Retail: Chairman of the Boarders

Its tough being hip among the skateboard crowd, especially when youre a 35-year-old who hangs out in malls.

Zumiez Inc. is the Lynnwood-based chain that sells apparel, equipment and accessories for snowboarders, surfers, skateboarders and BMX/motocross riders through 502 stores across North America and Europemore than double the number of locations the company had as recently as 2006.

Zumiez declined to talk to Seattle Business magazine for this story, stating that its corporate policy is to speak only to publications that target its teenage and young adult consumers. And those consumers in the 12-to-24 age bracket can be a demanding audience. One wrote snidely on a message board that the retail chain promotes a poser-skater-whatever-hipster style. Others attack it for taking business from local skate shops whose employees are said to be more knowledgeable than Zumiezs staff.

Yet by allying itself with cool rock bands and pro skateboarders, by exploiting skillful merchandising, and by building a strong presence on Facebook and Twitter, Zumiez has successfully attracted wave after wave of young skateboard enthusiasts.

Wall Street is pleased with the firms performance. Their [profit] margins are staying good while they are growing their store base, says Andrew Burns, an analyst at D.A. Davidson, a financial services firm in Portland, Oregon. Burns says Zumiez has mastered the art of stocking just the right mix of products. They have the right brands but they also have the right mix of apparel, footwear, accessories and snowboard-skateboard equipment.

The company, which was founded in 1978 and has been publicly held since 2005, hasnt been without its challenges. Zumiez was hammered in 2010 when the recession cut profits nearly in half from the year before. And its stock price, which soared last summer, has suffered some weakness in the past year because of uneven monthly same-store sales and weaker fourth-quarter earnings. A share price that peaked in June 2012 at more than $40 eroded to a low of $18 by December before beginning a gradual recovery this spring. As this story went to press in April, the stock price hovered near $27.

Still, Zumiez has avoided the troubles of competitors like Pacific Sunwear, which had to close 200 stores nationwide after expanding too rapidly and suffering losses during the past three years. Compared to Pac Sun, Zumiez is on a tear.

In the fiscal year that ended February 2, Zumiez reported record net sales of $669.4 million, up 20.4 percent from $555.9 million in 2012 and up more than 60 percent from 2010. Comparable annual store sales grew by 5 percent, while net income was up 12.9 percent to $42.2 million.

Fourth-quarter results in the period ending February 2 showed some warning signs, as same store sales fell 8.9 percent. Performance was hit by a federal payroll tax increase, bad weather, higher gas prices and delayed federal tax returns that cut into discretionary consumer spending. But in the five weeks ending March 31, the company showed renewed strength as sales climbed 19.7 percent from the year before. While comparable store sales have remained relatively flat during the past decade, the company is counting on growth from new stores, including the 60 it plans to add this year. The company is also looking to stronger online sales and higher sales overseas.

Overseas expansion is a critical ingredient of the companys growth strategy. In 2012, Zumiez used some of its healthy cash balance to buy European action sports retailer Blue Tomato for 59.9 million euros (about $78 million). Blue Tomato operates five stores in Austria and its bluetomato.com ecommerce site sells throughout Europe. In its 2012 fiscal year ending April 30, 2012, Blue Tomato reported a net sales increase of 27 percent to 29.4 million euros (about $38 million,) with roughly 75 percent generated through ecommerce.

Even so, the key to Zumiezs success continues to be the ability of its brick-and-mortar stores to continue attracting young consumers with what Zumiez CEO Rick Brooks has described as.a diverse branded merchandising strategy, differentiated shopping experience and unique culture.

Ryan Youngren, who looked at Zumiez as part of a Seattle University graduate accounting team project, says that for all the fears about the challenges faced by brick-and-mortar retail operations, his team was surprised to find that Zumiez stores remain popular, generating some 80 percent of the companys sales. Zumiez is blowing its mall-based competitors out of the water, says Youngren. He points out that the stores are designed to gives teens a place to escape by offering a setting that makes them feel at home, complete with couches, video game machines and posters in a design scheme called organized chaos. He credits the store with building a strong presence on social media and staying engaged with customers. Among the teams recommendations to Zumiez CFO Chris Work, who visited the Seattle University campus recently to listen to the presentation, were a more aggressive roll-out of stores and an expansion of Zumiezs line of store-brand clothing. The evaluation team showed up at the presentation wearing Zumiez-brand hoodies.

Analysts seem to support that assessment. With apparel retail sales in general expected to grow a relatively weak 3 to 4 percent this year, Burns of D.A. Davidson sees opportunities for Zumiez to add more apparel merchandise to augment its sports equipment sales, leaving it poised to catch each new wave of youngsters for generations to come.