Zumiez(US:ZUMZ)2021-03-15 20:01markdown [Part I](index=3&type=section&id=PART%20I) [Business](index=3&type=section&id=Item%201.%20Business) Zumiez Inc. is a global specialty retailer of apparel, footwear, and accessories, operating 721 stores and e-commerce sites for action sports and youth lifestyles - As of January 30, 2021, Zumiez operated **721 stores** globally: **602** in the U.S., **52** in Canada, **54** in Europe, and **13** in Australia under the brand names Zumiez, Blue Tomato, and Fast Times[17](index=17&type=chunk) - The company's growth strategy includes generating sales growth through existing channels, enhancing brand awareness via marketing, and opening approximately **22** new stores in fiscal 2021, with a focus on international markets[31](index=31&type=chunk)[32](index=32&type=chunk)[33](index=33&type=chunk) Merchandise Mix Fiscal Years 2018-2020 | Category | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | **Private Label % of Net Sales** | 11.4% | 11.3% | 13.1% | | **Largest 3rd Party Brand % of Net Sales** | 9.4% | 13.9% | 12.4% | Store Activity (Fiscal Years 2018-2020) | Fiscal Year | Stores Opened | Stores Closed | Total Stores End of Year | | :--- | :--- | :--- | :--- | | 2020 | 12 | 9 | 721 | | 2019 | 16 | 5 | 718 | | 2018 | 13 | 4 | 707 | - The business is seasonal, with approximately **60%** of net sales in fiscal 2020 occurring in the third and fourth quarters, driven by back-to-school and holiday shopping seasons[56](index=56&type=chunk) [Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces multiple risks including the COVID-19 pandemic, volatile fashion trends, intense competition, and economic dependency - The COVID-19 pandemic poses a material risk through potential store closures, supply chain disruptions, and negative impacts on consumer spending and confidence[66](index=66&type=chunk)[67](index=67&type=chunk)[68](index=68&type=chunk) - The company's success is highly dependent on its ability to anticipate and react to rapidly changing fashion trends; failure to do so could result in lower sales and excess inventory[74](index=74&type=chunk) - A heavy reliance on mall-based stores creates a risk associated with declining consumer traffic in malls, which could be exacerbated by economic downturns, competition, or health emergencies[80](index=80&type=chunk) - The business is highly seasonal, with a majority of sales and profits occurring in the third and fourth quarters. Negative factors during this period could have a material adverse effect on full-year results[85](index=85&type=chunk) - Cybersecurity risks are a significant concern. A failure to protect confidential and personal data could result in litigation, penalties, and reputational damage[89](index=89&type=chunk) [Unresolved Staff Comments](index=21&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the Securities and Exchange Commission - None[124](index=124&type=chunk) [Properties](index=21&type=section&id=Item%202.%20Properties) The company operates 721 leased stores totaling 2.1 million square feet, owning its home office and domestic distribution center, and leasing international facilities - All **721 stores** are occupied under operating leases, totaling approximately **2.1 million square feet**[125](index=125&type=chunk) - The company owns its **63,071 square foot** home office in Lynnwood, WA and a **168,450 square foot** distribution center in Corona, CA[125](index=125&type=chunk)[126](index=126&type=chunk) - Leased distribution centers support operations in Canada (**17,168 sq ft**), Europe (**112,112 sq ft**), and Australia (**10,010 sq ft**)[127](index=127&type=chunk) [Legal Proceedings](index=21&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in routine litigation not expected to materially affect its financial condition or operations - The company is involved in routine litigation incidental to its business, which is not expected to have a material adverse effect[128](index=128&type=chunk) [Mine Safety Disclosures](index=21&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company's operations - Not applicable[129](index=129&type=chunk) [Part II](index=22&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=22&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Zumiez common stock trades on Nasdaq, with no dividends declared, and a **$100.0 million** share repurchase program authorized in December 2020 remains available - The company's common stock trades on the Nasdaq Global Select Market under the symbol "ZUMZ"[131](index=131&type=chunk) - No cash dividends have been declared on common stock to date[136](index=136&type=chunk) - In December 2020, the Board authorized a repurchase of up to **$100.0 million** of common stock, which was fully available at the end of the fiscal year[137](index=137&type=chunk) [Selected Financial Data](index=24&type=section&id=Item%206.%20Selected%20Financial%20Data) This section summarizes five years of financial data, showing fiscal 2020 net sales of **$990.7 million** and net income of **$76.2 million**, despite COVID-19 impacts Selected Financial Data (2018-2020) | (in thousands, except per share data) | Fiscal 2020 | Fiscal 2019 | Fiscal 2018 | | :--- | :--- | :--- | :--- | | **Net sales** | $990,652 | $1,034,129 | $978,617 | | **Operating profit** | $96,938 | $85,807 | $61,078 | | **Net income** | $76,227 | $66,881 | $45,205 | | **Diluted EPS** | $3.00 | $2.62 | $1.79 | | **Comparable sales increase** | 13.6% | 4.9% | 5.6% | | **Number of stores** | 721 | 718 | 707 | - Fiscal 2020 results were significantly impacted by the COVID-19 pandemic, during which stores were open for approximately **78.4%** of the possible days[142](index=142&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses fiscal 2020 financial performance, highlighting record profitability despite sales decrease, strong liquidity, and plans for fiscal 2021 growth [Overview](index=26&type=section&id=Overview) Despite a **4.2%** sales decline in fiscal 2020, Zumiez achieved record profitability with **$3.00 diluted EPS**, driven by strong margins and expense control, with plans for **22** new stores in fiscal 2021 Fiscal 2020 vs. 2019 Performance | Metric | Fiscal 2020 | Fiscal 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales (in thousands) | $990,652 | $1,034,129 | -4.2% | | Operating profit (in thousands) | $96,938 | $85,807 | 13.0% | | Operating margin | 9.8% | 8.3% | +150 bps | | Diluted earnings per share | $3.00 | $2.62 | 14.5% | - For fiscal 2021, the company plans to open approximately **22** new stores and anticipates growing operating margins for the full year compared to fiscal 2020[150](index=150&type=chunk)[151](index=151&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) Fiscal 2020 saw a **4.2%** net sales decrease to **$990.7 million**, offset by **13.6%** comparable sales growth, with improved operating margin to **9.8%** and net income rising to **$76.2 million** - In fiscal 2020, net sales decreased **4.2%** to **$990.7 million**, but comparable sales increased **13.6%**, driven by strong e-commerce performance during store closures[164](index=164&type=chunk) - Gross profit as a percentage of sales decreased by **10 basis points** to **35.3%** in fiscal 2020, primarily due to increased web fulfillment costs, partially offset by higher product margins and lower inventory shrinkage[167](index=167&type=chunk) - SG&A expenses as a percentage of sales decreased by **160 basis points** to **25.5%** in fiscal 2020, driven by governmental credits, lower store wages, and reduced corporate costs[168](index=168&type=chunk) - Net income for fiscal 2020 was **$76.2 million**, or **$3.00 per diluted share**, an increase from **$66.9 million**, or **$2.62 per diluted share**, in fiscal 2019[169](index=169&type=chunk) [Liquidity and Capital Resources](index=32&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$375.5 million** in cash and marketable securities, **$138.4 million** in operating cash flow, and plans **$20 million to $22 million** in fiscal 2021 capital expenditures Cash and Working Capital (in millions) | Metric | Jan 30, 2021 | Feb 1, 2020 | | :--- | :--- | :--- | | Cash, cash equivalents & current marketable securities | $375.5 | $251.2 | | Working capital | $339.8 | $252.9 | Summary of Cash Flows (in thousands) | Activity | Fiscal 2020 | Fiscal 2019 | Fiscal 2018 | | :--- | :--- | :--- | :--- | | Operating activities | $138,412 | $106,070 | $65,406 | | Investing activities | $(110,541) | $(102,931) | $(36,398) | | Financing activities | $(9,694) | $2,010 | $120 | - Capital expenditures are expected to be approximately **$20 million to $22 million** in fiscal 2021, primarily for about **22** new stores and existing store remodels[195](index=195&type=chunk) [Critical Accounting Estimates](index=34&type=section&id=Critical%20Accounting%20Estimates) Management identifies critical accounting estimates including inventory valuation, impairment testing of long-lived assets, goodwill, and indefinite-lived intangible assets, requiring significant judgment and future cash flow projections - Valuation of merchandise inventories requires management to make assumptions about sales rates and shrinkage. A **10%** increase in the actual physical inventory shrinkage rate would have decreased fiscal 2020 net income by **$0.1 million**[199](index=199&type=chunk)[202](index=202&type=chunk)[204](index=204&type=chunk) - Long-lived assets are reviewed for impairment when events indicate their carrying value may not be recoverable, requiring management to estimate future cash flows and asset fair values[205](index=205&type=chunk)[207](index=207&type=chunk) - Goodwill and indefinite-lived intangible assets are tested for impairment annually, a process that involves complex judgments about future cash flows, growth rates, and discount rates. No impairment was recorded in fiscal 2020[231](index=231&type=chunk)[234](index=234&type=chunk)[236](index=236&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company is exposed to market risks from interest rate fluctuations and foreign currency exchange rates, with hypothetical **10%** changes impacting fiscal 2020 net income by **$0.3 million** and **$0.5 million** respectively - A hypothetical **10%** decrease in the average yield rate of the company's investment portfolio in fiscal 2020 would have decreased net income by **$0.3 million**[243](index=243&type=chunk) - A hypothetical **10%** change in foreign exchange rates in fiscal 2020 would have increased or decreased net income by **$0.5 million**[245](index=245&type=chunk) [Financial Statements and Supplementary Data](index=39&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This item refers to the consolidated financial statements and related notes, included in Part IV, Item 15 of the Form 10-K - The company's consolidated financial statements are provided in Part IV, Item 15 of this report[247](index=247&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=40&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[249](index=249&type=chunk) [Controls and Procedures](index=40&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls and internal control over financial reporting were effective as of January 30, 2021, with the independent auditor issuing an unqualified opinion - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of January 30, 2021[250](index=250&type=chunk) - Management's assessment concluded that the company's internal control over financial reporting was effective as of January 30, 2021[254](index=254&type=chunk) - The independent auditor, Moss Adams LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[258](index=258&type=chunk) [Other Information](index=42&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[265](index=265&type=chunk) [Part III](index=43&type=section&id=PART%20III) [Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership](index=43&type=section&id=Items%2010-14) Information for Items 10-14, covering directors, executive officers, corporate governance, compensation, and security ownership, is incorporated by reference from the 2021 proxy statement - Information regarding directors, executive officers, corporate governance, executive compensation, security ownership, and principal accountant fees is incorporated by reference from the company's definitive proxy statement[267](index=267&type=chunk)[268](index=268&type=chunk)[269](index=269&type=chunk) [Part IV](index=44&type=section&id=PART%20IV) [Exhibits, Financial Statement Schedules](index=44&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section contains the index to consolidated financial statements and a list of exhibits filed with the Form 10-K, with schedules omitted as not applicable or included elsewhere - This item includes the consolidated financial statements and an index of all exhibits filed with the report[273](index=273&type=chunk) [Consolidated Financial Statements](index=45&type=section&id=Consolidated%20Financial%20Statements) [Report of Independent Registered Public Accounting Firm](index=46&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The independent auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting, identifying goodwill, intangible, and store asset impairment as Critical Audit Matters - The auditor issued an unqualified (clean) opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[278](index=278&type=chunk)[279](index=279&type=chunk) - Critical Audit Matters identified were "Goodwill and Intangible Asset Impairment" and "Store Asset Impairment" due to the high degree of management judgment and significant assumptions required in these areas[284](index=284&type=chunk)[287](index=287&type=chunk) [Financial Statements](index=49&type=section&id=Financial%20Statements) The consolidated financial statements show total assets of **$998.4 million**, total liabilities of **$445.8 million**, net sales of **$990.7 million**, and net income of **$76.2 million** for fiscal 2020 Consolidated Balance Sheet Highlights (as of Jan 30, 2021) | Account (in thousands) | Amount | | :--- | :--- | | Cash and cash equivalents | $73,622 | | Total assets | $998,364 | | Total liabilities | $445,768 | | Total shareholders' equity | $552,596 | Consolidated Income Statement Highlights (Fiscal Year 2020) | Account (in thousands) | Amount | | :--- | :--- | | Net sales | $990,652 | | Gross profit | $350,015 | | Operating profit | $96,938 | | Net income | $76,227 | Consolidated Cash Flow Highlights (Fiscal Year 2020) | Account (in thousands) | Amount | | :--- | :--- | | Net cash provided by operating activities | $138,412 | | Net cash used in investing activities | $(110,541) | | Net cash used in financing activities | $(9,694) | [Notes to Consolidated Financial Statements](index=54&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, revenue disaggregation, leases, goodwill, and equity awards, highlighting Men's Apparel as the largest product category and the **$100 million** share repurchase program Net Sales by Geographic Region (in thousands) | Region | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | United States | $812,825 | $855,906 | $814,153 | | Foreign | $177,827 | $178,223 | $164,464 | | **Total** | **$990,652** | **$1,034,129** | **$978,617** | Sales by Product Category (% of Merchandise Sales) | Category | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Men's Apparel | 39% | 39% | 41% | | Hardgoods | 19% | 13% | 11% | | Accessories | 17% | 17% | 17% | | Footwear | 13% | 18% | 17% | | Women's Apparel | 12% | 13% | 14% | - As of January 30, 2021, the company had total operating lease liabilities with a present value of **$313.1 million**[372](index=372&type=chunk) - In fiscal 2020, the company repurchased **694,000 shares** of its common stock for a total cost of **$13.4 million**[382](index=382&type=chunk)[383](index=383&type=chunk)