UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)10-K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: January 31, 201528, 2017
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 | (IRS Employer | |
incorporation or organization) |
Identification No.) | |
4001 204th Street SW | ||
Lynnwood, Washington | 98036 | |
(Address of principal executive offices) | (Zip Code) |
(425) 551-1500
(Registrant’s telephone number, including area code)
Securities registered underpursuant to Section 12(b) of the Act:Common Stock
Name of each exchange on which registered:The Nasdaq Global Select Market
Securities registered underpursuant to Section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨☐ No x☒
Indicate by check mark if the registrant 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 registrant (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 90 days. Yes x☒ No ¨☐
Indicate by check mark whether the registrant 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’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. ¨☐
Indicate by check mark whether the registrant 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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x☒
The 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, August 1, 2014,July 30, 2016, was $602,237,794.
$299,590,875. At March 6, 2015,7, 2017, there were 29,417,02424,943,341 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 28, 2015,31, 2017, which definitive proxy statement will be filed not later than 120 days after the end of the fiscal year to which this report relates.
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 28, 2015, which definitive proxy statement will be filed not later than 120 days after the end of the fiscal year to which this report relates.
EXPLANATORY NOTE
This Amendment No. 1 to our Annual Report on Form 10-K (“Form 10-K/A) is being filed to amend our Annual Report on Form10-K for the year ended January 31, 2015 (“Form 10-K”), which was originally filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2015. We are amending Part II, Item 8 in this Form 10-K/A to revise Note 10 to the Consolidated Financial statements of Zumiez Inc. (the “Company”) to reflect a correction to certain rent expense and executory costs disclosed in Note 10 for the year ended January 31, 2015. We are also amending Part I, Item 1A to correct the same amounts disclosed in the Risk Factors. These changes do not affect the consolidated balance sheets as of January 31, 2015 and February 1, 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended January 31, 2015.
For the convenience of the reader, this Amendment No. 1 amends in its entirety the original filing of the Annual Report onForm 10-K. This Amendment No. 1 does not reflect events occurring after the March 17, 2015 original filing date of the Company’s Annual Report on Form 10-K for the year ended January 31, 2015 or modify or update those disclosures set forth in that Annual Report on Form 10-K, except to reflect the revision to Note 10 and the Risk Factors.
FORM 10-K
Item 1. | 3 | ||||||
Item 1A. | 11 | ||||||
Item 1B. | 20 | ||||||
Item 2. | 20 | ||||||
Item 3. | 20 | ||||||
Item 4. | 20 | ||||||
Item 5. | 21 | ||||||
Item 6. | 24 | ||||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | |||||
Item 7A. | 38 | ||||||
Item 8. | 39 | ||||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 39 | |||||
Item 9A. | 39 | ||||||
Item 9B. | 42 | ||||||
Item 10. | 43 | ||||||
Item 11. | 43 | ||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | 43 | |||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 43 | |||||
Item 14. | 43 | ||||||
Item 15. | 44 | ||||||
69 |
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 20152017 will be the 53 week period ending February 3, 2018. Fiscal 2016 was the 52 week period ending January 28, 2017. Fiscal 2015 was the 52 week period ending January 30, 2016. Fiscal 2014 was the 52-week period ending January 31, 2015. Fiscal 2013 was the 52-week period ending February 1, 2014. Fiscal 2012 was the 53-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.
“Zumiez,” the “Company,” “we,” “us,” “its,” “our” and similar references refer to Zumiez Inc. and its wholly-owned subsidiaries.
Zumiez Inc., including its wholly-owned subsidiaries, is a leading multi-channel specialty retailer of apparel, footwear, accessories and hardgoods rooted in youth culture as expressed through music, art, fashion and action sports lifestyle for young men and women.women who want to express their individuality through the fashion, music, art and culture of action sports, streetwear, and other unique lifestyles. Zumiez Inc. was formed in August 1978 and is a Washington State corporation.
At January 31, 2015,28, 2017, we operated 603685 stores; 550603 in the United States (“U.S.”), 3548 in Canada, 29 in Europe and 185 in Europe.Australia. We operate under the names Zumiez, Blue Tomato and Blue Tomato.Fast Times. Additionally, we operate ecommerce websites at www.zumiez.com, www.blue-tomato.com and www.blue-tomato.com.www.fasttimes.com.au.
We completed the acquisition ofacquired Snowboard Dachstein Tauern GmbH and Blue Tomato Graz Handel GmbH (collectively, “Blue Tomato”) during fiscal 2012. Blue Tomato is a multi-channelone of the leading European specialty retailers of apparel, footwear, accessories and hardgoods. We acquired Fast Times Skateboarding (“Fast Times”) during fiscal 2016. Fast Times is an Australian specialty retailer for board sports and relatedof skateboards, hardware, apparel and footwear that operates primarily in the European marketplace.footwear.
We operateemploy a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Our selling platforms bring the look and feel of an independent specialty shop 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 selling platforms to appeal to teenagers and young adults and to serve as a destination for our customers. We believe that our distinctive selling platforms concepts and compelling economics will provide continued opportunities for growth in both new and existing markets.
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We believe that our customers desire authentic merchandise and fashion that is rooted in the fashion, music, art and culture of action sports, lifestylestreetwear, and reflectsother unique lifestyles to express 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 merchandise 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 36-year38-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, trainingstreetwear and incentive programs, all designed to drive sales productivity at the individual store associate level.other unique lifestyles. We have increased our store count from 377444 as of the end of fiscal 20092011 to 603685 as of the end of fiscal 2014,2016, representing a compound annual growth rate of 9.8%9.1%; increased net sales from $407.6$555.9 million in fiscal 20092011 to $811.6$836.3 million in fiscal 2014,2016, representing a compound annual growth rate of 14.8%8.5%; and been profitable in every fiscal year of our 36-year38-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 young men and women, many of whom we believe are attracted to the action sports, lifestylestreetwear, and other unique lifestyles and desire to promoteexpress their personal independence and style through the apparel, footwear 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 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 and differentiates us in our market.
Differentiated Merchandising Strategy.Strategy. We have created a highly differentiated retailing concept by offering an extensive selection of current and relevant action sportslifestyle brands encompassing apparel, footwear, accessories and hardgoods. The breadth of merchandise offered through our sales channels exceeds that offered by many other action sports specialty storesof our competitors and includes some brands and products that are available only at our stores within many malls 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.dictates, providing us the opportunity to shift our merchandise selection seasonally. 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.Culture. We believe 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 from within and we provide our employees with the knowledge and tools to succeed through our comprehensive training programs and the empowerment to manage their stores to meet localized customer demand.
Distinctive Customer Experience.Experience. We strive to provide a convenient shopping environment that is appealing and clearly communicates our distinct brand image. We seek to integrate our store and digital shopping experiences to serve our customers whenever, wherever, and however they choose to engage with us. We seek to attract knowledgeable storesale associates who identify with the action sports lifestyleour brand and are able to offer superior customer service, advice and product expertise. We believe that our distinctive store environment and ecommerceshopping experience enhances our image as a leading source for apparel and equipment for the action sports, lifestyle.streetwear, and other unique lifestyles.
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Disciplined Operating Philosophy.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 employees with enhanced product knowledge, selling skills and operational expertise. We believe that our merchandising teams’ immersion in the action sports lifestyle,lifestyles we represent, supplemented with feedback from our customers, store associates and omni-channel leadership, 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.Approach. We seek to build relationships with our customers through a multi-faceted marketing approach that is designed to integrate our brand images with the action sports lifestyle.lifestyles we represent. Our marketing efforts focus on reaching our customers in their environment and feature extensive grassroots marketing 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. Events and activities such as these provide opportunities for our customers to develop a strong identity with our culture and brands. We believe that our immersion in the action sports lifestylelifestyles we represent 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 specialty retailer of action sports, lifestyle retailerstreetwear, and other unique lifestyles by:
Opening or Acquiring New Store Locations.Locations. We believe that the action sports lifestyleour brand has appeal that provides store expansion opportunities throughout the U.S., Canada, Europe and internationally.Australia. During the last three fiscal years, we have opened or acquired 174146 new stores consisting of 33 stores in fiscal 2016, 57 stores in fiscal 2015 and 56 stores in fiscal 2014, 59 stores in fiscal 2013 and 59 stores in fiscal 2012.2014. We have successfully opened or acquired stores in diverse markets throughout the U.S. and internationally, which we believe demonstrates the portability and growth potential of our concepts. To take advantage of what we believe to be a compelling economic store model, we plan to open approximately 5718 new stores in fiscal 2015,2017, including stores in our existing markets and in new markets domestically and internationally. The number of anticipated store openings may increase or decrease due to market conditions and other factors.
Continuing to Generate Sales Growth through Existing Channels.Channels. We seek to maximize our comparable sales by maintaining consistent store-level executioncontinuing to integrate our store and on-line shopping experiences and offering our customers a broad and relevant selection of action sports brands and products. We seek to continue to grow our ecommerce sales withproducts, including a continued focus on enhancingunique customer experience both in store and integrating the unique Zumiez and Blue Tomato brand experiences through this channel.on-line.
Enhancing our Brand Awareness through Continued Marketing and Promotion.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.unique lifestyles of our customers. 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, tofurther 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 lifestyletheir unique lifestyles across all channels in which we operate. We believe that the breadth of merchandise that we offer our customers, which includes apparel, footwear, accessories and hardgoods, exceeds that offered by many other action sports specialty stores at a single location, and makes us a single-stop purchase destination for our target customers.
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We seek to identify action sports oriented fashion trends as they develop and to respond in a timely manner with a relevant 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, country, and country,season, reflecting the specific action sports preferences and seasons in each market.
We believe that offering an extensive selection of current and relevant brands usedin sports, fashion, music, and sometimes developed by professional action sports athletesart is integral to our overall success. No single third-party brand including private label,that we carry accounted for more than 8.7%7.3%, 7.6%7.2% and 9.0%6.9% of our net sales in fiscal 2014, 20132016, 2015 and 2012.2014. We believe that our strategic mix of apparel, footwear, accessories and hardgoods 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 lifestyleunique lifestyles of our customers 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 we exclusively distribute. We supplement our merchandise assortment with a select offering of private label products across many of our 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 2014, 20132016, 2015 and 2012,2014, our private label merchandise represented 19.9%20.2%, 17.7%21.0% and 16.9%19.9% of our net sales.
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 stores’ sales strength, our promotions and seasonality.
Our merchandising staff remains in tune with the fashion, music, art and culture of action sports, culturestreetwear, and other unique lifestyles by participating in action sports, attending relevant events and concerts, watching action sports related programming and reading action sportsrelevant publications and relevant social network channels. In order to identify evolving trends and fashion preferences, our staff spends considerable time analyzing sales data, gathering feedback from our stores and customers, shopping in key markets and soliciting input from our vendors.
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.
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Store Locations.Locations. At January 31, 2015,28, 2017, we operated 603685 stores in the following locations:
United States and Puerto Rico - 550 Stores | ||||||||||||||||||||||||||||||||
United States and Puerto Rico - 603 Stores | United States and Puerto Rico - 603 Stores | |||||||||||||||||||||||||||||||
Alabama | 1 | Indiana | 10 | New Hampshire | 6 | South Carolina | 3 | 4 |
| Indiana | 10 |
| Nebraska | 2 |
| Rhode Island | 2 | |||||||||||||||
Alaska | 3 | Iowa | 4 | New Jersey | 20 | South Dakota | 2 | 3 |
| Iowa | 4 |
| New Hampshire | 6 |
| South Carolina | 4 | |||||||||||||||
Arizona | 13 | Kansas | 3 | New Mexico | 5 | Tennessee | 6 | 13 |
| Kansas | 3 |
| New Jersey | 20 |
| South Dakota | 2 | |||||||||||||||
Arkansas | 2 | Kentucky | 2 | New York | 32 | Texas | 50 | 3 |
| Kentucky | 4 |
| New Mexico | 5 |
| Tennessee | 9 | |||||||||||||||
California | 85 | Louisiana | 6 | Nevada | 9 | Utah | 14 | 91 |
| Louisiana | 6 |
| New York | 33 |
| Texas | 51 | |||||||||||||||
Colorado | 19 | Maine | 3 | North Carolina | 10 | Vermont | 1 | 19 |
| Maine | 3 |
| Nevada | 9 |
| Utah | 14 | |||||||||||||||
Connecticut | 9 | Maryland | 10 | North Dakota | 1 | Virginia | 13 | 9 |
| Maryland | 11 |
| North Carolina | 13 |
| Vermont | 1 | |||||||||||||||
Delaware | 4 | Massachusetts | 11 | Ohio | 9 | Washington | 25 | 4 |
| Massachusetts | 11 |
| North Dakota | 3 |
| Virginia | 15 | |||||||||||||||
Florida | 27 | Michigan | 9 | Oklahoma | 6 | West Virginia | 2 | 34 |
| Michigan | 13 |
| Ohio | 13 |
| Washington | 25 | |||||||||||||||
Georgia | 9 | Minnesota | 11 | Oregon | 13 | Wisconsin | 14 | 12 |
| Minnesota | 11 |
| Oklahoma | 6 |
| West Virginia | 2 | |||||||||||||||
Hawaii | 6 | Missouri | 7 | Pennsylvania | 19 | Wyoming | 2 | 7 |
| Mississippi | 2 |
| Oregon | 13 |
| Wisconsin | 14 | |||||||||||||||
Idaho | 6 | Montana | 5 | Puerto Rico | 1 | 6 |
| Missouri | 7 |
| Pennsylvania | 22 |
| Wyoming | 2 | |||||||||||||||||
Illinois | 18 | Nebraska | 2 | Rhode Island | 2 | 18 |
| Montana | 5 |
| Puerto Rico | 4 |
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Canada - 35 Stores | ||||||||||||||||||||||||||||||||
Canada - 48 Stores | Canada - 48 Stores | |||||||||||||||||||||||||||||||
Alberta | 5 | New Brunswick | 1 | 7 |
| New Brunswick | 1 |
| Saskatoon | 2 |
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British Columbia | 9 | Nova Scotia | 2 | 11 |
| Nova Scotia | 2 |
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Manitoba | 2 | Ontario | 16 | 2 |
| Ontario | 23 |
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Europe - 18 Stores | ||||||||||||||||||||||||||||||||
Europe - 29 Stores | Europe - 29 Stores | |||||||||||||||||||||||||||||||
Austria | 9 | 12 |
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Germany | 9 | 16 |
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Switzerland | 1 |
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Australia - 5 Stores | Australia - 5 Stores | |||||||||||||||||||||||||||||||
Victoria | 5 |
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The following table shows the number of stores (excluding temporary stores that we operate from time to time for special or seasonal events) opened, acquired and closed in each of our last three fiscal years:
Fiscal Year | Stores Opened | Stores Acquired | Stores Closed | Total Number of |
| Stores Opened |
| Stores Acquired |
| Stores Closed |
| Total Number of Stores End of Year | ||||
2016 |
| 28 |
| 5 |
| 6 |
| 685 | ||||||||
2015 |
| 57 |
| — |
| 2 |
| 658 | ||||||||
2014 | 56 | 0 | 4 | 603 |
| 56 |
| — |
| 4 |
| 603 | ||||
2013 | 59 | 0 | 6 | 551 | ||||||||||||
2012 | 53 | 6 | 5 | 498 |
Store Design and Environment.We design our stores to create a distinctive and engaging shopping environment that we believe resonates with our customers. Our stores feature an industrial look, dense merchandise displays, action sports lifestyle focused posters and signage and popular music, all of which are consistent with the look and feel of an independent action sports specialty shop. Our stores are designed 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 31, 2015,28, 2017, our stores averaged approximately 2,9362,932 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 2015, we plan on opening new stores with square footage similar to this average.
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Expansion Opportunities and Site Selection.Selection. In selecting a location for a new store, we target high-traffic locations with suitable demographics and favorable lease terms. For mall locations, we seek locations near busy areas of the mall such as food courts, movie theaters, game stores and other popular teen and young adult retailers. We generally locate our stores in malls in which other teen-orientedteen and young adult-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.
Store Management, Operations and Training.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.
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 offices, we give our 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 to improve both operational expertise and supervisory skills.
Our store associates generally have an interest in the fashion, music, art and culture of 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. These programs are designed to promote a competitive, yet fun, culture that is consistent with the action sports lifestyleunique lifestyles 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.lifestyles we represent. 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.lifestyles we offer. 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 brands and culture.
We have a customer loyalty program, the Zumiez STASH, which allows members to earn points for purchases or performance of certain activities. The points can be redeemed for a broad range of rewards, including product and experiential rewards. 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,STASH, catalogs and various social network channels. We believe that our immersion in the action sports, lifestylestreetwear, and other unique lifestyles 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 distributed to our stores.stores and customers. 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 We utilize a localized 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 atstrategy in which we get product to our customers. Additionally, we utilizeuse our domestic store network to provide fulfillment services for certainthe vast majority of customer purchases.
Internationally, we operate a combined distribution and ecommerce fulfillment centercenters located in Graz, Austria and Melbourne, Australia respectively, that supportssupport our Blue Tomato ecommerce and store operations in Europe and weour Fast Times ecommerce and store operations in Australia. We operate a distribution center located in Delta, British Columbia, Canada to distribute merchandise to our Canadian stores.
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Management Information Systems
Our management information systems provide integration of store, on-line, 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 ourthese systems with our business requirements and to support our continuing growth.
Competition
The teenage and young adult retail apparel, hardgoods, footwear and accessories industry is highly competitive. We compete with other retailers for vendors, customers, suitable store locations and qualified store associates, management personnel, on-line marketing content, social media engagement and management personnel.ecommerce traffic. In the softgoods market, which includes apparel, footwear and accessories, we currently compete with other teenage and young adult focused retailers. In addition, in the softgoods marketsmarket we compete with independent specialty shops, department stores, and direct marketersvendors that sell similar lines of merchandisetheir products directly to the retail market, non-mall retailers and target customers through catalogs and ecommerce.ecommerce retailers. In the hardgoods markets,market, 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,vendors who sell their products directly to the retail market 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 our ability to compete favorably with many of our competitors is 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 2014,2016, approximately 58% of our net sales and all of our net income occurred in the third and fourth quarters combined, similar to previous years.combined. 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, competitive influences and the number and timing of new store openings, remodels and closings.
Trademarks
The “Zumiez”, “Blue Tomato” and “Blue Tomato”“Fast Times” trademarks and certain other trademarks, have been registered, or are the subject of pending trademark applications, with the U.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 31, 2015,28, 2017, we employed approximately 2,1002,400 full-time and approximately 4,4004,900 part-time employees globally. However, the number of part-time employees fluctuates depending on our seasonal needs and generally increases during peak selling seasons, particularly the back-to-school and the winter holiday seasons. None of our employees are represented by a labor union and we believe that our relationship with our employees is good.
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Financial Information about Segments
See Note 17,16, “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.
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Investing in our securities involves a high degree of risk. The following risk factors, issues and uncertainties should be considered in evaluating our future prospects. In particular, keep these risk factors in mind when you read “forward-looking” statements elsewhere in this report. Forward-looking statements relate to our expectations for future events and time periods. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. Any of the following risks could harm our business, operating results or financial condition and could result in a complete loss of your investment. Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business and financial condition in the future.
Failure to anticipate, identify and respond to changing fashion trends, customer preferences and other fashion-related factors could have a material adverse effect on us.
Customer tastes and fashion trends in our market are volatile and tend to change rapidly. Our success depends on our ability to attracteffectively 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, including adequately anticipating the correct mix and trends of our private label merchandise, 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.
We may be unable to compete favorably in the highly competitive retail industry, and if we lose customers to our stores depends heavily on the success of the shopping malls in which manycompetitors, our sales could decrease.
The teenage and young adult retail apparel, footwear, accessories and hardgoods industry is highly competitive. We compete with other retailers for vendors, teenage and young adult customers, suitable store locations, qualified store associates, management personnel, on-line marketing content, social media engagement and ecommerce traffic. Some of our storescompetitors are located; anylarger than we are and have substantially greater financial and marketing resources, including advanced ecommerce market capabilities. 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.
U.S. and global economic and political uncertainty, coupled with cyclical economic trends in retailing, could have a material adverse effect on our results of operations.
Our retail market historically has been subject to substantial cyclicality. As the U.S. and global economic and political conditions change, the trends in discretionary consumer spending become unpredictable and discretionary consumer spending could be reduced due to uncertainties about the future. When disposable income decreases or discretionary consumer spending is reduced due to a decline in consumer confidence, purchases of apparel and related products may decline. The current uncertainty in the U.S. and global economies and political environment could have a material adverse impact on our results of operations and financial position.
In response to a decline in disposable income and consumer confidence, we believe the “value” message has become more important to consumers. As a retailer that sells approximately 80% branded merchandise, this trend may negatively affect our business, as we generally will have to charge more than vertically integrated private label retailers or we may be forced to rely on promotional sales to compete in our market which could have a material adverse effect on our financial position.
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A decrease in customerconsumer traffic in those malls could cause our sales to be less than expected.
In order to generateWe depend heavily on generating customer traffic we depend heavily onto our stores and websites. This includes 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. Furthermore, we depend on generating increased traffic to our websites and converting that traffic into sales. This requires us to achieve expected results from our marketing and social media campaigns, accuracy of data analytics, reliability of our website, network, and transaction processing and a high-quality on-line customer experience. Our sales volume and mallcustomer traffic in our stores and on our websites generally maycould be adversely affected by, among other things, economic downturns, in a particular area, competition from other ecommerce retailers, non-mall retailers and other malls, increases in gasoline prices, fluctuations in exchange rates in border or tourism-oriented locations 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 and ecommerce 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 mallconsumer traffic as a result of theseto our stores or any other factorswebsites could have a material adverse effect on our business, results of operations and financial condition.
Our growth strategy depends on our ability to opengrow customer engagement in our current markets and operateexpand into new stores each year,markets, which could strain our resources and cause the performance of our existing storesbusiness to suffer.
Our growth largely depends on our ability to openoptimize our customer engagement in our current trade areas and operate successfully in new stores successfully.geographic markets. However, our ability to open stores in new storesgeographic markets in the U.S. and international locations is subject to a variety of risks and uncertainties, and we may be unable to open new stores as planned or have access to desirable lease space, and any failure to successfully open and operate in new storesmarkets could 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.such that we have the optimum number of stores in any given trade area. The expansion into new markets may present competitive, merchandising, hiring and distribution challenges that are different from those currently encountered in our existing markets. 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 willmay not be able to obtain that financing on acceptable terms or at all.
In addition, we plan to open new stores in regions of the U.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.
Failure 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, which operates primarily in the European multi-channel retailer for board sportsmarket, and related apparel and footwear,Fast Times, which was completedoperates primarily in fiscal 2012.the Australian market. We may experience difficulties in integrating any stores or businesses we may acquire, including their stores, websites, facilities, personnel, financial systems, distribution, operations and general operating procedures, and any such acquisitions may also result in the diversion of our capital 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 receive, we could experience increased costs and other operating inefficiencies, which could have an adverse effect on our results of operations and overall financial performance.
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Our plans for international expansion include risks that could have a negative impact on our results of operations.
In fiscal 2011, we opened our first store locations in Canada and weWe plan to continue to open new stores in Canada. During fiscal 2012, we acquired Blue Tomato, which operates primarily in the Canadian, European, market, and we plan to open new stores in Europe in the future.Australian markets. We may continue to expand internationally in other markets, either organically, or through additional acquisitions. International markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing U.S. market. As a result, operations in international markets may be less successful than our operations in the U.S. Additionally, consumers in international markets may not be familiar with us andor the brands we sell, and we may need to build brand awareness in the markets. Furthermore, we have limited experience with the legal and regulatory environments and market practices outside of the U.S.in new international markets and cannot guarantee that we will be able to penetrate or successfully operate in these new international markets. We also expect to incur additional costs in complying with applicable foreign laws and regulations as they pertain to both our products and our operations.
Additionally, Accordingly, for the results of operations ofreasons noted above, our plans for 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 soexpansion include risks that 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 effectnegative impact on our results of operations.
The current uncertainty surrounding the U.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 U.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 U.S. and global economies and increased government debt 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.basis. 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. 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 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 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.
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Significant fluctuations and volatility in the pricecost of cotton, foreignraw materials, global labor, costsshipping and other raw materials used incosts related to 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, other raw materials, foreignglobal labor costs, freight costs and transportationother shipping costs used in the production and transportation of our merchandise can result in higher costs in the price we pay for this merchandise. The costs for cottonthese products are affected by weather, consumer demand, government regulation, 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 products do not increase proportionately with the increases in the costs of cotton or otherraw 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, quality and costs of these productsour merchandise 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 a material adverse effect on our results of operations. This includes costs to comply with regulatory developments regarding the use of “conflict minerals,” certain minerals originating from the Democratic Republic of Congo and adjoining countries, which may affect the sourcing and availability of raw materials used by manufacturers and subject us to increased costs associated with our products, processes or sources of our inputs. Our business could be adversely affected by disruptions in the supply chain, such as strikes, work stoppages, or port closures. Although
Fluctuations in foreign currency exchange rates could impact our financial condition and results of operations.
We are exposed to foreign currency exchange rate risk with respect to our sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. As a result, the fluctuation in the value of the U.S. dollar against other currencies could have a material adverse effect on our results of operations, financial condition and cash flows. Upon translation, operating results may differ materially from expectations. As we continue to expand our international operations, our exposure to exchange rate fluctuations will increase. Tourism spending may be affected by changes in currency exchange rates, and as a result, sales at stores with higher tourism traffic may be adversely impacted by fluctuations in currency exchange rates. Further, 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 our results of operations.
The regulatoryOur business could be adversely affected by increased labor costs, including costs related to an increase in minimum wage and health care.
Labor is one of the primary components in the cost of operating our business. Increased labor costs, whether due to competition, unionization, increased minimum wage, state unemployment rates, health care, or other employee benefits costs 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. Furthermore, inconsistent increases in state and or city minimum wage requirements regarding conflict minerals could have a negativelimit our ability to increase prices across all markets and channels. 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. There is no assurance that future health care legislation will not adversely impact on our results ofor operations.
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Our business could suffer if a manufacturer fails to use acceptable labor and environmental practices.
Pursuant toWe do not control our vendors or the Dodd-Frank Wall Street Reformmanufacturers that produce the products we buy from them, nor do we control the labor and Consumer Protection Act,environmental practices of our vendors and these manufacturers. The violation of labor, safety, environmental and/or other laws and standards by any of our vendors or these manufacturers, or the SEC promulgated final rules regarding disclosuredivergence of the uselabor and environmental practices followed by any 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 producedour vendors or these manufacturers from those minerals. We conducted required due diligence activities for the 2013 calendar year and filed our first Form SD report with the SEC in June 2014. While the conflict minerals rule continues in effectgenerally accepted as adopted, there remains uncertainty regarding how the conflict minerals rule, and our compliance obligations, will be affectedethical in the future. Specifically,U.S., could interrupt, or otherwise disrupt, the Courtshipment of Appeals for the D.C. Circuit largely upheld the conflict minerals rulefinished products to us or damage our reputation. Any of these, in April 2014, but in November 2014, it granted the SEC’s and Amnesty International’s petitions for rehearing regarding certain disclosure requirements of the rule. Additional requirements under the rule could affect sourcing at competitive prices and availability in sufficient quantities of certain of the conflict minerals used in the manufacture of our products, whichturn, could have a material adverse effect on our ability to purchase these products in the future. The costs of compliance, including those related to supply chain research, the limited number of suppliers and possible changes in the sourcing of these minerals, could have a material adverse effect on our results of operations or cash flow.
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 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 could have a material adverse effect on our businessreputation, financial condition and results of operations.
We In that regard, most of the products we sell are manufactured overseas, primarily in Asia, Mexico and Central America, which may be unable to compete favorablyincrease the risk that the labor and environmental practices followed by the manufacturers of these products may differ from those considered acceptable in the highly competitive retail industry,U.S.
Additionally, our products are subject to regulation of and if we lose customersregulatory standards set by various governmental authorities with respect to our competitors, our sales could decrease.
The teenagequality and young adult retail apparel, footwear, accessoriessafety. These regulations and hardgoods industry is highly competitive. We competestandards may change from time to time. Our inability to comply on a timely basis with other retailers for vendors, teenage and young adult customers, suitable store locations, qualified store associates and management personnel. 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 andregulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales. Issues with the lossquality and safety of merchandise we sell, regardless of our customers. Currentculpability, 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 competition could have a material adverse effect on our business, results of operations and financial condition.costs.
If we fail to develop and 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 continueddeveloping and maintaining good relationsrelationships with a large number of vendors to provide our vendors.customers with an extensive selection of current and relevant brands. In particular, weaddition to maintaining our large number of current vendor relationships, this includes identifying, attracting and launching new vendors every year to provide a diverse and unique product assortment. 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 could have a material adverse effect on our business. There
However, there can be no assurance that our current vendors or new vendors will provide us with an adequate supply or quality of products or acceptable pricing. Our vendors could discontinue selling to us, raise the prices they charge, at any timesell through direct channels 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, could have a material adverse effect on our business, results of operations and financial condition.
Our ecommerce operations subject usbusiness is susceptible to numerousweather conditions that are out of our control, including the potential risks thatof 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 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 could have a material adverse effect on our business and results of operations.
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Our omni-channel strategy may not have the return we anticipate, which could have an adverse effect on our results of operations.
We are executing an omni-channel strategy to enable our customers to shop wherever, whenever and however they choose to engage with us. Our omni-channel strategy may not deliver the results we anticipate or may not adequately anticipate changing consumer trends, preferences and expectations. We will continue to develop additional ways to execute our superior omni-channel experience and interact with our customers, which requires significant investments in IT systems and changes in operational strategy, including localization, on-line and in-store point of sale systems, order management system, and transportation management system. If we fail to effectively integrate our store and ecommerce operations subject us to certain risks that could have an adverse effectshopping experiences, effectively scale our IT structure or we do not realize the return on our operationalinvestments that we anticipate our operating results including:
rapid technological change;
liability for online content; and
risks relatedcould be adversely affected. Our competitors are also investing in omni-channel initiatives. If our competitors are able 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 vendorsbe more effective in the ecommerce business in competition with us, online security breaches and general economic conditions specific to ecommercetheir strategy, it could have an adverse effect on our results of operations.
If our information systems fail to function effectively our operations could be disrupted and our financial results could be harmed.
If our information systems 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. Further, we may suffer loss of critical data and interruptions or delays in our operations. 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, security 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.
If the security of our data is breached we may be subjected to adverse publicity, litigation and significant expenses.
Information systems are susceptible to an increasing threat of continually evolving cybersecurity risks. We maintain security systems, devices and activity monitoring to prevent unauthorized access to our network, systems and databases containing confidential, proprietary, and personally identifiable information. Nevertheless, if unauthorized parties gain access to our networks, systems or databases, they may be able to steal, publish, delete or modify confidential 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 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. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional resources, train employees, and engage third-parties. Further, the regulatory environment surrounding information security, cybersecurity and privacy is increasingly demanding. If we are unable to comply with the new and changing security standards, we may be subject to fines, restrictions and financial exposure, which could adversely affect our retail operations.
If we lose key executives 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 key 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. AsFurthermore, as our business grows, we will need to attract and retain additional qualified personnel in a timely manner and we may not be able to do so.
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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 who understand and appreciate our culture based on a passion for the action sports lifestyleand brand and are able to adequately represent this culture to our customers.culture. 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. Our business depends on the ability to hire and retain qualified technical and support roles for procurement, distribution, e-commerce and back office functions. Competition for qualified employees in these areas 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 and ecommerce fulfillment centersoperations 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. If we are unable to hire qualified temporary personnel, our results of operations could be adversely impacted.
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 business could suffer with the closure or disruption of our home office or our distribution or ecommerce fulfillment centers.
Domestically, we rely on a single distribution center locatedA decline in Corona, 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 storecash flows from 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 that affects one of the regions 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 could have a material adverse effect on our business and growth plans.
Payments under 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. Total rent expense, including contingent rent based on sales of some of our stores, was $64.6 million, $53.4 million and $50.0 million for fiscal 2014, 2013 and 2012. Total rent expense amounts do not include real estate taxes, insurance, common area maintenance charges and other executory costs, which were $35.6 million, $32.0 million and $28.0 million for fiscal 2014, 2013 and 2012.
At January 31, 2015, we were committed to property owners for minimum lease payments of $423.8 million. In addition to minimum lease payments, substantially all of our store leases provide for contingent rent payments
based on sales of the respective stores, as well as real estate taxes, insurance, common area maintenance charges and 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 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 payfund our lease expensescurrent operations and to fulfill our growth strategy, including the payment of our operating leases, wages, store operation costs and 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 loansour credit facility or from other sources, we may not be able to servicepay our operating lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could have a material adverse effect on our business.
The terms of our primaryasset-based revolving credit facilityagreement impose operating and financialcertain restrictions on us that may impair our ability to respond to changing business and economic conditions. These restrictionsconditions, which could have a significant adverse impact on our business. Additionally, our business could suffer if our ability to acquire financing is reduced or eliminated.
We maintain a securedan asset-based revolving credit agreement with Wells Fargo Bank, N.A., which provides us withfor a senior secured revolving credit facility until September 1, 2016(“ABL Facility”) of up to $25.0 million, which, pursuant to an accordion feature, may be increased to $35.0 million at our discretion.$100 million. The credit agreementABL Facility contains a number of restrictionsvarious representations, warranties and restrictive covenants that, generally limitamong other things and subject to specified circumstances and exceptions, restrict our ability to amongincur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other things, (1) incur additional debt, (2) undergo aindebtedness, engage in mergers, dispose of certain assets or change in ownership and (3) enter into certain transactions. The credit agreement also contains financial covenants that require usthe nature of their business. In addition, excess availability equal to meet certain specified financial tests and ratios, including, a maximum net income after taxesat least 10% of not less than one dollar on a trailing four-quarter basis provided, that, there shallthe loan cap must be added to net income all charges for impairment of goodwill and other intangibles and up to an aggregate of $5.0 million 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 borrowings outstanding. Our accounts receivable, general intangibles, inventory and equipment have been pledged to secure our obligationsmaintained under the credit agreement. We must also provideABL Facility. The ABL Facility does not otherwise contain financial information and statements to our lender. We were in compliance with all such covenants at January 31, 2015. There were no borrowings outstanding under the secured revolving credit facility at January 31, 2015 and February 1, 2014. We had open commercial letters of credit outstanding under our secured revolving credit facility of $0.3 million at January 31, 2015 and February 1, 2014.
A breach of any of these restrictive covenants or our inability to comply with the required financial tests and ratiosmaintenance covenants. These restrictions could result in a default under the credit agreement. If a default occurs, the lender may elect to declare all borrowings outstanding, together with accrued interest and other fees, to be immediately due and payable. If we are unable to repay borrowings outstanding 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.
The ABL Facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control. Additionally, in the current economic environment, we cannot be assured that our borrowing relationship with our lenders will continue or that our lenders will remain able to support their commitments to us in the future. If our lenders fail to do so, then we may not be able to secure alternative financing on commercially reasonable terms, or at all.
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Our business could suffer if a manufacturer fails to use acceptable labor practices.
We do not control our vendorswith the closure or the manufacturers that produce the products we buy from them, nor do we control the labor practicesdisruption of our vendorshome office or our distribution centers.
Domestically, we rely on a single distribution center located in Corona, California to receive, store and these manufacturers. The violationdistribute the vast majority of laborour merchandise to our domestic stores. 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. We operate a distribution center located in Delta, British Columbia, Canada to distribute our merchandise to our Canadian stores. We operate a distribution and fulfillment center located in Melbourne, Australia to distribute our merchandise to our Australian stores. Additionally, we are headquartered in Lynnwood, Washington. As a result, a natural disaster or other laws by any of our vendors or these manufacturers, or the divergencecatastrophic event that affects one of the labor practices followed by any ofregions where we operate these centers or our vendors or these manufacturers from those generally accepted as ethical in the U.S.,home office could interrupt, or otherwisesignificantly disrupt the shipment of finished products to us or damage our reputation. Any of these, in turn, couldoperations and have a material adverse effect on our financial condition andbusiness, results of operations. In that regard, mostoperations and financial condition.
The effects of the products we sell are manufactured overseas, primarily in Asia and Central America, which may increase the risk that the labor practices followed by the manufacturerswar, acts of these products may differ from those considered acceptable in the U.S.
Additionally, our products are subject to regulationterrorism, threat 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 finesterrorism, or penalties, whichother types of mall violence, could adversely affect our reputation and sales. Issues with the quality and safety of merchandise we sell, regardlessbusiness.
Most of our culpability,stores are located in shopping malls. Any threat of terrorist attacks or customeractual terrorist events, or other types of mall violence, such as shootings in malls, particularly in public areas, could lead to lower consumer 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 consumer traffic due to security concerns, about such issues, could result in damage to our reputation, lostdecreased sales. Additionally, the threat, escalation or commencement of war or other armed conflict elsewhere, could significantly diminish consumer spending, and result in decreased sales. Decreased 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, could have a material adverse effect on our comparable 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.
We are continuing to make investments to improve our information systems infrastructure. If our 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 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 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, or Blue Tomato, or Fast Times brands, our store 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 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.trademarks. 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 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.
Most 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, could 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 could 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 foreign 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.
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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.
Our failure to comply with federal, state, local or foreign laws and regulations, or changes in these laws and regulations, 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 including those related to employment, trade, consumer protection, transportation, occupancy laws, health care, wage laws, employee health and safety, taxes, privacy, health information privacy, identify theft, customs, truth-in-advertising, securities laws, unsolicited commercial communication and environmental issues. Our policies, procedures and internal controls are designed to comply with foreign and domestic laws and regulations, such as those required by the Sarbanes-Oxley Act of 2002 and the U.S. Foreign Corrupt Practices Act. Although we have policies and procedures aimed at ensuring legal and regulatory compliance, our employees or vendors could take actions that violate these laws and regulations. ChangesAny violations of such laws or regulations could have an adverse effect on our reputation, results of operations, financial condition and cash flows. Furthermore, 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 issuesparticularly in the U.S. and trade,Europe, could adversely affect our results of operations or financial condition.
Our business could be adversely affected by increased labor costs, including costs related to an increaseFluctuations in the minimum wageour tax obligations and new health care laws.
Labor is a primary componenteffective tax rate may result 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 impactvolatility in 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. 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, The Patient Protection and Affordable Care Act was enacted requiring employers such as us to provide health insurance for all qualifying employees or pay penalties for not providing coverage. The most significant increases in cost will occur in fiscal 2015 and fiscal 2016. We evaluated the impact the new law will have on us, and 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 we expect to raise our labor costs. While the majority of these costs will begin in fiscal 2015 and fiscal 2016, 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 or 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.results.
We completedare subject to income taxes in many domestic and foreign jurisdictions. In addition, our initial public offeringproducts are subject to import and excise duties and/or sales, consumption or value-added taxes 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 servemany jurisdictions. We record tax expense based on our boardestimates of directors or as officers.
Failurefuture payments, which include reserves for estimates of probable settlements of domestic and foreign tax audits. At any one time, many tax years are subject 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 managementaudit by various taxing jurisdictions. There can certifybe no assurance as to the effectivenessoutcome of these audits which may have an adverse effect to our internal controls andbusiness. In addition, 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 futureeffective tax rate may be required to improve our financialmaterially impacted by changes in tax rates and managerial controls, reporting systemsduties, the mix and procedures, to incur substantial expenses to make such improvements and to hire additional personnel. If our management is ever unable to certify the effectivenesslevel of our internal controlsearnings or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting,losses by taxing jurisdictions, 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 in the United States of America (“U.S. GAAP”). New accounting rules or regulations andby changes to existing accounting rules or regulationsregulations. Changes to foreign or domestic tax laws could 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 internationalmaterial impact on our financial reporting standards, could negatively affect ourcondition, results of operations and financial condition through increased cost of compliance.or cash flows.
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’analysts' estimates of our future performance. The analysts’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,
The reduction of total outstanding shares through the execution of the share repurchase program of common stock may increase the risk that a securities class action litigation and associated derivative lawsuits were brought against us and such actions are frequently brought against other companies followinggroup of shareholders could form 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 maygroup to 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.controlling shareholder.
We do not have our excess cash primarily invested in statea controlling shareholder, nor are we aware of any shareholders that have formed a “group” (defined as when two or more persons agree to act together for the purposes of acquiring, holding, voting or otherwise disposing of the equity securities of an issuer). The reduction of total outstanding shares through the execution of the share repurchase program of common stock may increase the risk that a group of shareholders could form a group to become a controlling shareholder.
A controlling shareholder would have significant influence over, and local municipal securities and variable-rate demand notes. These investments have historically been considered very safe investments with minimal default rates. At January 31, 2015, we had $138.2 million of investments in state and local government securities and variable-rate demand notes. These securities are not guaranteed by the U.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 the ability to control, matters requiring approval by our shareholders, including the election of directors and approval of mergers, consolidations, sales of assets, recapitalizations and amendments to our articles of incorporation. Furthermore, a negative adverse effect on our resultscontrolling shareholder may take actions with which other shareholders do not agree, including actions that delay, defer or prevent a change of operations, liquidity and financial condition.
A decline in the market price of our stock and/or our performance may trigger an impairmentcontrol of the goodwillcompany and other indefinite-lived intangible assets recorded onthat could cause the consolidated balance sheets.price that investors are willing to pay for the company’s stock to decline.
Goodwill and other indefinite-lived intangible assets are 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 impairment charge, which could have a significant impact on our results of operations.19
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 a non-cash impairment charge related to underperforming stores, which could impact our results of operations.
None.
All of our stores are occupied under operating leases and encompassed approximately 1.82.0 million total square feet at January 31, 2015.28, 2017.
We own approximately 356,000 square feet of land in Lynnwood, Washington, and completed construction of a 63,071 square foot global home office in fiscal 2012. Additionally, we lease 14,208 square feet of office space in Schladming, Austria for our European home office. This lease is set to expire in 2017.2027.
We own a 168,450 square foot building in Corona, California that serves as our domestic warehouse and distribution 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 82,06495,508 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. We lease a 2,852 square feet distribution and ecommerce fulfillment center in Melbourne, Australia that supports our Fast Times ecommerce and store operations in Australia. This lease is set to expire in 2018.
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 10,9, “Commitments and Contingencies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K, for additional information related to legal proceedings.
Not applicable.
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Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is traded on the Nasdaq Global Select Market under the symbol “ZUMZ.” At January 31, 2015,28, 2017, there were 29,417,71224,944,782 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.
Fiscal 2014 | High | Low | ||||||
First Fiscal Quarter (February 2, 2014—May 3, 2014) | $ | 26.50 | $ | 20.68 | ||||
Second Fiscal Quarter (May 4, 2014—August 2, 2014) | $ | 30.75 | $ | 24.25 | ||||
Third Fiscal Quarter (August 3, 2014—November 1, 2014) | $ | 34.64 | $ | 27.21 | ||||
Fourth Fiscal Quarter (November 2, 2013—January 31, 2015) | $ | 41.81 | $ | 32.68 | ||||
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 2016 |
| High |
|
| Low |
| ||
First Fiscal Quarter (January 31, 2016—April 30, 2016) |
| $ | 22.14 |
|
| $ | 16.33 |
|
Second Fiscal Quarter (May 1, 2016—July 30, 2016) |
| $ | 17.12 |
|
| $ | 13.50 |
|
Third Fiscal Quarter (July 31, 2016—October 29, 2016) |
| $ | 23.07 |
|
| $ | 14.42 |
|
Fourth Fiscal Quarter (October 30, 2016—January 28, 2017) |
| $ | 26.55 |
|
| $ | 18.20 |
|
Fiscal 2015 |
| High |
|
| Low |
| ||
First Fiscal Quarter (February 1, 2015—May 2, 2015) |
| $ | 40.64 |
|
| $ | 30.89 |
|
Second Fiscal Quarter (May 3, 2015—August 1, 2015) |
| $ | 32.29 |
|
| $ | 23.51 |
|
Third Fiscal Quarter (August 2, 2015—October 31, 2015) |
| $ | 26.32 |
|
| $ | 13.75 |
|
Fourth Fiscal Quarter (November 1, 2015—January 30, 2016) |
| $ | 18.49 |
|
| $ | 11.53 |
|
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Performance Measurement Comparison
The following graph shows a comparison for total cumulative returns for Zumiez, the Nasdaq Composite Index and the Nasdaq Retail Trade Index during the period commencing on January 30, 201028, 2012 and ending on January 31, 2015.28, 2017. The comparison assumes $100 was invested on January 30, 201028, 2012 in each of 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.
| 1/28/12 |
| 2/2/13 |
| 2/1/14 |
| 1/31/15 |
| 1/30/16 |
| 1/28/17 | |||||||||||||||||||||||||
1/30/10 | 1/29/11 | 1/28/12 | 2/2/13 | 2/1/14 | 1/31/15 |
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|
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| |||||||||||||||||||
Zumiez | 100.00 | 175.26 | 222.55 | 165.83 | 169.05 | 292.93 |
| 100.00 |
| 74.51 |
| 75.96 |
| 131.63 |
| 63.93 |
| 66.54 | ||||||||||||||||||
NASDAQ Composite | 100.00 | 126.90 | 134.50 | 152.96 | 204.19 | 231.72 |
| 100.00 |
| 113.29 |
| 151.56 |
| 172.90 |
| 172.62 |
| 211.07 | ||||||||||||||||||
NASDAQ Retail Trade | 100.00 | 128.20 | 143.05 | 176.27 | 219.05 | 232.39 |
| 100.00 |
| 123.01 |
| 155.03 |
| 174.00 |
| 205.56 |
| 247.71 |
Holders of the Company’s Capital Stock
We had 360465 shareholders of record as of February 27, 2015.2017.
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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.
Recent Sales of Unregistered Securities
None
Issuer Purchases of Equity Securities
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 $22.0 million of our common stock. This repurchase program was completed in December 2012. In December 2012, we publicly announced that2015, our Board of Directors authorized us to repurchase up to an additional $20.0$70.0 million of our common stock. On December 4, 2013, our BoardThis program was expired as 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. On December 10, 2014 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 30, 2016, unless the time period is extended or shortened by the Board of Directors.28, 2017. There were no issuer purchases with respect toof our common stock made during the thirteen weeks ended January 31, 2015.
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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 2014 (1) | Fiscal 2013 (2) | Fiscal 2012 (3) | Fiscal 2011 | Fiscal 2010 (4) | ||||||||||||||||
Statement of Operations Data (in thousands, except per share data): | ||||||||||||||||||||
Net sales | $ | 811,551 | $ | 724,337 | $ | 669,393 | $ | 555,874 | $ | 478,849 | ||||||||||
Cost of goods sold | 524,468 | 462,577 | 428,109 | 354,198 | 311,028 | |||||||||||||||
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Gross profit | 287,083 | 261,760 | 241,284 | 201,676 | 167,821 | |||||||||||||||
Selling, general and administrative expenses | 215,512 | 188,918 | 172,742 | 141,444 | 130,454 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Operating profit | 71,571 | 72,842 | 68,542 | 60,232 | 37,367 | |||||||||||||||
Interest income, net | 637 | 711 | 1,410 | 1,836 | 1,496 | |||||||||||||||
Other (expense) income, net | (557 | ) | (1,589 | ) | 327 | (379 | ) | (8 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings before income taxes | 71,651 | 71,964 | 70,279 | 61,689 | 38,855 | |||||||||||||||
Provision for income taxes | 28,459 | 26,016 | 28,115 | 24,338 | 14,652 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income | $ | 43,192 | $ | 45,948 | $ | 42,164 | $ | 37,351 | $ | 24,203 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Earnings per share: | ||||||||||||||||||||
Basic | $ | 1.50 | $ | 1.54 | $ | 1.37 | $ | 1.22 | $ | 0.81 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Diluted | $ | 1.47 | $ | 1.52 | $ | 1.35 | $ | 1.20 | $ | 0.79 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||
Basic | 28,871 | 29,810 | 30,742 | 30,527 | 29,971 | |||||||||||||||
Diluted | 29,288 | 30,206 | 31,273 | 31,119 | 30,794 | |||||||||||||||
Balance Sheet Data (in thousands): | ||||||||||||||||||||
Cash, cash equivalents and current marketable securities | $ | 154,644 | $ | 117,155 | $ | 103,172 | $ | 172,798 | $ | 128,801 | ||||||||||
Working capital (5) | 198,316 | 168,472 | 146,115 | 197,927 | 155,400 | |||||||||||||||
Total assets | 493,705 | 443,403 | 409,098 | 362,157 | 301,631 | |||||||||||||||
Total long-term liabilities | 52,734 | 46,375 | 48,478 | 34,304 | 29,435 | |||||||||||||||
Total shareholders’ equity | 359,524 | 335,654 | 303,421 | 272,277 | 226,735 | |||||||||||||||
Other Financial Data (in thousands, except gross margin and operating margin): | ||||||||||||||||||||
Gross margin (6) | 35.4 | % | 36.1 | % | 36.0 | % | 36.3 | % | 35.0 | % | ||||||||||
Operating margin (7) | 8.8 | % | 10.1 | % | 10.2 | % | 10.8 | % | 7.8 | % | ||||||||||
Capital expenditures | $ | 35,758 | $ | 35,969 | $ | 41,070 | $ | 25,508 | $ | 29,124 | ||||||||||
Depreciation, amortization and accretion | $ | 29,167 | $ | 26,596 | $ | 22,957 | $ | 19,744 | $ | 17,923 | ||||||||||
Company Data: | ||||||||||||||||||||
Number of stores open at end of period | 603 | 551 | 498 | 444 | 400 | |||||||||||||||
Comparable sales increase (decrease) (8) | 4.6 | % | (0.3 | %) | 5.0 | % | 8.7 | % | 11.9 | % | ||||||||||
Net sales per store (9) (in thousands) | $ | 1,390 | $ | 1,366 | $ | 1,403 | $ | 1,303 | $ | 1,221 | ||||||||||
Total store square footage (10) (in thousands) | 1,770 | 1,624 | 1,480 | 1,308 | 1,174 | |||||||||||||||
Average square footage per store (11) | 2,936 | 2,947 | 2,961 | 2,945 | 2,935 | |||||||||||||||
Net sales per square foot (12) | $ | 473 | $ | 462 | $ | 475 | $ | 443 | $ | 416 |
|
| Fiscal 2016 |
|
| Fiscal 2015 (1) |
|
| Fiscal 2014 (2) |
|
| Fiscal 2013 (3) |
|
| Fiscal 2012 (4) |
| |||||
Statement of Operations Data (in thousands, except per share data): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| $ | 836,268 |
|
| $ | 804,183 |
|
| $ | 811,551 |
|
| $ | 724,337 |
|
| $ | 669,393 |
|
Cost of goods sold |
|
| 561,266 |
|
|
| 535,559 |
|
|
| 524,468 |
|
|
| 462,577 |
|
|
| 428,109 |
|
Gross profit |
|
| 275,002 |
|
|
| 268,624 |
|
|
| 287,083 |
|
|
| 261,760 |
|
|
| 241,284 |
|
Selling, general and administrative expenses |
|
| 235,259 |
|
|
| 222,459 |
|
|
| 215,512 |
|
|
| 188,918 |
|
|
| 172,742 |
|
Operating profit |
|
| 39,743 |
|
|
| 46,165 |
|
|
| 71,571 |
|
|
| 72,842 |
|
|
| 68,542 |
|
Interest income, net |
|
| 32 |
|
|
| 529 |
|
|
| 637 |
|
|
| 711 |
|
|
| 1,410 |
|
Other income (expense), net |
|
| 449 |
|
|
| (833 | ) |
|
| (557 | ) |
|
| (1,589 | ) |
|
| 327 |
|
Earnings before income taxes |
|
| 40,224 |
|
|
| 45,861 |
|
|
| 71,651 |
|
|
| 71,964 |
|
|
| 70,279 |
|
Provision for income taxes |
|
| 14,320 |
|
|
| 17,076 |
|
|
| 28,459 |
|
|
| 26,016 |
|
|
| 28,115 |
|
Net income |
| $ | 25,904 |
|
| $ | 28,785 |
|
| $ | 43,192 |
|
| $ | 45,948 |
|
| $ | 42,164 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.05 |
|
| $ | 1.05 |
|
| $ | 1.50 |
|
| $ | 1.54 |
|
| $ | 1.37 |
|
Diluted |
| $ | 1.04 |
|
| $ | 1.04 |
|
| $ | 1.47 |
|
| $ | 1.52 |
|
| $ | 1.35 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 24,727 |
|
|
| 27,497 |
|
|
| 28,871 |
|
|
| 29,810 |
|
|
| 30,742 |
|
Diluted |
|
| 24,908 |
|
|
| 27,673 |
|
|
| 29,288 |
|
|
| 30,206 |
|
|
| 31,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and current marketable securities |
| $ | 78,826 |
|
| $ | 75,554 |
|
| $ | 154,644 |
|
| $ | 117,155 |
|
| $ | 103,172 |
|
Working capital |
|
| 137,766 |
|
|
| 129,755 |
|
|
| 191,351 |
|
|
| 168,472 |
|
|
| 146,115 |
|
Total assets |
|
| 426,683 |
|
|
| 414,695 |
|
|
| 493,705 |
|
|
| 443,403 |
|
|
| 409,098 |
|
Total long-term liabilities |
|
| 46,035 |
|
|
| 48,596 |
|
|
| 52,734 |
|
|
| 46,375 |
|
|
| 48,478 |
|
Total shareholders’ equity |
|
| 307,051 |
|
|
| 296,957 |
|
|
| 359,524 |
|
|
| 335,654 |
|
|
| 303,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data (in thousands, except gross margin and operating margin): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 32.9 | % |
|
| 33.4 | % |
|
| 35.4 | % |
|
| 36.1 | % |
|
| 36.0 | % |
Operating margin |
|
| 4.8 | % |
|
| 5.7 | % |
|
| 8.8 | % |
|
| 10.1 | % |
|
| 10.2 | % |
Capital expenditures |
| $ | 20,400 |
|
| $ | 34,834 |
|
| $ | 35,758 |
|
| $ | 35,969 |
|
| $ | 41,070 |
|
Depreciation, amortization and accretion |
| $ | 27,916 |
|
| $ | 30,410 |
|
| $ | 29,167 |
|
| $ | 26,596 |
|
| $ | 22,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of stores open at end of period |
|
| 685 |
|
|
| 658 |
|
|
| 603 |
|
|
| 551 |
|
|
| 498 |
|
Comparable sales (decrease) increase (5) |
| (0.2%) |
|
|
| (5.3 | %) |
|
| 4.6 | % |
|
| (0.3 | %) |
|
| 5.0 | % | |
Net sales per store (6) (in thousands) |
| $ | 1,235 |
|
| $ | 1,256 |
|
| $ | 1,390 |
|
| $ | 1,366 |
|
| $ | 1,403 |
|
Total store square footage (7) (in thousands) |
|
| 2,009 |
|
|
| 1,935 |
|
|
| 1,770 |
|
|
| 1,624 |
|
|
| 1,480 |
|
Average square footage per store (8) |
|
| 2,932 |
|
|
| 2,941 |
|
|
| 2,936 |
|
|
| 2,947 |
|
|
| 2,961 |
|
Net sales per square foot (9) |
| $ | 420 |
|
| $ | 427 |
|
| $ | 473 |
|
| $ | 462 |
|
| $ | 475 |
|
(1) | Included in the results for fiscal 2015 is $1.2 million for the exit costs associated with the closure of our Kansas fulfillment center, $0.6 million for the expense associated with the incentive payments in conjunction with our acquisition of Blue Tomato and an expense of $0.9 million of amortization of intangible assets. |
24
(3) | Included in the results for fiscal 2013 are the following charges: a) a benefit of $2.7 million representing the correction of an error related to our calculation to account for rent expense on a straight-line basis, b) a benefit of $2.6 million for the reversal of the previously recorded expense associated with the future incentive payments |
(4) | 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. |
(5) |
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—General” for more information about how we compute comparable sales. |
(6) | Net sales per store represents net sales, including 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 fiscal year divided by the number of months in the fiscal year. |
(7) | Total store square footage includes retail selling, storage and back office space at the end of the fiscal year. |
(8) | Average square footage per store is calculated based on the total store square footage at the end of the fiscal year, including retail selling, storage and back office space, of all stores open at the end of the fiscal year. |
(9) | Net sales per square foot represents net sales, including 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 fiscal year divided by the number of months in the fiscal year. |
25
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.
Fiscal 2014—2016—A Review of This Past Year
TeenIn fiscal 2016 teen retail in general began fiscal 2014 infaced a continuing challenging sales environment with many mall basedmall-based teen retailers seeing significantexperiencing declining sales and store closures. Following a fourth quarter 2015 comparable sales decrease of 9.5%, Zumiez comparable sales remained negative through the first half of fiscal 2016. By the third quarter of fiscal 2016, driven by the strength of several new brands, Zumiez comparable sales turned positive and remained positive through the balance of the year. The full year comparable sales for fiscal 2016 decreased 0.2%. Operating margins and earnings declines overdeclined from the past coupleprior year due primarily to deleveraging of years. As the year progressed some signs of a stronger retail landscape began to appear, culminating with a considerably stronger fourth quarter. Coming into fiscal 2014 our sales performancefixed costs on slightly negative comparable sales. We continued to be lower than historical results andmake investments in our North America store footprint focused on expanding in the first quarterUnited States and Canada by adding 22 new stores during fiscal 2016. We also added 6 new stores to our Blue Tomato operations in Europe and added 5 stores through the acquisition of the year we saw some margin erosion as we successfully cleaned up our inventory position following a tough Holiday seasonFast Times in the prior fiscal year. Comparable sales trends improved as the year progressed, particularly in the important fourth quarter, and for the year we achieved a comparable sales increase of 4.6%. Australia.
As a leading lifestyle retailer we continue to differentiate ourselves through our distinctive brand offering and diverse product selection, as well as the unique customer experience our sales associates provide. In addition, theWe also believe that investments and efforts we have made toward expandingin our North America footprint, establishing a progressive omni-channel platform focused on creating a seamless shopping experience for our customer between the physical and international expansion are enhancingdigital channels is critical for our sales results.
In 2014 we continued to fund our growth initiatives with a focus on long-term returns. These investments included continued expansionfinancial performance. Fiscal 2016 represented the first year of localized fulfillment of our storeson-line orders which drove significant improvements in North America, technology enhancements, fortifying our commerce platform through further upgradesspeed of delivery to our digital infrastructure, and the ongoing build outcustomers. In store fulfillment is a key part of our European operations. In North Americaomni-channel strategy that we opened 50 stores made upbelieve will drive long term market share by leveraging the strengths of 43 in the U.S.our store sales team, providing better and 7 in Canada,faster service to customers, improving product margins, and in Europe we opened 6 stores bringing our total stores count to 603. Additionally we made further progress across our omni-channel initiatives, enhancing our customers sales experience by serving them better whenever and wherever they want to interact with us.providing additional selling opportunities.
The following table shows net sales, operating profit, andoperating margin, and diluted earnings per share for fiscal 20142016 compared to fiscal 2013.2015. The fiscal 20142015 results include $8.7$1.5 million of charges associated with the acquisition of Blue Tomato made up of $6.4$0.6 million for future incentive payments related to the transaction and $2.3$0.9 million for the amortization of intangible assets. The fiscal 2013 results include a $2.7assets and $1.2 million benefit for the correction of a prior year errorassociated with exit charges related to our calculation to account for rent expense on a straight-line basis, a $1.3 million expense for a litigation settlement, and charges associated with the acquisition of Blue Tomato netting 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.Kansas fulfillment center.
Fiscal 2014 | Fiscal 2013 | % Change |
| Fiscal 2016 |
|
| Fiscal 2015 |
|
| % Change |
| |||||||||||||
Net sales (in thousands) | $ | 811,551 | $ | 724,337 | 12 | % |
| $ | 836,268 |
|
| $ | 804,183 |
|
|
| 4 | % | ||||||
Operating profit (in thousands) | $ | 71,571 | $ | 72,842 | -2 | % |
| $ | 39,743 |
|
| $ | 46,165 |
|
|
| -14 | % | ||||||
Operating margin | 8.8 | % | 10.1 | % |
|
| 4.8 | % |
|
| 5.7 | % |
|
|
|
| ||||||||
Diluted earnings per share | $ | 1.47 | $ | 1.52 | -3 | % |
| $ | 1.04 |
|
| $ | 1.04 |
|
|
| 0 | % |
The increase in net sales was primarily driven by the net addition of 5227 stores (56(33 new stores offset by four6 store closures) and, offset by a 4.6%0.2% comparable sales increase.decrease. The increasedecrease in comparable sales was driven by a decrease in dollars per transaction, partially offset by an increase in transactions and an increase in dollars per transaction.transactions. Dollars per transaction increased primarilydecreased due to an increasea decrease in units per transaction and a slight increasedecrease in average unit retail. Operating margin was down in fiscal 20142016 compared to fiscal 20132015 primarily as a result of the charges discussed above and a slight decrease in product margin for the year offset slightly by leveragingdeleveraging operating costs onpartially offset by a 12.0% sales increase.decline in unique charges as discussed above.
26
Fiscal 2015—2017—A Look At the Upcoming Year
We enter fiscal 2015 with some sales momentum, having achieved an 8.3% comparable sales increase in fiscal fourth quarter 2014. While we are encouraged with the improved performance, there is not enough evidence to suggest this is the beginning of a sustained retail trend. As suchEntering 2017 we remain cautious onwith our expectations for fiscal 2015 although we do believe sales, including comparable sales, and earnings will increase for the year.expectations. Our focus will be on continued execution of our provencore strategies as well as strategic investments centered on long-term quality growth. These investments will be largely be focused on the roll-out of our new Customer Engagement Suite, continued store growth both domestic and international,continued investments in our people. As we are closer to our targeted number of stores in North America, we expect that store growth in fiscal 2017 will be less than in fiscal 2016 with an estimated 18 stores opening during the fiscal year compared with 28 stores opened and 5 stores acquired in fiscal 2016. In 2017 we will invest in the roll-out of our Customer Engagement Suite focused on integrating our on-line and in-store point of sale (POS) systems, order management system (OMS), and transportation management system (TMS) improving our efficiency and further enhancements across the business to supportenhancing our omni-channel capabilities.
In fiscal 2015, excluding costs associated with the acquisition of Blue Tomato,2017, we expect our cost structure will grow at a similarhigher rate than 2016, primarily tied to the investments outlined above and required statutory wage increases. We anticipate inventory levels per square foot will grow at fiscal 2014.
year-end primarily due to timing related to the addition of the 53rd week. Excluding any possible share buy-backs, we expect cash, short-term investments and working capital to increase, and do not anticipate any new long-term borrowings during the year. Long-term we aim to grow sales annually and grow operating profit at a faster rate than sales by focusing on our growth initiativesthe changing consumer environment while managing our cost structure. Our primary growth vehicles in both our domestic and international markets are:
In fiscal 2015, we are expecting total sales to increase driven in part by an increase in comparable sales, recognizing that our performance can be impacted by a variety of factors including external influences. We are also planning sales growth from the opening of approximately 57 new stores, including approximately six stores in Europe. It is our goal to run quality sales gains and expect gross margins to have some fluctuation quarter to quarter but generally remain in-line with fiscal 2014. We will make further investments in people and infrastructure and expect earnings to increase. 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 during the year.
General
Net sales constitute gross sales, (netnet of actual and estimated returns and deductions for promotions)promotions, and shipping revenue. Net sales include our store sales and our ecommerce sales. Net sales are allocated between store and ecommerce based on the location where the sale is fulfilled, which does not always represent where the customer originated the sale. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized in net sales after 24 months, at which time the likelihood of redemption is considered remote based on our historical redemption data.
We report “comparable sales” based on net sales beginning on the first anniversary of the first day of operation of a new store or ecommerce business. We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Therefore, our comparable sales also include our ecommerce sales. Changes in our comparable sales between two periods are based on net sales of store or ecommerce businesses which were in operation during both of the two periods being compared and, if a store or ecommerce business is included in the calculation of comparable sales for only a portion of one of the two periods being compared, then that store or ecommerce business is included in the calculation for only the comparable portion of the other period. Any 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 sales. Any store or ecommerce business that we acquire will be included in the calculation of comparable sales after the first anniversary of the acquisition date. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable sales. As a result, data herein regarding our comparable sales may not be comparable to similar data made available by our competitors or other retailers.
Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of goods sold also includes shrinkage, buying, occupancy, ecommerce fulfillment, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold, a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors’ products.
With respect to the freight component of our ecommerce sales, amounts billed to our customers are included in net sales and the related freight cost is charged to cost of goods sold.
27
Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, freight costs for merchandise shipments from the distribution centers to the stores, store supplies, depreciation on fixed assets at our home office and stores, facility expenses, training expenses and advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses, amortization of intangibles, future incentive payments, 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 sales. As previously described in detail under the caption “General,” comparable 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 sales to be an important indicator of our current performance. Comparable sales results are important to achieve leveraging of our costs, including store payroll and store occupancy. Comparable sales also have a direct impact on our total net sales, operating profit, cash and working capital.
Gross profit.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 sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense.
Results of Operations
The following table presents selected items on the consolidated statements of income as a percent of net sales:
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 |
| Fiscal 2016 |
|
| Fiscal 2015 |
|
| Fiscal 2014 |
| |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % | ||||||
Cost of goods sold | 64.6 | % | 63.9 | % | 64.0 | % |
|
| 67.1 | % |
|
| 66.6 | % |
|
| 64.6 | % | ||||||
|
|
| ||||||||||||||||||||||
Gross profit | 35.4 | % | 36.1 | % | 36.0 | % |
|
| 32.9 | % |
|
| 33.4 | % |
|
| 35.4 | % | ||||||
Selling, general and administrative expenses | 26.6 | % | 26.0 | % | 25.8 | % |
|
| 28.1 | % |
|
| 27.7 | % |
|
| 26.6 | % | ||||||
|
|
| ||||||||||||||||||||||
Operating profit | 8.8 | % | 10.1 | % | 10.2 | % |
|
| 4.8 | % |
|
| 5.7 | % |
|
| 8.8 | % | ||||||
Interest and other (expenses)/income, net | 0.0 | % | (0.2 | %) | 0.3 | % | ||||||||||||||||||
|
|
| ||||||||||||||||||||||
Interest and other income (expenses), net |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.0 | % | ||||||||||||
Earnings before income taxes | 8.8 | % | 9.9 | % | 10.5 | % |
|
| 4.8 | % |
|
| 5.7 | % |
|
| 8.8 | % | ||||||
Provision for income taxes | 3.5 | % | 3.6 | % | 4.2 | % |
|
| 1.7 | % |
|
| 2.1 | % |
|
| 3.5 | % | ||||||
|
|
| ||||||||||||||||||||||
Net income | 5.3 | % | 6.3 | % | 6.3 | % |
|
| 3.1 | % |
|
| 3.6 | % |
|
| 5.3 | % | ||||||
|
|
|
Fiscal 20142016 Results Compared With Fiscal 20132015
Net Sales
Net sales were $811.6$836.3 million for fiscal 20142016 compared to $724.3$804.2 million for fiscal 2013,2015, an increase of $87.2$32.1 million or 12.0%4.0%. The increase reflected a $34.5 million increase due to the net addition of 5227 stores (made up of 5022 new stores in North America, and six6 new stores in Europe, and 5 stores acquired in Australia offset by four6 store closures in North America) and a $33.2closures), partially offset by decrease of $1.6 million increase due toof comparable sales forin fiscal 2014.2016. By region, North America sales increased $71.5$25.7 million or 10.6%3.5% and Europeanother international sales increased $15.7$6.4 million or 32.4%8.5% during fiscal 20142016 compared to fiscal 2013.2015.
28
The 4.6% increase0.2% decrease in comparable sales was primarily driven by a decrease in dollars per transaction partially offset by an increase in comparable transactions and dollars per transaction.transactions. Dollars per transaction increaseddecreased due to an increasea decrease in units per transaction and an increase in average unit retail. Comparable sales increasesdecreases in hardgoods, accessories,hardware, footwear, junior’s apparel, and men’s apparelaccessories were partially offset by a comparable sales decreaseincrease in footwear.men’s apparel. For information as to how we define comparable sales, see “General” above.
Gross Profit
Gross profit was $287.1$275.0 million for fiscal 20142016 compared to $261.8$268.6 million for fiscal 2013,2015, an increase of $25.3$6.4 million, or 9.7%2.4%. As a percentage of net sales, gross profit decreased 7050 basis points in fiscal 20142016 to 35.4%32.9%. The decrease was primarily driven by a 40 basis points benefit from the correction of an error in our calculation to account for rent expense recorded in fiscal 2013, 30 basis point decrease in product margin, 10 basis point impact due to deleveraging of our store occupancy costs, and 10 basis points impact of the increase in ecommerce related costs due to growth in ecommerce sales as a percentage of total sales. These decreases were partially offset by 20 basis points impact due to distribution center efficiencies.costs.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were $215.5$235.3 million for fiscal 20142016 compared to $188.9$222.5 million for fiscal 2013,2015, an increase of $26.6$12.8 million, or 14.0%5.8%. SG&A expenses as a percent of net sales increased by 6040 basis points in fiscal 20142016 to 26.6%28.1%. The increase was primarily driven by a 11030 basis points impact from the expense associated with the estimated future incentive paymentsdeleveraging of store costs primarily related to be paid in conjunction with our acquisition of Blue Tomatowages and 1030 basis point impact due to an increase in incentive compensation. These increases werecorporate costs primarily related to wages partially offset by a 4020 basis point impact duedecrease in impairment of long-lived assets compared to corporate costs savings, and 20 basis points impact due to a litigation settlement charge incurred in fiscal 2013. See Note 3, “Business Combination,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of the Form 10-K, for additional information related to our future incentive payments.2015.
Net Income
Net income for fiscal 20142016 was $43.2$25.9 million, or $1.47$1.04 per diluted share, compared with net income of $45.9$28.8 million, or $1.52$1.04 per diluted share, for fiscal 2013.2015. Our effective income tax rate for fiscal 20142016 was 39.7%35.6% compared to 36.1%37.2% for fiscal 2013.2015. The increasedecrease in the effective tax rate for fiscal 20142016 compared to fiscal 20132015 was primarily due to the tax impact on the estimated future incentive payments in fiscal 2013 and 2014 and the release of valuation allowance related to net operating losses and other deferred tax assets ofour foreign subsidiaries in fiscal 2013.operations.
Fiscal 20132015 Results Compared With Fiscal 20122014
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 sales are compared to the comparable sales for the 52 weeks ended February 2, 2013. Net sales were $724.3$804.2 million for fiscal 20132015 compared to $669.4$811.6 million for fiscal 2012, an
increase2014, a decrease of $54.9$7.4 million or 8.2%0.9%. The increasedecrease reflected the net addition of 53 stores (made up of 53 new stores in North America and six new stores in Europe offset by six store closures in North America) and Blue Tomato sales during fiscal 2013 that were not comparable to the prior year, partially offset by a $9.3 million decrease due to the impact of the 53rd week included in fiscal 2012 results and a $1.7$42.1 million decrease due to comparable sales for fiscal 2013.2015 and a decrease of $19.6 million due to the impact of changes in foreign exchange rates, partially offset by the net addition of 55 stores (made up of 51 new stores in North America and 6 new stores in Europe offset by 2 store closures in North America). By region, North America sales increased $35.2decreased $19.0 million or 2.5% and European sales increased $19.7$11.6 million or 18.0% during fiscal 20132015 compared to fiscal 2012.2014.
The 0.3% decrease in comparable sales was primarily driven by increasing due to Blue Tomato ecommerce sales that were not comparable to the prior year and the growth in comparable ecommerce sales mentioned above. The5.3% decrease in comparable sales was primarily driven by a declinedecrease in comparable 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 dueand to changesa lesser extent an increase in sales product mix.units per transaction. Comparable sales decreases in accessories, men’s apparel, footwear, and boy’sjunior’s apparel were partially offset by a comparable sales increasesincrease in junior’s apparel, hardgoods and accessories.hardgoods. For information as to how we define comparable sales, see “General” above.
Gross Profit
Gross profit was $261.8$268.6 million for fiscal 20132015 compared to $241.3$287.1 million for fiscal 2012, an increase2014, a decrease of $20.5$18.5 million, or 8.5%6.4%. As a percentage of net sales, gross profit increased 10decreased 200 basis points in fiscal 20132015 to 36.1%33.4%. The increasedecrease was primarily driven by a 40140 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 pointspoint impact due to the deleveraging of our store occupancy costs, and a 5030 basis points impact of the increase in ecommerce related costs due to ecommerce sales increasing as a percentincluding $1.2 million in exit costs associated with the closure of total sales.our Kansas fulfillment center and 20 basis point decrease in product margin.
29
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were $188.9$222.5 million for fiscal 20132015 compared to $172.7$215.5 million for fiscal 2012,2014, an increase of $16.2$7.0 million, or 9.4%3.2%. SG&A expenses as a percent of net sales increased by 20110 basis points in fiscal 20132015 to 26.0%27.7%. The increase was primarily driven by a 60170 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 ofpoint decrease from the reversal of the previously recordedfiscal 2014 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. See Note 3, “Business Combination,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of the Form 10-K, for additional information related to our future incentive payments.Tomato.
Net Income
Net income for fiscal 20132015 was $45.9$28.8 million, or $1.52$1.04 per diluted share, compared with net income of $42.2$43.2 million, or $1.35$1.47 per diluted share, for fiscal 2012.2014. Our effective income tax rate for fiscal 20132015 was 36.1%37.2% compared to 40.0%39.7% for fiscal 2012.2014. The decrease in the effective tax rate for fiscal 20132015 compared to fiscal 20122014 was primarily due to the tax impact of non-taxable acquisition related expenses incurredforeign operations and the incentive payments 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.
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 2014 |
| Fiscal 2016 |
| |||||||||||||||||||||||||||||
First Quarter | Second Quarter | Third Quarter | Fourth Quarter (1) |
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
| |||||||||||||||||
(in thousands, except stores and per share data) |
| (in thousands, except stores and per share data) |
| |||||||||||||||||||||||||||||
Net sales | $ | 162,932 | $ | 176,709 | $ | 213,341 | $ | 258,569 |
| $ | 172,970 |
|
| $ | 178,272 |
|
| $ | 221,391 |
|
| $ | 263,635 |
| ||||||||
Gross profit | $ | 50,533 | $ | 60,912 | $ | 77,860 | $ | 97,778 |
| $ | 49,958 |
|
| $ | 54,844 |
|
| $ | 76,178 |
|
| $ | 94,022 |
| ||||||||
Operating profit | $ | 3,713 | $ | 11,605 | $ | 24,975 | $ | 31,278 |
| $ | (3,941 | ) |
| $ | (1,136 | ) |
| $ | 16,913 |
|
| $ | 27,907 |
| ||||||||
Net income | $ | 2,496 | $ | 7,456 | $ | 15,727 | $ | 17,513 |
| $ | (2,137 | ) |
| $ | (838 | ) |
| $ | 10,695 |
|
| $ | 18,184 |
| ||||||||
Basic earnings per share | $ | 0.09 | $ | 0.26 | $ | 0.54 | $ | 0.60 |
| $ | (0.08 | ) |
| $ | (0.03 | ) |
| $ | 0.44 |
|
| $ | 0.74 |
| ||||||||
Diluted earnings per share | $ | 0.09 | $ | 0.26 | $ | 0.54 | $ | 0.60 |
| $ | (0.08 | ) |
| $ | (0.03 | ) |
| $ | 0.43 |
|
| $ | 0.74 |
| ||||||||
Number of stores open at the end of the period | 558 | 582 | 602 | 603 |
|
| 663 |
|
|
| 673 |
|
|
| 688 |
|
|
| 685 |
| ||||||||||||
Comparable sales increase (decrease) | 1.8 | % | 3.4 | % | 3.7 | % | 8.3 | % |
|
| -7.5 | % |
|
| -4.9 | % |
|
| 4.0 | % |
|
| 5.1 | % | ||||||||
Fiscal 2013 | ||||||||||||||||||||||||||||||||
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 sales (decrease) increase | (0.7 | %) | 0.9 | % | 1.5 | % | (2.2 | %) |
30
|
| Fiscal 2015 |
| |||||||||||||
|
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
| ||||
|
| (in thousands, except stores and per share data) |
| |||||||||||||
Net sales |
| $ | 177,610 |
|
| $ | 179,819 |
|
| $ | 204,320 |
|
| $ | 242,434 |
|
Gross profit |
| $ | 56,535 |
|
| $ | 57,773 |
|
| $ | 70,059 |
|
| $ | 84,257 |
|
Operating profit |
| $ | 4,126 |
|
| $ | 5,312 |
|
| $ | 15,224 |
|
| $ | 21,503 |
|
Net income |
| $ | 2,770 |
|
| $ | 3,213 |
|
| $ | 9,653 |
|
| $ | 13,149 |
|
Basic earnings per share |
| $ | 0.10 |
|
| $ | 0.11 |
|
| $ | 0.36 |
|
| $ | 0.50 |
|
Diluted earnings per share |
| $ | 0.09 |
|
| $ | 0.11 |
|
| $ | 0.36 |
|
| $ | 0.50 |
|
Number of stores open at the end of the period |
| 616 |
|
| 640 |
|
| 653 |
|
| 658 |
| ||||
Comparable sales increase (decrease) |
|
| 3.0 | % |
|
| -4.5 | % |
|
| -7.3 | % |
|
| -9.5 | % |
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. Refer to Note 11, “Stockholders’ Equity” of the Notes to Consolidated Financial Statements for further discussion of the repurchase plan. 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 January 31, 201528, 2017 and February 1, 2014,January 30, 2016, cash, cash equivalents and current marketable securities were $154.6$78.8 million and $117.2$75.6 million. Working capital, the excess of current assets over current liabilities, was $198.3$137.8 million at the end of fiscal 2014,2016, an increase of 17.7%6.2% from $168.5$129.8 million at the end of fiscal 2013.2015. The increase in cash, cash equivalents and current marketable securities in fiscal 2014 were2016 was due primarily to cash provided by operating activities of $89.9$48.5 million, partially offset by $21.6 million repurchase of common stock and $20.4 million of capital expenditures of $35.8 million due primarily related to the opening of 5628 new stores in fiscal 20142016 and the $19.6 million repurchase of common stock.14 remodels and relocations.
The following table summarizes our cash flows from operating, investing and financing activities (in thousands):
|
| Fiscal 2016 |
|
| Fiscal 2015 |
|
| Fiscal 2014 |
| |||
Total cash provided by (used in) |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 48,455 |
|
| $ | 48,607 |
|
| $ | 89,937 |
|
Investing activities |
|
| (51,515 | ) |
|
| 64,730 |
|
|
| (73,873 | ) |
Financing activities |
|
| (20,074 | ) |
|
| (90,758 | ) |
|
| (13,933 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| 218 |
|
|
| (278 | ) |
|
| (903 | ) |
Increase in cash and cash equivalents |
| $ | (22,916 | ) |
| $ | 22,301 |
|
| $ | 1,228 |
|
31
Fiscal 2014 | Fiscal 2013 | Fiscal 2012 | ||||||||||
Total cash provided by (used in) | ||||||||||||
Operating activities | $ | 89,937 | $ | 66,894 | $ | 66,225 | ||||||
Investing activities | (73,873 | ) | (49,619 | ) | (41,079 | ) | ||||||
Financing activities | (13,933 | ) | (15,233 | ) | (22,519 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (903 | ) | 13 | 173 | ||||||||
|
|
|
|
|
| |||||||
Increase in cash and cash equivalents | $ | 1,228 | $ | 2,055 | $ | 2,800 | ||||||
|
|
|
|
|
|
Net cash provided by operating activities increaseddecreased by $23.0$0.1 million in fiscal 20142016 to $89.9$48.5 million from $66.9$48.6 million in fiscal 2013.2015. Net cash provided by operating activities increaseddecreased by $0.7$41.3 million in fiscal 20132015 to $66.9$48.6 million from $66.2$89.9 million in fiscal 2012.2014. 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 and excess tax benefit from stock-based compensation, and changes to the components of working capital.
Investing Activities
Net cash provided by investing activities was $51.5 million in fiscal 2016 related to $25.7 million in net purchases of marketable securities, $20.4 million of capital expenditures primarily for new store openings and existing store remodels or relocations and $5.4 million for the acquisition of Fast Times (net of cash acquired). Net cash provided by investing activities was $64.7 million in fiscal 2015 related to $99.6 million in net sales of marketable securities partially offset by $34.8 million of capital expenditures primarily for new store openings and existing store remodels or relocations. Net cash used in investing activities was $73.9 million in fiscal 2014 related to $35.8 million of capital expenditures primarily for new store openings and existing store remodels or relocations and $38.1 million in net purchases of marketable securities.
Financing Activities
Net cash used in investingfinancing activities in fiscal 2016 was $49.6$20.1 million, related to $21.6 million cash paid for repurchase of common stock, partially offset by $0.9 million in fiscal 2013proceeds from stock-based compensation exercises and related to $36.0tax benefits and $0.6 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 and other investments.proceeds on revolving credit facilities. Net cash used in investing
financing activities was $41.1 million in fiscal 2012 primarily2015 was $90.8 million, related to $69.7$92.2 million cash paid (netfor repurchase 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,common stock, partially offset by $70.7 million in net salesproceeds from stock-based compensation exercises and related tax benefits of marketable securities.
Financing Activities
$1.6 million. Net cash used in financing activities in fiscal 2014 was $13.9 million, related to $19.6 million cash paid for repurchase of common stock and $2.1 million of net payments on long tem debt, revolving credit facilities, and other liabilities, partially offset by proceeds from stock-based compensation exercises and related tax benefits of $7.7 million. 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.
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 secured32
As of January 28, 2017, we maintained an asset-based revolving credit agreement with Wells Fargo Bank, N.A.,National Association as administrative agent, collateral agent, letter of credit issuer and lenders, which provides us withfor a senior secured revolving credit facility until September 1, 2016 of up to $25.0$100 million which, pursuant(“ABL Facility”), subject 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 standbyborrowing base, with a letter of credit sub-limit of $10 million. The ABL Facility is available for working capital and other general corporate purposes. The ABL Facility will mature on February 5, 2021. The ABL Facility is secured by a first-priority security interest in substantially all of the personal property (but not the real property) of the Company. Amounts borrowed under the ABL Facility bear interest, at the Company’s option, at either an amount notadjusted LIBOR rate plus a margin of 1.25% to exceed $5.0 million outstanding at any time1.75% per annum, or an alternate base rate plus a margin of 0.25% to 0.75% per annum. The Company is also required to pay a fee of 0.25% per annum on undrawn commitments under the ABL Facility. Customary agency fees and with a term not to exceed 365 days. The commercial line of credit provides for the issuance of a commercial letter of credit fees are also payable in an amount not to exceed $10.0 million and with terms not to exceed 120 days. The amountrespect 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.ABL Facility. There were no borrowings outstanding under the ABL Facility at January 28, 2017 or the replaced secured revolving credit facility at January 31, 2015 and February 1, 2014.30, 2016. We had no open commercial letters of credit outstanding under our secured revolving credit facility of $0.3 million at January 31, 201528, 2017 and February 1, 2014. The secured revolving credit facility bears interest at the Daily Three Month LIBOR rate plus 1.00%.January 30, 2016.
Additionally, we have revolving lines of credit of up to 9.0$21.9 million, Euros and other long-term debt, the proceeds of which are used to fund certain international operations. The revolving lines of credit bears interest at 1.63%. There were no borrowings or open commercial letters of credit outstanding under these revolving lines of credit at January 31, 201528, 2017 and February 1, 2014. There were no borrowings under the other long-term debt at January 31, 2015 and $1.9 million at February 1, 2014.30, 2016.
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 2016, we spent $20.4 million on capital expenditures, which consisted of $16.1 million of costs related to investment in 28 new stores and 14 remodeled or relocated stores, $2.3 million associated with improvements to our websites and the Customer Engagement Suite and $2.0 million in other improvements.
During fiscal 2015, we spent $34.8 million on capital expenditures, which consisted of $30.9 million of costs related to investment in 57 new stores and 19 remodeled or relocated stores, $1.9 million associated with improvements to our websites and the Customer Engagement Suite and $2.0 million in other improvements.
During fiscal 2014, we spent $35.8 million on capital expenditures, which consisted of $31.5 million of costs related to investment in 56 new stores and 19 remodeled or relocated stores, $1.7 million associated with improvements to our websites and $2.6 million in other improvements.
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.
In fiscal 2015,2017, we expect to spend approximately $39$24 million to $41$26 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the approximately 5718 new stores we plan to open in fiscal 20152017 and remodels or relocations of existing stores.stores and improvements to our websites and the Customer Engagement Suite There can be no assurance that the number of stores that we actually open in fiscal 20152017 will not be different from the number of stores we plan to open, or that actual fiscal 20152017 capital expenditures will not differ from this expected amount.
33
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 we 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 of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this 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.
34
Description | Judgments and Uncertainties | Effect If Actual Results Differ | |||
Valuation of Merchandise Inventories | |||||
We value our inventory at the lower of average 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 inventory. | Our write-down reserve contains uncertainties because the calculation requires management to make assumptions based on the current rate of sales, the age and profitability of inventory and other factors. Our shrinkage reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding a number of factors, including historical percentages that can be affected by changes in merchandise mix and changes in actual shrinkage trends. | We have not made any material changes in the accounting methodology used to calculate our write-down and shrinkage reserves 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 A 10% decrease in the sales price of our inventory at January 2016. A 10% increase in actual physical inventory shrinkage rate at January | |||
Valuation of Long-Lived Assets | |||||
We review the carrying value of our
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 discounted cash flow of the asset to the asset carrying value. 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. | Events that may result in an impairment include the decision to close a store or facility or a significant decrease in the operating performance of a long-lived asset group. Our impairment In addition to historical results, current trends and initiatives, and long-term macro-economic and industry factors are qualitatively considered. Additionally management seeks input from store operations related to local economic conditions, including the impact of closures of selected co-tenants who occupy the mall. 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 Declines in projected cash flow of the assets could result in impairment. Although management believes that the current useful life estimates assigned to our fixed assets are reasonable, factors could cause us to change our estimates, thus affecting the future calculation of depreciation. | |||
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Description | Judgments and Uncertainties | Effect If Actual Results Differ | |||
Revenue is recognized upon purchase at our retail store locations. For our ecommerce sales, revenue is recognized upon Revenue is not recorded on the sale of gift cards. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card. Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized in | 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 | 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% increase in our sales return reserve at January 2016. A 10% increase in our unredeemed gift card breakage life at January | |||
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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. | |||
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Description | Judgments and Uncertainties | Effect If Actual Results Differ | |||
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 | 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 contingency related judgments and estimates are reasonable, our accrual for claims and contingencies could fluctuate as additional information becomes known, thereby creating variability in our results of operations from period to period. Additionally, actual results could differ and we may be exposed to losses or gains that could be material. |
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Goodwill and | |||||||
We
We have an option to first
We test our indefinite-lived intangible assets by | The goodwill and Our quantitative goodwill analysis of | The fair value of the trade names and trademarks is determined using the relief from royalty method, which requires assumptions including forecasting future | Based on the results of our annual impairment test for goodwill and | ||||
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Contractual Obligations and Commercial Commitments
There were no material changes outside the ordinary course of business in our contractual obligations during fiscal 2014.2016. The following table summarizes the total amount of future payments due under our contractual obligations at January 31, 201528, 2017 (in thousands):
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| Fiscal 2018 and |
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| Fiscal 2020 and |
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| |||||||||||||||||||||||
Total | Fiscal 2015 | Fiscal 2016 and Fiscal 2017 | Fiscal 2018 and Fiscal 2019 | Thereafter |
| Total |
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| Fiscal 2017 |
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| Fiscal 2019 |
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| Fiscal 2021 |
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| Thereafter |
| |||||||||||||||||||||
Operating lease obligations (1) | $ | 423,764 | $ | 61,452 | $ | 116,311 | $ | 94,528 | $ | 151,473 |
| $ | 411,733 |
|
| $ | 67,790 |
|
| $ | 119,781 |
|
| $ | 100,045 |
|
| $ | 124,117 |
| ||||||||||
Purchase obligations (2) | 192,949 | 192,949 | — | — | — |
|
| 168,841 |
|
|
| 168,841 |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||
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| ||||||||||||||||||||||||||||||||||||
Total (3) | $ | 616,713 | $ | 254,401 | $ | 116,311 | $ | 94,528 | $ | 151,473 | ||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||
Total |
| $ | 580,574 |
|
| $ | 236,631 |
|
| $ | 119,781 |
|
| $ | 100,045 |
|
| $ | 124,117 |
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(1) | Amounts do not include contingent rent and real estate taxes, insurance, common area maintenance charges and other executory costs obligations. See Note |
(2) | We have an option to cancel these commitments with no notice prior to shipment, except for certain private label and international purchase orders in which we are obligated to repay contractual amounts upon cancellation. |
Off-Balance Sheet Arrangements
At January 31, 2015,28, 2017, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
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 or the potential change in regulatory environment, 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“Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10-K.
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 and variable-rate demand notes, which have long-term nominal maturity dates but feature variable interest rates that reset at short-
termshort-term intervals. If our current portfolio average yield rate decreased by 10% in fiscal 2014,2016, our net income would have decreased by $0.1 million. This amount is determined by considering the impact of the hypothetical yield rates on our cash, cash equivalents, short-term and long-term marketable securities balances and assumes no changes in our investment structure.
During different times of the year, due to the seasonality of our business, we may borrow under our revolving credit lines. To the extent we borrow under this revolving credit lines, we are exposed to the market risk related to changes in interest rates. At January 31, 2015,28, 2017, we had no borrowings outstanding under our revolving lines of credit and other long-term debt.credit.
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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. TheAs a result, the fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of revenues, expenses, assets and liabilities. Assuming a 10% change in foreign exchange rates, fiscal 2016 net sales would have decreased or increased by approximately $12.5 million. As we expand our international operations, our exposure to exchange rate fluctuations will continue to increase. To date, we have not used derivatives to manage foreign currency exchange risk.
We import merchandise from foreign countries. As a result, any significant or sudden change in the financial, banking or currency policies and practices of these countries could have a material adverse impact on our financial position, results of operations and cash flows.
Information with respect to this item is set forth in “Index to the Consolidated Financial Statements,” found in Part IV Item 15 of this Form 10-K.
None.
Evaluation of Disclosure Controls and Procedures.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 January 31, 2015,28, 2017, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting.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 January 31, 201530, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting.Reporting. The management of Zumiez Inc. (the “Company”)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 internal control may vary over time.
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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 January 31, 2015.28, 2017. Management’s assessment was based on criteria described in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of January 31, 2015.28, 2017.
The effectiveness of the Company’s internal control over financial reporting as of January 31, 201528, 2017 has been audited by Moss Adams LLP, the Company’s independent registered public accounting firm, as stated in their report, which is included below.
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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 January 31, 2015,28, 2017, based on criteria established inInternal Control—Control - Integrated Framework (2013) 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 over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
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 the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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. 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 January 31, 2015,28, 2017, based on criteria established inInternal Control—Control - Integrated Framework (2013) 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 January 31, 201528, 2017 and February 1, 2014,January 30, 2016, 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 January 31, 2015,28, 2017, and our report dated March 17, 2015,13, 2017, expressed an unqualified opinion on those consolidated financial statements.
/s/ Moss Adams LLP
Seattle, Washington
March 17, 201513, 2017
None.
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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 20152016 Annual Meeting of Shareholders (the “Proxy Statement”) that will be filed within 120 days after our fiscal year ended January 31, 201528, 2017 and is incorporated herein by this reference thereto. Information concerning our executive officers is set forth under the heading “Executive Officers” in our Proxy Statement, and is incorporated herein by reference thereto. Information regarding compliance with Section 16(a) of the Exchange Act, our code of conduct and ethics and certain information related to the Company’s Audit Committee, Compensation Committee and Governance Committee is set forth under the heading “Corporate Governance” in our Proxy Statement, and is incorporated herein by reference thereto.
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.
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
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 20142016 and 2013”2015” in our Proxy Statement, and is incorporated herein by this reference thereto.
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(a) | (1) | Consolidated Financial Statements |