the company’s sales and earnings projections lie significantly below the Zacks Consensus Estimate of $313.4 million and $1.14, respectively.
Moreover, Zumiez revealed that the additional 53rd week in fiscal 2017 will be detrimental to sales and earnings growth rates in the fourth quarter and fiscal 2018. The extra week is expected to affect fiscal 2018 comparisons from the prior-year figure by roughly $9.1 million for sales, $1.9 million for operating profit and 5 cents per share for earnings.
Nevertheless, the company reiterated its fiscal 2018 guidance. It expects comps to grow in the mid-single digit range, while operating margin is anticipated to increase in the mid-to-high teens range. Moreover, earnings per share is anticipated to be within $1.64-$1.70.
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