Zumiez Fourth-Quarter EPS Beat Expectations but First Quarter Will Be Dampened by Markdowns

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Zumiez’s fourth-quarter adjusted EPS declined 10%, to $0.68, above guidance of $0.61 to $0.64, our estimate of $0.61, and consensus of $0.62.

With sales already reported, adjusted operating margin declined 230 basis points, to 14.0%, including a 100-basis-point contraction in adjusted gross margin to 37.3% (better than consensus of 36.7% and mainly reflecting deleveraging on negative comps) and a 130-basis-point increase in SG&A to 23.3%.

Despite a soft end to 2013, Zumiez delivered record North American product margins in a highly promotional year, a strong testament to both the relevancy of the concept as well as the caliber of management.

Similar to many other retailers, Zumiez issued first-quarter guidance below expectations, with comps expected to decline at a low-single-digit rate, in keeping with our estimate for a decline of roughly 3% and consensus expectations for a 1% decline. However, firstquarter EPS are anticipated to be well below our estimate of $0.09 and consensus of $0.11, with management projecting adjusted EPS of $0.00 to $0.05 (excluding $0.02 of amortization of intangibles) on a 150- to 200-basis-point deterioration in merchandise margin as the company clears out carryover inventory from the fourth quarter (we and consensus had projected gross margin contraction in the 40- to 50-basis-point range). Looking further out, management encouragingly indicated that early reception of spring product in places with better weather has been fine.

Management expects to open 55 new stores in 2014, in line with our projection and representing growth of about 10%, with 50 new units planned for North America and 5 for Europe (Austria and Germany). SG&A is anticipated to grow at a lesser rate than the 13% experienced in 2013, and full-year product margins are expected to decline moderately, reflecting pressure in the first quarter as well as product mix shift.

Despite lowering our first-quarter estimate, we maintain our 2014 estimate of $1.55, up 6% and below consensus of $1.59. Our estimate is predicated on a 1% same-store sales gain for the full year, and, although visibility remains low, we are optimistic that comps will inflect into sustainably positive territory by the back half of the year against easier comparisons and as the company begins to implement CRM initiatives with its loyalty program Stash (which added 1 million members in 2013).

At 16 times our calendar 2014 EPS estimate and an EV to EBITDA just over six times, we continue to see value in Zumiez shares for investors with longer-term time horizons, although investors with shorter time horizons should be aware that comps will likely significantly soften in March, given tougher comparisons and a shift in Easter to April.

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