Wait for More Pullback on This Small Growing Retailer

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I have paid attention to one small cap retailer for more than a year now. I even have recommended it as an investment opportunity in September 2011. This retailer has experienced quite a lot of volatility in the stock market for the last several years, with a beta of 1.95. In 2009, it was as low as $6.90 per share. In June, it was as high as $39.50 per share, and now it is trading at only $20.68 per share. The company is Zumiez (NASDAQ: ZUMZ) with around 434 stores in the US and 10 stores in Canada. Just recently, Zumiez reported a fall in its profits for the third quarter results, making its shares plunge 10%. Should we harvest the shares at the current price? Or should we wait?

Zumiez experienced a good year-over-year growth in its revenue, of 16.9%, from $153.95 million to $180 million. However, because of the significant increases in the cost of goods sold and SG&A expenses, its operating profit declined from $22.8 million to $21.4 million, a decrease of 6.1%. Its diluted EPS for the third quarter 2012 was $0.40, a little lower than the third quarter last year, of $0.45. Zumiez experienced a third quarter comparable store sales growth of 3.7% on top of 6% last year. However, in November, its comp store sales actually decreased 4.2%, compared to its 8.4% growth in the same period last year. According to the company’s CEO Rick Brooks, the sluggish sales in November were due to a soft sales environment in Europe and Hurricane Sandy:

“Our third quarter operating results reflect softer than expected sales trends in Europe and modest comparable store sales for the post back to school period. Comp trends remained challenging in November, particularly early in the month in part due to Hurricane Sandy, however we are encouraged by the more recent sales results, with positive comps over the Black Friday weekend.”

Zumiez still expected the decrease of 3%-4% comp store sales in the fourth quarter, along with the sales of $218-$221 million and $0.59 - $0.62 EPS. So for the full year, its EPS would be in the range of $1.20 to $1.23 per share. Currently, it is trading at $20.68 per share, so the market is valuing Zumiez at 16.8x to 17.23x FY12 earnings.

As of October, Zumiez had $300.4 million in stockholders’ equity, only $6.8 million in long-term debt and other liabilities, and more than $98 million in cash and marketable securities. It was worth noting that its inventories have increased significantly, from $93.8 million last year to $109.8 million this year. Its level of inventory has reached the highest since 2005. It could be a warning sign combined with the sluggish comp store figure. The total enterprise value was $555.65 million, with its EV/EBITDA of 6.16x.

Compared to its competitors including Pacific Sunwear of California (NASDAQ: PSUN) and Hot Topic (NASDAQ: HOTT), Zumiez is the most expensive, whereas Hot Topic is trading at 5.12x EV/EBITDA. Pacific Sunwear doesn’t produce positive EBITDA, so the EV/EBITDA is a negative number. Even with the alarming increase in its inventories, Zumiez inventories, as a percentage of the total assets, is the least among the three, of 23.84%, whereas Pacific Sunwear’s is at 38.5% and Hot Topic’s is at 31.36%. Over the previous 12 months, Zumiez is still the best performing retailer with a 15.22% ROIC, whereas Hot Topic only delivered a 9% ROIC and Pacific Sunwear created losses.

Foolish Bottom Line

I am still quite bullish about Zumiez over the long-term. However, with the recent decrease in its same store sales and the sudden increase in its inventories, I would rather wait for a larger pullback to initiate any positions in this small, debt-free and growing retailer.

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Pacific Sunwear. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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