March same-store sales exceeded our projection, but fell below consensus seemingly due to a weaker-than-expected benefit from the Easter shift to early April. Monthly sales were slightly depressed relative to the strong comp due to foreign currency pressures amidst continued significant outperformance in Europe. We continue to recommend Zumiez for its differentiated business model, consistent strategy, strong free cash flow, proven management, and underappreciated international growth opportunity.
Continued Comp Momentum In March.
Zumiez’ March same-store sales increased 5.5%—above our 4.5% estimate, but below the Street consensus of 6.4% consensus seemingly due to a weaker-than-expected benefit from the Easter shift to early April. This follows better-than-expected trends in each of the prior thirteen months, helped initially by strong market share gains and more recently due to an improving overall backdrop and significant outperformance internationally. Still, management noted positive monthly comps across all countries.
Positive Trends Across Most Categories.
March same-store sales grew due to higher average unit retail (AUR) and units per transaction, partially offset by a decrease in comparable transactions. Similar to recent months, men’s, hardgoods, juniors, and accessories all trended positive, while footwear trended negative.
Quarterly Revenue Tracking In-Line With Our Estimate.
Despite the strong comp, total net sales for the month increased 11.1% to $70.7 million—thereby weighing on calculated new store productivity due to the strong international gains and related currency pressures. Still, the company remains on pace to meet our 1Q15 revenue estimate of $177.3 million and guidance of $176.0-$178.0M, if not consensus of $179.8 million.
Maintain Buy Rating.
Adjusting for the March upside offset by a slightly weaker projected April comp, we left our FY15 EPS estimate unchanged at $1.85. We continue to recommend ZUMZ shares due to the company’s continued share gains, differentiated business model, consistent strategy, strong free cash flow, proven management, and underappreciated international growth opportunity. However, consensus estimates for the current quarter look somewhat aggressive and comparisons get more difficult beginning next month. We continue to favor more undervalued names that are at least maintaining market share amidst the generally improving backdrop.
We are lowering our price target from $45 to $42, which now assumes a roughly 20x multiple (down from 22x) on our FY15 EPS estimate of $1.85, plus ~$5.30 in net cash. This multiple is derived using a high-teens underlying growth rate and a 1.00x-1.25x PEG ratio.
Impediments to our price target could include increased competition, inaccurate predictions of consumer preferences and fashion trends, seasonally weak results, the departure of key members of management, and weak consumer spending.
The company faces competition from other mainly mall-based specialty retailers, such as American Eagle (AEO, NC), Abercrombie & Fitch (ANF, NC), Buckle (BKE, NC), Hollister, PacSun (PSUN, Neutral), etc., off-mall retailers like Tilly’s (TLYS, Buy), independent specialty shops, department stores, and direct marketers of similar products. We also get the sense Zumiez is not top of mind in several key markets for action sports. Management believes it can co-exist with nearer competitors like a Tilly’s, which has larger stores in more off-mall locations.
Although its scarcity model and micro-merchandising strategy help to offset the risk, much of the company’s potential for success hinges on its ability to accurately predict consumer preferences and fashion trends. We believe that the company's failure to anticipate, identify, and react in a timely matter to fashion trends, could negatively affect its business.
The company's operating results fluctuate quarterly with the third and fourth quarters typically generating stronger sales and when applicable, profitability. Therefore, the company is somewhat dependent on its second half performance and any unfavorable changes in weather and holiday shopping trends could negatively affect operating results.
We do not believe Zumiez’ success hinges on the abilities of any single executive, but given management’s strong experience and proven track record, the departure of several key members could negatively affect results.
Consumer spending remains fairly constrained due to a still somewhat difficult economic environment. Lackluster consumer confidence could limit discretionary purchases and negatively impact Zumiez’s sales.
ZUMZ is a mall-based specialty retailer of action sports related apparel, footwear, equipment and accessories operating under the Zumiez brand name and targeting young men and women between the ages of 12 and 24 who seek popular brands centered on activities such as skateboarding, surfing, snowboarding, BMX and motocross. Headquartered in Lynnwood, Washington, the company was founded in 1978 by founder and current chairman, Thomas Campion, and has grown since then to 604 stores as of November 29, 2014. In addition, the company operates a website at www.zumiez.com, which sells merchandise and provides content for the company's target customers.
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
ROTH makes a market in shares of Zumiez, Inc., Pacific Sunwear of California, Inc. and Tilly's, Inc. and as such, buys and sells from customers on a principal basis.
Shares of Pacific Sunwear of California, Inc. may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities.