2021 was an exceptional 12 months for the Retail Sector (XRT), with retailers benefiting from wardrobe refreshes post-lockdowns, authorities stimulus, and pent-up demand to get out and spend once more after an uncommon 2020. This led to extra full-priced promoting, document earnings for a lot of retailers, and a brand new all-time excessive for the S&P Retail ETF. Sadly, 2022 could not be extra completely different. Not solely is the surroundings considerably extra promotional as a consequence of elevated stock ranges, however retailers have needed to lap document ends in the year-ago interval.
The result’s that the S&P Retail ETF has tumbled almost 50% from its This autumn 2021 highs, and outdoors of a handful of names, most retailers with a discretionary tilt are sitting at new 52-week lows. One identify that is been hit particularly arduous is Zumiez (NASDAQ:ZUMZ), a small-cap specialty retailer promoting attire, footwear, and arduous items within the skateboard/snowboard classes. The inventory has discovered itself down 60% from its highs, and after one other tough Q2 report that missed steering, it is robust to justify dashing into the inventory simply but. Let’s take a more in-depth look under:
Zumiez launched its Q2 outcomes final month, reporting quarterly income of $220.0 million, a big miss vs. steering of $232 million to $239 million, and an 18% decline in gross sales year-over-year. This sharp decline in gross sales was properly under administration’s expectations for the interval and was pushed by a big pullback in its US enterprise. The corporate famous that each one classes had been down on a year-over-year foundation, with the lads’s class and arduous items being the hardest-hit classes. Given the numerous miss and extra conservative steering for the again half of the 12 months, it is no shock that the inventory is without doubt one of the worst performers sector-wide.
If we take a look at gross sales slightly nearer, internet gross sales fell 3.7% under 2019 ranges, a stunning determine that may be attributed to the appreciable macro headwinds, with a recessionary and inflationary surroundings impacting discretionary budgets. The silver lining was that whereas the US enterprise was down 20% year-over-year and eight% vs. 2019 ranges, Australia and Europe have carried out properly, up 40% from 2019 ranges and up 10% year-over-year excluding international trade headwinds (down 3.4% on a non-adjusted foundation). Nevertheless, taking a look at early Q3 gross sales, the pattern is not bettering but, with gross sales as much as September fifth down 18.1% year-over-year, or 19.7% on a comp gross sales foundation.
Primarily based on administration’s steering of $220 million to $228 million in gross sales, the numerous decline in internet gross sales is anticipated to proceed, with gross sales anticipated to slip 24% year-over-year on the low finish of the vary (Q3 2021: $289.5 million). Luckily, the shop rely is rising in the identical interval, which helps to minimize the blow, with 4%+ unit development on deck this 12 months primarily based on plans to open 35 shops. The majority of those shops will probably be in its better-performing markets, with 54% of the 35 shops in Europe and Australia mixed. Assuming the corporate meets this steering, it can end the 12 months with roughly 775 complete shops.
Trade-Extensive Traits & Earnings Pattern
One of many main themes we noticed in Q2 was that stock was a lot greater than deliberate sector-wide, contributing to a really promotional surroundings for the sector to wash up higher-than-planned inventories. The opposite theme we have seen is that retail gross sales clearly stay beneath stress, as evidenced by September gross sales knowledge, which confirmed retail gross sales flat year-over-year, which missed expectations of a 0.2% enhance. This sharp pullback in gross sales and adverse pattern just isn’t overly shocking when private financial savings charges are at multi-year lows, and customers are being hit from each angle with rising fuel, utility, mortgage, hire, and meals costs.
Luckily, whereas the business has seen a pullback in site visitors, most manufacturers have benefited from vital value will increase, and there is been minimal change in client habits concerning buying and selling down. Nevertheless, as mentioned on Zumiez Q2 Convention Name, the corporate has seen a shift from higher-priced manufacturers to worth, that means it must discover methods to advertise worth whereas sustaining its place as a full-priced retailer within the present surroundings. This pattern locations Zumiez in a tough spot, on condition that it isn’t curious about selling closely like its friends, however its worth proposition erodes short-term on a relative foundation when many different retailers want to clear stock at closely discounted costs.
Luckily, Zumiez has achieved a fantastic job of managing stock, with stock up simply over 2% year-over-year to $151.1 million. As well as, the corporate is assured that whereas its margins have come beneath stress as a consequence of decreased gross sales leverage, it may well return to double-digit working margins long-term. So, whereas this 12 months has been very uncommon, and Zumiez actually is not in one of the best place throughout the Retail house, it has achieved a strong job of managing stock, and it is a firm with a 40-year historical past that has survived worse financial downturns, suggesting it is not going wherever.
Sadly, whereas the corporate has achieved a greater job than most managing stock and staying true to its core (full-priced promoting), even when that is on the expense of gross sales, its share repurchases have been much less spectacular. As of Q1 2021, on a trailing twelve-month foundation, the corporate purchased again an enormous portion of the float (6.5 million shares) at $43.00 per share, and year-to-date has repurchased 1.9 million shares at a mean of $43.50. Though this has decreased the share rely significantly, the corporate did not get a lot bang for its buck on these purchases, which hasn’t offered as a lot assist as extra opportunistic share buybacks would have when it comes to softening the blow from an earnings standpoint this 12 months.
The result’s that annual EPS is anticipated to say no greater than 70% year-over-year ($1.36 vs. $4.85) regardless of the advantage of appreciable share buybacks and can fall under FY2018 and FY2019 ranges regardless of unit development. The excellent news is that this appears to be a extreme aberration within the long-term earnings pattern and that FY2022 ought to mark the trough because the tempo of promotional promoting moderates post-2022. The dangerous information is that regardless of the 60% decline within the share value, the inventory nonetheless trades on the identical earnings a number of, given the decline in annual EPS anticipated this 12 months. Let’s examine whether or not that is priced into the inventory:
Valuation & Technical Image
Wanting on the chart under, we will see that Zumiez has traded at a mean earnings a number of of ~15.9 over the previous ten years, usually suggesting that the inventory has change into undervalued at a share value of $21.10 (12.5x ahead earnings). The issue is that this earnings a number of just isn’t almost conservative sufficient for the present market surroundings, which is arguably nothing just like the previous ten years, with the potential for a really arduous touchdown because the Federal Reserve raises charges aggressively right into a slowdown. So, primarily based on what I imagine to be a extra conservative earnings a number of of 12.7 (20% low cost to 10-year common) and FY2023 earnings estimates ($1.69), the inventory has restricted upside.
The excellent news is that if estimates are right and annual EPS will enhance significantly in FY2024 as margins enhance, the inventory has an upside case nearer to $30.00 per share (12.7x FY2024 earnings estimates of $2.34). As well as, if the corporate might be extra opportunistic with future share buybacks and proceed to see unit development, this FY2024 estimate of $2.34 in annual EPS is likely to be far too conservative. That mentioned, I want a big margin of security when shopping for small-cap shares, and with ZUMZ buying and selling at solely a slight low cost to conservative honest worth ($21.50 primarily based on FY2023 earnings), I do not see any technique to justify dashing into the inventory right here.
If we take a look at the technical image, it corroborates this view, with ZUMZ’s having a reward/danger ratio that is not almost favorable sufficient to justify beginning a brand new place. It is because the inventory has resistance at $28.90 and no robust help till $14.30, putting it in the midst of its help/resistance vary. Given this setup, the inventory would solely change into attention-grabbing if it declined under $15.00 inside 5% of help, and any sharp rallies within the inventory above $26.00 ought to current profit-taking alternatives.
Zumiez has had a tough 12 months with vital income and earnings per share declines, exacerbated by the very troublesome year-over-year comps. Sadly, the corporate’s alternative to purchase again a good portion of its inventory at depressed ranges was missed, on condition that the corporate did an enormous quantity of shopping for at a a lot much less favorable value of $40.00 per share. The excellent news is that Zumiez shouldn’t have any bother surviving, in contrast to weaker retailers, given its robust stability sheet and lengthy historical past.
That mentioned, I do not see almost sufficient margin of security but, and the macro backdrop stays very difficult, which favors proudly owning names with a much less discretionary tilt within the retail house. One identify that appears significantly better positioned is BJ’s Wholesale (BJ), which is seeing accelerating unit development however gaining market share as customers look to save lots of on fuel/grocery as a consequence of rising costs. So, if I had been wanting so as to add publicity to the Retail Sector, I see BJ’s Wholesale because the significantly better choice, and I might solely change into curious about Zumiez inventory under $15.00 close to multi-year help.