3 Reasons to Sell ZUMZ and 1 Stock to Buy Instead

Zumiez’s stock price has taken a beating over the past six months, shedding 46.1% of its value and falling to $12.37 per share. This may have investors wondering how to approach the situation.

Is now the time to buy Zumiez, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Zumiez Will Underperform?

Even with the cheaper entry price, we're swiping left on Zumiez for now. Here are three reasons why ZUMZ doesn't excite us and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Zumiez’s demand has been shrinking over the last two years as its same-store sales have averaged 3.2% annual declines.

2. Fewer Distribution Channels Limit its Ceiling

With $889.2 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. Operating Losses Sound the Alarms

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Although Zumiez was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 3.6% over the last two years. Despite the consumer retail industry’s secular decline, unprofitable public companies are few and far between. It’s unfortunate that Zumiez was one of them.

Final Judgment

We see the value of companies helping consumers, but in the case of Zumiez, we’re out. Following the recent decline, the stock trades at 30.5× forward P/E (or $12.37 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.

Stocks We Like More Than Zumiez

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