UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: January 28, 2012February 1, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-51300
ZUMIEZ INC.
(Exact name of Registrant as specified in its charter)
Washington | 91-1040022 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
(Address of principal executive offices) | (Zip Code) |
(425) 551-1500
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:Common Stock
Name of each exchange on which registered:The Nasdaq Global Select Market
Securities registered under Section 12(g) of the Act:None
Indicate by check mark if the Registrantregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the Registrantregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the last ninety90 days. Yes x No ¨
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10–K.10-K. ¨
Indicate by check mark whether the Registrantregistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |||||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark if the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
AsThe aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant as of the last business day of the second fiscal quarter, July 30, 2011, the aggregate market value of the Registrant’s voting and non-voting stock held by non-affiliates of the RegistrantAugust 2, 2013, was $584,285,938 using the closing sales price on that day of $26.57.$631,553,372.
At March 6, 2012,7, 2014, there were 31,170,12529,134,210 shares outstanding of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report is incorporated by reference from the Registrant’s definitive proxy statement, relating to the Annual Meeting of Shareholders scheduled to be held May 23, 2012,21, 2014, which definitive proxy statement will be filed not later than 120 days after the end of the fiscal year to which this report relates.
FORM 10-K
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | ||||||
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ZUMIEZ INC.
FORM 10-K
This Form 10-K contains forward-looking statements. These 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 in Item 1A below and in Item 7 of Part II of this Form 10-K. 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.
We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31. Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years. Fiscal 2014 will be the 52-week period ending January 31, 2015. Fiscal 2013 was the 52-week period ending February 1, 2014. Fiscal 2012 was the53-week period ending February 2, 2013. Fiscal 2011 was the 52-week period ending January 28, 2012. Fiscal 2010 was the 52-week period ending January 29, 2011. Fiscal 2009 was the 52-week period ended January 30, 2010. Fiscal 2008 was the 52-week period ended January 31, 2009.
“Zumiez,” the “Company,” “we,” “us,” “its,” “our” and similar references refer to Zumiez Inc. and its wholly-owned subsidiaries.
Item 1. | BUSINESS |
Zumiez Inc., a Washington corporation, is a leading multi-channel specialty retailer of action sports related apparel, footwear, equipmentaccessories and accessories operating under the Zumiez brand name. At January 28, 2012, we operated 444 stores primarily located in shopping malls, giving us a presence in 38 stateshardgoods, focusing on skateboarding, snowboarding, surfing, motocross and Canada. Our stores cater tobicycle motocross (“BMX”) for young men and women between the ages of 12 and 24 who seek popular brands representing an action sport lifestyle centered on activities that include skateboarding, surfing, snowboarding, bicycle motocross (or “BMX”) and motocross. We support the action sports lifestyle and promote our brand through a multi-faceted marketing approach that is designed to integrate our brand image with our customers’ activities and interests. This approach, combined with our differentiated merchandising strategy, store design, comprehensive training programs and passionate employees, allows us to provide an experience for our customers that we believe is consistent with their attitudes, fashion tastes and identities and is otherwise unavailable in most malls. In addition, we operate a website that sells merchandise online and provides content and a community for our target customers. The Companywomen. Zumiez Inc. was formed in August 1978.1978 and is a Washington State corporation.
At February 1, 2014, we operated 551 stores; 511 in the United States (“U.S.”), 28 in Canada and 12 in Europe. We operate under the names Zumiez and Blue Tomato. Additionally, we operate ecommerce websites at www.zumiez.com and www.blue-tomato.com.
We completed the acquisition of Snowboard Dachstein Tauern GmbH and Blue Tomato Graz Handel GmbH (collectively, “Blue Tomato”) during fiscal 2012. Blue Tomato is a multi-channel retailer for board sports and related apparel and footwear that operates primarily in the European marketplace.
We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our in-store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Our stores bring the look and feel of an independent specialty shop to the mall by emphasizing the action sports lifestyle through a distinctive store environment and high-energy sales personnel. We seek to staff our stores with store associates who are knowledgeable users of our products, which we believe provides our customers with enhanced customer service and supplements our ability to identify and react quickly to emerging trends and fashions. We design our stores to appeal to teenagers and young adults and to serve as a destination for our customers. Most of our stores, which average approximately 2,900 square feet, feature couches and action sports oriented video game stations that are intended to encourage our customers to shop for longer periods of time and to interact with each other and our store associates. To increase customer traffic, we generally locate our stores near busy areas of the mall such as food courts, movie theaters, game stores and other popular teen retailers. We believe that our distinctive store conceptconcepts and compelling store economics will provide continued opportunities for growth in both new and existing markets.
We believe that our customers desire authentic merchandise and fashion that is rooted in the action sports lifestyle and reflects their individuality. We strive to keep our merchandising mix fresh by continuously introducing new brands, styles and categories of product. Our focus on a diverse collection of brands allows us to
quickly adjust to changing fashion trends. We believe that our strategic mix of apparel, footwear, accessories and hardgoods, including skateboards, snowboards, bindings, components and other equipment, allows us to strengthen the potential of the brands we sell and helps to affirm our credibility with our customers. In addition, we supplement our storesmerchandise mix with a select offering of private label apparel and products as a value proposition that we believe complements our overall merchandise selection.
Over our 33-year35-year history, we have developed a corporate culture based on a passion for the action sports lifestyle. Our management philosophy emphasizes an integrated combination of results measurement, training and incentive programs, all designed to drive sales productivity at the individual store associate level. We empower our managers to make store-level business decisions and consistently reward their success. We seek to enhance the productivity of our employees and encourage their advancement by offering comprehensive in-store, regional and national training programs, which we refer to collectively as “Zumiez University.” We have:
increased our store count from 235343 as of the end of fiscal 20062008 to 444551 as of the end of fiscal 2011,2013, representing a compound annual growth rate of 13.6%9.9%;
experienced weighted-average net sales per square foot of $416 for our last five fiscal years ending with fiscal 2011, from a peak of net sales per square foot of $491 in fiscal 2006;
increased net sales from $298.2$408.7 million in fiscal 20062008 to $555.9$724.3 million in fiscal 2011,2013, representing a compound annual growth rate of 13.3%12.1%;
increased ecommerce sales from 1.5% of net sales in fiscal 2008 to 12.3% in fiscal 2013, representing a compound annual growth rate of 70.8%;
been profitable in every fiscal year of our 33-year35-year history.
Competitive Strengths
We believe that the following competitive strengths differentiate us from our competitors and are critical to our continuing success.
Attractive Lifestyle Retailing Concept. We target a large population of 12 to 24 year olds,young men and women, many of whom we believe are attracted to the action sports lifestyle and desire to promote their personal independence and style through the apparel, shoesfootwear and accessories they wear and the equipment they use. We believe that action sports is a permanent aspect of youth culture, reaching not only consumers that actually participate in action sports, but also those who seek brands and styles that fit a desired action sports image. We believe we have developed a brand image that our customers view as consistent with their attitudes, fashion tastes and identity that should allow us to benefit in our market.
Differentiated Merchandising Strategy. We have created a highly differentiated retailing concept by offering an extensive selection of current and relevant action sports brands encompassing apparel, footwear, equipmentaccessories and accessories.hardgoods. The breadth of merchandise offered at our stores exceeds that offered by many other action sports specialty stores and includes some brands and products that are available only at our stores within many malls only at our stores.or shopping areas. The action sports lifestyle includes activities that are popular at different times throughout the year, providing us the opportunity to shift our merchandise selection seasonally. Many of our customers desire to update their wardrobes and equipment as fashion trends evolve or the action sports season dictates. We believe that our ability to quickly recognize changing brand and style preferences and transition our merchandise offerings allows us to continually provide a compelling offering to our customers.
Deep-rooted Culture. Our culture and brand image enable us to successfully attract and retain high quality employees who are passionate and knowledgeable about the products we sell. We place great emphasis on customer service and satisfaction, and we have made this a defining feature of our corporate culture. To preserve our culture, we strive to promote store managers from within and they are given extensive responsibility for most
aspects of store level management. Wewe provide these managersour employees with the knowledge and tools to succeed through our comprehensive training programs and the flexibility to manage their stores to meet localized customer demand. Our store leadership at the district manager level and above have all been promoted from within the Zumiez system and their leadership provides unique value and insight to our store managers and sales associates.
Distinctive StoreCustomer Experience. We strive to provide a convenient shopping environment that is appealing and clearly communicates our distinct brand image. Our stores are designed to reflect an “organized chaos” that we believe is consistent with many teenagers’ and young adults’ lifestyles. We seek to attract knowledgeable store associates who identify with the action sports lifestyle and are able to offer superior customer service, advice and product expertise. To further enhance our customers’ experience, most of our stores feature areas with couches and action sports oriented video game stations that are intended to encourage our customers to shop for longer periods of time, to interact with each other and our store associates in a familiar and comfortable setting and to visit our stores more frequently. We believe that our distinctive store environment enhances our image as a leading source for apparel and equipment for the action sports lifestyle.
Disciplined Operating Philosophy. We have an experienced senior management team. Our management team has built a strong operating foundation based on sound retail principles that underlie our unique culture. Our philosophy emphasizes an integrated combination of results measurement, training and incentive programs, all designed to drive sales productivity to the individual store associate level. Our comprehensive training programs are designed to provide our home office staff, managers and store associatesemployees with enhanced product knowledge, selling skills and operational expertise. We believe that our merchandising team’steams’ immersion in the action sports lifestyle, supplemented with feedback from our customers, store associates and store leadership, and managers, allows us to consistently identify and react to emerging fashion trends. We believe that this, combined with our inventory planning and allocation processes and systems, helps us better manage markdown and fashion risk.
High-Impact, Integrated Marketing Approach. We seek to build relationships with our customers through a multi-faceted marketing approach that is designed to integrate our brand imageimages with the action sports lifestyle. Our marketing efforts focus on reaching our customers in their environment and feature extensive grassroots marketing events, such as the Zumiez Couch Tour, which is a series of interactive sports, music and lifestyle events held at various locations throughout the United States.events. Our marketing efforts also incorporate local sporting and music event promotions, advertising in magazines popular with our target market, interactive contest sponsorships that actively involve our customers with our brands and products and various social network channels such as Facebook and Twitter.channels. Events and activities such as these provide opportunities for our customers to develop a strong identity with our culture and brand.brands. We believe that our immersion in the action sports lifestyle allows us to build credibility with our customers and gather valuable feedback on evolving customer preferences.
Growth Strategy
We intend to expand our presence as a leading action sports lifestyle retailer by:
Opening New Store Locations. We believe that the action sports lifestyle has appeal that provides store expansion opportunities throughout the countryU.S. and internationally. During the last three fiscal years, ending with fiscal 2011, we have opened 108or acquired 163 new stores consisting of 59 stores in fiscal 2013, 59 stores in fiscal 2012 and 45 stores in fiscal 2011, 27 stores in fiscal 2010 and 36 stores in fiscal 2009.2011. We have successfully opened stores in diverse markets throughout the United StatesU.S. and Canada,internationally, which we believe demonstrates the portability and growth potential of our concept.concepts. To take advantage of what we believe to be a compelling economic store model, we plan to open approximately 5055 new stores in fiscal 2012,2014, including stores in our existing markets and in new markets domestically and in Canada.internationally. The number of anticipated store openings may increase or decrease due to market conditions.conditions and other factors.
Continuing to Generate Sales Growth through Improved Store Level Productivity and Continued Ecommerce Sales Growth. We seek to maximize our comparable store sales, including sales from our ecommerce site,businesses, and net sales per square foot by maintaining consistent store-level execution and offering our customers a
broad and relevant selection of action sports brands and products. We seek to continue to grow our ecommerce sales with a continued focus on enhancing and integrating the unique Zumiez and Blue Tomato brand experienceexperiences through this channel. In fiscal 2011, 20102013, 2012 and 2009,2011, ecommerce sales represented 7.3%12.3%, 4.7%11.2% and 2.5%7.3% of our total net sales.
Enhancing our Brand Awareness through Continued Marketing and Promotion. We believe that a key component of our success is the brand exposure that we receive from our marketing events, promotions and activities that embody the action sports lifestyle. These are designed to assist us in increasing brand awareness in our existing markets and expanding into new markets by strengthening our connection with our target customer base. We believe that our marketing efforts have also been successful in generating and promoting interest in our product offerings. In addition, we use our ecommerce presence, designed to convey our passion for the action sports lifestyle, to increase our brand awareness. We plan to continue to expand our integrated marketing efforts by promoting more events and activities in our existing and new markets. We also benefit from branded vendors’ marketing.
Merchandising and Purchasing
Our goal is to be viewed by our customers as the definitive source of merchandise for the action sports lifestyle.lifestyle across all channels in which we operate. We believe that the breadth of merchandise offered at our stores,that we offer, which includes apparel, footwear, equipmentaccessories and accessories,hardgoods, exceeds that offered by many other action sports specialty stores at a single location, and makes our storesus a single-stop purchase destination for our target customers. Our apparel offerings include tops, bottoms, outerwear and accessories such as caps, bags and backpacks, belts, jewelry and sunglasses. Our footwear offerings primarily consist of action sports related athletic shoes and sandals. Our equipment offerings, or hardgoods, include skateboards, snowboards and ancillary gear such as boots and bindings. We also offer a selection of other items, such as miscellaneous novelties.
We seek to identify action sports oriented fashion trends as they develop and to respond in a timely manner with a relevant in-store product assortment. We strive to keep our merchandising mix fresh by continuously introducing new brands or styles in response to the evolving desires of our customers. We also take advantage of the change in action sports seasons during the year to maintain an updated product selection. Our merchandise mix may vary by region and country, reflecting the specific action sports preferences and seasons in different parts of the country.each market.
We believe that offering an extensive selection of current and relevant brands used and sometimes developed by professional action sports athletes is integral to our overall success. No single brand, including private label, accounted for more than 6.3%7.6%, 6.5%9.0% and 7.1%6.3% of our net sales in fiscal 2011, 20102013, 2012 and 2009.2011. We believe that our strategic mix of both apparel, footwear, accessories and hardgoods including skateboards, snowboards, bindings, components and other equipment, allows us to strengthen the potential of the brands we sell and affirms our credibility with our customers.
We believe that our ability to maintain an image consistent with the action sports lifestyle is important to our key vendors. Given our scale and market position, we believe that many of our key vendors view us as an important retail partner. This position helps ensure our ability to procure a relevant product assortment and quickly respond to the changing fashion interests of our customers. Additionally, we believe we are presented with a greater variety of products and styles by some of our vendors, as well as certain specially designed items that arewe exclusively distributed to our stores.distribute. We supplement our merchandise assortment with a select offering of private label products across many of our apparel product categories. Our private label products complement the branded products we sell, and some of our private label brands allow us to cater to the more value-oriented customer. For fiscal 2011, 20102013, 2012 and 20092011, our private label merchandise represented 17.7%, 18.0%16.9% and 15.7%17.7% of our net sales.
Our purchasing approach focuses on quality, speed and cost in order to provide timely delivery of merchandise to our stores. We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandise strategy. We utilize a broad vendor base that allows
us to shift our merchandise purchases as required to react quickly to changing consumer demands and market conditions. We manage the purchasing and allocation process by reviewing branded merchandise lines from new and existing vendors, identifying emerging fashion trends and selecting branded merchandise styles in quantities, colors and sizes to meet inventory levels established by management. We also coordinate inventory levels in connection with individual storestores’ sales strength, our promotions and seasonality. Our management information systems provide us with current inventory levels at each store and for our Company as a whole, as well as current selling history within each store by merchandise classification and by style. We purchase most of our branded merchandise from domestic vendors.
Our merchandising staff remains in tune with the action sports culture by participating in action sports, attending relevant events and concerts, watching action sports related programming and reading action sports publications.publications and relevant social network channels. In order to identify evolving trends and fashion preferences, our staff spends considerable time analyzing sales data, by category and brand down to the stock keeping unit, or “SKU” (an identification used for inventory tracking purposes) level, gathering feedback from our stores and customers, shopping in key markets and soliciting input from our vendors. As part of our feedback collection process, our merchandise team receives merchandise requests from both customers and store associates and meets with our store managers two to three times per year to discuss current customer trends.
We source our private label merchandise from primarily foreign manufacturers around the world. We have cultivated our private label sources with a view towards high quality merchandise, production reliability and consistency of fit. We believe that our knowledge of fabric and production costs combined with a flexible sourcing base enables us to source high-quality private label goods at favorable costs.
Distribution and Fulfillment
Timely and efficient distribution of merchandise to our stores is an important component of our overall business strategy. During fiscal 2010, we relocated our distribution center from Everett, Washington to Corona, California to reduce distribution costs, expand capacity and increase speed of merchandise delivery to our customers. At our Corona, California facility, merchandise is inspected, allocated to stores, ticketed when necessary and boxed for distribution to our stores. Each store is typically shipped merchandise five times a week, providing our stores with a steady flow of new merchandise. We currently use United Parcel Service to ship the majority of our merchandise to our stores. Our current ecommerce fulfillment center is located in Everett, Washington. Subsequent to the fiscal 2011 year end, we entered into a 10 year lease agreement to lease up to 153,095 square feet in Edwardsville, Kansas for the purpose of relocating our ecommerce fulfillment center. We plan to move into this new leased space in fiscal 2012. We believe our distribution and ecommerce fulfillment infrastructure is sufficient to accommodate our expected store and ecommerce growth over the next several years.
Stores
Store Locations.All of our stores are leased and substantially all are located in shopping malls of different types. At January 28, 2012,February 1, 2014, we operated 434551 stores in the United States and 10 stores in Canada as shown below:following locations:
United States | ||||||||||||||||||||||
Alaska | 3 | Idaho | 6 | Montana | 4 | Rhode Island | 1 | |||||||||||||||
Arizona | 13 | Illinois | 16 | New Jersey | 18 | South Dakota | 2 | |||||||||||||||
California | 77 | Indiana | 8 | New Hampshire | 4 | Texas | 45 | |||||||||||||||
Colorado | 18 | Kansas | 3 | Nevada | 9 | Utah | 12 | |||||||||||||||
Connecticut | 8 | Maine | 2 | New Mexico | 5 | Virginia | 7 | |||||||||||||||
Delaware | 3 | Maryland | 9 | New York | 30 | Washington | 24 | |||||||||||||||
Florida | 18 | Massachusetts | 8 | North Carolina | 4 | Wisconsin | 13 | |||||||||||||||
Georgia | 3 | Michigan | 6 | Oklahoma | 6 | Wyoming | 2 | |||||||||||||||
Hawaii | 2 | Minnesota | 11 | Oregon | 12 | |||||||||||||||||
Iowa | 2 | Missouri | 2 | Pennsylvania | 18 |
United States - 511 Stores | ||||||||||||||||||||||
Alabama | 1 | Indiana | 10 | Nebraska | 1 | Rhode Island | 2 | |||||||||||||||
Alaska | 3 | Iowa | 4 | New Hampshire | 6 | South Carolina | 2 | |||||||||||||||
Arizona | 13 | Kansas | 3 | New Jersey | 19 | South Dakota | 2 | |||||||||||||||
California | 82 | Kentucky | 1 | Nevada | 8 | Tennessee | 6 | |||||||||||||||
Colorado | 18 | Louisiana | 2 | New Mexico | 5 | Texas | 48 | |||||||||||||||
Connecticut | 9 | Maine | 3 | New York | 32 | Utah | 14 | |||||||||||||||
Delaware | 3 | Maryland | 10 | North Carolina | 8 | Virginia | 11 | |||||||||||||||
Florida | 23 | Massachusetts | 11 | Ohio | 4 | Washington | 25 | |||||||||||||||
Georgia | 7 | Michigan | 8 | Oklahoma | 6 | West Virginia | 2 | |||||||||||||||
Hawaii | 5 | Minnesota | 11 | Oregon | 13 | Wisconsin | 14 | |||||||||||||||
Idaho | 6 | Missouri | 7 | Pennsylvania | 19 | Wyoming | 2 | |||||||||||||||
Illinois | 17 | Montana | 5 | |||||||||||||||||||
Canada - 28 Stores | ||||||||||||||||||||||
Alberta | 5 | New Brunswick | 1 | |||||||||||||||||||
British Columbia | 8 | Nova Scotia | 1 | |||||||||||||||||||
Manitoba | 1 | Ontario | 12 | |||||||||||||||||||
Europe - 12 Stores | ||||||||||||||||||||||
Austria | 5 | |||||||||||||||||||||
Germany | 7 |
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Approximately 29% of our stores have been opened or remodeled within the previous three fiscal years ending with fiscal 2011. The following table shows the number of stores (excluding temporary stores that we operate from time to time for special events) opened, acquired and closed in each of our last three fiscal years:
Fiscal Year | Stores Opened | Stores Closed | Total Number of Stores End of Year | Stores Opened | Stores Acquired | Stores Closed | Total Number of | |||||||
2013 | 59 | 0 | 6 | 551 | ||||||||||
2012 | 53 | 6 | 5 | 498 | ||||||||||
2011 | 45 | 1 | 444 | 45 | 0 | 1 | 444 | |||||||
2010 | 27 | 4 | 400 | |||||||||||
2009 | 36 | 2 | 377 |
Store Design and Environment.We design our stores to create a distinctive and engaging shopping environment that we believe resonates with our customers and it reflects an “organized chaos” that is consistent with many teenagers’ and young adults’ lifestyles.customers. Our stores feature an industrial look, with concrete floors and open ceilings, dense merchandise displays, action sports focused posters and signage and popular music, all of which are consistent with the look and feel of an independent action sports specialty shop. Most of ourOur stores have couches and action sports oriented video game stations that are intendeddesigned to encourage our customers to shop for longer periods of time, to interact with each other and our store associates and to visit our stores more frequently. Our stores are constructed and finished to allow us to efficiently shift merchandise displays throughout the year as the action sports season dictates. We believe that our store atmosphere enhances our image as a leading provider of action sports lifestyle merchandise.
At January 28, 2012,February 1, 2014, our stores averaged approximately 2,9003,000 square feet. All references in this Annual Report on Form 10-K to square footage of our stores refers to gross square footage, including retail selling, storage and back-office space. In fiscal 2012,2014, we plan on opening new stores with square footage similar to this average. New stores’ size is determined by our expected sales volume; for instance, if we project higher sales, we generally try to build larger stores and, conversely, if we believe stores will be lower volume stores we generally try to build smaller stores.
Expansion Opportunities and Site Selection.In selecting a location for a new store, we target high-traffic mall spacelocations with suitable demographics and favorable lease terms. WeFor mall locations, we seek locations near busy areas of the mall such as food courts, movie theaters, game stores and other popular teen retailers. We generally
locate our stores in malls in which other teen-oriented retailers have performed well. We also focus on evaluating the market and mall-specific competitive environment for potential new store locations. We seek to diversify our store locations regionally and by caliber of mall. We have currently identified a number of potential sites for new stores in malls with appropriate market characteristics.
We have successfully and consistently implemented our store concept across a variety of mall classifications and geographic locations. Our 27 new stores opened in fiscal 2010 generated average net sales of approximately $1.0 million per store in fiscal 2011 during their first full year of operation. In fiscal 2011, we opened 45 stores with an average net capital investment of approximately $0.3 million per store by negotiating favorable terms with our construction contractors and obtaining tenant improvement allowances from landlords. In addition to capital investments, we make working capital investments between $0.1 million and $0.3 million per store consisting primarily of merchandise inventory. However, our capital investment to open new stores and net sales generated by new stores vary significantly and depend on a number of factors, including manager and sales associate competency and tenure, the geographic location, type of mall, sales volume of the mall and square footage of those stores. Accordingly, net sales and other operating results for stores that we open or have opened
subsequent to the end of fiscal 2011, as well as our net capital investment to open those stores, may differ substantially from net sales and other operating results and our net capital investment for the stores we opened in prior years.
Store Management, Operations and Training. We believe that our success is dependent in part on our ability to attract, train, retain and motivate qualified employees at all levels of our organization. We have developed a corporate culture that we believe empowers the individual store managers to make store-level business decisions and consistently rewards their success. We are committed to improving the skills and careers of our workforce and providing advancement opportunities for employees, as evidenced by a significant number of our store managers that began their careers with us as store associates.employees.
Our store operations are currently organized into divisions, regions and districts. Each division is managed by a divisional manager, responsible for approximately one third of our stores. Each region is managed by a regional manager, responsible for approximately 50 stores. We employ one district manager per district, responsible for the sales and operations of approximately 10 stores. Each of our stores is typically staffed with one store manager, one or more assistant managers and two or more store associates, depending on the season and sales volume of the store. The number of store associates we employ generally increases during peak selling seasons, particularly the back-to-school and the winter holiday seasons, and will increase to the extent that we open new stores.
We believe we provide our managers with the knowledge and tools to succeed through our comprehensive training programs and the flexibility to manage their stores to meet customer demands. While general guidelines for our merchandise assortments, store layouts and in-store visuals are provided by our home office,offices, we give our store managers and district managers substantial discretion to tailor their stores to the individual market and empower them to make store-level business decisions. We design group training programs for our managers such as our “Zumiez Managers Retreat,” and “Rocktober,” to improve both operational expertise and supervisory skills. Our comprehensive training programs are offered at the store, regional and national levels. Our programs allow managers from all geographic locations to interact with each other and exchange ideas to better operate stores. Our store, district, and regional managers are compensated in part based on the sales volume of the store or stores they manage.
Our store associates generally have an interest in the action sports lifestyle and are knowledgeable about our products. Through our training, evaluation and incentive programs, we seek to enhance the productivity of our store associates. Our store associates receive extensive training from their managers to improve their product expertise and selling skills. We evaluate our store associates weekly on measures such as sales per hour, units per transaction and dollars per transaction to ensure consistent productivity, to reward top performers and to identify potential training opportunities. We provide sales incentives for store associates such as sales-based commissions in addition to hourly wages and our annual “Zumiez 100K” event, which recognizes outstanding sales performance in a resort setting that combines recreation and education. These and other incentive programs are designed to promote a competitive, yet fun, corporate culture that is consistent with the action sports lifestyle we seek to promote.
Marketing and Advertising
We seek to reach our target customer audience through a multi-faceted marketing approach that is designed to integrate our brand image with the action sports lifestyle. Our marketing efforts focus on reaching our customers in their environment, and feature extensive grassroots marketing events, which give our customers an opportunity to experience and participate in the action sports lifestyle. Our grassroots marketing events are built around the demographics of our customer base and offer an opportunity for our customers to develop a strong identity with our brandbrands and culture. For example, the Zumiez Couch Tour is a series of entertainment events that includes skateboarding demonstrations from top professionals, autograph sessions, competitions and live music, and has featured some of today’s most popular personalities in action sports and music. The Zumiez Couch Tour
provides a high-impact platform where customers can interact with some of their favorite action sports athletes and vendors can showcase new products. In fiscal 2011, our Zumiez Couch Tour completed a twelve-city tour across the United States.
Our marketing efforts also incorporate local sporting and music event promotions, advertising in magazines popular with our target market, interactive contest sponsorships that actively involve our customers with our brands and products, the Zumiez Stash, which is our customer loyalty program, catalogs and various social network channels such as Facebook and Twitter.channels. We believe that our immersion in the action sports lifestyle allows us to build credibility with our target audience and gather valuable feedback on evolving customer preferences.
Distribution and Fulfillment
Timely and efficient distribution of merchandise to our stores is an important component of our overall business strategy. Domestically, our distribution center is located in Corona, California. At this facility, merchandise is inspected, allocated to stores, ticketed when necessary and boxed for distribution to our stores. Each store is typically shipped merchandise five times a week, providing our stores with a steady flow of new merchandise.
During fiscal 2012, we relocated our domestic ecommerce fulfillment center from Everett, Washington to Edwardsville, Kansas to provide the additional capacity needed to support the continued growth of our domestic ecommerce operations, while also increasing the speed at which we get product to our customers. Additionally, we utilize our domestic store network to provide fulfillment services for certain customer purchases.
Internationally, we operate a combined distribution and ecommerce fulfillment center located in Graz, Austria that supports our Blue Tomato ecommerce and store operations in Europe and we operate a distribution center located in Delta, British Columbia, Canada to distribute our merchandise to our Canadian stores.
Management Information Systems
Our management information systems provide integration of store, merchandising, distribution, financial and human resources functions. The systems include applications related to point-of-sale, inventory management, supply chain, planning, sourcing, merchandising and financial reporting. We continue to invest in technology to align our systems with our business requirements and to support our continuing growth.
Competition
The teenage and young adult retail apparel, hardgoods and accessories industry is highly competitive. We compete with other retailers for vendors, customers, suitable store locations and qualified store associates and management personnel. In the softgoods markets,market, which includes apparel, accessoriesfootwear and footwear,accessories, we currently compete with other teenage-focused retailers such as Abercrombie & Fitch, Aeropostale, American Apparel, American Eagle Outfitters, Billabong, CCS, Forever 21, Hollister, Hot Topic, Old Navy, Pacific Sunwear of California, The Buckle, Wet Seal, Tilly’steenage and Urban Outfitters.young adult focused retailers. In addition, in the softgoods markets we compete with independent specialty shops, department stores and direct marketers that sell similar lines of merchandise and target customers through catalogs and ecommerce. In the hardgoods markets, which includes skateboards, snowboards, bindings, components and other equipment, we compete directly or indirectly with the following categories of companies: other specialty retailers that compete with us across a significant portion of our merchandising categories, such as local snowboard and skate shops; large-format sporting goods stores and chains such as Big 5 Sporting Goods, Dick’s Sporting Goods, Sport Chalet and The Sports Authority and ecommerce retailers.
Competition in our sector is based on, among other things, merchandise offerings, store location, price and the ability to identify with the customer. We believe that weour ability to compete favorably with many of our competitors based onis due to our differentiated merchandising strategy, compelling store environment and deep-rooted culture.
Seasonality
Historically, our operations have been seasonal, with the largest portion of net sales and net income occurring in the third and fourth fiscal quarters, reflecting increased demand during the back-to-school and winter holiday selling seasons. During fiscal 2011,2013, approximately 61%58% of our net sales occurred in the third and fourth quarters combined, similar to previous years. As a result of this seasonality, any factors negatively affecting us during the last half of the year, including unfavorable economic conditions, adverse weather or our ability to acquire seasonal merchandise inventory, could have a material adverse effect on our financial condition and results of operations for the entire year. Our quarterly results of operations may also fluctuate based upon such factors as the timing of certain holiday seasons, the popularity of seasonal merchandise offered, the timing and amount of markdowns, store remodels and closings, competitive influences and the number and timing of new store openings.openings, remodels and closings.
Trademarks
The “Zumiez” trademarkand “Blue Tomato” trademarks and certain other trademarks, have been registered, or are the subject of pending trademark applications, with the United StatesU.S. Patent and Trademark Office and with the registries of certain
foreign countries. We regard our trademarks as valuable and intend to maintain such marks and any related registrations and vigorously protect our trademarks. We also own numerous domain names, which have been registered with the Corporation for Assigned Names and Numbers.
Employees
At January 28, 2012,February 1, 2014, we employed approximately 1,3501,800 full-time and approximately 3,3303,800 part-time employees globally, of which approximately 380 were employed at our home office, distribution center and ecommerce fulfillment center and approximately 4,300 at our store locations.globally. However, the number of part-time employees fluctuates depending on our seasonal needs and in fiscal 2011, varied from between approximately 2,300generally increases during peak selling seasons, particularly the back-to-school and 5,900 part-time employees.the winter holiday seasons. None of our employees are represented by a labor union and we believe generally that our relationship with our employees is good.
Financial Information about Segments
See Note 17, “Segment Reporting,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K, for information regarding our segments, product categories and certain geographical information.
Available Information
Our principal website address is www.zumiez.com. We make available, free of charge, our proxy statement, annual report to shareholders, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”) at http://ir.zumiez.com. Information available on our website is not incorporated by reference in, and is not deemed a part of, this Form 10-K. The SEC maintains a website that contains electronic filings by Zumiez and other issuers at www.sec.gov. In addition, the public may read and copy any materials Zumiez files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Item 1A. | 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 “anticipate,“anticipates,” “believe,“expects,” “expect,“intends,” “intend”“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.
Significant fluctuations and volatility in the price of cotton, foreign labor costs and other raw materials used in the production of our merchandise may have a material adverse effect on our business, results of operations and financial conditions.
Increases in the cost of cotton, foreign labor costs or other raw materials used in the production of our merchandise can result in higher costs in the price we pay for this merchandise. The costs for cotton are affected by weather, consumer demand, speculation on the commodities market and other factors that are generally unpredictable and beyond our control. Our gross profit and earnings per share could be adversely affected to the extent that the selling prices of our products do not increase proportionately with the increases in the costs of cotton or other materials. Increasing labor costs and oil-related product costs, such as manufacturing and transportation costs, could also adversely impact gross profit. Additionally, significant changes in the relationship between carrier capacity and shipper demand could increase transportation costs, which could also adversely impact gross profit.
Most of our merchandise is produced by foreign manufacturers; therefore, the availability and costs of these products may be negatively affected by risks associated with international trade and other international conditions.
Most of our merchandise is produced by manufacturers around the world. Some of these facilities are located in regions that may be affected by natural disasters, political instability or other conditions that could
cause a disruption in trade. Trade restrictions such as increased tariffs or quotas, or both, could also affect the importation of merchandise generally and increase the cost and reduce the supply of merchandise available to us. Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local issues that disrupt trade could have a material adverse effect on our results of operations. Although the prices charged by vendors for the merchandise we purchase are primarily denominated in United States dollars, a continued decline in the relative value of the United States dollar to foreign currencies could lead to increased merchandise costs, which could negatively affect our competitive position and our results of operations.
Our ability to attract customers to our stores depends heavily on the success of the shopping malls in which many of our stores are located; any decrease in customer traffic in those malls could cause our sales to be less than expected.
In order to generate customer traffic we depend heavily on locating many of our stores in prominent locations within successful shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those malls. Our stores benefit from the ability of a mall’s other tenants to generate consumer traffic in the vicinity of our stores and the continuing popularity of malls as shopping destinations. Our sales volume and mall traffic generally may be adversely affected by, among other things, economic downturns in a particular area, competition from ecommerce retailers, non-mall retailers and other malls, increases in gasoline prices and the closing or decline in popularity of other stores in the malls in which we are located. An uncertain economic outlook could curtail new shopping mall development, decrease shopping mall traffic, reduce the number of hours that shopping mall operators keep their shopping malls open or force them to cease operations entirely. A reduction in mall traffic as a result of these or any other factors could have a material adverse effect on our business, results of operations and financial condition.
Our growth strategy depends on our ability to open and operate new stores each year, which could strain our resources and cause the performance of our existing stores to suffer.
Our growth largely depends on our ability to open and operate new stores successfully. However, our ability to open new stores is subject to a variety of risks and uncertainties, and we may be unable to open new stores as planned, and any failure to successfully open and operate new stores wouldcould have a material adverse effect on our results of operations. We intend to continue to open new stores in future years while remodeling a portion of our
existing store base annually. In addition, our proposed expansion will place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our individual stores and our overall business. To the extent our new store openings are in markets where we already have stores, we may experience reduced net sales in existing stores in those markets. In addition, successful execution of our growth strategy may require that we obtain additional financing, and we cannot assure you that we will be able to obtain that financing on acceptable terms or at all.
If we fail to effectively execute our expansion strategy, we may not be able to successfully open new store locations in a timely manner, if at all, which could have an adverse affect on our net sales and results of operations.
Our ability to open and operate new stores successfully depends on many factors, including, among others, our ability to:
identify suitable store locations, the availability of which is outside of our control;
negotiate acceptable lease terms, including desired tenant improvement allowances;
source sufficient levels of inventory at acceptable costs to meet the needs of new stores;
hire, train and retain qualified store personnel;
successfully integrate new stores into our existing operations; and
identify and satisfy the merchandise preferences of new geographic areas.
In addition, we plan to open new stores in regions of the United StatesU.S. or international locations in which we currently have few, or no, stores. The expansion into these markets may present competitive, merchandising, hiring and distribution challenges that are different from those currently encountered in our existing markets. Any of these challenges could adversely affect our business and results of operations.
The expansionFailure to successfully integrate any businesses or stores that we acquire could have an adverse impact on our results of operations and financial performance.
We may, from time to time, acquire other retail stores or businesses, such as our acquisition of Blue Tomato, a leading European multi-channel retailer for board sports and related apparel and footwear, which was completed in fiscal 2012. We may experience difficulties in integrating any stores or businesses we may acquire, including their facilities, personnel, financial systems, distribution, operations and general operating procedures, and any such acquisitions may also result in the diversion of our store basecapital and our management’s attention from other business issues and opportunities. If we experience difficulties in integrating acquisitions or if such acquisitions do not provide the benefits that we expect to Canada may presentreceive, we could experience increased costs and other operating inefficiencies, which could have an adverse effect on our results of operations and overall financial performance.
Our plans for international expansion include risks due tothat could have a negative impact on our limited familiarity with that market.results of operations.
In fiscal 2011, we opened our first store locations in Canada and we plan to continue to open new stores in Canada. The CanadianDuring fiscal 2012, we acquired Blue Tomato, which operates primarily in the European market, and we plan to open new stores in Europe in the future. We may continue to expand internationally, either organically, or through additional acquisitions. International markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing markets.U.S. market. As a result, new storesoperations in that marketinternational markets may be less successful than our storesoperations in the United States.U.S. Additionally, consumers in the Canadian marketinternational markets may not be familiar with our brand,brands, and we may need to build brand awareness in that market.the markets. Furthermore, we have limited experience with the legal and regulatory environments and market practices outside of the United StatesU.S. and cannot guarantee that we will be able to penetrate or successfully operate in the Canadian market.international markets. We may also expect to incur additional costs in complying with applicable Canadianforeign laws and regulations as they pertain to both our products and our operations.
Additionally, the results of operations of our international subsidiaries are exposed to foreign exchange rate fluctuations. Upon translation, operating results may differ materially from expectations. As we expand our international operations, our exposure to exchange rate fluctuations will increase.
Our business is dependent upon our being able to anticipate, identify and respond to changing fashion trends, customer preferences and other fashion-related factors; failure to do so could have a material adverse effect on us.
Customer tastes and fashion trends in the action sports lifestyle market are volatile and tend to change rapidly. Our success depends on our ability to effectively anticipate, identify and respond to changing fashion tastes and consumer preferences, and to translate market trends into appropriate, saleable product offerings in a timely manner. If we are unable to successfully anticipate, identify or respond to changing styles or trends and misjudge the market for our products or any new product lines, our sales may be lower than predicted and we
may be faced with a substantial amount of unsold inventory or missed opportunities. In response to such a situation, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory, which could have a material adverse effect on our results of operations.
The current uncertainty surrounding the United StatesU.S. and global economies, including the European economy, coupled with cyclical economic trends in action sports retailing could have a material adverse effect on our results of operations.
The action sports retail industry historically has been subject to substantial cyclicality. As the United StatesU.S. and global economic conditions change, the trends in discretionary consumer spending become unpredictable and discretionary consumer spending could be reduced due to uncertainties about the future. When discretionary consumer spending is reduced, purchases of action sports apparel and related products may decline. The current uncertainty in the United StatesU.S. and global economies and increased government debt spending may have a material adverse impact on our results of operations and financial position.
Because of this cycle, we believe the “value” message has become more important to consumers. As a retailer that sells approximately 80% to 85% branded merchandise, this trend may negatively affect our business, as we generally will have to charge more than vertically integrated private label retailers.
Our sales and inventory levels fluctuate on a seasonal basis, leaving our operating results particularly susceptible to changes in back-to-school and winter holiday shopping patterns. Accordingly, our quarterly results of operations are volatile and may fluctuate significantly.
Our quarterly results of operations have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future. Our sales and profitability are typically disproportionately higher in the third and fourth fiscal quarters of each fiscal year due to increased sales during the back-to-school and winter holiday shopping seasons. Sales during these periods cannot be used as an accurate indicator of annual results. Our sales in the first and second fiscal quarters are typically lower than in our third and fourth fiscal quarters due, in part, to the traditional retail slowdown immediately following the winter holiday season. As a result of this seasonality, any factors
negatively affecting us during the last half of the year, including unfavorable economic conditions, adverse weather or our ability to acquire seasonal merchandise inventory, could have a material adverse effect on our financial condition and results of operations for the entire year. In addition, in order to prepare for the back-to-school and winter holiday shopping seasons, we must order and keep in stock significantly more merchandise than we carry during other times of the year. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, results of operations and financial condition.
Our quarterly results of operations are volatile and may decline.
Our quarterly results of operations have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future. As discussed above, our sales and operating results are typically lower in the first and second quarters of our fiscal year due, in part, to the traditional retail slowdown immediately following the winter holiday season. Our quarterly results of operations are affected by a variety of other factors, including:
the timing of new store openings and the relative proportion of our new stores to mature stores;
whether we are able to successfully integrate any new stores that we acquire and the presence or absence of any unanticipated liabilities in connection therewith;
fashion trends and changes in consumer preferences;
calendar shifts of holiday or seasonal periods;
changes in our merchandise mix;
timing of promotional events;
general economic conditions and, in particular, the retail sales environment;
actions by competitors or mall anchor tenants;
weather conditions;
the level of pre-opening expenses associated with our new stores; and
inventory shrinkage beyond our historical average rates.
Failure to successfully integrate any businesses or stores that we acquire couldSignificant fluctuations and volatility in the price of cotton, foreign labor costs and other raw materials used in the production of our merchandise may have ana material adverse impacteffect on our business, results of operations and financial performance.conditions.
We may from time to time acquireIncreases in the cost of cotton, other retail stores, individually orraw materials, foreign labor costs and transportation costs used in groups, or businesses. We may experience difficulties in assimilating any stores or businesses we may acquire and any such acquisitions may alsothe production of our merchandise can result in higher costs in the diversionprice we pay for this merchandise. The costs for cotton are affected by weather, consumer demand, speculation on the commodities market and other factors that are generally unpredictable and beyond our control. Our gross profit and results of operations could be adversely affected to the extent that the selling prices of our capital and our management’s attention fromproducts do not increase proportionately with the increases in the costs of cotton or other business issues and opportunities. We may not be able to successfully integrate any stores or businesses that we may acquire, including their facilities, personnel, financial systems, distribution, operations and general operating procedures. If we fail to successfully integrate acquisitions or if such acquisitions fail to provide the benefits that we expect to receive, we could experience increasedmaterials. Increasing labor costs and other operating inefficiencies,oil-related product costs, such as manufacturing and transportation costs, could also adversely impact gross profit. Additionally, significant changes in the relationship between carrier capacity and shipper demand could increase transportation costs, which could also adversely impact gross profit.
Most of our merchandise is produced by foreign manufacturers; therefore, the availability and costs of these products may be negatively affected by risks associated with international trade and other international conditions.
Most of our merchandise is produced by manufacturers around the world. Some of these facilities are located in regions that may be affected by natural disasters, political instability or other conditions that could cause a disruption in trade. Trade restrictions such as increased tariffs or quotas, or both, could also increase the cost and reduce the supply of merchandise available to us. Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local issues that disrupt trade could have ana material adverse effect on our results of operationsoperations. Although the prices charged by vendors for the merchandise we purchase are primarily denominated in U.S. dollars, a decline in the relative value of the U.S. dollar to foreign currencies could lead to increased merchandise costs, which could negatively affect our competitive position and financial performance.our results of operations.
Required disclosures regarding conflict minerals could have a negative impact on our results of operations.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC promulgated final rules regarding disclosure of the use of certain minerals (tantalum, tin, gold and tungsten) known as conflict minerals, which are mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding a manufacturer’s efforts to prevent the sourcing of such minerals and metals produced from those minerals. These new requirements will require due diligence efforts, with initial disclosure requirements effective in May 2014. There may be costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our private label merchandise, as well as costs of possible changes to products, processes or sources of supply as a consequence of such verification activities. We may also face reputational challenges if we are unable to verify the origins for any or all conflict minerals used in our private label merchandise, or if we are unable to certify that our products are “conflict free.”
Our business is susceptible to weather conditions that are out of our control, including the potential risks of unpredictable weather patterns and any weather patterns associated with naturally occurring global climate change, and the resultant unseasonable weather could have a negative impact on our results of operations.
Our business is susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures (including any weather patterns associated with global warming and cooling) during the winter season or cool weather during the summer season (including any weather patterns associated with global warming and cooling) could render a portion of our inventory
incompatible with those unseasonable conditions. These prolonged unseasonable weather conditions particularly in regions of the United States where we have a concentration of stores, could have a material adverse effect on our business and results of operations.
We may be unable to compete favorably in the highly competitive retail industry, and if we lose customers to our competitors, our sales could decrease.
The teenage and young adult retail apparel, hardgoodsfootwear, accessories and accessorieshardgoods industry is highly competitive. We compete with other retailers for vendors, teenage and young adult customers, suitable store locations, qualified store associates and management personnel. In the softgoods market, which includes apparel, accessories and footwear, we currently compete with other teenage-focused retailers. In addition, in the softgoods market we compete with independent specialty shops, department stores and direct marketers that sell similar lines of merchandise and target customers through catalogs and ecommerce. In the hardgoods market, which includes skateboards, snowboards, bindings, components and other equipment, we compete directly or indirectly with other specialty retailers that compete with us across a significant portion of our merchandising categories, such as local snowboard and skate shops, large-format sporting goods stores and chains and ecommerce retailers.
Some of our competitors are larger than we are and have substantially greater financial, marketing, including advanced ecommerce marketing capabilities, and other resources than we do. Additionally, some of our competitors may offer more options for free and/or expedited shipping for ecommerce sales. Direct competition with these and other retailers may increase significantly in the future, which could require us, among other things, to lower our prices and could result in the loss of our customers. Current and increased competition could have a material adverse effect on our business, results of operations and financial condition.
If we fail to maintain good relationships with vendors or if a vendor is otherwise unable or unwilling to supply us with adequate quantities of their products at acceptable prices, our business and financial performance could suffer.
Our business is dependent on continued good relations with our vendors. In particular, we believe that we generally are able to obtain attractive pricing and other terms from vendors because we are perceived as a desirable customer, and deterioration in our relationship with our vendors would likelycould have a material adverse effect on our business. There can be no assurance that our vendors will provide us with an adequate supply or quality of products or acceptable pricing. Our vendors could discontinue selling to us, or raise the prices they charge at any time.time or allow their merchandise to be discounted by other retailers. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. In addition, certain of our vendors sell their products directly to the retail market and therefore compete with us directly and other vendors may decide to do so in the future. There can be no assurance that such vendors will not decide to discontinue supplying their products to us, supply us only less popular or lower quality items, raise the prices they charge us or focus on selling their products directly. In addition, a number of our vendors are smaller, less capitalized companies and are more likely to be impacted by unfavorable general economic and market conditions than larger and better capitalized companies. These smaller vendors may not have sufficient liquidity during economic downturns to properly fund their businesses and their ability to supply their products to us could be negatively impacted. Any inability to acquire suitable merchandise at acceptable prices, or the loss of one or more key vendors, wouldcould have a material adverse effect on our business, results of operations and financial condition.
Our ecommerce operations subject us to numerous risks that could have an adverse effect on our results of operations.
Our ecommerce operations subject us to certain risks that could have an adverse effect on our operational results, including:
diversion of traffic and sales from our stores;
rapid technological change;
liability for online content; and
risks related to the computer systems that operate our website and related support systems, including computer viruses, electronic break-ins and similar disruptions.
In addition, risks beyond our control, such as governmental regulation of ecommerce, entry of our vendors in the ecommerce business in competition with us, online security breaches and general economic conditions specific to ecommerce could have an adverse effect on our results of operations.
If we lose key managementexecutives or are unable to attract and retain the talent required for our business, our financial performance could suffer.
Our performance depends largely on the efforts and abilities of our senior management, including our Co-Founder and Chairman, Thomas D. Campion, our Chief Executive Officer, Richard M. Brooks, our President and General Merchandising Manager, Lynn K. Kilbourne, our Chief Financial Officer, Marc D. Stolzman and our Executive Vice President of Stores, Ford K. Wright. None of our employees have employment agreements with us and we do not plan to obtain key person life insurance covering any of our employees.executives. If we lose the
services of one or more of our key executives, we may not be able to successfully manage our business or achieve our growth objectives. As our business grows, we will need to attract and retain additional qualified management personnel in a timely manner and we may not be able to do so.
Our failure to meet our staffing needs could adversely affect our ability to implement our growth strategy and could have a material impact on our results of operations.
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees including divisional managers, regional managers, district managers, store managers and store associates, who understand and appreciate our corporate culture based on a passion for the action sports lifestyle and are able to adequately represent this culture to our customers. Qualified individuals of the requisite caliber, skills and number needed to fill these positions may be in short supply in some areas, and the employee turnover rate in the retail industry is high. Competition for qualified employees could require us to pay higher wages to attract a sufficient number of suitable employees. If we are unable to hire and retain store managers and store associates capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and knowledge of our merchandise, our ability to open new stores may be impaired and the performance of our existing and new stores could be materially adversely affected. We are also dependent upon temporary personnel to adequately staff our stores and distribution center and ecommerce fulfillment centercenters particularly during busy periods such as the back-to-school and winter holiday seasons. There can be no assurance that we will receive adequate assistance from our temporary personnel, or that there will be sufficient sources of temporary personnel. Although none of our employees are currently covered by collective bargaining agreements, we cannot guarantee that our employees will not elect to be represented by labor unions in the future, which could increase our labor costs and could subject us to the risk of work stoppages and strikes. Any such failure to meet our staffing needs, any material increases in employee turnover rates, any increases in labor costs or any work stoppages, interruptions or strikes could have a material adverse effect on our business or results of operations.
Our operations, includingbusiness could suffer with the closure or disruption of our home office or our distribution center andor ecommerce fulfillment center, are currently concentrated in the western United States, which makes us susceptible to adverse conditions in this region.centers.
Our home office and ecommerce fulfillment center are currently located in Washington, our distribution center is located in California and a substantial number of our stores are located in the western half of the United States. We also have a substantial number of stores in the New York/New Jersey region and Texas. As a result, our business may be more susceptible to regional factors than the operations of more geographically diversified competitors. These factors include, among others, economic and weather conditions, demographic and population changes and fashion tastes. In addition,Domestically, we rely on a single distribution center located in the United StatesCorona, California to receive, store and distribute the vast majority of our merchandise to our domestic stores and we primarily rely on a single ecommerce fulfillment center located in Edwardsville, Kansas to ship merchandise purchased on the www.zumiez.com website. Internationally, we operate a combined distribution and ecommerce fulfillment center located in Graz, Austria that support our Blue Tomato ecommerce and store operations in Europe and we operate a distribution center located in Delta, British Columbia, Canada to distribute our merchandise to our Canadian stores. Additionally, we are headquartered in Lynnwood, Washington. As a result, a natural disaster or other catastrophic event such as an earthquake affectingthat affects one of the West Coast, could significantly disrupt our operations and have a material adverse effect on our business, results of operations and financial condition.
We are relocating our ecommerce distribution center located in Everett, Washington to Edwardsville, Kansas during the second quarter of fiscal 2012. As a result, events may occur during the relocation period and the operating periods subsequent to the relocation thatregions where we operate these centers could significantly disrupt our operations and have a material adverse effect on our business, results of operations and financial condition.
We are required to make substantial rental payments under our operating leases and any failure to make these lease payments when due would likelycould have a material adverse effect on our business and growth plans.
We do not own any of our retail stores or our current combined home office and ecommerce fulfillment center, but instead we lease these facilities under operating leases. Payments under these operating leases account for a significant portion of our operating expenses and has historically been our third largest expense behind cost of sales and our employee related costs. For example, total rentalTotal rent expense, including additional rental payments
(or “percentage rent”)contingent rent based on sales of some of theour stores, was $53.4 million, $50.0 million and $44.1 million for fiscal 2013, 2012 and 2011. Total rent expense amounts do not include real estate taxes, insurance, common area maintenance charges and real estate taxes, under operating leases was $68.8other executory costs, which were $32.0 million, $61.8$28.0 million and $58.0$24.7 million for fiscal 2011, 20102013, 2012 and 2009. 2011.
At January 28, 2012,February 1, 2014, we were committed to property owners for operating leases obligations for $414.0minimum lease payments of $353.8 million. In addition to minimum lease payments, substantially all of our store leases provide for additional rental contingent rent
payments based on sales of the respective stores, as well as real estate taxes, insurance, common area maintenance charges and require that we pay real estate taxes.other executory costs. These amounts generally escalate each year. We expect that any new stores we open will also be leased by us under operating leases, which will further increase our operating lease expenses.expenses and obligations.
Our substantial operating lease obligations could have significant negative consequences, including:
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing;
requiring that a substantial portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes; and
limiting our flexibility in planning for or reacting to changes in our business or in the industry in which we compete, and placing us at a disadvantage with respect to some of our competitors.
We depend on cash flow from operations to pay our lease expenses and to fulfill our other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under bank loans or from other sources, we may not be able to service our operating lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which wouldcould have a material adverse effect on our business.
The terms of our revolvingprimary credit facility impose operating and financial restrictions on us that may impair our ability to respond to changing business and economic conditions. This impairmentThese restrictions could have a significant adverse impact on our business. Additionally, our business could suffer if our ability to acquire financing is reduced or eliminated.
On August 29, 2011, we renewed and amended ourWe maintain a secured credit agreement with Wells Fargo Bank, N.A., and the prior facility agreement was terminated. The credit agreementwhich provides us with a secured revolving credit facility until September 1, 20132014 of up to $25.0 million, which, pursuant to an accordion feature, may be increased to $35.0 million at our discretion. The secured revolving credit facility provides for the issuance of standby letter of credits in an amount not to exceed $5.0 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 letter of credits in an amount not to exceed $10.0 million and with terms not to exceed 120 days. The amount of borrowings available at any time under our secured revolving credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time. There were no outstanding borrowings under the secured revolving credit facility at January 28, 2012 and January 29, 2011. We had open commercial letters of credit outstanding under our secured revolving credit facility of $0.9 million at January 28, 2012 and $0.5 million at January 29, 2011. The secured revolving credit facility bears interest at the Daily One Month LIBOR rate plus 1.00%. The credit agreement contains a number of restrictions and covenants that generally limit our ability to, among other things, (1) incur additional debt, (2) undergo a change in ownership and (3) enter into certain transactions. The credit agreement also contains financial covenants that require us to meet certain specified financial tests and ratios, including, a maximum net lossincome after taxes of not to exceed $10.0 million after taxesless than one dollar on a trailing four-quarter basis provided, that, there shall be added to net income all charges for impairment of goodwill and store assets notother intangibles and up to exceedan aggregate of $5.0 million in aggregate,of store asset impairment, and a minimum quick ratio of 1.25. The quick ratio is defined as our cash and near cash equivalents plus certain defined receivables divided by the outstanding borrowings. Our accounts receivable, general intangibles, inventory and equipment have been pledged to secure our obligations under the credit agreement. We must also provide financial information and statements to our lender. We were in compliance with all such covenants at January 28, 2012.February 1, 2014. There were no outstanding borrowings under the secured revolving credit facility at February 1, 2014 and February 2, 2013. We had open commercial letters of credit outstanding under our secured revolving credit facility of $0.3 million and $0.2 million at February 1, 2014 and February 2, 2013.
A breach of any of these restrictive covenants or our inability to comply with the required financial tests and ratios could result in a default under the credit agreement. If a default occurs, the lender may elect to declare all
outstanding borrowings, outstanding, together with accrued interest and other fees, to be immediately due and payable. If we are unable to repay outstanding borrowings when due, whether at their maturity or if declared due and payable by the lender following a default, the lender has the right to proceed against the collateral granted to it to secure the indebtedness. As a result, any breach of these covenants or failure to comply with these tests and ratios could have a material adverse effect on us. There can be no assurance that we will not breach the covenants or fail to comply with the tests and ratios in our credit agreement or any other debt agreements we may enter into in the future and, if a breach occurs, there can be no assurance that we will be able to obtain necessary waivers or amendments from the lenders.
The restrictions contained in our credit agreement could: (1) limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and (2) adversely affect our ability to finance our operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest.
Our business could suffer if our ability to acquire financing is reduced or eliminated.
InAdditionally, in the current economic environment, we cannot be assured that our borrowing relationship with our lenderlenders will continue or that our lenderlenders will remain able to support itstheir commitments to us in the future. If our lender failslenders fail to do so, then we may not be able to secure alternative financing on commercially reasonable terms, or at all.
Our business could suffer as a result of small parcel delivery services being unable to distribute our merchandise.
We rely upon small parcel delivery services for our product shipments, including shipments to, from and between our stores and to our ecommerce customers. Accordingly, we are subject to risks, including employee strikes and inclement weather, which may affect their ability to meet our shipping needs. Among other things, any circumstances that require us to use other delivery services for all or a portion of our shipments could result in increased costs and delayed deliveries and could harm our business materially. In addition, although we have contracts with small parcel delivery services, we and the service providers have the right to terminate these contracts upon 30-90 days written notice. Although the contracts with these small parcel delivery services provide certain discounts from the shipment rates in effect at the time of shipment, the contracts do not limit their ability to raise the shipment rates at any time. Accordingly, we are subject to the risk that small parcel delivery services may increase the rates they charge, that they may terminate their contracts with us, that they may decrease the rate discounts provided to us when an existing contract is renewed or that we may be unable to agree on the terms of a new contract with them, any of which could materially adversely affect our operating results.
Our business could suffer if a manufacturer fails to use acceptable labor practices.
We do not control our vendors or the manufacturers that produce the products we buy from them, nor do we control the labor practices of our vendors and these manufacturers. The violation of labor or other laws by any of our vendors or these manufacturers, or the divergence of the labor practices followed by any of our vendors or these manufacturers from those generally accepted as ethical in the United States,U.S., could interrupt, or otherwise disrupt, the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our financial condition and results of operations. In that regard, most of the products sold in our storeswe sell are manufactured overseas, primarily in Asia and Central America, which may increase the risk that the labor practices followed by the manufacturers of these products may differ from those considered acceptable in the United States.U.S.
Additionally, our products are subject to regulation of and regulatory standards set by various governmental authorities with respect to quality and safety. Regulations and standards in this area are currently in place. These regulations and standards may change from time to time. Our inability to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation
and sales. Issues with the quality and safety of merchandise we sell, in our stores, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls and increased costs.
Our failure to adequately anticipate a correct mix of private label merchandise may have a material adverse effect on our business.
Sales from private label merchandise account for approximately 15% to 20% of our net sales and generally carry higher gross margins than our other merchandise. We may take steps to increase the percentage of net sales of private label merchandise in the future, although there can be no assurance that we will be able to achieve increases in private label merchandise sales as a percentage of net sales. Our failure to anticipate, identify and react in a timely manner to fashion trends with our private label merchandise, would likelycould have a material adverse effect on our comparable store sales, financial condition and results of operations.
If our information systems hardware or software fails to function effectively or does not scale to keep pace with our planned growth, our operations could be disrupted and our financial results could be harmed.
Over the past several years, we have made improvementsWe are continuing to make investments to improve our infrastructure and existing hardware and softwareinformation systems as well as implemented new systems.infrastructure. If these or any otherour information systems and software do not work effectively, this could adversely impact the promptness and accuracy of our transaction processing, financial accounting and reporting and our ability to manage our business and properly forecast operating results and cash requirements. Additionally, we rely on third-party service providers for certain information systems functions. If a service provider fails to provide the data quality, communications capacity or services we require, the failure could interrupt our services and could have a material adverse effect on our business, financial condition and results of operations. To manage the anticipated growth of our operations and personnel, we may need to continue to improve our operational and financial systems, transaction processing, procedures and controls, and in doing so could incur substantial additional expenses that could impact our financial results.
The security of our databases that contain personal information of our retail customers could be breached, which could subject us to adverse publicity, litigation and expenses. In addition, if we are unable to comply with security standards created by the credit card industry, our operations could be adversely affected.
Database privacy, network security and identity theft are matters of growing public concern. In an attempt to prevent unauthorized access to our network and databases containing confidential, third-party information, we have installed privacy protection systems, devices and activity monitoring on our network.networks. Nevertheless, if unauthorized parties gain access to our networks or databases, they may be able to steal, publish, delete or modify our private and sensitive third-party information. In such circumstances, we could be held liable to our customers or other parties or be subject to regulatory or other actions for breaching privacy rules.rules and we may be exposed to reputation damage and loss of customers’ trust and business. This could result in costly investigations and litigation, civil or criminal penalties and adverse publicity that could adversely affect our financial condition, results of operations and reputation. Further, if we are unable to comply with the security standards established by banks and the credit card industry, we may be subject to fines, restrictions and expulsion from card acceptance programs, which could adversely affect our retail operations.
Our inability or failure to protect our intellectual property or our infringement of other’s intellectual property could have a negative impact on our operating results.
We believe that our trademarks and domain names are valuable assets that are critical to our success. The unauthorized use or other misappropriation of our trademarks or domain names could diminish the value of the Zumiez brand,or Blue Tomato brands, our store concept,concepts, our private label brands or our goodwill and cause a decline in our net sales. Although we have secured or are in the process of securing protection for our trademarks and domain names in a number of countries outside of the United States,U.S., there are certain countries where we do not currently have or where we do not currently intend to apply for protection for certain trademarks or at all. Also, the efforts we have taken to protect our trademarks may not be sufficient or effective. Therefore, we may not be able to prevent other persons from using our trademarks or domain names outside of the United States,U.S., which also could adversely affect our business. We are also subject to the risk that we may infringe on the intellectual property rights of third
parties. Any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to pay royalties or license fees. As a result, any such claim could have a material adverse effect on our operating results.
The effects of war or acts of terrorism, or other types of mall violence, could adversely affect our business.
Substantially allMost of our stores are located in shopping malls. Any threat of terrorist attacks or actual terrorist events, or other types of mall violence, such as shootings in malls, particularly in public areas, could lead to lower customer traffic in shopping malls. In addition, local authorities or mall management could close shopping malls in response to security concerns. Mall closures, as well as lower customer traffic due to security concerns, would likelycould result in decreased sales. Additionally, the armed conflicts in the Middle East, or the threat, escalation or commencement of war or other armed conflict elsewhere, could significantly diminish consumer spending, and result in decreased sales for us. Decreased sales wouldcould have a material adverse effect on our business, financial condition and results of operations.
The outcome of litigation could have a material adverse effect on our business, and may result in substantial costs and could divert management’s attention.
We are involved, from time to time, in litigation incidental to our business including complaints filed by investors. This litigation could result in substantial costs, and could divert management’s attention and resources, which could harm our business. Risks associated with legal liability are often difficult to assess or quantify, and their existence and magnitude can remain unknown for significant periods of time. There can be no assurance that the actual outcome of pending or future litigation will not have a material adverse effect on our results of operations or financial condition. Additionally, while we maintain director and officer liability insurance for litigation surrounding investor lawsuits, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured.
Our operations expose us to the risk of litigation, which could lead to significant potential liability and costs that could harm our business, financial condition or results of operations.
We employ a substantial number of full-time and part-time employees, a majority of whom are employed at our store locations. As a result, we are subject to a large number of federal, state and stateforeign laws and regulations relating to employment. This creates a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. We are also subject to other types of claims in the ordinary course of our business. Some or all of these claims may give rise to litigation, which could be time-consuming for our management team, costly and harmful to our business.
In addition, we are exposed to the risk of class action litigation. The costs of defense and the risk of loss in connection with class action suits are greater than in single-party litigation claims. Due to the costs of defending against such litigation, the size of judgments that may be awarded against us, and the loss of significant management time devoted to such litigation, we cannot assure you that such litigation will not disrupt our business or impact our financial results.
Our failure to comply with federal, state, local or localforeign laws, or changes in these laws, could have an adverse impact on our results of operations and financial performance.
Our business is subject to a wide array of laws and regulations. Changes in the regulations, the imposition of additional regulations, or the enactment of any new legislation including those related to health care, taxes, privacy, environmental issues and trade, could adversely affect our results of operations or financial condition.
Recent federalOur business could be adversely affected by increased labor costs, including costs related to an increase in the minimum wage and new health care legislation couldlaws.
Labor is a primary component in the cost of operating our business. Increased labor costs, whether due to competition, unionization, increased minimum wage, state unemployment rates, employee benefits costs or otherwise, may adversely impact our operating expenses. A considerable amount of our store team members are paid at rates related to the federal or state minimum wage and any changes to the minimum wage rate may increase our operating expenses.
We Additionally, we are self-insured with respect to our health care coverage in the U.S. and do not purchase third party insurance for the health insurance benefits provided to employees with the exception of pre-defined stop loss coverage, which helps
limit the cost of large claims. In March 2010, theThe Patient Protection and Affordable Care Act (the “Act”) and the Health Care Education Reconciliation Act of 2010 (the “Reconciliation Act”) were signed into law. The Act,was enacted requiring employers such as modified by the Reconciliation Act, includes a large number of health care provisions to take effect over four years, including expanded dependent coverage, incentives for businessesus to provide health care benefits, a prohibition on the denial of coverage and denial of claims on pre-existing conditions, a prohibition on limits on essential benefits and other expansions of health care benefits andinsurance for all qualifying employees or pay penalties for not providing coverage. The costs of these provisionsmost significant increases in cost will occur in fiscal 2014 and fiscal 2015. We are expected to be funded by a variety of taxes and fees. Some of the taxes and fees, as well as certain health care changes required by these acts, are expected to result, directly or indirectly, in increased health care costs for us. It remains difficult to predict the cost impact of health care reform and at this time, we cannot quantifyevaluating the impact if any, that the legislation maynew law will have on us, dueand although we cannot predict with certainty the financial and operational impacts the new law will have, we expect to be required to provide health benefits to more employees than we currently do, which could raise our labor costs. While the changing regulatory environment around this legislationmajority of these costs will begin in fiscal 2014 and due to the government’s requirement to issue future unknown regulatory rules. Therefiscal 2015, there is no assurance that we will be able to absorb and/or pass through the costs of such legislation in a manner that will not adversely impact our results of operations.
Our ecommerce operations subject us to numerous risks that could have an adverse effect on our results of operations.
Although ecommerce sales constitute a small, but increasing portion of our overall sales, our ecommerce operations subject us to certain risks that could have an adverse effect on our operational results, including:
diversion of traffic and sales from our stores;
liability for online content; and
risks related to the computer systems that operate our website and related support systems, including computer viruses, electronic break-ins and similar disruptions.
In addition, risks beyond our control, such as governmental regulation of ecommerce, entry of our vendors in the ecommerce business in competition with us, online security breaches and general economic conditions specific to ecommerce could have an adverse effect on our results ofor operations.
We have incurred and will continue to incur significant expenses as a result of being a public company, which will negatively impact our financial performance.
We completed our initial public offering in May 2005 and we have incurred and could continue to incur significant legal, accounting, insurance and other expenses as a result of being a public company. Rules and regulations implemented by Congress, the SEC and the Nasdaq Global Select Market have required changes in corporate governance practices of public companies. Compliance with these laws could cause us to incur significant costs and expenses, including legal and accounting costs, and could make some compliance activities more time-consuming and negatively impact our financial performance. Additionally, these rules and regulations may make it more expensive for us to obtain director and officer liability insurance. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as officers.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could harm our ability to manage our expenses.
Reporting obligations as a public company and our anticipated growth, both domestically and internationally, are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, we are required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify as to the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the effectiveness of our internal control over financial reporting on an annual basis. This process requires us to document our internal controls over financial reporting and to potentially make significant changes thereto, if applicable. As a result, we have incurred and expect to continue to incur substantial expenses to test our financial controls and systems, and we
have been and in the future may be required to improve our financial and managerial controls, reporting systems and procedures, to incur substantial expenses to make such improvements and to hire additional personnel. If our management is ever unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are ever identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business and our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our stock price and adversely affect our ability to raise capital.
Changes to accounting rules or regulations could significantly affect our financial results.
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles generally accepted in the United States of America (“U.S. GAAP”). New accounting rules or regulations and changes to existing accounting rules or regulations have occurred and may occur in the future. Future changes to accounting rules or regulations, such as changes to lease accounting guidance or a requirement to convert to international financial reporting standards, could negatively affect our results of operations and financial condition through increased cost of compliance.
We may fail to meet analyst expectations, which could cause the price of our stock to decline.
Our common stock is traded publicly and various securities analysts follow our financial results and issue reports on us. These reports include information about our historical financial results as well as the analysts’ estimates of our future performance. The analysts’ estimates are based upon their own independent opinions and can be different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline. In December 2007, a securities class action litigation and associated derivative lawsuits waswere brought against us and such actions are frequently brought against other companies following a decline in the market price of their securities. These lawsuits were dismissed with prejudice in March 2009. If our stock price is volatile, we may become involved in this type of litigation in the future. Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.
The value of our investments may fluctuate.
We have our excess cash primarily invested in state and local municipal securities U.S. Treasury securities, U.S. Agency securities, corporate debt securities and variable-rate demand notes. These investments have historically been considered very safe investments with minimal default rates. At January 28, 2012,February 1, 2014, we had $159.3$98.0 million of investments in state and local government securities and variable-rate demand notes, excluding our auction rate security.notes. These securities are not guaranteed by the United StatesU.S. government and are subject to additional credit risk based upon each local municipality’s tax revenues and financial stability. As a result, we may experience a reduction in value or loss of liquidity of our investments, which may have a negative adverse effect on our results of operations, liquidity and financial condition.
A decline in the market price of our stock andand/or our performance may trigger an impairment of the goodwill and other indefinite-lived intangible assets recorded on the consolidated balance sheets.
Goodwill and other indefinite-lived intangible assets with indefinite lives isare required to be tested for impairment at least annually or more frequently if management believes indicators of impairment exist. Any reduction in the carrying value of our goodwill or other indefinite-lived intangible assets as a result of our impairment analysis could result in a non-cash goodwill impairment charge, to our statement of operations. A goodwill impairment chargewhich could have a significant impact on earnings and potentially result in a violationour results of our financial covenants, thereby limiting our ability to secure short-term financing.operations.
Reduced operating results and cash flows may cause us to incur impairment charges.
We review the carrying value of our fixed assets for impairment whenever events or changes in circumstances indicate that the carrying value of such asset may not be recoverable. The review could result in significant chargesa non-cash impairment charge related to underperforming stores, which could impact our results of operations.
Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
Item 2. | PROPERTIES |
All of our stores primarily located in shopping mallsare occupied under operating leases and encompassingencompassed approximately 1,307,5621,620,000 total square feet at January 28, 2012, are occupied under operating leases.February 1, 2014.
We lease an 87,350 square foot combined home office and ecommerce fulfillment center in Everett, Washington. This lease expires in 2017. In fiscal 2010 and fiscal 2011, we acquiredown approximately 356,000 square feet of developable land in Lynnwood, Washington, where we have begunand completed construction on our newof a 63,071 square foot global home office building. We plan to move into this new building in fiscal 2012. Subsequent to the fiscal 2011 year end,Additionally, we entered into a 10 year lease agreement to lease up to 153,09514,208 square feet in Edwardsville, Kansas for the purpose of relocating our ecommerce fulfillment center. We plan to move into this new leasedoffice space in fiscal 2012.Schladming, Austria for our European home office. This lease is set to expire in 2017.
In fiscal 2010, we acquiredWe own a 168,450 square foot building in Corona, California that serves as our domestic warehouse and distribution facility.center. We lease 123,761 square feet of a facility in Edwardsville, Kansas that serves as our zumiez.com ecommerce fulfillment center. This lease is set to expire in 2022.
We lease a 80,234 square feet combined distribution and ecommerce fulfillment center in Graz, Austria that supports our Blue Tomato ecommerce and store operations in Europe. This lease is set to expire in 2019. We lease 17,168 square feet of a distribution facility in Delta, British Columbia, Canada that supports our store operations in Canada. This lease is set to expire in 2018.
Additionally, we are under lease for a 59,972 square foot location in Everett, Washington that was previously used for a portion of our combined home office and ecommerce fulfillment center. This lease expires in 2017.
Item 3. | LEGAL PROCEEDINGS |
We are involved from time to time in litigation incidental to our business. We believe that the outcome of current litigation is not expected to have a material adverse effect on our results of operations or financial condition.
See Note 9 to10, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K, (listed under “Litigation” under Commitments and Contingencies).for additional information related to legal proceedings.
Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock hasis traded on the Nasdaq Global Select Market under the symbol “ZUMZ.” At January 28, 2012,February 1, 2014, there were 31,169,57329,619,305 shares of common stock outstanding. The following table sets forth the high and low sales prices for our common stock on the Nasdaq Global Select Market for fiscal 2011 and fiscal 2010.Market.
Fiscal 2011 | High | Low | ||||||
First Fiscal Quarter (January 30, 2011—April 30, 2011) | $ | 29.88 | $ | 22.13 | ||||
Second Fiscal Quarter (May 1, 2011—July 30, 2011) | $ | 30.90 | $ | 21.91 | ||||
Third Fiscal Quarter (July 31, 2011—October 29, 2011) | $ | 27.23 | $ | 15.85 | ||||
Fourth Fiscal Quarter (October 30, 2011—January 28, 2012) | $ | 32.49 | $ | 20.74 | ||||
Fiscal 2010 | High | Low | ||||||
First Fiscal Quarter (January 31, 2010—May 1, 2010) | $ | 22.53 | $ | 12.54 | ||||
Second Fiscal Quarter (May 2, 2010—July 31, 2010) | $ | 19.79 | $ | 14.98 | ||||
Third Fiscal Quarter (August 1, 2010—October 30, 2010) | $ | 26.45 | $ | 14.44 | ||||
Fourth Fiscal Quarter (October 31, 2010—January 29, 2011) | $ | 33.13 | $ | 22.24 |
Fiscal 2013 | High | Low | ||||||
First Fiscal Quarter (February 3, 2013—May 4, 2013) | $ | 30.32 | $ | 20.47 | ||||
Second Fiscal Quarter (May 5, 2013—August 3, 2013) | $ | 33.50 | $ | 26.67 | ||||
Third Fiscal Quarter (August 4, 2013—November 2, 2013) | $ | 30.18 | $ | 23.93 | ||||
Fourth Fiscal Quarter (November 3, 2013—February 1, 2014) | $ | 30.90 | $ | 21.01 | ||||
Fiscal 2012 | High | Low | ||||||
First Fiscal Quarter (January 29, 2012—April 28, 2012) | $ | 38.79 | $ | 27.66 | ||||
Second Fiscal Quarter (April 29, 2012—July 28, 2012) | $ | 41.96 | $ | 31.65 | ||||
Third Fiscal Quarter (July 29, 2012—October 27, 2012) | $ | 38.57 | $ | 24.60 | ||||
Fourth Fiscal Quarter (October 28, 2012—February 2, 2013) | $ | 26.94 | $ | 17.93 |
Performance Measurement Comparison
The following graph shows a comparison for total cumulative returns for Zumiez Inc., the Nasdaq Composite Index and the Nasdaq Retail Trade Index during the period commencing on February 3, 2007January 31, 2009 and ending on January 28, 2012.February 1, 2014. The comparison assumes $100 was invested on February 3, 2007January 31, 2009 in each Zumiez, the Nasdaq Composite Index and the Nasdaq Retail Trade Index, and assumes the reinvestment of all dividends, if any. The comparison in the following graph and table is required by the SEC and is not intended to be a forecast or to be indicative of future Company common stock performance.
2/3/07 | 2/2/08 | 1/31/09 | 1/30/10 | 1/29/11 | 1/28/12 | |||||||||||||||||||
Zumiez Inc. | 100.00 | 59.50 | 21.23 | 37.80 | 66.24 | 84.12 | ||||||||||||||||||
Nasdaq Composite | 100.00 | 97.07 | 60.02 | 87.95 | 111.84 | 116.36 | ||||||||||||||||||
Nasdaq Retail Trade | 100.00 | 108.17 | 73.39 | 123.33 | 163.38 | 190.39 |
1/31/09 | 1/30/10 | 1/29/11 | 1/28/12 | 2/2/13 | 2/1/14 | |||||||||||||||||||
Zumiez Inc. | 100.00 | 178.04 | 312.03 | 396.22 | 295.24 | 300.98 | ||||||||||||||||||
NASDAQ Composite | 100.00 | 145.73 | 185.35 | 196.13 | 222.33 | 296.73 | ||||||||||||||||||
NASDAQ Retail Trade | 100.00 | 176.03 | 231.96 | 262.10 | 333.70 | 401.19 |
Holders of the Corporation’sCompany’s Capital Stock
We had 390345 shareholders of record as of February 28, 2012.2014.
Dividends
No cash dividends have been declared on our common stock to date nor have any decisions been made to pay a dividend in the foreseeable future. Payment of dividends is evaluated on a periodic basis and if a dividend were paid, it would be subject to covenants of our lending facility, which may have the effect of restricting our ability to pay dividends.basis.
Recent Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
We did not repurchase anyThe following table presents information with respect to purchases of our common stock made during the thirteen weeks ended January 28, 2012.February 1, 2014 (in thousands, except average price paid per share):
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Dollar Value of Shares that May Yet be Repurchased Under the Plans or Programs (1) | ||||||||||||
November 3, 2013—November 30, 2013 | — | $ | — | — | $ | 12,475 | ||||||||||
December 1, 2013—January 4, 2014 | 103 | 24.24 | 103 | 27,510 | ||||||||||||
January 5, 2014—February 1, 2014 | 572 | 22.50 | 572 | 14,642 | ||||||||||||
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Total | 675 | 675 | ||||||||||||||
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(1) | The share repurchase program is conducted under authorizations made from time to time by our Board of Directors. In November 2012, we publicly announced that our Board of Directors authorized us to repurchase up to $22.0 million of our common stock. This repurchase program was completed in December 2012. In December 2012, we publicly announced that our Board of Directors authorized us to repurchase up to an additional $20.0 million of our common stock. On December 4, 2013, our Board of Directors superseded and replaced this program with a new $30.0 million share repurchase program that is expected to continue through January 31, 2015, unless the time period is extended or shortened by the Board of Directors. |
Item 6. | SELECTED FINANCIAL |
The following selected consolidated financial information has been derived from our audited Consolidated Financial Statements. The data should be read in conjunction with our Consolidated Financial Statements and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
Fiscal Year Ended | Fiscal 2013 (1) | Fiscal 2012 (2) | Fiscal 2011 | Fiscal 2010 (3) | Fiscal 2009 (4) | |||||||||||||||||||||||||||||||||||
January 28, 2012 | January 29, 2011 | January 30, 2010 | January 31, 2009 | February 2, 2008 | ||||||||||||||||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||||||||||||||
Statement of Operations Data (in thousands, except per share data): | ||||||||||||||||||||||||||||||||||||||||
Net sales | $ | 555,874 | $ | 478,849 | $ | 407,603 | $ | 408,669 | $ | 381,416 | $ | 724,337 | $ | 669,393 | $ | 555,874 | $ | 478,849 | $ | 407,603 | ||||||||||||||||||||
Cost of goods sold (1) | 354,198 | 311,028 | 274,396 | 274,134 | 244,429 | |||||||||||||||||||||||||||||||||||
Cost of goods sold | 462,577 | 428,109 | 354,198 | 311,028 | 274,396 | |||||||||||||||||||||||||||||||||||
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Gross profit | 201,676 | 167,821 | 133,207 | 134,535 | 136,987 | 261,760 | 241,284 | 201,676 | 167,821 | 133,207 | ||||||||||||||||||||||||||||||
Selling, general and administrative expenses (1) | 141,444 | 130,454 | 120,472 | 109,927 | 98,042 | |||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 188,918 | 172,742 | 141,444 | 130,454 | 120,472 | |||||||||||||||||||||||||||||||||||
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Operating profit | 60,232 | 37,367 | 12,735 | 24,608 | 38,945 | 72,842 | 68,542 | 60,232 | 37,367 | 12,735 | ||||||||||||||||||||||||||||||
Interest income, net | 1,836 | 1,496 | 1,176 | 2,059 | 1,722 | 711 | 1,410 | 1,836 | 1,496 | 1,176 | ||||||||||||||||||||||||||||||
Other (expense) income, net | (379 | ) | (8 | ) | 96 | 36 | 3 | (1,589 | ) | 327 | (379 | ) | (8 | ) | 96 | |||||||||||||||||||||||||
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Earnings before income taxes | 61,689 | 38,855 | 14,007 | 26,703 | 40,670 | 71,964 | 70,279 | 61,689 | 38,855 | 14,007 | ||||||||||||||||||||||||||||||
Provision for income taxes | 24,338 | 14,652 | 4,876 | 9,499 | 15,344 | 26,016 | 28,115 | 24,338 | 14,652 | 4,876 | ||||||||||||||||||||||||||||||
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Net income | $ | 37,351 | $ | 24,203 | $ | 9,131 | $ | 17,204 | $ | 25,326 | $ | 45,948 | $ | 42,164 | $ | 37,351 | $ | 24,203 | $ | 9,131 | ||||||||||||||||||||
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Earnings per share: | ||||||||||||||||||||||||||||||||||||||||
Basic | $ | 1.22 | $ | 0.81 | $ | 0.31 | $ | 0.59 | $ | 0.89 | $ | 1.54 | $ | 1.37 | $ | 1.22 | $ | 0.81 | $ | 0.31 | ||||||||||||||||||||
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Diluted | $ | 1.20 | $ | 0.79 | $ | 0.30 | $ | 0.58 | $ | 0.86 | $ | 1.52 | $ | 1.35 | $ | 1.20 | $ | 0.79 | $ | 0.30 | ||||||||||||||||||||
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Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
Basic | 30,527 | 29,971 | 29,499 | 29,127 | 28,609 | 29,810 | 30,742 | 30,527 | 29,971 | 29,499 | ||||||||||||||||||||||||||||||
Diluted | 31,119 | 30,794 | 30,133 | 29,694 | 29,322 | 30,206 | 31,273 | 31,119 | 30,794 | 30,133 | ||||||||||||||||||||||||||||||
Balance Sheet Data (in thousands): | ||||||||||||||||||||||||||||||||||||||||
Cash, cash equivalents and current marketable securities | $ | 117,155 | $ | 103,172 | $ | 172,798 | $ | 128,801 | $ | 108,051 | ||||||||||||||||||||||||||||||
Working capital (5) | 168,472 | 146,115 | 197,927 | 155,400 | 133,927 | |||||||||||||||||||||||||||||||||||
Total assets | 443,403 | 409,098 | 362,157 | 301,631 | 260,265 | |||||||||||||||||||||||||||||||||||
Total long-term liabilities | 46,375 | 48,478 | 34,304 | 29,435 | 27,802 | |||||||||||||||||||||||||||||||||||
Total shareholders’ equity | 335,654 | 303,421 | 272,277 | 226,735 | 192,676 | |||||||||||||||||||||||||||||||||||
Other Financial Data (in thousands, except gross margin and operating margin): | ||||||||||||||||||||||||||||||||||||||||
Gross margin (6) | 36.1 | % | 36.0 | % | 36.3 | % | 35.0 | % | 32.7 | % | ||||||||||||||||||||||||||||||
Operating margin (7) | 10.1 | % | 10.2 | % | 10.8 | % | 7.8 | % | 3.1 | % | ||||||||||||||||||||||||||||||
Capital expenditures | $ | 35,969 | $ | 41,070 | $ | 25,508 | $ | 29,124 | $ | 16,004 | ||||||||||||||||||||||||||||||
Depreciation, amortization and accretion | $ | 26,596 | $ | 22,957 | $ | 19,744 | $ | 17,923 | $ | 22,092 | ||||||||||||||||||||||||||||||
Store Data: | ||||||||||||||||||||||||||||||||||||||||
Number of stores open at end of period | 551 | 498 | 444 | 400 | 377 | |||||||||||||||||||||||||||||||||||
Comparable store sales (decrease) increase (8) | (0.3 | %) | 5.0 | % | 8.7 | % | 11.9 | % | (10.0 | %) | ||||||||||||||||||||||||||||||
Net sales per store (9) (in thousands) | $ | 1,196 | $ | 1,240 | $ | 1,210 | $ | 1,162 | $ | 1,081 | ||||||||||||||||||||||||||||||
Total store square footage (10) (in thousands) | 1,624 | 1,480 | 1,308 | 1,174 | 1,107 | |||||||||||||||||||||||||||||||||||
Average square footage per store (11) | 2,947 | 2,961 | 2,945 | 2,935 | 2,937 | |||||||||||||||||||||||||||||||||||
Net sales per square foot (12) | $ | 405 | $ | 421 | $ | 411 | $ | 396 | $ | 367 |
(1) |
January 28, 2012 | January 29, 2011 | January 30, 2010 | January 31, 2009 | February 2, 2008 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash, cash equivalents and current marketable securities | $ | 172,798 | $ | 128,801 | $ | 108,051 | $ | 78,582 | $ | 76,532 | ||||||||||
Working capital (1) | 197,927 | 155,400 | 133,927 | 112,092 | 92,161 | |||||||||||||||
Total assets | 362,157 | 301,631 | 260,265 | 233,349 | 216,095 | |||||||||||||||
Total long-term liabilities | 34,304 | 29,435 | 27,802 | 24,177 | 18,097 | |||||||||||||||
Total shareholders’ equity | 272,277 | 226,735 | 192,676 | 177,951 | 154,602 |
(2) | Fiscal 2012 consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks. In fiscal 2012, we acquired Blue Tomato for cash consideration of 59.5 million Euros ($74.8 million). Additionally, included in the results for fiscal 2012 are the following charges: a) an expense of $2.3 million associated with the future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, b) an expense of $2.2 million related to a step-up in inventory to estimated fair value in conjunction with our acquisition of Blue Tomato, c) an expense of $2.1 million associated with the relocation of our ecommerce fulfillment center and home office, d) an expense of $1.9 million in transaction costs incurred in conjunction with our acquisition of Blue Tomato and e) an expense of $1.3 million for the amortization of intangible assets. |
Included in the results of fiscal 2010 are the following charges: a) an expense of $2.4 million associated with the relocation of our distribution center and b) an expense of $2.1 million for a litigation settlement. Additionally, we changed our estimate of the useful lives of our leasehold improvements and the effect of this change reduced depreciation expense by $4.2 million. |
(4) | Included in the results of fiscal 2009 are the following charges: a) an expense of $2.5 million due to the impairment of the assets of 21 stores and b) an expense of $1.4 million for a litigation settlement. |
(5) | Working capital is defined as current assets minus current liabilities. |
Fiscal Year Ended | ||||||||||||||||||||
January 28, 2012 | January 29, 2011 | January 30, 2010 | January 31, 2009 | February 2, 2008 | ||||||||||||||||
Other Financial Data: | ||||||||||||||||||||
Gross margin (1) | 36.3 | % | 35.0 | % | 32.7 | % | 32.9 | % | 35.9 | % | ||||||||||
Capital expenditures (in thousands) (2) | $ | 25,508 | $ | 29,124 | $ | 16,004 | $ | 28,349 | $ | 30,722 | ||||||||||
Depreciation, amortization and accretion (in thousands) | $ | 19,744 | $ | 17,923 | $ | 22,092 | $ | 19,470 | $ | 14,762 |
Gross margin represents gross profit divided by net sales. |
Fiscal Year Ended | ||||||||||||||||||||
January 28, 2012 | January 29, 2011 | January 30, 2010 | January 31, 2009 | February 2, 2008 | ||||||||||||||||
Store Data: | ||||||||||||||||||||
Number of stores open at end of period | 444 | 400 | 377 | 343 | 285 | |||||||||||||||
Comparable store sales increase (decrease) (1) | 8.7 | % | 11.9 | % | (10.0 | %) | (6.5 | %) | 9.2 | % | ||||||||||
Net sales per store (2) (in thousands) | $ | 1,210 | $ | 1,162 | $ | 1,081 | $ | 1,240 | $ | 1,405 | ||||||||||
Total store square footage at end of period (3) (in thousands) | 1,308 | 1,174 | 1,107 | 1,005 | 829 | |||||||||||||||
Average square footage per store at end of period (4) | 2,945 | 2,935 | 2,937 | 2,930 | 2,909 | |||||||||||||||
Net sales per square foot (5) | $ | 411 | $ | 396 | $ | 367 | $ | 424 | $ | 488 |
Net sales per store represents net sales, excluding ecommerce sales, for the period divided by the average number of stores open during the period. For purposes of this calculation, the average number of stores open during the period is equal to the sum of the number of stores open as of the end of each month during the |
Total store square footage |
Average square footage per store |
Net sales per square foot represents net sales, excluding ecommerce sales, for the period divided by the average square footage of stores open during the period. For purposes of this calculation, the average square footage of stores open during the period is equal to the sum of the total square footage of the stores open as of the end of each month during the |
Item 7. | 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 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.” See the cautionary note regarding forward-looking statements set forth at the beginning of Part I of the Annual Report on Form 10-K.
Overview
We are a mall based specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name. At January 28, 2012, we operated 444 stores primarily located in shopping malls, giving us a presence in 38 states and Canada. Our stores cater to young men and women between the ages of 12 and 24 who seek popular brands representing a lifestyle centered on activities that include skateboarding, surfing, snowboarding, BMX and motocross. We support the action sports lifestyle and promote our brand through a multi-faceted marketing approach that is designed to integrate our brand image with our customers’ activities and interests. This approach, combined with our differentiated merchandising strategy, store design, comprehensive training programs and passionate employees, allows us to provide an experience for our customers that we believe is consistent with their attitudes, fashion tastes and identities and is otherwise unavailable in most malls. Accordingly, our success is largely dependent upon our ability to anticipate, identify and respond to the fashion tastes of our customers and to provide merchandise that satisfies customer demands.
Fiscal 2011—2013—A Review of This Past Year
In fiscal 20112013, teen retail in general experienced a challenging sales environment, with many mall based teen retailers seeing significant sales declines. Zumiez achieved recordwas not immune to the declines in traffic; however, with our distinctive brand offering and diverse product selection, as well as the unique customer experience our sales and earnings levels and continuedassociates provide, our sales results held strong relative to build on the momentumteen retail sector, with comparable stores sales down slightly while product margins remained essentially flat. At the beginning of fiscal 2013, we had seen in fiscal 2010. Sales, margins and profit all improved foranticipated the upcoming year exceeding internal projections, which was significant in an environment where increases in production costs and lingering economic worries had an impact on all of retail. In addition, while accomplishing these results,would be more challenging; however, we continuedmade a decision to makecontinue making strategic investments that we believe will reap long-term benefits focused onbenefits.
Our primary focus in fiscal 2013 was continued investments domestically and internationally in technology and people aimed at enhancing the customerconsumer experience across multiple salesall channels our customer engages with us and to build out our infrastructure in Europe where we are in the early stages of growth after the acquisition of Blue Tomato in fiscal 2012. In North America we opened 53 stores (44 in the U.S. and nine in Canada), we upgraded the zumiez.com ecommerce platform and made progress across our omni-channel initiatives, including expanding access to our inventory in all channels. In Europe we opened six stores during fiscal 2013, doubling our store count to 12 stores at the end of fiscal 2013, and we launched blue-tomato.com on our people and infrastructure aimed at improving decision making and product speed to market. a new ecommerce platform during the year.
The following table below shows net sales, operating profit and margin and diluted earnings per share growth for fiscal 20112013 compared to fiscal 2010:2012. The fiscal 2013 results include a $2.7 million benefit for the correction of an prior year error related to our calculation to account for rent expense on a straight-line basis and a $1.3 million expense for a litigation settlement. Charges in fiscal 2013 associated with the acquisition of Blue Tomato netted to a benefit of $0.1 million primarily related to a $2.6 million benefit for the reversal of the previously recorded expense associated with future incentive payments related to the transaction, offset by $2.3 million for the amortization of intangible assets. The fiscal 2012 results include $7.3 million in costs associated with the acquisition of Blue Tomato, including one-time acquisition costs, amortization of intangible assets and the costs associated with the future incentive payments related to the transaction, as well as $2.1 million in charges for the relocation of our home office and ecommerce fulfillment center.
Fiscal Year Ended | ||||||||||||||||||||||||
January 28, 2012 | January 29, 2011 | % Change | Fiscal 2013 (1) | Fiscal 2012 (1) | % Change | |||||||||||||||||||
Net sales (in thousands) | $ | 555,874 | $ | 478,849 | 16 | % | $ | 724,337 | $ | 669,393 | 8 | % | ||||||||||||
Operating profit (in thousands) | $ | 60,232 | $ | 37,367 | 61 | % | $ | 72,842 | $ | 68,542 | 6 | % | ||||||||||||
Operating margin | 10.8 | % | 7.8 | % | 10.1 | % | 10.2 | % | ||||||||||||||||
Diluted earnings per share | $ | 1.20 | $ | 0.79 | 52 | % | $ | 1.52 | $ | 1.35 | 13 | % |
Our
(1) | Fiscal 2013 consisted of 52 weeks versus 53 weeks in fiscal 2012. |
The increase in net sales results werewas primarily driven by the net addition of 53 stores (59 new stores offset by six store closures), partially offset by the impact of one less week of sales and a 0.3% decrease in comparable store sales. The decrease in comparable stores sales was primarily driven by a decrease in transactions, partially offset by an increase in dollars per transaction partially offset by a decrease in comparable store transactions.transaction. Dollars per transaction increased primarily due to an increase in average unit retail,units per transaction, partially offset by a decline in units per transaction. These sales results were achieved with record product margins, demonstrating the strength of our distinctive product offering and the unique customer experience our store associates provide. Asaverage unit retail. Operating margin was down slightly in fiscal 2013 compared to fiscal 2012 as a result of our continued focus on managing ourdeleveraging the cost structure theseon a comparable store sales decline, including the impact of investments made in the year, and the impact of the other charges discussed above.
The results translated intofor fiscal 2013 were below our expectations and our historical growth performance; however, when viewed against the teen landscape, we are encouraged that we were able to hold comparable store sales close to flat while maintaining strong operating profitproduct margins. While we cannot project when the current traffic headwinds will end, we believe that our proven product strategies and diluteddifferentiating shopping experience, along with the enhancements we continue to make, will result in long-term earnings per share growth.
Fiscal 2012—2014—A Look At the Upcoming Year
There are indications that economic worries are less prevalent andWe enter fiscal 2014 with many of the consumer psyche seemssame challenges we faced throughout fiscal 2013. The teen retail sector is in the midst of a down cycle which appears to be improving. While there is some uncertainty, particularly in today’s global economy, unemployment figures seemdriven by a combination of factors. With limited visibility into when these headwinds will subside, we are being cautious with our outlook for the year. Fiscal 2013 was a heavy investment year relative to be improving, consumer confidence is upour top line growth. In fiscal 2014, we do not anticipate the same rate of growth for our cost structure; however, we do plan to fund the growth and the inflationary concernsstrategic initiatives that retail faced a year ago should be less impactfulsupport our long-term vision. This could put pressure on our earnings in the upcoming year. Weshort-term, but we believe that we have momentum heading into fiscal 2012, and regardless of the macro economic landscape, we should perform well relative to other retailers by staying true to what makes us unique while continuing to make return based investments.will reaplong-term benefits.
Long-term we aim to grow sales annually and grow operating profit at a faster rate than sales by focusing on our growth initiatives while managing our cost structure. Our primary growth vehicles in both our domestic and international markets are:
1. | Initiatives that drive comparable store sales gains; |
2. | Opening high return new stores; |
3. | Ecommerce penetration; and |
4. |
In fiscal 20122014, we expect total sales to increase driven by an increase in comparable store sales, the opening of approximately 5055 new stores, including up to 10approximately five stores in Canada, and increased sales from our ecommerce channel. If we achieve our sales projections, we expect earnings will increase.Europe. We will make further investments in people and infrastructure in fiscal 2012,2014, building on the progress we have made through fiscal 2011,2013, primarily focused on the development of our omni-channel sales strategies continued progress onand our product assortment planning and supply chain solutions, the move of our ecommerce fulfillment center to Edwardsville, Kansas, and a capital investment related to building a new home office planned to open in the second quarter of fiscal 2012.international growth. We anticipate inventory levels per square foot to be flat or grow slightly. We expect our cash, short-term investments and working capital to increase, and do not anticipate any new borrowings on our credit facility.during the year.
General
Net sales constitute gross sales net(net of actual and estimated returns and deductions for promotions.promotions) and shipping revenue. Net sales include our in-store sales and our ecommerce sales. Net sales are allocated between in-store and ecommerce based on the location where the sale is fulfilled, which includes ecommerce shipping revenue. Ecommerce sales were 7.3%, 4.7% and 2.5% of total net sales for fiscal 2011, 2010 and 2009. Salesdoes not always represent where the customer originated the sale. We record the sale of gift cards are deferredas a current liability and recognizedrecognize revenue when a customer redeems a gift cards are redeemed. The amount of the gift card liability is determined taking into account our estimate ofcard. Additionally, the portion of gift cards that will not be redeemed or recovered (“gift card breakage”). Gift card breakage is recognized as revenuein net sales after 24 months, at which time the likelihood of redemption is considered remote based on our historical redemption data.
We report “comparable store sales” based on net sales beginning on the first anniversary of the first day of operation of a new store. Ourstore or ecommerce business. We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our in-store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Therefore, our comparable store sales also include our ecommerce sales, due to the substantial integration of our stores and ecommerce business.sales. Changes in our comparable store sales between two periods are based on net sales of storesin-store or ecommerce businesses which were in operation during both of the two periods being compared and, if a storean in-store or ecommerce business is included in the calculation of comparable store sales for only a portion of one of the two periods being compared, then that storein-store or ecommerce business is included in the calculation for only the comparable portion of the other period. Any change in square footage of an existing comparable store, including remodels and relocations, does not eliminate that store from inclusion in the calculation of comparable store sales. Any store or ecommerce business that we acquire will be included in the calculation of comparable store sales after the first anniversary of the acquisition date. As such, Blue Tomato results are included in the calculation of comparable store sales beginning in July 2013. Current year foreign exchange rates are applied to both current year and prior year comparable store 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 or same store sales. As a result, data herein regarding our comparable store 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, and buying, occupancy, ecommerce fulfillment, distribution and warehousing costs.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. We receive cashCash consideration received from vendors which have beenis reported as a reduction of cost of goods sold if the inventory has sold, as 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, we arrange and pay the freight for our customers and bill them for this service, unless our customers have their product shipped to one of our stores or we have free shipping promotionsamounts billed to our customers in which case we do not bill our customers. Such amounts billed 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, outbound 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 training, advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses, amortization of intangibles 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:
Comparable store sales. As previously described in detail under the caption “General,” comparable store sales provide a measure of sales growth for stores and ecommerce businesses open at least one year over the comparable prior year period.
We consider comparable store sales to be an important indicator of our current performance. Comparable store sales results are important to achieve leveraging of our costs, including store payroll and store occupancy. Comparable store sales also have a direct impact on our total net sales, 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 comparable store sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense.
Storeproductivity. We review our stores’ operating profitResults of Operations
The following table presents selected items on the consolidated statements of income as a measurepercent of their profitability.net sales:
Fiscal 2013 | Fiscal 2012 | Fiscal 2011 | ||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of goods sold | 63.9 | % | 64.0 | % | 63.7 | % | ||||||
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Gross profit | 36.1 | % | 36.0 | % | 36.3 | % | ||||||
Selling, general and administrative expenses | 26.0 | % | 25.8 | % | 25.5 | % | ||||||
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Operating profit | 10.1 | % | 10.2 | % | 10.8 | % | ||||||
Interest and other (expenses)/income, net | (0.2 | %) | 0.3 | % | 0.3 | % | ||||||
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Earnings before income taxes | 9.9 | % | 10.5 | % | 11.1 | % | ||||||
Provision for income taxes | 3.6 | % | 4.2 | % | 4.4 | % | ||||||
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Net income | 6.3 | % | 6.3 | % | 6.7 | % | ||||||
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Fiscal 2013 Results Compared With Fiscal 2012
Net Sales
Fiscal 2013 had 52 weeks versus 53 weeks in fiscal 2012. Net sales numbers for fiscal 2012 include an additional week and fiscal 2013 comparable stores sales are compared to the comparable store sales for the 52 weeks ended February 2, 2013. Net sales were $724.3 million for fiscal 2013 compared to $669.4 million for fiscal 2012, an increase of $54.9 million or 8.2%. The increase reflected the net addition of 53 stores (59 new stores offset by six store closures) and Blue Tomato sales during fiscal 2013 that were not comparable to the prior year, partially offset by the impact of the 53rd week included in fiscal 2012 results and a comparable store sales decrease of 0.3% for fiscal 2013.
The 0.3% decrease in comparable store sales was a result of a 1.0% decrease for our comparable in-store sales, partially offset by a 5.4% increase for our comparable ecommerce sales. Total ecommerce sales represented 12.3% of sales for fiscal 2013, compared to 11.2% of sales for fiscal 2012, increasing due to Blue Tomato ecommerce sales that were not comparable to the prior year and the growth in comparable ecommerce sales mentioned above. The decrease in comparable stores sales was primarily driven by a decline in comparable store transactions, partially offset by an increase in 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 store sales decreases in men’s apparel, footwear and boy’s apparel were partially offset by comparable store sales increases in junior’s apparel, hardgoods and accessories. For information as to how we define comparable store sales, see “General” above.
Gross Profit
Gross profit was $261.8 million for fiscal 2013 compared to $241.3 million for fiscal 2012, an increase of $20.5 million, or 8.5%. As a percentage of net sales, gross profit increased 10 basis points in fiscal 2013 to 36.1%. The increase was primarily driven by a 40 basis points benefit due to prior year costs related to a step-up in inventory to estimated fair value in conjunction with our acquisition of Blue Tomato and a 40 basis points impact of the correction of an error related to our calculation to account for rent expense on a straight-line basis. These increases were partially offset by a 50 basis points impact due to the deleveraging of our store occupancy costs and a 50 basis points impact of the increase in ecommerce related costs due to ecommerce sales increasing as a percent of total sales.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were $188.9 million for fiscal 2013 compared to $172.7 million for fiscal 2012, an increase of $16.2 million, or 9.4%. SG&A expenses as a percent of net sales increased by 20 basis points in fiscal 2013 to 26.0%. The increase was primarily driven by a 60 basis points impact of the increase in ecommerce corporate costs due to the growth and investments in our ecommerce business as a percent of total sales, a 40 basis points impact due to the deleveraging of our store operating expenses, a 20 basis points impact due to the deleveraging of our corporate costs and a 20 basis points impact of a litigation settlement charge incurred in fiscal 2013. These increases were partially offset by a 70 basis points impact of the reversal of the previously recorded expense associated with the future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, a 30 basis points benefit due to prior year costs related to transaction costs incurred in conjunction with our acquisition of Blue Tomato and a 20 basis point impact due to a decrease in incentive compensation.
Net Income
Net income for fiscal 2013 was $45.9 million, or $1.52 per diluted share, compared with net income of $42.2 million, or $1.35 per diluted share, for fiscal 2012. Our effective income tax rate for fiscal 2013 was 36.1% compared to 40.0% for fiscal 2012. The decrease in the effective tax rate for fiscal 2013 compared to fiscal 2012 was primarily due to the impact of non-taxable acquisition related expenses incurred in fiscal 2012, the release of valuation allowance related to net operating losses and other deferred tax assets of foreign subsidiaries and a reduction of state and local income taxes.
Fiscal 2012 Results Compared With Fiscal 2011
Net Sales
Fiscal 2012 had 53 weeks versus 52 weeks in fiscal 2011. Net sales for the year include an additional week and fiscal 2012 comparable stores sales are compared to the comparable store sales for the 53 weeks ended February 4, 2012. Net sales were $669.4 million for fiscal 2012 compared to $555.9 million for fiscal 2011, an increase of $113.5 million or 20.4%. The increase reflected a comparable store sales increase of 5.0% for fiscal 2012 as well as the net addition of 54 stores (59 new or acquired stores offset by five store closures), which includes the acquisition of Blue Tomato during the second quarter of fiscal 2012. Included in the results for fiscal 2012 were $28.3 million in net sales of Blue Tomato.
The 5.0% increase in comparable store sales was a result of a 2.9% increase for our comparable in-store sales and a 31.8% increase for our comparable ecommerce sales. Total ecommerce sales represented 11.2% of sales for fiscal 2012, compared to 7.3% of sales for fiscal 2011, and this increase was driven by the growth in comparable ecommerce sales mentioned above and our Blue Tomato acquisition. The increase in comparable stores sales was primarily driven by an increase in dollars per transaction, partially offset by a decline in comparable store transactions. Dollars per transaction increased due to an increase in average unit retail, partially offset by a decrease in units per transaction. Comparable store sales increases in men’s apparel, junior’s apparel, footwear and hardgoods were partially offset by comparable store sales decreases in accessories and boy’s apparel. For information as to how we define comparable store sales, see “General” above.
Gross Profit
Gross profit was $241.3 million for fiscal 2012 compared to $201.7 million for fiscal 2011, an increase of $39.6 million, or 19.6%. As a percentage of net sales, gross profit decreased 30 basis points in fiscal 2012 to 36.0%. The decrease was primarily due to an 80 basis points increase in ecommerce fulfillment and ecommerce shipping expenses due to ecommerce sales increasing as a percentage of total sales and a 30 basis points impact of a $2.2 million charge recorded during fiscal 2012 related to a step-up in inventory to estimated fair value in
conjunction with our acquisition of Blue Tomato. These decreases were partially offset by a 70 basis points impact from leveraging our store occupancy costs on a 20.4% net sales increase and 30 basis points in distribution center efficiencies.
Selling, General and Administrative Expenses
SG&A expenses were $172.7 million for fiscal 2012 compared to $141.4 million for fiscal 2011, an increase of $31.3 million, or 22.1%. SG&A expenses as a percent of net sales increased by 30 basis points in fiscal 2012 to 25.8%. The increase was primarily due to a 60 basis points increase in ecommerce corporate costs due to the growth in our ecommerce business, a 30 basis points impact of a $2.3 million charge incurred during fiscal 2012 related to the estimated future incentive payments to be paid in conjunction with our acquisition of Blue Tomato, a 30 basis points impact of the $1.9 million in transaction costs incurred during fiscal 2012 in conjunction with our acquisition of Blue Tomato and a 20 basis points impact of $1.3 million in amortization of intangible assets acquired as part of our Blue Tomato acquisition. These increases were partially offset by 90 basis points in store operating efficiencies and a 30 basis points decrease in incentive compensation.
Net Income
Net income for fiscal 2012 was $42.2 million, or $1.35 per diluted share, compared with net income of $37.4 million, or $1.20 per diluted share, for fiscal 2011. Our effective income tax rate for fiscal 2012 was 40.0% compared to 39.5% for fiscal 2011. Our effective tax rate for fiscal 2012 was adversely impacted by the tax effects of the acquisition of Blue Tomato.
Seasonality and Quarterly Results
As is the case with many retailers of apparel and related merchandise, our business is subject to seasonal influences. As a result, we have historically experienced, and expect to continue to experience, seasonal and quarterly fluctuations in our net sales and operating results. Our net sales and operating results are typically lower in the first and second quarters of our fiscal year, while the back-to-school and winter holiday periods in our third and fourth fiscal quarters historically have accounted for the largest percentage of our annual net sales. Quarterly results of operations may also fluctuate significantly as a result of a variety of factors, including the timing of store openings and the relative proportion of our new stores to mature stores, fashion trends and changes in consumer preferences, calendar shifts of holiday or seasonal periods, changes in merchandise mix, timing of promotional events, general economic conditions, competition and weather conditions.
The following table sets forth selected unaudited quarterly consolidated statements of income data. The unaudited quarterly information has been prepared on a basis consistent with the audited consolidated financial statements included elsewhere herein and includes all adjustments that we consider necessary for a fair presentation of the information shown. This information should be read in conjunction with our audited consolidated financial statements and the notes thereto. The operating results for any fiscal quarter are not indicative of the operating results for a full fiscal year or for any future period and there can be no assurance that any trend reflected in such results will continue in the future.
Fiscal 2013 (1) | ||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter (2) | |||||||||||||
(in thousands, except stores and per share data) | ||||||||||||||||
Net sales | $ | 148,496 | $ | 157,858 | $ | 191,145 | $ | 226,838 | ||||||||
Gross profit | $ | 47,972 | $ | 55,120 | $ | 70,789 | $ | 87,879 | ||||||||
Operating profit | $ | 4,029 | $ | 7,835 | $ | 20,678 | $ | 40,300 | ||||||||
Net income | $ | 2,498 | $ | 4,739 | $ | 11,860 | $ | 26,851 | ||||||||
Basic earnings per share | $ | 0.08 | $ | 0.16 | $ | 0.40 | $ | 0.90 | ||||||||
Diluted earnings per share | $ | 0.08 | $ | 0.16 | $ | 0.39 | $ | 0.89 | ||||||||
Number of stores open at the end of the period | 503 | 529 | 548 | 551 | ||||||||||||
Comparable store sales (decrease) increase | (0.7 | %) | 0.9 | % | 1.5 | % | (2.2 | %) | ||||||||
Fiscal 2012 (3) | ||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
(in thousands, except stores and per share data) | ||||||||||||||||
Net sales | $ | 129,899 | $ | 135,066 | $ | 180,023 | $ | 224,405 | ||||||||
Gross profit | $ | 42,101 | $ | 46,425 | $ | 67,075 | $ | 85,683 | ||||||||
Operating profit | $ | 7,262 | $ | 3,778 | $ | 21,401 | $ | 36,101 | ||||||||
Net income | $ | 4,527 | $ | 2,086 | $ | 12,667 | $ | 22,884 | ||||||||
Basic earnings per share | $ | 0.15 | $ | 0.07 | $ | 0.41 | $ | 0.75 | ||||||||
Diluted earnings per share | $ | 0.14 | $ | 0.07 | $ | 0.40 | $ | 0.74 | ||||||||
Number of stores open at the end of the period | 455 | 477 | 493 | 498 | ||||||||||||
Comparable store sales increase (decrease) | 12.9 | % | 9.5 | % | 3.7 | % | (1.0 | %) |
(1) | All quarters in fiscal 2013 are 13 week periods ended May 4, 2013, August 3, 2013, November 2, 2013 and February 1, 2014. |
(2) | Included in the results for the fourth quarter of fiscal 2013 are the following: a) a benefit of $5.8 million, of which $2.6 million related to prior fiscal years, for the reversal of the previously recorded expense associated with the future incentive payments to be paid in conjunction with our acquisition of Blue Tomato and b) a benefit of $3.3 million, of which $2.7 million related to prior fiscal years, representing the correction of an error related to our calculation to account for rent expense on a straight-line basis. |
(3) | The quarters in fiscal 2012 are 13 week periods ended April 28, 2012, July 28, 2012 and October 27, 2012 and a 14 week period ended February 2, 2013. |
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 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.
At February 1, 2014 and February 2, 2013, cash, cash equivalents and current marketable securities were $117.2 million and $103.2 million. Working capital, the excess of current assets over current liabilities, was $168.5 million at the end of fiscal 2013, an increase of 15.3% from $146.1 million at the end of fiscal 2012. The increase in cash, cash equivalents and current marketable securities and working capital in fiscal 2013 were due primarily to cash provided by operating activities of $66.9 million, partially offset by capital expenditures of $36.0 million due primarily to the opening of 59 new stores in fiscal 2013 and the $17.6 million repurchase of common stock.
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
Fiscal 2013 | Fiscal 2012 | Fiscal 2011 | ||||||||||
Total cash provided by (used in) | ||||||||||||
Operating activities | $ | 66,894 | $ | 66,225 | $ | 68,065 | ||||||
Investing activities | (49,619 | ) | (41,079 | ) | (68,074 | ) | ||||||
Financing activities | (15,233 | ) | (22,519 | ) | 3,415 | |||||||
Effect of exchange rate changes on cash and cash equivalents | 13 | 173 | 16 | |||||||||
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Increase in cash and cash equivalents | $ | 2,055 | $ | 2,800 | $ | 3,422 | ||||||
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Operating Activities
Net cash provided by operating activities increased by $0.7 million in fiscal 2013 to $66.9 million from $66.2 million in fiscal 2012. Net cash provided by operating activities decreased by $1.9 million in fiscal 2012 to $66.2 million from $68.1 million in fiscal 2011. 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. Changes to our operating cash flows have historically 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, excess tax benefit from stock-based compensation and changes to the components of working capital.
Investing Activities
Net cash used in investing activities was $49.6 million in fiscal 2013 related to $36.0 million of capital expenditures primarily for new store openings and existing store remodels or relocations and $13.6 million in net purchases of marketable securities. Net cash used in investing activities was $41.1 million in fiscal 2012 primarily related to $69.7 million cash paid (net of cash acquired) for the acquisition of Blue Tomato and $41.1 million of capital expenditures primarily for new store openings, existing store remodels or relocations and the construction of our new home office building in Lynnwood, Washington, partially offset by $70.7 million in net sales of marketable securities. Net cash used in investing activities was $68.1 million in fiscal 2011 related to net purchases of marketable securities of $42.6 million and capital expenditures of $25.5 million for new store openings and existing store remodels or relocations.
Financing Activities
Net cash used in financing activities in fiscal 2013 was $15.2 million, primarily related to $17.6 million cash paid for repurchase of common stock, partially offset by proceeds from stock-based compensation exercises and related tax benefits of $2.6 million. Net cash used in financing activities in fiscal 2012 was $22.5 million, primarily related to $25.2 million cash paid for the repurchase of common stock, partially offset by proceeds from stock-based compensation exercises and related tax benefits of $3.0 million. Net cash provided by financing activities in fiscal 2011 was $3.4 million related to proceeds from stock-based compensation exercises and related tax benefits.
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 provides us with a secured revolving credit facility until September 1, 2014 of up to $25.0 million, which, pursuant to an accordion feature, may be increased to $35.0 million at our discretion. The secured revolving credit facility provides for the issuance of a standby letter of credit in an amount not to exceed $5.0 million outstanding at any time and with a term not to exceed 365 days. The commercial line of credit provides for the issuance of a commercial letter of credit in an amount not to exceed $10.0 million and with terms not to exceed 120 days. The amount of borrowings available at any time under our secured revolving credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time. There were no outstanding borrowings under the secured revolving credit facility at February 1, 2014 and February 2, 2013. We had open commercial letters of credit outstanding under our secured revolving credit facility of $0.3 million at February 1, 2014 and $0.2 million at February 2, 2013. The secured revolving credit facility bears interest at the Daily Three Month LIBOR rate plus 1.00%.
Additionally, we have revolving lines of credit of up to 9.0 million Euro and other long-term debt, the proceeds of which are used to fund certain international operations. There were no outstanding borrowings under these revolving lines of credit at February 1, 2014 and February 2, 2013. The amount of borrowings under the other long-term debt was $1.9 million and $2.3 million at February 1, 2014 and February 2, 2013.
Capital Expenditures
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. In that regard, 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 2013, we spent $36.0 million on capital expenditures, which consisted of $30.2 million of costs related to investment in 59 new stores and 13 remodeled or relocated stores, $3.1 million associated with improvements to our websites and $2.7 million in other improvements.
During fiscal 2012, we spent $41.1 million on capital expenditures, which consisted of $28.7 million of costs related to investment in 53 new stores and 19 remodeled or relocated stores, $9.8 million of costs associated with the construction of our new home office building in Lynnwood, Washington and $2.6 million in other improvements.
During fiscal 2011, we spent $25.5 million on capital expenditures, which consisted of $21.2 million of costs related to investment in 45 new stores and 11 remodeled or relocated stores, $2.4 million of costs associated with the construction of our new home office building in Lynnwood, Washington and $1.9 million in other improvements.
In fiscal 2014, we expect to spend approximately $37 million to $39 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the approximately 55 new stores we plan to open in fiscal 2014 and remodels or relocations of existing stores. There can be no assurance that the number of stores that we actually open in fiscal 2014 will not be different from the number of stores we plan to open, or that actual fiscal 2014 capital expenditures will not differ from this expected amount.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our 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 management believeswe believe to be relevant at the time our consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our 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.
Our significant accounting policies are discussed in Note 2, Summary“Summary of Significant Accounting Policies, of” in the Notes to Consolidated Financial Statements includedfound in Part IV Item 15 “Exhibits and Consolidated Financial Statements,” of this Annual Report on Form 10-K. We believe that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Description | Judgments and Uncertainties | Effect If Actual Results Differ From Assumptions | ||
Valuation of Merchandise Inventories | ||||
We value our inventory at the lower of cost or fair market value through the establishment of write-down and inventory loss reserves.
Our write-down reserve represents the excess of the carrying value over the amount we expect to realize from the ultimate sales or other disposal of the inventory. Write-downs establish a new cost basis for our inventory. Subsequent changes in facts or circumstances do not result in the restoration of previously recorded write-downs or an increase in that newly established cost basis.
Our inventory loss reserve represents anticipated physical inventory losses (“shrinkage reserve”) that have occurred since the last physical | Our write-down reserve contains uncertainties because the calculation requires management to make assumptions based on the current rate of sales, the age
Our | We have not made any material changes in the accounting methodology used to calculate our write-down and
A 10% decrease in ultimate sales price at
A 10% | ||
Fixed Assets | ||||
We review the carrying value of our fixed assets for impairment whenever events or changes in circumstances indicate that the carrying value of such asset may not be recoverable.
Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment recognized is measured by comparing the projected
The actual economic lives of our fixed assets may be different from our estimated useful lives, thereby resulting in a different carrying value. These evaluations could result in a change in the depreciable lives of these assets and therefore our depreciation expense in future periods. | Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting future sales, gross profit and operating
Our fixed assets accounting methodology contains uncertainties because it requires management to make estimates with respect to the useful lives of our fixed assets that we believe are reasonable. | We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate
Although management believes that the current useful |
Description | Judgments and Uncertainties | Effect If Actual Results Differ From Assumptions | ||
Revenue Recognition | ||||
Revenue is recognized upon purchase at our retail store locations. For
Revenue is not recorded on the sale of gift cards. | Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions regarding future sales returns and the amount and timing of gift cards projected to be redeemed by gift card recipients. Our estimate of the amount and timing of sales returns and gift cards to be redeemed is based primarily on historical transaction experience. | We have not made any material changes in the accounting methodology used to measure future sales returns or recognize revenue for our gift card program in the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to recognize revenue. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10%
A 10% | ||
Stock-Based Compensation | ||||
We
We determine the fair value of our restricted stock awards based on the closing market price of our stock on the grant date. In determining the fair value of our stock options, we use the Black-Scholes option pricing model. The estimated fair value of stock-based awards is recognized as compensation expense over the vesting period, net of estimated forfeitures. | The calculation of stock-based compensation expense requires management to make assumptions and to apply judgment to estimate the number of stock awards that will ultimately vest and to determine the fair value of our stock option awards. These assumptions and judgments include estimating future employee turnover rates and the inputs to the Black-Scholes option pricing model, including | We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to determine stock-based compensation expense. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to changes in stock-based compensation expense that could be material.
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Description | Judgments and Uncertainties | Effect If Actual Results Differ From Assumptions | ||
Accounting for Income Taxes | ||||
As part of the process of preparing the consolidated financial statements, income taxes are estimated for each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included on the consolidated balance sheets. Valuation allowances may be established when necessary to reduce deferred tax assets to the amount expected to be realized. We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal, state and foreign filings by considering all relevant facts, circumstances and information available to us. If we believe it is more likely than not that our position will be sustained, we recognize a benefit at the largest amount that we believe is cumulatively greater than 50% likely to be realized. | Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rates could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. Unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation and our particular facts and circumstances. | Although management believes that the income tax related judgments and estimates are reasonable, actual results could differ and we may be exposed to losses or gains that could be material.
Upon income tax audit, any unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution. | ||
Accounting for Contingencies | ||||
We are subject to various claims and contingencies related to lawsuits, insurance, regulatory and other matters arising out of the normal course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if an estimate is not determinable, we provide disclosure of a material claim or contingency in the Notes to the Consolidated Financial Statements. | Significant judgment is required in evaluating our claims and contingencies, including determining the probability that a liability has been incurred and whether such liability is reasonably estimable. The estimated accruals for claims and contingencies are made based on the best information available, which can be highly subjective. | Although management believes that the |
Results of Operations
The following table presents, for the periods indicated, selected items in the consolidated statements of operations as a percent of net sales:
Description | Judgments and Uncertainties | Effect If Actual Results Differ From Assumptions | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill and Other Indefinite-lived Intangible Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
We test goodwill and other indefinite-lived intangible assets for impairment on an annual basis, or as indicators of impairment are present.
Contractual Obligations and Commercial Commitments There were no material changes outside the ordinary course of business in our contractual obligations during
Off-Balance Sheet
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.
Recent Accounting Pronouncements See Note 2, “Significant Accounting Policies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of
Interest Rate Risk Our earnings are affected by changes in market interest rates as a result of our short-term and long-term marketable securities, which are primarily invested in state and local municipal securities short-term intervals. If our current portfolio average yield rate decreased by 10% in fiscal During different times of the year, due to the seasonality of our business, we may borrow under our revolving credit Foreign Exchange Rate Risk Our international subsidiaries operate with functional currencies other than the U.S. dollar. Therefore, we must translate revenues, expenses, assets and liabilities from functional currencies into U.S. dollars at exchange rates in effect during, or at the end of, the reporting period. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. As we expand our international operations, our exposure to exchange rate fluctuations will increase.
Information with respect to this item is set forth in “Index to the Consolidated Financial Statements,”
None.
Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)). Based on this evaluation, our CEO and CFO concluded that, as of Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) during the quarter ended Management’s Annual Report on Internal Control over Financial Reporting.The management of Zumiez Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. This process includes policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, because of changes in conditions, the effectiveness of The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of The effectiveness of the Company’s internal control over financial reporting as of February 1, 2014 has been audited by Moss Adams LLP, the Company’s independent registered public accounting firm, as stated in their report, which REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Zumiez Inc. We have audited Zumiez Inc.’s (the “Company”) internal control over financial reporting as of February 1, 2014, based on criteria established inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Zumiez Inc. maintained, in all material respects, effective internal control over financial reporting as of February 1, 2014, based on criteria established inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Zumiez Inc. as of February 1, 2014 and February 2, 2013, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended February 1, 2014, and our report dated March 18, 2014, expressed an unqualified opinion on those consolidated financial statements. /s/ Moss Adams LLP Seattle, Washington March 18, 2014
None.
Information regarding our directors and nominees for directorship is presented under the headings “Election of Directors,” in our definitive proxy statement for use in connection with our
Information regarding the compensation of our directors and executive officers and certain information related to the Company’s Compensation Committee is set forth under the headings “Executive Compensation,” “Director Compensation,” “Compensation Discussion and Analysis,” “Report of the Compensation Committee of the Board of Directors” and “Compensation Committee Interlocks and Insider Participation” in our Proxy Statement, and is incorporated herein by this reference thereto.
Information with respect to security ownership of certain beneficial owners and management is set forth under the headings “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in our Proxy Statement, and is incorporated herein by this reference thereto.
Information regarding certain relationships and related transactions and director independence is presented under the heading “Corporate Governance” in our Proxy Statement, and is incorporated herein by this reference thereto.
Information concerning principal accounting fees and services is presented under the heading “Fees Paid to Independent Registered Public Accounting Firm for Fiscal
All financial statement schedules are omitted because the required information is presented either in the consolidated financial statements or notes thereto, or is not applicable, required or material.
See Exhibit Index.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders Zumiez Inc. We have audited the accompanying consolidated balance sheets of Zumiez Inc. (the “Company”) as of We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zumiez Inc. as of We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zumiez Inc.’s internal control over financial reporting as of /s/ Moss Adams LLP Seattle, Washington March (In thousands)
See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF (In thousands, except per share amounts)
See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF (In thousands)
See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF (In thousands)
See accompanying notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
See accompanying notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Basis of Presentation Nature of Business—Zumiez Inc., including its wholly-owned subsidiaries, (the “Company,” “we,” “us,” “its” and “our”) is a leading multi-channel specialty retailer of action sports related apparel, footwear, Fiscal Year—We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31. Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years. Basis of Presentation—The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles
2. Summary of Significant Accounting Policies Use of Estimates—The preparation of Fair Value of Financial Instruments—We disclose the estimated fair value of Cash and Cash Equivalents—We consider all highly liquid investments with original maturity of three months or less when purchased to be cash equivalents. Concentration of Risk—We maintain our cash and cash equivalents in accounts with major financial institutions in the form of demand deposits, money market accounts and state and local municipal securities. Deposits in these financial institutions may exceed the amount of federal deposit insurance provided on such deposits. We have not experienced any losses on our deposits of cash and cash equivalents. Marketable Securities—
Inventories—Merchandise inventories are valued at the lower of cost or Fixed Assets—Fixed assets primarily consist of
The cost and related accumulated depreciation of assets sold or otherwise disposed of is removed from the accounts and the related gain or loss is
Valuation of Long-Lived Assets—We review the carrying value of long-lived assets for impairment Goodwill—Goodwill represents the excess of purchase price over the fair value of acquired tangible and identifiable intangible net assets. We test goodwill for impairment on an annual basis or fourth quarter. Events that may trigger an early impairment
We generally determine the fair value of each of our reporting units based on a blended analysis of the present value of future discounted cash flows and market valuation approach using a multiple of an average annual earnings. Key assumptions used in this calculation include revenue growth, operating expenses, long-term rate of growth and the probability of the reporting unit, working capital impacts and a discount rate that we believe a buyer would assume when determining a purchase price for the reporting unit. Estimates of revenue growth and operating expenses are based on internal projections considering a Intangible Assets—Our intangible assets consist of trade names and trademarks with indefinite lives and certain definite-lived intangible assets. We test our indefinite-lived intangible assets for impairment on an Definite-lived intangible assets, which consist of developed technology and customer relationships, are amortized using the straight-line method over their estimated useful lives. Additionally, we test the definite-lived intangible assets when facts and circumstances indicate that the carrying values may not be recoverable. We Deferred Rent, Rent Expense and Tenant Allowances—We both, in the event that co-tenants cease to operate for specific periods or if certain sales levels are not met in specific periods. Most of the store leases require payment of a specified minimum rent and a contingent rent based on a percentage of the store’s net sales in excess of a specified Claims and Contingencies—We are subject to various claims and contingencies related to lawsuits, insurance, regulatory and other matters arising out of the normal course of business. We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable. If the likelihood of an adverse outcome is only reasonably possible (as opposed to probable), or if an estimate is not determinable, we provide disclosure of a material claim or contingency in the Notes to the Consolidated Financial Statements. Revenue Recognition—Sales are recognized upon purchase at our retail store locations. For We have a customer loyalty program, the Zumiez Stash, which allows members to earn points for purchases or performance of certain activities. The Cost of Goods Sold—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,
Selling, General and Administrative Expense—Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, Advertising—We expense advertising costs as Future Incentive Payments—In conjunction with our acquisition of Blue Tomato during the fiscal year ended February 2, 2013, there is the possibility of future incentive payments to the sellers and Stock-Based Compensation—We account for stock-based compensation by The fair value of restricted stock awards is measured based on the closing Volatility—This is a measure of the amount by which a stock price has fluctuated or is expected to fluctuate. We use actual daily historical changes in the market value of our stock Risk-free interest rate—This is the U.S. Treasury rate as of the grant date having a term equal to the expected term of the option. Expected term—The expected term was calculated using the simplified Dividend yield—We do not have plans to pay dividends in the foreseeable future. The following weighted-average assumptions were used to estimate the fair value of stock
Common Stock Share Repurchases—We may repurchase shares of our common stock under authorizations made from time to time by our Board of Directors. Under applicable Washington State law, shares repurchased are
Income laws that are expected to be in effect when the differences are expected to reverse. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, it is determined that it is more likely than not that all or some portion of the deferred tax benefit will not to be realized. We Our tax provision for interim periods is determined using an estimate of our annual effective rate, adjusted for discrete items, if any, that are taken into account in the Earnings per Foreign Currency Translation—Assets and liabilities denominated in foreign currencies were translated into U.S. dollars, the reporting currency, at the exchange rate prevailing at the balance sheet date. Revenue and expenses denominated in foreign currencies were translated into U.S. dollars at the monthly average exchange rate for the period and the translation adjustments are reported as an element of accumulated other comprehensive income on the consolidated balance sheets. Segment
Recently Adopted Accounting In July 2012, the FASB issued guidance that will allow an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment 3. Business Combination Blue Tomato—On July 4, 2012, we acquired 100% of the outstanding stock of Blue Tomato for cash consideration of 59.5 million Euros ($74.8 million). Blue Tomato is a leading European multi-channel retailer for board sports and related apparel and footwear and the acquisition allows us to enter into the European marketplace. In Pro Forma Financial Information—The The amounts also reflect the removal of the following non-recurring, transaction related costs and related income tax effect from the fiscal year ended February 2, 2013 pro forma results: (i) the transaction costs of $1.9 million associated with the Blue Tomato acquisition, (ii) the charge related to the fair value adjustment to acquisition date inventory of $2.2 million and (iii) the foreign currency transaction gain of $0.5 million associated with the foreign currency fluctuations associated with the acquisition of Blue Tomato. These amounts are assumed to be included in the fiscal year ended January 28, 2012 pro forma amounts. The pro forma financial information below is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the acquisition been completed as of the date indicated above or
The following tables summarize the
There was no impairment of goodwill for the The following table summarizes the gross carrying amount, accumulated amortization and the
There was no impairment of intangible assets for the fiscal years ended February 1, 2014, February 2, 2013 and January 28, 2012. Amortization expense of intangible assets for the fiscal years ended February 1, 2014 and February 2, 2013 was $2.3 million and $1.3 million. We did not record amortization expense of intangible assets for the fiscal year ended January 28, 2012. Amortization expense of intangible assets is recorded in
The following tables summarize the estimated fair value of our cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses
All of our available-for-sale securities, excluding our auction rate security, have an effective maturity date of two years or less and may be liquidated, at our discretion, prior to maturity. The following tables summarize the gross unrealized holding losses and fair value for investments in an unrealized loss position,
We did not record a realized loss for other-than-temporary impairments during the fiscal years ended February 1, 2014, February 2, 2013 and January 28,
Depreciation expense on fixed assets is recognized on our consolidated income statement as follows (in thousands):
8. Other Liabilities Other liabilities consisted of the following (in thousands):
9. Revolving Credit
Future principal payments for long-term debt at February 1, 2014 are as follows (in thousands):
10. Commitments and Contingencies Operating Leases—Total rent expense is as follows (in thousands):
Future minimum lease payments at February 1, 2014 are as follows (in thousands):
Purchase Litigation—We are involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. We have made accruals with respect to these matters, where appropriate, which are reflected in our consolidated financial statements. For some matters, the amount of liability is not probable or the amount cannot be
Insurance Reserves—We
We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities;
Level 2—Quoted prices for similar assets or liabilities in active markets or inputs that are observable; and
Level 3—Inputs that are unobservable.
The following tables summarize assets measured at fair value on a recurring basis
Our policy is to recognize transfers into and transfers out of hierarchy levels as of the actual date of the event or change in circumstances that caused the transfer. The Level 2 marketable securities primarily include state and local municipal
12. Stockholders’ Equity Share Repurchase—In November 2012, our Board of Directors authorized a share repurchase program that provided for the repurchase of up to $22.0 million of outstanding common stock. This program was completed in December 2012. In December 2012, our Board of Directors authorized a stock repurchase program that provided for the repurchase of up to an additional $20.0 million of outstanding common stock and $7.5 million of outstanding common stock was repurchased under that program. In December 2013, the Board of Directors authorized a stock repurchase program that provides for the repurchase of up to $30.0 million of outstanding common stock. This stock repurchase program replaces the existing stock repurchase program that was authorized in December 2012, which had $12.5 million remaining of the authorized amount to repurchase shares under that program and was set to expire on February 1, 2014. The current repurchase program is expected to continue through the fiscal year ending January
At February 1, 2014, there remains $14.6 million available to repurchase shares under the Accumulated Other Comprehensive Income (Loss)—The component of accumulated other comprehensive income (loss) and the adjustments to other comprehensive income (loss) for
General
Restricted Stock—The following table summarizes
The following table summarizes additional information related to restricted stock activity
The following table summarizes additional information related to
The
Employee Stock Purchase Plan—We offer an Employee Stock Purchase Plan (the “ESPP”) for eligible employees to purchase
The components of
United States Foreign Total earnings before income taxes The components of the provision for income taxes
The reconciliation of the income tax provision at the U.S. federal statutory rate to our effective income tax rate is as
The components of deferred income taxes are (in thousands):
At February 1, 2014 and February 2, 2013, we had deferred tax assets related to foreign net operating loss carryovers that could be utilized to reduce future years’ tax liabilities, totaling $2.0 million and $0.8 million. The net operating loss carryovers have an indefinite carryfoward period and currently will not expire. At each reporting date, we consider new evidence, both positive and negative, that could impact our view with regards to future realization of deferred tax assets. During the fiscal year ended February 1, 2014, we reversed the valuation allowance previously recorded on the deferred tax assets based on our reassessment of the amount of the deferred tax assets that are more likely than not to be realized. At February 2, 2013, we had a valuation allowance of $0.4 million, which was primarily related to net operating losses and other deferred tax assets of foreign subsidiaries. The net change in the total valuation allowance was a decrease of $0.4 million and an increase of $0.1 million for the fiscal years ended
At February 1, 2014, the gross amount of unrecognized tax benefits was $0.3 million, of which $0.2 million would affect the effective tax rate if recognized. We did not have We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Our U.S. federal income tax returns are no longer subject to examination for years before fiscal
15. Earnings per Share, Basic and Diluted The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
Total anti-dilutive common stock options not included in the calculation of diluted earnings per share were 16.
We committed charitable contributions to the Zumiez Foundation of $0.7 million 17. Segment Reporting The following table is a summary of product categories as a percentage of merchandise sales:
The following tables present summarized geographical information (in thousands):
18. Subsequent On Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the
EXHIBIT INDEX
Copies of Exhibits may be obtained upon request directed to the attention of our
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