Out of the mall-based retailers we’ve covered so far, Zumiez (ZUMZ) stands out from the pack. The company managed to increase revenues in times where the majority of retailers have seen double-digit declines in their top lines.

We believe the company’s strategy to target a specific niche market with a very technology savvy customer (teens and young adults) positions the business to capitalize on current trends.

Zumiez’s solid omnichannel strategy plus the acceleration of demand shifting towards e-commerce could unlock higher growth and market share opportunities. The wide variety of product assortments increases the appeal of Zumiez as a one-stop destination for teens and young adults looking for trendy items.

The company has a clean balance sheet with zero financial debt and a solid cash position of $299M, representing approximately 38% of its market cap. From a valuation perspective, the company trades at a forward earnings multiple of 10.7x, which we believe is cheap. For comparison, other mall-based retailers such as American Eagle (AEO), Abercrombie & Fitch (ANF), and Tilly’s (TLYS) trade at forward earnings multiples of 13.2x, 19x, and 11.5x, or an average of 15x. That said, Zumiez was the only retailer from its peer group that managed to comp positively during the second quarter. The company also has good opportunities for growth abroad, especially in Europe.

For investors looking at opportunities in the retail space, we believe Zumiez offers good value. However, that’s not to say that the stock is without risks. There have been reports of rising cases of COVID in Europe recently. If the situation gets out of control again, we might see another disruption in the retail space. Investors should position size accordingly.

Peer Group Outperformance

Zumiez reported second quarter sales of $250M, up 9.5% on a year-over-year basis, and beating sales expectations by $21M. The company also reported a GAAP EPS of $1.01, beating the consensus by $0.81.

The company’s surprising sales growth number outperformed its competitors by a wide margin. For example, second quarter sales from AEO, ANF, and TLYS were down by 15%, 17%, 16%, respectively.

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The company reported better-than-expected results despite having 27% fewer operating days in the quarter compared to its prior-year period. Their store reopening phase improved sequentially on a month-to-month basis as the quarter progressed. For example, in May (the beginning of Q2), the company only had 9% of their store fleet open for business which increased to 68% by the end of May. By the end of June, the company had 96% of its stores open. However, that number took a step back as the resurgence of COVID infections in July caused 69 stores to shut down once again, ending the quarter with 90% of their fleet back online.

The increase in sales was driven by a 20% increase in comparable sales on reopened stores and digital comparable sales growth of over 122%, compared to the previous year, for a consolidated comparable sales increase of 37.3%.

Zumiez’s ability to fulfill orders using its “ship from store” capabilities has been a surprising strength during this pandemic, and we believe it’s one of the reasons the company was able to show strong growth during Q2. Rather than remaining stagnant during the shutdown period, management was able to leverage its stores as mini distribution hubs to fulfill digital orders. As a result, online sales grew by 75.95% during Q1 followed by the recent triple-digit growth in Q2.

We believe Zumiez’s target market, which centers on young adults and teenagers, is also playing an important role in their strong sales rebound, as these age groups have fewer fears from the spread of COVID while not taking social distance guidelines too seriously.

A delayed back-to-school season puts pressure on Q3

For Zumiez, back-to-school season is its biggest revenue driver for Q3. The company says the following regarding the seasonality of their business:

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 2019, approximately 57% of our net sales occurred in the third and fourth quarters combined. – 2019 annual report

With back-to-school season delayed across the country, the company saw an instant impact to third quarter-to-date sales ending September 7th of down 14%, compared to the same time period in the prior year. That said, strength in their e-commerce channel is still relatively strong, growing by 27.4% during the same time frame.

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The company expects demand for the back-to-school season to extend beyond the second half of their third quarter but are still planning for softer demand overall, given the unpredictability in each state’s decision of when they believe it’s appropriate to bring students back. For example, management noted the following:

So we’ve done some survey work across our — all of our stores. And based on that survey work, what we’re seeing is about 50% of our schools are going back with some sort of hybrid, about 40% of our schools are going back 100% remote, and about 8% of our schools are going back in-person with just a couple of percent that didn’t come back. – Q2 call

As a result, the company wants to remain in a cautious position while being able to chase inventory once demand becomes clearer. The good news is that management believes they are entering the upcoming quarter with a clean inventory slate.

Long-term growth opportunity

We like how management thinks about its growth opportunities, especially in relation to its omnichannel strategy. The company has shown discipline in its store strategy expansion, indicating to the market that they are not chasing growth unless it makes economic sense.

Management has this idea about a “trade area” concept, which is the idea of having their stores act as fulfillment centers while being profitable; really thinking about the role of the store within their geography. In that way, the company can grow its digital channel while leveraging its ship-from-store capabilities, improving the efficiencies of employees while increasing customer satisfaction by bringing the last-mile shipping closer to them.

The growth opportunity for Zumiez comes from growing its International markets. The company is noting a consolidation of retailers in their international markets, creating a gap that can be filled by Zumiez.

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The consolidation among retailers is opening space in good quality centers, which is exciting news, as it would increase brand awareness on these relatively new markets. That said, the real growth driver would come once the company reaches scale and can implement its omnichannel strategy with their “trade area” concept. We believe once implemented, the company would enjoy the benefits of operating leverage and accelerate growth in EPS.

The Bottom Line

We believe Zumiez’s customer base adds to the strength of the company as long they can offer them good service and on-trend items. We believe young adults or teens, have more discretionary income they can spend, whether it’s from working a part-time job or a nice allowance while having less of the responsibility adults have. Because Zumiez targets a specific niche market (streetwear, outdoor sports), its customer base tends to be more loyal and passionate to the brands offered.

The company’s growth in e-commerce should also be highly beneficial to the company from an analytics perspective. As more people shop online or become members of their STASH loyalty program and use their app, Zumiez can gather first-party data that can be used to anticipate changing trends or test out new products.

At a forward earnings multiple of 11x, we believe Zumiez is trading for cheap, yet is one of the strongest mall retailers out there. A clean balance sheet, a strong cash position, and growth opportunities make us bullish on the company. That said, being a mall retailer in the current environment is a high-risk event so investors should position size accordingly.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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