Zoom in on this Sports Retailer

By Linda McDonough

Zumiez (Nasdaq: ZUMZ) is on the clearance rack. The specialty retailer of skateboarding, snowboarding, and surfing brands was down almost 30% in a single day based on weak future earnings and is down almost 60% year-to-date.

Although investors were right to be surprised by the magnitude of the cut to 3rd quarter estimates (from $0.51 down to $0.29), the stock looks cheap enough for buyers to start pulling a few shares off the rack.

The retailer, which started in 1978 with one store in Seattle, has developed a cult-like following by cutting edge teens.  Unlike most teen retailers, the bulk of Zumiez’ product is focused on men with 34% of sales stemming from men’s apparel and another 39% from accessories and shoes.

The chain focuses on introducing new, independent brands.  Stores are filled with alternate brands like Huf, Hoonigan and Empyre Surplus, brands whose coolness is amplified by their lack of mainstream following.

The company went public in 2005 and has withstood its share of fashion cycles. As founder Tom Campion describes below, Zumiez’s long and stable history gives it the confidence to work through poor cycles without abandoning its principles:

We’re mixing up products, the vendors we carry, and the classifications. Some things are pretty core, like denim, t-shirts, screenables and stuff like that. We’re a branded store. We’re America’s branded independent retailer is what we say. That makes it somewhat easier. Price isn’t necessarily the answer to that, however some things, in the last couple years, are more incentively priced and some things with this economy you just have to be patient and let the market come back. What started in the second-half of ’08 was the toughest I’ve ever seen it and I’ve been in retail since 1965. Sometimes it’s just a matter of having patience and explaining that to the kid that’s working for you rather than sitting there pounding on him or her because their store is comping down.

Zumiez earned $1.47 last year and has $2.75 per share in cash and no debt.  Although estimates for this year have not been adjusted yet, a draconian cut would leave estimates in the range of $.80 to $1.00 versus $1.54 where they began.

You’d have to go back to late 2008 and 2009 to find the stock trading in the mid-teens, a time when earnings power was less than it is now. Based on its healthy balance sheet and history of pulling itself out of something as treacherous as an infamous Upside-down 360 Loop, value investors should take a closer look.