Earnings Scorecard: Zumiez

Earlier this month, specialty retailer Zumiez Inc. (ZUMZ) announced its financial results for the fourth-quarter and year-end 2010.

Street analysts had nearly a week to ponder on the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.

Earnings Review

Net sales in the reported quarter increased 17.9% year over year to $156.2 million from $132.4 million a year ago. Comparable store sales rose 13.0% in the quarter compared with a decrease of 1.7% in fourth-quarter 2009. Total revenue fell short of the Zacks Consensus Estimate of $157 million.

Cost of goods sold in the quarter increased 13.0% year over year to $95.3 million. Contrarily, gross margin expanded 330 basis points to 39.0% in the quarter propelled by net sales increase. Selling, general and administrative expenses were $36.9 million, up 5.2% year over year. The company reported an operating income of $24.0 million compared with an operating income of $13.0 million in the prior-year quarter.

(Read our full coverage on this earnings report: Zumiez Beats EPS, Rev Nearly At Par)

Agreement of Estimate Revisions

Despite the reasonably good performance, analysts exhibit a mixed sentiment regarding Zumiez’ 2011 and 2012 outlook. Out of 20 analysts covering the stock, 8 have revised their estimates for 2011 upward, while 5 have gone in the opposite direction in the last 7 days. For fiscal 2012, out of 15 analysts, 1 analyst raised the estimate while 4 moved in the opposite direction in the last 7 days.

Estimates follow mixed revision trend for the first quarter of fiscal 2011. For the current quarter, 1 of the 17 analysts has increased the estimate over the last 7 days, compared with 4 negative adjustments.

The second quarter of fiscal 2011 depicts an overwhelmingly negative sentiment with 9 of the 19 analysts slashing their estimates downward while none moved in the opposite direction.

Magnitude of Estimate Revisions

As a result of the bearish sentiment seen among analysts over the past one week, the Zacks Consensus Estimate for fiscal 2011 has moved down by 1 cent (from $1.05 to $1.04), while the 2012 Consensus Estimate remained stagnant. Meanwhile, for the first quarter of 2011, the Consensus Estimate has decreased by 1 cent (from 1 cent to 0 cent) in the last 7 days. For the second quarter of fiscal 2011, the Zacks expectation has slipped by 2 cents (from 6 cents to 4 cents).

Our Recommendation

Zumiez is a mall-based specialty retailer of action-sports related apparel, footwear, equipment, and accessories. The company targets young men and women in the age group of 12 to 24 years who seek popular brands that represent a lifestyle centered on extreme sports activities. Furthermore, the company’s stores are strategically located in busy areas of the mall, such as food courts, movie theaters and music/game stores, which are typically frequented by the company’s target customers.

We expect Zumiez’ focus on teenage action-sports based merchandise and expanding store network to deliver solid performance in the upcoming quarters. However, intense competition from other specialty retailers, seasonal nature of the business and risks associated with sourcing merchandise from foreign countries might weigh on the company’s results.

The company operates in a highly fragmented specialty retail sector and faces intense competition from larger teenage-focused retailers such as Abercrombie & Fitch Co. (ANF), Aeropostale Inc. (ARO) and American Eagle Outfitters Inc. (AEO).

We maintain our long-term “Neutral” recommendation on Zumiez. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

ZUMIEZ INC (ZUMZ): Free Stock Analysis Report

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