ANF Abercrombie and Fitch Co

Backed by strong merchandising, new store opening and e-commerce strategies along with improved margins, specialty retailer Zumiez Inc. (ZUMZ) reported a strong third-quarter 2011 result. The quarterly earnings of 45 cents per share beat the Zacks Consensus Estimate of 41 cents and surged 12.5% from the prior-period level of 40 cents.

Net sales in the reported quarter climbed 13.3% to $154 million from $135.9 million a year ago. Comparable store sales rose 6.0% in the quarter compared with an increase of 14.4% in third-quarter 2010. Moreover, total revenue also surpassed the Zacks Consensus Estimate of $153 million.

Cost of goods sold in the quarter increased 12.7% year over year to $93.8 million. Gross margin nevertheless expanded 40 basis points to 39.1% in the quarter driven by net sales increase. Selling, general and administrative expenses were $37.3 million, down 40 basis points to 24.3% as a percentage of net sales.

Consequently, the company reported an operating income of $22.8 million, up 20.2% from the year-ago operating income of $19 million in the prior-year quarter resulting an expansion of 80 basis points in operating margin to 14.8%.

Financial Update

Cash and cash equivalents at the end of the quarter were $13.9 million, up sharply from $8.3 million at the end of the third quarter of fiscal 2010. Total long-term liabilities increased to $34.4 million at the end of third-quarter 2011 from $29.9 million at the end of the year-ago comparable quarter.

Store Update

The company has completed its earlier planning of opening 45 stores during fiscal 2011, including its first set of stores in Canada. The company is operating its business through 434 stores in the United States and 10 stores in Canada.

Guidance

For the fourth quarter of fiscal 2011, management anticipates to generate revenue in the range of $174 to $177 million on the back of a mid-single-digit growth in comparable store sales. On the verge of promising sales, the company is expecting earnings per share to come in the band of 52 cents to 54 cents. The current Zacks Consensus Estimate for the upcoming fourth-quarter 2011 stood at 52 cents per share, which is at the lower end of the guidance range.

Bolstered by better-than-expected quarterly results, management is quite keen on continuing with its key initiatives for enhancing productivity and global footprints.

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 upon 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 #2 Rank (short-term Buy rating) for the company indicates no clear directional pressure on the stock over the near term.

 
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