Zumiez (NASDAQ:ZUMZ): Retail Run into Holidays

Zumiez reported 3Q comps, revenue, and EPS of 14.4%, $135.9M, and $0.40, versus estimates for 14.4%, $135.9M, and $0.36 (consensus $0.36.) EPS upside was a function of better than expected gross margin, which came in at 39% versus estimates for 37% and up 362bp Y/Y. Total SG&A as a percentage of revenue was 25.1% versus estimates for 24.7%. SG&A as a percentage of revenue was down 261bp Y/Y as a function of leverage on the 14.4% comp.

Solid inventory management, with benefits from DC relocation. Total inventories of $87M were up 8.8 Y/Y on 20% Y/Y revenue growth, bringing days inventory to 78 days, down 5 days Y/Y and $3.9M below estimates. Inventories benefited from reduced in-transit inventories with relocation of the DC to California (70% of suppliers located in California.)

November comp momentum continues. November comps were reported in conjunction with 3Q results. Comps were up 20.7% bringing total sales to $40.4M, versus prior model for 17.5% comps. On a two-year stack, comps were up 12.2%, versus 12.6% two-year comps in October. Thanksgiving comps were similar to full month results. Comps were led by transactions, offset by dollars per transaction, as a result of lower AUR and units per transaction. The South led the comp in the month. All categories, with the exception of boys posted positive comps.

4Q comp guidance ahead of our expectations, EPS guidance brackets prior model. 4Q guidance was introduced for: 1) low double-digit to mid-teen comps (implies high single to low double-digit comps in December and January); 2) Revenue of $153-157M in revenue; 3) Approximately 200bp of gross margin expansion: 4) Approximately 100bp or SG&A leverage: 5) Operating margin of 13-14%; and 5) EPS of $0.43-0.47. Our F4Q comp, revenue, and EPS estimates were for 9.2%, $150.8M, and $0.44 (consensus 7.9%, $149.4M, $0.41.) Management noted that it expects slowing comps as it faces more challenging comparisons. Preliminary commentary for 2011 was introduced for: 1) Store growth of 8-10% Y/Y; and 2) merchandise margin pressure, particularly in 2H, due to labor, commodity, and transportation cost pressure.

We continue to expect a slowing of comps to a sustainable 4-5%; long-term potential for store productivity of $460/square foot. Over the past five years, store productivity has declined from a peak of $503.5/average square foot in 2006 to $379.1/average square foot, a 25% decline. In our view, this is a function of both: 1) structural changes (increasing presence in markets where the action sports lifestyle has less resonance, shifting competitive environment within the mall); and 2) macro-level changes (declining consumer apparel spend, juniors fashion shift.) We expect these structural changes will hold back recovery of the concept, and as such view it as appropriate to lay out a cautious scenario for 4-5% comps going forward, bringing productivity back to $460/square foot over the next 5 years.