Summary
- Zumiez had a solid operating history leading up to 2022, but performance since then has been awful.
- Revenues and profits have both declined materially, but shares now look quite cheap even after factoring that in.
- Shares are pricey compared to similar companies, but that doesn't mean the company doesn't have upside from here.
I don't often find myself attracted to retailers. The high costs, high levels of competitiveness, and low margins that many of them have to contend with is not appealing to my desire to invest in high-quality companies. But every so often, I will find a prospect that is trading at just the right price to at least consider. The latest example of this involves specialty retailer Zumiez ( ZUMZ ). Over the past several years, the company has done fairly well to grow both its top and bottom lines. The 2022 fiscal year, however, saw the company go through a great deal of pain. As a result, shares have significantly underperformed the broader market. But given how cheap the stock currently is on an absolute basis, despite being pricey compared to similar firms, I would say that a soft ‘buy’ rating would be appropriate at this time.
Tough times
According to the management team at Zumiez, the company operates as a leading specialty retailer of goods such as apparel, footwear, accessories, and hard goods. For the most part, it caters to young men and women who aim to express their individuality through fashion, music, sports, streetwear, and more. Although the company is known as Zumiez, it also operates under two other brand names. The first of these is Blue Tomato, which is a European specialty retailer of apparel, footwear, accessories, and hard goods that the company acquired in 2012. And the second is Fast Times, which is an Australian leading specialty retailer of hard goods, accessories, apparel, and footwear, that the company purchased in 2016.
The company has a long operating history. In fact, it's been around for roughly 44 years. But this doesn't mean that the firm can't learn new tricks. In addition to running its own stores, it also has a vibrant e-commerce platform. Unfortunately, we don't know exactly how much of its sales are conducted online. But management has said that it has significant distribution centers dedicated specifically to this kind of activity.
In recent years, the company has done fairly well to grow its top line. Revenue went from $927.4 million in 2017 to $1.03 billion in 2019. In 2020, the COVID-19 pandemic was responsible for pushing revenue down to $990.7 million. But that decline was short-lived, with revenue hitting $1.18 billion in 2021. The increase in sales between 2020 and 2021 was an impressive 19.5%. Management attributed this increase largely to the reopening of stores following the pandemic. For context, during the 2021 fiscal year, its stores were open 97% of the possible days that they could have been, up from the 78.4% reported for 2020.
As revenue rose, profitability largely followed suit. Net income for the company increased in each of the past five years, rising from $26.8 million in 2017 to $119.3 million in 2021. Other profitability metrics mostly followed suit. Operating cash flow, for instance, increased from $65.5 million to $135 million. Though it is worth mentioning that cash flow was slightly higher at $138.4 million in 2020. If we adjust for changes in working capital, the metric would have risen in each of the past five years, climbing from $64.7 million to $220.8 million. Meanwhile, EBITDA for the business expanded from $77.6 million to $185.7 million.
When it comes to the 2022 fiscal year, the verdict is still out in some respects. We do know that for the first nine months of the year, sales took a beating, plunging from $837.2 million in 2021 to $678.3 million in 2022. Management chalked this up largely to the impact that continued inflationary pressures had on consumers and the dying down of domestic stimulus that had propped up spending during 2021. Both the number of transactions and the value per transaction that the company experienced dropped. On the bottom line, the picture also worsened. Net income plunged from $81.1 million to $9.6 million. Operating cash flow went from $71.9 million to - 36.4 million dollars. If we adjust for changes in working capital, the metric would have fallen by roughly half from $157.7 million to $85.9 million. Also on the decline was EBITDA. According to management, it dropped from $126.7 million to $31.6 million.
Recently, management did provide a bit of detail when it came to 2022’s final quarter. In the final nine weeks of the year, comparable sales plunged 23.9%, with overall revenue for the quarter likely coming in at between $258 million and $268 million. Earnings per share, meanwhile, should be between $0.36 and $0.51. If we take the midpoint here for earnings, that would give us net income for 2022 as a whole of $18 million. Annualizing the other numbers provided by management would give us adjusted operating cash flow of $120.3 million and EBITDA of $46.5 million. It's also worth noting that the company has no debt on hand and has cash and cash equivalents of $141.1 million.
Taking these numbers, I calculated that the company is trading at a price-to-earnings multiple of 27.7. This is actually quite high. But fortunately, the other metrics are lower. The price to adjusted operating cash flow multiple should be 4.1, while the EV to EBITDA multiple should come in at 7.7. If we were to use data from 2021 instead, under the assumption that the company will eventually see its results revert back to those levels, we would get a price-to-earnings multiple of 4.2, a price to adjusted operating cash flow multiple of 2.3, and an EV to EBITDA multiple of 1.9. As part of my analysis, I also compared the company to five similar firms. On a price-to-earnings basis, these companies ranged from a low of 5.4 to a high of 11.9. Using the EV to EBITDA approach, we end up with a range of 2.9 to 5.9. In both of these cases, Zumiez was the most expensive of the group. When it comes to the price to operating cash flow approach, the range is from 7.7 to 12.2. In this case, our target was the cheapest of the group.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Zumiez | 27.7 | 4.1 | 7.7 |
The Children's Place ( PLCE ) | 6.9 | 12.2 | 4.5 |
Destination XL Group ( DXLG ) | 5.4 | 12.0 | 5.9 |
Genesco ( GCO ) | 6.8 | 7.7 | 3.9 |
Torrid Holdings ( CURV ) | 11.9 | 7.9 | 3.5 |
Chico's FAS ( CHS ) | 5.7 | 11.1 | 2.9 |
Takeaway
There's no doubt that Zumiez is experiencing a great deal of pain at this time. Clearly, the company is being pinched by declining sales and inflationary pressures. It is possible, perhaps even probable, that this trend could continue for the next few quarters. Long term though, the company will likely see at least some return to the kind of profitability it experienced in prior years. Even if it doesn't, shares look quite cheap on an absolute basis from a cash flow perspective, even though they are pricey compared to similar firms. All things considered here, including the significant cash position the company has, I believe that a soft ‘buy’ rating is not unrealistic.
For further details see:
Zumiez: A Specialty Retailer That's Worth A Look Given Recent Weakness