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.
Around the Roadrunner Portfolios
Hill-Rom Holdings (NYSE: HRC) continues to improve its financial health with weighty acquisitions. The purveyor of hospital beds and equipment was added to our Small Cap Momentum Portfolio on 09.03.13 and has already delivered an enviable 58% gain. Yet the company’s recent $2 billion acquisition of Welch Allyn should help move the stock higher.
Hill-Rom, known primarily for its hospital beds, furniture and stretchers, has a history of peppering long term growth with acquisitions. Since 2010 the company has made 6 acquisitions, including Welch-Allyn. In 2014 it purchased Trumpf Medical which helped it expand into operating room and surgical equipment.
Yet in the day of hospital consolidation, customers are getting bigger and more frugal. Big ticket durable medical equipment like beds are being used for longer periods of time and being replaced less frequently. Even the Trumpf acquisition, while adding a new product line, did little to move Hill-Rom away from the cyclical buying pattern of its customers.
Welch-Allyn, whose product portfolio spans vital sign readers, otoscopes, stethoscopes and blood pressure cuffs, enjoys more recurring sales from its customers. These diagnostic tools need to be replaced more frequently and require less budgetary approval than a $4,000 ergonomic hospital stretcher.
Welch-Allyn is Hill-Rom’s largest acquisition by far: $2 billion versus the $250 million spent on Trumpf in 2014 and the second largest $400 million for Aspen in 2012. The deal will be partly funded with debt and partly via newly issued stock. Welch-Allyn is expected to generate $2.6 billion in sales, more than doubling the $1.9 billion in sales expected for a standalone Hill-Rom in 2015.
This transformative acquisition will catapult Hill-Rom into a premier supplier for hospital chains and physicians’ practices. Large mergers often carry some integration risk but with two healthy companies joining forces, Hill-Rom will likely come out even more fit than before.
Investors worried about a slight decline in the order backlog at Apogee Enterprise (Nasdaq: APOG) need not fret. A recent story in the Wall Street Journal highlights the booming demand for the skyscraper glass that Apogee manufactures.
Commercial construction is growing at its fastest pace in recent history. Unfortunately, capacity for “floating glass”, the glass on the exterior of office and apartment buildings, has shrunk considerably. During the economic downturn 11 out of 47 North American float-glass manufacturing plants were shut down between 2007 and 2014. Due to the complicated fabrication process, these plants are not easily re-started. An idle plant would take months to get ready for production.
Apogee, an expert in architectural glass production, was wise enough to be one of the few producers adding capacity. The company recently opened a startup facility in Utah which helped it lower order to shipment times from 20 weeks to 8 weeks.
Investors who had become comfortable with ever increasing backlogs, sent Apogee’s stock down 12% in late June when it reported first quarter numbers. The company’s backlog declined slightly sequentially, something investors had not expected. However, based on the additional capacity, one would expect backlog to decline as orders are shipped out more quickly.
CEO Joe Puishys attempted to ameliorate any concern by assuring investors that the company had a keen view of longer term contracts that had yet to be signed. Although those contracts are not yet inked into backlog they offer solid longer term growth. Clearly, builders are hungry for more of the glass Apogee is making.
“Nowadays, the glass guys are dictating the timetables of a project to us, instead of the other way around,” said Ralph Esposito, who oversees commercial construction by the New York office of Lend Lease Corp., one of the country’s largest building contractors, with nearly 30 high-rise towers under way.
Based on the comment above, we think Apogee’s numbers will continue to grow nicely. The company’s second quarter, ending August, will be reported on September 16th. Management has guided to a slight sequential decline in revenue due to the timing of some large projects.
We still love this stock, which is up 78% since our addition to the Roadrunner Momentum Portfolio. Despite this huge run, the stock trades for a PE of 19 based on 2017 earnings, despite expected growth of 32%.
Gentex Corp (Nasdaq: GNTX) isn’t looking in the rear view mirror. The manufacturer of auto-dimming automotive mirrors is adding new features to its popular products. The company has built a solid business selling rear view mirrors that manage the glare of high beams, display speed and direction and announce lane changes in the exterior side mirrors.
However the company is not sitting still. It is adding new drivers’ assist features to its lineup. Lane departure warning, forward collision warning and pedestrian detection are being incorporated to Gentex’s products. A camera on a chip combined with algorithmic decision making software is integrated into its mirrors to offer this amazing functionality. In the era of the “driver-less” car, Gentex is keeping up with the competition.
Gentex has been incorporating Mobileye (Nasdaq: MBLY) driver-assist technology into these new mirrors. In the second quarter reported in late July, Gentex saw some measures of its profitability drop as it accounted for the additional cost of paying Mobileye for these components.
However, management believes profitability will improve as the company works to lower costs in other areas. Investors should note that Gentex sports some of the highest margins in its industry. Its operating profit margin, a measure of profits after deducting operating expenses, was almost 30%, more than twice the same margin at other automotive suppliers!
While Gentex’s earnings might be cramped for a bit as they work through these higher cost components, adding revolutionary new products is the best move for a growth company. Management has been able to consistently grow earnings and cash flow and will likely resume to higher profit growth in the near future.
Although the stock trades at a PE slightly higher than its expected growth rate, it offers a 2% dividend yield as investors wait out this transition period. Gentex is up 77% since being added to our Roadrunner Value Portfolio in January 2013 and is trading below our $25 limit price.