ZUMZ - Zumiez: Not Long Now Until We Have Our Long-Term Bottom

• Zumiez shares this month attempting a long-term bottom, but momentum was rejected by its 10-week moving average.
• One forward estimates case their bearish trends, this stock should rally aggressively.
• We await a convincing swing low before we put capital to work.

Intro

We wrote about Zumiez Inc. ( ZUMZ ) back in April of this year when we foresaw more declines in the stock price. The reasoning for our bearishness at the time was the apparent falloff in growth in the company, which coincided with a valuation that was only in line with historic multiples (Not Cheap Enough For Us). Furthermore, the deteriorating technicals were signaling that the stock's 2019 highs would at least get tested in its down move at the time. As we can see from the long-term weekly chart below, however, even support at this level was not able to stop the selling. In fact, selling has intensified to the downside in recent months, resulting in shares of Zumiez Inc. ( ZUMZ ) now finding themselves just above the $26 handle.

Furthermore, as we can see above, Zumiez's 10-week moving average rejected the mid-July 2022 rally, which means shares still have not registered a weekly MACD crossover buy signal. When this takes place (given how oversold shares remain), we expect at least a rally up those 2019 highs (Previous support which now becomes resistance) once more. Whether shares will have enough momentum to punch through this level in time remains to be seen. Investors need to be patient, however, before a confirmed weekly swing (on strong volume) is confirmed here.

We state this because getting our bottom may be a long-drawn-out process, especially when one views how forward-looking sales and revenues have been dropping in recent months. For the upcoming second quarter, for example, management guided between $232 & $239 million in top-line sales on the first quarter earnings call, but unless trends change here for the better, Zumiez's Q2 sales may even come in below management's guidance range released just eight weeks ago.

Patient long-term investors eyeing up this name may not care in the slightest. Zumiez continues to report no debt on its balance sheet and is now selling a forward sales multiple of 0.47. The value is there for everyone to see, but the market remains uninterested due to how profitability has been getting hammered in recent times.

Sluggish Sales Affecting Everything

In the first quarter this year, for example, management cited the tapering off of the US stimulus this year as well as high inflation for the dropoff in sales in that period. Therefore, taking into account the dropoff in sales from the higher margin US segment as well as the higher cost of revenues (lower gross margin) & higher SG&A costs, operating profit barely came in profitable for the first quarter compared to $34+ million in EBIT in the same period of 12 months prior.

Here in Zumiez, we can see the ramifications of negative sales growth and what this does to the income statement. The market is fully aware that in a high inflation environment, sales simply have to grow aggressively to be able to cover the significant level of costs on the back-end. Gross margin for example was adversely affected by elevated labor and logistical costs in Q1 and operating margins fell significantly due to higher wage and store costs as well as higher training and corporate costs. Furthermore, earnings in Q1 came in negative for the first quarter at -$0.02 per diluted share. Suffice it to say, higher costs on lower sales are not what the market wants to see and until we see improvement in these areas, profitability unfortunately is going to remain constrained.

Value

Following on from this, management reiterated on its first-quarter earnings call that operating profit is expected to be down close to 40% in fiscal 2022 due primarily to lower expected sales ($1.08 billion approx). If forward-looking revisions continue their bearish stance, these numbers could end up worse than they are now. The thing is from a long-term investor's standpoint, it would be preferable to get all the bad news out in the open swiftly, so the market can reprice shares accordingly. We state this because the company is expected to still be healthily profitable (Forward GAAP earnings multiple of 7.27), has no debt and its sales as mentioned earlier are trading for pennies on the dollar. There are the precise parameters we look for in our value plays, so as long as Zumiez can continue to generate cash flow, we will remain interested, especially if we can pick up shares at a knock-down valuation .

Conclusion

Therefore, to sum up, Zumiez has been up against very tough comparables, but despite the company's negative growth, high costs have eaten into both gross and operating margins. Strong inflation seems to have caught the company behind the eight-ball, and there is no clear end in sight yet as to when demand will come back in droves. In saying this, the company is still profitable and now getting very cheap when compared to historical levels. Let's see if shares can bottom soon. We look forward to continued coverage.

For further details see: