ANF Abercrombie and Fitch Co

We maintain our long-term Neutral recommendation on Zumiez Inc. (ZUMZ). Zumiez is a mall-based specialty retailer of action-sports related apparel, footwear, equipment, and accessories. Zumiez’s strategy is based on offering action-sports merchandise focused on young men and women in the age of group of 12 to 24 years, which has enabled the company to carve a distinct niche for itself.

Furthermore, the company’s stores are strategically located in busy areas of the mall, such as food courts, movie theatres and music/game stores, which are generally frequented by the company’s target customers.

Moreover, the company is currently in the early phase of its store expansion program and plans to enlarge its network by opening 44 new stores during fiscal 2011, including its first store in Canada.

Additionally, in the recent years, Zumiez has launched stores averaging 3,000 square feet, which enabled it to offer extended merchandise without compromising on the store ambience. These initiatives provide the company with a strong platform to effectively capitalize on the emerging opportunities.

Moreover, Zumiez has near to debt-free balance sheet with total long-term debt of $31.3 million and shareholder’s equity of $231.3 million, reflecting debt-to-capitalization ratio of just 11.9% at the end of first-quarter 2011. Moreover, Zumiez ended the quarter with $130.7 million of cash and marketable securities and offers the company financial flexibility to drive future expansion.

On the flip side, 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), andAeropostale Inc. (ARO). Furthermore, Zumiez also competes with large-format sporting goods stores, such as Big 5 Sporting Goods Corp. (BGFV) and Dick's Sporting Goods Inc. (DKS) as well as local snowboard and skate shops. Being in such competitive industry, Zumiez may find it difficult to execute and implement new business strategies, which in turn, may impact its operations adversely.

Moreover, Zumiez’s operations are seasonal in nature and typically generate stronger sales during the third and fourth quarters, which are characterized by the back-to-school and holiday seasons. As a result, the company is exposed to significant risks if the seasons fail to deliver expected operating performance.

Further, the company sources a major portion of its merchandise from manufacturers based in foreign countries. Accordingly, the company is exposed to political, social and economic risks related to operations in these countries.

Zumiez holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

 
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