UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
incorporation or organization) |
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Identification No.) |
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (
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.
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).
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 |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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).
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
At November 30, 2024, there were
ZUMIEZ INC.
FORM 10-Q
TABLE OF CONTENTS
Part I. |
Financial Information |
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Item 1. |
Condensed Consolidated Financial Statements |
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Condensed Consolidated Balance Sheets at November 2, 2024 (unaudited) and February 3, 2024 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
31 |
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Item 4. |
31 |
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Part II. |
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Item 1. |
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Item 1A. |
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Item 2. |
32 |
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Item 3. |
32 |
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Item 4. |
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Item 5. |
32 |
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Item 6. |
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34 |
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2
ZUMIEZ INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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November 2, 2024 |
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February 3, 2024 |
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(Unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
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$ |
Marketable securities |
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Receivables |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Fixed assets, net |
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Operating lease right-of-use assets |
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Goodwill |
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Intangible assets, net |
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Deferred tax assets, net |
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Other long-term assets |
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Total long-term assets |
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Total assets |
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$ |
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$ |
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Liabilities and Shareholders’ Equity |
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Current liabilities |
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Trade accounts payable |
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$ |
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$ |
Accrued payroll and payroll taxes |
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Operating lease liabilities |
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Other current liabilities |
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Total current liabilities |
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Long-term operating lease liabilities |
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Other long-term liabilities |
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Total long-term liabilities |
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Total liabilities |
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Shareholders’ equity |
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Preferred stock, par value, |
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Common stock, par value, |
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Accumulated other comprehensive loss |
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Retained earnings |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
See accompanying notes to condensed consolidated financial statements
3
ZUMIEZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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November 2, 2024 |
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October 28, 2023 |
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November 2, 2024 |
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October 28, 2023 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of goods sold |
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Gross profit |
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Selling, general and administrative expenses |
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Operating income (loss) |
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( |
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( |
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( |
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Interest income, net |
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Other expense, net |
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( |
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( |
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Profit (loss), before income taxes |
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( |
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Provision for (benefit from) income taxes |
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Net income (loss) |
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$ |
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$ |
( |
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$ |
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$ |
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Basic income (loss) per share |
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$ |
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$ |
( |
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$ |
( |
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$ |
( |
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Diluted income (loss) per share |
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$ |
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$ |
( |
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$ |
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$ |
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Weighted average shares used in computation of income (loss) per share |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements
4
ZUMIEZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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November 2, 2024 |
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October 28, 2023 |
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November 2, 2024 |
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October 28, 2023 |
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Net income (loss) |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive loss, net of tax and reclassification adjustments: |
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Foreign currency translation |
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Net change in fair value of marketable debt securities |
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Other comprehensive loss |
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( |
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( |
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( |
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Comprehensive income (loss) |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements
5
ZUMIEZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
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Common Stock |
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Accumulated |
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Retained |
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Shares |
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Amount |
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Loss |
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Earnings |
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Total |
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Balance at August 3, 2024 |
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$ |
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$ |
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$ |
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$ |
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Net income |
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— |
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— |
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— |
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Other comprehensive loss, net |
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— |
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— |
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( |
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— |
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( |
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Issuance and exercise of stock-based awards |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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Repurchase of common stock |
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( |
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— |
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— |
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( |
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( |
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Balance at November 2, 2024 |
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$ |
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$ |
( |
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$ |
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$ |
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Common Stock |
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Accumulated |
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Retained |
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Shares |
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Amount |
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Loss |
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Earnings |
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Total |
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Balance at July 29, 2023 |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Other comprehensive loss, net |
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— |
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— |
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( |
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— |
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( |
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Issuance and exercise of stock-based awards |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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Balance at October 28, 2023 |
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$ |
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$ |
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$ |
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$ |
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Common Stock |
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Accumulated |
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Retained |
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Shares |
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Amount |
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Loss |
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Earnings |
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Total |
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Balance at February 3, 2024 |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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( |
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( |
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Other comprehensive loss, net |
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— |
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— |
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( |
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— |
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( |
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Issuance and exercise of stock-based awards |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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Repurchase of common stock |
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( |
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— |
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— |
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( |
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( |
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Balance at November 2, 2024 |
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$ |
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$ |
( |
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$ |
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$ |
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Common Stock |
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Accumulated |
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Retained |
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Shares |
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Amount |
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Loss |
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Earnings |
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Total |
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Balance at January 28, 2023 |
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$ |
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$ |
( |
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$ |
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$ |
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Net loss |
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— |
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— |
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— |
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( |
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( |
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Other comprehensive loss, net |
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— |
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— |
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( |
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— |
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( |
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Issuance and exercise of stock-based awards |
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— |
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— |
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Stock-based compensation expense |
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— |
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— |
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— |
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Repurchase of common stock |
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— |
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— |
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— |
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— |
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— |
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Balance at October 28, 2023 |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements
6
ZUMIEZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended |
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November 2, 2024 |
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October 28, 2023 |
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Cash flows from operating activities: |
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Net loss |
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$ |
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$ |
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Adjustments to reconcile loss to net cash used in operating activities: |
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Depreciation, amortization and accretion |
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Noncash lease expense |
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Deferred taxes |
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Stock-based compensation expense |
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Impairment of long-lived assets |
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Other |
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Changes in operating assets and liabilities: |
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Receivables |
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Inventories |
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( |
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( |
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Prepaid expenses and other assets |
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Trade accounts payable |
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Accrued payroll and payroll taxes |
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Income taxes payable |
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Operating lease liabilities |
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( |
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( |
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Other liabilities |
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( |
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( |
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Net cash used in operating activities |
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Cash flows from investing activities: |
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Additions to fixed assets |
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Purchases of marketable securities |
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Sales and maturities of marketable securities and other investments |
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Net cash provided by (used in) investing activities |
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Cash flows from financing activities: |
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Proceeds from revolving credit facilities |
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Payments on revolving credit facilities |
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Proceeds from issuance and exercise of stock-based awards |
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Payments for tax withholdings on equity awards |
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( |
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( |
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Repurchase of common stock, including taxes |
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( |
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— |
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Net cash (used in) provided by financing activities |
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( |
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Effect of exchange rate changes on cash, cash equivalents, and restricted cash |
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( |
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( |
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Net decrease in cash, cash equivalents, and restricted cash |
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( |
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( |
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Cash, cash equivalents, and restricted cash, beginning of period |
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Cash, cash equivalents, and restricted cash, end of period |
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$ |
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$ |
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Supplemental disclosure on cash flow information: |
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Cash paid during the period for income taxes |
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$ |
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$ |
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Accrual for purchases of fixed assets |
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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. We operate under the names Zumiez, Blue Tomato and Fast Times. We operate ecommerce websites at zumiez.com, zumiez.ca, blue-tomato.com and fasttimes.com.au. At November 2, 2024, we operated
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 2, 2024 and October 28, 2023 were 13-week periods. The nine months ended November 2, 2024 and October 28, 2023 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, 2024 is derived from audited consolidated financial statements, which are included in our Annual Report on Form 10-K for the year ended February 3, 2024, 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.
8
Restricted Cash—Cash and cash equivalents that are restricted as to withdrawal or use under the terms of certain contractual agreements are recorded as restricted cash in other current assets and other long-term assets on our condensed consolidated balance sheets.
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November 2, 2024 |
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February 3, 2024 |
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Cash and cash equivalents |
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$ |
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$ |
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Restricted cash included in other current assets and other long-term assets |
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Total cash, cash equivalents, and restricted cash as shown in the statement of cash flows |
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$ |
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$ |
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As of November 2, 2024, restricted cash included in other current assets and other long-term assets amounted to $
Effective as of May 3, 2024, we terminated the Credit Agreement and standby letters of credit have been transitioned to restricted deposits with the Bank. See Note 6 Revolving Credit Facilities and Debt for details of termination.
Recent Accounting Standards—We review recent account pronouncements on a quarterly basis and have excluded discussion of those that are not applicable and those that we determined did not have, or are not expected to have, a material impact on the condensed consolidated financial statements.
In November 2024, the FASB issued Accounting Standards Update ("ASU") 2024-03, Comprehensive Income (Topic 220): Disaggregation of Income Statement Expenses, which requires additional disclosure of the nature of expenses included in the income statement in response to longstanding requests from investors for more information about an entity’s expenses. The new standard requires disclosures about specific types of expenses included in the expense captions presented on the face of the income statement as well as disclosures about selling expenses. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027. The Company is currently evaluating the effect that the new ASU will have on its disclosures.
In November 2023, the FASB issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires enhanced disclosures around significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The ASU requires public entities to adopt this new guidance on a retrospective basis. The Company is currently evaluating the effect that the new ASU will have on its disclosures and expects to adopt effective for fiscal 2025.
In December 2023, the FASB issued Accounting Standards Update ("ASU") 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires business entities to expand their annual disclosures of income taxes paid and the effective rate reconciliation. The ASU is effective for fiscal years beginning after December 15, 2024.The Company is currently evaluating the effect that the new ASU will have on its disclosures and expects to adopt effective for fiscal 2025.
On December 20, 2021, the Organization for Economic Co-operation and Development ("OECD") has published a proposal to establish a new global minimum corporate tax rate of
9
2. Revenue
The following table disaggregates net sales by geographic region (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
||||||
United States |
|
$ |
|
|
|
$ |
|
|
$ |
|
|
|
$ |
|
||||
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Canada |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Australia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net sales |
|
$ |
|
|
|
$ |
|
|
$ |
|
|
|
$ |
|
||||
Net sales for the three months ended November 2, 2024 included a $
Our contract liabilities include deferred revenue related to our customer loyalty program and gift cards. The current liability for gift cards was $
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 2, 2024 |
|
|||||||||||||
|
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Money market funds |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Total cash and cash equivalents |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. treasury and government agency securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Corporate debt securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
State and local government securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Certificate of deposits |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Variable-rate demand notes |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Total marketable securities |
|
$ |
|
|
$ |
— |
|
|
$ |
( |
) |
|
$ |
|
||
|
|
February 3, 2024 |
|
|||||||||||||
|
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Estimated |
|
||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
||
Money market funds |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Corporate debt securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Total cash and cash equivalents |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
U.S. treasury and government agency securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Corporate debt securities |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
State and local government securities |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Certificates of deposit |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Variable-rate demand notes |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Total marketable securities |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
10
All of our marketable securities have an effective maturity date or weighted average life of
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 2, 2024 |
|
|||||||||||||||||||||
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|||||||||||||||
|
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
||||||
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. treasury and government agency securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
State and local government securities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Total marketable securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
|
|
February 3, 2024 |
|
|||||||||||||||||||||
|
|
Less Than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|||||||||||||||
|
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
|
Fair Value |
|
|
Unrealized |
|
||||||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Corporate debt securities |
|
$ |
|
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
||
Total cash and cash equivalents |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
||
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
U.S. treasury and government agency securities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
State and local government securities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Total marketable securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
||
4. Leases
At November 2, 2024, we had operating leases for our retail stores, certain distribution and fulfillment facilities, vehicles and equipment. Our remaining lease terms vary from under
The following table presents components of lease expense (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
||||
Operating lease expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Variable lease expense |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total lease expense (1) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Supplemental cash flow information related to leases is as follows (in thousands):
|
|
Nine Months Ended |
|
|||||
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
||
Operating cash flows from operating leases |
|
$ |
( |
) |
|
$ |
( |
) |
Right-of-use assets obtained in exchange for new operating lease liabilities |
|
|
|
|
|
|
||
11
Weighted-average remaining lease term and discount rate were as follows:
|
|
November 2, 2024 |
|
October 28, 2023 |
Weighted-average remaining lease term |
|
|
||
Weighted-average discount rate |
|
|
At November 2, 2024, the maturities of our operating leases liabilities are as follows (in thousands):
Fiscal 2024 |
|
$ |
|
|
Fiscal 2025 |
|
|
|
|
Fiscal 2026 |
|
|
|
|
Fiscal 2027 |
|
|
|
|
Fiscal 2028 |
|
|
|
|
Fiscal 2029 |
|
|
|
|
Thereafter |
|
|
|
|
Total minimum lease payments |
|
|
|
|
Less: interest |
|
|
( |
) |
Present value of lease obligations |
|
|
|
|
Less: current portion |
|
|
( |
) |
Long-term lease obligations (1) |
|
$ |
|
At November 2, 2024, we have excluded from the table above $
5. Commitments and Contingencies
Purchase Commitments—At November 2, 2024, we had outstanding purchase orders to acquire merchandise from vendors of $
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.
On October 14, 2022, former employee Seana Neihart filed a representative action under California’s Private Attorneys General Act, California Labor Code section 2698 et seq (“PAGA”), against us. An answer to the complaint was filed on December 8, 2022. A first amended complaint was filed on February 8, 2023 adding Jessica King as a plaintiff. The lawsuit alleges a series of wage and hour violations under California’s Labor Code. Zumiez has answered the complaint. We are in the process of investigating the claims and we intend to vigorously defend ourselves.
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 2, 2024 and February 3, 2024 was $
6. Revolving Credit Facilities and Debt
We were previously parties to a Credit Agreement with Wells Fargo Bank, N.A. (the “Bank”) that provided us with a senior secured credit facility (“credit facility”) for working capital and other general corporate purposes of up to $
12
restricted deposits with the Bank. We expect to enter into a new credit facility with similar borrowing capacities with a new lender during the fourth quarter of fiscal 2024.
There were
There were
7. 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:
The following tables summarize assets measured at fair value on a recurring basis (in thousands):
|
|
November 2, 2024 |
|
|||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|||
Money market funds |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|||
U.S. treasury and government agency securities |
|
|
— |
|
|
|
|
|
|
— |
|
|
Corporate debt securities |
|
|
— |
|
|
|
|
|
|
— |
|
|
Certificates of deposit |
|
|
— |
|
|
|
|
|
|
— |
|
|
State and local government securities |
|
|
— |
|
|
|
|
|
|
— |
|
|
Variable-rate demand notes |
|
|
— |
|
|
|
|
|
|
— |
|
|
Other current and long-term assets: |
|
|
|
|
|
|
|
|
|
|||
Money market funds |
|
|
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
— |
|
||
|
|
February 3, 2024 |
|
|||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|||
Money market funds |
|
$ |
|
|
$ |
— |
|
|
$ |
— |
|
|
Corporate debt securities |
|
|
— |
|
|
|
|
|
|
— |
|
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|||
U.S. treasury and government agency securities |
|
|
— |
|
|
|
|
|
|
— |
|
|
Corporate debt securities |
|
|
— |
|
|
|
|
|
|
— |
|
|
Certificates of deposit |
|
|
— |
|
|
|
|
|
|
— |
|
|
State and local government securities |
|
|
— |
|
|
|
|
|
|
— |
|
|
Variable-rate demand notes |
|
|
— |
|
|
|
|
|
|
— |
|
|
Other long-term assets: |
|
|
|
|
|
|
|
|
|
|||
Money market funds |
|
|
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
|
|
$ |
|
|
$ |
— |
|
||
13
The Level 2 marketable securities include U.S treasury and government agency securities, corporate debt securities, state and local municipal securities and variable-rate demand notes. Fair values are based on quoted market prices for similar assets or liabilities or determined using inputs that use readily observable market data that are actively quoted and can be validated through external sources, including third-party pricing services, brokers, and market transactions. We review the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believe that its policies adequately consider market activity, either based on specific transactions for the security valued or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently traded. We monitor security-specific valuation trends and we make inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing.
Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as fixed assets, operating lease right-of-use-assets, goodwill, other intangible assets, and other assets. These assets are measured at fair value if determined to be impaired. During the three months ended November 2, 2024, we recognized $
8. Stockholders’ Equity
Share Repurchase—On June 5, 2024, Zumiez Inc. approved the repurchase of up to an aggregate of $
The following table summarizes common stock repurchase activity during the three months and nine months ended November 2, 2024. There were
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||
|
|
November 2, 2024 |
|
|||||
Number of shares repurchased |
|
|
|
|
|
|
||
Average price per share of repurchased shares (with commission) |
|
$ |
|
|
$ |
|
||
Total cost of shares repurchased |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Accumulated Other Comprehensive Loss —
|
|
Foreign currency |
|
|
Net change in fair value of marketable debt securities |
|
|
Accumulated other comprehensive losses |
|
|||
Three months ended November 2, 2024: |
|
|
|
|
|
|
|
|
|
|||
Balance at August 3, 2024 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive expense, net (1) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Balance at November 2, 2024 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Three months ended October 28, 2023: |
|
|
|
|
|
|
|
|
|
|||
Balance at July 29, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive expense (income), net (1) |
|
|
( |
) |
|
|
|
|
$ |
( |
) |
|
Balance at October 28, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
14
|
|
Foreign currency |
|
|
Net change in fair value of marketable debt securities |
|
|
Accumulated other comprehensive losses |
|
|||
Nine months ended November 2, 2024: |
|
|
|
|
|
|
|
|
|
|||
Balance at February 3, 2024 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive expense (income), net (2) |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
Balance at November 2, 2024 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Nine months ended October 28, 2023: |
|
|
|
|
|
|
|
|
|
|||
Balance at January 28, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Other comprehensive expense (income), net (2) |
|
|
( |
) |
|
|
|
|
$ |
( |
) |
|
Balance at October 28, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
9. Equity Awards
We maintain several equity incentive plans under which we may grant incentive stock options, non-qualified stock options, stock bonuses, restricted stock awards, restricted stock units and stock appreciation rights to employees (including officers), non-employee directors and consultants.
We account for stock-based compensation by recording the estimated fair value of stock-based awards granted as compensation expense over the vesting period, net of estimated forfeitures. Stock-based compensation expense is attributed to earnings using a straight-line method. We estimate forfeitures of stock-based awards based on historical experience and expected future activity.
The fair value of restricted stock awards and units is measured based on the closing price of our common stock on the date of grant. The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model.
Total stock-based compensation expense is recognized on our condensed consolidated statements of income (loss) as follows (in thousands):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
||||
Cost of goods sold |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total stock-based compensation expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
At November 2, 2024, there was $
15
The following table summarizes restricted stock awards and restricted stock units, collectively defined as “restricted equity awards” (in thousands, except grant date weighted-average fair value):
|
|
Restricted |
|
Grant Date |
|
Intrinsic |
Outstanding at February 3, 2024 |
|
|
$ |
|
|
|
Granted |
|
|
$ |
|
|
|
Vested |
|
( |
|
$ |
|
|
Forfeited |
|
( |
|
$ |
|
|
Outstanding at November 2, 2024 |
|
|
$ |
|
$ |
10. Income (Loss) per Share, Basic and Diluted
The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share amounts):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||||
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
||||||
Net income (loss) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
( |
) |
|
$ |
( |
) |
|
Weighted average common shares for basic income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of stock options and restricted stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average common shares for diluted income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic income (loss) per share |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
( |
) |
|
$ |
( |
) |
|
Diluted income (loss) per share |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
( |
) |
|
$ |
( |
) |
|
There were
16
Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this document. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those discussed in “Item 1A Risk Factors” in our Form 10-K filed with the SEC on March 14, 2024 and in this Form 10-Q.
Forward-looking statements relate to our expectations for future events and future financial performance. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. Actual events or results may differ materially. Factors which could affect our financial results are described below under the heading “Risk Factors” and in “Item 1A Risk Factors” of our Form 10-K referred to in the preceding paragraph. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.
Fiscal 2024 is the 52-week period ending February 1, 2025. Fiscal 2023 was the 53-week period ending February 3, 2024. The first nine months of fiscal 2024 was the 39-week period ended November 2, 2024. The first nine months of fiscal 2023 was the 39-week period ended October 28, 2023.
“Zumiez,” the “Company,” “we,” “us,” “its,” “our” and similar references refer to Zumiez Inc. and its wholly-owned subsidiaries.
General
Net sales constitute gross sales (net of actual and estimated returns and deductions for promotions) and shipping revenue. Net sales include our store sales and our ecommerce sales. We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card Additionally, the portion of gift cards that will not be redeemed (“gift card breakage”) is recognized based on our historical redemption rate in proportion to the pattern of rights exercised by the customer.
We report “comparable sales” based on net sales beginning on the first anniversary of the first day of operation of a new store or ecommerce business. We operate a sales strategy that integrates our stores with our ecommerce platform. There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers. Therefore, our comparable sales also include our ecommerce sales. Changes in our comparable sales between two periods are based on net sales of store or ecommerce businesses which were in operation during both of the two periods being compared and, if a store or ecommerce business is included in the calculation of comparable sales for only a portion of one of the two periods being compared, then that store or ecommerce business is included in the calculation for only the comparable portion of the other period. Any increase or decrease less than 25% in square footage of an existing comparable store, including remodels and relocations within the same mall, or temporary closures less than seven days does not eliminate that store from inclusion in the calculation of comparable sales. Any store or ecommerce business that we acquire will be included in the calculation of comparable sales after the first anniversary of the acquisition date. Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison. There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable sales. As a result, data herein regarding our comparable sales may not be comparable to similar data made available by our competitors or other retailers.
Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design, sourcing, importing and inbound freight costs. Our cost of goods sold also includes shrinkage, buying, occupancy, distribution and warehousing costs (including associated depreciation) and freight costs for store merchandise transfers. This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold. Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold, a reduction of the carrying value of the inventory if the inventory is still on hand, or a reduction of selling, general and administrative expense if the amounts are reimbursements of specific, incremental and identifiable costs of selling the vendors’ products.
With respect to the freight component of our ecommerce sales, amounts billed to our customers are included in net sales and the related freight cost is charged to cost of goods sold.
17
Selling, general and administrative expenses consist primarily of store personnel wages and benefits, administrative staff and infrastructure expenses, freight costs for merchandise shipments from the distribution centers to the stores, store supplies, depreciation on fixed assets at our home office and stores, facility expenses, training expenses and advertising and marketing costs. Credit card fees, insurance, public company expenses, legal expenses, incentive compensation, stock-based compensation and other miscellaneous operating costs are also included in selling, general and administrative expenses. This may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.
Key Performance Indicators
Our management evaluates the following items, which we consider key performance indicators, in assessing our performance:
Net sales. Net sales constitute gross sales, net of sales returns and deductions for promotions, and shipping revenue. Net sales includes comparable sales and new store sales for all our store and ecommerce businesses. We consider net sales to be an important indicator of our current performance. Net sales results are important to achieve leveraging of our costs, including store payroll and store occupancy. Net sales also have a direct impact on our operating profit, cash and working capital.
Gross profit. Gross profit measures whether we are optimizing the price and inventory levels of our merchandise. Gross profit is the difference between net sales and cost of goods sold. Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations.
Operating profit. We view operating profit as a key indicator of our success. Operating profit is the difference between gross profit and selling, general and administrative expenses. The key drivers of operating profit are net sales, gross profit, our ability to control selling, general and administrative expenses and our level of capital expenditures affecting depreciation expense.
Diluted earnings per share. Diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period. We view diluted earnings per share as a key indicator of our success in increasing shareholder value.
Trends and Uncertainties Affecting Our Results and Comparability
We have been, and we expect to continue to be affected by a number of factors that may cause actual results to differ from our historical results or current expectations. These factors include the impact of foreign currency rates; changes in laws, including U.S. tax law changes; fluctuations in variable costs, and changes in general economic conditions in the markets in which we operate. Additionally, we have experienced increased costs during 2023 and 2024. Our ability to raise our selling prices depends on market conditions and there may be periods during which we are unable to fully recover increases in our costs or experience an adverse impact on demand due to pricing actions. We believe higher consumer price inflation has resulted in reduced consumer confidence and consumer spending which negatively impacted our sales during fiscal 2023 and the first nine months of fiscal 2024.
Results of Operations
The following table presents selected items on the condensed consolidated statements of loss as a percent of net sales:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
|
November 2, 2024 |
|
|
October 28, 2023 |
|
|
||||
Net sales |
|
|
100.0 |
|
% |
|
100.0 |
|
% |
|
100.0 |
|
% |
|
100.0 |
|
% |
Cost of goods sold |
|
|
64.8 |
|
|
|
66.2 |
|
|
|
66.9 |
|
|
|
69.0 |
|
|
Gross profit |
|
|
35.2 |
|
|
|
33.8 |
|
|
|
33.1 |
|
|
|
31.0 |
|
|
Selling, general and administrative expenses |
|
|
34.1 |
|
|
|
33.9 |
|
|
|
36.0 |
|
|
|
36.3 |
|
|
Operating income (loss) |
|
|
1.1 |
|
|
|
(0.1 |
) |
|
|
(2.9 |
) |
|
|
(5.3 |
) |
|
Interest and other income, net |
|
|
0.4 |
|
|
|
— |
|
|
|
0.4 |
|
|
|
0.2 |
|
|
Income (loss) before income taxes |
|
|
1.5 |
|
|
|
(0.1 |
) |
|
|
(2.5 |
) |
|
|
(5.1 |
) |
|
Provision for (benefit from) income taxes |
|
|
0.9 |
|
|
|
0.9 |
|
|
|
0.1 |
|
|
|
(0.2 |
) |
|
Net income (loss) |
|
|
0.6 |
|
% |
|
(1.0 |
) |
% |
|
(2.6 |
) |
% |
|
(4.9 |
) |
% |
18
Three Months (13 weeks) Ended November 2, 2024 Compared With Three Months (13 weeks) Ended October 28, 2023
Net Sales
Net sales were $222.5 million for the three months ended November 2, 2024 compared to $216.3 million for the three months ended October 28, 2023, an increase of $6.2 million or 2.9%. The increase in sales was primarily driven by comparable sales increase in North America and is partially offset by a 5.1% decrease due to the retail calendar shift which moved one higher volume back-to-school week out of the third quarter and into the second quarter. By region, North America sales increased $5.2 million or 2.9% and other international sales (which consists of Europe and Australia sales) increased $0.9 million or 2.7% and for the three months ended November 2, 2024 compared to the three months ended October 28, 2023. Excluding the impact of changes in foreign exchange rates, North America sales increased $5.3 million or 2.9% and other international sales decreased $0.1 million or -0.3% for the three months ended November 2, 2024 compared to the three months ended October 28, 2023.
Comparable sales increased 7.5% for the three months ended November 2, 2024 driven by an increase in dollars per transaction and an increase in transactions. Dollars per transaction increased due to an increase in both average unit retail and units per transaction. By category, net sales were primarily driven by increases in men's clothing, women's clothing, and footwear, partially offset by decreases in accessories and hardgoods.
Gross Profit
Gross profit was $78.3 million for the three months ended November 2, 2024 compared to $73.2 million for the three months ended October 28, 2023, an increase of $5.1 million, or 7.0%. As a percent of net sales, gross profit increased 140 basis points for the three months ended November 2, 2024 to 35.2%. The increase was primarily driven by 70 basis point improvement in product margin (defined as net sales minus cost of goods sold excluding shrinkage, buying, occupancy, distribution and warehousing costs and freight costs for store merchandise transfers), 60 basis point leverage in store occupancy cost, 60 basis point benefit in web shipping costs, partially offset by 30 basis point detriment in inventory shrinkage and 10 basis point detriment due to increase in annual incentive compensation.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expense was $75.9 million for the three months ended November 2, 2024 compared to $73.4 million for the three months ended October 28, 2023, an increase of $2.6 million. SG&A expenses as a percent of net sales increased 20 basis points for the three months ended November 2, 2024 to 34.1%. The increase was primarily driven by 50 basis point increase in annual incentive compensation, 20 basis points deleverage in store costs not tied to wages, partially offset by 40 basis points due a reduction in employee training.
Net Income (Loss)
Net income for the three months ended November 2, 2024 was $1.2 million, or $0.06 earnings per diluted share, compared with net loss of $2.2 million, or $0.12 loss per diluted share, for the three months ended October 28, 2023. Our effective income tax rate for the three months ended November 2, 2024 was a 63.4% provision for income taxes compared to an 806.8% provision for income taxes for the three months ended October 28, 2023. The decrease in effective income tax rate was primarily due to the allocation of losses across the jurisdictions that we operate.
Nine Months (39 weeks) Ended November 2, 2024 Compared With Nine Months (39 weeks) Ended October 28, 2023
Net Sales
Net sales were $610.0 million for the nine months ended November 2, 2024, compared to $593.7 million for the nine months ended October 28, 2023, an increase of $16.4 million or 2.8%. The increase in sales was primarily driven by comparable sales increases in North America, partially offset by an unfavorable result in Europe. By region, North America sales increased $20.6 million or 4.2% and other international sales (which consists of Europe and Australia sales) decreased $4.2 million or 3.9% and for the nine months ended November 2, 2024, compared to the nine months ended October 28, 2023. Excluding the impact of changes in foreign exchange rates, North America sales increased $21.0 million or 4.3% and other international sales decreased $4.8 million or 4.4% for the nine months ended November 2, 2024 compared to the nine months ended October 28, 2023.
19
Comparable sales increased 3.2% for the nine months ended November 2, 2024, driven by an increase in dollars per transaction that was offset by a decrease in transactions. Dollars per transaction increased due to an increase in both average unit retail and units per transaction. By category, net sales were primarily driven by an increase in men's clothing, women's clothing, followed by footwear, partially offset by accessories and hardgoods.
Gross Profit
Gross profit was $202.0 million for the nine months ended November 2, 2024, compared to $184.2 million for the nine months ended October 28, 2023, an increase of $17.8 million, or 9.6%. As a percent of net sales, gross profit increased 210 basis points for the nine months ended November 2, 2024, to 33.1%. The increase was primarily driven by a 110 basis point benefit in web shipping costs, 70 basis point leverage in store occupancy cost, and a 30 basis point benefit in distribution center costs.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses were $220.2 million for the nine months ended November 2, 2024, compared to $216.2 million for the nine months ended October 28, 2023, an increase of $4.0 million, or 1.8%. SG&A expenses as a percent of net sales decreased 30 basis points for the nine months ended November 2, 2024, to 36.0%. The decrease was primarily driven by 30 basis point decrease in corporate costs, 30 basis point decrease in store wages tied to a reduction of store hours, 20 basis points due to store costs not tied to wages, partially offset by 50 basis point increase in annual incentive compensation.
Net Loss
Net loss for the nine months ended November 2, 2024, was $16.5 million, or $0.86 loss per diluted share, compared with net loss of $29.1 million, or $1.51 loss per diluted share, for the nine months ended October 28, 2023. Our effective income tax rate for the nine months ended November 2, 2024, was a 3.7% provision for income taxes compared to an 4.8% benefit from income taxes for the nine months ended October 28, 2023. The decrease in effective income tax rate was primarily due to the allocation of losses across the jurisdictions that we operate.
Liquidity and Capital Resources
Our primary uses of cash are for operational expenditures, inventory purchases and capital investments, including new stores, store remodels, store relocations, store fixtures and ongoing infrastructure improvements. Additionally, we may use cash for the repurchase of our common stock. Historically, our main source of liquidity has been cash flows from operations.
The significant components of our working capital are inventories and liquid assets such as cash, cash equivalents, current marketable securities and receivables, reduced by accounts payable, accrued payroll and accrued expenses. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale, while we typically have longer payment terms with our vendors.
Our capital requirements include construction and fixture costs related to the opening of new stores and remodel and relocation expenditures for existing stores. Future capital requirements will depend on many factors, including the pace of new store openings, the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords. Our net investment to open a new store has varied significantly in the past due to a number of factors, including the geographic location and size of the new store, and is likely to vary significantly in the future.
During fiscal 2024, we expect to spend approximately $14.0 million to $16.0 million on capital expenditures, a majority of which will relate to leasehold improvements and fixtures for the approximately 1 new stores we remain on track to open in fiscal 2024 and remodels or relocations of existing stores. There can be no assurance that the number of stores that we actually open in fiscal 2024 will not be different from the number of stores we plan to open, or that actual fiscal 2024 capital expenditures will not differ from our expectations.
20
Operating Activities
Net cash used in operating activities increased by $11.1 million to $34.0 million used in operating activities for the nine months ended November 2, 2024 from $22.9 million used in operating activities for the nine months ended October 28, 2023. Net cash used in operating activities was $34.0 million for the nine months ended November 2, 2024 related to $89.2 million in unfavorable changes in our operating assets and liabilities and a $16.5 million net loss, excluding $71.6 million of noncash charges included within net earnings for the period. Net cash used in operating activities was $22.9 million for the nine months ended October 28, 2023 related to $65.6 million in unfavorable changes in our operating assets and liabilities and a $29.1 million net loss, excluding $71.8 million of noncash charges included within net loss for the period. Our operating cash flows generally result primarily from cash received from our customers, offset by cash payments we make for inventory, employee compensation, store occupancy expenses and other operational expenditures. Cash received from our customers generally corresponds to our net sales. Because our customers primarily use credit cards or cash to buy from us, our receivables from customers settle quickly. Historically, changes to our operating cash flows have been driven primarily by changes in operating income, which is impacted by changes to non-cash items such as depreciation, amortization and accretion, deferred taxes, and changes to the components of working capital.
Investing Activities
Net cash provided by investing activities was $22.1 million for the nine months ended November 2, 2024 related to $32.1 million in net sales of marketable securities, partially offset $10.0 million of capital expenditures primarily for new store openings and existing store remodels or relocations. Net cash used in investing activities was $10.4 million for the nine months ended October 28, 2023, related to $16.2 million of capital expenditures primarily for new store openings and existing store remodels or relocation, partially offset by $5.9 million in net sales of marketable securities.
Financing Activities
Net cash used in financing activities for the nine months ended November 2, 2024 was $24.6 million, related $25.2 million used in the repurchase of common stock and $0.1 million in payments for tax withholding obligations upon vesting of restricted stock partially offset by $0.7 million in proceeds from the issuance and exercise of stock-based awards. Net cash provided by financing activities for the nine months ended October 28, 2023 was $0.7 million, related to $0.9 million in proceeds from the issuance and exercise of stock-based awards, partially offset by $0.2 million in payments for tax withholding obligations upon vesting of restricted stock.
Sources of Liquidity
Our most significant sources of liquidity continue to be funds generated by operating activities and available cash, cash equivalents and current marketable securities. We expect these sources of liquidity will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures for at least the next twelve months. Beyond this time frame, if cash flows from operations are not sufficient to meet our capital requirements, then we will be required to obtain additional equity or debt financing in the future. However, there can be no assurance that equity or debt financing will be available to us when we need it or, if available, that the terms will be satisfactory to us and not dilutive to our then-current shareholders.
Additionally, we previously maintained a secured credit agreement with Wells Fargo Bank, N.A., which provided us with a senior secured credit facility (“credit facility”) of up to $25.0 million through December 1, 2024. The credit facility was available for working capital and other general corporate purposes and provided for the issuance of standby and commercial letters of credit. The credit facility was secured by a first-priority security interest in substantially all personal property (but not the real property) of the borrowers and guarantors. The credit agreement was cancelled on May 3, 2024. Outstanding line of credits were transitioned to a cash backed status using restricted cash accounts. We expect to enter into a new credit facility with similar borrowing capacities with a new lender during the fourth quarter of fiscal 2024.
There were no borrowings or open commercial letters of credit outstanding under the secured credit facility at February 3, 2024. We had no open commercial letters of credit outstanding at November 2, 2024 nor outstanding as of February 3, 2024. We had $2.7 million in issued, but undrawn, standby letters of credit at November 2, 2024 and $3.4 million in issued, but undrawn, standby letters of credit at February 3, 2024 As of November 2, 2024, the open standby letters of credit are backed by restricted cash deposits at the bank.
At November 2, 2024, we did not have any “off-balance sheet arrangements” as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition, results of operation, liquidity, capital expenditures or capital resources.
21
Critical Accounting Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our condensed consolidated financial statements, we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that we believe to be relevant at the time our condensed consolidated financial statements are prepared. On a regular basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our condensed consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
There have been no significant changes to our critical accounting estimates as discussed in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024.
22
Risk Factors
Investing in our securities involves a high degree of risk. The following risk factors, issues and uncertainties should be considered in evaluating our future prospects. In particular, keep these risk factors in mind when you read “forward-looking” statements elsewhere in this report. Forward-looking statements relate to our expectations for future events and time periods. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential,” “continue” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. Any of the following risks could harm our business, operating results or financial condition and could result in a complete loss of your investment. Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business and financial condition in the future.
U.S. and global economic and political uncertainty, coupled with cyclical economic trends in retailing, could have a material adverse effect on our results of operations.
Our retail market historically has been subject to substantial cyclicality. As the U.S. and global economic and political conditions change, the trends in discretionary consumer spending become unpredictable and discretionary consumer spending could be reduced due to uncertainties about the future. Economic and consumer confidence can also be affected by a variety of factors, including housing prices, unemployment rates and inflation. When disposable income decreases or discretionary consumer spending is reduced due to a decline in consumer confidence, purchases of apparel and related products may decline. A deterioration in macroeconomic conditions or consumer confidence or uncertainty in the U.S. and global economies and political environment could have a material adverse impact on our results of operations and financial position. In addition, government shutdowns or the risk of government shutdowns as well as the impact or expected impact of elections, both in the U.S. and in other markets where we operate could have a material adverse impact on our results of operations and financial position.
In times when there is a decline in disposable income and consumer confidence, there could be a trend to consumers seeking more inexpensive or value-oriented merchandise. As a retailer that sells a substantial majority of branded merchandise, this could disproportionately impact us more than vertically integrated private label retailers or we may be forced to rely on promotional sales to compete in our market which could have a material adverse effect on our financial position.
Failure to anticipate, identify and respond to changing fashion trends, customer preferences and other fashion-related factors could have a material adverse effect on us.
Customer tastes and fashion trends in our market are volatile and tend to change rapidly. Our success depends on our ability to effectively anticipate, identify and respond to changing fashion tastes and consumer preferences, and to translate market trends into appropriate, saleable product offerings in a timely manner. If we are unable to successfully anticipate, identify or respond to changing styles or trends and misjudge the market for our products or any new product lines, including adequately anticipating the correct mix and trends of our private label merchandise, our sales may be lower than predicted and we may be faced with a substantial amount of unsold inventory or missed opportunities. In response to such a situation, we may be forced to rely on markdowns or promotional sales to dispose of excess or slow-moving inventory, which could have a material adverse effect on our results of operations.
We may be unable to compete favorably in the highly competitive retail industry, and if we lose customers to our competitors, our sales could decrease.
The teenage and young adult retail apparel, footwear, accessories and hardgoods industry is highly competitive. We compete with other retailers for vendors, teenage and young adult customers, suitable store locations, qualified store associates, management personnel, online marketing content, social media engagement and ecommerce traffic. Some of our competitors are larger than we are and have substantially greater financial and marketing resources, including advanced ecommerce market capabilities. Additionally, some of our competitors may offer more options for free and/or expedited shipping for ecommerce sales. Direct competition with these and other retailers may increase significantly in the future, which could require us, among other things, to lower our prices and could result in the loss of our customers. Current and increased competition could have a material adverse effect on our business, results of operations and financial condition.
We could incur charges due to impairment of goodwill, intangible assets and other long-term assets.
We have recorded goodwill, which is the premium paid over the fair market value of the acquired tangible and intangible assets paid in an acquisition, as part of our prior year acquisitions. Goodwill and intangible assets, which consist of tradenames and trademarks, are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Any event that impacts our results negatively could lead to impairment of these assets which could have negative impacts on our earnings. Long-term assets, primarily fixed assets and operating lease right-of-use assets, are also subject to testing for impairment if events or changes in circumstances indicate that the asset might be impaired. A significant amount of judgment is involved in our
23
impairment assessment. If actual results fall short of our estimates and assumptions used in estimating revenue growth, future cash flows and asset fair values, we could incur further impairment charges for goodwill, intangible assets, or long-term assets, which could have an adverse effect on our results of operations.
Most of our merchandise is produced by foreign manufacturers; therefore, the availability, quality and costs of our merchandise may be negatively affected by risks associated with international trade and other international conditions.
Most of our merchandise is produced by manufacturers around the world, including China. Some of these facilities are located in regions that may be affected by natural disasters, public health concerns, or emergencies, such as COVID-19 and other communicable diseases or viruses, political instability or other conditions that could cause a disruption in trade.
Trade restrictions such as increased tariffs or quotas, or both, could also increase the cost and reduce the supply of merchandise available to us. Any reduction in merchandise available to us or any increase in its cost due to tariffs, quotas or local issues that disrupt trade could have a material adverse effect on our results of operations. Additionally, the effects of U.S.-China relations, including escalating U.S.-China tensions and potential tariff increases, retaliations, restrictive regulations or boycotts could have a material adverse effect on our results of operations. This includes costs to comply with regulatory developments regarding the use of “conflict minerals,” certain minerals originating from the Democratic Republic of Congo and adjoining countries, which may affect the sourcing and availability of raw materials used by manufacturers and subject us to increased costs associated with our products, processes or sources of our inputs. Our business could be adversely affected by disruptions in the supply chain, such as strikes, work stoppages, or port closures.
A decrease in consumer traffic could cause our sales to be less than expected.
We depend heavily on generating customer traffic to our stores and websites. This includes locating many of our stores in prominent locations within successful shopping malls. Sales at these stores are derived, in part, from the volume of traffic in those malls. Our stores benefit from the ability of a mall’s “anchor” tenants, generally large department stores and other area attractions, to generate consumer traffic in the vicinity of our stores and the continuing popularity of malls as shopping destinations. In addition, some malls that were in prominent locations when we opened our stores may cease to be viewed as prominent. If this trend continues or if the popularity of mall shopping continues to decline generally among our customers, our sales may decline, which would impact our results of operations. These risks may include circumstances that are not within our control, such as changes in fair market rent. Furthermore, we depend on generating increased traffic to our ecommerce business and converting that traffic into sales. This requires us to achieve expected results from our marketing and social media campaigns, accuracy of data analytics, reliability of our website, network, and transaction processing and a high-quality online customer experience. Our sales volume and customer traffic in our stores and on our websites generally could be adversely affected by, among other things, economic downturns, competition from other ecommerce retailers, non-mall retailers and other malls, increases in gasoline prices, fluctuations in exchange rates in border or tourism-oriented locations and the closing or decline in popularity of other stores in the malls in which we are located. Also, geopolitical events, including the threat of terrorism, or widespread health emergencies, such as COVID-19 and other communicable diseases, viruses, or pandemics, could cause people to avoid our stores in shopping malls and alter consumer trends. An uncertain economic outlook or continued bankruptcies of mall-based retailers could curtail new shopping mall development, decrease shopping mall and ecommerce traffic, reduce the number of hours that shopping mall operators keep their shopping malls open or force them to cease operations entirely. A reduction in consumer traffic to our stores or websites could have a material adverse effect on our business, results of operations and financial condition.
Our North America growth strategy depends on our ability to grow customer engagement in our current markets, which could strain our resources and cause the performance of our existing business to suffer.
Our North America growth largely depends on our ability to optimize our customer engagement. We intend to continue to open new stores in future years, while remodeling a portion of our existing store base such that we have the optimum number of stores in any given trade area. The growth strategy may present competitive, merchandising, hiring and distribution challenges that are different from those currently encountered. In addition, it will place increased demands on our operational, managerial and administrative resources. These increased demands could cause us to operate our business less effectively, which in turn could cause deterioration in the financial performance of our individual stores and our overall business. In addition, successful execution of our growth strategy may require that we obtain additional financing, and we may not be able to obtain that financing on acceptable terms or at all.
Our plans for international expansion include risks that could have a negative impact on our results of operations.
We plan to continue to open new stores in the European and Australian markets. We may continue to expand internationally into other markets, either organically or through additional acquisitions. International markets may have different competitive conditions, consumer tastes and discretionary spending patterns than our existing North America market. The expansion strategy may present competitive, merchandising, hiring and distribution challenges that are different from those currently encountered. In addition, it will place increased demands on our operational, managerial and administrative resources. As a result, operations in international markets
24
may be less successful than our operations in the North America. Additionally, consumers in international markets may not be familiar with us or the brands we sell, and we may need to build brand awareness in the markets. Furthermore, we have limited experience with the legal and regulatory environments and market practices in new international markets and cannot guarantee that we will be able to penetrate or successfully operate in these new international markets. We also expect to incur additional costs in complying with applicable foreign laws and regulations as they pertain to both our products and our operations. Accordingly, for the reasons noted above, our plans for international expansion include risks that could have a negative impact on our results of operations.
Failure to successfully integrate any businesses that we acquire could have an adverse impact on our results of operations and financial performance.
We may, from time to time, acquire businesses, such as our acquisition of Blue Tomato and Fast Times. We may experience difficulties in integrating any businesses we may acquire, including their stores, websites, facilities, personnel, financial systems, distribution, operations and general operating procedures, and any such acquisitions may also result in the diversion of our capital and our management’s attention from other business issues and opportunities. If we experience difficulties in integrating acquisitions or if such acquisitions do not provide the benefits that we expect to receive, we could experience increased costs and other operating inefficiencies, which could have an adverse effect on our results of operations and overall financial performance.
Our sales and inventory levels fluctuate on a seasonal basis. Accordingly, our quarterly results of operations are volatile and may fluctuate significantly.
Our quarterly results of operations have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future. Our sales and profitability are typically disproportionately higher in the third and fourth fiscal quarters of each fiscal year due to increased sales during the back-to-school and winter holiday shopping seasons. Sales during these periods cannot be used as an accurate indicator of annual results. As a result of this seasonality, any factors negatively affecting us during the last half of the year, including unfavorable economic conditions, adverse weather or our ability to acquire seasonal merchandise inventory, could have a material adverse effect on our financial condition and results of operations for the entire year. In addition, in order to prepare for the back-to-school and winter holiday shopping seasons, we must order and keep in stock significantly more merchandise than we carry during other times of the year. Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown, which could have a material adverse effect on our business, results of operations and financial condition.
Our quarterly results of operations are affected by a variety of other factors, including calendar shifts of holiday or seasonal periods, timing of promotional events, general economic conditions, and numerous other items set forth on these risk factors.
Pandemics and other health crises, including COVID-19, could affect our business, financial condition and results of operations in many respects.
The emergence, severity, magnitude and duration of global or regional health crises are uncertain and difficult to predict. A pandemic, such as COVID-19, could affect certain business operations, demand for our products and services, in-stock positions, costs of doing business, availability of labor, access to inventory, supply chain operations, our ability to predict future performance, exposure to litigation, and our financial performance, among other things. Other factors and uncertainties include, but are not limited to:
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We rely on information systems and technology in our operations and our growth plans: and any material failure, inadequacy interruption, or security failure of that technology could adversely affect our ability to effectively operate and grow our business and could adversely affect our financial results.
If our information technology systems, including hardware and software, do not work effectively, this could adversely impact our ability to operate and manage our business, including the promptness and accuracy of our transaction processing, financial accounting and reporting and our ability to properly forecast operating results and cash requirements. Additionally, we rely on third-party service providers for certain information systems functions. If a service provider fails to provide the data quality, communications, capacity or services we require, the failure could interrupt our services and could have a material adverse effect on our business, financial condition and results of operations. Any failure, inadequacy, or interruption of our technology systems could harm our ability to effectively operate and grow our business and could adversely affect our financial results. In addition, the technologies and artificial intelligence tools that we incorporate into certain aspects of our operations may not generate the intended efficiencies and may impact our business results. Specifically artificial intelligence tools could have the potential to be deficient, inaccurate, or biased and if we fail to adopt and oversee the use of artificial intelligence in a thoughtful and strategic manner, it could harm our financial performance. To better manage, operate and grow our business, we may need to continue to invest in and improve our information technology systems, and in doing so could incur substantial additional expenses that could impact our financial results. In addition, remediation of any problems with our information technology systems could result in significant, unplanned expenses.
If we fail to meet the requirements to adequately maintain the privacy and security of personal data and business information, we may be subjected to adverse publicity, litigation, and significant expenses.
Information systems are susceptible to an increasing threat of continually evolving cybersecurity risks. Similar to many other retail companies, we expect to continue to experience cyber attacks, including phishing, social engineering, and other attempts to breach, or gain unauthorized access to our systems and databases. To date, these attacks have not had a material impact on our operations, but we cannot provide assurance that they will not have an impact in the future. Unauthorized access, theft, use, destruction, or other compromises are becoming increasingly sophisticated and may occur through a variety of methods. The rapid evolution and increased adoption of artificial intelligence technologies by attackers may intensify our cybersecurity risks. If we fail to maintain or adequately maintain security systems, devices, and activity monitoring to prevent unauthorized access to our network, systems and databases containing confidential, proprietary and personally identifiable information, we may be subject to additional risk of adverse publicity, litigation or significant expense. Nevertheless, if unauthorized parties gain access to our networks, systems, or databases, they may be able to steal, publish, delete or modify confidential information. In such circumstances, we could be held liable to our customers or other parties or be subject to regulatory or other actions for breaching privacy rules and we may be exposed to reputation damage and loss of customers’ trust and business. This could result in costly investigations and litigation, civil or criminal penalties and adverse publicity that could adversely affect our financial condition, results of operations and reputation. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional resources, train employees and engage third parties. Further, the regulatory environment surrounding information security, cybersecurity and privacy is increasingly demanding. If we are unable to comply with the new and changing security standards, we may be subject to fines, restrictions, and financial exposure, which could adversely affect our retail operations.
Significant fluctuations and volatility in the cost of raw materials, global labor, shipping and other costs related to the production of our merchandise may have a material adverse effect on our business, results of operations and financial conditions.
Increases in the cost of raw materials, global labor costs, freight costs and other shipping costs in the production and transportation of our merchandise can result in higher costs for this merchandise. The costs for these products are affected by weather, consumer demand, government regulation, speculation on the commodities market and other factors that are generally unpredictable and beyond our control. Our gross profit and results of operations could be adversely affected to the extent that the selling prices of our products do not increase proportionately with the increases in the costs of raw materials. Increasing labor costs and oil-related product costs, such as manufacturing and transportation costs, could also adversely impact gross profit. Additionally, significant changes in the relationship between carrier capacity and shipper demand could increase transportation costs, which could also adversely impact gross profit.
Fluctuations in foreign currency exchange rates could impact our financial condition and results of operations.
We are exposed to foreign currency exchange rate risk with respect to our sales, profits, assets and liabilities denominated in currencies other than the U.S. dollar. As a result, the fluctuation in the value of the U.S. dollar against other currencies could have a material adverse effect on our results of operations, financial condition and cash flows. Upon translation, operating results may differ materially from expectations. As we continue to expand our international operations, our exposure to exchange rate fluctuations will increase. Tourism spending may be affected by changes in currency exchange rates, and as a result, sales at stores with higher tourism traffic may be adversely impacted by fluctuations in currency exchange rates. Further, although the prices charged by vendors for the merchandise we purchase are primarily denominated in U.S. dollars, a decline in the relative value of the U.S. dollar to foreign
26
currencies could lead to increased merchandise costs, which could negatively affect our competitive position and our results of operations.
Our business could be adversely affected by increased labor costs, including costs related to an increase in minimum wage and health care.
Labor is one of the primary components in the cost of operating our business. Increased labor costs, whether due to competition, unionization, increased minimum wage, state unemployment rates, health care, mandated safety protocols, or other employee benefits costs may adversely impact our operating profit. A considerable amount of our store team members are paid at rates related to the federal or state minimum wage and any changes to the minimum wage rate may increase our operating expenses. Furthermore, inconsistent increases in state and or city minimum wage requirements limit our ability to increase prices across all markets and channels. Additionally, we are self-insured with respect to our health care coverage in the U.S. and do not purchase third party insurance for the health insurance benefits provided to employees with the exception of pre-defined stop loss coverage, which helps limit the cost of large claims. There is no assurance that future health care legislation will not adversely impact our results or operations.
Although none of our North America and Australia employees are currently covered by collective bargaining agreements, we cannot guarantee that they will not elect to be represented by labor unions in the future, which could increase our labor costs and could subject us to the risk of work stoppages and strikes. Any such failure to meet our staffing needs, any material increases in employee turnover rates, any increases in labor costs or any work stoppages, interruptions or strikes could have a material adverse effect on our business or results of operations.
Our business could suffer if a manufacturer fails to use acceptable labor and environmental practices.
We do not control our vendors or the manufacturers that produce the products we buy from them, nor do we control the labor and environmental practices of our vendors and these manufacturers. The violation of labor, safety, environmental and/or other laws and standards by any of our vendors or these manufacturers, or the divergence of the labor and environmental practices followed by any of our vendors or these manufacturers from those generally accepted as ethical in the U.S., could interrupt, or otherwise disrupt, the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our reputation, financial condition and results of operations. In that regard, most of the products we sell are manufactured internationally, primarily in Asia, Mexico and Central America, which may increase the risk that the labor and environmental practices followed by the manufacturers of these products may differ from those considered acceptable in the U.S.
Additionally, our products are subject to regulation of, and regulatory standards set by various governmental authorities with respect to quality and safety. These regulations and standards may change from time to time. Our inability to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which could adversely affect our reputation and sales. Issues with the quality and safety of merchandise we sell, regardless of our culpability, or customer concerns about such issues, could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls and increased costs.
If we fail to develop and maintain good relationships with vendors, or if a vendor is otherwise unable or unwilling to supply us with adequate quantities of their products at acceptable prices, our business and financial performance could suffer.
Our business is dependent on developing and maintaining good relationships with a large number of vendors to provide our customers with an extensive selection of current and relevant brands. In addition to maintaining our large number of current vendor relationships, each year we are identifying, attracting and launching new vendors to provide a diverse and unique product assortment. We believe that we generally are able to obtain attractive pricing and terms from vendors because we are perceived as a desirable customer, and deterioration in our relationship with our vendors could have a material adverse effect on our business.
However, there can be no assurance that our current vendors or new vendors will provide us with an adequate supply or quality of products or acceptable pricing. Our vendors could discontinue selling to us, raise the prices they charge, sell through direct channels or allow their merchandise to be discounted by other retailers. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. In addition, certain vendors sell their products directly to the retail market and therefore compete with us directly and other vendors may decide to do so in the future. There can be no assurance that such vendors will not decide to discontinue supplying their products to us, supply us only less popular or lower quality items, raise the prices they charge us or focus on selling their products directly.
In addition, a number of our vendors are smaller, less capitalized companies and are more likely to be impacted by unfavorable general economic and market conditions than larger and better capitalized companies. These smaller vendors may not have sufficient liquidity during economic downturns to properly fund their businesses and their ability to supply their products to us could be negatively impacted. Any inability to acquire suitable merchandise at acceptable prices, or the loss of one or more key vendors, could have a material adverse effect on our business, results of operations and financial condition.
27
Our business is susceptible to weather conditions that are out of our control, including the potential risks of unpredictable weather patterns and any weather patterns associated with naturally occurring global climate change, and the resultant unseasonable weather could have a negative impact on our results of operations.
Our business is susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season (including any weather patterns associated with global warming and cooling) could render a portion of our inventory incompatible with those unseasonable conditions. These prolonged unseasonable weather conditions could have a material adverse effect on our business and results of operations.
If we lose key executives or are unable to attract and retain the talent required for our business, our financial performance could suffer.
Our performance depends largely on the efforts and abilities of our key executives. If we lose the services of one or more of our key executives, we may not be able to successfully manage our business or achieve our growth objectives. Furthermore, as our business grows, we will need to attract and retain additional qualified personnel in a timely manner and we may not be able to do so.
Failure to meet our staffing needs could adversely affect our ability to implement our growth strategy and could have a material impact on our results of operations.
Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees who understand and appreciate our culture and brand and are able to adequately represent this culture. Qualified individuals of the requisite caliber, skills and number needed to fill these positions may be in short supply in some areas and the employee turnover rate in the retail industry is high. Our business depends on the ability to hire and retain qualified technical and support roles for procurement, distribution, ecommerce and back office functions. Competition for qualified employees in these areas could require us to pay higher wages to attract a sufficient number of suitable employees.
If we are unable to hire and retain store managers and store associates capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture and knowledge of our merchandise, our ability to open new stores may be impaired and the performance of our existing and new stores could be materially adversely affected. We are also dependent upon temporary personnel to adequately staff our operations particularly during busy periods such as the back-to-school and winter holiday seasons. There can be no assurance that we will receive adequate assistance from our temporary personnel, or that there will be sufficient sources of temporary personnel. If we are unable to hire qualified temporary personnel, our results of operations could be adversely impacted.
A decline in cash flows from operations could have a material adverse effect on our business and growth plans.
We depend on cash flow from operations to fund our current operations and our growth strategy, including the payment of our operating leases, wages, store operation costs and other cash needs. If our business does not generate sufficient cash flow from operating activities, and sufficient funds are not otherwise available to us from borrowings under a credit facility or from other sources, we may not be able to pay our operating lease expenses, grow our business, respond to competitive challenges or fund our other liquidity and capital needs, which could have a material adverse effect on our business.
Our business could suffer with the closure or disruption of our home office or our distribution centers.
In the U.S., we rely on a single distribution center located in Corona, California to receive, store and distribute the vast majority of our merchandise to our domestic stores. Internationally, we operate a combined distribution and ecommerce fulfillment center located in Graz, Austria that supports our Blue Tomato ecommerce and store operations in Europe. We operate a distribution center located in Delta, British Columbia, Canada to distribute our merchandise to our Canadian stores. We operate a distribution and ecommerce fulfillment center located in Melbourne, Australia to distribute our merchandise to our Australian stores. Additionally, we are headquartered in Lynnwood, Washington. As a result, unforeseen events, including war, terrorism, other political instability or conflicts, riots, public health issues (including widespread/pandemic illnesses such as coronavirus and other communicable diseases or viruses), a natural disaster or other catastrophic event that affects one of the regions where we operate these centers or our home office could significantly disrupt our operations and have a material adverse effect on our business, results of operations and financial condition.
28
The effects of war, acts of terrorism, threat of terrorism, or other types of mall violence, could adversely affect our business.
Most of our stores are located in shopping malls. Any threat of terrorist attacks or actual terrorist events, or other types of mall violence, such as shootings or riots, could lead to lower consumer traffic in shopping malls. In addition, local authorities or mall management could close shopping malls in response to security concerns. Mall closures, as well as lower consumer traffic due to security concerns, could result in decreased sales. Additionally, the threat, escalation or commencement of war or other armed conflict elsewhere, could significantly diminish consumer spending, and result in decreased sales. Decreased sales could have a material adverse effect on our business, financial condition and results of operations.
Our inability or failure to protect our intellectual property or our infringement of other’s intellectual property could have a negative impact on our operating results.
We believe that our trademarks and domain names are valuable assets that are critical to our success. The unauthorized use or other misappropriation of our trademarks or domain names could diminish the value of the Zumiez, Blue Tomato, or Fast Times brands, our store concepts, our private label brands or our goodwill and cause a decline in our net sales. Although we have secured or are in the process of securing protection for our trademarks and domain names in a number of countries outside of the U.S., there are certain countries where we do not currently have or where we do not currently intend to apply for protection for certain trademarks. Also, the efforts we have taken to protect our trademarks may not be sufficient or effective. Therefore, we may not be able to prevent other persons from using our trademarks or domain names outside of the U.S., which also could adversely affect our business. We are also subject to the risk that we may infringe on the intellectual property rights of third parties. Any infringement or other intellectual property claim made against us, whether or not it has merit, could be time-consuming, result in costly litigation, cause product delays or require us to pay royalties or license fees. As a result, any such claim could have a material adverse effect on our operating results.
Our operations expose us to the risk of litigation, which could lead to significant potential liability and costs that could harm our business, financial condition or results of operations.
We employ a substantial number of full-time and part-time employees, a majority of whom are employed at our store locations. As a result, we are subject to a large number of federal, state and foreign laws and regulations relating to employment. This creates a risk of potential claims that we have violated laws related to discrimination and harassment, health and safety, wage and hour laws, criminal activity, personal injury and other claims. We are also subject to other types of claims in the ordinary course of our business. Some or all of these claims may give rise to litigation, which could be time-consuming for our management team, costly and harmful to our business.
In addition, we are exposed to the risk of class action litigation. The costs of defense and the risk of loss in connection with class action suits are greater than in single-party litigation claims. Due to the costs of defending against such litigation, the size of judgments that may be awarded against us, and the loss of significant management time devoted to such litigation, we cannot provide assurance that such litigation will not disrupt our business or impact our financial results.
We are involved, from time to time, in litigation incidental to our business including complaints filed by investors. This litigation could result in substantial costs, and could divert management's attention and resources, which could harm our business. Risks associated with legal liability are often difficult to assess or quantify, and their existence and magnitude can remain unknown for significant periods of time.
Failure to comply with federal, state, local or foreign laws and regulations, or changes in these laws and regulations, could have an adverse impact on our results of operations and financial performance.
Our business is subject to a wide array of laws and regulations including those related to employment, trade, consumer protection, transportation, occupancy laws, health care, wage laws, employee health and safety, taxes, privacy, health information privacy, identify theft, customs, truth-in-advertising, securities laws, unsolicited commercial communication and environmental issues. Our policies, procedures and internal controls are designed to comply with foreign and domestic laws and regulations, such as those required by the Sarbanes-Oxley Act of 2002 and the U.S. Foreign Corrupt Practices Act. Although we have policies and procedures aimed at ensuring legal and regulatory compliance, our employees or vendors could take actions that violate these laws and regulations. Any violations of such laws or regulations could have an adverse effect on our reputation, results of operations, financial condition and cash flows. Furthermore, changes in the regulations, the imposition of additional regulations, or the enactment of any new legislation, particularly in the North America and International businesses, could adversely affect our results of operations or financial condition.
Fluctuations in our tax obligations and effective tax rate may result in volatility in our operating results.
We are subject to income taxes in many domestic and foreign jurisdictions. In addition, our products are subject to import and excise duties and/or sales, consumption or value-added taxes in many jurisdictions. We record tax expense based on our estimates of future
29
payments, which include reserves for estimates of probable settlements of domestic and foreign tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. There can be no assurance as to the outcome of these audits which may have an adverse effect to our business. In addition, our effective tax rate may be materially impacted by changes in tax rates and duties, the mix and level of earnings or losses by taxing jurisdictions, or by changes to existing accounting rules or regulations. Changes to foreign or domestic tax laws could have a material impact on our financial condition, results of operations or cash flows.
We may fail to meet analyst and investor expectations, which could cause the price of our stock to decline.
Our common stock is traded publicly and various securities analysts and investors follow our financial results and issue reports on us. These reports include information about our historical financial results as well as the analysts' and investors' estimates of our future performance. The analysts' and investors' estimates are based upon their own independent opinions and can be different from our estimates or expectations. If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.
The reduction of total outstanding shares through the execution of a share repurchase program of common stock may increase the risk that a group of shareholders could form a group to become a controlling shareholder.
A share repurchase program may be conducted from time to time under authorization made by our Board of Directors. We do not have a controlling shareholder, nor are we aware of any shareholders that have formed a “group” (defined as when two or more persons agree to act together for the purposes of acquiring, holding, voting or otherwise disposing of the equity securities of an issuer). The reduction of total outstanding shares through the execution of a share repurchase program of common stock may increase the risk that a group of shareholders could form a group to become a controlling shareholder.
A controlling shareholder would have significant influence over, and may have the ability to control, matters requiring approval by our shareholders, including the election of directors and approval of mergers, consolidations, sales of assets, recapitalizations and amendments to our articles of incorporation. Furthermore, a controlling shareholder may take actions with which other shareholders do not agree, including actions that delay, defer or prevent a change of control of the company and that could cause the price that investors are willing to pay for the company’s stock to decline.
Increased scrutiny and changing expectations from stakeholders with respect to the Company’s ESG practices may result in additional costs or risks.
Companies across many industries are facing increasing scrutiny related to their environmental, social and governance practices. Our employees, customers, various types of investors, and other stakeholders are also increasingly focused on ESG practices and in recent years have placed increasing importance on the non-financial impacts. If our ESG practices do not meet stakeholder expectations, which continue to evolve, we may incur additional costs and our brand may be harmed.
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Item 3: Quantitative and Qualitative Disclosures About Market Risk
Our market risk profile at November 2, 2024 has not significantly changed since February 3, 2024. Our market risk profile at February 3, 2024 is disclosed in our Annual Report on Form 10-K.
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rule 13a-15(e)). Based on this evaluation, our CEO and CFO concluded that, as of November 2, 2024, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting (as defined in Securities Exchange Act Rule 13a-15(f)) during the three months ended November 2, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved from time to time in litigation incidental to our business. We are unable to predict the outcome of litigated cases. A court determination in any of litigation actions against us could result in significant liability and could have a material adverse effect on our business, results of operations or financial condition.
See Note 5 to the Notes to Condensed Consolidated Financial Statements found in Part I Item 1 of this Form 10-Q (listed under “Litigation” under Commitments and Contingencies).
Item 1A. Risk Factors
Please refer to the Risk Factors set forth in Item 2 of Part I of this Form 10-Q as well as the risk factors previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended February 3, 2024. There have been no material changes in the risk factors set forth in our Annual Report on Form 10-K for the year ended February 3, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of common stock during the thirteen weeks ended November 2, 2024 are as set forth in the table below. Note that amounts below are in thousands except for price per share.
Period |
|
Total Number |
|
|
Average Price |
|
|
Total Number of |
|
|
Dollar Value of |
|
||||
August 4, 2024 - August 31, 2024 |
|
|
220 |
|
|
$ |
25.39 |
|
|
|
220 |
|
|
$ |
5,578 |
|
September 1, 2024 - October 5, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
October 6, 2024 - November 2, 2024 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
Total |
|
|
220 |
|
|
|
|
|
|
220 |
|
|
|
|
||
(1) |
On June 5, 2024, Zumiez Inc. approved the repurchase of up to an aggregate of $25 million of its Common Stock (the “Repurchase Program”). The repurchases will be made from time to time on the open market at prevailing market prices. The Repurchase Program is expected to continue through June 30, 2025, unless the time period is extended or shortened by the Board of Directors. |
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
During the three months ended November 2, 2024, none of our directors or “officers” (as defined in Rule 16a-1(f) under the Exchange Act)
On
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Item 6. Exhibits
Exhibit No. |
|
Description of Exhibits |
|
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
101 |
|
The following materials from Zumiez Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended November 2, 2024, formatted in Inline XBRL (eXtensible Business Reporting Language):
(i) Condensed Consolidated Balance Sheets at November 2, 2024 (unaudited) and February 3, 2024; (ii) Unaudited Condensed Consolidated Statements of loss for the three and nine months ended November 2, 2024 and October 28, 2023; (iii) Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended November 2, 2024 and October 28, 2023; (iv) Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended November 2, 2024 and October 28, 2023; (v) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended November 2, 2024 and October 28, 2023; and (vi) Notes to Condensed Consolidated Financial Statements.
|
104 |
|
The cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101 |
|
|
|
|
|
|
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
ZUMIEZ INC. |
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|
|
Dated: December 5, 2024 |
By: |
/s/ Christopher C. Work |
|
|
Christopher C. Work |
|
|
Chief Financial Officer (Principal Financial Officer and |
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Exhibit 31.1
CERTIFICATION PURSUANT TO
RULE 13a-14(a), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard M. Brooks, certify that:
/s/ Richard M. Brooks |
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Dated: December 5, 2024 |
Richard M. Brooks |
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Chief Executive Officer and Director |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATION PURSUANT TO
RULE 13a-14(a), AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher C. Work, certify that:
/s/ Christopher C. Work |
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Dated: December 5, 2024 |
Christopher C. Work |
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Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
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Exhibit 32.1
CERTIFICATIONS PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(18 U.S.C. SECTION 1350)
In connection with the Quarterly Report of Zumiez Inc., a Washington corporation (the “Company”), on Form 10-Q for the three months ended November 2, 2024 as filed with the Securities and Exchange Commission (the “Report”), I, Richard M. Brooks, Principal Executive Officer of the Company and Christopher C. Work, Principal Financial Officer of the Company, certify, pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that:
/s/ Richard M. Brooks |
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/s/ Christopher C. Work |
Richard M. Brooks |
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Christopher C. Work |
Chief Executive Officer and Director (Principal Executive Officer)
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Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
December 5, 2024 |
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December 5, 2024 |