FinanceLooker

Excrept from filing document 2024-02-03

The information required by Part III of this report is incorporated by reference from the Registrant s definitive proxy statement relating to the Annual Meeting of Shareholders scheduled to be held June 5 2024 which definitive proxy statement will be filed not later than 120 days after the end of the fiscal year to which this report relates
This Form 10 K contains forward looking statements These statements relate to our expectations for future events and future financial performance Generally the words anticipates expects intends may should plans believes predicts potential continue and similar expressions identify forward looking statements Forward looking statements involve risks and uncertainties and future events and circumstances could differ significantly from those anticipated in the forward looking statements These statements are only predictions Actual events or results may differ materially Factors which could affect our financial results are described in Item 1A below and in Item 7 of Part II of this Form 10 K Readers are cautioned not to place undue reliance on these forward looking statements which speak only as of the date hereof Although we believe that the expectations reflected in the forward looking statements are reasonable we cannot guarantee future results levels of activity performance or achievements Moreover neither we nor any other person assume responsibility for the accuracy and completeness of the forward looking statements We undertake no duty to update any of the forward looking statements after the date of this report to conform such statements to actual results or to changes in our expectations
We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52 or 53 week period ending on the Saturday closest to January 31 Each fiscal year consists of four 13 week quarters with an extra week added to the fourth quarter every five or six years Fiscal 2023 was the 53 week period ending February 3 2024 Fiscal 2022 was the 52 week period ending January 28 2023 Fiscal 2021 was the 52 week period ending January 29 2022 Fiscal 2020 was the 52 week period ending January 30 2021 Fiscal 2019 was the 52 week period ending February 1 2020 Fiscal 2018 was the 52 week period ending February 2 2019
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 Zumiez Inc was formed in August 1978 and is a Washington State corporation
We acquired Blue Tomato in fiscal 2012 Blue Tomato is one of the leading European specialty retailers of apparel footwear accessories and hardgoods We acquired Fast Times Skateboarding Fast Times in fiscal 2016 Fast Times is an Australian leading specialty retailer of hardgoods accessories apparel and footwear
We employ a sales strategy that integrates our stores with our ecommerce platform to serve our customers There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem by our customers Our selling platforms bring the look and feel of an independent specialty shop through a distinctive store environment and high energy sales personnel We seek to staff our stores with store associates who are knowledgeable users of our products which we believe provides our customers with enhanced customer service and supplements our ability to identify and react quickly to emerging trends and fashions We design our selling platforms to appeal to teenagers and young adults and to serve as a destination for our customers We believe that our distinctive selling platforms concepts and compelling economics will provide continued opportunities for growth in both new and existing markets
We believe that our customers desire authentic merchandise and fashion that is rooted in the fashion music art and culture of action sports streetwear and other unique lifestyles to express their individuality We strive to keep our merchandising mix fresh by continuously introducing new brands styles and categories of product Our focus on a diverse collection of brands allows us to quickly adjust to changing fashion trends We believe that our strategic mix of apparel footwear accessories and hardgoods including skateboards snowboards bindings components and other equipment allows us to strengthen the potential of the brands we sell and helps to affirm our credibility with our customers In addition we supplement our merchandise mix with a select offering of private label apparel and products as a value proposition that we believe complements our overall merchandise selection
Attractive Lifestyle Retailing Concept We target a large population of young men and women many of whom we believe are attracted to action sports streetwear and other unique lifestyles and desire to express their personal independence and style through the apparel footwear and accessories they wear and the equipment they use We believe we have developed a brand image that our customers view as consistent with their attitudes fashion tastes and identity and differentiates us in our market
Differentiated Merchandising Strategy We have created a highly differentiated global retailing concept by offering an extensive selection of current and relevant lifestyle brands encompassing apparel footwear accessories and hardgoods The breadth of merchandise offered through our sales channels exceeds that offered by many of our competitors and includes some brands and products that are available only from us Many of our customers desire to update their wardrobes and equipment as fashion trends evolve or the season dictates providing us the opportunity to shift our merchandise selection seasonally We believe that our ability to quickly recognize changing brand and style preferences and transition our merchandise offerings allows us to continually provide a compelling offering to our customers
Deep rooted Culture We believe our culture and brand image enable us to successfully attract and retain high quality employees who are passionate and knowledgeable about the products we sell We place great emphasis on customer service and satisfaction and we have made this a defining feature of our corporate culture To preserve our culture we strive to promote from within and we provide our employees with the knowledge and tools to succeed through our comprehensive training programs and the empowerment to manage their stores to meet localized customer demand
Distinctive Customer Experience We strive to provide a convenient shopping environment that is appealing and clearly communicates our distinct brand image We seek to integrate our store and digital shopping experiences to serve our customers whenever wherever and however they choose to engage with us We seek to attract knowledgeable sale associates who identify with our brand and are able to offer superior customer service advice and product expertise We believe that our distinctive shopping experience enhances our image as a leading source for apparel and equipment for action sports streetwear and other unique lifestyles
Disciplined Operating Philosophy We have an experienced senior management team Our management team has built a strong operating foundation based on sound retail principles that underlie our unique culture Our philosophy emphasizes an integrated combination of results measurement training and incentive programs all designed to drive sales productivity to the individual store associate level Our comprehensive training programs are designed to provide our employees with the knowledge and tools to develop leadership communication sales and operational expertise We believe that our merchandising team immersion in the lifestyles we represent supplemented with feedback from our customers store associates and omni channel leadership allows us to consistently identify and react to emerging fashion trends We believe that this combined with our inventory planning and allocation processes and systems helps us better manage markdown and fashion risk
High Impact Integrated Marketing Approach We seek to build relationships with our customers through a multi faceted marketing approach that is designed to integrate our brand images with the lifestyles we represent Our marketing efforts focus on reaching our customers in their environment and feature extensive grassroots digital and physical marketing events as well as the Zumiez STASH loyalty program Our marketing efforts incorporate local sporting and music event promotions interactive contest sponsorships that actively involve our customers with our brands and products and various social network channels Events and activities such as these provide opportunities for our customers to develop a strong identity with our culture and brands Our STASH loyalty program allows us to learn more about our customer and serve their needs better We believe that our ability to interact with our customer and our immersion in the lifestyles we represent allows us to build credibility with our customers and gather valuable feedback on evolving customer preferences
Continuing to Generate Sales Growth through Existing Channels We seek to maximize our comparable sales through our integrated store and online shopping experiences and offering our customers a broad and relevant selection of brands and products including a unique customer experience through each interaction with our brand We believe in driving to the optimum store count in each physical geography that we operate in and optimizing comparable sales within these markets between physical and digital to drive total trade area sales growth
Enhancing our Brand Awareness through Continued Marketing and Promotion We believe that a key component of our success is the brand exposure that we receive from our marketing events promotions and activities that embody the unique lifestyles of our customers These are designed to assist us in increasing brand awareness in our existing markets and expanding into new markets by strengthening our connection with our target customer base We also use our STASH loyalty program to increase brand engagement and enhance brand creditability We believe that our marketing efforts have also been successful in generating and promoting interest in our product offerings In addition we use our ecommerce presence to further increase our brand awareness We focus on utilizing an integrated marketing approach by promoting events and activities in our existing and new markets We also benefit from branded vendors marketing
Opening or Acquiring New Store Locations We believe our brand has appeal that provides select store expansion opportunities particularly within our international markets During the last three fiscal years we have opened 74 new stores consisting of 19 stores in fiscal 2023 32 stores in fiscal 2022 and 23 stores in fiscal 2021 We have successfully opened stores in diverse markets throughout the U S and internationally which we believe demonstrates the portability and growth potential of our concepts To take advantage of what we believe to be a compelling economic store model we plan to open approximately 10 new stores in fiscal 2024 including stores in our existing markets and in new markets internationally The number of anticipated store openings may increase or decrease due to market conditions and other factors Our goal in opening stores is to not have one more store than needed to serve all our customers within a trade area
Our goal is to be viewed by our customers as the definitive source of merchandise for their unique lifestyles across all channels in which we operate We believe that the breadth of merchandise that we offer our customers which includes apparel footwear accessories and hardgoods exceeds that offered by many other specialty stores at a single location and makes us a single stop purchase destination for our target customers
We seek to identify fashion trends as they develop and to respond in a timely manner with a relevant product assortment We strive to keep our merchandising mix fresh by continuously introducing new brands or styles in response to the evolving desires of our customers Our merchandise mix may vary by region country and season reflecting the preferences and seasons in each market
We believe that offering an extensive selection of current and relevant brands in sports fashion music and art is integral to our overall success No single third party brand that we carry accounted for more than 5 9 6 3 and 7 9 of our net sales in fiscal 2023 2022 and 2021 respectively We believe that our strategic mix of apparel footwear accessories and hardgoods allows us to strengthen the potential of the brands we sell and affirms our credibility with our customers
We believe that our ability to maintain an image consistent with the unique lifestyles of our customers is important to our key vendors Given our scale and market position we believe that many of our key vendors view us as an important retail partner This position helps ensure our ability to procure a relevant product assortment and quickly respond to the changing fashion interests of our customers Additionally we believe we are presented with a greater variety of products and styles by some of our vendors as well as certain specially designed items that we exclusively distribute We supplement our merchandise assortment with a select offering of private label products across many of our product categories Our private label products complement the branded products we sell and some of our private label brands allow us to cater to the more value oriented customer For fiscal 2023 2022 and 2021 our private label merchandise represented 23 0 18 4 and 13 3 of our net sales respectively
We have developed a disciplined approach to buying and a dynamic inventory planning and allocation process to support our merchandise strategy We utilize a broad vendor base that allows us to shift our merchandise purchases as required to react quickly to changing consumer demands and market conditions We manage the purchasing and allocation process by reviewing branded merchandise lines from new and existing vendors identifying emerging fashion trends and selecting branded merchandise styles in quantities colors and sizes to meet inventory levels established by management We coordinate inventory levels in connection with individual stores sales strength our promotions and seasonality We utilize a localized fulfillment strategy to fulfill the vast majority of our ecommerce orders through our stores to enhance customer experience maximize inventory productivity and reduce shipping time
Our merchandising staff remains in tune with the fashion music art and culture of action sports streetwear and other unique lifestyles by participating in lifestyles we support attending relevant events and concerts watching related programming and reading relevant publications and social network channels In order to identify evolving trends and fashion preferences our staff spends considerable time analyzing sales data gathering feedback from our stores and customers shopping in key markets and soliciting input from our vendors With a global footprint we are able to identify trends that emerge all over the world
We source our private label merchandise from primarily foreign manufacturers around the world We have cultivated our private label sources with a view towards high quality merchandise production reliability and consistency of fit We believe that our knowledge of fabric and production costs combined with a flexible sourcing base enables us to source high quality private label goods at favorable costs
Store Design and Environment We design our stores to create a distinctive and engaging shopping environment that we believe resonates with our customers Our stores feature an industrial look dense merchandise displays lifestyle focused posters and signage and popular music all of which are consistent with the look and feel of an independent specialty shop Our stores are designed to encourage our customers to shop for longer periods of time to interact with each other and our store associates and to visit our stores more frequently Our stores are constructed and finished to allow us to efficiently shift merchandise displays throughout the year as the season dictates At February 3 2024 our stores averaged approximately 2 909 square feet All references in this Annual Report on Form 10 K to square footage of our stores refers to gross square footage including retail selling storage and back office space
Expansion Opportunities and Site Selection In selecting a location for a new store we target high traffic locations with suitable demographics and favorable lease terms We generally locate our stores in areas in which other teen and young adult oriented retailers have performed well We focus on evaluating the market specific competitive environment for potential new store locations We seek to diversify our store locations regionally and by caliber of mall or shopping area For mall locations we seek locations near busy areas of the mall such as food courts movie theaters game stores and other popular teen and young adult retailers
Store Management Operations and Training We believe that our success is dependent in part on our ability to attract train retain and motivate qualified employees at all levels of our organization We have developed a corporate culture that we believe empowers the individual store managers to make store level business decisions and consistently rewards their success We are committed to improving the skills and careers of our workforce and providing advancement opportunities for employees
We believe we provide our managers with the knowledge and tools to succeed through our comprehensive training programs and the flexibility to manage their stores to meet customer demands While general guidelines for our merchandise assortments store layouts and in store visuals are provided by our home offices we give our managers substantial discretion to tailor their stores to the individual market and empower them to make store level business decisions We design group training programs for our managers to improve both operational expertise and supervisory skills
Our store associates generally have an interest in the fashion music art and culture of the lifestyle we support and are knowledgeable about our products Through our training evaluation and incentive programs we seek to enhance the productivity of our store associates These programs are designed to promote a competitive yet fun culture that is consistent with the unique lifestyles we seek to promote
We seek to reach our target customer audience through a multi faceted marketing approach that is designed to integrate our brand image with the lifestyles we represent Our marketing efforts focus on reaching our customers in their environment and feature extensive physical and digital grassroots marketing events which give our customers an opportunity to experience and participate in the lifestyles we offer Our grassroots marketing events are built around the demographics of our customer base and offer an opportunity for our customers to develop a strong identity with our brands and culture
We have a customer loyalty program the Zumiez STASH which allows members to earn points for purchases or performance of certain activities The points can be redeemed for a broad range of rewards including product and experiential rewards Our marketing efforts also incorporate local sporting and music event promotions advertising in magazines popular with our target market interactive contest sponsorships that actively involve our customers with our brands and products the Zumiez STASH catalogs and various social network channels We believe that our immersion in action sports streetwear and other unique lifestyles allows us to build credibility with our target audience and gather valuable feedback on evolving customer preferences
Timely and efficient distribution of merchandise to our stores is an important component of our overall business strategy Domestically our distribution center is located in Corona California At this facility merchandise is inspected allocated to stores and distributed to our stores and customers Each store is typically shipped merchandise five times a week providing our stores with a steady flow of new merchandise We utilize a localized fulfillment strategy in which we use our domestic store network to provide fulfillment services for the vast majority of online customer purchases
Internationally we operate distribution centers located in Delta Canada Graz Austria and Melbourne Australia to support our operations in Canada Europe and Australia respectively Each of our international entities are progressing toward full localized fulfillment and are in various states of implementation
Our management information systems provide integration of store online merchandising distribution financial and human resources functions The systems include applications related to point of sale inventory management supply chain planning sourcing merchandising and financial reporting We continue to invest in technology to align these systems with our business requirements and to support our continuing growth
The teenage and young adult retail apparel hardgoods footwear and accessories industry is highly competitive We compete with other retailers for vendors customers suitable store locations and qualified store associates management personnel online marketing content social media engagement and ecommerce traffic In the softgoods market which includes apparel footwear and accessories we currently compete with other teenage and young adult focused retailers In addition in the softgoods market we compete with independent specialty shops department stores vendors that sell their products directly to the retail market non mall retailers and ecommerce retailers In the hardgoods market which includes skateboards snowboards bindings components and other equipment we compete directly or indirectly with the following categories of companies other specialty retailers such as local snowboard and skate shops large format sporting goods stores and chains vendors who sell their products directly to the retail market and ecommerce retailers
Competition in our sector is based on among other things merchandise offerings store location price and the ability to identify with the customer We believe that our ability to compete favorably with our competitors is due to our differentiated merchandising strategy compelling store environment and deep rooted culture
Historically our operations have been seasonal with the largest portion of net sales and net income occurring in the third and fourth fiscal quarters reflecting increased demand during the back to school and winter holiday selling seasons During fiscal 2023 approximately 57 of our net sales occurred in the third and fourth quarters combined As a result of this seasonality any factors negatively affecting us during the last half of the year including unfavorable economic conditions adverse weather or our ability to acquire seasonal merchandise inventory could have a material adverse effect on our financial condition and results of operations for the entire year Our quarterly results of operations may also fluctuate based upon such factors as the timing of certain holiday seasons the popularity of seasonal merchandise offered the timing and amount of markdowns competitive influences and the number and timing of new store openings remodels and closings
The Zumiez Blue Tomato and Fast Times trademarks and certain other trademarks have been registered or are the subject of pending trademark applications with the U S Patent and Trademark Office and with the registries of certain foreign countries We regard our trademarks as valuable and intend to maintain such marks and any related registrations and vigorously protect our trademarks We also own numerous domain names which have been registered with the Corporation for Assigned Names and Numbers
On February 3 2024 we employed approximately 2 600 full time and approximately 6 300 part time employees globally However the number of part time employees fluctuates depending on our seasonal needs and generally increases during peak selling seasons particularly the back to school and the winter holiday seasons None of our employees in North America and Australia are represented by labor unions and we believe that our relationship with our employees is positive
We believe in delivering quality employment experiences at all levels within the Company In that regard every year we create thousands of career opportunities in our stores for individuals who are just beginning their professional careers and who are driven to develop new skills in an environment centered around teaching and learning Many of these opportunities are provided to our part time sales associates who on average are approximately 19 years of age and are often furthering their career through concurrent education and or additional employment opportunities
The Zumiez culture is built on a set of shared values that have been in place since the inception of the business These shared values include empowered managers teaching and learning competition recognition and fairness and honesty Our culture strives to integrate quality teaching and learning experiences throughout the organization We do this through a comprehensive training program which primarily focuses on sales management and customer service training in our stores and is more focused on professional development in our home office Our training programs have been developed internally and are almost exclusively taught internally by Zumiez employees to Zumiez employees The training programs have been developed to empower our employees to make good business decisions
We believe Zumiez is a place where people have a voice will be heard and have bias free opportunities Accordingly our workplace is built upon the foundation of inclusion and equity where its people are diverse in their backgrounds communities and points of view yet all share the same core cultural values of working hard giving back and empowering others In this regard we strive for our employees within a trade area to be reflective of the communities they serve Pay equity meaning pay parity between employees performing similar job duties without regard for race or gender is a base line component of this focus on inclusion and equity and something we evaluate as part of our pay practice procedures
Our principal website address is www zumiez com We make available free of charge our proxy statement annual report to shareholders annual report on Form 10 K quarterly reports on Form 10 Q current reports on Form 8 K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission SEC at http ir zumiez com Information available on our website is not incorporated by reference in and is not deemed a part of this Form 10 K The SEC maintains a website that contains electronic filings by Zumiez and other issuers at www sec gov In addition the SEC maintains an internet site http www sec gov that contains reports proxy and information statements and other information regarding issuers that file electronically with the SEC
Investing in our securities involves a high degree of risk The following risk factors issues and uncertainties should be considered in evaluating our future prospects In particular keep these risk factors in mind when you read forward looking statements elsewhere in this report Forward looking statements relate to our expectations for future events and time periods Generally the words anticipates expects intends may should plans believes predicts potential continue and similar expressions identify forward looking statements Forward looking statements involve risks and uncertainties and future events and circumstances could differ significantly from those anticipated in the forward looking statements Any of the following risks could harm our business operating results or financial condition and could result in a complete loss of your investment Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business and financial condition in the future
Our retail market historically has been subject to substantial cyclicality As the U S and global economic and political conditions change the trends in discretionary consumer spending become unpredictable and discretionary consumer spending could be reduced due to uncertainties about the future Economic and consumer confidence can also be affected by a variety of factors including housing prices unemployment rates and inflation When disposable income decreases or discretionary consumer spending is reduced due to a decline in consumer confidence purchases of apparel and related products may decline A deterioration in macroeconomic conditions or consumer confidence or uncertainty in the U S and global economies and political environment could have a material adverse impact on our results of operations and financial position
In times when there is a decline in disposable income and consumer confidence there could be a trend to consumers seeking more inexpensive or value oriented merchandise As a retailer that sells a substantial majority of branded merchandise this could disproportionately impact us more than vertically integrated private label retailers or we may be forced to rely on promotional sales to compete in our market which could have a material adverse effect on our financial position
Customer tastes and fashion trends in our market are volatile and tend to change rapidly Our success depends on our ability to effectively anticipate identify and respond to changing fashion tastes and consumer preferences and to translate market trends into appropriate saleable product offerings in a timely manner If we are unable to successfully anticipate identify or respond to changing styles or trends and misjudge the market for our products or any new product lines including adequately anticipating the correct mix and trends of our private label merchandise our sales may be lower than predicted and we may be faced with a substantial amount of unsold inventory or missed opportunities In response to such a situation we may be forced to rely on markdowns or promotional sales to dispose of excess or slow moving inventory which could have a material adverse effect on our results of operations
The teenage and young adult retail apparel footwear accessories and hardgoods industry is highly competitive We compete with other retailers for vendors teenage and young adult customers suitable store locations qualified store associates management personnel online marketing content social media engagement and ecommerce traffic Some of our competitors are larger than we are and have substantially greater financial and marketing resources including advanced ecommerce market capabilities Additionally some of our competitors may offer more options for free and or expedited shipping for ecommerce sales Direct competition with these and other retailers may increase significantly in the future which could require us among other things to lower our prices and could result in the loss of our customers Current and increased competition could have a material adverse effect on our business results of operations and financial condition
We have recorded goodwill which is the premium paid over the fair market value of the acquired tangible and intangible assets paid in an acquisition as part of our prior year acquisitions Goodwill and intangible assets which consist of tradenames and trademarks are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired Any event that impacts our results negatively could lead to impairment of these assets which could have negative impacts on our earnings Long term assets primarily fixed assets and operating lease right of use assets are also subject to testing for impairment if events or changes in circumstances indicate that the asset might be impaired A significant amount of judgment is involved in our impairment assessment If actual results fall short of our estimates and assumptions used in estimating revenue growth future cash flows and asset fair values we could incur further impairment charges for goodwill intangible assets or long term assets which could have an adverse effect on our results of operations
Most of our merchandise is produced by manufacturers around the world Some of these facilities are located in regions that may be affected by natural disasters public health concerns or emergencies such as COVID 19 and other communicable diseases or viruses political instability or other conditions that could cause a disruption in trade Trade restrictions such as increased tariffs or quotas or both could also increase the cost and reduce the supply of merchandise available to us Any reduction in merchandise available to us or any increase in its cost due to tariffs quotas or local issues that disrupt trade could have a material adverse effect on our results of operations This includes costs to comply with regulatory developments regarding the use of conflict minerals certain minerals originating from the Democratic Republic of Congo and adjoining countries which may affect the sourcing and availability of raw materials used by manufacturers and subject us to increased costs associated with our products processes or sources of our inputs Our business could be adversely affected by disruptions in the supply chain such as strikes work stoppages or port closures
We depend heavily on generating customer traffic to our stores and websites This includes locating many of our stores in prominent locations within successful shopping malls Sales at these stores are derived in part from the volume of traffic in those malls Our stores benefit from the ability of a mall s anchor tenants generally large department stores and other area attractions to generate consumer traffic in the vicinity of our stores and the continuing popularity of malls as shopping destinations In addition some malls that were in prominent locations when we opened our stores may cease to be viewed as prominent If this trend continues or if the popularity of mall shopping continues to decline generally among our customers our sales may decline which would impact our results of operations These risks may include circumstances that are not within our control such as changes in fair market rent Furthermore we depend on generating increased traffic to our ecommerce business and converting that traffic into sales This requires us to achieve expected results from our marketing and social media campaigns accuracy of data analytics reliability of our website network and transaction processing and a high quality online customer experience Our sales volume and customer traffic in our stores and on our websites generally could be adversely affected by among other things economic downturns competition from other ecommerce retailers non mall retailers and other malls increases in gasoline prices fluctuations in exchange rates in border or tourism oriented locations and the closing or decline in popularity of other stores in the malls in which we are located Also geopolitical events including the threat of terrorism or widespread health emergencies such as COVID 19 and other communicable diseases viruses or pandemics could cause people to avoid our stores in shopping malls and alter consumer trends An uncertain economic outlook or continued bankruptcies of mall based retailers could curtail new shopping mall development decrease shopping mall and ecommerce traffic reduce the number of hours that shopping mall operators keep their shopping malls open or force them to cease operations entirely A reduction in consumer traffic to our stores or websites could have a material adverse effect on our business results of operations and financial condition
Our North America growth largely depends on our ability to optimize our customer engagement We intend to continue to open new stores in future years while remodeling a portion of our existing store base such that we have the optimum number of stores in any given trade area The growth strategy may present competitive merchandising hiring and distribution challenges that are different from those currently encountered In addition it will place increased demands on our operational managerial and administrative resources These increased demands could cause us to operate our business less effectively which in turn could cause deterioration in the financial performance of our individual stores and our overall business In addition successful execution of our growth strategy may require that we obtain additional financing and we may not be able to obtain that financing on acceptable terms or at all
We plan to continue to open new stores in the European and Australian markets We may continue to expand internationally into other markets either organically or through additional acquisitions International markets may have different competitive conditions consumer tastes and discretionary spending patterns than our existing North America market The expansion strategy may present competitive merchandising hiring and distribution challenges that are different from those currently encountered In addition it will place increased demands on our operational managerial and administrative resources As a result operations in international markets may be less successful than our operations in the North America Additionally consumers in international markets may not be familiar with us or the brands we sell and we may need to build brand awareness in the markets Furthermore we have limited experience with the legal and regulatory environments and market practices in new international markets and cannot guarantee that we will be able to penetrate or successfully operate in these new international markets We also expect to incur additional costs in complying with applicable foreign laws and regulations as they pertain to both our products and our operations Accordingly for the reasons noted above our plans for international expansion include risks that could have a negative impact on our results of operations
We may from time to time acquire businesses such as our acquisition of Blue Tomato and Fast Times We may experience difficulties in integrating any businesses we may acquire including their stores websites facilities personnel financial systems distribution operations and general operating procedures and any such acquisitions may also result in the diversion of our capital and our management s attention from other business issues and opportunities If we experience difficulties in integrating acquisitions or if such acquisitions do not provide the benefits that we expect to receive we could experience increased costs and other operating inefficiencies which could have an adverse effect on our results of operations and overall financial performance
Our quarterly results of operations have fluctuated significantly in the past and can be expected to continue to fluctuate significantly in the future Our sales and profitability are typically disproportionately higher in the third and fourth fiscal quarters of each fiscal year due to increased sales during the back to school and winter holiday shopping seasons Sales during these periods cannot be used as an accurate indicator of annual results As a result of this seasonality any factors negatively affecting us during the last half of the year including unfavorable economic conditions adverse weather or our ability to acquire seasonal merchandise inventory could have a material adverse effect on our financial condition and results of operations for the entire year In addition in order to prepare for the back to school and winter holiday shopping seasons we must order and keep in stock significantly more merchandise than we carry during other times of the year Any unanticipated decrease in demand for our products during these peak shopping seasons could require us to sell excess inventory at a substantial markdown which could have a material adverse effect on our business results of operations and financial condition
The emergence severity magnitude and duration of global or regional health crises are uncertain and difficult to predict A pandemic such as COVID 19 could affect certain business operations demand for our products and services in stock positions costs of doing business availability of labor access to inventory supply chain operations our ability to predict future performance exposure to litigation and our financial performance among other things Other factors and uncertainties include but are not limited to
If our information systems including hardware and software do not work effectively this could adversely impact the promptness and accuracy of our transaction processing financial accounting and reporting and our ability to manage our business and properly forecast operating results and cash requirements Additionally we rely on third party service providers for certain information systems functions If a service provider fails to provide the data quality communications capacity or services we require the failure could interrupt our services and could have a material adverse effect on our business financial condition and results of operations To manage the anticipated growth of our operations and personnel we may need to continue to improve our operational and financial systems transaction processing procedures and controls and in doing so could incur substantial additional expenses that could impact our financial results
Information systems are susceptible to an increasing threat of continually evolving cybersecurity risks If we fail to maintain or adequately maintain security systems devices and activity monitoring to prevent unauthorized access to our network systems and databases containing confidential proprietary and personally identifiable information we may be subject to additional risk of adverse publicity litigation or significant expense Nevertheless if unauthorized parties gain access to our networks systems or databases they may be able to steal publish delete or modify confidential information In such circumstances we could be held liable to our customers or other parties or be subject to regulatory or other actions for breaching privacy rules and we may be exposed to reputation damage and loss of customers trust and business This could result in costly investigations and litigation civil or criminal penalties and adverse publicity that could adversely affect our financial condition results of operations and reputation Actual or anticipated attacks may cause us to incur increasing costs including costs to deploy additional resources train employees and engage third parties Further the regulatory environment surrounding information security cybersecurity and privacy is increasingly demanding If we are unable to comply with the new and changing security standards we may be subject to fines restrictions and financial exposure which could adversely affect our retail operations
Increases in the cost of raw materials global labor costs freight costs and other shipping costs in the production and transportation of our merchandise can result in higher costs for this merchandise The costs for these products are affected by weather consumer demand government regulation speculation on the commodities market and other factors that are generally unpredictable and beyond our control Our gross profit and results of operations could be adversely affected to the extent that the selling prices of our products do not increase proportionately with the increases in the costs of raw materials Increasing labor costs and oil related product costs such as manufacturing and transportation costs could also adversely impact gross profit Additionally significant changes in the relationship between carrier capacity and shipper demand could increase transportation costs which could also adversely impact gross profit
We are exposed to foreign currency exchange rate risk with respect to our sales profits assets and liabilities denominated in currencies other than the U S dollar As a result the fluctuation in the value of the U S dollar against other currencies could have a material adverse effect on our results of operations financial condition and cash flows Upon translation operating results may differ materially from expectations As we continue to expand our international operations our exposure to exchange rate fluctuations will increase Tourism spending may be affected by changes in currency exchange rates and as a result sales at stores with higher tourism traffic may be adversely impacted by fluctuations in currency exchange rates Further although the prices charged by vendors for the merchandise we purchase are primarily denominated in U S dollars a decline in the relative value of the U S dollar to foreign currencies could lead to increased merchandise costs which could negatively affect our competitive position and our results of operations
Labor is one of the primary components in the cost of operating our business Increased labor costs whether due to competition unionization increased minimum wage state unemployment rates health care mandated safety protocols or other employee benefits costs may adversely impact our operating profit A considerable amount of our store team members are paid at rates related to the federal or state minimum wage and any changes to the minimum wage rate may increase our operating expenses Furthermore inconsistent increases in state and or city minimum wage requirements limit our ability to increase prices across all markets and channels Additionally we are self insured with respect to our health care coverage in the U S and do not purchase third party insurance for the health insurance benefits provided to employees with the exception of pre defined stop loss coverage which helps limit the cost of large claims There is no assurance that future health care legislation will not adversely impact our results or operations
Although none of our North America and Australia employees are currently covered by collective bargaining agreements we cannot guarantee that they will not elect to be represented by labor unions in the future which could increase our labor costs and could subject us to the risk of work stoppages and strikes Any such failure to meet our staffing needs any material increases in employee turnover rates any increases in labor costs or any work stoppages interruptions or strikes could have a material adverse effect on our business or results of operations
We do not control our vendors or the manufacturers that produce the products we buy from them nor do we control the labor and environmental practices of our vendors and these manufacturers The violation of labor safety environmental and or other laws and standards by any of our vendors or these manufacturers or the divergence of the labor and environmental practices followed by any of our vendors or these manufacturers from those generally accepted as ethical in the U S could interrupt or otherwise disrupt the shipment of finished products to us or damage our reputation Any of these in turn could have a material adverse effect on our reputation financial condition and results of operations In that regard most of the products we sell are manufactured internationally primarily in Asia Mexico and Central America which may increase the risk that the labor and environmental practices followed by the manufacturers of these products may differ from those considered acceptable in the U S
Additionally our products are subject to regulation of and regulatory standards set by various governmental authorities with respect to quality and safety These regulations and standards may change from time to time Our inability to comply on a timely basis with regulatory requirements could result in significant fines or penalties which could adversely affect our reputation and sales Issues with the quality and safety of merchandise we sell regardless of our culpability or customer concerns about such issues could result in damage to our reputation lost sales uninsured product liability claims or losses merchandise recalls and increased costs
Our business is dependent on developing and maintaining good relationships with a large number of vendors to provide our customers with an extensive selection of current and relevant brands In addition to maintaining our large number of current vendor relationships each year we are identifying attracting and launching new vendors to provide a diverse and unique product assortment We believe that we generally are able to obtain attractive pricing and terms from vendors because we are perceived as a desirable customer and deterioration in our relationship with our vendors could have a material adverse effect on our business
However there can be no assurance that our current vendors or new vendors will provide us with an adequate supply or quality of products or acceptable pricing Our vendors could discontinue selling to us raise the prices they charge sell through direct channels or allow their merchandise to be discounted by other retailers There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future In addition certain vendors sell their products directly to the retail market and therefore compete with us directly and other vendors may decide to do so in the future There can be no assurance that such vendors will not decide to discontinue supplying their products to us supply us only less popular or lower quality items raise the prices they charge us or focus on selling their products directly
In addition a number of our vendors are smaller less capitalized companies and are more likely to be impacted by unfavorable general economic and market conditions than larger and better capitalized companies These smaller vendors may not have sufficient liquidity during economic downturns to properly fund their businesses and their ability to supply their products to us could be negatively impacted Any inability to acquire suitable merchandise at acceptable prices or the loss of one or more key vendors could have a material adverse effect on our business results of operations and financial condition
Our business is susceptible to weather conditions that are out of our control including the potential risks of unpredictable weather patterns and any weather patterns associated with naturally occurring global climate change and the resultant unseasonable weather could have a negative impact on our results of operations
Our business is susceptible to unseasonable weather conditions For example extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season including any weather patterns associated with global warming and cooling could render a portion of our inventory incompatible with those unseasonable conditions These prolonged unseasonable weather conditions could have a material adverse effect on our business and results of operations
Our performance depends largely on the efforts and abilities of our key executives If we lose the services of one or more of our key executives we may not be able to successfully manage our business or achieve our growth objectives Furthermore as our business grows we will need to attract and retain additional qualified personnel in a timely manner and we may not be able to do so
Our success depends in part upon our ability to attract motivate and retain a sufficient number of qualified employees who understand and appreciate our culture and brand and are able to adequately represent this culture Qualified individuals of the requisite caliber skills and number needed to fill these positions may be in short supply in some areas and the employee turnover rate in the retail industry is high Our business depends on the ability to hire and retain qualified technical and support roles for procurement distribution ecommerce and back office functions Competition for qualified employees in these areas could require us to pay higher wages to attract a sufficient number of suitable employees
If we are unable to hire and retain store managers and store associates capable of consistently providing a high level of customer service as demonstrated by their enthusiasm for our culture and knowledge of our merchandise our ability to open new stores may be impaired and the performance of our existing and new stores could be materially adversely affected We are also dependent upon temporary personnel to adequately staff our operations particularly during busy periods such as the back to school and winter holiday seasons There can be no assurance that we will receive adequate assistance from our temporary personnel or that there will be sufficient sources of temporary personnel If we are unable to hire qualified temporary personnel our results of operations could be adversely impacted
generate sufficient cash flow from operating activities and sufficient funds are not otherwise available to us from borrowings under our credit facility or from other sources we may not be able to pay our operating lease expenses grow our business respond to competitive challenges or fund our other liquidity and capital needs which could have a material adverse effect on our business
The terms of our secured credit agreement impose certain restrictions on us that may impair our ability to respond to changing business and economic conditions which could have a significant adverse impact on our business Additionally our business could suffer if our ability to acquire financing is reduced or eliminated
We maintain a secured credit agreement with Wells Fargo Bank N A which provides us with a senior secured credit facility credit facility of up to 25 0 million through December 1 2024 The credit facility contains various representations warranties and restrictive covenants that among other things and subject to specified circumstances and exceptions restrict our ability to incur indebtedness including guarantees grant liens make investments pay dividends or distributions with respect to capital stock make prepayments on other indebtedness engage in mergers dispose of certain assets or change the nature of their business The credit facility contains certain financial maintenance covenants that generally require us to have EBITDA on a trailing four quarter basis of not less than 9 million for the quarter ending October 28 2023 not less than 2 5 million for the quarter ending February 3 2024 not less than 9 million for the quarter ending May 4 2024 not less than 12 million for the quarter ending August 3 2024 and not less than 20 million for the quarter ending November 2 2024 and a quick ratio of 1 25 1 0 at the end of each fiscal quarter These restrictions could 1 limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans and 2 adversely affect our ability to finance our operations strategic acquisitions investments or other capital needs or to engage in other business activities that would be in our interest
The credit facility contains certain affirmative covenants including reporting requirements such as delivery of financial statements certificates and notices of certain events maintaining insurance and providing additional guarantees and collateral in certain circumstances The credit facility includes customary events of default including non payment of principal interest or fees violation of covenants inaccuracy of representations or warranties cross default to other material indebtedness bankruptcy and insolvency events invalidity or impairment of guarantees or security interests material judgments and change of control Additionally we cannot be assured that our borrowing relationship with our lenders will continue or that our lenders will remain able to support their commitments to us in the future If our lenders fail to do so then we may not be able to secure alternative financing on commercially reasonable terms or at all
In the U S we rely on a single distribution center located in Corona California to receive store and distribute the vast majority of our merchandise to our domestic stores Internationally we operate a combined distribution and ecommerce fulfillment center located in Graz Austria that supports our Blue Tomato ecommerce and store operations in Europe We operate a distribution center located in Delta British Columbia Canada to distribute our merchandise to our Canadian stores We operate a distribution and ecommerce fulfillment center located in Melbourne Australia to distribute our merchandise to our Australian stores Additionally we are headquartered in Lynnwood Washington As a result unforeseen events including war terrorism other political instability or conflicts riots public health issues including widespread pandemic illnesses such as coronavirus and other communicable diseases or viruses a natural disaster or other catastrophic event that affects one of the regions where we operate these centers or our home office could significantly disrupt our operations and have a material adverse effect on our business results of operations and financial condition
Most of our stores are located in shopping malls Any threat of terrorist attacks or actual terrorist events or other types of mall violence such as shootings or riots could lead to lower consumer traffic in shopping malls In addition local authorities or mall management could close shopping malls in response to security concerns Mall closures as well as lower consumer traffic due to security concerns could result in decreased sales Additionally the threat escalation or commencement of war or other armed conflict elsewhere could significantly diminish consumer spending and result in decreased sales Decreased sales could have a material adverse effect on our business financial condition and results of operations
We believe that our trademarks and domain names are valuable assets that are critical to our success The unauthorized use or other misappropriation of our trademarks or domain names could diminish the value of the Zumiez Blue Tomato or Fast Times brands our store concepts our private label brands or our goodwill and cause a decline in our net sales Although we have secured or are in the process of securing protection for our trademarks and domain names in a number of countries outside of the U S there are certain countries where we do not currently have or where we do not currently intend to apply for protection for certain trademarks Also the efforts we have taken to protect our trademarks may not be sufficient or effective Therefore we may not be able to prevent other persons from using our trademarks or domain names outside of the U S which also could adversely affect our business We are also subject to the risk that we may infringe on the intellectual property rights of third parties Any infringement or other intellectual property claim made against us whether or not it has merit could be time consuming result in costly litigation cause product delays or require us to pay royalties or license fees As a result any such claim could have a material adverse effect on our operating results
We employ a substantial number of full time and part time employees a majority of whom are employed at our store locations As a result we are subject to a large number of federal state and foreign laws and regulations relating to employment This creates a risk of potential claims that we have violated laws related to discrimination and harassment health and safety wage and hour laws criminal activity personal injury and other claims We are also subject to other types of claims in the ordinary course of our business Some or all of these claims may give rise to litigation which could be time consuming for our management team costly and harmful to our business
In addition we are exposed to the risk of class action litigation The costs of defense and the risk of loss in connection with class action suits are greater than in single party litigation claims Due to the costs of defending against such litigation the size of judgments that may be awarded against us and the loss of significant management time devoted to such litigation we cannot provide assurance that such litigation will not disrupt our business or impact our financial results
We are involved from time to time in litigation incidental to our business including complaints filed by investors This litigation could result in substantial costs and could divert management s attention and resources which could harm our business Risks associated with legal liability are often difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time
Our business is subject to a wide array of laws and regulations including those related to employment trade consumer protection transportation occupancy laws health care wage laws employee health and safety taxes privacy health information privacy identify theft customs truth in advertising securities laws unsolicited commercial communication and environmental issues Our policies procedures and internal controls are designed to comply with foreign and domestic laws and regulations such as those required by the Sarbanes Oxley Act of 2002 and the U S Foreign Corrupt Practices Act Although we have policies and procedures aimed at ensuring legal and regulatory compliance our employees or vendors could take actions that violate these laws and regulations Any
violations of such laws or regulations could have an adverse effect on our reputation results of operations financial condition and cash flows Furthermore changes in the regulations the imposition of additional regulations or the enactment of any new legislation particularly in the North America and International businesses could adversely affect our results of operations or financial condition
We are subject to income taxes in many domestic and foreign jurisdictions In addition our products are subject to import and excise duties and or sales consumption or value added taxes in many jurisdictions We record tax expense based on our estimates of future payments which include reserves for estimates of probable settlements of domestic and foreign tax audits At any one time many tax years are subject to audit by various taxing jurisdictions There can be no assurance as to the outcome of these audits which may have an adverse effect to our business In addition our effective tax rate may be materially impacted by changes in tax rates and duties the mix and level of earnings or losses by taxing jurisdictions or by changes to existing accounting rules or regulations Changes to foreign or domestic tax laws could have a material impact on our financial condition results of operations or cash flows
Our common stock is traded publicly and various securities analysts and investors follow our financial results and issue reports on us These reports include information about our historical financial results as well as the analysts and investors estimates of our future performance The analysts and investors estimates are based upon their own independent opinions and can be different from our estimates or expectations If our operating results are below the estimates or expectations of public market analysts and investors our stock price could decline
A share repurchase program may be conducted from time to time under authorization made by our Board of Directors We do not have a controlling shareholder nor are we aware of any shareholders that have formed a group defined as when two or more persons agree to act together for the purposes of acquiring holding voting or otherwise disposing of the equity securities of an issuer The reduction of total outstanding shares through the execution of a share repurchase program of common stock may increase the risk that a group of shareholders could form a group to become a controlling shareholder
A controlling shareholder would have significant influence over and may have the ability to control matters requiring approval by our shareholders including the election of directors and approval of mergers consolidations sales of assets recapitalizations and amendments to our articles of incorporation Furthermore a controlling shareholder may take actions with which other shareholders do not agree including actions that delay defer or prevent a change of control of the company and that could cause the price that investors are willing to pay for the company s stock to decline
Companies across many industries are facing increasing scrutiny related to their environmental social and governance practices Our employees customers various types of investors and other stakeholders are also increasingly focused on ESG practices and in recent years have placed increasing importance on the non financial impacts If our ESG practices do not meet stakeholder expectations which continue to evolve we may incur additional costs and our brand may be harmed
At its core our cybersecurity program is the collection of people processes and technologies that are designed to protect our networks computers and data from attack damage or unauthorized access The cybersecurity program is also part of a broader cybersecurity framework which involves how we assess and manage cybersecurity threat risks and how this integrates into our overall risk management framework While the foregoing summary is specific to our North America business operations we believe that the cybersecurity programs of our International business operations are consistent with the approach and framework outlined below and are appropriate for the scope and scale of their operations
The Security and Compliance Team within our IT department takes the lead role in helping to ensure that we maintain comprehensive technologies and programs to ensure our systems are effective and prepared for cybersecurity risks The Security and Compliance Team is led by the Security and Compliance Program Manager and consists of a Lead Security Engineer and a Security Analyst The Security and Compliance Team works very closely with our team across the IT department and with several different third parties who provide expertise in different areas such as threat hunting and penetration testing
We have implemented risk based controls to protect our networks computers and data To this end we utilize the Center for Internet Security CIS version 8 0 framework which is comprised of eighteen critical security controls The CIS framework is based on the COSO Committee of Sponsoring Organizations on the Treadway Commission and NIST National Institute of Standards and Technology frameworks and provides a highly actionable way to implement those frameworks and maps directly to other compliance requirements relevant to us including PCI compliance and SOX controls briefly discussed above
We work with a third party that provides us with threat hunting services via an Endpoint Detection and Response EDR platform This team proactively searches for newly uncovered threats based on up to the minute intelligence on the cybersecurity threat landscape and their knowledge of the Zumiez environment Upon discovery of a potential threat the threat hunting team provides initial remediation guidance
We also conduct periodic penetration testing of our systems This testing is performed by a qualified third party testing company and is in alignment with our CIS controls Penetration testing is meant to provide us with information on the security of a particular system or application These findings then can be used by us to inform remediation work on a go forward basis
We maintain what we believe are appropriate levels of cybersecurity insurance that covers settlements judgments and defense costs arising out of a failure of network security a privacy breach media liability business income loss resulting from a cyber event and for cyber extortion coverage This cybersecurity insurance coverage also provides for the following breach response services in connection with incidents involving the theft loss or unauthorized disclosure of third party information and computer system security breaches
We also manage cybersecurity risk by limiting our threat landscape For example as an omni channel retailer we accept credit and debit cards via all sales channels and protecting cardholder data is a critical component of our security practices Accordingly PCI compliance discussed briefly above is very important and we engage an external qualified assessor to audit our compliance and to provide us with a report on compliance that is also shared with various payment providers To help reduce our exposure to unauthorized access of cardholder data we have utilized a strategy of minimizing or eliminating the storage of and unencrypted transmission of cardholder information across our various systems
Moreover our businesses do not involve or represent national infrastructure the likes of which are common targets of cyber attackers e g energy oil gas transportation communications banking and financial systems etc We recognize that cyber threats are a permanent part of the risk landscape and that new threats are constantly evolving For these and other reasons cybersecurity is a top risk management priority at Zumiez
Like many companies we face a number of cybersecurity risks in the day to day operation of our business Although to date these risks have not materialized into any instances or series of instances that have had a material adverse effect on our business or otherwise caused material harm to the company we have on occasion experienced cybersecurity threats to our data and information systems including phishing attacks For more information about the cybersecurity risks we face see the risk factor entitled If we fail to meet the requirements to adequately maintain the privacy and security of personal data and business information we may be subject to adverse publicity litigation and significant expenses in Item 1A Risk Factors
As discussed above the Security and Compliance team takes a lead role in helping to ensure that we maintain comprehensive technologies and programs to ensure our systems are effective and prepared for cybersecurity risks This team is supported by our Zumiez North America Cybersecurity Team which consists of the Security and Compliance Program Manager the Director of Infrastructure IT the Vice President of IT the Chief Financial Officer and the Chief Legal Officer Additional support and guidance are provided by the Zumiez North America IT Steering Committee which consists of the Chief Financial Officer Chief Legal Officer the Executive Vice President of North American Consumer Teams the Vice President of IT the Director of Infrastructure IT and the Senior Program Manager of Digital Commerce Together the Zumiez North America Cybersecurity Team and the Zumiez North America IT Steering Committee provide guidance and oversight to the Security and Compliance Team in alignment with the company s overall risk management and oversight framework
Members of management including our Chief Legal Officer regularly report on the company s cybersecurity matters to our board s Audit Committee The Audit Committee has been assigned the responsibility for reviewing and discussing with management the company s major operational legal and regulatory risks including data security and privacy and the company s policies to identify and manage cybersecurity risks
Annual Cybersecurity Plan This plan is provided for the first quarter Audit Committee meeting and outlines the cybersecurity related strategic initiatives for the fiscal year It outlines any new investments and projects and their alignment with the cybersecurity framework as well as the expected timelines for the implementation of these activities
Quarterly Cybersecurity Memos At the 2nd 3rd and 4thquarter Audit Committee meetings an update memo is provided to the Audit Committee that details the progress against the Annual Cybersecurity Plan any updates on PCI compliance and SOX compliance activities and any emerging threats The memo also contains a summary of significant cybersecurity threats over the past quarter both within our ecosystem and outside our ecosystem and any impact if any they may have had upon the company
We lease 17 168 square feet of a distribution facility in Delta British Columbia Canada that supports our store operations in Canada We lease 114 571 square feet to serve as a distribution and ecommerce fulfillment center and office space in Graz Austria that supports our Blue Tomato ecommerce and store operations in Europe We lease a 21 754 square feet building that serves as a distribution and ecommerce fulfillment center and office space in Melbourne Australia that supports our Fast Times ecommerce and store operations in Australia
We had approximately 12 shareholders of record as of March 7 2024 The number of shareholders of record is based upon the actual number of shareholders registered at such date and does not include holders of shares in street names or persons partnerships associates corporations or other entities identified in security position listings maintained by depositories such as the Depository Trust Company
The following graph shows a comparison for total cumulative returns for Zumiez the Nasdaq Composite Index the Nasdaq Retail Trade Index the S P Midcap 400 and the S P 400 apparel retail during the period commencing on February 2 2019 and ending on February 3 2024 The comparison assumes 100 was invested on February 2 2019 in each of Zumiez the Nasdaq Composite Index and the Nasdaq Retail Trade Index and assumes the reinvestment of all dividends if any The comparison in the following graph and table is required by the SEC and is not intended to be a forecast or to be indicative of future Company common stock performance
For the year ended February 3 2024 the Company elected to change the relative benchmark groups from NASDAQ Composite Index and NASDAQ Retail Trade Index to S P Midcap 400 and S P 400 apparel retail Our vendor has discontinued their in house calculation for NASDAQ as they fell out of the requirements of using indexes that are publicly accessible to shareholders
The following discussion and analysis compares the change in the consolidated financial statements for years ended and February 3 2024 and January 28 2023 and should be read together with our consolidated financial statements the accompanying notes and other information included in this Annual Report In particular the risk factors contained in Item 1A may reflect trends demands commitments events or uncertainties that could materially impact our results of operations and liquidity and capital resources For comparisons of years ended January 28 2023 and January 29 2022 see our Management s Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of our Annual Report on Form 10 K for the year ended January 28 2023 filed with the SEC on March 20 2023 and incorporated herein by reference
This discussion contains forward looking statements based upon current expectations that involve risks and uncertainties Our actual results may differ materially from those anticipated in these forward looking statements as a result of various factors including those discussed in the section titled Risk Factors and in other parts of this Annual Report on Form 10 K See also the section titled Note Regarding Forward Looking Statements in this report
After achieving record sales in fiscal 2021 we have now experienced two challenging years in a row Though we ended the year down 8 6 in net sales the sales trends improved each quarter throughout the year with sales down 17 1 in the first quarter down 11 6 in the second quarter down 8 9 in the third quarter and turned positive in the fourth quarter with growth of 0 6 inclusive of the 53rd week Overall consolidated sales were down low single digits for the quarter excluding the 53rd week While inflation declined throughout the first half 2023 and moderated for the last half of the year the multi year inflationary impact on consumer discretionary income particularly with our younger customer base negatively affected sales This coupled with higher competition for the discretionary dollar with consumers appearing to favor experiences vs apparel and negative trends in the business around areas like Skate had a material impact on our results The improvement in year over year sales trends throughout fiscal 2023 reflects positive momentum in emerging brands on the men s side of the business as the men s category had positive sales growth both in the back to school weeks of the third quarter and the entire fourth quarter We are also beginning to see some of the more difficult categories over the past two years become less of a negative impact on total sales growth as we reach lower levels of sales and continue to try new things in these categories
In fiscal year 2023 product margin declined 70 basis points from the prior year while fiscal 2022 had declined 80 basis points from fiscal 2021 The decline of 150 basis points in product margin over the past two years was driven largely by the difficult sales environment which necessitated discounting to maintain a healthy inventory position In a more normalized sales environment we believe that we can begin to recover and continue to grow product margins through existing initiatives in the business over time In addition to the decline of 70 basis points in product margin in fiscal 2023 the 8 6 decrease in net sales created deleverage of other significant fixed costs included in gross margin such as occupancy and merchandising expenses resulting in a decrease of 180 basis points in total Gross Margin from the prior year Selling General and Administrative costs increased 17 7 in fiscal year 2023 inclusive of a one time goodwill impairment charge of 41 1 million which represented 14 0 of the total growth for these expenses during the year Our loss per share in fiscal 2023 of 3 25 includes a one time goodwill impairment charge worth 2 14 cents per share was down from earnings per share in fiscal 2022 of 1 08
As a leading global lifestyle retailer we continue to differentiate ourselves through our distinctive brand offering and diverse product selection as well as the unique customer experience across all our platforms We remain committed to serving the customer launching nearly 200 new brands in 2023 continuing to focus on our localized fulfillment platform that provides substantial improvements in the speed of delivery to our customers and connecting with our customers in a unique way through our events and digital communications
In fiscal 2024 our focus will continue to be serving the customer with strategic investments focused on enhancing the customer experience while growing sales and market share to create operational efficiencies to drive long term operating margin expansion Though the last two years have been challenging the balance sheet remains strong with 171 6 million in current cash and marketable securities at the end of fiscal 2023 We were able to minimize the decrease in current cash and marketable securities through this difficult sales cycle with diligent expense management and a reduction in inventory of 4 4 from fiscal 2022 We believe we have the balance sheet to manage through potential difficulties while also investing strategically in important long term initiatives and returning value to our shareholders
Following a difficult sales and earnings cycle through fiscal 2022 and fiscal 2023 the macro economic environment in 2024 is unclear While inflation is moderating from the peaks in 2022 and early 2023 the impact of multiple years of compounding growth in the cost of consumer goods continues to put pressure on the discretionary income of our customer base Comparing fiscal 2023 quarterly performance to pre pandemic fiscal 2019 which had more typical seasonality throughout the year our sales in fiscal 2023 stabilized but remained below 2019 levels As we move through 2024 our focus will be to grow sales by building on the momentum we are seeing in emerging brands within the Men s category during 2023 and continuing to showcase our growing private label offering while also testing new brands to drive sales growth across all of our categories We also believe that we can achieve product margin expansion while also diligently controlling spending to drive back to profitability As we turn our attention to same store sales we plan to pull back on new unit growth slowing new store openings to 10 throughout the year with our largest percentage decline in Europe as we focus on the profitability of the region and driving cash flow From a total store count perspective we expect to end 2024 with less stores than we had at the end of 2023 as we pair back underperforming stores With our relentless focus on the customer we believe we can win in our space as we move through the year despite significant macro challenges to the business
Net sales constitute gross sales net of actual and estimated returns and deductions for promotions and shipping revenue Net sales include our store sales and our ecommerce sales We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card Additionally the portion of gift cards that will not be redeemed gift card breakage is recognized based on our historical redemption rate in proportion to the pattern of rights exercised by the customer
We report comparable sales based on net sales beginning on the first anniversary of the first day of operation of a new store or ecommerce business We operate a sales strategy that integrates our stores with our ecommerce platform There is significant interaction between our store sales and our ecommerce sales channels and we believe that they are utilized in tandem to serve our customers Therefore our comparable sales also include our ecommerce sales Changes in our comparable sales between two periods are based on net sales of store or ecommerce business which were in operation during both of the two periods being compared and if a store or ecommerce business is included in the calculation of comparable sales for only a portion of one of the two periods being compared then that store or ecommerce business is included in the calculation for only the comparable portion of the other period Any increase or decrease less than 25 in square footage of an existing comparable store including remodels and relocations within the same mall or temporary closures less than seven days does not eliminate that store from inclusion in the calculation of comparable sales Any store or ecommerce business that we acquire will be included in the calculation of comparable sales after the first anniversary of the acquisition date Current year foreign exchange rates are applied to both current year and prior year comparable sales to achieve a consistent basis for comparison There may be variations in the way in which some of our competitors and other apparel retailers calculate comparable sales As a result data herein regarding our comparable sales may not be comparable to similar data made available by our competitors or other retailers
Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design sourcing importing and inbound freight costs Our cost of goods sold also includes shrinkage buying occupancy ecommerce fulfillment distribution and warehousing costs including associated depreciation and freight costs for store merchandise transfers This may not be comparable to the way in which our competitors or other retailers compute their cost of goods sold Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold a reduction of the carrying value of the inventory if the inventory is still on hand or a reduction of selling general and administrative expense if the amounts are reimbursements of specific incremental and identifiable costs of selling the vendors products
Selling general and administrative expenses consist primarily of store personnel wages and benefits administrative staff and infrastructure expenses freight costs for merchandise shipments from the distribution centers to the stores store supplies depreciation on fixed assets at our home office and stores facility expenses training expenses and advertising and marketing costs Credit card fees insurance public company expenses legal expenses amortization of intangibles and other miscellaneous operating costs are also included in selling general and administrative expenses This may not be comparable to the way in which our competitors or other retailers compute their selling general and administrative expenses
Net sales Net sales constitute gross sales net of sales returns and deductions for promotions and shipping revenue Net sales includes comparable sales and new store sales for all our store and ecommerce businesses We consider net sales to be an important indicator of our current performance Net sales results are important to achieve leveraging of our costs including store payroll and store occupancy Net sales also have a direct impact on our operating profit cash and working capital
Gross profit Gross profit measures whether we are optimizing the price and inventory levels of our merchandise Gross profit is the difference between net sales and cost of goods sold Any inability to obtain acceptable levels of initial markups or any significant increase in our use of markdowns could have an adverse effect on our gross profit and results of operations
Operating profit We view operating profit as a key indicator of our success Operating profit is the difference between gross profit and selling general and administrative expenses The key drivers of operating profit are net sales gross profit our ability to control selling general and administrative expenses and our level of capital expenditures affecting depreciation expense
Net sales were 875 5 million for fiscal 2023 compared to 958 4 million for fiscal 2022 a decrease of 82 9 million or 8 6 The decrease in sales was primarily driven by continued inflationary pressures on the consumer continued challenges in competition for the discretionary dollar and tougher trends in certain categories of our business
The decrease in net sales included a decrease in transactions partially offset by an increase in dollars per transaction The increase in dollars per transaction was driven by an increase in average unit retail partially offset by a decrease in units per transaction For the year the footwear category was our largest declining category followed by women s accessories hardgoods and men s
By region North America sales decreased 104 7 million or 13 1 and other international sales increased 21 8 million or 14 0 during fiscal 2023 compared to fiscal 2022 Net sales for the year ended February 3 2024 included a 2 5 million increase due to the change in foreign exchange rates which consisted of 4 7 million in Europe which was offset by decrease of 1 2 million in Canada and decrease of 1 1 million in Australia Excluding the impact of changes in foreign exchange rates North America sales decreased 103 5 million or 12 9 and other international sales increased 18 2 million or 11 8 during fiscal 2023 compared to fiscal 2022
Gross profit was 280 9 million for fiscal 2023 compared to 324 7 million for fiscal 2022 a decrease of 43 8 million or 13 5 As a percentage of net sales gross profit decreased 180 basis points in fiscal 2023 to 32 1 as we saw significant deleverage on lower sales across our fixed costs as well as rate increases in numerous areas The decrease was primarily driven by a 130 basis points deleverage in store occupancy costs and 70 basis points decrease in product margin These decreases were partially offset by a 20 basis points of efficiencies in distribution costs
Selling general and administrative SG A expenses were 345 7 million for fiscal 2023 compared to 293 6 million for fiscal 2022 an increase of 52 1 million or 17 7 SG A expenses as a percent of net sales increased 880 basis points in fiscal 2023 to 39 5 The increase was primarily driven by 470 basis points due to impairment of goodwill worth 41 1 million 180 basis points due to store wages tied to both deleverage on lower sales as well as rate increase that we could not offset by management of hours 110 basis points due to store costs not tied to wages primarily impacted by deleverage on lower sales 80 basis points in corporate costs and 60 basis points in non store wages These increases were partially offset by a 20 basis points decrease in training events
Net loss for fiscal 2023 was 62 6 million or 3 25 per diluted share compared with net income of 21 0 million or 1 08 per diluted share for fiscal 2022 Our effective income tax rate for fiscal 2023 was 1 2 compared to 35 2 for fiscal 2022 The change in effective income tax rate for fiscal 2023 compared to fiscal 2022 was primarily related to an increase in foreign losses in certain jurisdictions including Blue Tomato goodwill impairment which are subject to a valuation allowance Due to cumulative and ongoing foreign losses in such jurisdictions the realization of such deferred tax assets is uncertain and thus subject to a valuation allowance The increase in the valuation allowance in fiscal 2023 resulted in 12 3 million of income tax expense when compared to fiscal 2022 of 3 0 million
Our cash requirements are subject to change as business conditions warrant and opportunities arise Our primary uses of cash are for operational expenditures inventory purchases common stock repurchases and capital investments including new stores store remodels store relocations store fixtures and ongoing infrastructure improvements Historically our main source of liquidity has been cash flows from operations
The significant components of our working capital are inventories and liquid assets such as cash cash equivalents current marketable securities and receivables reduced by accounts payable and accrued expenses Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or within several days of the related sale while we typically have longer payment terms with our vendors
At February 3 2024 and January 28 2023 cash cash equivalents and current marketable securities were 171 6 million and 173 5 million Working capital the excess of current assets over current liabilities was 182 5 million at the end of fiscal 2023 a decrease of 6 1 from 194 4 million at the end of fiscal 2022 The decrease in cash cash equivalents and current marketable securities in fiscal 2023 was due primarily to cash provided by operating activities of 14 8 million partially offset by capital expenditures of 20 3 million primarily related to the opening of 19 new stores and 4 remodels and relocations
Net cash provided by operating activities increased by 15 1 million in fiscal 2023 to 14 8 million cash provided by operating activities from 0 4 million cash used in operating activities in fiscal 2022 Net cash provided by operating activities decreased by 135 3 million in fiscal 2022 to 0 4 million cash used in operating activities from 135 0 million cash provided by operating activities in fiscal 2021 Our operating cash flows result primarily from cash received from our customers offset by cash payments we make for inventory employee compensation store occupancy expenses and other operational expenditures Cash received from our customers generally corresponds to our net sales Because our customers primarily use credit and debit cards or cash to buy from us our receivables from customers settle quickly Changes to our operating cash flows have historically been driven primarily by changes in operating income which is impacted by changes to non cash items such as depreciation impairment amortization and accretion deferred taxes and changes to the components of working capital
Net cash used in investing activities was 8 5 million in fiscal 2023 related to 20 4 million of capital expenditures primarily for new store openings and existing store remodels or relocations primarily offset by 11 7 million in net sales of marketable securities Net cash provided by investing activities was 54 2 million in fiscal 2022 related to 79 8 million in net sales of marketable securities and 25 6 million of capital expenditures primarily for new store openings and existing store remodels or relocations Net cash provided by investing activities was 101 6 million in fiscal 2021 related to 117 4 million in net sales of marketable securities and 15 7 million of capital expenditures primarily for new store openings and existing store remodels or relocations
Net cash provided by financing activities in fiscal 2023 was 0 7 million related to proceeds from the issuance and exercise of stock based awards Net cash used in financing activities in fiscal 2022 was 87 3 million related to 87 9 million used in the repurchase of common stock and 0 5 million in payments for tax withholding obligations upon vesting of restricted stock partially offset by 1 1 million in proceeds from the issuance and exercise of stock based awards Net cash used in financing activities in fiscal 2021 was 191 4 million related to 193 8 million used in the repurchase of common stock and 0 6 million in payments on tax withholding obligation upon vesting of restricted stock partially offset by 3 0 million in proceeds from the issuance and exercise of stock based awards
Our capital requirements include construction and fixture costs related to the opening of new stores and remodel and relocation expenditures for existing stores Future capital requirements will depend on many factors including the pace of new store openings the availability of suitable locations for new stores and the nature of arrangements negotiated with landlords In that regard our net investment to open a new store has varied significantly in the past due to a number of factors including the geographic location and size of the new store and is likely to vary significantly in the future
In fiscal 2024 we expect to spend approximately 14 million to 16 million on capital expenditures a majority of which will relate to leasehold improvements and fixtures for the approximately 10 new stores we plan to open in fiscal 2024 and remodels or relocations of existing stores There can be no assurance that the number of stores that we actually open in fiscal 2024 will not be different from the number of stores we plan to open or that actual fiscal 2024 capital expenditures will not differ from this expected amount
Our material cash requirements include the following contractual and other obligations 1 purchase obligations for additional information see Note 11 to the Consolidated Financial Statements 2 supply and service arrangements entered in the normal course of business 3 operating lease payments for additional information see Note 10 to the Consolidated Financial Statements and 4 employee wages benefits and incentives 5 commitments for capital expenditures and 6 tax payables Moreover we may be subject to additional material cash requirements that are contingent upon the occurrence of certain events e g legal contingencies uncertain tax positions and other matters
Our most significant sources of liquidity continue to be funds generated by operating activities and available cash cash equivalents and current marketable securities We expect these sources of liquidity and available borrowings under our revolving credit facility will be sufficient to meet our foreseeable cash requirements for operations and planned capital expenditures for at least the next twelve months Beyond this time frame if cash flows from operations are not sufficient to meet our capital requirements then we will be required to obtain additional equity or debt financing in the future However there can be no assurance that equity or debt financing will be available to us when we need it or if available that the terms will be satisfactory to us and not dilutive to our then current shareholders
As of February 3 2024 we maintained a secured credit agreement with Wells Fargo Bank N A which provided us with a senior secured credit facility credit facility of up to 25 0 million through December 1 2024 The credit facility is available for working capital and other general corporate purposes The credit facility provides for the issuance of standby letters of credit in an amount not to exceed 17 5 million outstanding at any time and with a term not to exceed 365 days beyond the maturity of the credit facility The commercial line of credit provides for the issuance of commercial letters of credit in an amount not to exceed 10 0 million and with terms not to exceed 120 days beyond the maturity of the credit facility The credit facility will mature on December 1 2024 The credit facility is secured by a first priority security interest in substantially all personal property but not the real property of the borrowers and guarantors There were no borrowings or open commercial letters of credit outstanding under the secured credit facility at February 3 2024 and January 28 2023 We had 3 5 million and 0 6 million in issued but undrawn standby letters of credit at February 3 2024 and January 28 2023 respectively
On November 30 2023 we entered a third amendment to our credit facility with Wells Fargo Bank N A The amendment among other things a amended the credit limit to 25 million through December 1 2024 b amended the EBITDA covenant to not less than 9 million for the quarter ending October 28 2023 not less than 2 5 million for the quarter ending February 3 2024 not less than 9 million in the quarter ending May 4 2024 not less than 12 million for the quarter ending August 3 2024 and not less than 20 million for the quarter ending November 2 2024 c amended the borrowing rate to SOFR plus 1 75 per annum d introduced an unused commitment fee of 0 50 per annum and e disallows distribution of dividends or execution of stock buybacks through December 1 2024 without bank approval
Our consolidated financial statements are prepared in accordance with U S GAAP In connection with the preparation of our consolidated financial statements we are required to make assumptions and estimates about future events and apply judgments that affect the reported amounts of assets liabilities revenue expenses and the related disclosures We base our assumptions estimates and judgments on historical experience current trends and other factors that we believe to be relevant at the time our consolidated financial statements are prepared On a regular basis we review the accounting policies assumptions estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U S GAAP However because future events and their effects cannot be determined with certainty actual results could differ from our assumptions and estimates and such differences could be material
Our significant accounting policies are discussed in Note 2 Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements found in Part IV Item 15 of this Form 10 K We believe that the following accounting estimates involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our consolidated financial statements
Our write down reserve represents the excess of the carrying value over the amount we expect to realize from the ultimate sales or other disposal of the inventory Write downs establish a new cost basis for our inventory Subsequent changes in facts or circumstances do not result in the restoration of previously recorded write downs or an increase in that newly established cost basis
We have not made any material changes in the accounting methodology used to calculate our write down and shrinkage reserves in the past three fiscal years We do not believe there is a reasonable likelihood that there will be a material change in the future estimates we use to calculate our inventory reserves However if actual results are not consistent with our estimates we may be exposed to losses or gains that could be material Our inventory reserves have decreased by 0 3 million in fiscal 2023
Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset If such assets are considered impaired the impairment recognized is measured by comparing the fair value of the asset to the asset carrying value
Events that may result in an impairment include the decision to close a store or facility or a significant decrease in the operating performance of a long lived asset group Our impairment calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values including forecasting future sales gross profit operating expenses or sub lease income In addition to historical results current trends and initiatives and long term macro economic and industry factors are qualitatively considered Additionally management seeks input from store operations related to local economic conditions including the impact of closures of selected co tenants who occupy the mall
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long lived asset impairment losses However if actual results are not consistent with our estimates and assumptions our operating results could be adversely affected Declines in projected cash flow of the assets could result in impairment We recognized impairment losses of 2 9 million related to long lived assets in fiscal 2023 A 10 basis point decrease in forecasted sales assumptions would have resulted in an additional impairment charge of 0 1 million in fiscal 2023
Operating lease right of use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term net of lease incentives received and initial direct costs paid Our retail store leases are generally for an initial period of 5 10 years with some of our international leases structured to include renewal options at our election We include renewal options that we are reasonably certain to exercise in the measurement of our lease liabilities and right of use assets
Significant judgment is required in determining our incremental borrowing rate and the expected lease term both of which impact the determination of lease classification and the present value of lease payments Generally our lease contracts do not provide a readily determinable implicit rate and therefore we use an estimated incremental borrowing rate as of the lease commencement date in determining the present value of lease payments The estimated incremental borrowing rate reflects considerations such as market rates for our outstanding collateralized debt and interpolations of rates for leases with terms that differ from our outstanding debt
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate right of use assets and lease liabilities Given the significant operating lease assets and liabilities recorded changes in the estimates made by management or the underlying assumptions could have a material impact on our consolidated financial statements
Revenue is not recorded on the sale of gift cards We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card Additionally the portion of gift cards that will not be redeemed gift card breakage is recognized in proportion of the patterns used by the customer based on our historical redemption patterns
Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions regarding future sales returns and the amount and timing of gift cards projected to be redeemed by gift card recipients Our estimate of the amount and timing of sales returns and gift cards to be redeemed is based primarily on historical experience
As part of the process of preparing the consolidated financial statements income taxes are estimated for each of the jurisdictions in which we operate This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes These differences result in deferred tax assets and liabilities which are included on the consolidated balance sheets Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized
We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal state and foreign filings by considering all relevant facts circumstances and information available to us If we believe it is more likely than not that our position will be sustained we recognize a benefit at the largest amount that we believe is cumulatively greater than 50 likely to be realized
Significant judgment is required in evaluating our tax positions and determining our provision for income taxes During the ordinary course of business there are many transactions and calculations for which the ultimate tax determination is uncertain For example our effective tax rates could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates
Upon income tax audit any unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution
We are subject to various claims and contingencies related to lawsuits insurance regulatory and other matters arising out of the normal course of business We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable If the likelihood of an adverse outcome is only reasonably possible as opposed to probable or if an estimate is not determinable we provide disclosure of a material claim or contingency
Significant judgment is required in evaluating our claims and contingencies including determining the probability that a liability has been incurred and whether such liability is reasonably estimable The estimated accruals for claims and contingencies are made based on the best information available which can be highly subjective
Although management believes that the contingency related judgments and estimates are reasonable our accrual for claims and contingencies could fluctuate as additional information becomes known thereby creating variability in our results of operations from period to period Additionally actual results could differ and we may be exposed to losses or gains that could be material See Note 11 Commitments and Contingencies in the Notes to the consolidated financial statements found in Part IV Item 15 of this Form 10 K
We have an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount If we choose not to perform the qualitative test or we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount we compare the carrying value of the reporting unit to its estimated fair value which is based on the perspective of a market participant If the fair value of the reporting unit is lower than the carrying value an impairment loss is recorded for the amount in which the carrying value exceeds the estimated fair value
Our quantitative goodwill analysis of fair value is determined using a combination of the income and market approaches Key assumptions in the income approach include estimating future cash flows long term growth rates and weighted average cost of capital Our ability to realize the future cash flows used in our fair value calculations is affected by factors such as changes in economic conditions operating performance and our business strategies Key assumptions in the market approach include identifying companies and transactions with comparable business factors such as earnings growth profitability business and financial risk
If actual results are not consistent with our estimates or assumptions or there are significant changes in any of these estimates projections and assumptions could have a material effect of the fair value of these assets in future measurement periods and result in an additional impairment which could materially affect our results of operations
Our earnings are affected by changes in market interest rates as a result of our short term and long term marketable securities which are primarily invested in state and local municipal securities and variable rate demand notes which have long term nominal maturity dates but feature variable interest rates that reset at short term intervals If our current portfolio average yield rate decreased by 10 in fiscal 2023 our net income would have decreased by 0 3 million This amount is determined by considering the impact of the hypothetical yield rates on our cash cash equivalents short term marketable securities and assumes no changes in our investment structure
During different times of the year due to the seasonality of our business we may borrow under our revolving credit facility To the extent we borrow under this revolving credit facility we are exposed to the market risk related to changes in interest rates At February 3 2024 we had no borrowings outstanding under the secured revolving credit facility
Our international subsidiaries operate with functional currencies other than the U S Dollar including the Canadian Dollar Euro Australian Dollar Norwegian Krone Swedish Krona and Swiss Franc Therefore we must translate revenues expenses assets and liabilities from functional currencies into U S dollars at exchange rates in effect during or at the end of the reporting period As a result the fluctuation in the value of the U S dollar against other currencies affects the reported amounts of revenues expenses assets and liabilities Assuming a 10 change in foreign exchange rates in fiscal 2023 our net income would have decreased or increased by 0 2 million As we expand our international operations our exposure to exchange rate fluctuations will continue to increase To date we have not used derivatives to manage foreign currency exchange risk
Evaluation of Disclosure Controls and Procedures We carried out an evaluation under the supervision and with the participation of our management including our Chief Executive Officer CEO and Chief Financial Officer CFO of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Securities Exchange Act Rule 13a 15 e Based on this evaluation our CEO and CFO concluded that as of February 3 2024 our disclosure controls and procedures were effective
Changes in Internal Control Over Financial Reporting There has been no change in our internal control over financial reporting as defined in Securities Exchange Act Rule 13a 15 f during the quarter ended February 3 2024 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting
Management s Annual Report on Internal Control over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a 15 f of the Securities Exchange Act of 1934 The Company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles
This process includes policies and procedures that i pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions of the Company ii provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company and iii provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the Company s assets that could have a material effect on the financial statements Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements and can provide only reasonable not absolute assurance that the objectives of the control system are met Furthermore because of changes in conditions the effectiveness of internal control may vary over time
The Company s management with the participation of the Chief Executive Officer and Chief Financial Officer assessed the effectiveness of the Company s internal control over financial reporting as of February 3 2024 Management s assessment was based on criteria described in the Internal Control Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission Based on this assessment management concluded that the Company s internal control over financial reporting was effective as of February 3 2024
The effectiveness of the Company s internal control over financial reporting as of February 3 2024 has been audited by Moss Adams LLP the Company s independent registered public accounting firm as stated in their report appearing herein under the heading Report of Independent Registered Public Accounting Firm
Information regarding our directors and nominees for directorship is presented under the headings Election of Directors in our definitive proxy statement for use in connection with our 2023 Annual Meeting of Shareholders the Proxy Statement that will be filed within 120 days after our fiscal year ended February 3 2024 and is incorporated herein by this reference thereto Information concerning our executive officers is set forth under the heading Executive Officers in our Proxy Statement and is incorporated herein by reference thereto Information regarding compliance with Section 16 a of the Exchange Act our code of conduct and ethics and certain information related to the Company s Audit Committee Compensation Committee and Governance Committee is set forth under the heading Corporate Governance in our Proxy Statement and is incorporated herein by reference thereto
Information regarding the compensation of our directors and executive officers and certain information related to the Company s Compensation Committee is set forth under the headings Executive Compensation Director Compensation Compensation Discussion and Analysis Report of the Compensation Committee of the Board of Directors and Compensation Committee Interlocks and Insider Participation in our Proxy Statement and is incorporated herein by this reference thereto
Information with respect to security ownership of certain beneficial owners and management is set forth under the headings Security Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information in our Proxy Statement and is incorporated herein by this reference thereto
We have audited the accompanying consolidated balance sheets of Zumiez Inc the Company as of February 3 2024 and January 28 2023 the related consolidated statements of loss income comprehensive loss income changes in shareholders equity and cash flows for each of the three years in the period ended February 3 2024 and the related notes collectively referred to as the consolidated financial statements We also have audited the Company s internal control over financial reporting as of February 3 2024 based on criteria established in Internal Control Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission COSO
In our opinion the consolidated financial statements referred to above present fairly in all material respects the consolidated financial position of the Company as of February 3 2024 and January 28 2023 and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 3 2024 in conformity with accounting principles generally accepted in the United States of America Also in our opinion the Company maintained in all material respects effective internal control over financial reporting as of February 3 2024 based on criteria established in Internal Control Integrated Framework 2013 issued by COSO
The Company s management is responsible for these consolidated financial statements for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting included in Item 9A Our responsibility is to express an opinion on the Company s consolidated financial statements and an opinion on the Company s internal control over financial reporting based on our audits We are a public accounting firm registered with the Public Company Accounting Oversight Board United States PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audits in accordance with the standards of the PCAOB Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements whether due to error or fraud and performing procedures to respond to those risks Such procedures included examining on a test basis evidence regarding the amounts and disclosures in the consolidated financial statements Our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the consolidated financial statements
A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles A company s internal control over financial reporting includes those policies and procedures that 1 pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company 2 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and 3 provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the company s assets that could have a material effect on the financial statements
Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate
audit committee and that i relates to accounts or disclosures that are material to the consolidated financial statements and ii involved our especially challenging subjective or complex judgments The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements taken as a whole and we are not by communicating the critical audit matters below providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate
As described in Note 7 to the consolidated financial statements the Company s consolidated goodwill and intangible assets balances were 15 4 million and 14 2 million respectively as of February 3 2024 For the year ended February 3 2024 the Company recorded a full impairment of the Europe reporting unit goodwill as disclosed in Notes 7 and 12 amounting to 41 1 million As described in Note 2 to the consolidated financial statements the Company has an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than it s carrying amount If management chooses not to perform the qualitative test or determines that it is more likely than not that the fair value of the reporting unit is less than the carrying amount the Company s evaluation of impairment of goodwill and intangible assets requires a comparison of the reporting unit s and intangible asset s fair value to their carrying value If the fair value of the reporting unit or intangible asset is lower than the carrying value then the Company records an impairment in the amount equal to the excess not to exceed the carrying value
The determination of the fair value of the reporting unit and intangible assets requires management to make significant estimates complex judgments and assumptions These assumptions include forecasts of future cash flows long term growth rates weighted average cost of capital valuation ratios derived from market transactions of similar companies and royalty rates
Given the Company s evaluation of impairment of goodwill and intangible assets requires management to make significant assumptions performing audit procedures to evaluate whether management appropriately determined the fair value of the reporting unit and intangible assets required a high degree of auditor judgment In addition our audit effort included the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained
As described in Note 6 to the consolidated financial statements the Company s consolidated fixed assets net balance was 90 5 million and operating lease right of use assets was 196 8 million as of February 3 2024 For the year ended February 3 2024 the Company recognized store asset impairment losses of 2 9 million as disclosed in Note 12 which consists of impairment charges for fixed assets of 1 6 million and impairment charges for operating right of use assets of 1 3 million As described in Note 2 to the consolidated financial statements the Company evaluates the carrying value of long lived assets or asset groups defined as a store corporate facility or distribution center for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable Events that result in a store asset impairment review include plans to close a store or facility or a significant decrease in the operating performance of a store When such an indicator occurs the Company evaluates the store assets for impairment by comparing the undiscounted future cash flows expected to be generated by the store to the carrying amount If the carrying amount exceeds the estimated undiscounted future cash flows an analysis is performed to estimate the fair value of the assets An impairment is recorded if the fair value of the store s assets is less than the carrying amount
Given the Company s evaluation of impairment of store assets requires management to make significant assumptions performing audit procedures to evaluate whether management appropriately identified events or changes in circumstances indicating that the carrying amounts of store assets may not be recoverable and determine store fair value required a high degree of auditor judgment In addition our audit effort included the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained
Nature of Business Zumiez Inc including its wholly owned subsidiaries Zumiez the Company we us its and our is a global 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 We operate under the names Zumiez Blue Tomato and Fast Times We operate ecommerce websites at zumiez com zumiez ca blue tomato com and fasttimes com au
Fiscal Year We use a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52 or 53 week period ending on the Saturday closest to January 31 Each fiscal year consists of four 13 week quarters with an extra week added to the fourth quarter every five or six years The fiscal year ended February 3 2024 has 53 week period The fiscal years ended January 28 2023 and January 29 2022 were 52 week periods
Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America U S GAAP The consolidated financial statements include the accounts of Zumiez Inc and its wholly owned subsidiaries All significant intercompany transactions and balances are eliminated in consolidation
On April 1 2022 we received 3 2 million Euro 3 6 million as a taxable subsidy from the German government related to our European business for costs incurred during fiscal 2020 and fiscal 2021 related to the COVID 19 pandemic The subsidy was granted free of future obligations to repay and was accounted for using IAS 20 Accounting for Government Grants and Disclosure of Government Assistance by analogy The amount was recorded as a reduction to expense in selling general and administrative expenses on the consolidated statement of loss income in the first quarter of fiscal 2022
Use of Estimates The preparation of financial statements in conformity with U S GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements as well as the reported amounts of revenues and expenses during the reporting period These estimates can also affect supplemental information disclosed by us including information about contingencies risk and financial condition Actual results could differ from these estimates and assumptions
Fair Value of Financial Instruments We disclose the estimated fair value of our financial instruments Financial instruments are generally defined as cash evidence of ownership interest in an entity or a contractual obligation that both conveys to one entity a right to receive cash or other financial instruments from another entity and imposes on the other entity the obligation to deliver cash or other financial instruments to the first entity Our financial instruments other than those presented in Note 12 Fair Value Measurements include cash and cash equivalents receivables payables and other liabilities The carrying amounts of cash and cash equivalents receivables payables and other liabilities approximate fair value because of the short term nature of these instruments Our policy is to present transfers into and transfers out of hierarchy levels as of the actual date of the event or change in circumstances that caused the transfer
Concentration of Risk We maintain our cash and cash equivalents in accounts with major financial institutions in the form of demand deposits money market accounts and corporate debt securities Deposits in these financial institutions may exceed the amount of federal deposit insurance provided on such deposits
Marketable Securities Our marketable securities primarily consist of U S treasury and government agency securities corporate debt securities state and local municipal securities and variable rate demand notes Variable rate demand notes are considered highly liquid Although the variable rate demand notes have long term nominal maturity dates the interest rates generally reset weekly Despite the long term nature of the underlying securities of the variable rate demand notes we have the ability to quickly liquidate these securities which have an embedded put option that allows the bondholder to sell the security at par plus accrued interest
Investments are considered to be impaired when a decline in fair value is determined to be other than temporary If the cost of an investment exceeds its fair value we evaluate information about the underlying investment that is publicly available such as analyst reports applicable industry data and other pertinent information and assess our intent and ability to hold the security For fixed income securities we also evaluate whether we have plans to sell the security or it is more likely than not we will be required to sell the security before recovery The investment would be written down to its fair value at the time the impairment is deemed to have occurred and a new cost basis is established Future adverse changes in market conditions poor operating results of underlying investments or other factors could result in losses that may not be reflected in an investment s current carrying value possibly requiring an impairment charge in the future
Inventories Merchandise inventories are valued at the lower of cost or net realizable value The cost of merchandise inventories is based upon an average cost methodology Merchandise inventories may include items that have been written down to our best estimate of their net realizable value Our decisions to write down our merchandise inventories are based on their current rate of sale the age of the inventory the profitability of the inventory and other factors The inventory related to this reserve is not marked up in subsequent periods Inventory is at net realizable value which factors in a reserve for inventory whose selling price is below cost and an estimate for inventory shrinkage Shrinkage refers to a reduction in inventory due to shoplifting employee theft and other matters We estimate an inventory shrinkage reserve for anticipated losses and a write down for our merchandise inventories at February 3 2024 and January 28 2023 in the amounts of 2 8 million and 2 5 million respectively
Fixed Assets Fixed assets primarily consist of leasehold improvements fixtures land buildings computer equipment software and store equipment Fixed assets are stated at cost less accumulated depreciation utilizing the straight line method over the assets estimated useful lives The useful lives of our major classes of fixed assets are as follows
Asset Retirement Obligations An asset retirement obligation ARO represents a legal obligation associated with the retirement of a tangible long lived asset that is incurred upon the acquisition construction development or normal operation of that long lived asset Our AROs are associated with leasehold improvements that at the end of a lease we are contractually obligated to remove in order to comply with certain lease agreements The ARO balance at February 3 2024 and January 28 2023 was 4 8 million and 3 4 million and is recorded in other liabilities and other long term liabilities on the consolidated balance sheets and will be subsequently adjusted for changes in fair value The associated estimated asset retirement costs are capitalized as part of the carrying amount of the long lived asset and depreciated over its useful life
Valuation of Long Lived Assets We review the carrying value of long lived assets or asset groups generally defined as a store corporate facility or distribution center for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset or asset group to future undiscounted net cash flows expected to be generated by the asset If such assets are considered impaired the impairment recognized is measured by comparing the fair value of the assets or asset group to the carrying values The estimation of future cash flows from operating activities requires significant judgments of factors that include forecasting future sales gross profit and operating expenses In addition to historical results current trends and initiatives long term macro economic and industry factors are qualitatively considered Additionally management seeks input from store operations related to local economic conditions Impairment charges for operating lease right of use assets are included in cost of goods sold and impairment charges for fixed assets are included in selling general and administrative expenses on the consolidated statements of loss income
Goodwill Goodwill represents the excess of purchase price over the fair value of acquired tangible and identifiable intangible net assets We test goodwill for impairment on an annual basis or more frequently if indicators of impairment are present We perform our annual impairment measurement test on the first day of the fourth quarter Events that may trigger an early impairment review include significant changes in the current business climate future expectations of economic conditions declines in our operating results of our reporting units or an expectation that the carrying amount may not be recoverable
We have an option to test goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount If we choose not to perform the qualitative test or we determine that it is more likely than not that the fair value of the reporting unit is less than the carrying amount we compare the carrying value of the reporting unit to its estimated fair value which is based on the perspective of a market participant If the carrying amount of the reporting unit s goodwill exceeds the estimated fair value we recognize an impairment loss in an amount equal to the excess not to exceed the carrying amount
We generally determine the fair value of each of our reporting units based on a combination of the income approach and the market valuation approaches Key assumptions in the income approach include estimating future cash flows long term growth rates and weighted average cost of capital Our ability to realize the future cash flows used in our fair value calculations is affected by factors such as changes in economic conditions operating performance and our business strategies Key assumptions in the market approaches include identifying companies and transactions with comparable business factors such as earnings growth profitability business and financial risk
Intangible Assets Our intangible assets consist of trade names and trademarks with indefinite lives and certain definite lived intangible assets We test our indefinite lived intangible assets for impairment on an annual basis or more frequently if indicators of impairment are present We test our indefinite lived assets by estimating the fair value of the asset and comparing that to the carrying value an impairment loss is recorded for the amount that carrying value exceeds the estimated fair value The fair value of the trade names and trademarks is determined
using the relief from royalty method This method assumes that the trade name and trademarks have value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them The assumptions used in this method requires management judgment and estimates in forecasting future revenue growth discount rates and royalty rates
Definite lived intangible assets which consist of developed technology customer relationships and non compete agreements are amortized using the straight line method over their estimated useful lives Additionally we test the definite lived intangible assets when facts and circumstances indicate that the carrying values may not be recoverable We first assess the recoverability of our definite lived intangible assets by comparing the undiscounted cash flows of the definite lived asset less its carrying value If the undiscounted cash flows are less than the carrying value we then determine the estimated fair value of our definite lived asset by taking the estimated future operating cash flows derived from the operation to which the asset relates over its remaining useful life using a discounted cash flow analysis and comparing it to the carrying value Any impairment would be measured as the difference between the carrying amount and the estimated fair value Changes in any of these estimates projections and assumptions could have a material effect of the fair value of these assets in future measurement periods and result in an impairment which could materially affect our results of operations
Leases We determine at inception if a contract is or contains a lease The lease classification is determined at the commencement date The majority of our leases are operating leases for our retail store locations We do not have any material leases individually or in the aggregate classified as a finance leasing arrangement Upon modification of a contract we reassess if a contract is or contains a lease For contracts that contain both lease and non lease components such as common area maintenance we allocate the consideration to the components based on the relative standalone price At the commencement date of a lease we recognize 1 a right of use asset representing our right to use the underlying asset during the lease term and 2 a lease liability for the present value of the lease payments not yet made
The lease term includes the options to extend the lease only to the extent it is reasonably certain that we will exercise such extension options and not exercise such early termination options respectively The majority of our store operating leases include ongoing co tenancy requirements or early termination option that reduce lease payments permit lease termination or both in the event that co tenants cease to operate for specific periods or if stated sales levels are not met in specific periods As the rate implicit in the lease is not readily determinable for our leases we discount our lease payments using our incremental borrowing rate Our incremental borrowing rate is based on information available at commencement date and represents the rate of interest we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment
The right of use asset is measured at the present value of fixed lease payments not yet made with adjustments for initial direct costs lease prepayments and lease incentives received The right of use asset is reduced over time by the recognition of straight line expense less the accretion of the lease liability under the effective interest method The lease liability is measured at the present value of fixed lease payments not yet made We evaluate the carrying value of right of use assets for indicators of impairment and perform an analysis of the recoverability of the related asset group If the carrying value of the asset group is determined to be in excess of the estimated fair value we record an impairment loss in our consolidated statements of loss income Additionally we review the carrying value of the right of use assets for impairment when events or changes in circumstances indicate that the carrying values may not be recoverable require reassessment of the leases and remeasurement if needed
Our store operating leases may include fixed minimum lease payments as contractually stated in the lease agreement or variable lease payments which are generally based on a percentage of the store s net sales in excess of a specified threshold or are dependent on changes in an index Operating lease expense relating to fixed lease payments is recognized on a straight line basis over the lease term and lease expense relating to variable payments is expensed as incurred Operating lease expense is recorded in the cost of goods sold expenses on the consolidated statements of loss income
Claims and Contingencies We are subject to various claims and contingencies related to lawsuits insurance regulatory and other matters arising out of the normal course of business We accrue a liability if the likelihood of an adverse outcome is probable and the amount is estimable If the likelihood of an adverse outcome is only reasonably possible as opposed to probable or if an estimate is not determinable we provide disclosure of a material claim or contingency
Revenue Recognition Revenue is recognized upon purchase at our retail store locations For our ecommerce sales revenue is recognized when control passes to the customer upon shipment Taxes collected from our customers are recorded on a net basis We accrue for estimated sales returns by customers based on historical return experience The allowance for sales returns at February 3 2024 and January 28 2023 was 3 0 million and 3 1 million respectively We record the sale of gift cards as a current liability and recognize revenue when a customer redeems a gift card The current liability for gift cards was 4 3 million at February 3 2024 and 4 9 million at January 28 2023 Additionally the portion of gift cards that will not be redeemed gift card breakage is recognized in proportion of the patterns used by the customer based on our historical redemption patterns For the fiscal years ended February 3 2024 January 28 2023 and January 29 2022 we recorded net sales related to gift card breakage income of 1 8 million 1 9 million and 1 7 million respectively
Loyalty Program We have a customer loyalty program the Zumiez STASH which allows members to earn points for purchases or performance of certain activities The points can be redeemed for a broad range of rewards including product and experiential rewards Points earned for purchases are recorded as a current liability and a reduction of net sales based on the relative fair value of the points at the time the points are earned and estimated redemption rates Revenue is recognized upon redemption of points for rewards Points earned for the performance of activities are recorded as a current liability based on the estimated cost of the points and as marketing expense when redeemed The deferred revenue related to our customer loyalty program at February 3 2024 and January 28 2023 was 1 0 million and 1 2 million respectively
Cost of Goods Sold Cost of goods sold consists of branded merchandise costs and our private label merchandise costs including design sourcing importing and inbound freight costs Our cost of goods sold also includes shrinkage buying occupancy ecommerce fulfillment distribution and warehousing costs including associated depreciation and freight costs for store merchandise transfers Cash consideration received from vendors is reported as a reduction of cost of goods sold if the inventory has sold a reduction of the carrying value of the inventory if the inventory is still on hand or a reduction of selling general and administrative expense if the amounts are reimbursements of specific incremental and identifiable costs of selling the vendors products
Selling General and Administrative Expense Selling general and administrative expenses consist primarily of store personnel wages and benefits administrative staff and infrastructure expenses freight costs for merchandise shipments from the distribution centers to the stores store supplies depreciation on fixed assets at the home office and stores facility expenses training expenses advertising and marketing costs Credit card fees insurance public company expenses legal expenses amortization of intangibles assets and other miscellaneous operating costs are also included in selling general and administrative expenses
Advertising We expense advertising costs as incurred except for catalog costs which are expensed once the catalog is mailed Advertising expenses are net of sponsorships and vendor reimbursements Advertising expense was 11 5 million 10 4 million and 13 5 million for the fiscal years ended February 3 2024 January 28 2023 and January 29 2022 respectively
Stock Based Compensation We account for stock based compensation by recording the estimated fair value of stock based awards granted as compensation expense over the vesting period net of estimated forfeitures Stock based compensation expense is attributed using the straight line method We estimate forfeitures of stock based awards based on historical experience and expected future activity The fair value of restricted stock awards and units is measured based on the closing price of our common stock on the date of grant The fair value of stock option grants is estimated on the date of grant using the Black Scholes option pricing model
Common Stock Share Repurchases We may repurchase shares of our common stock under authorizations made from time to time by our Board of Directors Under applicable Washington State law shares repurchased are retired and not presented separately as treasury stock on the consolidated financial statements Instead the value of repurchased shares is deducted from retained earnings
Income Taxes We use the asset and liability method of accounting for income taxes Using this method deferred tax assets and liabilities are recorded based on the differences between the financial reporting and tax basis of assets and liabilities The deferred tax assets and liabilities are calculated using the enacted tax rates and laws that we expect to be in effect when the differences are expected to reverse We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if based on all available evidence it is determined that it is more likely than not that all or some portion of the deferred tax benefit will not be realized
We regularly evaluate the likelihood of realizing the benefit of income tax positions that we have taken in various federal state and foreign filings by considering all relevant facts circumstances and information available If we believe it is more likely than not that our position will be sustained we recognize a benefit at the largest amount that we believe is cumulatively greater than 50 likely to be realized Interest and penalties related to income tax matters are classified as a component of income tax expense Unrecognized tax benefits of 2 6 million and 2 5 million are recorded in other long term liabilities on the consolidated balance sheets at February 3 2024 and January 28 2023 respectively
Our tax provision for interim periods is determined using an estimate of our annual effective rate adjusted for discrete items if any that are taken into account in the relevant period As the fiscal year progresses we periodically refine our estimate based on actual events and earnings by jurisdiction This ongoing estimation process can result in changes to our expected effective tax rate for the full fiscal year When this occurs we adjust the income tax provision during the quarter in which the change in estimate occurs so that our year to date provision equals our expected annual rate
Earnings per Share Basic earnings per share is based on the weighted average number of common shares outstanding during the period Diluted earnings per share is based on the weighted average number of common shares and common share equivalents outstanding during the period The dilutive effect of stock options and restricted stock is applicable only in periods of net income Common share equivalents included in the computation represent shares issuable upon assumed exercise of outstanding stock options employee stock purchase plan funds held to acquire stock and non vested restricted stock Potentially anti dilutive securities not included in the calculation of diluted earnings per share are options to purchase common stock where the option exercise price is greater than the average market price of our common stock during the period reported
Foreign Currency Translation Our international subsidiaries operate with functional currencies other than the U S Dollar including the Canadian Dollar Australian Dollar Euro Norwegian Krone Swedish Krona and Swiss Franc Assets and liabilities denominated in foreign currencies are translated into U S dollars the reporting currency at the exchange rate prevailing at the balance sheet date Revenue and expenses denominated in foreign currencies are translated into U S dollars at the monthly average exchange rate for the period and the translation adjustments are reported as an element of accumulated other comprehensive loss on the consolidated balance sheets
Segment Reporting We identify our operating segments according to how our business activities are managed and evaluated Our operating segments have been aggregated and are reported as one reportable segment based on the similar nature of products sold production merchandising and distribution processes involved target customers and economic characteristics
In November 2023 the Financial Accounting Standards Board FASB issued ASU No 2023 07 Improvements to Reportable Segment Disclosures Topic 280 This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker CODM and included within each reported measure of a segment s profit or loss This ASU also requires disclosure of the title and position of the individual identified as the CODM and an
explanation of how the CODM uses the reported measures of a segment s profit or loss in assessing segment performance and deciding how to allocate resources The ASU is effective for annual periods beginning after December 15 2023 and interim periods within fiscal years beginning after December 15 2024 Adoption of the ASU should be applied retrospectively to all prior periods presented in the financial statements Early adoption is also permitted This ASU will likely result in us including the additional required disclosures when adopted We are currently evaluating the provisions of this ASU and expect to adopt them for the year ending December 31 2024
In December 2023 the FASB issued ASU No 2023 09 Improvements to Income Tax Disclosures Topic 740 The ASU requires disaggregated information about a reporting entity s effective tax rate reconciliation as well as additional information on income taxes paid The ASU is effective on a prospective basis for annual periods beginning after December 15 2024 Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance This ASU will result in the required additional disclosures being included in our consolidated financial statements once adopted
The company performs annual impairment test over goodwill and intangible assets to determine if fair value exceeds carrying value The fair value of the reporting unit was determined using a combination of an income based approach discounted cash flows and a market based approach guideline transaction method and guideline public company method The discounted cash flow method involved subjective estimates and assumptions such as projected revenue growth operating profit and the discount rate The guideline transaction method involved actual transactions that have occurred in the company s industry or related industries to arrive at an indication of value The guideline public company method involved calculations based on operating data from comparable publicly traded companies
We recorded a full impairment of Blue Tomato goodwill amounting to 41 1 million for the fiscal year ended February 3 2024 Though sales at Blue Tomato continued a trend of year over year growth the trend has been more closely tied to store growth than comparable sales trends needed to keep up with the cost of doing business As such we have experienced increasing operating losses with the current fiscal year having the largest loss at Blue Tomato since acquisition The macroeconomic climate conditions continue to indicate economic instability Factors include consumer trends higher costs of doing business lingering COVID 19 impacts war in Ukraine energy challenges and inflation interest rate pressures These pressures and the continued lack of scalability in the business lead the Board and Company management to prioritize positive cash flow and operating profit in the annual budget cycle and the resulting 5 and 10 year plans that reduced expected store count by 50 to align with lower levels of capital and attempt to focus on profitability rather than growth This change in store growth directly impacts the future revenue expectations of the business and related present value valuation technique used in our annual impairment test Furthermore we have reduced growth rates going forward to more closely align with historical trends as well as factor in the impact of less maturing stores There was no impairment of goodwill for the fiscal years ended January 28 2023 and January 29 2022
We recorded no amortization expense for intangible assets for the year ended February 3 2024 and January 28 2023 We recorded 0 1 million of amortization expense for intangible assets for the year ended January 29 2022 Amortization expense of intangible assets is recorded in selling general and administrative expense on the consolidated statements of loss income
On October 14 2021 we amended our credit agreement with Wells Fargo Bank N A previously entered into December 7 2018 which provided us with a senior secured credit facility credit facility of up to 25 0 million through December 1 2023 and up to 35 0 million after December 1 2023 and through December 1 2024 The secured revolving credit facility is available for working capital and other general corporate purposes The senior secured credit facility provides for the issuance of standby letters of credit in an amount not to exceed 17 5 million outstanding at any time and with a term not to exceed 365 days The commercial line of credit provides for the issuance of commercial letters of credit in an amount not to exceed 10 0 million and with terms not to exceed 120 days The amount of borrowings available at any time under our credit facility is reduced by the amount of standby and commercial letters of credit outstanding at that time The credit facility will mature on December 1 2024 All obligations under the credit facility are joint and several with Zumiez Services and guaranteed by certain of our subsidiaries The credit facility is secured by a first priority security interest in substantially all of the personal property but not the real property of the borrowers and guarantors Amounts borrowed under the credit facility bear interest at a daily simple SOFR rate plus a margin of 1 35 per annum
The credit facility contains various representations warranties and restrictive covenants that among other things and subject to specified circumstances and exceptions restrict our ability to incur indebtedness including guarantees grant liens make investments pay dividends or distributions with respect to capital stock make prepayments on other indebtedness engage in mergers dispose of certain assets or change the nature of their business The credit facility contains certain financial maintenance covenants that generally require the Registrant to have net income after taxes of at least 5 0 million on a trailing four quarter basis and a quick ratio of 1 25 1 0 at the end of each fiscal quarter The credit facility contains certain affirmative covenants including reporting requirements such as delivery of financial statements certificates and notices of certain events maintaining insurance and providing additional guarantees and collateral in certain circumstances The credit facility includes customary events of default including non payment of principal interest or fees violation of covenants inaccuracy of representations or warranties cross default to other material indebtedness bankruptcy and insolvency events invalidity or impairment of guarantees or security interests material judgments and change of control
On November 30 2023 we entered into a third amendment to our credit facility with Wells Fargo Bank N A The amendment among other things a amended the credit limit to 25 million through December 1 2024 b amended the EBITDA covenant to not less than 9 million for the quarter ending October 28 2023 not less than 2 5 million for the quarter ending February 3 2024 not less than 9 million in the quarter ending May 4 2024 not less than 12 million for the quarter ending August 3 2024 and not less than 20 million for the quarter ending November 2 2024 c amended the borrowing rate to SOFR plus 1 75 per annum d introduced an unused commitment fee of 0 50 per annum and e disallows distribution of dividends or execution of stock buybacks through December 1 2024 without bank approval
There were no borrowings outstanding under the credit facility at February 3 2024 or January 28 2023 We had no open commercial letters of credit outstanding under our secured revolving credit facility at February 3 2024 or January 28 2023 We had 3 4 million in issued but undrawn standby letters of credit at February 3 2024 and 0 6 million in issued but undrawn standby letters of credit at January 28 2023
At February 3 2024 we had operating leases for our retail stores certain distribution and fulfillment facilities vehicles and equipment Our remaining lease terms vary from one month to eleven years with varying renewal and termination options At February 3 2024 and January 28 2023 the weighted average of the remaining lease term was 5 0 years and the weighted average operating lease discount rate was 3 4 and 2 5 respectively
Purchase Commitments At February 3 2024 and January 28 2023 we had outstanding purchase orders to acquire merchandise from vendors of 180 9 million and 174 3 million respectively We have an option to cancel these commitments with no notice prior to shipment except for certain private label packaging supplies and international purchase orders in which we are obligated to repay contractual amounts upon cancellation
Litigation We are involved from time to time in claims proceedings and litigation arising in the ordinary course of business We have made accruals with respect to these matters where appropriate which are reflected in our consolidated financial statements For some matters the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made We may enter into discussions regarding settlement of these matters and may enter into settlement agreements if we believe settlement is in the best interest of our shareholders
On October 14 2022 former employee Seana Neihart filed a representative action under California s Private Attorneys General Act California Labor Code section 2698 et seq PAGA against us An answer to the complaint was filed on December 8 2022 A first amended complaint was filed on February 8 2023 adding Jessica King as a plaintiff The lawsuit alleges a series of wage and hour violations under California s Labor Code Zumiez has answered the complaint We are in the process of investigating the claims and we intend to vigorously defend ourselves
Insurance Reserves We use a combination of third party insurance and self insurance for a number of risk management activities including workers compensation general liability and employee related health care benefits We maintain reserves for our self insured losses which are estimated based on actuarial based analysis of historical claims experience The self insurance reserve which is recorded under Accrued payroll and payroll taxes in the consolidated balance sheets was 1 7 million and 2 8 million for fiscal years ended February 3 2024 and January 28 2023 respectively
The Level 2 marketable securities primarily include U S treasury and government agency securities corporate debt securities state and local municipal securities variable rate demand notes and certificates of deposit Fair values are based on quoted market prices for similar assets or liabilities or determined using inputs that use readily observable market data that are actively quoted and can be validated through external sources including third party pricing services brokers and market transactions We review the pricing techniques and methodologies of the independent pricing service for Level 2 investments and believe that its policies adequately consider market activity either based on specific transactions for the security valued or based on modeling of securities with similar credit quality duration yield and structure that were recently traded We monitor security specific valuation trends and we make inquiries with the pricing service about material changes or the absence of expected changes to understand the underlying factors and inputs and to validate the reasonableness of the pricing
Assets and liabilities recognized or disclosed at fair value on the consolidated financial statements on a nonrecurring basis include items such as fixed assets operating lease right of use assets goodwill other intangible assets and other assets These assets are measured at fair value if determined to be impaired We recorded impairment charges for operating lease right of use assets of 1 3 million in cost of sales We recorded impairment charges for fixed assets and goodwill of 1 6 million and 41 1 million respectively in selling general and administrative expenses on the consolidated statement of loss income for the year ended February 3 2024 We recorded impairment charges for operating right of use assets of 0 4 million in costs of sales and impairment charges for fixed assets of 1 7 million in selling general and administrative expenses on the consolidated statement of loss income for the year ended January 28 2023
Share Repurchase In December 2021 our Board of Directors approved the repurchase of up to an aggregate of 150 million of common stock This repurchase program superseded all previously approved and authorized stock repurchase programs The December 2021 stock repurchase program was completed in March 2022
Employee Stock Purchase Plan We offer an Employee Stock Purchase Plan ESPP for eligible employees to purchase our common stock at a 15 discount of the lesser of fair market value of the stock on the first business day or the last business day of the offering period subject to maximum contribution thresholds The number of shares issued under our ESPP was less than 0 1 million for each of the fiscal years ended February 3 2024 January 28 2023 and January 29 2022
At February 3 2024 and January 28 2023 we had foreign net operating loss carryovers that could be utilized to reduce future years tax liabilities of 111 2 million and 88 1 million respectively The tax effected foreign net operating loss carryovers were 25 6 million and 20 3 million at February 3 2024 and January 28 2023 respectively The net operating loss carryovers have an indefinite carryforward period and currently will not expire
At February 3 2024 and January 28 2023 we had state net operating loss carryovers that could be utilized to reduce future year s tax liabilities of 16 8 million and 0 respectively which if unused will expire in years 2028 through 2043 The tax effected state net operating loss carryovers were 0 3 million and 0 at February 3 2024 and January 28 2023 respectively
At February 3 2024 we had 2 6 million of gross unrecognized tax benefits of which 1 6 million if recognized would affect our effective tax rate We recognized an expense of 0 01 million an expense of 0 12 million and an expense of 0 09 million of interest and penalties in income tax expense prior to the benefit of the federal tax deduction for fiscal 2023 2022 and 2021 respectively As of February 3 2024 and January 28 2023 we had accrued interest and penalties of 0 3 million and 0 3 million respectively within our consolidated balance sheets
We file income tax returns in the U S federal jurisdiction and various state and foreign jurisdictions Our U S federal income tax returns are no longer subject to examination for years before fiscal 2020 and we are no longer subject to U S state and local examinations for years before fiscal 2019 We are no longer subject to examination for all foreign income tax returns before fiscal 2018
The Zumiez Foundation is a charitable based nonprofit organization focused on meeting various needs of the under privileged Our Chairman of the Board is also the President of the Zumiez Foundation We committed charitable contributions to the Zumiez Foundation of 0 1 million 0 9 million and 1 6 million for the fiscal years ended February 3 2024 January 28 2023 and January 29 2022 respectively There were no accruals for charitable contributions payable to the Zumiez Foundation as of February 3 2024 Accrued charitable contributions payable to the Zumiez Foundation amounted to 0 5 million as of January 28 2023
Bylaws as amended and restated May 21 2014 and Amendment No 1 dated as of May 21 2015 to Bylaws of Zumiez Inc as previously Amended and Restated as of May 21 2014 Incorporated by reference to Exhibit 3 2 to the Company s Current Report on Form 8 K filed on May 23 2014 and Exhibit to the Company s Form 8 K filed on May 22 2015
i Consolidated Balance Sheets at February 3 2024 and January 28 2023 ii Consolidated statements of loss income for the fiscal years ended February 3 2024 January 28 2023 and January 29 2022 iii Consolidated statement of comprehensive loss income for the fiscal years ended February 3 2024 January 28 2023 and January 29 2022 iv Consolidated Statements of Changes in Shareholders Equity for the fiscal years ended February 3 2024 January 28 2023 and January 29 2022 v Consolidated Statements of Cash Flows for the fiscal years ended February 3 2024 January 28 2023 and January 29 2022 and vi Notes to Consolidated Financial Statements

Company Name	Zumiez Inc Vist SEC web-site
Category	RETAIL-APPAREL & ACCESSORY STORES
Trading Symbol	ZUMZ