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Why Shares of Zumiez Inc. Crashed on Friday

By Timothy Green - Sep 11, 2015 at 11:41AM

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The retailer is struggling to grow sales, and its profits are falling off a cliff.

What: Shares of specialty retailer Zumiez (ZUMZ 0.53%) crashed on Friday after the company reported its second-quarter results, providing guidance that was well below expectations. At 11:40 Friday morning, the stock was down about 28%.

So what: Zumiez met analyst expectations for both revenue and earnings during the second quarter. The company reported revenue of $179.8 million, up 1.8% year-over-year, and net income of $0.11 per share, down by nearly 60% compared to the second quarter of 2014. Adjusted net income, which excludes a $0.4 million one-time charge, was $0.12 per share.

Despite the revenue increase, comparable-store sales slumped by 4.5% during the second quarter, a significant deterioration from the 3.4% growth Zumiez posted during the same period last year. CEO Rick Brooks pointed to merchandising issues and higher promotional activity to explain the slump in comparable sales and profits: "We remain confident that our strategic course continues to provide us with compelling opportunities to grow our business and return greater value to our shareholders over the long-term. That said we are disappointed in our recent performance which reflects a slowdown in domestic sales. The response to our merchandise offering fell short of expectations, requiring us to become more promotional than planned to clear slow moving inventory ahead of the back-to-school selling season."

Now what: Zumiez's results may have met the muted expectations of analysts, but its guidance fell well short of the mark. The company expects comparable sales to decline by 7%-9% year-over-year during the third quarter, with total sales expected to be between $202 million and $206 million, below analyst expectations of $224 million. EPS is expected to be between $0.27 and $0.31, a far cry from the average analyst estimate of $0.53.

Investors appear to be losing confidence in Zumiez. The company continues to build new stores, with another 57 set to open during the third quarter, despite a major slump in comparable sales at its existing stores, and profits are taking a big hit as a result. The drop in the stock price today may seem extreme, but the company's results and guidance point to a difficult time ahead for the retailer.

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