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Dec. 9, 2019, 4:21 p.m. EST

10-Q: ZUMIEZ INC

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(EDGAR Online via COMTEX) -- Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in "Item 1A Risk Factors" in our Form 10-K filed with the SEC on March 18, 2019 and in this Form 10-Q.

Forward-looking statements relate to our expectations for future events and future financial performance. Generally, the words "anticipates," "expects," "intends," "may," "should," "plans," "believes," "predicts," "potential," "continue" and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. Actual events or results may differ materially. Factors which could affect our financial results are described below under the heading "Risk Factors" and in "Item 1A Risk Factors" of our Form 10-K referred to in the preceding paragraph. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

Fiscal 2019 is the 52-week period ending February 1, 2020. Fiscal 2018 was the 52-week period ending February 2, 2019. The first nine months of fiscal 2019 was the 39-week period ended November 2, 2019. The first nine months of fiscal 2018 was the 39-week period ended November 3, 2018.

"Zumiez," the "Company," "we," "us," "its," "our" and similar references refer to Zumiez Inc. and its wholly-owned subsidiaries.

General

Net sales constitute gross sales (net of actual and estimated returns and deductions for promotions) and shipping revenue. Net sales include our store sales and our ecommerce sales. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards that will not be redeemed ("gift card breakage") is recognized based on our historical redemption rate in proportion to the pattern of rights exercised by the customer.

We report "comparable sales" based on net sales beginning on the first anniversary of the first day of operation of a new store or ecommerce business. We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Therefore, our comparable sales also include our ecommerce sales. Changes in our comparable sales between two periods are based on net sales of store or ecommerce businesses which were in operation during both of the two periods being compared and, if a store or ecommerce business is included in the calculation of comparable sales for only a portion of one of the two periods being compared, then that store or ecommerce business is included in the calculation for only the comparable portion of the other period. Any increase or decrease less than 25% in square footage of an existing comparable store, including remodels and relocations within the same mall, or temporary closures less than seven days does not eliminate that store from inclusion in the calculation of comparable sales. Any store or ecommerce business that we acquire will be included in the calculation of comparable sales after the first anniversary of the acquisition date. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable sales. As a result, data herein regarding our comparable sales may not be comparable to similar data made available by our competitors or other retailers.

Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of goods sold also includes shrinkage, buying, occupancy, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold, a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors' products.

With respect to the freight component of our ecommerce sales, amounts billed to our customers are included in net sales and the related freight cost is charged to cost of goods sold.

Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, freight costs for merchandise shipments from the distribution centers to the stores, store supplies, depreciation on fixed assets at our home office and stores, facility expenses, training expenses and advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses, incentive compensation, stock-based compensation and other miscellaneous operating costs are also included in selling, general and administrative expenses. This may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.

Key Performance Indicators

Our management evaluates the following items, which we consider key performance indicators, in assessing our performance:

Net sales. Net sales constitute gross sales, net of sales returns and deductions for promotions, and shipping revenue. Net sales includes comparable sales and new store sales for all our store and ecommerce businesses. We consider net sales to be an important indicator of our current performance. Net sales results are important to achieve leveraging of our costs, including store payroll and store occupancy. Net sales also have a direct impact on our operating profit, cash and working capital.

Gross profit. Gross profit measures whether we are optimizing the price and inventory levels of our merchandise. Gross profit is the difference between net sales and cost of goods sold. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.

Operating profit. We view operating profit as a key indicator of our success. Operating profit is the difference between gross profit and selling, general and administrative expenses. The key drivers of operating profit are net sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense.

Diluted earnings per share. Diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period. We view diluted earnings per share as a key indicator of our success in increasing shareholder value.







        Results of Operations
        The following table presents selected items on the condensed consolidated
        statements of income as a percent of net sales:
                                                            Three Months Ended                Nine Months Ended
                                                       November 2,       November 3,     November 2,      November 3,
                                                           2019             2018             2019            2018
        Net sales                                             100.0    %       100.0   %        100.0   %       100.0   %
        Cost of goods sold                                     64.2             65.1             66.2            67.1
        Gross profit                                           35.8             34.9             33.8            32.9
        Selling, general and administrative expenses           26.6             27.5             28.6            29.4
        Operating profit                                        9.2              7.4              5.2             3.5
        Interest and other income, net                          0.5              0.2              0.6             0.1
        Earnings before income taxes                            9.7              7.6              5.8             3.6
        Provision for income taxes                              2.4              2.0              1.7             1.3
        Net income                                              7.3    %         5.6   %          4.1   %         2.3   %
        


Three Months (13 weeks) Ended November 2, 2019 Compared With Three Months (13 weeks) Ended November 3, 2018

Net Sales

Net sales were $264.0 million for the three months ended November 2, 2019 compared to $248.8 million for the three months ended November 3, 2018, an increase of $15.2 million or 6.1%. The increase primarily reflected an increase in comparable sales of $13.5 million and the net addition of 15 stores (made up of 6 new stores in North America, 10 new stores in Europe and 4 new stores in Australia partially offset by 5 store closures in North America) subsequent to November 3, 2018 partially offset by a decrease of $1.4 million due to changes in foreign currency rates. By region, North America sales increased $11.9 million or 5.3% and other international sales (which consists of Europe and Australia sales) increased $3.3 million or 14.8% for the three months ended November 2, 2019 compared to the three months ended November 3, 2018. Excluding the impact of changes in foreign exchange rates, North America sales increased $12.2 million or 5.4% and other international sales increased $4.4 million or 19.8% for the three months ended November 2, 2019 compared to the three months ended November 3, 2018.

Comparable sales increased 5.5% primarily driven by an increase in comparable transactions and dollars per transaction. Dollars per transaction increased due to an increase in units per transaction partially offset by a decrease in average unit retail. Comparable sales were primarily driven by an increase in hardgoods followed by footwear, accessories and men's clothing. These increases were partially offset by decreases in comparable sales in women's clothing. For information as to how we define comparable sales, see "General" above.

Gross Profit

Gross profit was $94.6 million for the three months ended November 2, 2019 compared to $86.9 million for the three months ended November 3, 2018, an increase of $7.7 million, or 8.9%. As a percent of net sales, gross profit increased 90 basis points for the three months ended November 2, 2019 to 35.8%. The increase was primarily driven by 40 basis points of leverage in our store occupancy costs, a 30 basis point decrease in web fulfillment, distribution and shipping costs, and a 20 basis point decrease in the write-off of excess or slow moving inventory.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $70.3 million for the three months ended November 2, 2019 compared to $68.5 million for the three months ended November 3, 2018, an increase of $1.8 million, or 2.6%. SG&A expenses as a percent of net sales decreased 90 basis points for the three months ended November 2, 2019 to 26.6%. The decrease was primarily driven by 100 basis points of leverage in our store costs, including 30 basis points of depreciation.

Net Income

Net income for the three months ended November 2, 2019 was $19.2 million, or $0.75 earnings per diluted share, compared with net income of $13.8 million, or $0.55 earnings per diluted share, for the three months ended November 3, 2018. Our effective income tax rate for the three months ended November 2, 2019 was a 25.0% provision for income taxes compared to a 26.5% provision for income taxes for the three months ended November 3, 2018. The decrease was primarily due to a reduction in net losses in certain jurisdictions which are excluded from our estimated annual effective tax rate due to the uncertainty of the realization of deferred tax assets and the proportion of earnings or loss before income taxes across jurisdictions.

Nine Months (39 weeks) Ended November 2, 2019 Compared With Nine Months (39 weeks) Ended November 3, 2018

Net Sales

Net sales were $705.4 million for the nine months ended November 2, 2019 compared to $674.1 million for the nine months ended November 3, 2018, an increase of $31.3 million or 4.6%. The increase primarily reflected an increase in comparable sales of $27.9 million and the net addition of 15 stores (made up of 6 new stores in North America, 10 new stores in Europe and 4 new stores in Australia partially offset by 5 store closures in North America) subsequent to November 3, 2018 partially offset by a decrease of $5.3 million due to changes in foreign currency rates. By region, North America sales increased $24.5 million or 4.0% and other international sales (which consists of Europe and Australia sales) increased $6.8 million or 10.5% for the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018. Excluding the impact of changes in foreign exchange rates, North America sales increased $25.5 million or 4.2% and other international sales increased $11.2 million or 17.2% for the nine months ended November 2, 2019 compared to the nine months ended November 3, 2018.

Comparable sales increased 4.2% primarily driven by an increase in comparable transactions and dollars per transaction. Dollars per transaction increased due to an increase in average unit retail and units per transaction. Comparable sales were primarily driven by an increase in hardgoods followed by footwear and accessories. These increases were partially offset by decreases in comparable sales in women's clothing followed by men's clothing. For information as to how we define comparable sales, see "General" above.

Gross Profit

Gross profit was $238.2 million for the nine months ended November 2, 2019 compared to $222.0 million for the nine months ended November 3, 2018, an increase of $16.2 million, or 7.3%. As a percent of net sales, gross profit increased 90 basis points for the nine months ended November 2, 2019 to 33.8%. The increase was primarily driven by 40 basis points of leverage in our store occupancy costs, a 30 basis point decrease in web fulfillment, distribution and shipping costs, and a 20 basis point decrease in the write-off of excess or slow moving inventory.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses were $201.3 million for the nine months ended November 2, 2019 compared to $198.6 million for the nine months ended November 3, 2018, an increase of $2.7 million, or 1.3%. SG&A expenses as a percent of net sales decreased 80 basis points for the nine months ended November 2, 2019 to 28.6%. The decrease was primarily driven by 90 basis points of leverage in our store costs, including 30 basis points of depreciation.

Net Income

Net income for the nine months ended November 2, 2019 was $29.0 million, or $1.14 earnings per diluted share, compared with net income of $15.6 million, or $0.62 earnings per diluted share, for the nine months ended November 3, 2018. Our effective income tax rate for the nine months ended November 2, 2019 was a 28.6% provision for income taxes compared to a 35.3% provision for income taxes for the nine months ended November 3, 2018. The decrease was primarily due to a reduction in net losses in certain jurisdictions which are excluded from our estimated annual effective tax rate due to the uncertainty of the realization of deferred tax assets and the proportion of earnings or loss before income taxes across jurisdictions.

Liquidity and Capital Resources

Our primary uses of cash are for operational expenditures, inventory purchases and capital investments, including new stores, store remodels, store relocations, store fixtures and ongoing infrastructure improvements. Additionally, we may use cash for the repurchase of our common stock. Historically, our main source of liquidity has been cash flows from operations.

The significant components of our working capital are inventories and liquid assets such as cash, cash equivalents, current marketable securities and receivables, reduced by accounts payable, accrued payroll and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors.

Our capital requirements include construction and fixture costs related to the opening of new stores and remodel and relocation expenditures for existing stores. Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords. Our net investment to open a new store has varied significantly in the past due to a number of factors, including the geographic location and size of the new store, and is likely to vary significantly in the future.

During fiscal 2019, we expect to spend approximately $19 million to $21 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the approximately 15 new stores we remain on track to open in fiscal 2019 and remodels or relocations of existing stores. There can be no assurance that the number of stores that we actually open in fiscal 2019 will not be different from the number of stores we plan to open, or that actual fiscal 2019 capital expenditures will not differ from our expectations.

Operating Activities

Net cash from operating activities increased by $12.4 million to $29.5 million provided by operating activities for the nine months ended November 2, 2019 from $17.1 million provided by operating activities for the nine months ended November 3, 2018. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, store occupancy expenses and other operational expenditures. Cash received from our customers generally corresponds to our net sales. Because our customers primarily use credit cards or cash to buy from us, our receivables from customers settle quickly. Historically, changes to our operating cash flows have been driven primarily by changes in operating income, which is impacted by changes to non-cash items such as depreciation, amortization and accretion, deferred taxes, and changes to the components of working capital.

Investing Activities

Net cash used in investing activities was $46.8 million for the nine months ended November 2, 2019 related to $32.9 million in net purchases of marketable securities in addition to $13.9 million of capital expenditures primarily for new store openings and existing store remodels or relocations. Net cash used in investing activities was $16.6 million for the nine months ended November 3, 2018, related to $15.7 million of capital expenditures primarily for new store openings and existing store remodels or relocations and $0.9 million in net purchases of marketable securities.

Financing Activities

Net cash provided by financing activities for the nine months ended November 2, 2019 was $1.4 million, related to $1.6 million proceeds from the issuance and exercise of stock-based awards partially offset by $0.2 million in payments for tax withholding obligations upon vesting of restricted stock. Net cash provided by financing activities for the nine months ended November 3, 2018 was $5.8 million, primarily related to $5.1 million in net proceeds from revolving credit facilities and $0.9 million proceeds from the

issuance and exercise of stock-based awards partially offset by $0.2 million in payments for tax withholding obligations upon vesting of restricted stock.

Sources of Liquidity

Our most significant sources of liquidity continue to be funds generated by operating activities and available cash, cash equivalents and current marketable securities. We expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures for at least the next twelve months. Beyond this time frame, if cash flows from operations are not sufficient to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. However, there can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.

We maintain a secured credit agreement with Wells Fargo Bank, N.A., which provided us with a senior secured credit facility ("credit facility") of up to $35.0 million. The credit facility is available for working capital and other general corporate purposes. The credit facility provides for the issuance of standby letters of credit in an amount not to exceed $17.5 million outstanding at any time and with a term not to exceed 365 days. The commercial line of credit provides for the issuance of commercial letters of credit in an amount not to exceed $10.0 million and with terms not to exceed 120 days. The credit facility will mature on December 7, 2021. The credit facility is secured by a first-priority security interest in substantially all of the personal property (but not the real property) of the borrowers and guarantors. Amounts borrowed under the credit facility bear interest at an adjusted LIBOR rate plus a margin of 1.25% per annum. There were no borrowings or open commercial letters of credit outstanding under the secured credit facility at November 2, 2019 and February 2, 2019.

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

There have been no significant changes to our critical accounting estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.







        Contractual Obligations and Commercial Commitments
        There were no material changes outside the ordinary course of business in our
        contractual obligations during the nine months ended November 2, 2019. The
        following table summarizes the total amount of future payments due under our
        contractual obligations at November 2, 2019 (in thousands):
                                                                                Fiscal 2020 and       Fiscal 2022 and
                                                 Total        Fiscal 2019         Fiscal 2021           Fiscal 2023         Thereafter
        Operating lease liabilities,
        including imputed interest (1)         $ 384,346     $      13,986     $         144,926     $         112,052     $    113,382
        Purchase obligations (2)               $ 183,234           181,513                 1,721
        Total                                  $ 567,580     $     195,499     $         146,647     $         112,052     $    113,382
        


(1) This amount represent the minimum lease payments, included imputed interest, under non-cancelable operating leases. See Note 4, "Leases," in the Notes to Condensed Consolidated Financial Statements found in Item 1 of this Form 10-Q, for additional information related to our operating leases.

(2) We have an option to cancel these commitments with no notice prior to shipment, except for certain private label, packaging supplies and international purchase orders in which we are obligated to repay contractual amounts upon cancellation.

Off-Balance Sheet Arrangements

At November 2, 2019, we did not have any off-balance sheet arrangements.

Impact of Inflation/Deflation

We do not believe that inflation has had a material impact on our net sales or operating results for the past three fiscal years. However, substantial increases in costs, including the price of raw materials, labor, energy and other inputs used in the production of our merchandise, could have a significant impact on our business and the industry in the future. Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower sales and operating results.

Risk Factors

Investing in our securities involves a high degree of risk. The following risk factors, issues and uncertainties should be considered in evaluating our future prospects. In particular, keep these risk factors in mind when you read "forward-looking" statements elsewhere in this report. Forward-looking statements relate to our expectations for future events and time periods. Generally, the words "anticipates," "expects," "intends," "may," "should," "plans," "believes," "predicts," "potential," "continue" and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. Any of the following risks could harm our business, operating results or financial condition and could result in a complete loss of your investment. Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business and financial condition in the future.

. . .

Dec 09, 2019

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