Black Friday Bargain Stock: Zumiez

Thanksgiving brings three things: family, food, and Black Friday bargains. Not everyone welcomes the first two with open arms, but every investor loves a bargain. With this Motley Fool Hidden Gems recommendation going from its 52-week high last month to a fresh 52-week low this week -- the stock chart is enough to make owners lose even their biggest holiday appetite -- investors should take a look at the Zumiez (Nasdaq: ZUMZ  ) leftovers.

Action sports lifestyle retailer Zumiez caters to 12- to 24- year-olds, offering a variety of brands from Volcom (Nasdaq: VLCM  ) and Quiksilver's (Nasdaq: ZQK  ) Roxy to lesser-known brands that only Zumiez carries among mall-based retailers.

So what caused Zumiez to skid off the rail, slashing the company's market cap in half? Take your pick: It's a small-cap company, plus it's a retailer during a questionable economic environment, not to mention it just lowered guidance. Might as well toss in something housing-related for added effect -- yes, that's a joke.

The latest guidance revision has sent shares shimmying back to November 2006, when they were last at $27. In fact, the stock is cheaper today than when it was recommended in June 2006 to our Motley Fool Hidden Gems subscribers at $31.72.

But is it time to skate off toward the exits? No way. This latest market reaction presents an excellent buying opportunity.

When screening for promising small-cap companies, Motley Fool co-founder Tom Gardner looks for certain qualities, such as inside ownership and market positioning. (Read about his small-cap screen to find your next home run stock.) That's where Zumiez flexes its muscles:

  • Zumiez executives own 37% of the company's shares.
  • The company has no debt.
  • As a specialty retailer, it holds an advantage of better brand diversity with few competitors.
  • Analysts forecast the company to grow its earnings by 30% in the next five years.

Let's focus on two drivers behind Zumiez's success: its growth and culture.

I'm just a growth machine
Although Zumiez has been a public company only since 2005, it has been in the retail business for 28 years. Of those 28 years, it's booked gains in comparable-store sales every year except one. Plus it continues to expand aggressively -- adding 50 stores this year while growing its square footage by 20%.

Its track record speaks for itself. Take a look at Zumiez's year-over-year revenue growth compared to competitors:

FY 2003

FY 2004

FY 2005

FY 2006

August 2007 (ttm*)

Zumiez

53.7%

30.3%

33.9%

45.0%

46.1%

PacSun (NASDAQ:PSUN)

22.9%

18.1%

13.1%

4.0%

5.8%

Buckle (NYSE:BKE)

5.4%

11.4%

6.4%

5.8%

11.9%

Source: Capital IQ.
*Trailing 12 months.

Net income growth over the same time period:

FY 2003

FY 2004

FY 2005

FY 2006

August 2007 (ttm*)

Zumiez

NA

62.4%

76.8%

62.3%

54.4%

PacSun

61.5%

33.3%

18.1%

(68.6%)

(97.7%)

Buckle

5%

28.4%

20.1%

7.4%

23.2%

Source: Capital IQ.
*Trailing 12 months

While top- and bottom-line growth has been somewhat spotty, and nearly nonexistent for PacSun lately, Zumiez has posted strong, consistent gains. That growth should only continue. Management forecasts expansion to the tune of 800 total stores. That would almost triple the company's current 283 stores and fuel the top and bottom line. Are you really going to let the recent guidance revision tarnish shiny years of future growth?

The buena Zumiez culture club
As the company continues to swell its store base, it becomes more important for Zumiez to preserve its unique company culture. (Coming from the Fool, I know how important culture is and the effects it can have on the business.) Part of how Zumiez accomplishes this -- in addition to development programs and micro-merchandising stores -- is by designing each store differently. As CEO Rich Brooks said, "My goal is that every store looks and feels as if it is an independent store. ... No two stores look alike. That is a great thing."

Being unique in the retail industry is what drives growth without diluting the brand.

That's Zumiez's competitive advantage. The teenagers that are Zumiez's prime demographic value independence and diversity. The quickest way to fall out of favor would be to sell to their customers and not for the customers. Contrast that to the Starbucks (Nasdaq: SBUX  ) experience. Every Starbucks store has an identical concept and feel. Because no Starbucks offers enough of a distinctive experience to justify its prices, it's slowly losing its appeal to the general consumer.

Zoom, zoom Zumiez
Zumiez presents a fantastic growth prospect in a small-cap company that's currently trading at a discount. It's not just about expansion, but smart expansion. And the response from Fools is overwhelming. Don't take my word for it. Of the players that have rated Zumiez in CAPS, a whopping 95% believe the company will outperform the S&P, making the company a four-star stock. If you agree, then head over to Motley Fool CAPS and mark the stock an outperform. Then tune in next week, when we reveal which company is the best Black Friday Bargain Stock.

Skate on with Foolishness:

Ready for more Fool-light specials? Dash to the rest of the series here.


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