Zumiez Inc., including its wholly-owned subsidiaries, 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. Company's target audiences are youth, teenagers and young adults who are into skateboarding and express themselves through fashion. Zumiez revenues come from USA, Canada, Europe and Australia. USA accounts for 82% of revenues, while Europe and Australia are relatively new to Zumiez. North America is not expected to generate any revenue growth in the future, so management's plan is to expand through Europe and Australia by opening 21 new locations in 2021. Overall, popularity of Zumiez growth across the world which can be seen from its financial statememts. I would like to about 3 main aspects why Zumiez is a great stock:
1) Strong financial position
2) Good growth prodpects through Europe and Australia
3) It is undervalued
Now, I would like to talk about ZUMZ financial position. To begin with, I would like to mention that Zumiez enjoys a pretty strong financial position which is seen from its balance sheet. We can observe that Zumiez carries big amounts of Cash and Marketable securities which is a strongly positive sign. If we add Cash to Marketable Securities (MS are also highly liquid and recorded on market basis), we get $14 of cash and securities per share of ZUMZ common stock (current market price of ZUMZ is $43) which translates into 32% of ZUMZ share price!
Additionally, I would like to point out that current liabilities are more than offset by current assets which indicates company's financial strenght. On the top of that, Zumiez has no long-term debt at all (except from lease liabilities) which means that they do not pay any interest and their profit is not deteriorated. Zero debt also means that the compoany is all Equity which makes it extra safe in cases of distress (2020 is a proof, Zumiez managed not only to survive, but it actually showed some record breaking income figures).
For the last 5 years Zumiez has demonstarted a steady revenue growth from both an increase in same store sales and new stores. Not only Zumiez was focusing on expanding its operations but also it improved its Gross Profit Margin, Operating Margin, Profit Margin and EPS. Company does not pay any dividends (so its plowback ratio is 100%), but it activelly repurchases its common stock.
Zumiez's ROE is around 12% which is higher than industry average (since company pays no dividends, ROE = sustainable growth rate). ROA is 7.5% which is also higher than average.
Looking at cash flow statements we see that company enjoys more than adequate cash flows from operations while its CapEx is getting relatively small (CapEx has been decreasig for the last 5 years while CFO has been invreasing) which is a sign of improvement. It also translates into strong and growing Free Cash Flow numbers. Overall, we can observe that FCF, Operating Income and Net Income are growing at approximatelly the same rate which is a sign of consistency and strenght.
Since the company has no debt and its beta is 1.83, its WACC = ~10%.
Taking analysts' estimates into a consideration and deriving some information from the earnings 2020 Q4 call, I concluded that Free Cash Flow for 2021 is estimated to be ~$131 250 000. But I have to subtract interest income of $3 500 000 in order to calculate business value on its own (ignoring income form securities held on balance). Thus, we get $127 500 000 of FCF estimated for 2021 (FCF here is the same as FCF to Equity as company has 0 debt). First, we grow this number at a conservative rate of 5% per year (5% is conservative because sustainable growth rate = ROE which is 12%) for 5 years and then grow is at a rate of 2.5% as a perpetuity. After that, we discount obtainded future Cash Flows by WACC and divide it by the number of shares. This manipulation gives us an intrinsic value of $98 dollars per share for the business on its own! Remember, current market price of a share is $43. We also have to account for cash and securities held on balance (we subtracted interest from FCF previuosly, so we can add cash and securities back now). DCF demonstartes that business is worth $98 per share + $14 per share of cash and securities held, so we arrive at $112 per share intrinsic value for ZUMZ.
What if DCF is a wrong model? Lets look at the multiples as well. Historically, average P/E for ZUMZ was 16.5 for the last 5-6 years, and the industry average (excluding outliers) is 22. Now, current P/E of ZUMZ is 14 (is 10 if we subtract $14 of cash and securities from $43) which indicates that the stock is tradiung below its own average, below industry and below market in general. Furthermore, forward P/E of ZUMZ is estimated to be 13 (which is even lower than today). Because estimated EPS for 2021 is $3.3, we can arrive at another valuation method. Since ZUMZ average P/E for the last 5 years is 16.5 and the industry average is 22, we will use these 2 numbers and projected EPS to calculate IV: 3.3*((16.5+22)/2) = $63.5 (current market price per share is $43).
Moreover, as I mentioned, forward P/E of the company is 12 while sustainable growth rate (ROE) is 12%. This gives us PEG of 1, a great opportunity to buy.
Taking facts mentioned above into a consideration, I conclude that ZUMZ is a strong buy.