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Why Shares of Zumiez Tumbled Today

By Timothy Green – Dec 1, 2017 at 12:58PM

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A solid quarter was overshadowed by lofty expectations and a declining gross margin.

What happened

Shares of retailer Zumiez (ZUMZ -1.55%) slumped on Friday following the company's third-quarter report. Zumiez reported in-line earnings and revenue above what analysts had expected, along with strong comparable sales growth. But investors may have been concerned about a slumping gross margin. The stock was down about 11% at 12:15 p.m. EST.

So what

Zumiez reported third-quarter revenue of $245.8 million, up 11% year over year and about $3.4 million above the average analyst estimate. Comparable sales jumped 7.9%, on top of a 4% increase during the third quarter of 2016. Zumiez also reported strong November sales, with comparable sales during the month jumping 7.8%.

A Zumiez store in Wilton, NY.

Image source: Zumiez.

Net income came in at $0.48 per share, up from $0.43 per share in the prior-year period and in-line with analyst expectations. One piece of bad news was a slump in the gross margin. Zumiez managed a gross margin of 33.9%, down from 34.4% in the prior-year period. A reduction in operating costs as a percentage of revenue and higher sales more than offset that decline.

For the fourth quarter Zumiez expects to produce revenue between $291 million and $297 million, driven by a comparable sales increase between 3% and 5%. Net income per share is expected between $0.78 and $0.84.

Now what

Shares of Zumiez have soared since bottoming out in late August, up 68% as of close on Thursday. Friday's slump may be due to the expectations built into the stock price getting out ahead of what the company could deliver. The slumping gross margin may have been just enough bad news for the stock to reverse direction.

Zumiez stock is still fairly expensive relative to trailing-12-month earnings, trading at a multiple around 20 even after Friday's decline. The company's results were solid, especially in a tough retail environment, but it may not be enough to justify that valuation.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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