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EX-31.1 - EX-31.1 - Zumiez Inczumz-ex311_6.htm

 

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 NOVEMBER 3, 2018

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

At December 4, 2018, there were 25,530,794 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 November 3, 2018 (unaudited) and February 3, 2018

3

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Income for the three and nine months ended November 3, 2018 and October 28, 2017

4

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended November 3, 2018 and October 28, 2017

5

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended November 3, 2018 and October 28, 2017

6

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended November 3, 2018 and October 28, 2017

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2.

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

16

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

 

 

Item 4.

Controls and Procedures

29

 

 

 

 

Part II.

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

 

 

Item 1A.

Risk Factors

30

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

30

 

 

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

 

 

Item 5.

Other Information

30

 

 

 

 

 

Item 6.

Exhibits

31

 

 

 

 

Signature

32

 

 

2


ZUMIEZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

November 3, 2018

 

 

February 3, 2018

 

 

 

(Unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

29,640

 

 

$

24,041

 

Marketable securities

 

98,236

 

 

97,864

 

Receivables

 

17,521

 

 

17,027

 

Inventories

 

186,938

 

 

125,826

 

Prepaid expenses and other current assets

 

15,853

 

 

14,405

 

Total current assets

 

348,188

 

 

279,163

 

Fixed assets, net

 

123,074

 

 

128,852

 

Goodwill

 

58,619

 

 

62,912

 

Intangible assets, net

 

15,203

 

 

16,696

 

Deferred tax assets, net

 

4,438

 

 

4,174

 

Other long-term assets

 

7,197

 

 

7,713

 

Total long-term assets

 

208,531

 

 

220,347

 

Total assets

 

 

$

556,719

 

 

$

499,510

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Trade accounts payable

 

 

$

90,060

 

 

$

37,861

 

Accrued payroll and payroll taxes

 

21,724

 

 

20,650

 

Income taxes payable

 

 

 

2,782

 

 

 

5,796

 

Deferred rent and tenant allowances

 

7,790

 

 

8,073

 

Other liabilities

 

24,645

 

 

26,867

 

Total current liabilities

 

147,001

 

 

99,247

 

Long-term deferred rent and tenant allowances

 

37,631

 

 

39,275

 

Other long-term liabilities

 

3,315

 

 

5,073

 

Total long-term liabilities

 

40,946

 

 

44,348

 

Total liabilities

 

187,947

 

 

143,595

 

Commitments and contingencies (Note 4)

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

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

 

 

 

 

 

Common stock, no par value, 50,000 shares authorized; 25,532 shares issued and outstanding at November 3, 2018 and 25,249 shares issued and outstanding at February 3, 2018

 

151,658

 

 

146,523

 

Accumulated other comprehensive (loss) income

 

(9,888)

 

 

35

 

Retained earnings

 

227,002

 

 

209,357

 

Total shareholders’ equity

 

368,772

 

 

355,915

 

Total liabilities and shareholders’ equity

 

 

$

556,719

 

 

$

499,510

 

 

See accompanying notes to condensed consolidated financial statements

 

3


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

 

October 28, 2017

 

 

November 3, 2018

 

 

 

October 28, 2017

 

Net sales

 

$

 

248,795

 

 

$

 

245,756

 

 

$

 

674,052

 

 

$

 

619,156

 

Cost of goods sold

 

 

 

161,922

 

 

 

 

162,389

 

 

 

 

452,057

 

 

 

 

423,944

 

Gross profit

 

 

 

86,873

 

 

 

 

83,367

 

 

 

 

221,995

 

 

 

 

195,212

 

Selling, general and administrative expenses

 

 

 

68,479

 

 

 

 

64,559

 

 

 

 

198,613

 

 

 

 

183,401

 

Operating profit

 

 

 

18,394

 

 

 

 

18,808

 

 

 

 

23,382

 

 

 

 

11,811

 

Interest income, net

 

 

 

493

 

 

 

 

111

 

 

 

 

1,015

 

 

 

 

284

 

Other expense, net

 

 

 

(74

)

 

 

 

(326

)

 

 

 

(308

)

 

 

 

(798

)

Earnings before income taxes

 

 

 

18,813

 

 

 

 

18,593

 

 

 

 

24,089

 

 

 

 

11,297

 

Provision for income taxes

 

 

 

4,990

 

 

 

 

6,671

 

 

 

 

8,496

 

 

 

 

4,432

 

Net income

 

$

 

13,823

 

 

$

 

11,922

 

 

$

 

15,593

 

 

 

 

6,865

 

Basic earnings per share

 

$

 

0.55

 

 

$

 

0.48

 

 

$

 

0.63

 

 

 

 

0.28

 

Diluted earnings per share

 

$

 

0.55

 

 

$

 

0.48

 

 

$

 

0.62

 

 

 

 

0.28

 

Weighted average shares used in computation of earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

24,974

 

 

 

 

24,712

 

 

 

 

24,920

 

 

 

 

24,660

 

Diluted

 

 

 

25,261

 

 

 

 

24,804

 

 

 

 

25,220

 

 

 

 

24,845

 

 

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

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

 

November 3, 2018

 

 

October 28, 2017

 

Net income

 

$

13,823

 

 

$

11,922

 

 

 

$

15,593

 

 

$

6,865

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(1,672

)

 

 

(1,368

)

 

 

 

(9,840

)

 

 

8,416

 

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

 

 

(115

)

 

 

(23

)

 

 

 

(83

)

 

 

5

 

Other comprehensive (loss) income, net

 

 

(1,787

)

 

 

(1,391

)

 

 

 

(9,923

)

 

 

8,421

 

Comprehensive income

 

$

12,036

 

 

$

10,531

 

 

 

$

5,670

 

 

$

15,286

 

 

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

 

 

Income (Loss)

 

 

Earnings

 

 

Total

 

Balance at February 3, 2018

 

 

25,249

 

 

$

146,523

 

 

$

35

 

 

$

209,357

 

 

$

355,915

 

Net income

 

 

 

 

 

 

 

 

 

 

 

15,593

 

 

 

15,593

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

(9,923

)

 

 

 

 

 

(9,923

)

Issuance and exercise of stock-based awards

 

 

283

 

 

 

704

 

 

 

 

 

 

 

 

 

704

 

Stock-based compensation expense

 

 

 

 

 

4,431

 

 

 

 

 

 

 

 

 

4,431

 

Cumulative effect of accounting change (Note 1)

 

 

 

 

 

 

 

 

 

 

 

2,052

 

 

 

2,052

 

Balance at November 3, 2018

 

 

25,532

 

 

$

151,658

 

 

$

(9,888

)

 

$

227,002

 

 

$

368,772

 

 

 

 

 

 

 

Common Stock

 

 

Accumulated

Other

Comprehensive

 

 

Retained

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Loss

 

 

Earnings

 

 

Total

 

Balance at January 28, 2017

 

 

24,945

 

 

$

140,984

 

 

$

(16,488

)

 

$

182,555

 

 

$

307,051

 

Net income

 

 

 

 

 

 

 

 

 

 

 

6,865

 

 

 

6,865

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

8,421

 

 

 

 

 

 

8,421

 

Issuance and exercise of stock-based awards

 

 

307

 

 

 

526

 

 

 

 

 

 

 

 

 

526

 

Stock-based compensation expense

 

 

 

 

 

3,720

 

 

 

 

 

 

 

 

 

3,720

 

Balance at October 28, 2017

 

 

25,252

 

 

$

145,230

 

 

$

(8,067

)

 

$

189,420

 

 

$

326,583

 

 

See accompanying notes to condensed consolidated financial statements

 

6


ZUMIEZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

15,593

 

 

$

6,865

 

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

 

 

 

 

 

 

 

 

Depreciation, amortization and accretion

 

 

21,249

 

 

 

20,338

 

Deferred taxes

 

 

(919

)

 

 

(2,625

)

Stock-based compensation expense

 

 

4,431

 

 

 

3,720

 

Other

 

 

482

 

 

 

1,189

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables

 

 

(1,680

)

 

 

(2,449

)

Inventories

 

 

(63,892

)

 

 

(48,491

)

Prepaid expenses and other current assets

 

 

(1,904

)

 

 

(578

)

Trade accounts payable

 

 

53,037

 

 

 

35,693

 

Accrued payroll and payroll taxes

 

 

1,342

 

 

 

699

 

Income taxes payable

 

 

(2,206

)

 

 

2,856

 

Deferred rent and tenant allowances

 

 

(1,564

)

 

 

(1,240

)

Other liabilities

 

 

(6,845

)

 

 

(2,108

)

Net cash provided by operating activities

 

 

17,124

 

 

 

13,869

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to fixed assets

 

 

(15,683

)

 

 

(19,072

)

Purchases of marketable securities and other investments

 

 

(116,430

)

 

 

(80,198

)

Sales and maturities of marketable securities and other investments

 

 

115,536

 

 

 

63,365

 

Net cash used in investing activities

 

 

(16,577

)

 

 

(35,905

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from revolving credit facilities

 

 

32,776

 

 

 

19,412

 

Payments on revolving credit facilities

 

 

(27,651

)

 

 

(7,841

)

Proceeds from issuance and exercise of stock-based awards

 

 

899

 

 

 

697

 

Payments for tax withholdings on equity awards

 

 

(195

)

 

 

(171

)

Net cash provided by financing activities

 

 

5,829

 

 

 

12,097

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(777

)

 

 

352

 

Net increase (decrease) in cash and cash equivalents

 

 

5,599

 

 

 

(9,587

)

Cash and cash equivalents, beginning of period

 

 

24,041

 

 

 

20,247

 

Cash and cash equivalents, end of period

 

$

29,640

 

 

$

10,660

 

Supplemental disclosure on cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for income taxes

 

$

11,893

 

 

$

4,434

 

Accrual for purchases of fixed assets

 

 

1,477

 

 

 

2,190

 

 

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.  At November 3, 2018, we operated 703 stores; 609 in the United States (“U.S.”), 50 in Canada, 37 in Europe, and 7 in Australia.  We operate under the names Zumiez, Blue Tomato and Fast Times.  Additionally, we operate ecommerce websites at zumiez.com, blue-tomato.com and fasttimes.com.au.

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 November 3, 2018 and October 28, 2017 were 13-week periods.  The nine months ended November 3, 2018 and October 28, 2017 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 3, 2018 is derived from audited consolidated financial statements, which are included in our Annual Report on Form 10-K for the year ended February 3, 2018, 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.

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 3, 2018.  There have been no significant changes in accounting policies, with exception of the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“ASC 606”).  Our significant accounting policies impacted by the adoption of ASC 606 are discussed below.

Revenue Recognition—Revenue is recognized upon purchase at our retail store locations.  For our ecommerce sales, revenue is recognized when control passes to the customer upon shipment.  Taxes collected from our customers are recorded on a net basis.  We accrue for estimated sales returns by customers based on historical return experience.  The allowance for sales returns was $2.5 million at November 3, 2018 and $2.6 million at February 3, 2018. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card.  The current liability for gift cards was $2.5 million at November 3, 2018 and $6.4 million at February 3, 2018.  Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized in proportion of the patterns used by the customer based on our historical redemption patterns.  We recognized net sales related to gift card breakage of $0.1 million for the three months ended November 3, 2018 and October 28, 2017 and $0.4 million for the nine months ended November 3, 2018 and $0.3 million for the nine months ended October 28, 2017.  

8


Loyalty Program—We have a customer loyalty program, the Zumiez STASH, which allows members to earn points for purchases or performance of certain activities.  The points can be redeemed for a broad range of rewards, including product and experiential rewards.  Points earned for purchases are recorded as a current liability and a reduction of net sales based on the relative fair value of the points at the time the points are earned and estimated redemption rates.  Revenue is recognized upon redemption of points for rewards.  Points earned for the performance of activities are recorded as a current liability based on the estimated cost of the points and as marketing expense when redeemed.  Deferred revenue related to our customer loyalty program was $2.0 million at November 3, 2018 and $1.6 million at February 3, 2018.

Recent Accounting Standards—In August 2018, the Financial Accounting Standards Board (“FASB”) issued a new standard over customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract.  The standard is intended to clarify the accounting for implementation costs of a hosting arrangement that is a service contract and requires that implementation costs incurred in a hosting arrangement that is a service contract be accounted for in accordance with ASC 350-40.  The new standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted.  We are currently evaluating the impact of this standard on our consolidated financial statements.

In February 2016, the FASB issued a comprehensive standard related to lease accounting to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  Most significantly, the new guidance requires lessees to recognize operating leases with a term of more than 12 months as lease assets and lease liabilities.  The adoption will require a modified retrospective approach at the beginning of the earliest period presented.  The new standard is effective for the fiscal year beginning after December 15, 2018.  We will adopt for the fiscal year beginning February 3, 2019.  All of our retail store locations are subject to operating lease arrangements.  While we expect this standard to result in a material increase to the assets and liabilities on our Consolidated Balance Sheet, we are continuing to evaluate the impact of this standard on our consolidated financial statements and related disclosures. Our minimum lease commitments at November 3, 2018 are disclosed in Note 4, “Commitments and Contingencies”.

In January 2016, the FASB issued a new standard related primarily to accounting for equity investments, financial liabilities where the fair value option has been elected, and the presentation and disclosure requirements for financial instruments.  There will no longer be an available-for-sale classification for equity securities and therefore, no changes in fair value will be reported in other comprehensive income for equity securities with readily determinable fair values.  We adopted this standard beginning February 4, 2018 and it did not have a material impact to our condensed consolidated financial statements.

In May 2014, the FASB issued a comprehensive new revenue recognition standard codified under ASC 606.  The new standard allows for a full retrospective approach to transition or a modified retrospective approach.  This guidance was effective for fiscal years beginning after December 15, 2017.  On February 4, 2018, we adopted this standard using the modified retrospective approach.  Results at November 3, 2018 and for the three and nine months ended November 3, 2018 are presented under ASC 606, while results at October 28, 2017 and for the three and nine months ended October 28, 2017 continue to be reported in accordance with our historical accounting under ASC Topic 605, Revenue Recognition.

The adoption of ASC 606 resulted in a change to the timing of revenue recognition on ecommerce sales from delivery to shipment and the timing of revenue recognition on gift card breakage from remote to in proportion to the patterns of rights exercised by our customers.  We recorded an increase to retained earnings of $2.1 million, net of $0.6 million in taxes, as of February 4, 2018 due to the cumulative effect of adopting ASC 606.  The cumulative effect resulted in a decrease in other liabilities of $3.1 million and inventory of $0.4 million, as well as $0.4 million decrease in our deferred tax assets and $0.2 million increase in income taxes payable.  The impact of adopting ASC 606 was not material to the condensed consolidated financial statements for the three and nine months ended November 3, 2018.  

We elected to use the practical expedients to account for shipping and handling costs that occur after the customer obtains control of the goods as fulfillment costs.  We accrue the expense of shipping and handling costs when product is shipped. We also elected to exclude from net sales the tax amounts collected from our customers to be remitted to governmental authorities.

 

2. Revenue Recognition

 

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

 

9


 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

United States

 

$

 

210,690

 

 

$

207,223

 

 

$

 

569,878

 

 

$

526,507

 

Canada

 

 

 

15,828

 

 

 

15,839

 

 

 

 

38,999

 

 

 

35,626

 

Europe

 

 

 

20,631

 

 

 

20,936

 

 

 

 

59,876

 

 

 

52,030

 

Australia

 

 

 

1,646

 

 

 

1,758

 

 

 

 

5,299

 

 

 

4,993

 

Net sales

 

$

 

248,795

 

 

$

245,756

 

 

$

 

674,052

 

 

$

619,156

 

 

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):

 

 

 

November 3, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Holding

Gains

 

 

Gross

Unrealized

Holding

Losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

22,175

 

 

$

 

 

$

 

 

$

22,175

 

Money market funds

 

 

3,370

 

 

 

 

 

 

 

 

 

3,370

 

Corporate debt securities

 

 

2,995

 

 

 

 

 

 

 

 

 

2,995

 

State and local government securities

 

 

1,100

 

 

 

 

 

 

 

 

 

1,100

 

Total cash and cash equivalents

 

 

29,640

 

 

 

 

 

 

 

 

 

29,640

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local government securities

 

 

65,491

 

 

 

3

 

 

 

(174

)

 

 

65,320

 

Corporate debt securities

 

 

31,012

 

 

 

 

 

 

(36

)

 

 

30,976

 

Variable-rate demand notes

 

 

1,940

 

 

 

 

 

 

 

 

 

1,940

 

Total marketable securities

 

$

98,443

 

 

$

3

 

 

$

(210

)

 

$

98,236

 

 

 

 

February 3, 2018

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Holding

Gains

 

 

Gross

Unrealized

Holding

Losses

 

 

Estimated

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

21,911

 

 

$

 

 

$

 

 

$

21,911

 

Money market funds

 

 

2,130

 

 

 

 

 

 

 

 

 

2,130

 

Total cash and cash equivalents

 

 

24,041

 

 

 

 

 

 

 

 

 

24,041

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local government securities

 

 

68,620

 

 

 

9

 

 

 

(130

)

 

 

68,499

 

Variable-rate demand notes

 

 

29,365

 

 

 

 

 

 

 

 

 

29,365

 

Total marketable securities

 

$

97,985

 

 

$

9

 

 

$

(130

)

 

$

97,864

 

 

All of our marketable securities have an effective maturity date of two 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):

 

 

 

November 3, 2018

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

 

26,931

 

 

 

(36

)

 

 

 

 

 

 

 

 

26,931

 

 

 

(36

)

State and local government securities

 

 

49,496

 

 

 

(118

)

 

 

12,512

 

 

 

(56

)

 

 

62,008

 

 

 

(174

)

Total marketable securities

 

$

76,427

 

 

$

(154

)

 

$

12,512

 

 

$

(56

)

 

$

88,939

 

 

$

(210

)

10


 

 

 

February 3, 2018

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

 

Fair Value

 

 

Unrealized

Losses

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and local government securities

 

 

53,655

 

 

 

(129

)

 

 

610

 

 

 

(1

)

 

 

54,265

 

 

 

(130

)

Total marketable securities

 

$

53,655

 

 

$

(129

)

 

$

610

 

 

$

(1

)

 

$

54,265

 

 

$

(130

)

 

We did not record a realized loss for other-than-temporary impairments during the three and nine months ended November 3, 2018 or October 28, 2017.

 

 

4. Commitments and Contingencies

Leases—We lease our stores and certain corporate and other operating facilities under operating leases.  Total rent expense is as follows (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

November 3, 2018

 

 

October 28, 2017

 

 

November 3, 2018

 

 

October 28, 2017

 

Minimum rent expense

 

$

19,865

 

 

$

19,604

 

 

$

59,892

 

 

$

57,898

 

Contingent rent expense

 

 

820

 

 

 

799

 

 

 

2,347

 

 

 

2,016

 

Total rent expense (1)

 

$

20,685

 

 

$

20,403

 

 

$

62,239

 

 

$

59,914

 

 

(1)

Total rent expense does not include real estate taxes, insurance, common area maintenance charges and other executory costs, which were $10.3 million and $30.6 million for the three and nine months ended November 3, 2018 and $10.4 million and $31.2 million for the three and nine months ended October 28, 2017.

A majority of our leases provide for ongoing co-tenancy requirements or early cancellation clauses that would further lower rental rates, or permit lease terminations, or both, in the event that co-tenants cease to operate for specific periods or if certain sales levels are not met in specific periods.  Most of the store leases require payment of a specified minimum rent and a contingent rent based on a percentage of the store’s net sales in excess of a specified threshold, as well as real estate taxes, insurance, common area maintenance charges and other executory costs.  Future minimum lease payments at November 3, 2018 are as follows (in thousands):

 

Fiscal 2018

 

$

18,157

 

Fiscal 2019

 

 

67,299

 

Fiscal 2020

 

 

63,528

 

Fiscal 2021

 

 

57,738

 

Fiscal 2022

 

 

51,917

 

Thereafter

 

 

125,085

 

Total (1)

 

$

383,724

 

 

(1)

Amounts in the table do not include contingent rent and real estate taxes, insurance, common area maintenance charges and other executory costs obligations.

Purchase Commitments—At November 3, 2018, we had outstanding purchase orders to acquire merchandise from vendors of $199.0 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

11


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 the date of oral argument has been scheduled for February 4, 2019.  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 November 3, 2018 and February 3, 2018 was $2.8 million and $2.1 million.

 

 

5. Revolving Credit Facilities and Debt

On February 5, 2016, the Company entered into an asset-based revolving credit agreement with Wells Fargo Bank, National Association, as administrative agent, collateral agent, letter of credit issuer and lenders, which provides for a senior secured revolving credit facility of up to $100 million (“ABL Facility”), subject to a borrowing base, with a letter of credit sub-limit of $10 million. The ABL Facility is available for working capital and other general corporate purposes.  The ABL Facility will mature on February 5, 2021.

The ABL 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 ABL Facility bear interest, at the Company’s option, at either an adjusted LIBOR rate plus a margin of 1.25% to 1.75% per annum, or an alternate base rate plus a margin of 0.25% to 0.75% per annum. The Company is also required to pay a fee of 0.25% per annum on undrawn commitments under the ABL Facility. Customary agency fees and letter of credit fees are also payable in respect of the ABL Facility.

There were no borrowings outstanding under the ABL Facility at November 3, 2018 and at February 3, 2018. We had no open commercial letters of credit outstanding under these lines of credit at November 3, 2018 and February 3, 2018.

Additionally, we have revolving lines of credit with Commerzbank Germany of up to 5.5 million Euro ($6.3 million) at November 3, 2018, the proceeds of which are used to fund certain international operations.  The revolving line of credit bears interest at 1.55%. The utilized facility amount, in whole or in part, is subject to termination with three months’ notice and with immediate effect to the unused facility amount.  There was $5.7 million of borrowings outstanding at November 3, 2018 and $0.9 million in borrowings outstanding at February 3, 2018. We had no open commercial letters of credit outstanding under these lines of credit at November 3, 2018 and at February 3, 2018.

 

 

6. 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

 

Level 3— Inputs that are unobservable.

12


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

 

 

 

November 3, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

3,370

 

 

$