The Wall Street Journal-20080123-Zumiez Stays Course in Niche
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Zumiez Stays Course in Niche
It isn't easy being a retailer these days, but Zumiez Inc. is sticking to its guns.
Beset by a late start to winter weather in the West, where it operates most of its stores, and burdened by a pullback in overall consumer spending, the Everett, Wash., retailer of snowboards, skateboards and accessories has seen its sales slow, its earnings decline and its shares plummet. But the company has no plans to revise its operating strategy and Wall Street analysts still think it can weather the current spending downturn and thrive because the active- lifestyle niche it serves is robust.
"The retail environment, obviously, is very difficult, but on average teen retailers have held up better," said Wedbush Morgan Securities analyst Betty Chen. "We are a little bit surprised that Zumiez's momentum has slowed so much for a company that was once hot."
Shares of Zumiez, once a darling of Wall Street, have definitely cooled off. The stock was at $16.68 in 4 p.m. Nasdaq Stock Market trading yesterday, well below its 52-week high of $53.99, hit Oct. 11.
Some analysts attribute Zumiez's decline to weak sales of winter apparel at its mall-based stores. At the start of 2008, analysts noted that Zumiez's markdowns appeared to be greater than last year's, partly due to winter's slow start. That slow start put ski resorts behind schedule in opening ski runs and building a snow base for the holidays, therefore affecting the need for many of Zumiez's snowboarder customers to buy gear.
Zumiez's shares fell 9% on Jan. 2 after CIBC World Markets analyst Roxanne Meyer told clients that Zumiez's markdowns on outerwear, T- shirts, accessories and select snowboard packages were heavier than previous years. She also noted the significant growth of its clearance section.
"Weather played a big part of it and they had a slower start on snow," said Ms. Meyer in a phone interview. "It's really more recently that the momentum has slowed, but I think this is confined to the fourth quarter."
Zumiez's comparable-store sales, or sales of stores open at least a year, for the five weeks ended Jan. 5 rose 3.9% from a year earlier. That was a lot better than teen retailers such as Pacific Sunwear of California Inc., whose sales were down 2.8%; American Eagle Outfitters Inc., which had a 2% decline; and Abercrombie & Fitch Co., where sales also fell 2%.
But because holiday sales didn't meet its expectations, Zumiez said it expects fiscal-2007 per-share earnings to fall short of its previous guidance. "Although holiday sales were positive, we did not experience the across-the-board strength that we had planned for," said Chief Executive Rick Brooks.
Zumiez now sees fiscal-year per-share earnings of 82 cents to 83 cents, down from previous guidance of 92 cents to 94 cents.
Mary Lisanti at AH Lisanti Capital Growth said Zumiez's stock declined because Wall Street's expectations were too high. Ms. Lisanti sold her 1% stake in Zumiez in October after meeting with management. "We sold it because people had priced it for perfection, then people got nervous," said Ms. Lisanti. "The company has not missed anything. All they did was report comps that were not as much as they beat in the last couple of times."
Piper Jaffray analyst Jeffrey P. Klinefelter believes Wall Street should ease off on Zumiez. In a note to clients, he said shares have overcorrected based on current consumer concerns, irrespective of underlying fundamental growth potential. According to Mr. Klinefelter, Zumiez occupies a unique market niche in the active-lifestyle category where demand trends remain relatively firm.
"We maintain a high degree of confidence in the Zumiez concept and management's ability to execute in a difficult selling environment," said Mr. Klinefelter. "We expect the company to continue to increase its presence in the Midwest, Southeast and Northeast while maintaining its ratio of East-to-West stores and balancing productivity rates."
Some analysts say that Zumiez, which currently operates 285 retail stores, has the potential to grow to 800 stores. They point to other teen retailers such as Pacific Sunwear, American Eagle and Abercrombie & Fitch, which all operate more than 800 stores.
Zumiez still has doubters, who say the retailer's growth potential is questionable and needs to be watched closely, given the state of the retail market and investors' fears related to a softening job market and instability in the credit markets. Naysayers also question Zumiez's efforts to expand beyond its Northwest roots to Eastern and Southern regions, believing that teens in those regions won't take to its Western concept.
Zumiez Chief Financial Officer Trevor Lang said the company will continue to deliver on its strategy and "let shareholders decide where they want to place their investments." He added that Zumiez has a good long-term growth strategy that he believes will reward investors.
Mr. Lang said Zumiez doesn't plan to revise its growth strategy of opening more than 50 stores a year. He adds that 12% of Zumiez's retail stores are in Eastern regions and many of the stores perform well.
