Zumiez To Catch Wave With European Buyout Deal


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After riding the crest of the board-sports wave in the U.S.,Zumiez ( ZUMZ ) is about to take on Europe.

And it's taking the acquisition route to get there. The teen focused action-sports retailer has agreed to buy Austria-based peer Blue Tomato for $75 million, it said last Tuesday.

The deal, which is expected to close before the end of the current quarter, should give Zumiez a boost as it moves to tap into the large European market for action sports goods.

Blue Tomato sells branded board-sports clothing and gear mainly through its e-commerce website, which ships goods to 60 countries. Bluetomato.com is available in 14 languages. Online sales accounted for roughly 75% of its 2012 fiscal year revenue of $36.9 million. It also has five stores in Austria.

Zumiez expects the buy to be modestly accretive to 2012 earnings, excluding acquisition and integration costs.

The deal comes at a time when the Everett, Wash.-based Zumiez is enjoying a booming business selling clothes and accessories to board sports enthusiasts in North America with 448 mall-based stores in the U.S. and 11 in Canada as of May 26.

Double-Digit Growth

Sales have grown by double digits the past nine quarters. And Zumiez same-store sales have outpaced the industry overall in all but two months since November 2010, according to Ken Perkins, president of Retail Metrics. In May, its comps surged 13.7% vs. a year earlier compared with a 2% gain for the industry.

But the buy represents a way for Zumiez to enter the European market without taking a big risk of acquiring a large store fleet, says B. Riley & Co. analyst Jeff Van Sinderen. And it would give Zumiez the opportunity to draw on Blue Tomato's large and established e-commerce business to gain a presence in France, Germany and other countries in Europe, where there's a love of action sports similar to that in the U.S., he says.

"There is an opportunistic, contrarian element of buying a European business at this moment," he adds.

But, he says, Zumiez might have had to pay more for Blue Tomato if "all the stars were aligned" for Europe on the macro front.

"We believe that the fact that it's 75% online makes it a safer way of entering an untapped market," adds JPMorgan analyst Simeon Siegel. "But we recognize that this is not without risks given the macro economic environment abroad."

Global Presence

Zumiez sees a lot of potential having Blue Tomato onboard.

"Blue Tomato's experience and growth trajectory in Europe combined with Zumiez's proven ability to open highly productive stores with an integrated website provides a unique opportunity to build a dominant global action sports retail presence," said Chief Financial Officer Marc Stolzman on a conference call announcing the deal.

In addition to the purchase price, Zumiez will also give Blue Tomato an additional payment based on certain performance objectives over the next three years.

Blue Tomato's large e-commerce business is a big draw, watchers say.

Zumiez caters to the 14- to 24-year-old crowd, mainly male, who love board sports like surfing and skateboarding. They're also big online buyers.

Building a well-developed e-commerce business is a direction that's been very important for Zumiez, says John Horan, publisher of Sporting Goods Intelligence, a weekly newsletter.

"Given the age of its customers, I see a bigger piece of their sales migrating online and to mobile than for most retailers," he said. "That's part of the attraction."

Blue Tomato is a well-respected, well-run company, he adds, with a lot of potential for expansion. Blue Tomato will keep its home base in Austria and its senior management will stay on in their current roles.

Keeping the management in place with the potential for an earn-out is a good move, says Horan.

It's a much more complicated platform to accept multiple currencies and sell in multiple languages than having an e-commerce business in the U.S., he says.

So having local management's expertise will be important. Zumiez is weighted more toward apparel and carries little equipment, says Horan.

Comps And Margins

Meanwhile, Zumiez is faring handsomely with its current mix. In the most recent first quarter, profits surged 150% to 15 cents a share. Sales climbed 23% to $129.9 million. Same-store sales popped 12.9% vs. a year earlier. Based on better-than-planned sales, Zumiez raised its guidance to $134 million to $136 million, including $2 million from Blue Tomato, assuming the buy is done by July 1.

That's up from its original sales guidance of $128 million to $130 million.

"They've been doing extremely well and outperforming most of retail in terms of comps and margins," said Van Sinderen.

While the company "felt some pain" in 2008 and 2009, it stuck to the strategy that defines what Zumiez is all about.

"Their customers didn't see them radically change their strategy," he said. "They just refined it and are getting better at it. They continue to be the dominant retailer for core action-sports apparel in the malls."

The design and the merchandising in its stores are a big draw, say followers. The board-sports enthusiasts it caters to know its stores are a destination where the employees are knowledgable about action sports and probably participate in them, says Van Sinderen.

Analysts polled by Thomson Reuters expect full-year earnings to rise 33% to $1.60 a share. They see a 14% increase in 2013.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas

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