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Zumiez Inc - Quarter Report: 2020 October (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-51300

 

 

ZUMIEZ INC.

(Exact name of registrant as specified in its charter)

 

 

Washington

 

91-1040022

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

4001 204th Street SW, Lynnwood, WA 98036

(Address of principal executive offices)  (Zip Code)

Registrant’s telephone number, including area code: (425) 551-1500

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes     No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

ZUMZ

Nasdaq Global Select

At November 28, 2020, there were 25,475,730 shares outstanding of common stock.

 

 


ZUMIEZ INC.

FORM 10-Q

TABLE OF CONTENTS

 

Part I.

Financial Information

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets at October 31, 2020 (unaudited) and February 1, 2020

3

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2020 and November 2, 2019

4

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 31, 2020 and November 2, 2019

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended October 31, 2020 and November 2, 2019

6

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 2020 and November 2, 2019

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

 

 

Item 4.

Controls and Procedures

31

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

 

 

Item 1A.

Risk Factors

32

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

32

 

 

 

 

 

Item 4.

Mine Safety Disclosures

32

 

 

 

 

 

Item 5.

Other Information

32

 

 

 

 

 

Item 6.

Exhibits

33

 

 

 

 

Signature

34

 

 

2


ZUMIEZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

October 31, 2020

 

 

February 1, 2020

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

84,939

 

 

$

52,428

 

Marketable securities

 

 

231,234

 

 

 

198,768

 

Receivables

 

 

19,301

 

 

 

16,841

 

Inventories

 

 

160,961

 

 

 

135,095

 

Prepaid expenses and other current assets

 

 

9,240

 

 

 

9,456

 

Total current assets

 

 

505,675

 

 

 

412,588

 

Fixed assets, net

 

 

101,820

 

 

 

113,051

 

Operating lease right-of-use assets

 

 

273,796

 

 

 

301,784

 

Goodwill

 

 

59,540

 

 

 

57,099

 

Intangible assets, net

 

 

15,329

 

 

 

14,564

 

Deferred tax assets, net

 

 

8,192

 

 

 

6,303

 

Other long-term assets

 

 

9,802

 

 

 

8,869

 

Total long-term assets

 

 

468,479

 

 

 

501,670

 

Total assets

 

$

974,154

 

 

$

914,258

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Trade accounts payable

 

$

84,069

 

 

$

47,787

 

Accrued payroll and payroll taxes

 

 

25,603

 

 

 

23,653

 

Income taxes payable

 

 

8,402

 

 

 

4,686

 

Operating lease liabilities

 

 

72,526

 

 

 

61,800

 

Other liabilities

 

 

25,327

 

 

 

21,784

 

Total current liabilities

 

 

215,927

 

 

 

159,710

 

Long-term operating lease liabilities

 

 

255,160

 

 

 

284,717

 

Other long-term liabilities

 

 

3,881

 

 

 

3,745

 

Total long-term liabilities

 

 

259,041

 

 

 

288,462

 

Total liabilities

 

 

474,968

 

 

 

448,172

 

Commitments and contingencies (Note 5)

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

Preferred stock, no par value, 20,000 shares authorized; none issued and outstanding

 

 

 

 

 

 

Common stock, no par value, 50,000 shares authorized; 25,472 shares issued and outstanding at October 31, 2020 and 25,828 shares issued and outstanding at February 1, 2020

 

 

167,119

 

 

 

161,458

 

Accumulated other comprehensive loss

 

 

(5,165

)

 

 

(12,591

)

Retained earnings

 

 

337,232

 

 

 

317,219

 

Total shareholders’ equity

 

 

499,186

 

 

 

466,086

 

Total liabilities and shareholders’ equity

 

$

974,154

 

 

$

914,258

 

 

See accompanying notes to condensed consolidated financial statements

 

3


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

 

November 2, 2019

 

 

October 31, 2020

 

 

 

November 2, 2019

 

Net sales

 

$

 

270,952

 

 

$

 

264,022

 

 

$

 

659,116

 

 

 

 

705,376

 

Cost of goods sold

 

 

 

165,146

 

 

 

 

169,446

 

 

 

 

438,724

 

 

 

 

467,140

 

Gross profit

 

 

 

105,806

 

 

 

 

94,576

 

 

 

 

220,392

 

 

 

 

238,236

 

Selling, general and administrative expenses

 

 

 

67,941

 

 

 

 

70,266

 

 

 

 

177,263

 

 

 

 

201,285

 

Operating profit

 

 

 

37,865

 

 

 

 

24,310

 

 

 

 

43,129

 

 

 

 

36,951

 

Interest income, net

 

 

 

769

 

 

 

 

1,002

 

 

 

 

2,637

 

 

 

 

2,652

 

Other income, net

 

 

 

86

 

 

 

 

275

 

 

 

 

584

 

 

 

 

987

 

Earnings before income taxes

 

 

 

38,720

 

 

 

 

25,587

 

 

 

 

46,350

 

 

 

 

40,590

 

Provision for income taxes

 

 

 

9,581

 

 

 

 

6,408

 

 

 

 

12,920

 

 

 

 

11,593

 

Net income

 

$

 

29,139

 

 

$

 

19,179

 

 

$

 

33,430

 

 

 

 

28,997

 

Basic earnings per share

 

$

 

1.17

 

 

$

 

0.76

 

 

$

 

1.34

 

 

 

 

1.15

 

Diluted earnings per share

 

$

 

1.16

 

 

$

 

0.75

 

 

$

 

1.32

 

 

 

 

1.14

 

Weighted average shares used in computation of earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

24,864

 

 

 

 

25,231

 

 

 

 

24,913

 

 

 

 

25,173

 

Diluted

 

 

 

25,219

 

 

 

 

25,560

 

 

 

 

25,271

 

 

 

 

25,480

 

 

See accompanying notes to condensed consolidated financial statements

 

4


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

 

October 31, 2020

 

 

November 2, 2019

 

Net income

 

$

29,139

 

 

$

19,179

 

 

 

$

33,430

 

 

$

28,997

 

Other comprehensive (loss) income, net of tax and reclassification adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(1,802

)

 

 

817

 

 

 

 

6,359

 

 

 

(2,881

)

Net change in unrealized (loss) gain on available-for-sale debt securities

 

 

(240

)

 

 

10

 

 

 

 

1,067

 

 

 

358

 

Other comprehensive (loss) income, net

 

 

(2,042

)

 

 

827

 

 

 

 

7,426

 

 

 

(2,523

)

Comprehensive income

 

$

27,097

 

 

$

20,006

 

 

 

$

40,856

 

 

$

26,474

 

 

See accompanying notes to condensed consolidated financial statements

 

5


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at August 1, 2020

 

 

25,450

 

 

$

165,056

 

 

$

(3,123

)

 

$

308,093

 

 

$

470,026

 

Net income

 

 

 

 

 

 

 

 

 

 

 

29,139

 

 

 

29,139

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(2,042

)

 

 

 

 

 

(2,042

)

Issuance and exercise of stock-based awards

 

 

22

 

 

 

414

 

 

 

 

 

 

 

 

 

414

 

Stock-based compensation expense

 

 

 

 

 

1,649

 

 

 

 

 

 

 

 

 

1,649

 

Balance at October 31, 2020

 

 

25,472

 

 

$

167,119

 

 

$

(5,165

)

 

$

337,232

 

 

$

499,186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at August 3, 2019

 

 

25,770

 

 

$

156,625

 

 

$

(12,574

)

 

$

260,156

 

 

$

404,207

 

Net income

 

 

 

 

 

 

 

 

 

 

 

19,179

 

 

 

19,179

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

827

 

 

 

 

 

 

827

 

Issuance and exercise of stock-based awards

 

 

35

 

 

 

1,021

 

 

 

 

 

 

 

 

 

1,021

 

Stock-based compensation expense

 

 

 

 

 

1,605

 

 

 

 

 

 

 

 

 

1,605

 

Balance at November 2, 2019

 

 

25,805

 

 

$

159,251

 

 

$

(11,747

)

 

$

279,335

 

 

$

426,839

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at February 1, 2020

 

 

25,828

 

 

$

161,458

 

 

$

(12,591

)

 

$

317,219

 

 

$

466,086

 

Net income

 

 

 

 

 

 

 

 

 

 

 

33,430

 

 

 

33,430

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

7,426

 

 

 

 

 

 

7,426

 

Issuance and exercise of stock-based awards

 

 

338

 

 

 

866

 

 

 

 

 

 

 

 

 

866

 

Stock-based compensation expense

 

 

 

 

 

4,795

 

 

 

 

 

 

 

 

 

4,795

 

Repurchase of common stock

 

 

(694

)

 

 

 

 

 

 

 

 

(13,417

)

 

 

(13,417

)

Balance at October 31, 2020

 

 

25,472

 

 

$

167,119

 

 

$

(5,165

)

 

$

337,232

 

 

$

499,186

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at February 2, 2019

 

 

25,521

 

 

$

153,066

 

 

$

(9,224

)

 

$

256,614

 

 

$

400,456

 

Net income

 

 

 

 

 

 

 

 

 

 

 

28,997

 

 

 

28,997

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(2,523

)

 

 

 

 

 

(2,523

)

Issuance and exercise of stock-based awards

 

 

284

 

 

 

1,366

 

 

 

 

 

 

 

 

 

1,366

 

Stock-based compensation expense

 

 

 

 

 

4,819

 

 

 

 

 

 

 

 

 

4,819

 

Cumulative effect of accounting change under ASC 842

 

 

 

 

 

 

 

 

 

 

 

(6,276

)

 

 

(6,276

)

Balance at November 2, 2019

 

 

25,805

 

 

$

159,251

 

 

$

(11,747

)

 

$

279,335

 

 

$

426,839

 

 

See accompanying notes to condensed consolidated financial statements

 

6


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

33,430

 

 

$

28,997

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

17,909

 

 

 

18,776

 

Noncash lease expense

 

 

45,797

 

 

 

42,960

 

Deferred taxes

 

 

(2,155

)

 

 

29

 

Stock-based compensation expense

 

 

4,795

 

 

 

4,819

 

Impairment of long-lived assets

 

 

4,443

 

 

 

123

 

Other

 

 

(430

)

 

 

(562

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(1,030

)

 

 

3,190

 

Inventories

 

 

(24,856

)

 

 

(54,687

)

Prepaid expenses and other assets

 

 

532

 

 

 

(934

)

Trade accounts payable

 

 

36,196

 

 

 

38,186

 

Accrued payroll and payroll taxes

 

 

1,711

 

 

 

971

 

Income taxes payable

 

 

2,629

 

 

 

(2,586

)

Operating lease liabilities

 

 

(40,945

)

 

 

(45,512

)

Other liabilities

 

 

3,728

 

 

 

(4,316

)

Net cash provided by operating activities

 

 

81,754

 

 

 

29,454

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to fixed assets

 

 

(7,488

)

 

 

(13,871

)

Purchases of marketable securities and other investments

 

 

(135,515

)

 

 

(165,912

)

Sales and maturities of marketable securities and other investments

 

 

104,742

 

 

 

132,974

 

Net cash used in investing activities

 

 

(38,261

)

 

 

(46,809

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance and exercise of stock-based awards

 

 

959

 

 

 

1,604

 

Payments for tax withholdings on equity awards

 

 

(93

)

 

 

(238

)

Common stock repurchased

 

 

(13,417

)

 

 

 

Net cash (used in) provided by financing activities

 

 

(12,551

)

 

 

1,366

 

Effect of exchange rate changes on cash, cash equivalents, and restricted cash

 

 

1,899

 

 

 

(242

)

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

32,841

 

 

 

(16,231

)

Cash, cash equivalents, and restricted cash, beginning of period

 

 

58,991

 

 

 

54,271

 

Cash, cash equivalents, and restricted cash, end of period

 

$

91,832

 

 

$

38,040

 

Supplemental disclosure on cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

11,933

 

 

$

14,024

 

Accrual for purchases of fixed assets

 

 

346

 

 

 

1,412

 

 

See accompanying notes to condensed consolidated financial statements

 

7


ZUMIEZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. Nature of Business and Basis of Presentation

Nature of Business—Zumiez Inc., including its wholly owned subsidiaries, (the “Company,” “we,” “us,” “its” and “our”) is a leading specialty retailer of apparel, footwear, accessories and hardgoods for young men and women who want to express their individuality through the fashion, music, art and culture of action sports, streetwear, and other unique lifestyles. We operate under the names Zumiez, Blue Tomato and Fast Times. We operate ecommerce websites at zumiez.com, zumiez.ca, blue-tomato.com and fasttimes.com.au. At October 31, 2020, we operated 725 stores; 608 in the United States (“U.S.”), 52 in Canada, 53 in Europe, and 12 in Australia.

Beginning in mid-March, we experienced global store closures as a result of a novel strain of coronavirus (“COVID-19”) that extended for a significant portion of March and April. We began gradually re-opening physical stores at the end of the first fiscal quarter and into the second fiscal quarter, with 68.4% of stores re-opened at the end of the first quarter and 89.6% open and operating by the end of the second quarter. During the third fiscal quarter, on an aggregate basis our stores were open approximately 94.7% of the possible days across the business with limited closures.             

Fiscal Year—We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday closest to January 31.  Each fiscal year consists of four 13-week quarters, with an extra week added to the fourth quarter every five or six years.  The three months ended October 31, 2020 and November 2, 2019 were 13-week periods. The nine months ended October 31, 2020 and November 2, 2019 were 39-week periods.

Basis of Presentation—The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting.  Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  The unaudited condensed consolidated financial statements include the accounts of Zumiez Inc. and its wholly-owned subsidiaries.  All significant intercompany transactions and balances are eliminated in consolidation.

In our opinion, the unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated balance sheets, operating results and cash flows for the periods presented.

The financial data at February 1, 2020 is derived from audited consolidated financial statements, which are included in our Annual Report on Form 10-K for the year ended February 1, 2020, and should be read in conjunction with the audited consolidated financial statements and notes thereto.  Interim results are not necessarily indicative of results for the full fiscal year due to seasonality and other factors.

Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period.  These estimates can also affect supplemental information disclosed by us, including information about contingencies, risk and financial condition.  Actual results could differ from these estimates and assumptions. 

COVID-19— In December 2019, COVID-19 was first identified, and in March 2020, the World Health Organization categorized COVID-19 as a pandemic. To help control the spread of the virus and protect the health and safety of our employees and customers, we began closing our retail stores across all markets that we operate between March 16, 2020 and March 19, 2020. We began gradually re-opening stores at the end of the first fiscal quarter and into the second fiscal quarter. During the third fiscal quarter, we were open and operating for approximately 94.7% of the possible days across our global stores. Changes in our operations due to COVID-19 resulted in material fluctuations to our results of operations during the nine months ended October 31, 2020 and are expected to create continued volatility in our results through the balance of the year and potentially into 2021.  

The COVID-19 pandemic remains a rapidly evolving situation. The continuation of the outbreak may cause prolonged periods of store closures and modified operating schedules and may result in changes in customer behaviors, including a potential reduction in consumer discretionary spending in our stores. This in turn may lead to increased asset recovery and valuation risks, such as impairment of our stores and other assets and an inability to realize deferred tax assets due to sustaining losses in certain jurisdictions. Uncertainties in the global economy could impact the financial viability of our suppliers, vendors and other business partners, which could interrupt our supply chain, limit our ability to sell to our consumer and require other changes to our operations. These and other factors could adversely impact our net revenues, operating income, earnings per share and other financial measures.

8


Restricted Cash— Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash in other long-term assets on our condensed consolidated balance sheets. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows (in thousands):

 

 

 

October 31, 2020

 

 

February 1, 2020

 

Cash and cash equivalents

 

$

 

84,939

 

 

$

 

52,428

 

Restricted cash included in other long-term assets

 

 

 

6,893

 

 

 

 

6,563

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

 

91,832

 

 

$

 

58,991

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted cash included in other long-term assets represents amounts held as insurance collateral and collateral for bank guarantees on certain store operating leases.

Significant Accounting Policies—Our significant accounting policies are detailed in Note 2, “Summary of Significant Accounting Policies” within Part IV Item 15 of the Annual Report on Form 10-K for the year ended February 1, 2020.  There have been no changes in accounting policies other than specific accounting considerations herein that we have taken as a result of COVID-19.      

 

Zumiez evaluates its long-lived assets for indicators of impairment quarterly or when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Given the substantial reduction in our sales and reduced cash flow projections as a result of the store closures due to the COVID-19 pandemic, we determined that a triggering event occurred and that an impairment assessment was warranted for certain stores. This analysis resulted in the Company recording $2.3 million and $4.4 million of impairment charges related to long-lived assets and operating lease right-of-use assets in the three and nine months ended October 31, 2020, respectively.   

 

We assess goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter or more frequently if indicators of impairment arise. We perform this analysis at the reporting unit level by determining whether the fair value of a reporting unit is less than its carrying amount. Given the aforementioned circumstances surrounding COVID-19, we determined that a triggering event had, in fact, occurred. Based on our prior year fourth quarter impairment analysis, in which the fair values of all reporting units were in excess of their carrying amounts, we concluded that impairment was not needed. At this time, we do not believe that additional impairment of goodwill for the nine months ended October 31, 2020 is warranted; however, we are currently monitoring the ongoing negative effects of COVID-19 and if our results decline from our current estimates, we may incur future potential impairments.

 

Merchandise inventories are stated at the lower of cost or net realizable value. We record reserves for obsolete and slow-moving inventory and for estimated shrinkage between physical inventory counts. During the three and nine months ended October 31, 2020, we recorded immaterial inventory write-offs as a result of excess inventory due to the temporary closure of our retail stores.

During the nine months ended October 31, 2020, we received COVID-19 related lease concessions and deferrals for certain stores in United States, Europe and Australia, generally correlating with the limited time period our stores were closed during stay-at-home mandates. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, we have elected to treat COVID-19-related rent concessions as variable lease expense and lease deferrals as there is no change in the contract assuming they are short-term in nature. COVID-19 related rent concessions that are expected to extend well beyond the fiscal year or change the other terms in the lease are treated as lease modifications and a full re-valuation of the right-of-use asset and liability is performed.  We are having ongoing conversations with landlords in various markets to seek commercially reasonable lease concessions given the current environment.  

Recent Accounting Standards— In April 2020, the FASB issued interpretive guidance that indicated it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how those concessions would be accounted for under Topic 842, as though enforceable rights and obligations for those concessions existed (regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract).  The FASB also indicated it was acceptable to treat deferral of lease payments with no substantive changes to the contract as if there was no change to the contract. The Company has elected to treat COVID-19 related lease concessions as variable lease expense and COVID-19 related lease deferrals as there was no change to the contract assuming they are short-term in nature.  For leases where rent concessions are expected to extend well beyond the fiscal year or change the other terms of the lease these are treated as a lease modification. We have adopted this standard prospectively for the fiscal year beginning February 2, 2020.               

In December 2019, the FASB issued an update simplifying the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after

9


December 15, 2020. We early adopted this update for the fiscal year, and interim periods, beginning February 2, 2020. The impact on our condensed consolidated financial statements was not material.

In January 2017, the FASB issued a new standard simplifying the test for goodwill impairment.  The standard eliminates Step 2 from the goodwill impairment test. The standard requires entities perform the goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount and recognize the impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total goodwill allocated to that reporting unit. The new standard is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.  We do not expect this standard to have a material impact on our condensed consolidated financial statements.

     

 

2. Revenue

 

The following table disaggregates net sales by geographic region (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

United States

 

$

 

223,410

 

 

$

221,800

 

 

$

 

542,956

 

 

$

592,556

 

Canada

 

 

 

16,920

 

 

 

16,657

 

 

 

 

37,384

 

 

 

40,817

 

Europe

 

 

 

27,712

 

 

 

23,199

 

 

 

 

70,519

 

 

 

65,360

 

Australia

 

 

 

2,910

 

 

 

2,366

 

 

 

 

8,257

 

 

 

6,643

 

Net sales

 

$

 

270,952

 

 

$

264,022

 

 

$

 

659,116

 

 

$

705,376

 

 

Net sales for the three months ended October 31, 2020 included a $1.9 million increase due to the change in foreign exchange rates, which consisted primarily of $1.7 million in Europe and $0.2 million in Australia. Net sales for the nine months ended October 31, 2020 included a $0.4 million increase due to the change in foreign exchange rates, which consisted of $1.1 million in Europe, partially offset by decreases of $0.6 million in Canada and $0.1 million in Australia.       

      

Our contract liabilities include deferred revenue related to our customer loyalty program and gift cards. The current liability for gift cards was $2.9 million at October 31, 2020 and $4.3 million at February 1, 2020, respectively. Deferred revenue related to our STASH loyalty program was $0.7 million at October 31, 2020 and $0.7 million at February 1, 2020, respectively.

 

3. Cash, Cash Equivalents and Marketable Securities

The following tables summarize the estimated fair value of our cash, cash equivalents and marketable securities and the gross unrealized holding gains and losses (in thousands)

 

 

 

October 31, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Holding

Gains

 

 

Gross

Unrealized

Holding

Losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

50,765

 

 

$

 

 

$

 

 

$

50,765

 

Money market funds

 

 

32,374

 

 

 

 

 

 

 

 

 

32,374

 

Corporate debt securities

 

 

1,800

 

 

 

 

 

 

 

 

 

1,800

 

Total cash and cash equivalents

 

 

84,939

 

 

 

 

 

 

 

 

 

84,939

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agency securities

 

 

35,044

 

 

 

332

 

 

 

(39

)

 

 

35,337

 

Corporate debt securities

 

 

169,434

 

 

 

2,378

 

 

 

(32

)

 

 

171,780

 

State and local government securities

 

 

23,872

 

 

 

254

 

 

 

(9

)

 

 

24,117

 

Total marketable securities

 

$

228,350

 

 

$

2,964

 

 

$

(80

)

 

$

231,234

 

 

10


 

 

February 1, 2020

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Holding

Gains

 

 

Gross

Unrealized

Holding

Losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

34,233

 

 

$

 

 

$

 

 

$

34,233

 

Money market funds

 

 

9,850

 

 

 

 

 

 

 

 

 

9,850

 

Corporate debt securities

 

 

8,345

 

 

 

 

 

 

 

 

 

8,345

 

Total cash and cash equivalents

 

 

52,428

 

 

 

 

 

 

 

 

 

52,428

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agency securities

 

 

25,452

 

 

 

142

 

 

 

(2

)

 

 

25,592

 

Corporate debt securities

 

 

148,608

 

 

 

1,121

 

 

 

 

 

 

149,729

 

State and local government securities

 

 

22,310

 

 

 

207

 

 

 

 

 

 

22,517

 

Variable-rate demand notes

 

 

930

 

 

 

 

 

 

 

 

 

930

 

Total marketable securities

 

$

197,300

 

 

$

1,470

 

 

$

(2

)

 

$

198,768

 

 

All of our marketable securities have an effective maturity date of five years or less and may be liquidated, at our discretion, prior to maturity.

The following tables summarize the gross unrealized holding losses and fair value for investments in an unrealized loss position, and the length of time that individual securities have been in a continuous loss position (in thousands):

 

 

 

October 31, 2020

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agency securities

 

$

9,935

 

 

$

(39

)

 

$

 

 

$

 

 

$

9,935

 

 

$

(39

)

Corporate debt securities

 

 

26,811

 

 

 

(32

)

 

 

 

 

 

 

 

 

26,811

 

 

 

(32

)

State and local government securities

 

 

8,283

 

 

 

(9

)

 

 

 

 

 

 

 

 

8,283

 

 

 

(9

)

Total marketable securities

 

$

45,029

 

 

$

(80

)

 

$

 

 

$

 

 

$

45,029

 

 

$

(80

)

 

 

 

February 1, 2020

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agency securities

 

$

567

 

 

$

(2

)

 

$

 

 

$

 

 

$

567

 

 

$

(2

)

Total marketable securities

 

$

567

 

 

$

(2

)

 

$

 

 

$

 

 

$

567

 

 

$

(2

)

 

We did not record a realized loss for other-than-temporary impairments during the three and nine months ended October 31, 2020 or November 2, 2019.

 

4. Leases

At October 31, 2020, we had operating leases for our retail stores, certain distribution and fulfillment facilities, vehicles and equipment. Our remaining lease terms vary from one month to ten years, with varying renewal and termination options. At October 31, 2020, the weighted-average of the remaining lease term was 5.5 years and the weighted-average discount rate was 3.1%.

The following table presents components of lease expense (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

Operating lease expense

 

$

18,004

 

 

$

17,573

 

 

$

53,520

 

 

$

52,232

 

Variable lease expense

 

 

1,034

 

 

 

1,433

 

 

 

2,485

 

 

 

3,672

 

Total lease expense (1)

 

$

19,038

 

 

$

19,006

 

 

$

56,005

 

 

$

55,904

 

 

11


 

(1)

Total lease expense includes short-term lease expense and sublease income which is immaterial to the Company. Total lease expense does not include right-of-use asset impairment charges, common area maintenance charges and other non-lease components.

 

 

Supplemental cash flow information related to leases is as follows (in thousands):

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

(40,945

)

 

$

(45,512

)

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

17,452

 

 

 

49,263

 

 

At October 31, 2020, the maturities of our operating leases liabilities are as follows (in thousands):

 

Fiscal 2020

 

$

23,684

 

Fiscal 2021

 

 

76,532

 

Fiscal 2022

 

 

67,076

 

Fiscal 2023

 

 

56,546

 

Fiscal 2024

 

 

48,360

 

Thereafter

 

 

82,658

 

Total minimum lease payments

 

 

354,856

 

Less: interest

 

 

(27,170

)

Present value of lease obligations

 

 

327,686

 

Less: current portion

 

 

(72,526

)

Long-term lease obligations (1)

 

$

255,160

 

 

 

(1)

Amounts in the table do not include contingent rent, common area maintenance charges and other non-lease components.

 

At October 31, 2020, we have excluded from the table above $0.5 million of operating leases that were contractually executed, but had not yet commenced. These operating leases are expected to commence by the end of fiscal 2020.  

5. Commitments and Contingencies

Purchase Commitments—At October 31, 2020, we had outstanding purchase orders to acquire merchandise from vendors of $248.0 million. We have an option to cancel these commitments with no notice prior to shipment, except for certain private label and international purchase orders in which we are obligated to repay contractual amounts upon cancellation.

Litigation—We are involved from time to time in claims, proceedings and litigation arising in the ordinary course of business.  We have made accruals with respect to these matters, where appropriate, which are reflected in our condensed consolidated financial statements.  For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made.  We may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if we believe settlement is in the best interest of our shareholders.

A putative class action, Alexia Herrera, on behalf of herself and all other similarly situated, v. Zumiez Inc., was filed against us in the Eastern District Count of California, Sacramento Division under case number 2:16-cv-01802-SB in August 2016.  Alexandra Bernal filed the initial complaint and then in October 2016 added Alexia Herrera as a named plaintiff and Alexandra Bernal left the case.  The putative class action lawsuit against us alleges, among other things, various violations of California’s wage and hour laws, including alleged violations of failure to pay reporting time.  In May 2017 we moved for judgment on the pleadings in that plaintiff’s cause of action for reporting-time pay should fail as a matter of law as the plaintiff and the other putative class members did not “report for work” with respect to certain shifts on which the plaintiff’s claims are based.  In August 2017, the court denied the motion.  However, in October 2017 the district court certified the order denying the motion for judgment on the pleadings for immediate interlocutory review by the United States Court of Appeals for the Ninth Circuit.  We then filed a petition for permission to appeal the order denying the motion for judgment on the pleadings with the United States Court of Appeals for the Ninth Circuit, which petition was then granted in January 2018.  Our opening appellate brief was filed on June 6, 2018 and the plaintiff’s answering appellate brief was filed August 6, 2018.  Our reply brief to the Plaintiff’s answering appellate brief was filed on September 26, 2018 and oral arguments were completed on February 4, 2019.  On May 20, 2019, the United States Court of Appeals for the Ninth Circuit granted our motion for leave to file a supplemental brief addressing new authority. On June 10, 2019, the plaintiff’s supplemental answering brief was filed with the United States Court of Appeals for the Ninth Circuit.  We then filed our supplemental reply

12


brief to the plaintiff’s supplemental answering brief with the United States Court of Appeals for the Ninth Circuit on June 24, 2019. On March 19, 2020 the United States Court of Appeals for the Ninth Circuit published its opinion (i) affirming the District Court’s denial of judgment on the pleadings on plaintiff’s reporting time pay and minimum wage claims, (ii) reversing the District Court’s denial of judgment on the pleadings on plaintiff’s expense reimbursement claim and (iii) refusing to certify the reporting time pay question to the California Supreme Court.  On April 2, 2020 we filed a petition for rehearing en banc to certify the reporting time pay question to the California Supreme Court and on April 27, 2020 plaintiff filed a response to our petition for rehearing en banc. We in turn filed a reply in support of our petition for rehearing en banc on May 1, 2020. On May 14, 2020, the United States Court of Appeals for the Ninth Circuit denied our petition for rehearing en banc. The case was remanded to the Eastern District of California, Sacramento for further proceedings. The court has tentatively scheduled plaintiff’s deadline for filing a motion for class certification on April 15, 2021, and Defendant’s tentative deadline to file an opposition to the motion on June 15, 2021. Given the current status of this case, we are unable to express a view regarding the ultimate outcome or, if the outcome is adverse, to estimate an amount, or range, of reasonably possible loss. We have defended this case vigorously and will continue to do so. 

Insurance Reserves—We use a combination of third-party insurance and self-insurance for a number of risk management activities including workers’ compensation, general liability and employee-related health care benefits.  We maintain reserves for our self-insured losses, which are estimated based on historical claims experience and actuarial and other assumptions.  The self-insurance reserve at October 31, 2020 and February 1, 2020 was $2.3 million and $1.9 million.

 

 

6. Revolving Credit Facilities and Debt

On December 7, 2018, the Company entered into a secured credit agreement with Wells Fargo Bank, N.A., which provided us with a senior secured credit facility (“credit facility”) of up to $35.0 million.  The secured revolving credit facility is available for working capital and other general corporate purposes.  The senior secured credit facility provides for the issuance of standby letters of credit in an amount not to exceed $17.5 million outstanding at any time and with a term not to exceed 365 days.  The commercial line of credit provides for the issuance of commercial letters of credit in an amount not to exceed $10.0 million and with terms not to exceed 120 days.  The amount of borrowings available at any time under our credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time.   The credit facility will mature on December 7, 2021. All obligations under the credit facility are joint and several with Zumiez Services and guaranteed by certain of our subsidiaries.  The credit facility is secured by a first-priority security interest in substantially all of the personal property (but not the real property) of the borrowers and guarantors.  Amounts borrowed under the credit facility bear interest at an adjusted LIBOR rate plus a margin of 1.25% per annum.

The credit facility contains various representations, warranties and restrictive covenants that, among other things and subject to specified circumstances and exceptions, restrict our ability to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business. 

The credit facility contains certain financial maintenance covenants that generally require us to have net income after taxes of at least $5.0 million on a trailing four-quarter basis and a quick ratio of 1.25:1.0 at the end of each fiscal quarter.  The credit facility contains certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance, and providing additional guarantees and collateral in certain circumstances.  The credit facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control.

There were no borrowings outstanding under the credit facility at October 31, 2020 and February 1, 2020. We had open letters of credit outstanding of less than $0.1 million under our secured revolving credit facility at October 31, 2020 and no open commercial letters of credit outstanding at February 1, 2020.

Additionally, on October 12, 2020, we entered into a credit facility with UBS Switzerland AG of up to 15.0 million Euro ($17.5 million), which may be used to guarantee payment of letters of credit. Either party has a right to terminate this credit agreement at any time with immediate effect. The credit facility bears interest at 1.25%. There were no borrowings outstanding under the secured credit agreement at October 31, 2020.

 

7. Fair Value Measurements

We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1— Quoted prices in active markets for identical assets or liabilities;

 

Level 2— Quoted prices for similar assets or liabilities in active markets or inputs that are observable; and

13


 

Level 3— Inputs that are unobservable.

The following tables summarize assets measured at fair value on a recurring basis (in thousands):

 

 

 

October 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

32,374

 

 

$

 

 

$

 

Corporate debt securities

 

 

 

 

 

1,800

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agency securities

 

 

 

 

 

35,337

 

 

 

 

Corporate debt securities

 

 

 

 

 

171,780

 

 

 

 

State and local government securities

 

 

 

 

 

24,117

 

 

 

 

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

6,893

 

 

 

 

 

 

 

Total

 

$

39,267

 

 

$

233,034

 

 

$

 

 

 

 

 

 

 

February 1, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

9,850

 

 

$

 

 

$

 

Corporate debt securities

 

 

 

 

 

8,345

 

 

 

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury and government agency securities

 

 

 

 

 

25,592

 

 

 

 

Corporate debt securities

 

 

 

 

 

149,729

 

 

 

 

State and local government securities

 

 

 

 

 

22,517

 

 

 

 

Variable-rate demand notes

 

 

 

 

 

930

 

 

 

 

Other long-term assets:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

1,711

 

 

 

 

 

 

 

Total

 

$

11,561

 

 

$

207,113

 

 

$

 

 

The Level 2 marketable securities include U.S treasury and government agency securities, corporate debt securities, state and local municipal securities and variable-rate demand notes.  Fair values are based on quoted market prices for similar assets or liabilities or determined using inputs that use readily observable market data that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions.  We review the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believe that its policies adequately consider market activity, either based on specific transactions for the security valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded.  We monitor security-specific valuation trends and we make inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing.

Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as fixed assets, operating lease right-of-use-assets, goodwill, other intangible assets and other assets. These assets are measured at fair value if determined to be impaired. During the three and nine months ended October 31, 2020, we recognized $2.3 million and $4.4 million, respectively, of impairment losses related to fixed assets and operating lease right-of-use assets. During the three and nine months ended November 2, 2019, we recognized no impairment and $0.1 million, respectively, on fixed assets and operating lease right-of-use assets.

 

 

8. Stockholders’ Equity

Share Repurchase—On December 4, 2019, our Board of Directors approved the repurchase of up to an aggregate of $100 million of common stock. Repurchases may be made from time to time on the open market at prevailing market prices. This program is expected to continue through January 30, 2021, unless the time period is extended or shortened by the Board of Directors. This repurchase program supersedes all previously approved and authorized share repurchase programs. As of October 31, 2020, there remains $86.6 million available to repurchase common stock under the share repurchase program.    

14


There were no common stock repurchases during the three months ended October 31, 2020. The following table summarizes common stock repurchase activity during the nine months ended October 31, 2020 (in thousands, except per share amounts):

 

Number of shares repurchased

 

 

694

 

Average price per share of repurchased shares (with commission)

 

$

19.31

 

Total cost of shares repurchased

 

$

13,417

 

 

Accumulated Other Comprehensive Loss—The components of accumulated other comprehensive loss and the adjustments to other comprehensive income for amounts reclassified from accumulated other comprehensive loss into net income are as follows (in thousands):

 

 

 

Foreign currency

translation

adjustments

 

 

Net unrealized

gains

on

available-for-

sale

debt securities

 

 

Accumulated other

comprehensive

loss

 

Three months ended October 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at August 1, 2020

 

$

(5,535

)

 

$

2,412

 

 

$

(3,123

)

Other comprehensive loss, net (1)

 

 

(1,802

)

 

 

(240

)

 

 

(2,042

)

Balance at October 31, 2020

 

$

(7,337

)

 

$

2,172

 

 

$

(5,165

)

Three months ended November 2, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at August 3, 2019

 

$

(12,968

)

 

$

394

 

 

$

(12,574

)

Other comprehensive income, net (1)

 

 

817

 

 

 

10

 

 

 

827

 

Balance at November 2, 2019

 

$

(12,151

)

 

$

404

 

 

$

(11,747

)

 

 

 

Foreign currency

translation

adjustments

 

 

Net unrealized

gains

on

available-for-

sale

investments

 

 

Accumulated other

comprehensive

loss

 

Nine months ended October 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 1, 2020

 

$

(13,696

)

 

$

1,105

 

 

$

(12,591

)

Other comprehensive income, net (1)

 

 

6,359

 

 

 

1,067

 

 

 

7,426

 

Balance at October 31, 2020

 

$

(7,337

)

 

$

2,172

 

 

$

(5,165

)

Nine months ended November 2, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 2, 2019

 

$

(9,270

)

 

$

46

 

 

$

(9,224

)

Other comprehensive loss, net (1)

 

 

(2,881

)

 

 

358

 

 

 

(2,523

)

Balance at November 2, 2019

 

$

(12,151

)

 

$

404

 

 

$

(11,747

)

 

(1)

Other comprehensive income (loss) is net of immaterial taxes for the three and nine months ended October 31, 2020 and November 2, 2019 for net unrealized gains on available-for-sale investments.  Foreign currency translation adjustments are not adjusted for income taxes as they relate to permanent investments in our international subsidiaries.

 

 

9. Equity Awards

We maintain several equity incentive plans under which we may grant incentive stock options, nonqualified stock options, stock bonuses, restricted stock awards, restricted stock units and stock appreciation rights to employees (including officers), non-employee directors and consultants.

We account for stock-based compensation by recording the estimated fair value of stock-based awards granted as compensation expense over the vesting period, net of estimated forfeitures.  Stock-based compensation expense is attributed to earnings using a straight-line method.  We estimate forfeitures of stock-based awards based on historical experience and expected future activity.

The fair value of restricted stock awards and units is measured based on the closing price of our common stock on the date of grant.  The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model.

15


Total stock-based compensation expense is recognized on our condensed consolidated statements of operations as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

Cost of goods sold

 

$

344

 

 

$

306

 

 

$

991

 

 

$

952

 

Selling, general and administrative expenses

 

 

1,305

 

 

 

1,299

 

 

 

3,804

 

 

 

3,867

 

Total stock-based compensation expense

 

$

1,649

 

 

$

1,605

 

 

$

4,795

 

 

$

4,819

 

 

At October 31, 2020, there was $9.8 million of total unrecognized compensation cost related to unvested stock options, restricted stock awards and restricted stock units. This cost has a weighted-average remaining recognition period of 1.2 years.

The following table summarizes restricted stock awards and restricted stock units activity (in thousands, except grant date weighted-average fair value):

 

 

 

Restricted

Stock

Awards/Units

 

 

Grant Date

Weighted-

Average Fair

Value

 

 

Intrinsic

Value

 

Outstanding at February 1, 2020

 

 

541

 

 

$

22.82

 

 

 

 

 

Granted

 

 

317

 

 

$

19.36

 

 

 

 

 

Vested

 

 

(221

)

 

$

22.18

 

 

 

 

 

Forfeited

 

 

(28

)

 

$

21.37

 

 

 

 

 

Outstanding at October 31, 2020

 

 

609

 

 

$

21.32

 

 

$

17,065

 

 

We had 0.4 million stock options outstanding at October 31, 2020 with a weighted average exercise price of $22.13 and 0.3 million stock options outstanding at February 1, 2020 with a weighted average exercise price of $23.38.

 

 

10. Earnings per Share, Basic and Diluted

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

Net income

 

$

 

29,139

 

 

$

19,179

 

 

$

 

33,430

 

 

$

28,997

 

Weighted average common shares for basic earnings per share:

 

 

 

24,864

 

 

 

25,231

 

 

 

 

24,913

 

 

 

25,173

 

Dilutive effect of stock options and restricted stock

 

 

 

355

 

 

 

329

 

 

 

 

358

 

 

 

307

 

Weighted average common shares for diluted earnings per share:

 

 

 

25,219

 

 

 

25,560

 

 

 

 

25,271

 

 

 

25,480

 

Basic earnings per share

 

$

 

1.17

 

 

$

0.76

 

 

$

 

1.34

 

 

$

1.15

 

Diluted earnings per share

 

$

 

1.16

 

 

$

0.75

 

 

$

 

1.32

 

 

$

1.14

 

 

There were fewer than 0.1 million anti-dilutive common shares related to stock-based awards for the three and nine months ended October 31, 2020 and no anti-dilutive common shares related to stock-based awards for the three and nine months ended November 2, 2019.

 

 

11. Subsequent Events

On December 2, 2020, our Board of Directors approved the repurchase of up to an aggregate of $100 million of common stock. Repurchases may be made from time to time on the open market at prevailing market prices. This repurchase authorization replaces the previously approved repurchase program and is expected to continue through January 29, 2022, unless the time period is extended or shortened by the Board of Directors.  

16


Item 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this document.  This discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in “Item 1A Risk Factors” in our Form 10-K filed with the SEC on March 16, 2020 and in this Form 10-Q.

Forward-looking statements relate to our expectations for future events and future financial performance.  Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements.  Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. Uncertainty is further heightened given the innumerable considerations related to COVID-19. Results and trends may differ materially depending on a variety of factors, including, but not limited to: further spread of COVID-19; regulatory measures or recommendations put in place to limit the spread of COVID-19, including restrictions on business operations and social distancing requirements, the length and severity of such restrictions; the potential for a resurgence of COVID-19 infections in a given geographic region, and fluctuations in U.S. and international economies. Actual events or results may differ materially.  Factors which could affect our financial results are described below under the heading “Risk Factors” and in “Item 1A Risk Factors” of our Form 10-K referred to in the preceding paragraph.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements.  We undertake no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.

Fiscal 2020 is the 52-week period ending January 30, 2021. Fiscal 2019 was the 52-week period ending February 1, 2020. The first nine months of fiscal 2020 was the 39-week period ended October 31, 2020. The first nine months of fiscal 2019 was the 39-week period ended November 2, 2019.

“Zumiez,” the “Company,” “we,” “us,” “its,” “our” and similar references refer to Zumiez Inc. and its wholly-owned subsidiaries.

General

Net sales constitute gross sales (net of actual and estimated returns and deductions for promotions) and shipping revenue.  Net sales include our store sales and our ecommerce sales.  We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card.  Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized based on our historical redemption rate in proportion to the pattern of rights exercised by the customer.

We report “comparable sales” based on net sales beginning on the first anniversary of the first day of operation of a new store or ecommerce business.  We operate a sales strategy that integrates our stores with our ecommerce platform.  There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers.  Therefore, our comparable sales also include our ecommerce sales.  Changes in our comparable sales between two periods are based on net sales of store or ecommerce businesses which were in operation during both of the two periods being compared and, if a store or ecommerce business is included in the calculation of comparable sales for only a portion of one of the two periods being compared, then that store or ecommerce business is included in the calculation for only the comparable portion of the other period.  Any increase or decrease less than 25% in square footage of an existing comparable store, including remodels and relocations within the same mall, or temporary closures less than seven days does not eliminate that store from inclusion in the calculation of comparable sales.  Any store or ecommerce business that we acquire will be included in the calculation of comparable sales after the first anniversary of the acquisition date. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. Stores closed due the impacts of COVID-19 are excluded from our comparable sales calculation if they were closed for longer than seven days. Our ecommerce business has remained open during the COVID-19 pandemic and therefore remains reported in our comparable sales calculation. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable sales. As a result, data herein regarding our comparable sales may not be comparable to similar data made available by our competitors or other retailers.

Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs.  Our cost of goods sold also includes shrinkage, buying, occupancy, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers.  This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold.  Cash consideration received from vendors is reported as a

17


reduction of cost of goods sold if the inventory has sold, a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors’ products.

With respect to the freight component of our ecommerce sales, amounts billed to our customers are included in net sales and the related freight cost is charged to cost of goods sold.

Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, freight costs for merchandise shipments from the distribution centers to the stores, store supplies, depreciation on fixed assets at our home office and stores, facility expenses, training expenses and advertising and marketing costs.  Credit card fees, insurance, public company expenses, legal expenses, incentive compensation, stock-based compensation and other miscellaneous operating costs are also included in selling, general and administrative expenses.  This may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.

Key Performance Indicators

Our management evaluates the following items, which we consider key performance indicators, in assessing our performance:

Net sales.  Net sales constitute gross sales, net of sales returns and deductions for promotions, and shipping revenue.  Net sales includes comparable sales and new store sales for all our store and ecommerce businesses.  We consider net sales to be an important indicator of our current performance.  Net sales results are important to achieve leveraging of our costs, including store payroll and store occupancy.  Net sales also have a direct impact on our operating profit, cash and working capital.

Gross profit.  Gross profit measures whether we are optimizing the price and inventory levels of our merchandise.  Gross profit is the difference between net sales and cost of goods sold.  Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.

Operating profit.  We view operating profit as a key indicator of our success.  Operating profit is the difference between gross profit and selling, general and administrative expenses.  The key drivers of operating profit are net sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense.

Diluted earnings per share. Diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period.  We view diluted earnings per share as a key indicator of our success in increasing shareholder value.

We consider our cash and current marketable securities balances to be a critical asset of the business and important to drive our short and long-term initiatives as well as balance our liquidity for on-going operations.  We have always strived to maintain a strong balance sheet that is built to weather the storm of an economic down turn and support the long-term viability of the business.  

Results of Operations

In December 2019, a strain of coronavirus (COVID-19) was first identified. Since then, COVID-19 has surfaced in almost all regions around the world. In the best interest of our customers and employees and in line with governmental regulations, all stores were closed by March 19, 2020, with a significant majority remaining closed through the end of May 2020. We began gradually re-opening physical retail stores at the end of the first fiscal quarter and into the second fiscal quarter with the majority of our stores opened throughout the third fiscal quarter. Since the initial closure of stores, we have carefully monitored our locations on a store by stores basis and gradually reopened in cities where state, county or local rules have allowed such opening and where we have determined that it is safe to do so. The impacts of COVID-19 have resulted in material fluctuations to the financial results of our business during the nine months ended October 31, 2020 and are expected to create continued volatility in our results through the balance of the year and potentially into 2021.

18


The following table presents selected items on the condensed consolidated statements of operations as a percent of net sales:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

October 31, 2020

 

 

November 2, 2019

 

 

October 31, 2020

 

 

November 2, 2019

 

 

Net sales

 

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

 

100.0

 

%

Cost of goods sold

 

 

61.0

 

 

 

64.2

 

 

 

66.6

 

 

 

66.2

 

 

Gross profit

 

 

39.0

 

 

 

35.8

 

 

 

33.4

 

 

 

33.8

 

 

Selling, general and administrative expenses

 

 

25.0

 

 

 

26.6

 

 

 

26.9

 

 

 

28.6

 

 

Operating profit

 

 

14.0

 

 

 

9.2

 

 

 

6.5

 

 

 

5.2

 

 

Interest and other income, net

 

 

0.3

 

 

 

0.5

 

 

 

0.5

 

 

 

0.6

 

 

Earnings before income taxes

 

 

14.3

 

 

 

9.7

 

 

 

7.0

 

 

 

5.8

 

 

Provision for income taxes

 

 

3.5

 

 

 

2.4

 

 

 

1.9

 

 

 

1.7

 

 

Net income

 

 

10.8

 

%

 

7.3

 

%

 

5.1

 

%

 

4.1

 

%

 

As part of the COVID-19 response, the Company has lowered operating costs, including reduced payroll costs through lower operating hours, governmental assistance, negotiated rent relief with landlords, reduced travel, marketing and other non-essential items, reduced capital spend by delaying or cancelling select projects, paused national training events, extended payment terms for both merchandise and non-merchandise vendor invoices, and effectively paused share repurchases. The Company ended the quarter with $316.2 million in cash and short-term investments and no debt.

Three Months (13 weeks) Ended October 31, 2020 Compared With Three Months (13 weeks) Ended November 2, 2019

Net Sales

Net sales were $271.0 million for the three months ended October 31, 2020 compared to $264.0 million for the three months ended November 2, 2019, an increase of $7.0 million or 2.6%. The increase in sales was primarily driven by the continued strength of our ecommerce demand, partially offset by continued stores closures and restrictions due to the COVID-19 pandemic. For the quarter, our stores were open approximately 94.7% of the possible days. Comparable sales for retail stores locations open in the third quarter, as well as our ecommerce business, increased 8.1% or $20.0 million. This increase was partially offset by a decrease of $14.9 million due primarily to store closures during the three months ended October 31, 2020.

Comparable sales increased by $20.0 million or 8.1% primarily driven by an increase in comparable transactions and dollars per transaction.  Dollars per transaction increased due to an increase in both units per transaction and average unit retail. By channel, comparable stores sales were up 2.2% and comparable ecommerce sales were up 39.6%. By category, comparable sales were primarily driven by an increase in hardgoods followed by men’s clothing, accessories, and women’s clothing, partially offset by a decrease in footwear.

By region, North America sales increased $1.9 million or 0.8% and other international sales (which consists of Europe and Australia sales) increased $5.1 million or 19.8% for the three months ended October 31, 2020 compared to the three months ended November 2, 2019. Excluding the impact of changes in foreign exchange rates, North America sales increased $1.9 million or 0.8% and other international sales increased $3.2 million or 12.5% for the three months ended October 31, 2020 compared to the three months ended November 2, 2019.

Gross Profit

Gross profit was $105.8 million for the three months ended October 31, 2020 compared to $94.6 million for the three months ended November 2, 2019, an increase of $11.2 million, or 11.9%.  As a percent of net sales, gross profit increased 320 basis points for the three months ended October 31, 2020 to 39.0%. The increase was primarily driven by a 170 basis point increase in product margin, a 150 basis point decrease in inventory shrinkage, and a 30 basis point decrease in store occupancy costs. This was partially offset by a 40 basis point increase in web shipping costs due to increased web activity, however leveraged to the prior year when compared to total shipped sales.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $67.9 million for the three months ended October 31, 2020 compared to $70.3 million for the three months ended November 2, 2019, a decrease of $2.4 million, or 3.5%. SG&A expenses as a percent of net sales decreased 160 basis points for the three months ended October 31, 2020 to 25.0%. The decrease was primarily driven by a 90 basis point decrease in our store wages, 40 basis point leverage in other store costs, a 40 basis point decrease in corporate costs, a 30 basis point decrease due to governmental payroll credits, and a 30 basis point decrease in national training and recognition events costs. This was partially offset by a 40 basis point increase in annual discretionary incentive compensation and a 30 basis point increase in impairment on fixed assets.  

19


Net Income

Net income for the three months ended October 31, 2020 was $29.1 million, or $1.16 earnings per diluted share, compared with net income of $19.2 million, or $0.75 earnings per diluted share, for the three months ended November 2, 2019.  Our effective income tax rate for the three months ended October 31, 2020 was a 24.7% provision for income taxes compared to a 25.0% provision for income taxes for the three months ended November 2, 2019. The decrease in effective income tax rate was primarily due to a reduction in net losses in certain jurisdictions which are excluded from our estimated annual effective tax rate due to the uncertainty of the realization of deferred tax assets and the proportion of earnings or loss before income taxes across jurisdictions.

Nine Months (39 weeks) Ended October 31, 2020 Compared With Nine Months (39 weeks) Ended November 2, 2019

Net Sales

Net sales were $659.1 million for the nine months ended October 31, 2020 compared to $705.4 million for the nine months ended November 2, 2019, a decrease of $46.3 million or 6.6%. The decrease in sales was primarily driven by the closure of our physical retail across the world due to the impact of COVID-19 of $154.7 million. For the year, our stores were open approximately 72.8% of the possible days. This decrease was partially offset by a $101.6 million increase in comparable sales driven by the increase in ecommerce sales as well as the performance of our physical stores upon re-opening.

Comparable sales increased by $101.6 million or 18.8% primarily driven by an increase in comparable transactions and dollars per transaction.  Dollars per transaction increased due to an increase in both units per transaction and average unit retail. By channel, comparable stores sales were up 8.0% and comparable ecommerce sales were up 65.0%. By category, comparable sales were primarily driven by an increase in hardgoods followed by men’s clothing, accessories and women’s clothing, partially offset by a decrease in footwear.

By region, North America sales decreased $53.1 million or 8.4% and other international sales (which consists of Europe and Australia sales) increased $6.8 million or 9.4% for the nine months ended October 31, 2020 compared to the nine months ended November 2, 2019. Excluding the impact of changes in foreign exchange rates, North America sales decreased $52.5 million or 8.3% and other international sales increased $5.8 million or 8.1% for the nine months ended October 31, 2020 compared to the nine months ended November 2, 2019.

Gross Profit

Gross profit was $220.4 million for the nine months ended October 31, 2020 compared to $238.2 million for the nine months ended November 2, 2019, a decrease of $17.8 million, or 7.5%.  As a percent of net sales, gross profit decreased 40 basis points for the nine months ended October 31, 2020 to 33.4%. The decrease was primarily driven by a 130 basis point increase in web fulfillment and shipping costs due to increased web activity as a result of COVID-19, however leveraged to the prior year when compared to total shipped sales and a 100 basis point increase in our store occupancy costs due to the continuation of rent charges without associated sales during our period of store closures. This was partially offset by a 110 basis point increase in product margin and an 80 basis point decrease in inventory shrinkage.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $177.3 million for the nine months ended October 31, 2020 compared to $201.3 million for the nine months ended November 2, 2019, a decrease of $24.0 million, or 11.9%. SG&A expenses as a percent of net sales decreased 170 basis points for the nine months ended October 31, 2020 to 26.9%. The decrease was primarily driven by an 80 basis points decrease due to governmental payroll credits, a 70 basis point decrease in our store wages, a 30 basis point decrease in corporate costs, a 30 basis point decrease in national training and recognition events, and a 20 basis point decrease in annual discretionary incentive compensation. This was partially offset by a 20 basis point deleverage in corporate wages, a 20 basis point increase in impairment on fixed assets, and a 20 basis point increase in store costs as a result of deleverage on the sales decline due to COVID-19.

 

Net Income

Net income for the nine months ended October 31, 2020 was $33.4 million, or $1.32 earnings per diluted share, compared with net income of $29.0 million, or $1.14 earnings per diluted share, for the nine months ended November 2, 2019.  Our effective income tax rate for the nine months ended October 31, 2020 was a 27.9% provision for income taxes compared to a 28.6% provision for income taxes for the nine months ended November 2, 2019. The decrease in effective income tax rate was primarily due to a reduction in net losses in certain jurisdictions.

Liquidity and Capital Resources

Our primary uses of cash are for operational expenditures, inventory purchases and capital investments, including new stores, store remodels, store relocations, store fixtures and ongoing infrastructure improvements.  Additionally, we may use cash for the repurchase of our common stock.  Historically, our main source of liquidity has been cash flows from operations.

20


The significant components of our working capital are inventories and liquid assets such as cash, cash equivalents, current marketable securities and receivables, reduced by accounts payable, accrued payroll and accrued expenses.  Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors.

Our capital requirements include construction and fixture costs related to the opening of new stores and remodel and relocation expenditures for existing stores.  Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords.  Our net investment to open a new store has varied significantly in the past due to a number of factors, including the geographic location and size of the new store, and is likely to vary significantly in the future.

During fiscal 2020, we expect to spend approximately $10 million to $11 million on capital expenditures, which is down from $18 million to $20 million, which we reported in March 2020. The majority of our capital expenditures will relate to leasehold improvements and fixtures for the approximately 13 new stores we remain on track to open in fiscal 2020 and remodels or relocations of existing stores.  There can be no assurance that the number of stores that we actually open in fiscal 2020 will not be different from the number of stores we plan to open, or that actual fiscal 2020 capital expenditures will not differ from our expectations.

Operating Activities

Net cash from operating activities increased by $52.3 million to $81.8 million provided by operating activities for the nine months ended October 31, 2020 from $29.5 million provided by operating activities for the nine months ended November 2, 2019. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, store occupancy expenses and other operational expenditures. Net cash from operating activities increase included cash deferment of $53.0 million composed of lower inventory levels, landlord payments, extended vendor payment terms, and payroll tax payments as well as net income improvements related to abatements, credits and expense reductions. Cash received from our customers generally corresponds to our net sales. Because our customers primarily use credit cards or cash to buy from us, our receivables from customers settle quickly.  Historically, changes to our operating cash flows have been driven primarily by changes in operating income, which is impacted by changes to non-cash items such as depreciation, amortization and accretion, deferred taxes, and changes to the components of working capital.

Investing Activities

Net cash used in investing activities was $38.3 million for the nine months ended October 31, 2020 related to $30.8 million in net purchases of marketable securities and $7.5 million of capital expenditures primarily for new store openings and existing store remodels or relocations.  Net cash used in investing activities was $46.8 million for the nine months ended November 2, 2019, related to $32.9 million in net purchases of marketable securities in addition to $13.9 million of capital expenditures primarily for new store openings and existing store remodels or relocations.

Financing Activities

Net cash used in financing activities for the nine months ended October 31, 2020 was $12.6 million, related to $13.4 million used in the repurchase of common stock and $0.1 million in payments for tax withholding obligations upon vesting of restricted stock partially offset by $0.9 million in proceeds from the issuance and exercise of stock-based awards. Net cash provided by financing activities for the nine months ended November 2, 2019 was $1.4 million, related to $1.6 million proceeds from the issuance and exercise of stock-based awards partially offset by $0.2 million in payments for tax withholding obligations upon vesting of restricted stock.

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Sources of Liquidity

Our most significant sources of liquidity continue to be funds generated by operating activities and available cash, cash equivalents and current marketable securities.  We expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures for at least the next twelve months.  Beyond this time frame, if cash flows from operations are not sufficient to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future.  However, there can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.

We maintain a secured credit agreement with Wells Fargo Bank, N.A., which provided us with a senior secured credit facility (“credit facility”) of up to $35.0 million.  The credit facility is available for working capital and other general corporate purposes. The credit facility provides for the issuance of standby letters of credit in an amount not to exceed $17.5 million outstanding at any time and with a term not to exceed 365 days. The commercial line of credit provides for the issuance of commercial letters of credit in an amount not to exceed $10.0 million and with terms not to exceed 120 days.  The credit facility will mature on December 7, 2021. The credit facility is secured by a first-priority security interest in substantially all of the personal property (but not the real property) of the borrowers and guarantors.  Amounts borrowed under the credit facility bear interest at an adjusted LIBOR rate plus a margin of 1.25% per annum. There were open letters of credit outstanding of less than $0.1 million under our secured revolving credit facility at October 31, 2020 and no borrowings or open letters of credit outstanding at February 1, 2020.

Additionally, on October 12, 2020, we entered into a credit facility with UBS Switzerland AG of up to 15.0 million Euro ($17.5 million), which may be used to guarantee payment of letters of credit. The credit facility bears interest at 1.25%. There were no borrowings outstanding under the credit agreement at October 31, 2020.

Critical Accounting Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP.  In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures.  We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our condensed consolidated financial statements are prepared.  On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with U.S. GAAP.  However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

There have been no significant changes to our critical accounting estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020.

Contractual Obligations and Commercial Commitments

There were no material changes outside the ordinary course of business in our contractual obligations during the nine months ended October 31, 2020.  The following table summarizes the total amount of future payments due under our contractual obligations at October 31, 2020 (in thousands):

 

 

 

Total

 

 

Fiscal 2020

 

 

Fiscal 2021 and

Fiscal 2022

 

 

Fiscal 2023 and

Fiscal 2024

 

 

Thereafter

 

Operating lease liabilities, including imputed interest (1)

 

$

354,856

 

 

$

23,684

 

 

$

143,608

 

 

$

104,906

 

 

$

82,658

 

Purchase obligations (2)

 

$

247,974

 

 

 

244,349

 

 

 

3,625

 

 

 

 

 

 

 

Total

 

$

602,830

 

 

$

268,033

 

 

$

147,233

 

 

$

104,906

 

 

$

82,658

 

 

(1)

This amount represents the minimum lease payments, included imputed interest, under non-cancelable operating leases. See Note 4, “Leases,” in the Notes to Condensed Consolidated Financial Statements found in Item 1 of this Form 10-Q, for additional information related to our operating leases.

(2)

We have an option to cancel these commitments with no notice prior to shipment, except for certain private label, packaging supplies and international purchase orders in which we are obligated to repay contractual amounts upon cancellation.

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Off-Balance Sheet Arrangements

At October 31, 2020, we did not have any off-balance sheet arrangements.

Impact of Inflation/Deflation

We do not believe that inflation has had a material impact on our net sales or operating results for the past three fiscal years.  However, substantial increases in costs, including the price of raw materials, labor, energy and other inputs used in the production of our merchandise, could have a significant impact on our business and the industry in the future.  Additionally, while deflation could positively impact our merchandise costs, it could have an adverse effect on our average unit retail price, resulting in lower sales and operating results.

Risk Factors

Investing in our securities involves a high degree of risk.  The following risk factors, issues and uncertainties should be considered in evaluating our future prospects.  In particular, keep these risk factors in mind when you read “forward-looking” statements elsewhere in this report.  Forward-looking statements relate to our expectations for future events and time periods.  Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements.  Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements.  Any of the following risks could harm our business, operating results or financial condition and could result in a complete loss of your investment.  Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business and financial condition in the future.

The novel coronavirus disease (COVID-19) global pandemic could continue to have a material adverse impact on our business.

Since being declared a pandemic by the World Health Organization in March 2020, COVID-19 has negatively impacted global economies, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. The COVID-19 global pandemic could continue to have a material impact on our business, including our results of operations, financial condition and liquidity. The duration and severity of the COVID-19 pandemic will determine its ongoing impact on our business, including our ability to execute business strategies and initiatives in their expected time frame, the effect on our suppliers and disruptions to the global supply chain, and the ability of our customers to pay for our services and products.

A resurgence in the spread of COVID-19, could force the closure of our retail stores globally, as we saw in the first quarter of 2020. We could also experience store closures on a regional basis, like we have seen in California beginning at the end of the second quarter of 2020. We may face long term store closure requirements or restrictions in allowed store capacity or occupancy and other operational restrictions with respect to some or all of our physical locations for prolonged periods of time due to, among other factors, evolving and increasingly stringent governmental restrictions, public health directives, quarantine policies, or social distancing measures, resulting in a materially adverse impact to our financial results.

With store closures withstanding, consumer fears about becoming ill with the virus may persist, adversely affecting traffic to our stores. Consumer spending may also be negatively impacted by general economic downturn and decreased consumer confidence resulting from the COVID-19 global pandemic. This may negatively impact sales in our stores and our ecommerce channel. The potential reduction in consumer visits to our stores, caused by COVID-19, and any decreased spending at retail stores or online caused by a lack of consumer confidence and spending following the pandemic, could result in a loss of sales and profits.

A rise in the spread COVID-19 also has the potential to significantly impact our supply chain if manufacturers of our products, distribution centers where we manage our inventory, or operations of our logistics and other service providers are disrupted, temporarily closed or experience worker shortages.

The COVID-19 pandemic’s impact on macroeconomic conditions could alter the functioning of financial and capital markets, foreign currency exchange rates, commodity prices, and interest rates. After the COVID-19 global pandemic has settled, we may continue to experience adverse impacts to our business as a result of any economic recession that has occurred or may occur in the future.

The extent of the impact of the COVID-19 global pandemic on our business is highly uncertain and difficult to predict, given the innumerable unknowns regarding the duration and severity of the pandemic.

Failure to anticipate, identify and respond to changing fashion trends, customer preferences and other fashion-related factors could have a material adverse effect on us.

Customer tastes and fashion trends in our market are volatile and tend to change rapidly.  Our success depends on our ability to effectively anticipate, identify and respond to changing fashion tastes and consumer preferences, and to translate market trends into appropriate, saleable product offerings in a timely manner.  If we are unable to successfully anticipate, identify or respond to changing styles or trends and misjudge the market for our products or any new product lines, including adequately anticipating the correct mix

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and trends of our private label merchandise, our sales may be lower than predicted and we may be faced with a substantial amount of unsold inventory or missed opportunities.  In response to such a situation, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory, which could have a material adverse effect on our results of operations.

We may be unable to compete favorably in the highly competitive retail industry, and if we lose customers to our competitors, our sales could decrease.

The teenage and young adult retail apparel, footwear, accessories and hardgoods industry is highly competitive.  We compete with other retailers for vendors, teenage and young adult customers, suitable store locations, qualified store associates, management personnel, online marketing content, social media engagement and ecommerce traffic.  Some of our competitors are larger than we are and have substantially greater financial and marketing resources, including advanced ecommerce market capabilities.  Additionally, some of our competitors may offer more options for free and/or expedited shipping for ecommerce sales.  Direct competition with these and other retailers may increase significantly in the future, which could require us, among other things, to lower our prices and could result in the loss of our customers.  Current and increased competition could have a material adverse effect on our business, results of operations and financial condition.

U.S. and global economic and political uncertainty, coupled with cyclical economic trends in retailing, could have a material adverse effect on our results of operations.

Our retail market historically has been subject to substantial cyclicality.  As the U.S. and global economic and political conditions change, the trends in discretionary consumer spending become unpredictable and discretionary consumer spending could be reduced due to uncertainties about the future.  When disposable income decreases or discretionary consumer spending is reduced due to a decline in consumer confidence, purchases of apparel and related products may decline.  Uncertainty in the U.S. and global economies and political environment could have a material adverse impact on our results of operations and financial position.

In response to a decline in disposable income and consumer confidence, we believe the “value” message has become more important to consumers.  As a retailer that sells approximately 85% branded merchandise, this trend may negatively affect our business, as we generally will have to charge more than vertically integrated private label retailers or we may be forced to rely on promotional sales to compete in our market which could have a material adverse effect on our financial position.

Most of our merchandise is produced by foreign manufacturers; therefore, the availability, quality and costs of our merchandise may be negatively affected by risks associated with international trade and other international conditions.

Most of our merchandise is produced by manufacturers around the world. Some of these facilities are located in regions that may be affected by natural disasters, public health concerns, or emergencies, such as coronavirus and other communicable diseases or viruses, political instability or other conditions that could cause a disruption in trade. Trade restrictions such as increased tariffs or quotas, or both, could also increase the cost and reduce the supply of merchandise available to us.  Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local issues that disrupt trade could have a material adverse effect on our results of operations.  This includes costs to comply with regulatory developments regarding the use of “conflict minerals,” certain minerals originating from the Democratic Republic of Congo and adjoining countries, which may affect the sourcing and availability of raw materials used by manufacturers and subject us to increased costs associated with our products, processes or sources of our inputs.  Our business could be adversely affected by disruptions in the supply chain, such as strikes, work stoppages, or port closures.  

A decrease in consumer traffic could cause our sales to be less than expected.

We depend heavily on generating customer traffic to our stores and websites.  This includes locating many of our stores in prominent locations within successful shopping malls.  Sales at these stores are derived, in part, from the volume of traffic in those malls.  Our stores benefit from the ability of a mall’s “anchor” tenants, generally large department stores and other area attractions, to generate consumer traffic in the vicinity of our stores and the continuing popularity of malls as shopping destinations.  In addition, some malls that were in prominent locations when we opened our stores may cease to be viewed as prominent. If this trend continues or if the popularity of mall shopping continues to decline generally among our customers, our sales may decline, which would impact our results of operations. Additionally, we may experience other risks associated with operating leases, such as lease termination or impairment of operating lease right-of-use assets. These risks may include circumstances that are not within our control, such as changes in fair market rent. Furthermore, we depend on generating increased traffic to our ecommerce business and converting that traffic into sales. This requires us to achieve expected results from our marketing and social media campaigns, accuracy of data analytics, reliability of our website, network, and transaction processing and a high-quality online customer experience. Our sales volume and customer traffic in our stores and on our websites generally could be adversely affected by, among other things, economic downturns, competition from other ecommerce retailers, non-mall retailers and other malls, increases in gasoline prices, fluctuations in exchange rates in border or tourism-oriented locations and the closing or decline in popularity of other stores in the malls in which we are located. Also, geopolitical events, including the threat of terrorism, or widespread health emergencies, such as coronavirus and

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other communicable diseases, viruses, or pandemics, could cause people to avoid our stores in shopping malls. An uncertain economic outlook could curtail new shopping mall development, decrease shopping mall and ecommerce traffic, reduce the number of hours that shopping mall operators keep their shopping malls open or force them to cease operations entirely.  A reduction in consumer traffic to our stores or websites could have a material adverse effect on our business, results of operations and financial condition.

Our growth strategy depends on our ability to grow customer engagement in our current markets and expand into new markets, which could strain our resources and cause the performance of our existing business to suffer.

Our growth largely depends on our ability to optimize our customer engagement in our current trade areas and operate successfully in new geographic markets.  However, our ability to open stores in new geographic markets, including international locations, is subject to a variety of risks and uncertainties, and we may be unable to open new stores as planned or have access to desirable lease space, and any failure to successfully open and operate in new markets could have a material adverse effect on our results of operations.  We intend to continue to open new stores in future years, while remodeling a portion of our existing store base such that we have the optimum number of stores in any given trade area.  The expansion into new markets may present competitive, merchandising, hiring and distribution challenges that are different from those currently encountered in our existing markets.  In addition, our proposed expansion will place increased demands on our operational, managerial and administrative resources.  These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our individual stores and our overall business.  In addition, successful execution of our growth strategy may require that we obtain additional financing, and we may not be able to obtain that financing on acceptable terms or at all.

Failure to successfully integrate any businesses that we acquire could have an adverse impact on our results of operations and financial performance.

We may, from time to time, acquire businesses, such as our acquisition of Blue Tomato and Fast Times.  We may experience difficulties in integrating any businesses we may acquire, including their stores, websites, facilities, personnel, financial systems, distribution, operations and general operating procedures, and any such acquisitions may also result in the diversion of our capital and our management’s attention from other business issues and opportunities.  If we experience difficulties in integrating acquisitions or if such acquisitions do not provide the benefits that we expect to receive, we could experience increased costs and other operating inefficiencies, which could have an adverse effect on our results of operations and overall financial performance.

Our plans for international expansion include risks that could have a negative impact on our results of operations.

We plan to continue to open new stores in the Canadian, European, and Australian markets. We may continue to expand internationally into other markets, either organically, or through additional acquisitions.  International markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing U.S. market.  As a result, operations in international markets may be less successful than our operations in the U.S.  Additionally, consumers in international markets may not be familiar with us or the brands we sell, and we may need to build brand awareness in the markets.  Furthermore, we have limited experience with the legal and regulatory environments and market practices in new international markets and cannot guarantee that we will be able to penetrate or successfully operate in these new international markets.  We also expect to incur additional costs in complying with applicable foreign laws and regulations as they pertain to both our products and our operations.  Accordingly, for the reasons noted above, our plans for international expansion include risks that could have a negative impact on our results of operations.

Our sales and inventory levels fluctuate on a seasonal basis.  Accordingly, our quarterly results of operations are volatile and may fluctuate significantly.

Our quarterly results of operations have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future.  Our sales and profitability are typically disproportionately higher in the third and fourth fiscal quarters of each fiscal year due to increased sales during the back-to-school and winter holiday shopping seasons.  Sales during these periods cannot be used as an accurate indicator of annual results.  As a result of this seasonality, any factors negatively affecting us during the last half of the year, including unfavorable economic conditions, adverse weather or our ability to acquire seasonal merchandise inventory, could have a material adverse effect on our financial condition and results of operations for the entire year. In addition, in order to prepare for the back-to-school and winter holiday shopping seasons, we must order and keep in stock significantly more merchandise than we carry during other times of the year.  Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, results of operations and financial condition.

Our quarterly results of operations are affected by a variety of other factors, including:

 

 

the timing of new store openings and the relative proportion of our new stores to mature stores;

 

25


 

whether we are able to successfully integrate any new stores that we acquire and the presence of any unanticipated liabilities in connection therewith;        

 

 

fashion trends and changes in consumer preferences;

 

 

calendar shifts of holiday or seasonal periods;

 

 

changes in our merchandise mix;

 

 

timing of promotional events;

 

 

general economic conditions and, in particular, the retail sales environment;

 

 

actions by competitors or mall anchor tenants;

 

 

weather conditions;

 

 

the level of pre-opening expenses associated with our new stores; and

 

 

inventory shrinkage beyond our historical average rates.

If our information systems hardware or software fails to function effectively or does not scale to keep pace with our planned growth, our operations could be disrupted and our financial results could be harmed.

If our information systems, including software, do not work effectively, this could adversely impact the promptness and accuracy of our transaction processing, financial accounting and reporting and our ability to manage our business and properly forecast operating results and cash requirements.  Additionally, we rely on third-party service providers for certain information systems functions.  If a service provider fails to provide the data quality, communications capacity or services we require, the failure could interrupt our services and could have a material adverse effect on our business, financial condition and results of operations.  To manage the anticipated growth of our operations and personnel, we may need to continue to improve our operational and financial systems, transaction processing, procedures and controls, and in doing so could incur substantial additional expenses that could impact our financial results.

If the security of our data is breached we may be subjected to adverse publicity, litigation and significant expenses.

Information systems are susceptible to an increasing threat of continually evolving cybersecurity risks. We maintain security systems, devices and activity monitoring to prevent unauthorized access to our network, systems and databases containing confidential, proprietary, and personally identifiable information.  Nevertheless, if unauthorized parties gain access to our networks, systems or databases, they may be able to steal, publish, delete or modify confidential information.  In such circumstances, we could be held liable to our customers or other parties or be subject to regulatory or other actions for breaching privacy rules and we may be exposed to reputation damage and loss of customers’ trust and business.  This could result in costly investigations and litigation, civil or criminal penalties and adverse publicity that could adversely affect our financial condition, results of operations and reputation.  Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional resources, train employees, and engage third-parties. Further, the regulatory environment surrounding information security, cybersecurity and privacy is increasingly demanding. If we are unable to comply with the new and changing security standards, we may be subject to fines, restrictions and financial exposure, which could adversely affect our retail operations.

Significant fluctuations and volatility in the cost of raw materials, global labor, shipping and other costs related to the production of our merchandise may have a material adverse effect on our business, results of operations and financial conditions.

Increases in the cost of raw materials, global labor costs, freight costs and other shipping costs in the production and transportation of our merchandise can result in higher costs for this merchandise.  The costs for these products are affected by weather, consumer demand, government regulation, speculation on the commodities market and other factors that are generally unpredictable and beyond our control.  Our gross profit and results of operations could be adversely affected to the extent that the selling prices of our products do not increase proportionately with the increases in the costs of raw materials.  Increasing labor costs and oil-related product costs, such as manufacturing and transportation costs, could also adversely impact gross profit.  Additionally, significant changes in the relationship between carrier capacity and shipper demand could increase transportation costs, which could also adversely impact gross profit.  

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Fluctuations in foreign currency exchange rates could impact our financial condition and results of operations.

We are exposed to foreign currency exchange rate risk with respect to our sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. As a result, the fluctuation in the value of the U.S. dollar against other currencies could have a material adverse effect on our results of operations, financial condition and cash flows. Upon translation, operating results may differ materially from expectations.  As we continue to expand our international operations, our exposure to exchange rate fluctuations will increase.  Tourism spending may be affected by changes in currency exchange rates, and as a result, sales at stores with higher tourism traffic may be adversely impacted by fluctuations in currency exchange rates. Further, although the prices charged by vendors for the merchandise we purchase are primarily denominated in U.S. dollars, a decline in the relative value of the U.S. dollar to foreign currencies could lead to increased merchandise costs, which could negatively affect our competitive position and our results of operations.  

Our business could be adversely affected by increased labor costs, including costs related to an increase in minimum wage and health care.

Labor is one of the primary components in the cost of operating our business.  Increased labor costs, whether due to competition, unionization, increased minimum wage, state unemployment rates, health care, mandated safety protocols, or other employee benefits costs may adversely impact our operating profit.  A considerable amount of our store team members are paid at rates related to the federal or state minimum wage and any changes to the minimum wage rate may increase our operating expenses.  Furthermore, inconsistent increases in state and or city minimum wage requirements limit our ability to increase prices across all markets and channels.  Additionally, we are self-insured with respect to our health care coverage in the U.S. and do not purchase third party insurance for the health insurance benefits provided to employees with the exception of pre-defined stop loss coverage, which helps limit the cost of large claims.  There is no assurance that future health care legislation will not adversely impact our results or operations.  

Our business could suffer if a manufacturer fails to use acceptable labor and environmental practices.

We do not control our vendors or the manufacturers that produce the products we buy from them, nor do we control the labor and environmental practices of our vendors and these manufacturers.  The violation of labor, safety, environmental and/or other laws and standards by any of our vendors or these manufacturers, or the divergence of the labor and environmental practices followed by any of our vendors or these manufacturers from those generally accepted as ethical in the U.S., could interrupt, or otherwise disrupt, the shipment of finished products to us or damage our reputation.  Any of these, in turn, could have a material adverse effect on our reputation, financial condition and results of operations.  In that regard, most of the products we sell are manufactured overseas, primarily in Asia, Mexico and Central America, which may increase the risk that the labor and environmental practices followed by the manufacturers of these products may differ from those considered acceptable in the U.S.

Additionally, our products are subject to regulation of and regulatory standards set by various governmental authorities with respect to quality and safety.  These regulations and standards may change from time to time.  Our inability to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales.  Issues with the quality and safety of merchandise we sell, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls and increased costs.

If we fail to develop and maintain good relationships with vendors or if a vendor is otherwise unable or unwilling to supply us with adequate quantities of their products at acceptable prices, our business and financial performance could suffer.

Our business is dependent on developing and maintaining good relationships with a large number of vendors to provide our customers with an extensive selection of current and relevant brands.  In addition to maintaining our large number of current vendor relationships, each year we are identifying, attracting and launching new vendors to provide a diverse and unique product assortment. We believe that we generally are able to obtain attractive pricing and terms from vendors because we are perceived as a desirable customer, and deterioration in our relationship with our vendors could have a material adverse effect on our business.  

However, there can be no assurance that our current vendors or new vendors will provide us with an adequate supply or quality of products or acceptable pricing.  Our vendors could discontinue selling to us, raise the prices they charge, sell through direct channels or allow their merchandise to be discounted by other retailers.  There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future.  In addition, certain vendors sell their products directly to the retail market and therefore compete with us directly and other vendors may decide to do so in the future.  There can be no assurance that such vendors will not decide to discontinue supplying their products to us, supply us only less popular or lower quality items, raise the prices they charge us or focus on selling their products directly.  

27


In addition, a number of our vendors are smaller, less capitalized companies and are more likely to be impacted by unfavorable general economic and market conditions than larger and better capitalized companies.  These smaller vendors may not have sufficient liquidity during economic downturns to properly fund their businesses and their ability to supply their products to us could be negatively impacted.  Any inability to acquire suitable merchandise at acceptable prices, or the loss of one or more key vendors, could have a material adverse effect on our business, results of operations and financial condition.

Our business is susceptible to weather conditions that are out of our control, including the potential risks of unpredictable weather patterns and any weather patterns associated with naturally occurring global climate change, and the resultant unseasonable weather could have a negative impact on our results of operations.

Our business is susceptible to unseasonable weather conditions.  For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season (including any weather patterns associated with global warming and cooling) could render a portion of our inventory incompatible with those unseasonable conditions.  These prolonged unseasonable weather conditions could have a material adverse effect on our business and results of operations.

Our omni-channel strategy may not have the return we anticipate, which could have an adverse effect on our results of operations.

We are executing an omni-channel strategy to enable our customers to shop wherever, whenever and however they choose to engage with us.  Our omni-channel strategy may not deliver the results we anticipate or may not adequately anticipate changing consumer trends, preferences and expectations.  We will continue to develop additional ways to execute our superior omni-channel experience and interact with our customers, which requires significant investments in IT systems and changes in operational strategy, including localization, online and in-store point of sale systems, order management system, and transportation management system.  If we fail to effectively integrate our store and ecommerce shopping experiences, effectively scale our IT structure or we do not realize the return on our investments that we anticipate our operating results could be adversely affected.  Our competitors are also investing in omni-channel initiatives.  If our competitors are able to be more effective in their strategy, it could have an adverse effect on our results of operations.  If we our omni-channel strategy fails to meet customer expectations related to functionality, timely delivery, or customer experience, our business and results of operations may be adversely affected. Additionally, to manage the anticipated growth of our operations and personnel, we will need to continue to improve our operational and financial systems, transaction processing, procedures and controls, and in doing so could incur substantial additional expenses that could impact our financial results.  

If we lose key executives or are unable to attract and retain the talent required for our business, our financial performance could suffer.

Our performance depends largely on the efforts and abilities of our key executives.  If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our growth objectives.  Furthermore, as our business grows, we will need to attract and retain additional qualified personnel in a timely manner and we may not be able to do so.

Failure to meet our staffing needs could adversely affect our ability to implement our growth strategy and could have a material impact on our results of operations.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees who understand and appreciate our culture and brand and are able to adequately represent this culture.  Qualified individuals of the requisite caliber, skills and number needed to fill these positions may be in short supply in some areas and the employee turnover rate in the retail industry is high. Our business depends on the ability to hire and retain qualified technical and support roles for procurement, distribution, ecommerce and back office functions. Competition for qualified employees in these areas could require us to pay higher wages to attract a sufficient number of suitable employees.  

If we are unable to hire and retain store managers and store associates capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and knowledge of our merchandise, our ability to open new stores may be impaired and the performance of our existing and new stores could be materially adversely affected.  We are also dependent upon temporary personnel to adequately staff our operations particularly during busy periods such as the back-to-school and winter holiday seasons.  There can be no assurance that we will receive adequate assistance from our temporary personnel, or that there will be sufficient sources of temporary personnel. If we are unable to hire qualified temporary personnel, our results of operations could be adversely impacted.  

Although none of our employees are currently covered by collective bargaining agreements, we cannot guarantee that our employees will not elect to be represented by labor unions in the future, which could increase our labor costs and could subject us to the risk of work stoppages and strikes.  Any such failure to meet our staffing needs, any material increases in employee turnover rates, any increases in labor costs or any work stoppages, interruptions or strikes could have a material adverse effect on our business or results of operations.

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A decline in cash flows from operations could have a material adverse effect on our business and growth plans.

We depend on cash flow from operations to fund our current operations and our growth strategy, including the payment of our operating leases, wages, store operation costs and other cash needs.  If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under our credit facility or from other sources, we may not be able to pay our operating lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could have a material adverse effect on our business.

The terms of our secured credit agreement impose certain restrictions on us that may impair our ability to respond to changing business and economic conditions, which could have a significant adverse impact on our business.  Additionally, our business could suffer if our ability to acquire financing is reduced or eliminated.

We maintain a secured credit agreement with Wells Fargo Bank, N.A., which provided us with a senior secured credit facility (“credit facility”) of up to $35.0 million.  The credit facility contains various representations, warranties and restrictive covenants that, among other things and subject to specified circumstances and exceptions, restrict our ability to incur indebtedness (including guarantees), grant liens, make investments, pay dividends or distributions with respect to capital stock, make prepayments on other indebtedness, engage in mergers, dispose of certain assets or change the nature of their business.  The credit facility contains certain financial maintenance covenants that generally require us to have net income after taxes of at least $5.0 million on a trailing four-quarter basis and a quick ratio of 1.25:1.0 at the end of each fiscal quarter.  These restrictions could (1) limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and (2) adversely affect our ability to finance our operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest.

The credit facility contains certain affirmative covenants, including reporting requirements such as delivery of financial statements, certificates and notices of certain events, maintaining insurance, and providing additional guarantees and collateral in certain circumstances.  The credit facility includes customary events of default including non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties, cross-default to other material indebtedness, bankruptcy and insolvency events, invalidity or impairment of guarantees or security interests, material judgments and change of control. Additionally, we cannot be assured that our borrowing relationship with our lenders will continue or that our lenders will remain able to support their commitments to us in the future.  If our lenders fail to do so, then we may not be able to secure alternative financing on commercially reasonable terms, or at all.

Our business could suffer with the closure or disruption of our home office or our distribution centers.

In the U.S., we rely on a single distribution center located in Corona, California to receive, store and distribute the vast majority of our merchandise to our domestic stores.  Internationally, we operate a combined distribution and ecommerce fulfillment center located in Graz, Austria that supports our Blue Tomato ecommerce and store operations in Europe. We operate a distribution center located in Delta, British Columbia, Canada to distribute our merchandise to our Canadian stores. We operate a distribution and fulfillment center located in Melbourne, Australia to distribute our merchandise to our Australian stores. Additionally, we are headquartered in Lynnwood, Washington. As a result, unforeseen events, including war, terrorism, other political instability or conflicts, riots, public health issues (including widespread/pandemic illnesses such as coronavirus and other communicable diseases or viruses), a natural disaster or other catastrophic event that affects one of the regions where we operate these centers or our home office could significantly disrupt our operations and have a material adverse effect on our business, results of operations and financial condition.

The effects of war, acts of terrorism, threat of terrorism, or other types of mall violence, could adversely affect our business.

Most of our stores are located in shopping malls.  Any threat of terrorist attacks or actual terrorist events, or other types of mall violence, such as shootings or riots, could lead to lower consumer traffic in shopping malls. In addition, local authorities or mall management could close shopping malls in response to security concerns.  Mall closures, as well as lower consumer traffic due to security concerns, could result in decreased sales.  Additionally, the threat, escalation or commencement of war or other armed conflict elsewhere, could significantly diminish consumer spending, and result in decreased sales.  Decreased sales could have a material adverse effect on our business, financial condition and results of operations.

Our inability or failure to protect our intellectual property or our infringement of other’s intellectual property could have a negative impact on our operating results.

We believe that our trademarks and domain names are valuable assets that are critical to our success.  The unauthorized use or other misappropriation of our trademarks or domain names could diminish the value of the Zumiez, Blue Tomato, or Fast Times brands, our store concepts, our private label brands or our goodwill and cause a decline in our net sales.  Although we have secured or are in the process of securing protection for our trademarks and domain names in a number of countries outside of the U.S., there are certain

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countries where we do not currently have or where we do not currently intend to apply for protection for certain trademarks.  Also, the efforts we have taken to protect our trademarks may not be sufficient or effective.  Therefore, we may not be able to prevent other persons from using our trademarks or domain names outside of the U.S., which also could adversely affect our business.  We are also subject to the risk that we may infringe on the intellectual property rights of third parties.  Any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to pay royalties or license fees.  As a result, any such claim could have a material adverse effect on our operating results.

Our operations expose us to the risk of litigation, which could lead to significant potential liability and costs that could harm our business, financial condition or results of operations.  

We employ a substantial number of full-time and part-time employees, a majority of whom are employed at our store locations.  As a result, we are subject to a large number of federal, state and foreign laws and regulations relating to employment.  This creates a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims.  We are also subject to other types of claims in the ordinary course of our business.  Some or all of these claims may give rise to litigation, which could be time-consuming for our management team, costly and harmful to our business.

In addition, we are exposed to the risk of class action litigation.  The costs of defense and the risk of loss in connection with class action suits are greater than in single-party litigation claims.  Due to the costs of defending against such litigation, the size of judgments that may be awarded against us, and the loss of significant management time devoted to such litigation, we cannot provide assurance that such litigation will not disrupt our business or impact our financial results.

We are involved, from time to time, in litigation incidental to our business including complaints filed by investors.  This litigation could result in substantial costs, and could divert management's attention and resources, which could harm our business.  Risks associated with legal liability are often difficult to assess or quantify, and their existence and magnitude can remain unknown for significant periods of time.  

Failure to comply with federal, state, local or foreign laws and regulations, or changes in these laws and regulations, could have an adverse impact on our results of operations and financial performance.

 

Our business is subject to a wide array of laws and regulations including those related to employment, trade, consumer protection, transportation, occupancy laws, health care, wage laws, employee health and safety, taxes, privacy, health information privacy, identify theft, customs, truth-in-advertising, securities laws, unsolicited commercial communication and environmental issues.  Our policies, procedures and internal controls are designed to comply with foreign and domestic laws and regulations, such as those required by the Sarbanes-Oxley Act of 2002 and the U.S. Foreign Corrupt Practices Act. Although we have policies and procedures aimed at ensuring legal and regulatory compliance, our employees or vendors could take actions that violate these laws and regulations. Any violations of such laws or regulations could have an adverse effect on our reputation, results of operations, financial condition and cash flows. Furthermore, changes in the regulations, the imposition of additional regulations, or the enactment of any new legislation, particularly in the U.S. and Europe, could adversely affect our results of operations or financial condition.

Fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results.

We are subject to income taxes in many domestic and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes in many jurisdictions. We record tax expense based on our estimates of future payments, which include reserves for estimates of probable settlements of domestic and foreign tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. There can be no assurance as to the outcome of these audits which may have an adverse effect to our business. In addition, our effective tax rate may be materially impacted by changes in tax rates and duties, the mix and level of earnings or losses by taxing jurisdictions, or by changes to existing accounting rules or regulations. Changes to foreign or domestic tax laws could have a material impact on our financial condition, results of operations or cash flows.

We may fail to meet analyst expectations, which could cause the price of our stock to decline.

Our common stock is traded publicly and various securities analysts follow our financial results and issue reports on us.  These reports include information about our historical financial results as well as the analysts' estimates of our future performance.  The analysts' estimates are based upon their own independent opinions and can be different from our estimates or expectations.  If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.  

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The reduction of total outstanding shares through the execution of a share repurchase program of common stock may increase the risk that a group of shareholders could form a group to become a controlling shareholder.  

A share repurchase program may be conducted from time to time under authorization made by our Board of Directors.  We do not have a controlling shareholder, nor are we aware of any shareholders that have formed a “group” (defined as when two or more persons agree to act together for the purposes of acquiring, holding, voting or otherwise disposing of the equity securities of an issuer).  The reduction of total outstanding shares through the execution of a share repurchase program of common stock may increase the risk that a group of shareholders could form a group to become a controlling shareholder.  

A controlling shareholder would have significant influence over, and may have the ability to control, matters requiring approval by our shareholders, including the election of directors and approval of mergers, consolidations, sales of assets, recapitalizations and amendments to our articles of incorporation.  Furthermore, a controlling shareholder may take actions with which other shareholders do not agree, including actions that delay, defer or prevent a change of control of the company and that could cause the price that investors are willing to pay for the company’s stock to decline.

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

Our market risk profile at October 31, 2020 has not significantly changed since February 1, 2020. Our market risk profile at February 1, 2020 is disclosed in our Annual Report on Form 10-K.

 

 

Item 4:

Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)). Based on this evaluation, our CEO and CFO concluded that, as of October 31, 2020, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) during the three months ended October 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

 

Item 1.

We are involved from time to time in litigation incidental to our business.  We are unable to predict the outcome of litigated cases.  A court determination in any of litigation actions against us could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.

See Note 5 to the Notes to Condensed Consolidated Financial Statements found in Part I Item 1 of this Form 10-Q (listed under “Litigation” under Commitments and Contingencies).

 

 

Item 1A.

Risk Factors

Please refer to the Risk Factors set forth in Item 2 of Part I of this Form 10-Q as well as the risk factors previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended February 1, 2020.  There have been no material changes in the risk factors set forth in our Annual Report on Form 10-K for the year ended February 1, 2020.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

There were no issuer purchases of common stock during the thirteen weeks ended October 31, 2020.

 

 

Item 3.

Defaults Upon Senior Securities

None

 

 

Item 4.

Mine Safety Disclosures

Not applicable

 

 

Item 5.

Other Information

None

 

 

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Item 6.

Exhibits

 

Exhibit No.

 

Description of Exhibits

 

 

 

31.1

   

Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

 

 

 

101

 

The following materials from Zumiez Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language):

 

(i) Condensed Consolidated Balance Sheets at October 31, 2020 (unaudited) and February 1, 2020; (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended October 31, 2020 and November 2, 2019; (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 31, 2020 and November 2, 2019; (iv) Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended October 31, 2020 and November 2, 2019; (v) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended October 31, 2020 and November 2, 2019; and (vi) Notes to Condensed Consolidated Financial Statements.

 

104

 

The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101

 

 

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

ZUMIEZ INC.

 

 

Dated:  December 7, 2020

By:

/s/ Christopher C. Work

 

 

Christopher C. Work

 

 

Chief Financial Officer

(Principal Financial Officer and
Principal Accounting Officer)

 

 

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