A Soft Outlook
For the current quarter, Zumiez expects to earn 4 to 7 cents per diluted share, on revenue of $141 million to $144 million. Additional costs from Blue Tomato are expected to reduce diluted earnings by $1.5 million, or 4 cents per share. The company’s forecast missed the analyst consensus of 13 cents per share on $145 million in revenue.
Aggressive Expansion
At the start of March, Zumiez operated 472 stores in the United States, with 21 in Canada and eight locations in Europe, for a total store count of 501.
Despite its soft guidance for the current quarter, Zumiez Inc. (NASDAQ:ZUMZ) intends to add 60 new stores in fiscal 2013, including ten namesake stores in Canada and six brick and mortar Blue Tomato locations in Europe.
Although new locations will boost revenue growth going into fiscal 2013, expenses will continue to rise as cash reserves decline. Costs from maintaining and expanding Blue Tomato will also weigh on its bottom line, especially if same-store sales growth trends into negative territory.
The company has a lofty goal of 600 to 700 global locations, which means that expenses and capital expenditures will keep increasing over the next several quarters.
Crushing the Competitors
Zumiez Inc. (NASDAQ:ZUMZ) competes with Quiksilver, Inc. (NYSE:ZQK) in the surfing department, Pacific Sunwear of California, Inc. (NASDAQ:PSUN) in surf and skate apparel, and Australian company Billabong, which offers snow, surfing and skating apparel.
The chart below simply shows that Zumiez is crushing these market rivals.
| Forward P/E | Price to Sales (ttm) | Return on Equity (ttm) | Debt to Equity | Profit Margin | Qty. Revenue Growth (Y-O-Y) | Qty. Earnings Growth (Y-O-Y) | |
| Zumiez | 13.09 | 1.12 | 14.65% | 1.98 | 6.30% | 22.10% | 22.10% |
| Quiksilver | 19.48 | 0.54 | -3.29% | 133.55 | -0.97% | -4.10% | N/A |
| Pacific Sunwear | N/A | 0.20 | -53.67% | 89.58 | -8.30% | 0.70% | N/A |
| Billabong | 12.00 | 0.29 | -117.03% | 49.97 | -59.94% | -8.10% | N/A |
| Advantage | Billabong | Pacific Sunwear | Zumiez | Zumiez | Zumiez | Zumiez | Zumiez |
Source: Yahoo Finance, 3/20/2013
Zumiez is the only one of these “action sports” apparel retailers that is even profitable. Its top and bottom line growth is well ahead of its peers, and it has the lowest debt and best past performance of the bunch. Zumiez’s P/E ratio is also far lower than the industry average of 17.40 – making it fit my three favorite words in the stock market: an
undervalued growth stock
.
The Bottom Line
Although Zumiez’s fundamentals are strong, let’s not get ahead of ourselves. While rapid expansion could fuel equally rapid revenue growth, expenses must stay in check.
First, the company should cool it with the stock buybacks – that’s what mature companies, not growing ones, do.
Second, it should reevaluate the need for a brick and mortar expansion, especially into debt-straddled Europe, considering the robust growth of its online business. Plenty of retail companies, such as Lululemon Athletica inc. (NASDAQ:LULU), have flourished on a large online presence complemented by a limited brick and mortar footprint. Yet make no mistake – Zumiez is growing, and it could still be a long-term winner.
The article Is Zumiez Ready to Zoom? originally appeared on Fool.com and is written by Leo Sun.
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