Executive Summary / Key Takeaways

• Zumiez is executing a strategic pivot focused on profitability and operational efficiency, building on recent positive comparable sales momentum, particularly in North America.
• The company achieved its fourth consecutive quarter of positive comparable sales growth in Q1 2025 (up 5.5%), driven by increased dollars per transaction and strength in apparel and footwear categories.
• Gross margins are improving due to leverage on higher sales and operational efficiencies, while SG&A is being managed despite one-time legal costs, contributing to a reduced operating loss in Q1 2025 compared to the prior year.
• Zumiez is actively diversifying its sourcing base to mitigate the impact of potential tariffs, aiming to significantly reduce reliance on China by the end of 2025, while also considering selective price adjustments.
• A strong balance sheet with over $101 million in cash and no debt provides financial flexibility, supporting strategic investments and ongoing share repurchase programs, including a new $15 million authorization.

Setting the Scene: A Specialty Retailer's Evolution

Zumiez Inc. has carved out a distinct niche in the retail landscape over nearly five decades, positioning itself as a leading specialty retailer catering to young men and women who express their individuality through action sports, streetwear, and unique lifestyle cultures. Operating under the banners of Zumiez, Blue Tomato, and Fast Times across North America, Europe, and Australia, the company differentiates itself through a curated product assortment that blends sought-after branded merchandise with a rapidly growing private label portfolio. This strategy is underpinned by a commitment to injecting assortments with newness, evidenced by the launch of over 150 new brands in 2023 and over 120 in 2024, and fostering deep customer engagement through best-in-class service both in its physical stores and integrated ecommerce platforms.

The company's operational backbone relies on a connected network of physical stores and robust ecommerce capabilities, viewed as working in tandem to serve the customer. This omnichannel approach is supported by investments in technology aimed at enhancing customer relationships through personalized engagement and efficient transaction processing. While specific, quantifiable details on the performance metrics of these underlying technologies (beyond their strategic intent) are not extensively disclosed, the company's focus on data analytics, website reliability, network infrastructure, and security systems is integral to its operational efficiency and customer experience. Furthermore, investments in supply chain logistics and distribution centers (including a single primary U.S. center and international facilities) are critical for inventory management and timely product delivery, contributing to operational effectiveness. The company also notes the incorporation of technologies and AI tools into operations, acknowledging the potential for both efficiencies and risks if not managed thoughtfully.

Zumiez operates within a highly competitive retail industry, vying for customers, vendors, and talent against a diverse set of players. Direct competitors like Urban Outfitters (URBN), Tilly's (TLYS), and Foot Locker (FL) offer varying degrees of overlap in target demographic and product categories. Urban Outfitters, with its broader urban fashion focus and diversified brand portfolio, presents competition across lifestyle apparel, while Tilly's competes more directly in the action-sports and casual wear space. Foot Locker, primarily focused on athletic footwear, overlaps in the footwear and accessories categories. Larger competitors often possess greater financial and marketing resources, including more advanced ecommerce capabilities and potentially more aggressive shipping options. Zumiez distinguishes itself through its deep roots in action-sports culture, its expertise in hardgoods (like skateboards), and its strategy of delivering value through curated assortments and bundling rather than relying heavily on broad price cutting, aiming to maintain a full-price, full-margin approach where possible. This niche focus and differentiated product mix are key to its competitive positioning, although it faces challenges from the scale and potentially lower operating costs of larger rivals and the agile supply chains of fast-fashion players.

Historically, Zumiez experienced a period of strong growth, including a peak in sales and profitability around 2020, partly fueled by an acceleration in the skate hardgoods cycle. However, the subsequent downturn in this category and a challenging macroeconomic environment, particularly in Europe, led to a period of sales declines in fiscal 2022 and 2023. In response, the company initiated a strategic pivot, shifting focus towards enhancing profitability and operational efficiency across its global footprint. This involved optimizing its store base through targeted closures, streamlining labor costs, and improving supply chain and logistics expenses, alongside a renewed emphasis on its core strengths in product curation and customer engagement.

Recent Performance: Building Momentum Amidst Headwinds

Zumiez's recent financial performance reflects the initial positive impacts of its strategic adjustments, particularly in North America, while highlighting ongoing challenges in international markets and the broader macroeconomic environment. The first quarter of fiscal 2025 saw net sales increase by 3.9% to $184.3 million, primarily driven by a solid 5.5% increase in comparable sales. This marks the fourth consecutive quarter of positive comparable sales growth, indicating a stabilizing trend and a positive response from customers to the company's merchandise assortments and shopping experience.

The comparable sales growth in Q1 2025 was fueled by an increase in dollars per transaction, resulting from higher average unit retail prices and more units purchased per transaction, partially offset by a decrease in transaction volume. This suggests customers are buying higher-value items or more items per visit, which is favorable for revenue per customer. By category, the growth was primarily driven by increases in women's clothing, men's clothing, footwear, and accessories, although the hardgoods category continued to see a decrease. This performance builds on the momentum seen in fiscal 2024, which management characterized as a "stabilizing year" with positive comparable sales growth each quarter in North America and a return to positive operating margins for the full year ($2.0 million operating income in FY24 vs. $64.8 million operating loss in FY23, including a significant goodwill impairment charge).

Gross profit in Q1 2025 rose by 6.6% to $55.3 million, outpacing sales growth. This resulted in a 70 basis point expansion in gross margin to 30.0% of net sales. The primary driver for this margin improvement was leverage gained from higher sales against relatively fixed store occupancy costs. This demonstrates operational efficiency in managing store-level expenses as sales recover.

Selling, General and Administrative (SGA) expenses increased by $3.1 million in Q1 2025, reaching $75.2 million. As a percentage of net sales, SGA increased by 20 basis points to 40.8%. This increase was significantly impacted by a one-time $2.9 million legal settlement related to a wage and hour lawsuit in California, which accounted for a 160 basis point increase in the SGA rate. Excluding this one-time item, SGA would have leveraged significantly, benefiting from efficiencies in non-wage store operating costs, corporate costs, and other areas like wages and training, reflecting the company's cost management initiatives, including the closure of 31 underperforming stores in fiscal 2024.

The operating loss for Q1 2025 was $19.9 million, or 10.8% of net sales, an improvement compared to the $20.2 million operating loss (11.3% of net sales) in Q1 2024. The net loss for the quarter was $14.3 million ($0.79 per diluted share), including the $0.13 per share impact of the legal settlement. This compares favorably to the $16.8 million net loss ($0.86 per diluted share) in the prior year quarter, indicating a step towards improved profitability despite the one-time charge. The effective income tax rate for Q1 2025 was a 9.1% benefit, lower than the 14.4% benefit in Q1 2024, primarily due to the allocation of losses across different tax jurisdictions.

Strategic Execution and Operational Focus

Zumiez's strategic priorities for 2025 are clearly defined: accelerate top-line expansion, maintain disciplined profitability, and leverage its strong financial position. The company's approach to top-line growth centers on its core strengths: product newness, private label expansion, and customer engagement. The consistent introduction of new brands is a deliberate strategy to keep assortments fresh and unique, resonating with a customer base seeking differentiation. The significant growth in private label, reaching 30% of sales in Q1 2025 from 11% five years ago, highlights its success in meeting both trend and value-conscious consumer needs, providing a higher-margin avenue for growth. Investments in training and technology aim to enhance the customer experience, both in-store and online, fostering loyalty in a competitive environment.

Profitability is being addressed through a multi-pronged approach. In North America, the focus is on driving full-price selling and leveraging operational efficiencies. The closure of 31 underperforming locations in FY24 and plans for approximately 20 more in FY25 are intended to optimize the store footprint and eliminate unprofitable units, contributing to a more streamlined operating model. Comprehensive staffing model optimizations and structural cost reductions in shipping and logistics are further efforts to manage expenses and improve margins.

The European market, operating under the Blue Tomato brand, remains a challenging environment. The strategy here has pivoted from aggressive store expansion to enhancing the productivity of the existing 87 stores and pan-European web business. The focus is on driving the top line through unique product selection while emphasizing full-price selling and cost control. While Q1 2025 saw a decline in European sales and comparable sales (down 2.3% comp), management notes favorable margins even in a tougher May sales period and believes achieving profitability in Europe is feasible with this focused approach, drawing parallels to the successful development of the Canadian and Australian markets. The significant concentration of European sales in the fourth quarter (over 40%) means the performance in the latter half of the year is critical for this region.

A key operational challenge and strategic focus is managing the impact of potential tariffs, particularly on goods sourced from China. As of the end of FY24, approximately 50% of North America receipts came from China. The company has been proactive in diversifying its sourcing base and expects to significantly reduce this exposure, aiming for China to represent 30% or potentially lower of product sourcing by the end of 2025, with a long-term goal of no single country representing more than 20% by 2026. Mitigation efforts also include working with brand partners and manufacturers on production processes and considering selective price adjustments, bundling, and package deals to offset increased costs.

Financial Health and Capital Allocation

Zumiez maintains a strong financial position, providing flexibility in an uncertain environment. As of May 3, 2025, the company held $101 million in cash and current marketable securities, with no outstanding debt. This represents a decrease from $146.6 million a year prior, primarily due to significant share repurchases ($50.4 million over the trailing 12 months) and capital expenditures ($14.7 million), partially offset by cash generated from operating activities ($17.2 million).

The company's liquidity is primarily driven by cash flows from operations, which benefit from quick cash collection from customers relative to vendor payment terms. Capital expenditures are focused on maintaining and optimizing the store base and infrastructure, with planned spending of $14 million to $16 million in fiscal 2025, primarily for new store openings (9 planned) and remodels/relocations.

Returning value to shareholders through share repurchases has been a notable use of cash. In Q1 2025, Zumiez completed a $25 million repurchase authorization, buying back 1.8 million shares at an average price of $13.82. Demonstrating continued confidence and commitment to shareholder returns, the Board approved a new $15 million repurchase authorization on June 4, 2025. While share buybacks can negatively impact earnings per share in periods of loss due to a reduced share count denominator, management expects this program to be accretive to EPS in the future as the company returns to profitability.

Outlook and Future Trajectory

Zumiez's outlook for the remainder of fiscal 2025 reflects cautious optimism, balancing recent positive momentum with acknowledged macroeconomic uncertainties, particularly regarding tariffs and consumer spending.

For the second quarter of fiscal 2025 (ending August 3, 2025), the company anticipates total sales between $207 million and $214 million, representing a change of negative 2% to positive 2% year-over-year. Comparable sales growth is expected to be between negative 1% and positive 3%. Management projects product margin to increase from Q2 2024 levels. The consolidated operating loss is guided between $0.7 million and $4 million, compared to a loss of $0.4 million in the prior year. Loss per share is anticipated between $0.09 and $0.24, compared to a loss of $0.04 in the prior year. This expected pressure on total earnings is attributed to lower interest income on reduced cash balances, a slightly higher anticipated loss in Europe (exacerbated by unfavorable foreign currency movements), an unfavorable effective tax rate due to the geographic mix of losses, and the impact of the share buyback on EPS in the quarter.

Despite the near-term pressures highlighted in the Q2 guidance, management believes that achieving their previously mentioned annual expectations for fiscal 2025 remains feasible under current circumstances and tariff levels. Key expectations for the full year include:

• Year-over-year total sales growth, despite the estimated $14.7 million negative impact from store closures in FY24 and planned closures in FY25.
• Modest year-over-year growth in product margin, building on the 70 basis points improvement in FY24.
• Additional gross margin leverage from other expenses like occupancy, distribution, and logistics.
• Holding SG&A costs (excluding one-time legal charges) relatively flat as a percentage of sales compared to FY24, achieved through expense management and efficiencies while continuing strategic investments.
• A year-over-year increase in operating margins and net profit, signifying a return to overall profitability for the fiscal year.
• Capital expenditures between $14 million and $16 million.
• Depreciation and amortization (excluding non-cash lease expense) of approximately $22 million.
• A full-year effective tax rate roughly between 50% and 60%.
• A projected diluted share count of approximately 17.5 million shares for the full year (excluding future repurchases beyond the completed March authorization).

This outlook is predicated on the continued execution of strategic initiatives, the resilience of the North American business, and successful mitigation of tariff impacts.

Risks and Challenges

While Zumiez has demonstrated positive momentum and strategic agility, several risks and challenges could impact its trajectory and the investment thesis. The macroeconomic environment remains uncertain, with potential impacts from inflation, unemployment, and shifts in consumer confidence and discretionary spending. Rising geopolitical tensions and changes in global trade policy, particularly the potential for increased tariffs on imported goods, pose a significant risk to merchandise costs, potentially pressuring margins or requiring price increases that could dampen demand.

The highly competitive retail landscape, with larger players possessing greater resources and advanced capabilities, necessitates continuous innovation and differentiation to maintain market share. Failure to accurately anticipate and respond to rapidly changing fashion trends and customer preferences could lead to excess inventory and required markdowns, negatively impacting profitability.

Operational risks include potential disruptions to the supply chain, which relies heavily on foreign manufacturers and can be affected by natural disasters, public health crises, or political instability. Rising labor costs, including minimum wage increases and healthcare expenses, also present ongoing pressure on operating expenses. The company's reliance on information systems and technology for operations, including ecommerce and data security, exposes it to risks of failure, interruption, or cybersecurity breaches, which could disrupt business and harm its reputation.

The performance of the international segments, particularly Europe, remains a challenge. Despite strategic pivots, the difficult market environment and unfavorable weather conditions can impact sales and profitability, potentially offsetting gains in other regions. The hardgoods category, while showing potential signs of bottoming in some markets, continues to be a drag on overall comparable sales.

Finally, while the strong balance sheet provides a buffer, a sustained period of weak operating performance could deplete cash reserves and necessitate external financing on potentially unfavorable terms. The effectiveness of strategic initiatives, such as sourcing diversification and cost management, in fully offsetting external pressures like tariffs and inflation is not guaranteed.

Conclusion

Zumiez is navigating a complex retail environment by leaning into its core strengths and executing a strategic pivot aimed at restoring profitability. The recent trend of positive comparable sales growth, particularly the sustained momentum in North America, signals that the company's focus on product newness, private label expansion, and customer engagement is resonating with its target demographic. Improvements in gross margin, driven by operational efficiencies and leverage on increasing sales, underscore the effectiveness of cost management initiatives and the strategic optimization of the store footprint through targeted closures.

While the European market presents ongoing challenges and the specter of tariffs introduces significant uncertainty regarding future merchandise costs, Zumiez's proactive approach to sourcing diversification and its strong balance sheet provide a degree of resilience. The company's commitment to returning value through share repurchases, alongside planned investments in its operational infrastructure, reflects confidence in its long-term potential. The path back to historical profitability levels is not without hurdles, including intense competition and the inherent volatility of fashion trends and macroeconomic conditions. However, the recent performance trajectory, coupled with a clear strategic roadmap focused on disciplined growth and efficiency, positions Zumiez to potentially build on its current momentum and enhance shareholder value as it works towards its goal of sustained profitability.