ANF Abercrombie and Fitch Co

Specialty retailer Zumiez Inc. (ZUMZ) reported second-quarter earnings of 8 cents a share, beating the Zacks Consensus Estimate of 5 cents a share. The company also outpaced earnings of 2 cents a share posted in the second quarter of fiscal 2010. Net income from operations was $2.6 million compared with $1.9 million in the prior-year quarter.

Net sales in the reported quarter increased 14.9% year over year to $112.2 million from $97.7 million a year ago. Comparable store sales rose 7.5% in the quarter compared with an increase of 9.3% in second-quarter 2010. Total revenue missed the Zacks Consensus Estimate of $152 million.

Cost of goods sold in the quarter increased 11.5% year over year to $74.9 million. Gross margin nevertheless expanded 200 basis points to 33.2% in the quarter propelled by net sales increase. Selling, general and administrative expenses were $33.7 million, down 360 basis points to 30% as a percentage of net sales. The company reported an operating income of $3.5 million, reversing the operating loss of $2.4 million in the prior-year quarter. Operating margin for the quarter came in at 3.2%.

Financial Update

Cash and cash equivalents at quarter end were $14.2 million, up sharply from $6.8 million at the end of the second quarter of fiscal 2010.

Total long-term liabilities increased to $33.4 million at the end of second quarter 2011 from $29.8 million at the end of second quarter 2010.

Store Update

At quarter end, Zumeiz operated 425 stores. The company expects to open approximately 45 new stores in fiscal 2011, including its first set of stores in Canada.

Guidance

For the third quarter of 2011, management expects comparable store sales to increase in the low-single-digit range and net income to come in a band of 37 cents to $39 cents per share.

We expect Zumiez’s 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.

 
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