Why Zumiez’s Superior Performance Looks Set to Continue

Mall-based specialty action sports retailer Zumiez (NASDAQ: ZUMZ  ) has done very well this year. Its second-quarter results defied the general trend of missed earnings & revenue expectations in the apparel retail sector.

Zumiez's superiority is reflected in its stock price performance when stacked up against peers such as Pacific Sunwear (NASDAQ: PSUN  ) and Abercrombie & Fitch (NYSE: ANF  ) . Year-to-date, Zumiez's stock price has appreciated by approximately 47%.

ZUMZ Chart

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Strong results
Zumiez reported total sales of $157.9 million in the quarter, up 16.9% from the year-ago period and almost in line with consensus estimates. Revenue was driven by a marginal increase in comps of 0.9%, which compares to 9.5% in the year-ago quarter. The men's, boys and accessories segments saw negative comps, which is in line with the general trend in the apparel and accessories retail sector.

On the back of growth in the top line and an increase in gross margin by 50 basis points, gross profit increased 18.7% year over year to $55.1 million. The company reported earnings of $0.20 per share, which comfortably beat the consensus estimate of $0.17 per share. Excluding the charges of $0.04 per diluted share associated with the acquisition of Blue Tomato, net earnings came in at $0.16 per share.

Watching the end market
The tough employment scenario and inconsistency in the economic recovery affect sports such as surfing, which hinders sales of apparel retailers for this particular market. The near flat comps of Zumiez during the reported quarter indicate this. The month of August saw an increase in comps by 3%, which led to 14.1% higher sales versus the same period last year. This improvement in August can be related to an improvement in the consumer confidence index. This, however, fell to the lowest level since April in the month of September. This isn't an encouraging sign by any means.

The global surfing apparel market is estimated to reach $13.24 billion in revenue by the year 2017 . The U.S. and Europe together account for a major share of global surfing market revenue. The market for surfing apparel in Europe is expected to increase at a compound annual growth rate of nearly 5% going forward. In order to tap these additional growth opportunities, Zumiez plans to open 58 new stores in fiscal 2013, including nine in Canada and five in Europe.

Better than others
Pacific Sunwear is also a specialty apparel retailer with a focus geared toward selling the "California Lifestyle" and skate/street wear. The company is trying to shift its target demographic from teens towards young adults in order to drive more customers to its 638 stores, spread across 50 states and Puerto Rico .

Its net sales for the second quarter increased to $215.2 million from $197.3 million last year. Overall, comparable store sales increased 3%. However, due to a weak forecast on the back of general weakness in the retail sector, shares have dropped by almost 60% from their peak in early August.

To get back on the growth path, Pacific Sunwear is targeting a wider customer base, which is a tailwind going forward. It is trying to win back teens who shopped at its stores earlier but who are now in the 17-24 age group and have moved on to other retailers.

Abercrombie, on the other hand, is in hot water. It posted second-quarter results that included a 20% decline in earnings. Domestic sales declined 8% and comps fell 10%. Abercrombie expects this decline to continue going forward. The company couldn't offer guidance beyond the third quarter due to lack of clarity around its business given recent traffic trends.

Abercrombie is trying to get better by expanding its international operations. It is opening a new flagship store in Seoul this year. Moreover, a total of 20 international outlets under the Hollister brand are expected to be opened. However, these moves won't lead to instant improvements, and Abercrombie might continue suffering.

A good pick
It is evident that Zumiez is doing better than its retail peers, and its focus on sports apparel is working well. Its earnings are expected to grow at a CAGR of 15% over the next five years, which is better than its competitors discussed above.

As we saw, there is sizable opportunity in the market, and the company plans to open more stores to benefit from the end market opportunity. With a trailing P/E ratio of only 20, which comes down to 15.94 on a forward P/E basis, Zumiez could be a good pick.

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