Zumiez trades at $23.97 per share and has stayed right on track with the overall market, gaining 11% over the last six months. At the same time, the S&P 500 has returned 7.1%.
Is there a buying opportunity in Zumiez, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Zumiez Will Underperform?
We're cautious about Zumiez. Here are three reasons you should be careful with ZUMZ and a stock we'd rather own.
1. Stores Are Closing, a Headwind for Revenue
A retailer’s store count influences how much it can sell and how quickly revenue can grow.
Zumiez operated 719 locations in the latest quarter. Over the last two years, the company has generally closed its stores, averaging 2.2% annual declines.
When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.
2. Fewer Distribution Channels Limit its Ceiling
With $929.1 million in revenue over the past 12 months, Zumiez is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Zumiez historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.1%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.
Final Judgment
Zumiez falls short of our quality standards. That said, the stock currently trades at 24.4× forward P/E (or $23.97 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d suggest looking at one of our all-time favorite software stocks.
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